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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                            --------------------

                                   FORM 10-K
(MARK ONE)
   [X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

                   FOR FISCAL YEAR ENDED DECEMBER 31, 1996
                                       OR
   [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
          EXCHANGE ACT OF 1934

             FOR THE TRANSITION PERIOD FROM             TO
                                            ------------  ---------------

                            --------------------

                         Commission File Number 0-20750

                           STERLING BANCSHARES, INC.
             (Exact name of registrant as specified in its charter)

                                                         
                  TEXAS                                    74-2175590
    (State or other jurisdiction of                       (IRS employer
     incorporation or organization)                   identification number)
                                                          

         15000 NORTHWEST FREEWAY                             77040
             HOUSTON, TEXAS                                (Zip Code)
(Address of principal executive offices)


      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (713) 466-8300

                             --------------------

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


                                                       NAME OF EACH EXCHANGE
    TITLE OF EACH CLASS                                 ON WHICH REGISTERED
    -------------------                                 -------------------
           NONE                                                 N/A

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:


  TITLE OF EACH CLASS                   SHARES OUTSTANDING AT DECEMBER 31, 1996
  -------------------                   ---------------------------------------
Common Stock, $1 Par Value                              7,966,222

                             --------------------

        Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:  Yes [X]  No [    ]

        Indicate by check if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (17 CFR 229.405) is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.     [X]

        The aggregate market value of the registrant's Common Stock held by
non-affiliates as of March 14, 1997, was $136,042,290 based on the closing sales
price of $15.375 on such date.

        As of March 14, 1997, registrant had outstanding 12,001,400 shares of
Common Stock, $1.00 par value.

        DOCUMENTS INCORPORATED BY REFERENCE:  Proxy Statement for the Annual
Meeting of Shareholders to be held April 21, 1997 (Part III)

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                           Page 1 of 65 Total Pages
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PART -- I

ITEM 1 -- BUSINESS

GENERAL

Sterling Bancshares, Inc. (the "Company"), headquartered in Houston, Texas, is
a bank holding company that provides commercial and retail banking services
through the community banking offices of Sterling Bank, a banking association
chartered under the laws of the State of Texas (the "Bank") in Houston, Texas.
The Company's principal executive offices are located at 15000 Northwest
Freeway, Suite 200, Houston, Texas, 77040 and its telephone number is (713)
466-8300.  The Company was incorporated under the laws of the State of Texas in
1980 and became the parent bank holding company of the Bank in 1981.  The Bank
was chartered in Texas in 1974.  The Company completed its initial public
offering on October 22, 1992.  At December 31, 1996, the Company had total
assets of $790.1 million, deposits of $717.4 million and shareholders' equity
of $59.4 million.

FINANCIAL SERVICES

The Bank provides a wide range of retail and commercial banking services,
including demand, savings and time deposits; commercial, real estate and
consumer loans; merchant credit card services; letters of credit; cash
management services; and drive-in banking services.  In addition, the Bank
facilitates sales of brokerage, mutual funds, and insurance products through
third-party vendors.  The deposits of the Bank are insured by the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC").
The primary lending focus of the Bank is on commercial loans and owner-occupied
real estate loans to local businesses with annual sales ranging from $300,000
to $30 million.  Typically, borrowers' financing requirements are between
$100,000 and $500,000.  The Bank does not seek loans larger than $2 million per
relationship, but will consider larger lending relationships in cases which
involve exceptional levels of credit quality.  The Bank's credit range allows
for greater diversity in the loan portfolio, less competition from large banks,
and better pricing opportunities.

SUPERCOMMUNITY BANKING STRATEGY

The Company's business strategy is generally known as a supercommunity bank
strategy.  Under this strategy, the Company provides a broad line of financial
products and services to small and medium-sized businesses and consumers
through full service community banking offices.  Each banking office has senior
management, with significant lending experience, who exercise substantial
autonomy over credit and pricing decisions, subject to loan committee approval
for larger credits.  This decentralized management approach, coupled with
continuity of service by the same staff members, enables the Bank to develop
long-term customer relationships, maintain high quality service and respond
quickly to customer needs.  The Company believes that its emphasis on local
relationship banking, together with a conservative approach to lending and
resultant high asset quality, are important factors in the success and growth
of the Bank.

The Company and the Bank have maintained a strong community orientation by,
among other things, supporting the active participation of staff members in
local charitable, civic, school and religious activities.  Each banking office
also appoints selected customers to a business development board that assists
in introducing prospective customers to the Bank and in developing or improving
products and services to meet customer needs.  As a result of the development
of broad banking relationships with their customers and the convenience and
service of the Bank's fourteen full-service banking offices, lending and
investing activities are funded almost entirely by core deposits, approximately
three-fourths of which are demand and savings deposits.

The Company centralizes functions that are transparent to customers in order to
achieve consistency and cost efficiencies in the delivery of products and
services by each banking office.  The central office of the Company provides
services such as data processing, bookkeeping, accounting, loan administration,
loan review, compliance, legal management, and internal auditing to all
fourteen community banking offices to enhance their ability to compete
effectively.  The Company also provides overall direction in the areas of
credit policy





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and administration, strategic planning, marketing, investment portfolio
management, and other financial and administrative services. The community
banking offices work closely with the Company to develop new products and
services needed by their customers and introduce enhancements to existing
products and services.

EXPANSION

The Company's growth strategy has been concentrated on increasing its community
banking presence in its existing markets, and expanding into new communities
within the greater Houston area in response to the expressed needs of those
communities.  The Company has grown through a combination of internal growth,
mergers and acquisitions, and the opening of new community banking offices.

On December 31, 1993, the Company purchased 100% of the stock of Enterprise
Bank - Houston ("Enterprise") for $15 million.  Throughout 1994 and until
January 3, 1995, the Company operated Enterprise as a separate banking
subsidiary with three community banking offices and deposits of approximately
$120 million.  On March 4, 1994, the Company merged with Guardian Bancshares,
Inc. ("Guardian"), the parent company of Guardian Bank of Houston, which had
deposits of approximately $90 million, in a transaction accounted for as a
pooling of interests.  After March 4, 1994, the Company operated Guardian as a
separate bank subsidiary until it was merged with and into the Bank
concomitantly with Enterprise.  In 1989 and 1990 the Company merged two other
100%-owned bank subsidiaries, one a de novo bank chartered by the Company in
1984 and the other acquired from the FDIC out of receivership, into the Bank.

During 1996, the Company opened two new community banking offices, the first in
the Upper Kirby district of central Houston, and the second in the Galleria
area of Houston.  The Company opened its fourteenth banking office in the
Cypress Station area, north of the city, in January 1997.  In addition, the
Company will seek to expand by taking advantage of selected acquisition
opportunities where available and consistent with its community banking
philosophy.  To accommodate further growth, the Company continues to upgrade
its central office data processing and telecommunication systems and facilities
to provide the Company with the technological capacity necessary to meet the
needs and expectations of its customers and accommodate further growth in the
Company's assets and number of offices.

On March 18, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") to acquire First Houston Bancshares, Inc. ("First
Houston") and its subsidiary, Houston National Bank, in a stock-for-stock
merger. At December 31, 1996, First Houston had total assets of approximately
$130 million and total deposits of approximately $120 million. Houston National
Bank operates one banking office at 5757 Memorial Drive in central Houston. The
Merger Agreement, which is subject to approval of First Houston's shareholders
and various banking regulatory authorities, provides that the Company will
issue approximately 1.72 million shares of the Company's common stock to the
shareholders of First Houston in exchange for all of the shares of stock of
First Houston. The final purchase price is subject to certain potential
adjustments. The transaction is expected to be accounted for as a pooling of
interests. Additional information regarding this transaction is included in
Note X to the Consolidated Financial Statements which appears on page 65 of
this Annual Report.

The Company had approximately 372 full time equivalent employees, including 102
officers, as of December 31, 1996.

COMPETITION

The Bank engages in highly competitive activities.  Each activity and market 
served involves competition with other banks, as well as with non-banking
financial and non-financial enterprises.  The Bank actively competes with other
banks in its efforts to obtain deposits and make loans, in the scope and types
of services offered, in interest rates paid on time deposits and charged on
loans and in other aspects of banking.

In addition to competing with other commercial banks within and outside their
primary service area, the Bank competes with other financial institutions
engaged in the business of making loans or accepting deposits, such as savings
and loan associations, credit unions, industrial loan associations, insurance
companies, small loan companies, finance companies, mortgage companies, real
estate investment trusts, certain governmental agencies, credit card
organizations and other enterprises.  In recent years, competition for funds
from securities brokers for money market accounts has also intensified.
Additional competition for deposits comes from government and private issues of
debt obligations and other investment alternatives for depositors such as money
market funds.  The Bank also competes with a variety of other institutions in
the provision of discount brokerage services.





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SUPERVISION AND REGULATION

References herein to applicable statutes and regulations are brief summaries
thereof, do not purport to be complete, and are qualified in their entirety by
reference to such statutes and regulations.

THE COMPANY

The Company and its second tier holding company, Sterling Bancorporation, Inc.,
are bank holding companies registered under the Bank Holding Company Act of
1956, as amended ("BHCA"), and are subject to supervision and regulation by the
Board of Governors of the Federal Reserve System ("FRB").  Federal laws subject
bank holding companies to particular restrictions on the types of activities in
which they may engage, and to a range of supervisory requirements and
activities, including regulatory enforcement actions for violations of laws and
policies.  In addition, Texas law authorizes the Banking Department of Texas to
supervise and regulate a holding company controlling a state bank.

PERMISSIBLE ACTIVITIES

As a bank holding company, the activities of the Company, as well as the
activities of companies which are controlled by the Company or in which the
Company owns 5% or more of the voting securities, are limited by the BHCA to
banking, management and control of banks, furnishing or performing services for
its subsidiaries, or any other activity which the FRB determines to be
incidental or closely related to banking or managing or controlling banks.  In
approving acquisitions by the Company of companies engaged in banking-related
activities, the FRB considers a number of factors, including the expected
benefits to the public, such as greater convenience and increased competition
or gains in efficiency, which are weighed against the risks of possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices.

SAFETY AND SOUNDNESS STANDARDS

The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") expanded the FRB's authority to prohibit activities of bank holding
companies and their nonbanking subsidiaries which represent unsafe and unsound
banking practices or which constitute violations of laws or regulations.
Notably, FIRREA increased the amount of civil money penalties which the FRB can
assess for certain activities conducted on a knowing and reckless basis, if
those activities caused a substantial loss to a depository institution.  The
penalties can be as high as $1 million per day.  FIRREA also expanded the scope
of individuals and entities against which such penalties may be assessed.

On July 10, 1995, the four federal agencies that regulate banks and savings
associations (FDIC, FRB, Office of the Comptroller of the Currency, and the
Office of Thrift Supervision) jointly issued guidelines for safe and sound
banking operations as required by Section 132 of the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA").  The guidelines, which became effective
August 9, 1995, identify the fundamental standards that the four agencies have
traditionally used to evaluate operational and managerial controls at insured
institutions.  An institution's performance will be evaluated against these
postulated standards during the regulators' periodic on-site examinations.  The
regulators believe that well managed institutions generally should not have to
modify their operations to comply with the operational and managerial standards
in the guidelines since the standards represent a coordination of structure
rather than a change in the agencies' policies.  Institutions retain the
flexibility to develop procedures and to maintain compliance in a manner
appropriate to their circumstances.

CAPITAL ADEQUACY REQUIREMENTS

The FRB monitors the capital adequacy of bank holding companies.  As discussed
below, the Bank is also subject to the capital adequacy requirements of the
FDIC and the Banking Department of Texas.  The FRB uses a combination of risk-
based guidelines and leverage ratios to evaluate capital adequacy.





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The FRB has adopted a system using internationally consistent risk-based
capital adequacy guidelines to evaluate the capital adequacy of bank holding
companies.  Under the risk-based capital guidelines, different categories of
assets are assigned different risk weights, based generally on the perceived
credit risk of the asset.  These risk weights are multiplied by corresponding
asset balances to determine a "risk-weighted" asset base.  Certain off-balance
sheet items, which previously were not expressly considered in capital adequacy
computations, are added to the risk-weighted asset base by converting them to a
balance sheet equivalent and assigning to them the appropriate risk weight.  In
addition, the guidelines define the capital components.  Total capital is
defined as the sum of "Tier 1" and "Tier 2" capital elements, with "Tier 2"
being limited to 100% of "Tier 1."  For bank holding companies, "Tier 1"
capital includes, with certain restrictions, common stockholders' equity,
perpetual preferred stock, and minority interests in consolidated subsidiaries.
"Tier 2" capital includes, with certain limitations, certain forms of perpetual
preferred stock, as well as maturing capital instruments and the reserve for
credit losses.  The guidelines require achievement of a minimum ratio of total
capital-to-risk-weighted assets of 8.0% (of which at least 4.0% is required to
be comprised of "Tier 1" capital elements).  At December 31, 1996, the
Company's ratios of "Tier 1" and "Total" capital-to-risk-weighted assets were
approximately 10.27% and 11.44%, respectively.

In addition to the risk-based capital guidelines, the FRB and the FDIC have
adopted the use of a leverage ratio as an additional tool to evaluate the
capital adequacy of banks and bank holding companies.  The leverage ratio is
defined to be a company's "Tier 1" capital divided by its adjusted total
assets.  The leverage ratio adopted by the federal banking agencies requires a
3.0% "Tier 1" capital to adjusted total assets ratio for institutions with a
highest regulatory rating of 1.  All other institutions will be expected to
maintain a 100 to 200 basis point cushion; that is, these institutions will be
expected to maintain a leverage ratio of 4.0% to 5.0%.  The Company's leverage
ratio at December 31, 1996, was 8.03%, significantly exceeding the regulatory
minimum.

AUDIT REPORTS

Beginning January 1, 1994, FDICIA requires insured institutions to submit
annual audit reports prepared by independent auditors to federal and state
regulators.  The audit report of the institution's holding company can be used
to satisfy this requirement.  Auditors must apply procedures agreed to by the
FDIC to determine compliance by the institution or holding company with legal
requirements designated by the FDIC.  The annual audit report shall include
financial statements prepared in accordance with generally accepted accounting
principles, statements concerning management's responsibility for the financial
statements and internal controls designated by the FDIC, and an attestation by
the auditor regarding the statements of management.  For certain "large"
institutions, which has been determined by the FDIC to be those banks with
total assets of $500 million or more, independent auditors may be required to
review quarterly financial statements.  FDICIA requires that independent audit
committees be formed, consisting of outside directors only.  As of December 31,
1996, the Company functions with an audit committee comprised solely of outside
directors who are either certified public accountants or who have extensive
banking experience, and, therefore, is in compliance with the requirements of a
"large" institution.  Commencing in 1996, the Bank qualified as a "large"
institution subject to the audit and reporting requirements of FDICIA.

ACQUISITIONS BY BANK HOLDING COMPANIES

FRB Approval.  The BHCA requires every bank holding company to obtain the prior
approval of the FRB before it may acquire all or substantially all of the
assets of any bank, or ownership or control of any voting shares of any bank,
if after such acquisition it would own or control, directly or indirectly, more
than 5% of the voting shares of such bank.  In approving bank acquisitions by
bank holding companies, the FRB is required to consider the financial and
managerial resources and future prospects of the bank holding company and the
banks concerned, the convenience and needs of the communities to be served, and
various competitive factors.  The Attorney General of the United States may,
within 30 days after approval of an acquisition by the FRB, bring an action
challenging such acquisition under the federal antitrust laws, in which case
the effectiveness of such approval is stayed pending a final ruling by the
courts.





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Mergers of Banks and Thrifts.  FDICIA has eased restrictions on cross-industry
mergers.  Members of the BIF and the Savings Association Insurance Fund
("SAIF") are generally allowed to merge, assume each other's deposits, and
transfer assets in exchange for an assumption of deposit liabilities.  A
formula applies to treat insurance assessments relating to acquired deposits as
if they were still insured through the acquired institution's insurance fund.
The transaction must be approved by the appropriate federal banking regulator.
In considering such approval, the regulators take into account applicable
capital requirements, certain interstate banking restrictions, and other
factors.

Interstate Acquisitions.  The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Branching Act"), discussed below, has
increased the ease and likelihood of interstate acquisitions throughout much of
the United States.  The FRB, however, will only allow the acquisition by a bank
holding company of an interest in any bank located in another state if the
statutory laws of the state in which the target bank is located expressly
authorize such acquisition.  Despite Texas' having opted out of the Riegle-Neal
Act, the Texas Banking Code permits, in certain circumstances, out-of-state
bank holding companies to acquire certain existing banks and bank holding
companies in Texas.

INTERSTATE BANKING

Congress passed legislation in 1994 to remove geographic restrictions on bank
expansion.  The Interstate Branching Act removes state law barriers to
acquisitions in all states and allows multistate banking operations to merge
into a single bank with interstate branches.  Interstate banking and branching
authority will be subject to certain conditions and restrictions, such as
capital adequacy, management and CRA compliance.  The Interstate Branching Act
preempts existing barriers that restrict entry into all states--such as
regional compacts and reciprocity agreements--thus creating opportunities for
expansion into markets that were previously closed.  Under the law, bank
holding companies will be able to acquire banks in any state, subject to
certain conditions.  When the interstate branching provisions of the law become
effective, banks acquired pursuant to this authority may subsequently be
converted to branches.  Interstate branching will be permitted by allowing
banks to merge across state lines to form a single institution.  Interstate
merger transactions can be used to consolidate existing multistate operations
or to acquire new branches.  A bank will be able to establish a new branch as
its initial entry into a state only if the state has authorized de novo
branching.  In addition, out-of-state banks may merge with a single branch of a
bank if the state has authorized such a transaction.  The interstate branching
provisions will become effective on June 1, 1997, unless a state takes action
before that time.  A state can pass laws to opt in early or to opt out
completely, as long as they act before June 1, 1997.  Texas has become the
first state to "opt out" of the Interstate Branching Act.

STERLING BANK

The Bank is a Texas-chartered banking association, the deposits of which are
insured by the FDIC, and is not a member of the Federal Reserve System;
therefore, the Bank is subject to supervision and regulation by the FDIC and
the Banking Department of Texas.  Pursuant to such regulation, the Bank is
subject to special restrictions, supervisory requirements, and potential
enforcement actions.  The FRB also has supervisory authority which directly
affects the Bank.  The Bank is a member of the Federal Home Loan Bank System.

PERMISSIBLE ACTIVITIES FOR STATE-CHARTERED INSTITUTIONS

The Texas Constitution, as amended in 1986, provides that a Texas-chartered
bank has the same rights and privileges that are or may be granted to national
banks domiciled in Texas.  FDICIA addresses the issue of whether state banks
may exercise greater powers than national banks.  FDICIA provides that,
effective December 19, 1992, no state bank or subsidiary thereof may engage as
principal in any activity not permitted for national banks, unless the
institution complies with applicable capital requirements and the FDIC
determines that the activity poses no significant risk to the BIF.  In general,
statutory restrictions on the activities of banks are aimed at protecting the
safety and soundness of depository institutions.





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Many of the statutory restrictions limit the participation of such institutions
in the securities and insurance product markets.  Presently these restrictions
do not affect the Bank, since it is not involved in the types of transactions
covered by the restrictions.

BRANCHING

Texas law provides that a Texas-chartered bank can establish a branch anywhere
in Texas provided that the branch is approved in advance by the Commissioner of
the Texas Department of Banking (the "Commissioner").  The branch must also be
approved by the FDIC, which considers a number of factors, including financial
history, capital adequacy, earnings prospects, character of management, needs
of the community, and consistency with corporate powers.  There are no federal
limitations on the ability of insured nonmember state banks to branch across
state lines; however, such branching would be subject to applicable state law
restrictions.

RESTRICTIONS ON SUBSIDIARY BANK DIVIDENDS

Dividends paid by the Bank provided substantially all of the Company's cash
flow during 1996 and will continue to do so in the foreseeable future.  Under
federal law, the Bank may not pay a dividend that results in an
"undercapitalized" situation.  At December 31, 1996, there was an aggregate of
approximately $17.1 million available for the payment of dividends by the Bank
to the Company without prior regulatory approval.

EXAMINATIONS

The FDIC periodically examines and evaluates insured banks.  Effective December
19, 1992, FDICIA required that on-site examinations were to be conducted every
18 months until December 31, 1993, except that certain less- than-satisfactory
institutions would be examined every 12 months.  Thereafter, FDIC examinations
are conducted every 12 months.  FDICIA authorizes the FDIC to assess the
institution for its costs of conducting the examinations.

The Commissioner also conducts examinations annually, unless additional
examinations are deemed necessary to safeguard the interests of shareholders,
depositors and creditors.  The Commissioner may accept the results of a federal
examination in lieu of conducting an independent examination.

DEPOSIT INSURANCE ASSESSMENTS

The FDIC is required by the Federal Deposit Insurance Act to assess all banks
in order to adequately fund the BIF so as to resolve any insured institution
that is declared insolvent by its primary regulator.  FDICIA required the FDIC
to establish a risk-based deposit insurance premium schedule.  The risk-based
assessment system is used to calculate a depository institution's semi-annual
deposit insurance assessment based upon the designated reserve ratio for the
deposit insurance fund and the probability and extent to which the deposit
insurance fund will incur a loss with respect to this institution.  In
addition, the FDIC can impose special assessments to cover the cost of
borrowings from the U.S. Treasury, the Federal Financing Bank, and BIF member
banks.

On September 15, 1992, the FDIC issued a rule revising its assessment
regulations from the existing flat-rate system for deposit insurance
assessments (or "premiums") to a new, risk-based assessment system.  This
system became effective for the assessment period beginning January 1, 1993.
Under this system, each depository institution will be place in one of nine
assessment categories based on certain capital and supervisory measures.
Institutions assigned to higher-risk categories -- that is, institutions that
pose a greater risk of loss to their respective deposit insurance funds -- pay
assessments at higher rates than would institutions that pose a lower risk.
The Bank was assessed a weighted average premium of $0.16 and $0.31 per $100 of
deposits for the year ended December 31, 1995 and 1994, respectively.

On August 8, 1995, the FDIC amended its regulations to change the range of
deposit insurance assessments charged to members of the BIF from the then-
prevailing range of .23% to .31% of deposits, to a range of .04% to .31% of
deposits.  On November 14, 1995, the FDIC further reduced the deposit insurance
assessment for the





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<PAGE>   8
BIF-member institutions, such that the range of BIF assessments is currently
between 0% and .27% of deposits.  BIF-member institutions which qualify for the
0% assessment category will, however, still have to pay the $1,000 minimum
semi-annual assessment required by federal statute.  The Bank was assessed the
minimum amount of $2,000 for the year ended December 31, 1996.

In connection with the new rate schedule, the FDIC established a process for
raising or lowering all rates for BIF-insured institutions semi-annually if
conditions warrant a change.  Under this new system, the FDIC will have the
flexibility to adjust the entire BIF assessment rate schedule twice a year
without seeking public comment first, bust only within a range of five cents
per $100 above or below the premium schedule adopted.  Changes in the rate
schedule outside the five cent range above or below the current schedule can be
made by the FDIC only after a full rulemaking with opportunity for public
comment.

On September 30, 1996, President Clinton signed into law an act that contained
a comprehensive approach to recapitalizing the SAIF and to assure the payment
of the Financing Corporation's ("FICO") bond obligations.  Under this new act,
banks insured under the BIF are required to pay a portion of the interest due
on bonds that were issued by FICO to help shore up the ailing Federal Savings
and Loan Insurance Corporations ("FSLIC") in 1987.  The amount of FICO debt
service to be paid by all BIF-insured institutions is currently estimated to be
approximately $320,343,000 per year, or $0.128 per $100 of deposits from 1997
until the year 2000, when the obligation of BIF-insured institutions increase
to approximately $598,500,000 or $0.240 per $100 of deposits per year through
the year 2019.

EXPANDING ENFORCEMENT AUTHORITY

One of the major additional impacts imposed on the banking industry by FDICIA
is the increased ability of banking regulators to monitor the activities of
banks and their holding companies.  In addition, the FRB and FDIC have
extensive authority to police unsafe or unsound practices and violations of
applicable laws and regulations by depository institutions and their holding
companies.  For example, the FDIC may terminate the deposit insurance of any
institution which it determines has engaged in an unsafe or unsound practice.
The agencies can also assess civil money penalties, issue cease and desist or
removal orders, seek injunctions, and publicly disclose such actions.  FDICIA,
FIRREA and other laws have expanded the agencies' authority in recent years,
and the agencies have not yet fully tested the limits of their powers.  Unlike
the federal agencies, the Texas authorities generally do not possess
enforcement powers parallel to those enumerated above to address violations of
the Texas Banking Code.

EFFECT ON ECONOMIC ENVIRONMENT

The policies of regulatory authorities, including the monetary policy of the
FRB, have a significant effect on the operating results of bank holding
companies and their subsidiaries.  Among the means available to the FRB to
affect the money supply are open market operations in U.S. government
securities, changes in the discount rate on member bank borrowings, and changes
in reserve requirements against member bank deposits.  These means are used in
varying combinations to influence overall growth and distribution of bank
loans, investments and deposits, and their use may affect interest rates
charged on loans or paid for deposits.

FRB monetary policies have materially affected the operating results of
commercial banks in the past and are expected to continue to do so in the
future.  The nature of future monetary policies and the effect of such policies
on the business and earnings of the Company and its subsidiaries cannot be
predicted.

ITEM 2 -- PROPERTIES

The principal executive offices of the Company and the Bank are located at
15000 Northwest Freeway, Houston, Texas, 77040, in a building owned by the
Bank.  In addition to its principal office, as of December 31, 1996, the Bank
owned four other community banking offices located at 414 West 19th Street at
Ashland, 2201 Mangum Road at Dacoma, 4600 Gulf Freeway at Dumble, and 855 F.M.
1960 West at Red Oak.  At December 31, 1996, the Bank also leased nine other
community banking offices located at 6500 FM 1960 West at Champions Drive, 7060
Hwy. 6 North at FM 529, 10260 Westheimer at Beltway 8, 10301 Katy Freeway at





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Benignus, 13111 Westheimer Road at Synott, in the University Center on the
University of Houston main campus, 13386 Jones Road at Grant, 2575 Kirby at
Westheimer, and 2401 Fountainview at Westheimer.  In addition, the Bank owned
its loan operations center next to the Mangum office at 2201 Mangum Road at
Dacoma.  On March 7, 1997, the Bank completed construction of a new facility on
a tract of land owned by the Bank at 6333 FM 1960 West at Champions Drive,
which will house the Champions office, formerly located at 6500 FM 1960 West.
The lease for 6500 FM 1960 West terminates March 31, 1997.  On November 19,
1996, the Bank acquired a 1.045 acre tract of land on which it intends to build
a new office for relocation of the banking office presently located at 7060
Hwy. 6 North prior to expiration of its lease on July 31, 1997.

ITEM 3 -- LEGAL PROCEEDINGS

Neither the Company nor any of its subsidiaries is presently involved in any
material legal proceedings.

ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders by solicitation of
proxies or otherwise during the fourth quarter of 1996.





                                       9
<PAGE>   10
PART -- II

ITEM 5 -- MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

The following table sets forth, per share of the Company's common stock, the
high and low stock prices as quoted on the NASDAQ National Market System and
the dividends paid thereon for each quarter of the last two fiscal years.  As
noted below, current and prior year information has been restated to reflect
the February 14, 1996, and February 24, 1997, stock splits.

<TABLE>
<CAPTION>
1996                                               High         Low      Dividend
----                                               ----         ---      --------
<S>                                               <C>         <C>         <C>   
  First quarter                                   $ 9.33      $ 7.50      $ 0.05
  Second quarter                                   10.33        8.83        0.05
  Third quarter                                    10.17        9.17        0.05
  Fourth quarter                                   12.59        9.33        0.05

1995                                               High         Low      Dividend
----                                               ----         ---      --------
  First quarter                                   $ 6.11      $ 4.99      $ 0.04
  Second quarter                                    6.00        5.22        0.04
  Third quarter                                     8.00        5.78        0.04
  Fourth quarter                                    8.11        7.33        0.04
</TABLE>

On January 22, 1996, the Company's directors declared a three-for-two stock
split (effected as a 50% stock dividend) to shareholders of record February 2,
1996, with shares distributed February 14, 1996.  Concurrently with the 1996
stock split, the Company declared a quarterly $0.07 ($0.047 computed after the
1997 stock split) cash dividend payable on February 14, 1996, to shareholders
of record February 2, 1996.  The Company paid regular quarterly dividends at
the same rate throughout 1996.  On January 27, 1997, the Company's directors
declared another three-for-two stock split (effected as a 50% stock dividend)
to shareholders of record February 10, 1997, with shares distributed February
24, 1997.  Concurrently with the 1997 stock split, the Company declared a
quarterly $0.055 cash dividend (computed on an "after-split" basis) payable on
February 24, 1997, to shareholders of record February 10, 1997.  The Company
intends to continue to pay a dividend at the rate of $0.055 per share quarterly
throughout 1997.  The 1996 and 1995 quarterly information disclosed above is
reflective of both the 1997 and 1996 stock split and dividend change.

As of March 14, 1997, there were 586 shareholders of record of common stock.
The number of beneficial shareholders is unknown to the Company at this time.

The Company's stock trades through the National Market System of the NASDAQ
under the symbol SBIB.


DESCRIPTION OF CAPITAL STOCK

AUTHORIZED CAPITAL STOCK

The authorized capital stock of the Company consists of (i) 20,000,000 shares
of Common Stock, $1.00 per share par value, of which 7,966,222 , (11,949,333
restated for the 1997 stock split) were issued and outstanding as of December
31, 1996 and (ii) 1,000,000 shares of Preferred Stock, $1.00 per share par
value ("Preferred Stock"), issuable in series, of which 49,500 shares of Series
A and 38,880 shares of Series B Convertible Preferred Stock were issued and
outstanding as of December 31, 1996.  As of December 31, 1996, an additional





                                       10
<PAGE>   11
514,000 (771,000 restated for the 1997 stock split) shares of Common Stock were
issuable upon exercise of the Company's outstanding employee stock options and
pursuant to outstanding subscriptions under the Company's Employee Stock
Purchase Plan.

The following discussion of the terms and provisions of the Company's capital
stock is qualified in its entirety by reference to the Company's Articles of
Incorporation and bylaws, copies of which are included as exhibits.

Common Stock

All outstanding shares of Common Stock are fully paid and nonassessable.  There
are no preemptive, conversion, subscription, redemption or repurchase rights
associated with shares of Common Stock, except as exist under the 1994
Incentive Stock Option Plan and the 1994 Employee Stock Purchase Plan.  Each
holder of shares of Common Stock is entitled to one vote for each share held of
record as to all matters voted on.  Holders of shares of Common Stock are not
entitled to cumulative voting rights in the election of directors.  Upon the
dissolution of the Company, the holders of Common Stock would be entitled to
participate ratably in the assets available for distribution after satisfaction
of the claims of creditors of the Company and of holders of any series of
Preferred Stock having a liquidation preference, to the extent of such
preference.

The holders of shares of the Common Stock are entitled to such dividends as the
Board of Directors, in its discretion, may declare out of funds legally
available therefor.  Under the Texas Business Corporation Act, as amended (the
"TBCA"), dividends may not be paid if, after the payment, the Company's total
assets would be less than the sum of its total debts and stated capital, or if
the Company would be unable to pay its debts as they become due in the usual
course of its business.  There can be no assurances such dividends will
continue to be paid in the future.  Payment of future dividends will be
dependent upon, among other things, the Company's and the Bank's earnings and
financial condition, and the general economic and regulatory climate.

Funds for the payment of dividends by the Company are obtained from dividends
received from the Bank.  Certain restrictions exist regarding the ability of
the Bank to pay dividends to the Company.  Under federal law, the Bank cannot
pay a dividend if it will cause the Bank to be "undercapitalized."  The
regulators of the Bank and the Company may administratively impose stricter
limits on the ability of the Bank to pay dividends to the Company.

The Bank is also subject to risk based capital rules which restrict its ability
to pay dividends.  The risk based capital rules set an explicit schedule for
achieving minimum capital levels in relation to risk weighted assets.  The Bank
has been required to meet a minimum ratio of total capital to risk weighted
assets of 8.0%.  As of December 31, 1996, the Bank was in compliance with all
capital requirements.

Effective March 15, 1997, Harris Trust and Savings Bank has been appointed as
the transfer agent and registrar for the Common Stock.

Preferred Stock

The Company is authorized to issue 1,000,000 shares of Preferred Stock, $1.00
par value.  As of December 31, 1996, four series of 150,000 shares each have
been designated, of which the Company has issued 49,500 shares of Series A and
38,880 of Series B Convertible Preferred Stock.  The Company's Preferred Stock
(or other securities convertible in whole or in part into Preferred Stock) is
available for issuance from time to time for various purposes as determined by
the Company's Board of Directors, including, without limitation, making future
acquisitions, raising additional equity capital and financings.  Subject to
certain limits set by its Articles of Incorporation, the Preferred Stock (or
such convertible securities) may be issued on such terms and conditions, at
such times and in such situations as the Board of Directors, in its discretion,
determines to be appropriate, without any further approval or action by the
shareholders (unless otherwise required by laws, rules, regulations or
agreements applicable to the Company).





                                       11
<PAGE>   12
ITEM 6 -- SELECTED FINANCIAL DATA

The following table sets forth summary historical data for the Company for the
periods indicated.  Since Enterprise was acquired on December 31, 1993, but
after close of business operations for the year, historical results of
operations for 1993 and 1992 do not include Enterprise data.  Balance sheet
data and related ratios, however, include Enterprise financial information on a
consolidated basis for 1993 and subsequent periods.  Since the Guardian merger
during 1994 was accounted for on the "pooling of interests" method, 1994 and all
prior years have been restated to include Guardian balance sheet data and
historical results of operations.  All per share data amounts have been
restated for the 1997 stock splits.

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                             --------------------------------------------------------
                                                                 1996        1995        1994        1993        1992
                                                             --------------------------------------------------------
SUMMARY OF INCOME:                                                ( In thousands except for per share amounts)
<S>                                                          <C>         <C>         <C>         <C>         <C>     
Interest income                                              $ 53,413    $ 46,734    $ 39,735    $ 27,231    $ 26,136
Interest expense                                               16,727      14,557      11,140       7,301       8,699
Net interest income                                            36,686      32,177      28,595      19,930      17,437
Provision for credit losses                                     2,113         919         921         856         808
Noninterest income                                              7,964       7,536       7,135       4,424       3,690
Noninterest expense                                            27,134      25,781      24,458      15,661      13,266
Income before income taxes                                     15,403      13,013      10,351       7,837       7,053
Income taxes                                                    4,749       4,147       3,200       2,474       2,274
Net income                                                     10,654       8,866       7,151       5,363       4,779

PER SHARE DATA:
Net earnings per share (fully diluted)                       $   0.86    $   0.73    $   0.60    $   0.45    $   0.52
Book value per share at period-end                               4.97        4.22        3.38        3.09        3.58
Tangible book value per share at period-end                      4.82        4.03        3.17        2.85        3.48
Weighted average common and common equivalent shares           12,340      12,117      11,883      11,824       9,248

BALANCE SHEET DATA (at period-end):
Total assets                                                 $790,073    $647,349    $598,654    $553,196    $380,435
Loans, net of unearned discount                               497,429     392,645     328,560     291,762     205,356
Allowance for credit losses                                     6,578       5,907       5,810       5,044       3,373
Investment securities                                         152,253     167,512     191,957     192,919     115,135
Deposits                                                      717,413     574,724     538,335     481,677     337,631
Notes payable and senior debentures                             4,000       5,800       8,050      12,900       2,300
Shareholders' equity                                           59,407      49,691      39,623      35,792      33,077

SELECTED PERFORMANCE RATIOS:
Return on average assets                                         1.53%       1.48%       1.26%       1.37%       1.95%
Return on average shareholders' equity                          19.40%      19.87%      18.76%      15.24%      27.77%
Dividend payout ratio                                           21.54%      19.38%      19.85%      23.53%       0.00%
Net interest margin (tax equivalent)                             6.03%       6.10%       5.72%       5.72%       5.78%

ASSET QUALITY RATIOS:
Nonperforming loans to total period-end loans                    0.55%       0.87%       0.80%       1.04%       0.60%
Period-end nonperforming assets to total assets                  0.64%       0.80%       0.72%       1.03%       1.30%
Period-end allowance for credit losses to nonperforming loans  242.56%     173.38%     221.09%     116.05%     271.80%
Period-end allowance for credit losses to total loans            1.32%       1.50%       1.77%       1.73%       1.64%
Net charge-offs to average loans                                 0.33%       0.23%       0.05%       0.34%       0.18%

LIQUIDITY AND CAPITAL RATIOS:
Average loans to average deposits                                70.4%      68.69%      61.22%      61.31%      60.87%
Period-end shareholders' equity to total assets                  7.52%       7.68%       6.62%       6.47%       8.69%
Average shareholders' equity to average assets                   7.89%       7.46%       6.71%       8.99%       6.84%
Period-end Tier 1 capital to risk weighted assets(1)            10.27%      10.82%      10.41%       9.75%      13.13%
Period-end total capital to risk weighted assets(1)             11.44%      12.07%      11.67%      10.99%      14.38%
Period-end Tier 1 leverage ratio (tangible shareholders' equity
     to total average assets)(1)                                 8.03%       7.66%       6.57%       5.96%       8.69%
</TABLE>

(1) Calculated in accordance with regulations in effect at December 31, 1996.





                                       12
<PAGE>   13
QUARTERLY RESULTS (UNAUDITED)

A summary of the unaudited results of operations for each quarter of 1996 and
1995 follows:

<TABLE>
<CAPTION>
                                         First     Second      Third     Fourth
                                        Quarter    Quarter    Quarter   Quarter
                                       -----------------------------------------
                                        (In thousands except per share amounts)
<S>                                    <C>        <C>        <C>        <C>     
1996
   Total interest income               $ 12,435   $ 12,927   $ 13,681   $ 14,370
   Total interest expense                 3,968      4,091      4,236      4,432
   Net interest income                    8,467      8,836      9,445      9,938
   Provision for credit losses              513        520        532        548
   Total noninterest income               1,930      1,849      2,090      2,095
   Total noninterest expense              6,328      6,551      6,904      7,351
   Income tax expense                     1,153      1,083      1,308      1,205
   Net income                             2,403      2,531      2,791      2,929

   Per common share:
      Net income                       $   0.20   $   0.21   $   0.22   $   0.23
      Cash dividends                       0.05       0.05       0.05       0.05
   Stock price range:
      High                             $   9.33   $  10.33   $  10.17   $  12.59
      Low                                  7.50       8.83       9.17       9.33
      Close                                9.33       9.25       9.92      12.59

1995
   Total interest income               $ 11,007   $ 11,624   $ 11,823   $ 12,280
   Total interest expense                 3,280      3,690      3,737      3,850
   Net interest income                    7,727      7,934      8,086      8,430
   Provision for credit losses              286        231        186        216
   Total noninterest income               1,777      1,911      1,913      1,935
   Total noninterest expense              6,334      6,524      6,344      6,579
   Income tax expense                       900        972      1,129      1,146
   Net income                             1,984      2,118      2,340      2,424

   Per common share:
      Net income                       $   0.16   $   0.18   $   0.19   $   0.20
      Cash dividends                       0.04       0.04       0.04       0.04
   Stock price range:
      High                             $   6.11   $   6.00   $   8.00   $   8.11
      Low                                  4.99       5.22       5.78       7.33
      Close                                5.78       5.89       7.67       7.78
</TABLE>


Both 1996 and 1995 "per share" data reflect the three-for-two stock splits of
February 14, 1996 and February 24, 1997.





                                       13
<PAGE>   14
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Company's
consolidated balance sheets and statements of earnings.  This section should be
read in conjunction with the Company's consolidated financial statements and
accompanying notes and other detailed information incorporated by reference.
Since the Guardian merger was accounted for on a "pooling of interests" basis, 
all prior years have been restated to include Guardian balance sheet data and 
historical results of operations.

The statements contained in this Annual Report which are not historical
statements of fact may constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform act of 1995.  Any such
forward-looking statements involve a number of risks and uncertainties.  The
actual results of future events could differ materially from those stated in
any forward-looking statements made in this Annual Report.  Among the factors
that could cause actual results to differ materially are the risks and
uncertainties discussed in this Item 7 and the uncertainties set forth from
time to time in the Company's other public reports and filings and public
statements.  The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.

PERFORMANCE SUMMARY

Net earnings for 1996 were $10.7 million, an increase of $1.8 million, or 20.2%
over the $8.9 million recorded for 1995. Net earnings of $8.9 million in 1995
increased $1.7 million, or 23.6% over the $7.2 million recorded for 1994.
These increases were primarily due to increased net interest income.

On a fully diluted weighted average share basis, net earnings for 1996 were
$0.86 per share of Common Stock as compared to $0.73 per share for 1995 and
$0.60 per share for 1994.  All per share  amounts have been restated to reflect
the three-for-two stock splits effective February 14, 1996, and February 24,
1997.

Two industry measures of the performance by a banking institution are its
return on average assets and return on average equity.  Return on average
assets ("ROA") measures net earnings in relation to average total assets and
indicates a company's ability to employ its resources profitably.  During 1996,
the Company's ROA was 1.53%, as compared to 1.48% and  1.26% for 1995 and 1994,
respectively.

Return on average equity ("ROE") is determined by dividing annual net earnings
by average shareholders' equity and indicates how effectively a company can
generate net income on the capital invested by its shareholders.  During 1996,
the Company's annualized ROE was 19.40% compared to 19.87% and 18.76% for 1995
and 1994, respectively.

NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income represents the amount by which interest income on interest-
earning assets, including investment securities and loans, exceeds interest
paid on interest-bearing liabilities, including deposits and other borrowed
funds.  Net interest income is the principal source of the Company's earnings.
Interest rate fluctuations, as well as changes in the amount and type of
earning assets and liabilities, combine to affect net interest income.

Net interest income for 1996 was $36.7 million, compared to $32.2 million for
1995, an increase of $4.5 million or 14.0%.  The improvement in net interest
income for 1996 was mainly due to an increase in total interest earning assets,
specifically in the loan portfolio.  During 1996, the yield on interest earning
assets decreased 5 basis points, from 8.69% in 1995 to 8.64% in 1996.  Total
funding costs remained at 3.81% for both 1995 and 1996.  For 1996, the net
interest margin (net interest income divided by average total interest earning
assets) decreased 6 basis points to 5.93% from 5.99% in 1995.

Net interest income for 1995 was $32.2 million, up $3.6 million or 12.6% from
$28.6 million for 1994.  The improvement in net interest income for 1995 was
mainly due to a relative increase in the amount of loans and other higher-
earning assets over investment securities and other lower-earning assets.
During 1995, the yield on interest earning assets increased 91 basis points
from 7.78% in 1994 to 8.69% in 1995.  For 1995 total funding costs increased 78
basis points from 3.03% in 1994 to 3.81% in 1995.  The 91 basis point increase
in the yield on interest-earning assets between 1994 and 1995 was due primarily
to the previously mentioned shift from investment securities into the loan
portfolio.  The 78 basis point increase in total funding costs over the





                                       14
<PAGE>   15
same period was due primarily to increased borrowing as loan growth exceeded
growth in deposits, resulting in the cost of borrowed funds exceeding the cost
of deposits.  For 1995, the net interest margin (net interest income divided by
average total interest-earning assets) increased 39 basis points to 5.99% from
5.60% for 1994. 

To provide a more in-depth analysis of net interest income, the
following average balance sheets and net interest income analysis detail the
contribution of interest-earning assets to overall net interest income and the
impact of the cost of funds:

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                         ----------------------------------------------------------
                                                                      1996                           1995            
                                                         ---------------------------    ---------------------------  
                                                          Average             Average   Average              Average 
                                                          Balance   Interest   Yield    Balance    Interest   Yield  
                                                         --------   --------  ------    -------    --------  ------- 
                                                                              (In thousands)                                     
<S>                                                     <C>         <C>        <C>      <C>       <C>         <C>       
Interest earning assets:                                                                                             
Interest bearing deposits in financial institutions      $ 10,310   $   540     5.24%   $  2,297   $   133     5.79% 
Federal funds sold                                         13,718       732     5.34%      1,857        89     4.79% 
Investment securities (taxable)                           131,210     8,158     6.22%    153,005     9,605     6.28% 
Investment securities (tax-exempt)                         22,230     1,122     5.05%     22,930     1,152     5.02% 
Loans, net of unearned discount (taxable)(1)              439,998    42,781     9.72%    356,665    35,687    10.01% 
Loans, net of unearned discount (tax-exempt)                1,036        80     7.72%        795        68     8.55% 
                                                         --------   -------     ----    --------   -------     ----  
  Total interest earning assets                           618,502   $53,413     8.64%   $537,549   $46,734     8.69% 
                                                                                                                     
Noninterest earning assets:                                                                                          
Cash and due from banks                                    54,310                         42,575                     
Premises and equipment, net                                18,510                         14,116                     
Other assets                                               11,636                         10,281                     
Allowance for credit losses                                (6,361)                        (6,080)                    
                                                         --------                       --------                     
  Total noninterest earning assets                         78,095                         60,892                     
                                                         --------                       --------                     
                                                                                                                     
  Total assets                                           $696,597                       $598,441                     
                                                         ========                       ========                     
                                                                                                                     
Interest bearing liabilities:                                                                                        
Demand and savings deposits                              $268,696   $ 8,251     3.07%   $205,952   $ 5,620     2.73% 
Certificates and other time deposits                      158,327     7,773     4.91%    145,422     6,988     4.81% 
Other borrowings                                            6,948       318     4.58%     23,518     1,362     5.79% 
Debentures and notes payable                                4,886       385     7.88%      6,990       587     8.40% 
                                                         --------    ------     ----    --------   -------     ----  
  Total interest bearing liabilities                      438,857   $16,727     3.81%    381,882    14,557     3.81% 
                                                                                                                     
Noninterest bearing liabilities:                                                                                     
Demand deposits                                           199,095                        168,987                     
Other liabilities                                           3,715                          2,955                     
                                                         --------                       --------
  Total noninterest bearing liabilities                   202,810                        171,942                     
                                                                                                                     
Shareholders' equity                                       54,930                         44,617
                                                         --------                       --------
  Total liabilities and shareholders' equity             $696,597                       $598,441                     
                                                         ========                       ========                     
                                                                                                                     
Net interest income and margin(2)                                   $36,686     5.93%              $32,177     5.99% 
                                                                    =======     ====               =======     ====  
                                                                                                                     
Net interest income and margin (tax-equivalent basis)(3)            $37,314     6.03%              $32,805     6.10% 
                                                                    =======     ====               =======     ====  
<CAPTION>
                                                        Year Ended December 31,
                                                      --------------------------- 
                                                                   1994
                                                      --------------------------- 
                                                       Average              Average
                                                       Balance   Interest   Yield
                                                      --------    ------     ---- 
                                                               (In thousands)                                     
<S>                                                   <C>       <C>        <C>
Interest earning assets:                              
Interest bearing deposits in financial institutions   $  1,051   $    35     3.33%
Federal funds sold                                       4,764       221     4.64%
Investment securities (taxable)                        174,690    10,339     5.92%
Investment securities (tax-exempt)                      22,022     1,106     5.02%
Loans, net of unearned discount (taxable)(1)           307,502    27,965     9.09%
Loans, net of unearned discount (tax-exempt)               833        69     8.28%
                                                      --------   -------     ---- 
  Total interest earning assets                       $510,862   $39,735     7.78%
                                                      
Noninterest earning assets:                           
Cash and due from banks                                 40,351
Premises and equipment, net                             12,220
Other assets                                            10,488
Allowance for credit losses                             (5,720)
                                                      --------
  Total noninterest earning assets                      57,339
                                                      --------
                                                      
  Total assets                                        $568,201
                                                      ========
                                                      
Interest bearing liabilities:                         
Demand and savings deposits                           $207,509   $ 5,082     2.45%
Certificates and other time deposits                   140,269     4,996     3.56%
Other borrowings                                         9,423       366     3.88%
Debentures and notes payable                            10,951       696     6.36%
                                                      --------   -------     ---- 
  Total interest bearing liabilities                   368,152    11,140     3.03%
                                                      
Noninterest bearing liabilities:                      
Demand deposits                                        155,860
Other liabilities                                        6,066
                                                      --------
  Total noninterest bearing liabilities                161,926
                                                      
Shareholders' equity                                    38,123
                                                      --------
  Total liabilities and shareholders' equity          $568,201
                                                      ========
                                                      
Net interest income and margin(2)                                $28,595     5.60%
                                                                 =======     ==== 
Net interest income and margin (tax-equivalent        
   basis)(3)                                                     $29,200     5.72%
                                                                 =======     ==== 

</TABLE>


(1)      Loan origination fees are considered adjustments to interest income.
         These fees aggregated $478,000, $498,000, and $739,000 for the years
         ended December 31, 1996, 1995 and 1994, respectively.  Related loan
         origination costs are not separately allocated to loans, but are
         charged to non-interest expense.  For the purpose of calculating loan
         yields, average loan balances include nonaccrual loans with no related
         interest income.
(2)      The net interest margin is equal to net interest income divided by
         average interest-earning assets.
(3)      In order to make pretax income and resultant yields on tax-exempt
         investments and loans comparable to those on taxable investments and
         loans, a tax-equivalent adjustment is made equally to interest income
         and income tax expense with no effect on after tax income.  The tax
         equivalent adjustment has been computed using a federal income tax
         rate of 34% and has increased net interest income by $628,000,
         $628,000, and $605,000 for the years ended December 31, 1996, 1995 and
         1994, respectively.





                                       15
<PAGE>   16
The following rate/volume analysis shows the portions of the net change in
interest income due to changes in volume or rate.  The changes in interest
income due to both rate and volume in the rate/volume analysis table have been
allocated to volume or rate change in proportion to the absolute amounts of the
change in each (in thousands).

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                           1996 vs. 1995                      1995 vs. 1994
                                                         Increase (Decrease)                 Increase (Decrease)
                                                          Due to Changes in:                  Due to Changes in:
-----------------------------------------------------------------------------------------------------------------------
                                                     Volume       Rate       Total       Volume      Rate       Total
-----------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>         <C>         <C>         <C>         <C>        <C>     
Interest earning assets:
Deposits in financial institutions                  $    464    $    (57)   $    407    $     41    $     57   $     98
Federal funds sold                                       568          75         643        (135)          3       (132)
Investment securities (taxable)                       (1,368)        (79)     (1,447)     (1,283)        549       (734)
Investment securities (tax-exempt)                       (35)          5         (30)         46        --           46
Loans, net of unearned discount (taxable)              8,338      (1,244)      7,094       4,471       3,251      7,722
Loans, net of unearned discount (tax-exempt)              21          (9)         12          (3)          2         (1)

Total Interest Income                                  7,988      (1,309)      6,679       3,137       3,862      6,999

-----------------------------------------------------------------------------------------------------------------------

Interest bearing liabilities:
Demand and savings deposits                         $  1,712    $    919    $  2,631    $    (38)   $    576   $    538
Certificates and other time deposits                     620         165         785         184       1,808      1,992
Other borrowings                                        (960)        (84)     (1,044)        547         449        996
Debentures and notes payable                            (177)        (25)       (202)       (252)        143       (109)

Total Interest Expense                                 1,196         974       2,170         441       2,976      3,417

Net Interest Income                                 $  6,792    $ (2,283)   $  4,509    $  2,696    $    886   $  3,582

-----------------------------------------------------------------------------------------------------------------------
</TABLE>


NONINTEREST INCOME

For 1996, noninterest income totaled $7.9 million, an increase of $400,000 or
5.3% over $7.5 million in 1995.  The increase is primarily due to $316,000 in
earnings recognized in 1996 from Sterling Capital Mortgage Company ("SCMC"), an
originator and servicer of single family residential mortgage loans in which
the Bank owns a forty percent interest that was acquired in 1996.  The
remaining increase is attributed to volume growth in deposit accounts.
Noninterest income of $7.5 million for the year ended December 31, 1995,
increased $400,000 or 5.6% over 1994, primarily due to increases in various
customer service fees, increased deposit account transaction volume, and an
increase in the number of retail customers.

For the years 1996, 1995, and 1994, the Company's ratio of noninterest income
to total income (net interest income plus noninterest income) was 17.84%,
18.98%, and 20.0%, respectively.

NONINTEREST EXPENSES

For 1996, noninterest expenses totaled $27.1 million, an increase of $1.3
million or 5.0% over $25.8 million in 1995.  Salaries and employee benefits
including profit sharing provision for 1996 totaled $16.6 million, an increase
of $1.5 million or 9.9% over $15.1 million for 1995 due primarily to an
increase in the number of full time equivalent employees, salary increases of
approximately 3%, and an increase in the profit sharing provision of $268,000.
The Bank increased its number of full-time equivalent personnel by 50 or 16%
during the year, from 322 at year end 1995 to 372 at year end 1996.  Staffing
of the new Cypress Station, Upper Kirby, and Fountainview offices accounted for
the majority of the staff increases, while the Central Office added staff
necessary to handle the additional volume growth of the Bank.  Depreciation and
amortization expenses of $2.5





                                       16
<PAGE>   17
million decreased $0.2 million or 7.4% over $2.7 million for 1995 due to the
fact that a significant portion of the computer and data processing equipment
reached the end of its depreciable life.  The majority of this equipment was
either upgraded or replaced throughout 1996.  Net occupancy expenses of $1.5
million increased $0.1 million or 7.1% from $1.4 million for 1995 due to
additional lease expense resulting from the opening of the Upper Kirby and
Fountainview offices.  Real estate acquired by foreclosure (Other Real Estate
or "ORE") resulted in a net loss of $155,000 during 1996, as compared to a net
gain of $107,000 during 1995.  The $262,000 increase in ORE expense over 1995
was due primarily to the fact that the Company recognized net gains of $297,000
on the sale of various ORE properties.  These gains more than offset any
writedowns and carrying costs in 1995.  During 1996, the Company sold several
properties, but only $1,000 in net gain was recognized on these sales.  FDIC
assessments for 1996 totaled $2,000, a decrease of $580,000 or 99.7% over
$582,000 for 1995.  The reduction is due to a change in the FDIC assessment
rate from $0.23 and $0.04 per $100 of deposits for the first and second half of
1995, respectively, as compared to $500 per quarter for 1996.  Data processing
expense of $537,000 decreased by $191,000 or 26.2% from $728,000 for 1995 due
primarily to further efficiencies gained as a result of the consolidation of
the central data processing in 1995.  Postage and delivery charges of $751,000
increased $49,000 or 7.0% from $702,000 in 1995 due to overall growth in the
Bank's customer base.  Professional fees of $490,000 decreased $32,000 or 6.1%
from $522,000 in 1995 due to consulting fees incurred as a result of the merger
of the three banks.  Other operating expenses of $2.7 million increased
$400,000 or 17.4% as compared to $2.3 million during 1995.  This increase was
primarily attributable to an increase in expenditures for marketing and
advertising.

For 1995, noninterest expenses totaled $25.8 million, an increase of $1.3
million or 5.3% over $24.5 million in 1994.  Salaries and employee benefits
including profit sharing provision for 1995 totaled $15.1 million, an increase
of $2.2 million or 17.1% over $12.9 million for 1994 due primarily to an
increase in the number of full time equivalent employees, salary increases of
approximately 4%, and an increase in the profit sharing provision of $296,000.
The Bank increased its number of full-time equivalent personnel by 24 or 8%
during the year, from 298 at year end 1994 to 322 at year end 1995.  Staff
increases at the loan operations center required to accommodate loan growth
were augmented by new employees hired for the new Cypress and Cypress Station
offices and by increases in the technology and information systems full-time
equivalent personnel due to the Company's decision to complete its data
network.  Depreciation and amortization expenses of $2.7 million increased $0.5
million or 22.7% over $2.2 million for 1994 due primarily to substantial
capital improvements of banking offices and to data processing equipment
acquisitions required by the centralization of back office functions of the
Bank.  Net occupancy expenses of $1.4 million decreased $0.2 million or 12.5%
from $1.6 million for 1994 due primarily to favorable lease negotiations
resulting in lower rental expenses at some of the Bank's leased banking
offices.  ORE resulted in a net gain of $107,000 during 1995, as compared to
$144,000 during 1994.  FDIC assessments for 1995 totaled $582,000, a decrease
of $518,000 or 47.1% over $1.1 million for 1994 due to the reduction in the
FDIC assessment rate from $0.23 to $0.04 per $100 of deposits as of June 1,
1995.  Data processing expense of $.7 million decreased by $400,000 or 36.4%
from $1.1 million for 1994 due primarily to the consolidation of the central
data processing in 1995.  Supplies expense of $595,000 increased $115,000 or
24.0% from $480,000 in 1994 due to additional printing costs associated with
supplying the former Enterprise and Guardian offices with the Bank's forms,
stationery, and marketing materials, as well as to continued strong growth in
loans and bookkeeping operations.  Professional fees of $522,000 decreased
$410,000 or 44.0% from $932,000 in 1994 due to various consulting and legal
fees paid in 1994 associated with the merger of the three banks.  Other
operating expenses of $2.3 million decreased $500,000 or 17.9% as compared to
$2.8 million during 1994.  Approximately $189,000 of the decrease in other
operating expenses relates to savings in service charges due to the
consolidation of due from bank accounts resulting from the merger of Enterprise
and Guardian with and into the Bank.  The remaining decrease was primarily
attributable to cost efficiencies associated with consolidation of the three
banks.

Management continually monitors overhead expenses.  A key measure used to
monitor the Company's progress in controlling overhead expenses is the overhead
ratio.  The overhead ratio is the Company's noninterest expenses, divided by
the sum of net interest income and noninterest income, exclusive of gains or
losses on the sale of investment securities.  This ratio was 60.8%, 64.9%, and
66.9% for 1996, 1995, and 1994, respectively.





                                       17
<PAGE>   18
INCOME TAXES

The Company provided $4.7 million for federal income taxes for 1996, $4.1
million for 1995, and $3.2 million for 1994.  The effective tax rates for 1996,
1995, and 1994 were 30.8%, 31.9%, and 30.9%, respectively.

IMPACT OF INFLATION

The effects of inflation on the local economy and on the Company's operating
results have been relatively modest for the past several years.  Since
substantially all of the Company's assets and liabilities are monetary in
nature, such as cash, investments, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates.  The Company tries
to control the impact of interest rate fluctuations by managing the
relationship between its interest rate sensitive assets and liabilities.

LOAN PORTFOLIO

At December 31, 1996, loans, excluding mortgage and student loans held for
resale in the amounts of $40.7 million in 1996 and $7.9 million in 1995, were
$456.7 million, an increase of $71.9 million or 18.7% over loans at December
31, 1995 of $384.8 million, as loan demand remained strong.  During 1995, loans
increased $61.6 million, or 19.1%, from $323.2 million at December 31, 1994, to
$384.8 million at December 31, 1995.  During 1994, loans increased $34.9
million, or 12.1%, from $288.5 million at December 31, 1993 to $323.2 million.
During 1993, loans increased $83.1 million, or 40.5%, from $205.4 million at
December 31, 1992, to $288.5 million.  $66.8 million of this increase was due
to the acquisition of Enterprise on December 31, 1993, and the remainder of the
increase reflected steady loan demand.

At December 31, 1996, total loans were 69.3% of deposits and 63.0% of total
assets. At December 31, 1995, total loans were 68.3% of deposits and 60.7% of
total assets.

The following table summarizes the loan portfolio of the Bank by type of
loan as of December 31, 1996, 1995, 1994, 1993, and 1992, excluding student
loans held for sale (in thousands):

<TABLE>
<CAPTION>
                                              1996                     1995                   1994         
                                        --------------------------------------------------------------  
                                         Amount      %           Amount       %         Amount      %  
                                        --------------------------------------------------------------  
<S>                                     <C>         <C>        <C>         <C>        <C>         <C>  
Commercial, financial and industrial:                                                                  
  US addressees                         $178,145    39.0%      $139,964    36.4%      $118,253    36.6%
  Non-US addressees                        1,353     0.3%         3,108     0.8%           957     0.3%
Real estate mortgage:                                                                                  
  Commercial                             112,903    24.7%       104,686    27.2%        93,483    28.9%
  Residential                             49,136    10.8%        44,059    11.5%        40,439    12.5%
Real estate construction                  40,486     8.9%        31,497     8.2%        20,884     6.5%
Consumer                                  74,675    16.4%        61,463    16.0%        49,233    15.2%
                                        --------------------------------------------------------------  
                                        $456,698   100.0%      $384,777   100.0%      $323,249   100.0%
                                        ============================================================== 
</TABLE>

<TABLE>
<CAPTION>
                                                       1993                   1992
                                              -----------------------------------------  
                                               Amount       %          Amount       %
                                              -----------------------------------------  
<S>                                           <C>          <C>        <C>          <C>  
Commercial, financial and industrial:                                         
  US addressees                               $118,119     40.9%      $ 79,919     38.9%
  Non-US addressees                              3,038      1.1%         2,316      1.1%
Real estate mortgage:                                                         
  Commercial                                    68,362     23.7%        58,061     28.3%
  Residential                                   58,464     20.3%        36,491     17.8%
Real estate construction                        14,120      4.9%        12,673      6.2%
Consumer                                        26,357      9.1%        15,896      7.7%
                                              -----------------------------------------
                                              $288,460    100.0%      $205,356    100.0%
                                              ========================================= 
</TABLE>

The primary lending focus of the Bank has been on commercial loans and owner-
occupied real estate loans to local businesses.  Although the Bank's legal
lending limit was $8,375,000, at December 31, 1996, the Bank has not maintained
exposure greater than $4.0 million on any relationship.

The Bank makes commercial loans primarily to small and medium-sized businesses
and to professionals.  The Bank offers a variety of commercial loan products
including revolving lines of credit, letters of credit, working capital loans,
and loans to finance accounts receivable, inventory and equipment.  Typically,
the Bank's commercial loans have floating rates of interest, are for varying
terms (generally not exceeding three years), are personally guaranteed by the
borrower's owner and are secured by accounts receivable, inventory and/or other





                                       18
<PAGE>   19
business assets. In addition to the commercial loans secured solely by non-real
estate business assets, the Bank makes commercial loans which are secured by
owner-occupied real estate, as well as other business assets.  At December 31,
1996, the Bank had $73.7 million in owner-occupied commercial real estate
loans.

In addition to commercial loans secured by real estate, the Bank makes
residential and, to a lesser extent, commercial mortgage loans to finance the
purchase of real property, generally real estate on which structures have
already been completed.  The Bank's residential mortgage loans are secured by
first liens on the underlying real property, have fixed interest rates, and
generally amortize over a 15-year period with balloon payments due at the end
of three years.  Upon the expiration of each three-year period, the Bank may,
but is not obligated to, renew the loan at the then current market rate for an
additional three-year period.  These loans are limited generally to 80% of the
property value.

The Bank's commercial mortgage loans are secured by first liens on real estate,
typically have floating interest rates, and amortize over a 15-year period with
balloon payments due at the end of three years.  In underwriting commercial
mortgage loans, consideration is given to the property's operating history,
future operating projections, current and projected occupancy, location and
physical condition.  The underwriting analysis also includes credit checks,
appraisals, and a review of the financial condition of the borrower.

The Bank makes loans to finance the construction of residential and, to a
limited extent, nonresidential properties, such as churches.  Construction
loans generally are secured by first liens on real estate and have floating
interest rates.  The Bank conducts periodic inspections, either directly or
through an architect or other agent, prior to approval of periodic draws on
these loans.  Underwriting guidelines similar to those described above are also
used in the Bank's construction lending activities.

The Bank makes automobile, boat, home improvement and other loans to consumers.
These loans are primarily made to customers who have other relationships with
the Bank.  In addition, the Bank began issuing consumer credit cards through
the Visa and MasterCard systems during 1995.  These cards are primarily issued
to customers who have other relationships with the Bank and who are subjected
to examination of creditworthiness prior to approval.  As of December 31, 1996,
and 1995, the Bank had outstanding credit card balances of $2.1 million and
$1.2 million, respectively.

The strong 1996 loan demand created by the Bank's markets is an
indicator of the health in the Houston economy.  The University of Houston's
Center for Public Policy projects an annual employment growth rate of 3% for the
next five years, a significant portion of which is expected to occur in the
manufacturing, trade, and services sectors.  The Bank operates in a strong
economic market, and expects the underlying strength in the Houston area, at
least during the near term, to outperform the national economy.  The Bank
recognizes, however, that the effect of national and international economic
factors may temper the optimistic local forecast and, therefore, the Bank
imposes safeguards in its lending practices.  The Bank seeks to compete
effectively in its chosen markets by consistent application of its business
strategy.  [See further discussion of "Supercommunity Bank Strategy" at page 2
and "Competition" at page 3.]





                                       19
<PAGE>   20
The maturity ranges of the loan portfolio and the amount of loans with
predetermined interest rates and floating rates in each maturity range as of
December 31, 1996, are summarized in the following table (in thousands):

<TABLE>
<CAPTION>
                                                                       Due After
                                             Due in One   One Through  Due After
                                            Year or Less  Five Years   Five Years     Total
                                             -------------------------------------------------
<S>                                          <C>          <C>          <C>          <C>       
Commercial, financial, and industrial:
   US addressees                             $   85,176   $   87,057   $    5,912   $  178,145
   Non-US addressees                              1,078          275         --          1,353
Real estate mortgage and construction            48,336      138,733       15,456      202,525
Consumer                                         21,445       52,143        1,087       74,675

                                             =================================================
Total                                        $  156,035   $  278,208   $   22,455   $  456,698
                                             =================================================

Loans with a predetermined interest rate     $   68,698   $  174,953   $   10,259   $  253,910
Loans with a floating interest rate              87,337      103,255       12,196      202,788
                                             =================================================
                                             $  156,035   $  278,208   $   22,455   $  456,698
                                             =================================================
</TABLE>

As of December 31, 1996, there was no concentration of loans to any one type of
industry exceeding 10% of total loans nor were there any loans classified as
highly-leveraged transactions.

RISK ELEMENTS

Nonperforming, past due, and restructured loans are fully or substantially
secured by assets, with any excess of loan balances over collateral values
specifically allocated in the allowance for credit losses.  The Bank on an
ongoing basis receives updated appraisals on loans secured by real estate,
particularly those categorized as nonperforming loans and potential problem
loans.  In instances where updated appraisals reflect reduced collateral
values, an evaluation of the borrower's overall financial condition is made to
determine the need, if any, for possible writedowns, appropriate additions to
the allowance for credit losses in accordance with SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan."

The Bank records all ORE at the lower of the outstanding loan balance or the
current fair market value, less estimated closing costs at the time of
foreclosure.  Annually, the Bank generally obtains fair value appraisals on all
properties with a carrying value of $250,000 or more.  Adjustments are made to
reflect declines in value subsequent to acquisition.

The Bank defines potential problem loans as those loans not classified as
nonperforming, but where information known by management indicates serious
doubt that the borrower will be able to comply with the present payment terms.
Management identifies these loans through its continuous loan review process
and classifies potential problem loans as those loans graded as substandard,
doubtful, or loss, excluding all nonperforming loans.

The Bank had no material foreign outstandings or loan concentrations for the
years ended December 31, 1992, through 1996.  The Bank, however, continues to
monitor the potential risk of foreign borrowers and concentrations of credit.





                                       20
<PAGE>   21
The following table presents information regarding non-performing loans and
assets as of December 31, 1992 through 1996 (in thousands):

<TABLE>
<CAPTION>
                                                   1996        1995        1994        1993        1992
                                                --------------------------------------------------------
<S>                                             <C>         <C>         <C>         <C>         <C>     
Nonaccrual loans (1)                            $  2,438    $  2,858    $  2,073    $  1,903    $    587
Restructured loans                                    45         103         142         144        --
Accruing loans past due 90 days or more              229         446         413         975         654
                                                --------------------------------------------------------
Total nonperforming loans                          2,712       3,407       2,628       3,022       1,241
Real estate acquired by foreclosure                2,035       1,716       1,706       2,676       3,720
Other repossessed assets                             342          29        --          --          --
                                                ========================================================
Total nonperforming assets                      $  5,089    $  5,152    $  4,334    $  5,698    $  4,961
                                                ========================================================

Nonperforming loans to total loans                  0.55%       0.87%       0.80%       1.04%       0.60%
Nonperforming assets to total assets                0.64%       0.80%       0.72%       1.03%       1.30%

Potential problem loans                         $ 12,738    $ 12,496         N/A         N/A         N/A
                                                ========================================================
</TABLE>

(1)    Interest income of approximately $199,000, $113,000, $110,000, $29,000,
       and $44,000 would have been recorded in each of 1996 through 1992,
       respectively, on nonperforming and restructured loans if the loans had
       been current in accordance with their original terms.


ALLOWANCE FOR CREDIT LOSSES

The Bank has several procedures in place to assist in maintaining the overall
quality of its loan portfolios.  The Bank has established underwriting
guidelines to be followed by its offices.  The Bank also monitors its
delinquency levels for any negative or adverse trends and particularly monitors
credits which have total exposure of $50,000 or more.  However, there can be no
assurance that the Bank's loan portfolios will not become subject to increasing
pressures from deteriorating borrower credit due to general economic
conditions.

The allowance for credit losses is a reserve established through charges to
earnings in the form of a provision for credit losses.  Based on an evaluation
of the loan portfolios, management presents a quarterly review of the allowance
for credit losses to the Bank's Board of Directors, indicating any changes in
the allowance since the last review and any recommendations as to adjustments
in the allowance.  In making its evaluation, management considers the industry
diversification of the Bank's commercial loan portfolio and the effect of
changes in the local real estate market on collateral values.  The Bank also
considers the results of recent regulatory examinations.  The Bank continues to
monitor the effects of current economic indicators and their probable impact on
borrowers, the amount of charge-offs for the period, the amount of
non-performing loans and related collateral security.  The Bank monitors the
loan portfolio through its internal loan review department and obtains an annual
loan review by independent consultants.  Charge-offs occur when loans are deemed
to be uncollectible.

The Bank follows a loan review program to evaluate the credit risk in the
commercial loan portfolio for substantially all commercial loans and real
estate loans.  Through the loan review process, the Bank maintains an
internally classified loan list which, along with the delinquency list of
loans, helps management assess the overall quality of the loan portfolios and
the adequacy of the allowance for credit losses.  Loans classified as
"substandard" are those loans with clear and defined weaknesses such as highly
leveraged positions, unfavorable financial ratios, uncertain repayment sources
or poor financial condition, which may jeopardize recoverability of the debt.





                                       21
<PAGE>   22
Loans classified as "doubtful" are those loans which have characteristics
similar to substandard accounts but with an increased risk that a loss may
occur, or at least a portion of the loan may require a charge-off if liquidated
at present.  Although loans classified as substandard do not duplicate loans
classified as doubtful, both substandard and doubtful loans include some loans
that are delinquent at least 30 days or on nonaccrual status.  Loans classified
as "loss" are those loans which are in the process of being charged off.

At December 31, 1996, substandard loans totaled $13.4 million, of which $3.0
million were loans designated as delinquent or nonaccrual; and doubtful loans
totaled $594,000 of which $322,000 were designated as delinquent or nonaccrual.
At December 31, 1995, substandard loans totaled $11.6 million, of which $4.9
million were loans designated as delinquent or nonaccrual; and doubtful loans
totaled $846,000 of which $399,000 were designated as delinquent or nonaccrual.

In addition to the internally classified loan list and delinquency list of
loans, the Bank maintains a separate "watch list" which further aids the Bank
in monitoring loan portfolios.  Watch list loans show warning elements where
the present status portrays one or more deficiencies that require attention in
the short run or where pertinent ratios of the loan account have weakened to a
point where more frequent monitoring is warranted.  These loans do not have all
the characteristics of a classified loan (substandard or doubtful) but do show
weakened elements as compared with those of a satisfactory credit.  The Bank
reviews these loans to assist in assessing the adequacy of the allowance for
credit losses.  As of December 31, 1996 and 1995, none of the watch list loans
were designated as delinquent and there were none on nonaccrual.  Approximately
99.5% and 99.7% of the loans on the watch list are current and paying in
accordance with loan terms as of December 31, 1996 and 1995, respectively.  As
of December 31, 1996, watch list loans totaled $13.6 million as compared to
$11.8 million at December 31, 1995.

In order to determine the adequacy of the allowance for credit losses,
management considers the risk classification or delinquency status of loans and
other factors.  Management also establishes specific allowances for credits
which management believes require reserves greater than those allocated
according to their classification or delinquent status.  An unallocated
allowance is also established based on the Bank's historical charge-off
experience.  The Bank currently charges against its operations a provision for
credit losses equal to the greater of 0.50% of total loans, determined on an
annualized basis, or the amount necessary to maintain the allowance for credit
losses at an adequate level determined according to the foregoing methodology.





                                       22
<PAGE>   23
The following table presents, for the periods indicated, an analysis of the
allowance for credit losses and other related data (in thousands):

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                    -----------------------------------------------------------------
                                                         1996          1995          1994          1993          1992
                                                    -----------------------------------------------------------------
<S>                                                 <C>           <C>           <C>           <C>           <C>      
Average loans outstanding                           $ 441,034     $ 357,460     $ 308,335     $ 202,624     $ 182,627
                                                    =================================================================
Loans outstanding at period end                     $ 497,429     $ 392,645     $ 328,560     $ 291,762     $ 205,356
                                                    =================================================================

Allowance for credit losses at January 1            $   5,907     $   5,810     $   5,044     $   3,373     $   2,899

Charge-offs:
     Commercial, financial, and industrial             (1,208)         (953)         (689)         (488)         (486)
     Real estate, mortgage and construction               (14)          (16)         (109)         (191)         (233)
     Installment                                         (634)         (203)         (176)         (135)         (158)
                                                    -----------------------------------------------------------------
          Total charge-offs                            (1,856)       (1,172)         (974)         (814)         (877)
Recoveries:
     Commercial, financial, and industrial                268           180           496            50           153
     Real estate, mortgage and construction                27             8           287            26           289
     Installment                                          119           162            36            16           101
                                                    -----------------------------------------------------------------
          Total recoveries                                414           350           819            92           543

Net charge-offs                                        (1,442)         (822)         (155)         (722)         (334)
Provision for credit losses                             2,113           919           921           856           808
Enterprise allowance at purchase date                    --            --            --           1,537          --
                                                    -----------------------------------------------------------------
Allowance for credit losses at December 31          $   6,578     $   5,907     $   5,810     $   5,044     $   3,373
                                                    =================================================================

Ratios:
     Allowance to average loans                          1.49%         1.65%         1.88%         2.37%         1.85%
     Allowance to period end loans                       1.32%         1.50%         1.77%         1.73%         1.64%
     Net charge-offs to average loans                    0.33%         0.23%         0.05%         0.34%         0.18%
     Allowance to period-end nonperforming assets      129.26%       125.52%       148.18%       106.80%        78.31%
</TABLE>





                                       23
<PAGE>   24
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES

The following table describes the allocation of the allowance for credit losses
among various categories of loans and certain other information as of the dates
indicated.  The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future loan losses may occur.
The total allowance is available to absorb losses from any segment of loans.

<TABLE>
<CAPTION>
                                                     Year ended December 31,
                                                          (In thousands)
                           ------------------------------------------------------------------------------------------------------
                                        1996                                    1995                          1994               
                           ------------------------------------------------------------------------------------------------------
Balance of allowance                                     % of                                   % of                             
for credit losses                                      Loans to                                Loans to                          
applicable to:                            % of          Total                      % of         Total                  % of      
                            Amount      Allowance       Loans       Amount       Allowance      Loans      Amount     Allowance   
                           ------------------------------------------------------------------------------------------------------
<S>                        <C>                 <C>          <C>   <C>                 <C>          <C>    <C>              <C>   
Commercial, financial                                                                                                            
     and industrial        $   2,109           32%          64%   $   1,385           23%          51%    $   1,843        32%   
Real estate mortgage             282            4%          11%       1,066           18%          43%          997        17%   
Real estate construction         203            3%           9%        --              0%           0%          121         2%   
Installment                      480            7%          16%         230            4%           6%           60         1%   
Unallocated                    3,504           53%         N/A        3,226           55%         N/A         2,789        48%   
                                                                                                                                 
                           ======================================================================================================
                           $   6,578          100%         100%   $   5,907          100%         100%    $   5,810       100%   
                           ======================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                           -------------------------------------------------------------------------------------
                              1994                           1993                                    1992
                           -------------------------------------------------------------------------------------
Balance of allowance            % of                                 % of                                   % of   
for credit losses             Loans to                             Loans to                               Loans to 
applicable to:                 Total                   % of          Total                    % of         Total   
                               Loans       Amount    Allowance      Loans      Amount       Allowance      Loans   
                           -------------------------------------------------------------------------------------
<S>                               <C>   <C>              <C>          <C>   <C>                 <C>          <C>
Commercial, financial                              
     and industrial               38%   $   1,152        23%          37%   $     758           22%          33%
Real estate mortgage              41%         634        13%          44%         166            5%          46%
Real estate construction           6%         121         2%           6%        --              0%           6%
Installment                       15%         164         3%          13%         230            7%          12%
Unallocated                      N/A        2,973        59%         N/A        2,219           66%         N/A
                                                   
                           =====================================================================================
                                 100%   $   5,044       100%         100%   $   3,373          100%          97%
                           =====================================================================================
</TABLE>

INVESTMENT SECURITIES

The following table summarizes the book value of investment securities held by
the Bank as of the dates shown.  See Note D to the Company's consolidated
financial statements for information relating to fair values and details of
held-to-maturity and available-for-sale investment securities.

<TABLE>
<CAPTION>
                                                              Year ended December 31,
                                                                   (In thousands)
                                        --------------------------------------------------------------------
                                             1996           %        1995           %        1994           %
                                         --------------------------------------------------------------------
<S>                                      <C>             <C>     <C>             <C>     <C>             <C>  
U.S. Treasury & U.S. government
   agency securities                     $ 66,621        43.8%   $ 72,064        43.0%   $ 91,051        47.4%
States and political subdivisions          22,227        14.6%     22,732        13.6%     23,041        12.0%
Mortgage-backed securities                 59,225        38.9%     68,760        41.0%     76,778        40.0%
Other securities                            4,180         2.7%      3,956         2.4%      1,087         0.6%
                                         ====================================================================
                                         $152,253       100.0%   $167,512       100.0%   $191,957       100.0%
                                         ====================================================================
</TABLE>

At December 31, 1996, investment securities of $152.3 million had decreased
$15.2 million from $167.5 million at December 31, 1995, as the Bank continued
to use proceeds from repayments and maturities of investment securities to fund
the Bank's temporary mortgage purchase program and growing loan portfolio.  At
December 31, 1995, investment securities of $167.5 million had decreased $24.5
million from $192.0 million at December 31, 1994, as proceeds from repayments
and maturities of investment securities were used to fund the Bank's growing
loan portfolio.  At December 31, 1996, investment securities represented 21.2%
of total deposits and 19.3% of total assets.  The portfolio investment mix at
December 31, 1996, remained relatively unchanged when compared to December 31,
1995.

During 1996, the Bank made $17.3 million in purchases of U.S. agency and
mortgage-backed securities.  In addition, the Bank reinvested $240,000 in
dividends from its stock in the Federal Home Loan Bank.  During 1995, the Bank
purchased $754,000 in local municipal obligations.  In 1994, the Bank 
invested deposits in excess of those required to fund loans, as well as a
portion of the proceeds of maturing U.S. Treasury securities, in various fixed
and floating rate agency issued mortgage-backed securities.  Such investment in
mortgage-





                                       24
<PAGE>   25
backed securities was undertaken after an analysis of the Company's
asset/liability and interest rate sensitivity positions and liquidity
requirements, and was designed to take advantage of higher-yielding investment
products without subjecting the Company to undue exposure to future interest
rate increases.  In making these investments, the duration of the entire
investment portfolio has been kept within four years.  The Company has
concluded that its balance sheet is properly structured and consistent with
achieving a reliable and steady stream of investment income.

The yield on the Bank's investment portfolio at December 31, 1996, was 6.6% and
the weighted average life of the portfolio was approximately 3.74 years.  The
yield on the Bank's investment portfolio at December 31, 1995, was 6.6% and the
weighted average life of the portfolio was approximately 5.01 years.  The yield
on the investment portfolio for 1994 was 6.1% and the weighted average life of
the investment portfolio was approximately 4.41 years.

The maturity distribution and weighted average yield of the Bank's investment
portfolio as of December 31, 1996, are summarized in the following table.
Weighted average yield is calculated by dividing income within each maturity
range by the outstanding amount of the related investment.

<TABLE>
<CAPTION>
                                                                                 December 31, 1996
                                                                                  (In thousands)
                                     --------------------------------------------------------------------------------------------
                                          Due less                                                      Due Greater               
                                         Than 1-Year          Due 1-5 Years        Due 5-10 Years       Than Years        Total
                                     --------------------------------------------------------------------------------------------
                                      Amount     Yield      Amount     Yield     Amount      Yield     Amount   Yield
                                     --------------------------------------------------------------------------------------------
<S>                                  <C>          <C>     <C>          <C>     <C>          <C>     <C>                  <C>     
U.S. Treasury and
    U.S. government
    agency securities                $  8,995     5.75%   $ 43,869     6.04%   $ 13,757     6.26%   $      -        -    $ 66,621
State and political
     subdivisions                         392     5.13%      7,910     5.07%     12,225     4.98%      1,700     5.46%     22,227
Mortgage-backed
     securities                         4,664     5.77%     28,853     6.45%     14,109     6.84%     11,599     7.89%     59,225
Other securities                            -                   10                    -                4,170        -       4,180
                                     --------------------------------------------------------------------------------------------
                                     $ 14,051     5.74%   $ 80,642     5.49%   $ 40,091     6.08%   $ 17,469     5.77%   $152,253
                                     ========             ========             ========             ========             ========
</TABLE>

At December 31, 1996, 19.58% of the mortgage-backed securities held by the Bank
have remaining maturities of more than 10 years.  However, unlike U.S. Treasury
and U.S. government agency securities, which have a lump sum payment at
maturity, mortgage-backed securities provide cash flows from regular principal
and interest payments and principal prepayments throughout the lives of the
securities.  Due to the significance of monthly principal and interest payments
and anticipated principal prepayments, the weighted average life of the
mortgage-backed securities portfolio was estimated to be 3.5 years at December
31, 1996.  If interest rates rise, prepayments may decrease and if interest
rates fall, prepayments may increase.  Approximately $19.5 million of the
Bank's mortgage-backed securities earn interest at floating rates and reprice
within one year, and accordingly are less susceptible to declines in value
should interest rates increase.

DEPOSITS

The Bank's lending and investing activities are funded almost entirely by core
deposits, approximately three-fourths of which are demand and savings deposits.
Average noninterest-bearing deposits for 1996 were $199.1 million as compared
to $169.0 million for 1995, an increase of $30.0 million or 17.8% over 1995.
Deposits grew due to a combination of same location growth and as the result of
the opening of two new locations in 1996.  Approximately 31.8% of average 1996
deposits were noninterest bearing.  Noninterest bearing deposits increased from
$155.9 million or 32.5% of average total deposits for 1994 to $169.0 million or
30.9% of average total deposits for 1995.  The Bank does not accept brokered
deposits.





                                       25
<PAGE>   26
The Bank's average total deposits for 1996 were $626.1 million, or $105.7
million and 20.3% over average total deposits during 1995 which were $520.4
million, and increased $16.8 million, or 3.3% from average total deposits of
$503.6 million during 1994.  The Bank's total deposits at December 31, 1996,
were $717.4 million, up $142.7 million or 24.8% over total deposits of $574.7
million at year-end 1995.  Deposit growth was concentrated primarily in core
deposits, consisting of all deposits other than retail and public fund
certificates of deposit in excess of $100,000.

The average balances and weighted average rates paid on deposits for each of
the years ended December 31, 1996, 1995, and 1994 are presented below (in
thousands):

<TABLE>
<CAPTION>
                                               --------------------------------------------------------------------
                                                      1996                   1995                  1994
                                               --------------------------------------------------------------------
                                               Average    Average     Average    Average     Average    Average
                                               Balance     Rate       Balance     Rate       Balance      Rate
                                               --------------------------------------------------------------------
<S>                                            <C>                   <C>                   <C>             
Noninterest-bearing demand deposits            $ 199,095     --      $ 168,987     --      $ 155,860     --
Interest-bearing demand and savings deposits     268,696     3.07%     205,952     2.73%     207,509     2.45%
Time deposits                                    158,327     4.91%     145,422     4.81%     140,269     3.56%
                                               ---------             ---------             --------- 
Total deposits                                 $ 626,118     2.56%   $ 520,361     2.42%   $ 503,638     1.94%
                                               =========             =========             =========     
</TABLE>

The Bank's time deposits of $100,000 or more have consistently shown a pattern
of renewal similar to that for deposits of less than $100,000.  The remaining
maturity on certificates of deposit of $100,000 or more is presented below at
December 31, 1996, 1995 and 1994 (in thousands).

<TABLE>
<CAPTION>
                                 ---------------------------------
               Maturity            1996         1995        1994
                                 ---------   ---------   ---------
<S>                              <C>         <C>         <C>      
3 months or less                 $  33,733   $  21,708   $  25,237
3 to 6 months                       11,581      11,453      10,646
6 to 12 months                      14,074      10,095       9,156
Over 12 months                       9,145       8,759       7,832
                                 ---------   ---------   ---------
                                 $  68,533   $  52,015   $  52,871
                                 =========   =========   =========
</TABLE>


BORROWINGS

Deposits are the primary source of funds for the Bank's lending and investment
activities and for its general business purposes.  Occasionally, the Bank
obtains additional funds from the Federal Home Loan Bank and correspondent
banks.  For much of 1995, as the Bank's loan growth exceeded growth in its
deposit base, the Bank borrowed pursuant to such arrangements.  In September
1995, the Bank introduced a new money market account providing a yield generally
aligned with, and 25 basis points below, the 13 week U.S. Treasury bill.  The
new deposit product was well received by the market and provided substantial new
funding to the Bank, enabling the Bank to repay all borrowed funds before the
end of the year.

Effective December 31, 1993, the Company borrowed $6.6 million from a regional
bank to fund part of the Enterprise acquisition.  On March 4, 1994, the Company
borrowed an additional $1.4 million pursuant to the same facility to fund part
of the redemption payment due to holders of Guardian Bancshares, Inc.,
preferred stock.  Pursuant to the terms of the agreement, interest only was due
March 31, and June 30, 1994.  Effective September 30, 1994, and quarterly
thereafter until paid in full, principal of $400,000 plus interest will be due.
The Company has paid ten quarterly principal amounts of $400,000 each, and
current outstanding indebtedness under this facility has been reduced to $4.0
million at December 31, 1996.





                                       26
<PAGE>   27
At December 31, 1995, the Company had $200,000 in outstanding senior
debentures.  On February 26, 1996, the total amount of senior debentures
matured and paid in full.  The Company has no other outstanding borrowings at
December 31, 1996.

INTEREST RATE SENSITIVITY AND LIQUIDITY

The Company's Funds Management Policy provides management with the necessary
guidelines for effective funds management, and the Company has established a
measurement system for monitoring its net interest rate sensitivity position.
The Company's objectives are generally to maintain a relatively balanced
position between interest rate sensitive assets and interest rate sensitive
liabilities with minor adjustments for rising or declining interest rate
environments.

An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or experiences an interest rate change in line with
general market interest rates.  The management of interest rate risk is
performed by analyzing the maturity and repricing relationships between
interest-earning assets and interest-bearing liabilities at specific points in
time ("GAP") and by analyzing the effects of interest rate changes on net
interest income over specific periods of time by projecting the performance of
the mix of assets and liabilities in varied interest rate environments.
Interest rate sensitivity reflects the potential effect on net interest income
of a movement in interest rates.  A company is considered to be asset
sensitive, or having a positive GAP, when the amount of its interest-earning
assets maturing or repricing within a given period exceeds the amount of its
interest-bearing liabilities also maturing or repricing within that time
period.  Conversely, a company is considered to be liability sensitive, or
having a negative GAP, when the amount of its interest-bearing liabilities
maturing or repricing within a given period exceeds the amount of its interest-
earning assets also maturing or repricing within that time period.  During a
period of rising interest rates, a negative GAP would tend to affect adversely
net interest income, while a positive GAP would tend to result in an increase
in net interest income.  During a period of falling interest rates, a negative
GAP would tend to result in an increase in net interest income, while a
positive GAP would tend to affect net interest income adversely.





                                       27
<PAGE>   28
When analyzing its GAP position, the Company emphasizes the next twelve month
period.  The following table shows the interest rate sensitivity GAPs for five
different time periods and the cumulative interest rate sensitivity GAPs for
the same periods as of December 31, 1996:

<TABLE>
<CAPTION>
                                        ------------------------------------------------------------------------------- 
                                          0-90         90-180        180-365         1-5           Over
                                          Days          Days           Days         Years        5 Years        Total
                                        ------------------------------------------------------------------------------- 
                                                      (In thousands, except for data expressed in percents)
<S>                                     <C>           <C>           <C>           <C>           <C>           <C>      
Interest earning assets:
Federal funds sold                      $  30,000     $    --       $    --       $    --       $    --       $  30,000
Interest bearing deposits in other
  financial institutions                       22          --            --            --            --              22
Investment securities                      22,406           101        18,710        50,533        60,503       152,253
Loans                                     260,591        14,324        26,611       185,876        10,027       497,429
                                        ------------------------------------------------------------------------------- 
   Total interest earning assets        $ 313,019     $  14,425     $  45,321     $ 236,409     $  70,530     $ 679,704

Interest bearing liabilities:
Demand and savings deposits             $ 546,815     $    --       $    --       $    --       $    --       $ 546,815
Certificates of deposit and
   other time deposits                     67,928        37,655        39,745        25,270          --         170,598
Other borrowings                            3,751          --            --            --            --           3,751
Notes payable                               4,000          --            --            --            --           4,000
                                        ------------------------------------------------------------------------------- 
   Total interest bearing liabilities   $ 622,494     $  37,655     $  39,745     $  25,270     $    --       $ 725,164

Period GAP                              $(309,475)    $ (23,230)    $   5,576     $ 211,139     $  70,530     $ (45,460)

Cumulative GAP                          $(309,475)    $(332,705)    $(327,129)    $(115,990)    $ (45,460)

Period GAP to total assets                 (39.17)%       (2.94)%        0.71%        26.72%         8.93%

Cumulative GAP to total assets             (39.17)%      (42.11)%      (41.40)%      (14.68)%       (5.75)%
</TABLE>

Shortcomings are inherent in any GAP analysis since certain assets and
liabilities may not re-price proportionally as interest rates change.
Consequently, the Company's management has begun to utilize an interest rate
risk simulation model to increase its ability to monitor and forecast the
effect of various interest rate environments on earnings and its net capital
position.  Based on the Company's December 31, 1996, interest rate sensitivity
position, the Company estimates that a 100 basis point change in interest rates
would have an impact of less than five percent on its net interest income over
a twelve month period.

LIQUIDITY

Liquidity involves the Company's ability to raise funds to support asset growth
or reduce assets to meet deposit withdrawals and other payment obligations, to
maintain reserve requirements and otherwise to operate the Company on an
ongoing basis.  During the past four and one-half years, the Company's
liquidity needs have primarily been met by growth in core deposits, as
previously discussed.  Although access to purchased funds from correspondent
banks is available and has been utilized on occasion to take advantage of
investment opportunities, the Company does not generally rely on these external
funding sources.  Generally, the cash and federal funds sold position,
supplemented by amortizing investment and loan portfolios, have created an
adequate liquidity position.





                                       28
<PAGE>   29
CAPITAL RESOURCES

At December 31, 1996, shareholders' equity totaled $59.4 million or 7.5% of
total assets, as compared to $49.7 million and 7.7% of total assets for the
year ended 1995, and $39.6 million or 6.6% of total assets at December 31,
1994.

Bank regulatory authorities in the United States have issued risk-based capital
standards by which all bank holding companies and banks will be evaluated in
terms of capital adequacy.  These guidelines relate a banking company's capital
to the risk profile of its assets.  Tier 1 capital includes common
stockholders' equity and qualifying perpetual preferred stock together with
related surpluses and retained earnings.  Tier 2 capital may be comprised of
limited life preferred stock, qualifying debt instruments, and the reserves for
credit losses.

Banking regulators have also issued leverage ratio requirements.  The leverage
ratio requirement is measured as the ratio of Tier 1 capital to adjusted
assets.  The risk-based capital and leverage ratio requirements replaced the
primary capital and total capital guidelines used previously.  See Note U to
the Company's consolidated financial statements for further discussion of the
Company's and the Bank's regulatory capital requirements.  The follow table
shows the Company's capital ratios for the periods presented and the minimum
regulatory requirements:


<TABLE>
<CAPTION>
                                         December 31,                  Minimum
                                 -----------------------------        Regulatory
                                   1996       1995       1994        Requirements
                                 -----------------------------       -------------
<S>                               <C>        <C>         <C>             <C>
Risk based capital ratios:                                          
     Tier 1                       10.27%     10.82%      10.41%          4.00%
     Total Capital                11.44%     12.07%      11.67%          8.00%
Leverage Ratio                     8.03%      7.66%       6.57%          3.00%
</TABLE>

Under the FDIC's finalized regulations, the Company and the Bank are well
capitalized.





                                       29
<PAGE>   30
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the index included on page 33 and the Consolidated Financial Statements
which begin on page 35 of this Form 10-K.

ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
          ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no disagreements with accountants on any matter of accounting
principles or practices or financial statement disclosures during the twenty-
four (24) month period ended December 31, 1996.

PART - III

ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth under the caption "ELECTION OF DIRECTORS" of the
Company's Proxy Statement dated March 21, 1997, relating to the 1997 Annual
Meeting of Shareholders of the Company, is incorporated herein by reference.

ITEM 11 -- EXECUTIVE COMPENSATION

The information set forth under the caption "EXECUTIVE COMPENSATION" of the
Company's Proxy Statement dated March 21, 1997, relating to the 1997 Annual
Meeting of Shareholders of the Company, is incorporated herein by reference.

ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information relating to the beneficial ownership of the outstanding shares
of Common Stock of the Company by its directors and executive officers set
forth under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" of the Company's Proxy Statement dated March 21, 1997, relating to
the 1997 Annual Meeting of Shareholders of the Corporation, is incorporated
herein by reference.

ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption "CERTAIN TRANSACTIONS" of the
Company's Proxy Statement dated March 21, 1997, relating to the 1997 Annual
Meeting of Shareholders of the Company, is incorporated herein by reference.

PART  -- IV

ITEM 14  -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(b)  Reports on Form 8-K

       No reports on Form 8-K were filed during the quarter ended December 31,
       1996.

(c)  Exhibits

2.1  Merger Agreement dated as of October 21, 1993, between Sterling Bancshares,
     Inc., and Guardian Bancshares, Inc. [Incorporated by reference to exhibit
     2(a) of the Company's Registration Statement on Form S-4, effective
     February 10, 1994 (Registration No. 33-71660)]

2.2  Amendment No. 1 dated as of January 26, 1994, to the Merger Agreement dated
     as of October 21, 1993, between Sterling Bancshares, Inc., and Guardian
     Bancshares, Inc. [Incorporated by reference to exhibit 2(b) of the
     Company's Registration Statement on Form S-4, effective February 10, 1994
     (Registration No. 33-71660)]





                                       30
<PAGE>   31
2.3   Stock Purchase Agreement dated as of September 10, 1993, among Sterling
      Bancshares, Inc., Sterling Bancorporation, Inc., Enterprise Bank--
      Houston, and the Shareholder Representatives of Enterprise Bank--Houston,
      Inc. [Incorporated by reference to exhibit 2(c) of the Company's
      Registration Statement on Form S-4, effective February 10, 1994
      (Registration No. 33-71660)]

3.1   Articles of Incorporation of the Registrant and all amendments thereto
      [Incorporated by reference to Exhibits 4.1 to 4.6 of the Company's Report
      on Form 10-Q for the quarter ended June 30, 1996]

3.2   Restated By-Laws of the Registrant [Incorporated by reference to Exhibit
      4.2 of the Company's Registration Statement on Form S-8, effective
      November 25, 1996 (File No. 333-16719)]

10.1* 1994 Incentive Stock Option Plan of the Registrant [Incorporated by
      reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for
      the year ended December 31, 1994]

10.2  1994 Employee Stock Purchase Plan of the Registrant [Incorporated by
      reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K for
      the year ended December 31, 1994]

10.3* 1984 Incentive Stock Option Plan of the Registrant [Incorporated by
      reference to Exhibit 10.1 of the Company's Registration Statement on Form
      S-1, effective October 22, 1992 (Registration No. 33-51476)]

10.4  Loan Agreement dated November 24, 1993, between Sterling Bancshares,
      Inc., Sterling Bancorporation, Inc., and First Interstate Bank of Texas,
      N.A [Incorporated by reference to exhibit 10(j) of the Company's
      Registration Statement on Form S-4, effective February 10, 1994
      (Registration No. 33-71660)]

10.5* Settlement and Release Agreement dated October 2, 1995, between Sterling
      Bancshares, Inc., and C. Frank Kurtin

10.6* Consulting Contract dated October 2, 1995, between Sterling Bancshares,
      Inc., and C. Frank Kurtin

10.7* 1995 Non-Employee Director Stock Compensation Plan [Incorporated by
      reference to Exhibit 5.1 of the Company's Registration Statement on Form
      S-8, effective November 25, 1996 (File No. 333-16719)]

21    Subsidiaries of the Registrant [Incorporated by reference to Exhibit 21
      of the Company's Registration Statement on Form S-1, effective October
      22, 1992 (Registration No. 33-51476)]

*   Management Compensation Agreement





                                       31
<PAGE>   32
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.



                                           STERLING BANCSHARES, INC.
                                           
                                           by  /s/ George Martinez             
                                              ---------------------------------
DATE:  March 18, 1997                      George Martinez,
                                           Chairman and Chief Financial Officer
                                           


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacity indicated on this the 18th day of March, 1996.


<TABLE>
<CAPTION>
SIGNATURE                         TITLE                       SIGNATURE                         TITLE
---------                         -----                       ---------                         -----
<S>                               <C>                         <C>                               <C>
 /s/ George Martinez              Chairman and Director        /s/ James Kearney                Director
------------------------------                                ------------------------------            
George Martinez                                               James Kearney
                                                              
                                                              
 /s/ Mark T. Giles                President and Director       /s/ C. Frank Kurtin              Director
------------------------------                                ------------------------------            
Mark T. Giles                                                 C. Frank Kurtin
                                                              
                                                              
 /s/ C. P. Bryan, Jr.             Executive Vice President     /s/ Russell Orr                  Director
------------------------------    and Director                ------------------------------            
C. P. Bryan, Jr.                                              Russell Orr
                                                              
                                                              
 /s/ John H. Buck                 Director                    /s/ Wayne Owen                    Director
------------------------------                                ------------------------------            
John H. Buck                                                  Wayne Owen
                                                              
                                                              
/s/ George D. Francklow, Jr.      Director                    /s/ Christian A. Rasch            Director
------------------------------                                ------------------------------            
George D. Francklow, Jr.                                      Christian A. Rasch
                                                              
                                                              
/s/ Walter P. Gibbs, Jr.          Director                    /s/ Steven F. Retzloff            Director
------------------------------                                ------------------------------            
Walter P. Gibbs, Jr.                                          Steven F. Retzloff
                                                              
                                                              
/s/ Bruce J. Harper               Director                    /s/ Raimundo Riojas               Director
------------------------------                                ------------------------------            
Bruce J. Harper                                               Raimundo Riojas
                                                              
                                                              
/s/ Glenn H. Johnson              Director                    /s/ Cuba Wadlington, Jr.          Director
------------------------------                                ------------------------------            
Glenn H. Johnson                                              Cuba Wadlington, Jr.
</TABLE>





                                       32
<PAGE>   33
STERLING BANCSHARES, INC.


TABLE OF CONTENTS
<TABLE>
<CAPTION>
-------------------------------------------------------------
                                                         PAGE
                                                         ----
<S>                                                       <C>

INDEPENDENT AUDITORS' REPORT                              34

CONSOLIDATED FINANCIAL STATEMENTS:

   Balance Sheets                                         35

   Statements of Income                                   36

   Statements of Shareholders' Equity                     38

   Statements of Cash Flows                               40

   Notes to Consolidated Financial Statements             42
</TABLE>



                                      33









<PAGE>   34





INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders of
    Sterling Bancshares, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheets of Sterling
Bancshares, Inc. and subsidiaries (the "Company") as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Sterling Bancshares,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.




DELOITTE & TOUCHE LLP
Houston, Texas
March 7, 1997 (except for Note X as to which the date is March 18, 1997)





                                      34

<PAGE>   35


STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS,
DECEMBER 31, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>           <C>
ASSETS                                                                                1996          1995
<S>                                                                                   <C>           <C>
Cash and due from banks (Note C)                                                   $  78,442    $  60,075
Federal funds sold                                                                    30,000        5,000
                                                                                   ---------    ---------
                Total cash and cash equivalents                                      108,442       65,075

Interest-bearing deposits in financial institutions                                       22        1,135
Available-for-sale investment securities, at fair value (amortized cost of
 $4,170 and $3,931 at December 31, 1996 and 1995, respectively) (Note D)               4,170        3,931
Held-to-maturity investment securities, at cost (fair value of $147,665 and
  $164,111 at December 31, 1996 and 1995, respectively) (Note D)                     148,083      163,581
Equity in unconsolidated subsidiary                                                    2,316         --
Loans held for sale                                                                   40,731        7,868

Loans (Notes E and F)                                                                456,698      384,777
Allowance for credit losses (Note G)                                                  (6,578)      (5,907)
                                                                                   ---------    ---------
                Loans, net                                                           450,120      378,870

Accrued interest receivable                                                            4,725        4,449
Real estate acquired by foreclosure                                                    2,035        1,716
Premises and equipment, net (Note H)                                                  23,100       14,823
Goodwill, net of accumulated amortization of $2,310 and $1,983 at December 31,
 1996 and 1995, respectively                                                           1,839        2,166
Other assets                                                                           4,490        3,735
                                                                                   ---------    ---------
TOTAL ASSETS                                                                       $ 790,073    $ 647,349
                                                                                   =========    =========

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
   Demand deposits:
      Noninterest-bearing                                                          $ 245,571    $ 190,333

      Interest-bearing                                                               301,244      237,778
   Certificates of deposit and other time deposits (Note I)                          170,598      146,613
                                                                                   ---------    ---------
                Total deposits                                                       717,413      574,724

   Securities sold under agreements to repurchase (Note J)                             3,751       12,083
   Accrued interest payable and other liabilities                                      5,502        5,051
   Notes payable (Note K)                                                              4,000        5,600
   Senior debentures (Note L)                                                           --            200
                                                                                   ---------    ---------
                Total liabilities                                                    730,666      597,658

COMMITMENTS AND CONTINGENCIES (Notes Q and T)

SHAREHOLDERS' EQUITY (Notes O, P, R and U):
   Preferred stock, $1 par value; 1,000,000 shares authorized, 88,380 and 49,500
      issued and outstanding at December 31, 1996 and 1995, respectively                  88           49
   Common stock, $1 par value; 20,000,000 and 10,000,000 shares authorized,
      7,966,000 and 7,859,000 issued and outstanding at December 31, 1996 and
      1995, respectively                                                               7,966        7,859
   Capital surplus                                                                    16,058       14,985
   Retained earnings                                                                  35,426       27,005
   Net unrealized losses on held-to-maturity investment securities transferred
      from available-for-sale, net of tax of $67 and $107 at December 31, 1996
      and 1995, respectively                                                            (131)        (207)
                                                                                   ---------    ---------
                Total shareholders' equity                                            59,407       49,691
                                                                                   ---------    ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                         $ 790,073    $ 647,349
                                                                                   =========    =========
</TABLE>


See notes to consolidated financial statements



                                      35

<PAGE>   36



STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands except per share amounts)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
                                                         1996      1995      1994

<S>                                                     <C>       <C>       <C>
INTEREST INCOME:
   Loans, including fees                                $42,861   $35,755   $28,034
   Investment securities:
      Taxable                                             8,158     9,605    10,339
      Nontaxable                                          1,122     1,152     1,106
   Federal funds sold and
      securities purchased under agreements to resell       732        89       221
   Deposits in financial institutions                       540       133        35
                                                        -------   -------   -------

               Total interest income                     53,413    46,734    39,735
                                                        -------   -------   -------

INTEREST EXPENSE:
   Demand and savings deposits                            8,251     5,620     5,082
   Certificates and other time deposits                   7,773     6,988     4,996
   Federal funds purchased and
     securities sold under agreements to repurchase         318     1,362       366
   Notes payable                                            384       525       586
   Senior debentures                                          1        62       110
                                                        -------   -------   -------

                Total interest expense                   16,727    14,557    11,140
                                                        -------   -------   -------

NET INTEREST INCOME                                      36,686    32,177    28,595
                                                        -------   -------   -------

PROVISION FOR CREDIT LOSSES (Note G)                      2,113       919       921
                                                        -------   -------   -------

NET INTEREST INCOME AFTER
  PROVISION FOR CREDIT LOSSES                            34,573    31,258    27,674
                                                        -------   -------   -------

NONINTEREST INCOME:
   Customer service fees                                  5,141     5,128     4,768
   Earnings of unconsolidated subsidiary                    316      --        --
   Other                                                  2,507     2,408     2,367
                                                        -------   -------   -------

                Total noninterest income                  7,964     7,536     7,135
                                                        -------   -------   -------
</TABLE>




                                      36

<PAGE>   37
STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>                                                                                                 
------------------------------------------------------------------------------------------------------------

                                                                                1996       1995        1994

NONINTEREST EXPENSE:
<S>                                                                             <C>        <C>         <C>  
   Salaries and employee benefits (Note N)                                   $ 16,606   $ 15,140    $ 12,872
   Depreciation and amortization                                                2,520      2,734       2,169
   Net occupancy expense                                                        1,516      1,398       1,578
   (gains) losses and carrying costs of real estate acquired by foreclosure        155       (107)       (144)
   FDIC assessment                                                                  2        582       1,100
   Data processing                                                                537        728       1,135
   Postage and delivery charges                                                   751        702         657
   Equipment expense                                                              649        694         596
   Supplies                                                                       573        595         480
   Telephone and communication                                                    629        486         301
   Professional fees                                                              490        522         932
   Other                                                                        2,706      2,307       2,782
                                                                             --------   --------    --------
          Total noninterest expenses                                           27,134     25,781      24,458
                                                                             --------   --------    --------
INCOME BEFORE INCOME TAXES                                                     15,403     13,013      10,351

PROVISION FOR INCOME TAXES (Note M)                                             4,479      4,147       3,200
                                                                             --------   --------    --------

NET INCOME                                                                   $ 10,654   $  8,866    $  7,151
                                                                             ========   ========    ========
PRIMARY EARNINGS PER SHARE (Note P)                                          $   0.87   $   0.74    $   0.60
                                                                             ========   ========    ========
FULLY DILUTED EARNINGS PER SHARE (Note P)                                    $   0.86   $   0.73    $   0.60
                                                                             ========   ========    ========
</TABLE>

See notes to consolidated financial statements 



                                      37

<PAGE>   38
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands except share amounts)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                         Preferred Stock         Common Stock
                                                                      ----------------------  -------------------  Capital  Retained
                                                                         Shares     Amount      Shares    Amount   Surplus  Earnings
<S>                                                                      <C>        <C>         <C>        <C>     <C>      <C>
BALANCE AT JANUARY 1, 1994                                                   -      $    -      7,716      $7,716  $14,030  $14,046
   Unrealized gain on available-for-sale securities upon adoption of                         
      SFAS No. 115                                                           -           -          -           -        -        -
   Sale of common stock, at an average price of $2.15 per share,             -           -        102         102      174      (57)
   Cash dividends paid, at $0.18 per share,                                  -           -          -           -        -   (1,311)
   Net change in unrealized loss on available-for-sale securities            -           -          -           -        -        -
   Net income                                                                                                            -    7,151
                                                                         -----      ------      -----      ------  -------  -------
BALANCE AT DECEMBER 31, 1994                                                 -           -      7,818       7,818   14,204   19,829
   Sale of common stock, at an average price of $5.12 per share              -           -         41          41      185      (16)
   Sale of preferred stock, at an average price of  $13.16 per share        49          49          -           -      596        -
   Cash dividends paid, at $.21 per share                                    -           -          -           -        -   (1,674)
   Unrealized loss on held-to-maturity investment securities                                 
      transferred from available-for-sale                                    -           -          -           -        -        -
   Net change in unrealized loss on available-for-sale investment                            
      securities                                                             -           -          -           -        -        -
   Net income                                                                -           -          -           -        -    8,866
                                                                         -----       -----      -----      ------  -------  -------
BALANCE AT DECEMBER 31, 1995                                                49          49      7,859       7,859   14,985   27,005
   Sale of common stock, at an average price of $5.92 per share              -           -        107         107      537      (11)
   Sale of preferred stock, at an average price of  $14.79 per share        39          39          -           -      536        -
   Cash dividends paid, at $.28 per share                                    -           -          -           -        -   (2,222)
   Amortization of unrealized loss on held-to-maturity investment                            
      securities transferred from available-for-sale                         -           -          -           -        -        -
   Net income                                                                -           -          -           -        -   10,654
                                                                         -----      ------     ------      ------  -------  -------
BALANCE AT DECEMBER 31, 1996                                                88      $   88      7,966      $7,966  $16,058  $35,426
                                                                         =====      ======     ======      ======  =======  =======
</TABLE>
<TABLE>
<CAPTION>
                                                                                                Net Unrealized
                                                                            Net Unrealized      Gain (Loss) on
                                                                           Gain (Loss) on      Held-to-Maturity                
                                                                          Available-for-Sale  Investment Securities
                                                                              Investment        Transferred from           Total
                                                                              Securities,      Available-for-Sale      Shareholders'
                                                                             Net of Taxes         Net of Taxes             Equity
<S>                                                                          <C>                  <C>                  <C>
BALANCE AT JANUARY 1, 1994                                                   $       -            $       -            $35,792
   Unrealized gain on available-for-sale securities upon adoption of                                                          
      SFAS No. 115                                                               1,107                    -              1,107
   Sale of common stock, at an average price of $2.15 per share                      -                    -                219
   Cash dividends paid, at $0.18 per share                                           -                    -             (1,311)
   Net change in unrealized loss on available-for-sale securities               (3,335)                   -             (3,335)
   Net income                                                                        -                    -              7,151
                                                                             ---------             --------            ------- 
BALANCE AT DECEMBER 31, 1994                                                    (2,228)                   -             39,623
   Sale of common stock, at an average price of $5.12 per share                      -                    -                210
   Sale of preferred stock, at an average price of  $13.16 per share                 -                    -                645
   Cash dividends paid, at $.21 per share                                            -                    -             (1,674)
   Unrealized loss on held-to-maturity investment securities        
      transferred from available-for-sale                                          207                 (207)                 -
   Net change in unrealized loss on available-for-sale investment   
      securities                                                                 2,021                    -              2,021
   Net income                                                                        -                    -              8,866
                                                                             ---------             --------            ------- 
BALANCE AT DECEMBER 31, 1995                                                         -                 (207)            49,691
   Sale of common stock, at an average price of $5.92 per share                      -                    -                633
   Sale of preferred stock, at an average price of  $14.79 per share                 -                    -                575
   Cash dividends paid, at $.28 per share                                            -                    -             (2,222)
   Amortization of unrealized loss on held-to-maturity investment   
      securities transferred from available-for-sale                                 -                   76                 76
   Net income                                                                        -                    -             10,654
                                                                             ---------             --------            -------  
BALANCE AT DECEMBER 31, 1996                                                 $       -             $   (131)           $59,407
                                                                             =========             ========            =======
</TABLE>
 See notes to consolidated financial statements.



                                       38
<PAGE>   39
STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                                                     1996         1995          1994

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                               <C>          <C>          <C>      
   Net income                                                                     $  10,654    $   8,866    $   7,151
   Adjustments to reconcile net income to net cash provided by operating
   activities:
      Amortization and accretion of premiums and discounts on investment
         securities, net                                                                210          374        1,040
      Provision for credit losses                                                     2,113          919          921
      Equity in undistributed earnings from unconsolidated subsidiary                  (316)        --           --
      (Gain) loss on sale of premises and equipment                                     (30)          (2)          24
      Gain on sale of real estate acquired by foreclosure                                (1)        (297)        (196)
      Depreciation and amortization                                                   2,520        2,734        2,169
      Write-down of real estate acquired by foreclosure                                  37          146          336
      Mortgage loans originated for sale                                           (281,869)        --           --
      Proceeds from sale of mortgage loans originated for sale                      250,432         --           --
      Increase in accrued interest receivable and other assets                       (1,071)      (1,443)      (1,480)
      Increase (decrease) in accrued interest payable and other liabilities             451         (223)       1,308
                                                                                  ---------    ---------    ---------
                Total adjustments                                                   (27,524)       2,208        4,122
                                                                                  ---------    ---------    ---------

                Net cash (used in) provided by operating activities                 (16,870)      11,074       11,273
                                                                                  ---------    ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from maturities and principal paydowns of held-to-maturity
      investment securities                                                          32,663       16,112       18,198
   Purchases of held-to-maturity investment securities                              (17,259)        (754)     (28,223)
   Proceeds from maturities and principal paydowns of available-for-sale
      investment securities                                                            --         14,644       18,130
   Purchases of available-for-sale investment securities                               (239)      (2,869)     (11,559)
   Purchase of investment in unconsolidated subsidiary                               (2,000)        --           --
   Net increase in loans                                                            (74,878)     (65,195)     (36,629)
   Proceeds from sale of real estate acquired by foreclosure                            418          438          474
   Capital improvements to real estate acquired by foreclosure                          (12)          (9)        --
   Net (increase) decrease in interest-bearing deposits in financial
   institutions                                                                       1,113         (734)       5,691
   Proceeds from sale of premises and equipment                                          54          121           32
   Cash paydowns on foreclosed loans                                                   --           --             32
   Purchase of premises and equipment                                               (11,166)      (4,408)      (3,018)
                                                                                  ---------    ---------    ---------
                Net cash used in investing activities                               (71,306)     (42,654)     (36,872)
                                                                                  ---------    ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase in deposit accounts                                                 142,689       36,389       56,658
   Net increase (decrease) in repurchase agreements and federal funds purchased      (8,332)       3,563        6,690
   Proceeds from notes payable                                                         --           --          1,400
   Repayments of notes payable                                                       (1,600)      (1,600)      (5,800)
   Payments made to Enterprise Bank shareholders                                       --           --        (15,000)
   Payments made to Guardian Bank Preferred shareholders                               --           --         (2,031)
   Proceeds from issuance of common stock                                               633          210          219
   Proceeds from issuance of preferred stock                                            575          645         --
   Repayment of senior debentures                                                      (200)        (650)        (450)
   Payments of cash dividends                                                        (2,222)      (1,674)      (1,311)
                                                                                  ---------    ---------    ---------
                Net cash provided by financing activities                           131,543       36,883       40,375
                                                                                  ---------    ---------    ---------
</TABLE>




                                      39

<PAGE>   40






STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------

                                               1996       1995       1994

<S>                                           <C>        <C>        <C>   
NET INCREASE IN CASH AND CASH EQUIVALENTS   $ 43,367   $  5,303   $ 14,776

CASH AND CASH EQUIVALENTS:
   Beginning of period                        65,075     59,772     44,996
                                            --------   --------   --------

   End of period                            $108,442   $ 65,075   $ 59,772
                                            ========   ========   ========

SUPPLEMENTAL INFORMATION:
   Income taxes paid                        $  4,970   $  5,505   $  2,789
                                            ========   ========   ========

   Interest paid                            $ 16,561   $ 14,104   $ 11,393
                                            ========   ========   ========
</TABLE>

NONCASH FINANCING ACTIVITIES:

   On January 22, 1996, the Board of Directors declared a three-for-two stock
   split of the Company's common stock to be distributed on February 14, 1996.
   This three-for-two stock split resulted in the distribution of one
   additional share for every two shares of common stock already issued. The
   par value of the common stock remained at $1 per share. In connection with
   this split, the outstanding common stock was increased by 2,631,000 shares.

   On January 25, 1995, the Board of Directors declared a three-for-two stock
   split of the Company's common stock to be distributed on February 10, 1995.
   This three-for-two stock split resulted in the distribution of one
   additional share for every two shares of common stock already issued. The
   par value of the common stock remained at $1 per share. In connection with
   this split, the outstanding common stock was increased by 1,740,000 shares.

   On December 31, 1993, the Company acquired all capital stock outstanding of
   Enterprise Bank - Houston for $15 million. The acquisition price was
   recorded as a payable to former shareholders at December 31, 1993.

   All share information in the consolidated financial statements has been
   adjusted for the effect of the stock splits.

NONCASH INVESTING ACTIVITIES:

   The Company acquired certain real estate through foreclosure of collateral
   on loans totaling approximately $972,000, $1,078,000 and $433,000 during the
   three years ended December 31, 1996, 1995 and 1994, respectively.

   During the years ended December 31, 1996, 1995 and 1994, the Company made
   loans to facilitate the sale of real estate in the amounts of approximately
   $198,000, $790,000 and $757,000, respectively.

   During 1996, the Company transferred a parcel of land valued at $671,000 to
   other real estate. The land was originally purchased for further expansion,
   but an alternative site was purchased and developed.

   During December 1995, the Company transferred securities classified as
   available-for-sale, with a cost basis of $53,507,000 and a fair value of
   $53,193,000, to held to maturity.

   The Company transferred securities classified as held to maturity, with a
   cost basis of approximately $75,789,000, to available for sale on January 1,
   1994, in connection with the adoption of SFAS No. 115.

See notes to consolidated financial statements.                    (Concluded)





                                      40

<PAGE>   41


STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
-------------------------------------------------------------------------------

A.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

      NATURE OF OPERATIONS - Sterling Bancshares, Inc., ("Bancshares"), is a
      bank holding company headquartered in Houston, Texas that provides retail
      and commercial banking services through Sterling Bank (the "Bank"), its
      Texas-chartered bank subsidiary. The Bank provides a broad line of
      financial products and services to small to medium-sized businesses and
      consumers through its fourteen community banking offices in Harris
      County.

      SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES - The accounting
      and reporting policies of Bancshares conform to generally accepted
      accounting principles and the prevailing practices within the banking
      industry. A summary of significant accounting policies follows:

      BASIS OF PRESENTATION - The consolidated financial statements include the
      accounts of Bancshares and its wholly owned subsidiaries, Sterling
      Bancorporation, Inc. ("Bancorp") and the Bank, hereafter collectively
      referred to as the "Company." All material intercompany transactions have
      been eliminated in consolidation.

      USE OF ESTIMATES - The preparation of financial statements in conformity
      with generally accepted accounting principles requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the
      date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from
      those estimates.

      INVESTMENT SECURITIES - Investment securities held to maturity are
      carried at cost, adjusted for the amortization of premiums and the
      accretion of discounts. Management has the positive intent and the
      Company has the ability to hold these assets as long-term investments
      until their estimated maturities. Under certain circumstances (including
      the deterioration of the issuer's creditworthiness or a change in tax law
      or statutory or regulatory requirements), securities may be sold or
      transferred to another portfolio.

      Investment securities available for sale are carried at fair value.
      Unrealized gains and losses are excluded from earnings and reported net
      of tax, as a separate component of shareholders' equity until realized.
      Securities within the available for sale portfolio may be used as part of
      the Company's asset and liability management strategy and may be sold in
      response to changes in interest rate risk, prepayment risk or other
      similar economic factors.

      Premiums and discounts are amortized and accreted to operations using the
      level-yield method of accounting, adjusted for prepayments as applicable.
      The specific identification method of accounting is used to compute gains
      or losses on the sales of these assets.

      EQUITY IN UNCONSOLIDATED SUBSIDIARY - In September 1996, the Bank
      acquired a 40% equity and 44% voting interest in Sterling Capital
      Mortgage Company, ("SCMC"), an originator and servicer of single family
      residential mortgage loans headquartered in Houston, Texas. The Bank
      accounts for its



                                      41

<PAGE>   42
      investment under the equity method of accounting. Under the equity
      method, the original investment is recorded at cost and is adjusted
      periodically to recognize the Bank's share of earnings or losses after
      the date of acquisition. Dividends received reduce the basis of the
      investment.

      LOANS HELD FOR SALE - Loans originated and intended for sale in the
      secondary market are carried at the lower of cost or market value in the
      aggregate. Net unrealized losses are recognized in a valuation allowance
      by charges to income. There were no net unrealized losses charged to
      income during the years ended December 31, 1996, 1995 and 1994.

      LOANS - Loans are stated at the principal amount outstanding, net of
      unearned discount. Unearned discount relates principally to consumer
      installment loans. The related interest income for installment loans is
      recognized principally by the "sum of the months' digits" method, which
      records interest in proportion to the declining outstanding balances of
      the loans. This method approximates the interest method. For other loans,
      such income is recognized using the simple interest method.

      Effective January 1, 1995, the Company adopted Statement of Financial
      Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
      Impairment of a Loan," as amended by SFAS No. 118, "Accounting by
      Creditors for Impairment of a Loan - Income Recognition and Disclosure."
      SFAS No. 114 applies only to impaired loans, with the exception of groups
      of smaller-balance homogeneous loans that are collectively evaluated for
      impairment. A loan is defined as impaired by SFAS No. 114 if, based on
      current information and events, it is probable that a creditor will be
      unable to collect all amounts due, both interest and principal, according
      to the contractual terms of the loan agreement. Specifically, SFAS No.
      114 requires that the allowance for credit losses related to impaired
      loans be determined based on the present value of expected cash flows
      discounted at the loan's effective interest rate or, as a practical
      expedient, the loan's observable market price or the fair value of the
      collateral if the loan is collateral dependent. Prior to the adoption of
      SFAS No. 114, the Company's methodology for determining the adequacy of
      the allowance for credit losses did not incorporate the concept of the
      time value of money and the expected future interest cash flow.

      As permitted by SFAS No. 118, interest revenue received on impaired loans
      continues to be either applied against principal or realized as interest
      revenue, according to management's judgment as to the collectibility of
      principal.

      NONREFUNDABLE FEES AND COSTS ASSOCIATED WITH LENDING ACTIVITIES - Loan
      origination and commitment fees are recognized at the time of funding and
      are considered adjustments to interest income. These fees aggregated
      approximately $478,000, $498,000 and $739,000 for the years ended
      December 31, 1996, 1995 and 1994, respectively. Related direct costs are
      not separately allocated to loans but are charged to noninterest expense
      in the period incurred. The net effect of not recognizing such fees and
      related costs over the life of the related loan is not considered to be
      material to the financial statements.

      NONACCRUAL, PAST-DUE AND RESTRUCTURED LOANS - Included in this loan
      category are loans which have been categorized by management as
      nonaccrual because collection of interest is doubtful and loans which
      have been restructured to provide a reduction in the interest rate below
      the current market rate or a deferral of interest or principal payments.

      When the payment of principal or interest on a loan is delinquent for 90
      days, or earlier in some cases, the loan is placed on nonaccrual status
      unless the loan is in the process of collection and the underlying
      collateral fully supports the carrying value of the loan. If the decision
      is made to continue accruing interest on the loan, periodic reviews are
      made to confirm the accruing status of the loan. When a loan is placed on
      nonaccrual status, interest accrued during the current year prior to the
      judgment of



                                      42
<PAGE>   43

      noncollectibility is charged to operations. Interest accrued
      during prior periods is charged to the allowance for credit losses.
      Generally, any payments received on nonaccrual loans are applied first to
      outstanding loan amounts and next to the recovery of charged-off loan
      amounts. Any excess is treated as a recovery of lost interest.

      Restructured loans are those loans for which concessions in terms have
      been granted because of a borrower's financial difficulty. Interest is
      generally accrued on such loans in accordance with the new terms.

      ALLOWANCE FOR CREDIT LOSSES - The allowance for credit losses is a
      valuation allowance available for losses incurred on loans. All losses
      are charged to the allowance when the loss actually occurs or when a
      determination is made that a probable loss has occurred. Recoveries are
      credited to the allowance at the time of recovery.

      Throughout the year, management estimates the likely level of losses to
      determine whether the allowance for credit losses is adequate to absorb
      losses in the existing portfolio. Based on these estimates, an amount is
      charged to the provision for credit losses and credited to the allowance
      for credit losses in order to adjust the allowance to a level determined
      to be adequate to absorb losses.

      Management's judgment as to the level of losses on existing loans
      involves the consideration of current and anticipated economic conditions
      and their potential effects on specific borrowers; an evaluation of the
      existing relationships among loans, potential credit losses and the
      present level of the allowance; results of examinations of the loan
      portfolio by regulatory agencies; and management's internal review of the
      loan portfolio. In determining the collectibility of certain loans,
      management also considers the fair value of any underlying collateral.
      The amounts ultimately realized may differ from the carrying value of
      these assets because of economic, operating or other conditions beyond
      the Company's control.

      It should be understood that estimates of credit losses involve an
      exercise of judgment. While it is reasonably possible that in the near
      term the Company may sustain losses which are substantial relative to the
      allowance for credit losses, it is the judgment of management that the
      allowance for credit losses reflected in the consolidated balance sheets
      is adequate to absorb estimated losses that exist in the current loan
      portfolio.

      PREMISES AND EQUIPMENT - Land is carried at cost. Premises and equipment
      are carried at cost, less accumulated depreciation and amortization.
      Depreciation expense is computed principally using the straight-line
      method over the estimated useful lives of the assets. Leasehold
      improvements are amortized straight-line over the periods of the leases
      or the estimated useful lives, whichever is shorter.

      AMORTIZATION OF GOODWILL - Goodwill is amortized using the straight-line
      method over a period of 10 to 25 years. Management periodically performs
      an evaluation of whether any impairment of goodwill has occurred; if any
      such impairment is identified, a writedown of the goodwill is recorded.
      There were no such writedowns recorded during 1996, 1995 or 1994.

      REAL ESTATE ACQUIRED BY FORECLOSURE - The Bank records real estate
      acquired by foreclosure at the lesser of the outstanding loan amount or
      fair value, less estimated costs to sell, at the time of foreclosure.
      Adjustments are made to reflect declines in value subsequent to
      acquisition, if any, below the recorded amounts. Required developmental
      costs associated with foreclosed property under construction are
      capitalized and considered in determining the fair value of the property.
      Real estate



                                      43
<PAGE>   44

      and other property acquired in lieu of loan balances are included in the
      accompanying consolidated balance sheets. Operating expenses of such
      properties, net of related income, and gains and losses on their
      disposition are included in noninterest expenses.

      FEDERAL INCOME TAXES - The Company files a consolidated federal income
      tax return. The Bank computes federal income taxes as if it filed a
      separate return and remits to, or is reimbursed by Bancshares based on
      the portion of taxes currently due or refundable.

      Deferred income taxes are accounted for by applying statutory tax rates
      in effect at the balance sheet date to differences between the book basis
      and the tax basis of assets and liabilities. The resulting deferred tax
      assets and liabilities are adjusted to reflect changes in enacted tax
      laws or rates.

      Realization of net deferred tax assets is dependent on generating
      sufficient future taxable income. Although realization is not assured,
      management believes it is more likely than not that all of the net
      deferred tax assets will be realized. The amount of the net deferred tax
      asset considered realizable, however, could be reduced in the near term
      if estimates of future taxable income are reduced.

      STOCK OPTION PLAN - Prior to January 1, 1996, the Company accounted for
      its stock option plan in accordance with the provisions of Accounting
      Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
      Employees," and related interpretations. As such, compensation expense
      would be recorded on the date of grant only if the current market price
      of the underlying stock exceeded the exercise price. In October 1995, the
      Financial Accounting Standards Board ("FASB") issued SFAS No. 123, ("SFAS
      No. 123") "Accounting for Stock-Based Compensation," which permits
      entities to recognize as expense over the vesting period the fair value
      of all stock-based awards on the date of grant. Alternatively, SFAS No.
      123 also allows entities to continue to apply the provisions of APB
      Opinion No. 25 and provide pro forma net income and pro forma earnings
      per share disclosure for employee stock option grants made in 1995 and
      future years as if the fair-value-based method defined in SFAS No. 123
      had been applied. The Company has elected to continue to apply the
      provision of APB Opinion No. 25 and provide the pro forma disclosure
      provisions of SFAS No. 123.

      PROFIT SHARING PLAN - The Company has a profit sharing plan which covers
      all full-time employees who meet specific minimum eligibility
      requirements. Contributions are accrued and funded currently.

      STATEMENTS OF CASH FLOWS - For purposes of the statements of cash flows,
      cash and cash equivalents are defined as cash and due from banks and
      federal funds sold. Generally, federal funds are sold for one-day
      periods.

      EARNINGS PER COMMON SHARE - Earnings per common share are calculated by
      dividing net income by the weighted average number of common shares and
      common stock equivalents. Stock options are regarded as common stock
      equivalents and are therefore considered in earnings per share
      calculations if dilutive. Common stock equivalents are computed using the
      treasury stock method.

      RECLASSIFICATIONS - Certain reclassifications have been made to prior
      years' amounts to conform them to current year presentation. All
      reclassifications have been applied consistently for the periods
      presented.



                                      44

<PAGE>   45



B.    ACQUISITIONS

      On March 4, 1994, the Company acquired Guardian Bancshares, Inc.
      ("Guardian") in exchange for 1,653,491 shares (adjusted for the 1995 and
      1996 three-for-two stock split) of the Company's common stock for
      Guardian's outstanding common stock and approximately $2 million for
      Guardian's $1.85 cumulative preferred stock representing the aggregate
      liquidation preference of the preferred stock plus all accrued but unpaid
      dividends. This acquisition has been accounted for as a pooling of
      interests, and previously issued financial statements have been restated.
      There were no material adjustments to the net assets of Guardian as a
      result of adopting the same accounting practices as Sterling Bancshares,
      Inc., and its subsidiaries. The effect of the pooling of interests on
      previously reported operations is as follows (in thousands, except for
      per share amounts):

<TABLE>
<CAPTION>
                                                                     DECEMBER 31, 1993
                                                      ----------------------------------------
                                                      ORIGINALLY                           
                                                       REPORTED       COMBINATION    RESTATED
<S>                                                       <C>            <C>          <C>     
Interest income                                         $20,522        $ 6,709        $27,231 
Interest expense                                          5,490          1,811          7,301 
                                                        -------        -------        ------- 
                                                                                              
Net interest income                                      15,032          4,898         19,930 
                                                                                              
Provision for credit losses                                 788             68            856 
                                                        -------        -------        ------- 
                                                                                              
Net interest income after provision for credit losses    14,244          4,830         19,074 
                                                                                              
Noninterest income                                        3,315          1,109          4,424 
Noninterest expense                                      11,443          4,218         15,661 
                                                        -------        -------        ------- 
                                                                                              
Net income before income taxes                            6,116          1,721          7,837 
                                                                                              
Provision for income taxes                                1,961            513          2,474 
                                                        -------        -------        ------- 
                                                                                              
Net income                                              $ 4,155        $ 1,208        $ 5,363 
                                                        =======        =======        ======= 
                                                                                              
Income per common share                                 $  1.00                       $  1.02 
                                                        =======                       ======= 
                                                                                              
Average common and common equivalent                                                          
   shares outstanding                                     4,152                         5,255  
                                                        =======                       ======= 

</TABLE>




                                      45

<PAGE>   46
C.    CASH AND DUE FROM BANKS

      The Bank is required by the Board of Governors of the Federal Reserve
      System (the "FBR") to maintain average reserve balances. "Cash and due
      from banks" in the consolidated balance sheets includes amounts so
      restricted of approximately $22,352,000 at December 31, 1996, and
      $14,774,000 at December 31, 1995.



                                      46

<PAGE>   47


D.    INVESTMENT SECURITIES

      The amortized cost and fair value of debt securities are as follows (in 
thousands):

<TABLE>
<CAPTION>
                                                 DECEMBER 31, 1996
                               ------------------------------------------------------
                                            GROSS      GROSS
                               AMORTIZED  UNREALIZED  UNREALIZED  FAIR      CARRYING
                                 COST       GAINS      LOSSES     VALUE      VALUE
                               --------   --------   --------    --------   --------
<S>                            <C>        <C>        <C>         <C>        <C>     
AVAILABLE FOR SALE
Federal Home Loan Bank
   stock and other             $  4,170   $   --     $   --      $  4,170   $  4,170
                               --------   --------   --------    --------   --------
Total                          $  4,170   $   --     $   --      $  4,170   $  4,170
                               ========   ========   ========    ========   ========

HELD TO MATURITY
U.S. Treasury securities
   and obligations of U.S. 
   government agencies         $ 66,621   $    156   $   (742)   $ 66,035   $ 66,621
Obligations of states and
   political subdivisions        22,227        221       (141)     22,307     22,227
Mortgage-backed securities
 and collateralized mortgage
 obligations                     59,225        516       (427)     59,314     59,225
Other debt securities                10       --           (1)          9         10
                               --------   --------   --------    --------   --------
Total                          $148,083   $    893   $ (1,311)   $147,665   $148,083
                               ========   ========   ========    ========   ========
</TABLE>

<TABLE>
<CAPTION>
                                                   DECEMBER 31, 1995
                               -------------------------------------------------------
                                            GROSS      GROSS
                               AMORTIZED  UNREALIZED  UNREALIZED   FAIR     CARRYING
                                 COST       GAINS      LOSSES      VALUE      VALUE
                               --------   --------   --------    --------   --------
<S>                            <C>        <C>        <C>         <C>        <C>
AVAILABLE FOR SALE
Federal Home Loan Bank
   stock and other             $  3,931   $   --     $   --      $  3,931   $  3,931
                               --------   -------    -------     --------   --------
Total                          $  3,931   $   --     $   --      $  3,931   $  3,931
                               ========   =======    =======     ========   ========

HELD TO MATURITY
U.S. Treasury securities
   and obligations of U.S. 
   government agencies         $ 72,064   $    451   $   (530)   $ 71,985   $ 72,064
Obligations of states and
   political subdivisions        22,732        316       (168)     22,880     22,732
Mortgage-backed securities
 and collateralized mortgage
 obligations                     68,760        581       (119)     69,222     68,760
Other debt securities                25       --           (1)         24         25
                               --------   --------   --------    --------   --------
Total                          $163,581   $  1,348   $   (818)   $164,111   $163,581
                               ========   ========   ========    ========   ========
</TABLE>



                                      47

<PAGE>   48




      The amortized cost and fair value of debt securities at December 31,
      1996, by contractual maturity, are shown below. Expected maturities will
      differ from contractual maturities because borrowers may have the right
      to call or prepay obligations with or without call or prepayment
      penalties. All amounts are shown in thousands.

<TABLE>
<CAPTION>
                                           HELD TO MATURITY     AVAILABLE FOR SALE
                                         -------------------   -------------------
                                         AMORTIZED    FAIR      AMORTIZED    FAIR
                                           COST       VALUE       COST       VALUE
<S>                                        <C>        <C>                       
Due in one year or less                  $ 14,051   $ 14,074   $   --     $   --
Due after one year through five years      80,642     80,075       --         --
Due after five years through ten years     40,091     39,889       --         --
Due after ten years                        13,299     13,628      4,170      4,170
                                         --------   --------   --------   --------
Total                                    $148,083   $147,665   $  4,170   $  4,170
                                         ========   ========   ========   ========
</TABLE>



      In November 1995, the Financial Accounting Standards Board, ("FASB"),
      issued "A Guide to Implementation of Statement 115 on Accounting for
      Certain Investments in Debt and Equity Securities" (the "Implementation
      Guide"). Concurrent with the initial adoption of the Implementation
      Guide, but no later than December 31, 1995, the Company was permitted to
      reassess the appropriateness of the classifications of all securities
      held at that time. Under the Implementation Guide, reclassifications from
      the held to maturity category resulting from this one-time reassessment
      do not call into question the intent to hold other securities to maturity
      in the future. Upon adoption of the Implementation Guide, the Bank
      reclassified no securities from its held to maturity portfolio to its
      available for sale portfolio, but did reclassify $53,507,000 in
      securities from its available for sale portfolio to its held to maturity
      portfolio. The remaining net unrealized losses of $314,000 will be
      amortized and accreted over the remaining maturities of these securities,
      using the specific identification method in accordance with SFAS No. 115.

      There were no sales of held-to-maturity or available-for-sale investment
      securities during 1996, 1995 or 1994.

      Included in the held-to-maturity and available-for-sale investment
      securities at December 31, 1996 and 1995, are $40,054,000 and $47,271,000
      of mortgage-backed securities and $19,171,000 and $21,867,000 of
      collateralized mortgage obligations, respectively, having stated
      maturities after the year 1997. The expected maturities on these
      securities are between 1 and 18 years, based on estimated prepayments of
      the underlying mortgages.

      The Company does not own any investment securities of any one issuer of
      which aggregate adjusted cost exceeds 10% of the consolidated
      shareholders' equity at December 31, 1996 or 1995.

      Investment securities with carrying values of $66,316,000 and $83,182,000
      and fair values of $65,808,000 and $81,927,000 at December 31, 1996 and
      1995, respectively, were pledged to secure public deposits and securities
      sold under repurchase agreements and for other purposes required or
      permitted by law.



                                      48

<PAGE>   49


E.    LOANS

      The loan portfolio consists of various types of loans made principally to
      borrowers located in Harris County, Texas, and is classified by major
      type as follows (in thousands):

<TABLE>
<CAPTION>
                                           DECEMBER 31,
                                       ----------------------
                                          1996         1995

<S>                                      <C>          <C>    
Commercial, financial and industrial   $ 178,145    $ 139,964
Real estate - commercial                 112,903      104,686
Real estate - mortgage                    49,136       44,059
Real estate - construction                40,486       31,497
Installment                               78,034       64,080
Foreign                                    1,353        3,108
Less unearned discount                    (3,359)      (2,617)
                                       ---------    ---------
Total                                  $ 456,698    $ 384,777
                                       =========    =========
</TABLE>



      As discussed in Note A, the Company adopted SFAS No. 114 and 118
      effective January 1, 1995. Adoption of these statements had no impact on
      the Company's financial statements including the level of the allowance
      for credit losses. Instead, it resulted merely in a reallocation of the
      existing allowance for credit loses.

      The recorded investment in impaired loans under SFAS No. 114 is
      approximately $12,738,000 and $12,496,000, at December 31, 1996 and 1995,
      respectively. Under SFAS No. 114, such impaired loans required an
      allowance for credit losses of approximately $2,083,000 and $2,427,000
      for the same periods.

      The average recorded investment in impaired loans for the years ended
      December 31, 1996 and 1995, was $13,346,000 and $10,226,000. The Company
      recognized interest income on these impaired loans of $1,112,000 in 1996
      and $1,127,000 in 1995.

      Loan maturities and rate sensitivity of the loan portfolio are as follows
(in thousands):

<TABLE>
<CAPTION>
                                        DECEMBER 31,
                                   -------------------
            MATURITY                  1996       1995

<S>                                <C>        <C>     
Within one year                    $156,035   $133,425
After one through five years        278,208    232,738
After five years                     22,455     18,614
                                   --------   --------
Total                              $456,698   $384,777
                                   ========   ========
Loans at fixed interest rates      $253,910   $189,906
Loans at variable interest rates    202,788    194,871
                                   --------   --------
Total                              $456,698   $384,777
                                   ========   ========
</TABLE>



                                      49

<PAGE>   50


      As of December 31, 1996 and 1995, loans outstanding to directors,
      officers and their affiliates were approximately $6,688,000 and
      $7,366,000, respectively. In the opinion of management, all transactions
      entered into between the Bank and such related parties have been and are,
      in the ordinary course of business, made on the same terms and conditions
      as similar transactions with unaffiliated persons.

      An analysis of activity with respect to these related-party loans is as
follows (in thousands):

<TABLE>
<CAPTION>
                                              YEAR ENDED
                                              DECEMBER 31,
                                           ------------------
                                              1996       1995

<S>                                        <C>        <C>    
Beginning balance                          $ 7,366    $ 6,719
New loans and reclassified related loans     7,913      9,078
Repayments                                  (8,591)    (8,431)
                                           -------    -------
Ending balance                             $ 6,688    $ 7,366
                                           =======    =======
</TABLE>


F.    NONACCRUAL, PAST-DUE AND RESTRUCTURED LOANS

      The following table presents information relating to nonaccrual, past-due
      and restructured loans (in thousands):

<TABLE>
<CAPTION>
                                                      DECEMBER 31,
                                                    ---------------
                                                      1996     1995

<C>                                                    <C>      <C>
Nonaccrual loans                                    $2,438   $2,858
90 days or more past-due loans, not on nonaccrual      229      446
Restructured loans                                      45      103
                                                    ------   ------
TOTAL                                               $2,712   $3,407
                                                    ======   ======
</TABLE>

      With respect to the above nonperforming loans, the following table
      presents interest income actually earned and additional interest income
      that would have been earned under the original terms of the loans (in
      thousands):

<TABLE>
<CAPTION>
                           YEAR ENDED
                          DECEMBER 31,
                      ------------------
                      1996   1995   1994

Nonaccrual loans:
<S>                   <C>    <C>    <C> 
   Income earned      $  5   $ 15   $ 33
   Forgone income      125     69     52
Restructured loans:
   Income earned       --      12     16
   Forgone income       74     44     58
</TABLE>




                                      50

<PAGE>   51
G.    ALLOWANCE FOR CREDIT LOSSES

      An analysis of activity in the allowance for credit losses is as follows
(in thousands):

<TABLE>
<CAPTION>
                                                  YEAR ENDED
                                                  DECEMBER 31,
                                        -----------------------------
                                           1996       1995       1994

<S>                                       <C>          <C>        <C>
Balance at beginning of period          $ 5,907    $ 5,810    $ 5,044
   Additions:
      Provision charged to operations     2,113        919        921
   Deductions:
      Loans charged off                   1,856      1,172        974
      Loan recoveries                      (414)      (350)      (819)
                                        -------    -------    ------- 
         Net charge-offs                  1,442        822        155
                                        -------    -------    -------
Balance at end of year                  $ 6,578    $ 5,907    $ 5,810
                                        =======    =======    =======
</TABLE>



H.    PREMISES AND EQUIPMENT

      Premises and equipment are summarized as follows (in thousands):

<TABLE>
<CAPTION>

                                                     DECEMBER 31,
                                                 --------------------
                                                     1996        1995

<S>                                              <C>         <C>     
Land                                             $  4,599    $  2,633
Buildings and improvements                         18,861      15,309
Furniture, fixtures and equipment                  12,854       9,498
Less accumulated depreciation and amortization    (13,214)    (12,617)
                                                 --------    --------
Premises and equipment, net                      $ 23,100    $ 14,823
                                                 ========    ========
</TABLE>



I.    DEPOSITS

      Included in certificates of deposit and other time deposits are
      certificates of deposit in amounts of $100,000 or more. The remaining
      maturities of these certificates are summarized as follows (in
      thousands):

<TABLE>
<CAPTION>
                                 DECEMBER 31,
                              -----------------
                                1996      1995

<S>                           <C>       <C>    
Three months or less          $33,733   $21,708
Four through six months        11,581    11,453
Seven through twelve months    14,074    10,095
Thereafter                      9,145     8,759
                              -------   -------
Total                         $68,533   $52,015
                              =======   =======
</TABLE>


      Interest expense for certificates of deposit in excess of $100,000 was
      approximately $2,959,000, $2,600,000, and $1,759,000 for the years ended
      December 31, 1996, 1995 and 1994, respectively.

      The Bank has no brokered deposits and there are no major concentrations
of deposits.



                                      51
<PAGE>   52
J.    SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

      Securities sold under agreements to repurchase generally mature within
      one to four days from the transaction date. Information concerning
      securities sold under agreements to repurchase is summarized as follows:

<TABLE>
<CAPTION>
                                                   1996          1995
                                               -----------   -----------

<S>                                            <C>           <C>  
Average balance during the year                $ 7,068,000   $19,413,000
Average interest rate during the year                 4.31%         4.92%
Maximum month-end balance during the year      $12,687,000   $39,999,000
Average interest rate at the end of the year          4.22%         4.62%
</TABLE>


K.    NOTES PAYABLE

      In connection with the acquisition of Enterprise Bank ("Enterprise") in
      1993 and the merger with Guardian Bancshares, Inc. ("Guardian") in 1994,
      the Company entered into a loan agreement with a bank (the "lending
      bank") which committed $6,600,000 for the funding of the acquisition of
      Enterprise and $1,400,000 for the merger with Guardian. The loan is
      payable in quarterly installments of approximately $400,000 commencing on
      September 30, 1994, with the remaining principal balance of approximately
      $800,000 due on July 31, 1999. The Company may, at its discretion, prepay
      the loan at any time.

      Provided that an event of default has not occurred, the loan bears
      interest at the lesser of the maximum rate allowable by law or, at the
      discretion of the Company, the lending bank's prime rate or LIBOR plus
      200 basis points. At December 31, 1996, the loan was in the LIBOR rate
      mode and the interest rate was 7.69%.

      Aggregate  maturities of notes payable in each of the next three year are
      as follows:  1997 - $1,600,000; 1998 - $1,600,000; and 1999 - $800,000.
      There are no further maturities after 1999.

      The loan agreement requires, among other provisions, that the Company
      cause the Bank to (i) maintain a minimum return on average assets ("ROA")
      of 0.8%, (ii) maintain a ratio of Tier I capital to total assets of at
      least 5%, (iii) keep its ratio of classified assets to capital at 75% or
      less, (iv) maintain a minimum cash flow coverage of 1.25%, (v) not incur
      any additional debt without the prior approval of the lending bank, and
      (vi) pay dividends to the Company's shareholders not to exceed $0.15 per
      quarter. The Company was in compliance with the terms of the loan at
      December 31, 1996 and 1995.

L.    SENIOR DEBENTURES

      In February 1991, the Company issued and sold $2,850,000 in aggregate
      principal amount of interest-bearing debentures (the "debentures") in
      denominations of $50,000 bearing interest at rates ranging from 8.6% to
      10.5%, depending on the maturity date. A portion of the proceeds of the
      sale of the debentures was used to repay the Company's outstanding
      indebtedness to a bank in the principal amount of $1,626,000. All
      remaining debentures matured during the year ended December 31, 1996.



                                      52

<PAGE>   53
M.    INCOME TAXES

      The components of the provision for federal income tax expense follow 
(in thousands):

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                               --------------------------------
                                                    1996      1995       1994

<S>                                            <C>       <C>            <C>    
Current                                         $  5,582     $ 4,329    $ 3,690
Deferred and decrease in valuation allowance        (833)       (182)      (490)
                                                --------     -------    -------
Total                                           $  4,749     $ 4,147    $ 3,200
                                                ========     =======    =======
</TABLE>



      The provision for federal income taxes differs from the amount computed
      by applying the federal income tax statutory rate on operations as
      follows (in thousands):

<TABLE>
<CAPTION>
                                            YEAR ENDED DECEMBER 31,
                                        -----------------------------
                                           1996       1995       1994

<S>                                     <C>        <C>        <C>    
Taxes calculated at statutory rate      $ 5,391    $ 4,554    $ 3,519
Increase(decrease) resulting from:
    Tax-exempt interest income             (421)      (415)      (422)
    Goodwill amortization                   114        114        113
    Adjustment to valuation allowance      (261)      --         --
    Other, net                              (74)      (106)       (10)
                                        -------    -------    -------
Federal income tax expense              $ 4,749    $ 4,147    $ 3,200
                                        =======    =======    =======
</TABLE>



      Deferred income taxes and benefits are provided for differences between
      the financial statement carrying amount of existing assets and
      liabilities and their respective tax basis. Significant deferred tax
      assets and liabilities at December 31, 1996 and 1995, were as follows (in
      thousands):

<TABLE>
                                                                             DECEMBER 31,
                                                                         ------------------
                                                                            1996       1995
Deferred tax assets:
<S>                                                                      <C>        <C>    
   Unrealized depreciation on available-for-sale investment securities   $    67    $   107
   Depreciable assets                                                        206       --
   Other real estate acquired by foreclosure                                 197        395
   Allowance for credit losses                                             1,817      1,231
   Net operating loss carryforward                                           271        301
   Deferred compensation bonus                                               182         78
   Other                                                                     187        122
                                                                         -------    -------
Total deferred tax assets                                                  2,927      2,234
Deferred tax liabilities:
   Earnings from unconsolidated subsidiary                                  (111)      --
   Depreciable assets and other                                              (84)       (34)
                                                                         -------    -------
Total deferred tax liabilities                                              (195)       (34)
Net deferred tax asset before valuation allowance                          2,732      2,200
Valuation allowance                                                          399        660
                                                                         -------    -------
Net deferred tax asset                                                   $ 2,333    $ 1,540
                                                                         =======    =======
</TABLE>



                                      53
<PAGE>   54
N.    PROFIT SHARING PLAN

      The Company's profit sharing plan includes all full-time employees who
      meet specified length-of-service requirements. Contributions to the plan
      are made at the discretion of the Board of Directors but must equal a
      minimum of 10% of the Company's pretax income. Employee contributions are
      optional. Profit sharing contributions are accrued and funded currently.
      Total profit sharing expense for the years ended December 31, 1996, 1995
      and 1994 were approximately $1,711,000, $1,443,000, and $1,147,000,
      respectively.

O.    SHAREHOLDERS' EQUITY

      On January 27, 1997, the Board of Directors declared a three-for-two
      stock split of the Company's common stock to be distributed on February
      24, 1997, to shareholders of record on February 10, 1997. This
      three-for-two stock split resulted in the distribution of one additional
      share for every two shares of common stock already issued. The par value
      of the common stock will remain at $1 per share.

      On July 17, 1995, the Company's Board of Directors authorized the
      issuance of up to 150,000 shares of convertible preferred stock in each
      of three series designated as Series A, Series B, and Series C. The
      Series A shares were offered and sold pursuant to a Confidential Private
      Placement Memorandum in conjunction with the opening of the new Cypress
      office of Sterling Bank. The period for subscription of Series A shares
      terminated October 20, 1995, resulting in the issuance of 49,500 shares
      of preferred stock, which are convertible into a maximum of 139,219
      shares of the Company's common stock, adjusted for the 1996 and 1997
      three-for-two stock split. The conversion ratio is dependent upon the
      Cypress office meeting certain performance goals.

      In conjunction with the opening of the Upper Kirby office in August 1996,
      the Series B shares were offered to qualified investors and sold pursuant
      to a Confidential Private Placement Memorandum. The offering terminated
      October 1, 1996, resulting in the issuance of 38,880 shares of preferred
      stock, which are convertible into a maximum of 72,900 shares of the
      Company's common stock, adjusted for the February 24, 1997, three-for-two
      stock split. The conversion ratio is dependent the new Upper Kirby office
      meeting certain performance goals.

      In conjunction with the opening of the Fountainview office in December
      1996, the Series C shares are being offered at this time to qualified
      investors pursuant to a Confidential Private Placement Memorandum. The
      offering of Series C shares will terminate on April 15, 1997. Assuming
      all of the Series C shares are sold, a maximum of 187,500 shares of
      common stock would be issuable upon conversion of such Series C shares.
      There are no assurances, however, that all of the Series C shares will be
      sold.

      On October 21, 1996, the Company's Board of Directors designated an
      additional series of convertible preferred stock, Series D, and
      authorized the issuance of up to 150,000 shares of Series D shares. In
      conjunction with the opening of the Cypress Station office in January
      1997, the Series D shares are being offered at this time to qualified
      investors pursuant to a Confidential Private Placement Memorandum. The
      offering of Series D shares will terminate on May 5, 1997. Assuming all
      of the Series D shares are sold, a maximum of 187,500 shares of common
      stock would be issuable upon conversion of such Series D shares. There
      are no assurances, however, that all of the Series D shares will be sold.



                                      54

<PAGE>   55


      Options have been granted to key employees at stock prices determined by
      the Compensation Committee of the Board of Directors which approximate
      the fair market value of the common stock at the date of grant and
      generally vest ratably over a four-year period. Options granted under the
      plan must be exercised not later than ten years from the date of grant.

      A summary of changes in outstanding options, as restated for the 1996
      stock split, is as follows (in thousands):

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                          -------------------------------------------------------------
                                               1996                    1995                 1994       
                                          -------------------------------------------------------------
                                                   WEIGHTED              WEIGHTED              WEIGHTED
                                                    AVERAGE               AVERAGE               AVERAGE
                                          SHARES    EXERCISE    SHARES    EXERCISE   SHARES    EXERCISE
                                           (000)    PRICE       (000)      PRICE      (000)      PRICE 
                                          -------------------------------------------------------------
<S>                                        <C>      <C>          <C>       <C>         <C>      <C>    
Shares under option, beginning of period   523      $  6.58      228       $ 3.99      339      $ 2.29
Changes during the period:
   Granted                                  98        13.93      365         8.09       --          --
   Canceled/expired                         32         8.27       47         7.41       18        5.33
   Exercised                                84         4.37       23         3.20       93        2.13
                                           ---      -------      ---       ------      ---      ------
Shares under option, end of period         505      $  8.26      523       $ 6.58      228      $ 3.99
                                           ===      =======      ===       ======      ===      ======

Shares exercisable, end of period          187                   173                   165
                                           ===                   ===                   ===

Shares reserved for future
    granting of options                    321                   419                   788
                                           ===                   ===                   ===

Weighted-average fair value of options
    granted during the year                         $13.93                 $ 8.09               $  0.00
                                                    ======                 ======               =======

Range of exercise prices of options
    granted during the year                $11.92-$16.00           $7.78 - $11.33             N/A 
</TABLE>



      During April 1994, the Company adopted the "1994 Stock Incentive Plan
      (the "Stock Plan"). The Stock Plan provides for a maximum of 788,000
      shares of the Company's common stock to be issued with 732,000 shares
      reserved for options and 56,000 shares to be reserved for issuance as
      performance shares. No options or performance shares may be granted after
      April 2004. The options are to be issued at the fair market value at the
      date of grant, and, accordingly, such options are noncompensatory.
      Compensation expense will be recognized for performance shares issued.
      During 1996 and 1995, 300 and 3,750 performance shares were awarded under
      the Stock Plan, respectively.

      During October 1994, the Company adopted the 1994 Employee Stock Purchase
      Plan (the "Purchase Plan"), which is a compensatory benefit plan, to
      replace the stock purchase plan implemented during 1990. All employees
      who are employed for more than 20 hours per week and meet minimum
      length-of-service requirements of three months are eligible to
      participate in the Purchase Plan. The Purchase Plan provides for an
      aggregate of 300,000 shares of the Company's common stock to be issued
      under the Plan with no more than 30,000 shares available during any
      annual offering. The purchase price for shares available under the
      Purchase Plan is equal to the fair market value on the date of the
      offering. During 1996 and 1995, 11,575 and 3,900 shares, respectively,
      were purchased and 4,152 and 6,491 shares, respectively, were subscribed
      for through payroll deduction for a maximum of two years. Shares are
      issued upon full payment.



                                      55

<PAGE>   56

      At December 31, 1996, the Company has one stock-based compensation plan,
      which is described above. The Company applies APB Opinion 25 and related
      interpretations in accounting for its plan. Accordingly, no compensation
      cost has been recognized for the stock option plan. Had compensation cost
      for the Company's stock-based compensation plan been determined based on
      the fair value at the grant dates for awards under the plan consistent
      with the method of SFAS No. 123, the Company's net income and earnings
      per share would have been reduced to the pro forma amounts indicated
      below (in thousands, except per share data):

<TABLE>
<CAPTION>
                                     -----------------------------------------------------------
                                                1996                           1995
                                     As reported     Pro forma        As reported     Pro forma
                                     -----------------------------------------------------------
<S>                                  <C>              <C>             <C>            <C>      
Net income                           $   10,654       $ 10,602        $   8,866      $   8,828
Primary earnings per share           $     0.87       $   0.87        $    0.74      $    0.73
Fully diluted earnings per share           0.86           0.86             0.73           0.73
</TABLE>


      The fair value of options at date of grant was estimated using the
      Black-Scholes option pricing model with the following weighted-average
      assumptions:

<TABLE>
<CAPTION>
                          1996      1995
                        -------   -------
<S>                        <C>      <C> 
Expected life (years)      6.00     6.00
Interest rate              7.08%    7.08%
Volatility                22.69%   22.69%
Dividend yield             2.00%    2.00%
</TABLE>


      No options were granted during the year ended December 31, 1994. Pro
      forma net income reflects only those options granted in 1996 and 1995.
      Therefore, the full impact of calculating compensation cost for stock
      options under Statement 123 is not reflected in the pro forma net income
      amounts presented above because compensation cost is reflected over the
      options' vesting period of four years and compensation cost for options
      granted prior to January 1, 1994 is not considered.

P.    INCOME PER COMMON SHARE

      Income per common share was computed based on following (in thousands, 
      except per share data):

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                      --------------------------
                                                        1996    1995      1994

Consolidated net income                               $10,654  $ 8,866   $ 7,151
                                                      =======  =======   =======

<S>                                                    <C>      <C>      <C>   
Average common shares outstanding                      11,894   11,766    11,682

Average common shares and common stock equivalents     12,251   12,031    11,877

Average common shares and common stock equivalents,
   assuming full dilution                              12,340   12,117    11,883

Primary earnings per share                             $ 0.87   $ 0.74   $  0.60
                                                       ======   ======   =======

Fully diluted earnings per share                       $ 0.86   $ 0.73   $  0.60
                                                       ======   ======   =======
</TABLE>



      Common share equivalents include options granted to the Company's
      employees (see Note O) and have been adjusted for stock splits, including
      the split effected on February 24, 1997 (see Note O).



                                      56
<PAGE>   57

Q.    COMMITMENTS AND CONTINGENCIES

      LEASES - A summary as of December 31, 1996, of noncancelable future
      operating lease commitments follows (in thousands):

<TABLE>

<C>                                      <C>   
1997                                     $  768
1998                                        716
1999                                        698
2000                                        631
2001                                        644
Thereafter                                2,733
                                         ------
Total                                    $6,190
                                         ======
</TABLE>


      It is expected that in the normal course of business, leases that expire
      will be renewed or replaced by leases on other property or equipment.

      Rent expense under all noncancelable operating lease obligations, net of
      income from noncancelable subleases aggregated, was approximately
      $319,000, $266,000 and $432,000 for the years ended December 31, 1996,
      1995 and 1994, respectively. Rents received on noncancelable sublease
      agreements approximately $636,000, $657,000 and $623,000, respectively,
      for these years.

      LITIGATION - The Company has been named as a defendant in various legal
      actions arising in the normal course of business. In the opinion of
      management, after reviewing such claims with outside counsel, resolution
      of such matters will not have a materially adverse impact on the
      consolidated financial statements.

R.    DIVIDEND RESTRICTIONS

      Dividends paid by the Bank and the Company are subject to certain
      restrictions imposed by regulatory agencies. Under these restrictions
      there was an aggregate of approximately $17,109,000 and $21,464,000
      available for payment of dividends at December 31, 1996, by the Bank and
      the Company, respectively. Dividends paid by the Bank to Bancorp, and by
      Bancorp to Bancshares, for the years ended December 31, 1996, 1995 and
      1994 were $4,200,000, $3,540,000, and $3,421,000, respectively. The
      Company paid cash dividends to its shareholders totaling $2,222,000,
      $1,674,000, and $1,311,000 for the years ended December 31, 1996, 1995
      and 1994, respectively.

S.    INTEREST RATE RISK

      The Bank is principally engaged in providing short-term commercial loans
      with interest rates that fluctuate with various market indices and
      long-term, fixed-rate real estate loans. These loans are primarily funded
      through short-term demand deposits and longer-term certificates of
      deposit with variable and fixed rates. The real estate mortgage loans are
      more sensitive to interest rate risk than the commercial loans because of
      their fixed rates and maturity characteristics.

T.    FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

      The Bank is a party to various financial instruments with
      off-balance-sheet risk in the normal course of business to meet the
      financial needs of its customers. These financial instruments include
      commitments to extend credit and standby letters of credit. These
      instruments involve, to varying degrees, elements of credit and interest
      rate risk in excess of the amounts recognized in the consolidated balance
      sheets.



                                     57
<PAGE>   58

      The Bank's exposure to credit loss in the event of nonperformance
      by the other party to the financial instrument for commitments to extend
      credit is represented by the contractual notional amount of these
      instruments. The Bank uses the same credit policies in making these
      commitments and conditional obligations as it does for on-balance-sheet
      instruments.

      The following is a summary of the various financial instruments entered
      into by the Bank (in thousands):

<TABLE>
<CAPTION>
                                                    DECEMBER 31,
                                                --------------------
                                                  1996        1995

<S>                                              <C>       <C>
Financial instruments whose
   contract amount represents credit risk:
   Commitments to extend credit                   $74,095   $60,890
   Standby letters of credit                        6,546     4,614
</TABLE>


     Commitments to extend credit are agreements to lend to a customer as long
      as there is no violation of any condition established in the contract.
      Commitments generally have fixed expiration dates or other termination
      clauses and may require payment of a fee. Since many of the commitments
      are expected to expire without being fully drawn upon, the total
      commitment amounts disclosed above do not necessarily represent future
      cash requirements.

      The Bank evaluates each customer's creditworthiness on a case-by-case
      basis. The amount of collateral obtained, if considered necessary by the
      Bank upon extension of credit, is based on management's credit evaluation
      of the customer.

      Standby letters of credit are conditional commitments issued by the Bank
      to guarantee the performance of a customer to a third party. The credit
      risk to the Bank in issuing letters of credit is essentially the same as
      that involved in extending loan facilities to its customers.

U.    REGULATORY MATTERS

      The Company and the Bank are subject to various regulatory capital
      requirements administered by the federal banking agencies. Any
      institution that fails to meet its minimum capital requirements is
      subject to actions by regulators that could have a direct material effect
      on the Company's and the Bank's financial statements. Under the capital
      adequacy guidelines and the regulatory framework for prompt corrective
      action, the Bank must meet specific capital guidelines based on the
      Bank's assets, liabilities, and certain off-balance-sheet items as
      calculated under regulatory accounting practices. The Company's and the
      Bank's capital amount and the Bank's classification under the regulatory
      framework for prompt corrective action are also subject to qualitative
      judgments by the regulators about the components, risk weightings, and
      other factors.

      To meet the capital adequacy requirements, the Company and the Bank must
      maintain minimum capital amounts and ratios as defined in the regulations.
      Management believes, as of December 31, 1996 and 1995, that the Company
      and the Bank met all capital adequacy requirements to which they are
      subject.

      As of December 31, 1996, the Company and the Bank were categorized as well
      capitalized under the regulatory framework for prompt corrective action.
      To be categorized as well capitalized the Bank must maintain minimum total
      risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
      the table. There are no conditions or events since that notification that
      management believes have changed the Bank's category.



                                      58

<PAGE>   59


      The following is a summary of the Company's and the Bank's capital ratios
      for the periods presented (in thousands):

<TABLE>
<CAPTION>
                                                                                              TO BE WELL
                                                                                           CAPITALIZED UNDER
                                                                      FOR CAPITAL          PROMPT CORRECTIVE
                                                ACTUAL             ADEQUACY PURPOSES       ACTION PROVISIONS
                                           -----------------------------------------------------------------
                                           AMOUNT      RATIO       AMOUNT      RATIO       AMOUNT      RATIO
<S>                                        <C>          <C>        <C>         <C>           <C>       <C>
CONSOLIDATED:
As of December 31, 1996:
Total Capital (to Risk Weighted Assets)    $64,278      11.44%    $44,936     8.0%          N/A       N/A
Tier I Capital (to Risk Weighted Assets)    57,700      10.27%     22,468     4.0%          N/A       N/A
Tier I Capital (to Average Assets)          57,700       8.03%     21,561     3.0%          N/A       N/A

As of December 31, 1995:
Total Capital (to Risk Weighted Assets)    $53,247      12.07%    $35,296     8.0%          N/A       N/A
Tier I Capital (to Risk Weighted Assets)    47,732      10.82%     17,648     4.0%          N/A       N/A
Tier I Capital (to Average Assets)          47,732       7.66%     18,690     3.0%          N/A       N/A

BANK ONLY:
As of December 31, 1996:
Total Capital (to Risk Weighted Assets)    $66,441      11.84%    $44,893     8.0%       $56,116     10.0%
Tier I Capital (to Risk Weighted Assets)    59,863      10.67%     22,442     4.0%        33,662      6.0%
Tier I Capital (to Average Assets)          59,863       8.57%     20,956     3.0%        34,926      5.0%

As of December 31, 1995:
Total Capital (to Risk Weighted Assets)    $58,157      13.20%    $35,247     8.0%       $44,058     10.0%
Tier I Capital (to Risk Weighted Assets)    52,651      11.95%     17,624     4.0%        26,436      6.0%
Tier I Capital (to Average Assets)          52,651       8.81%     17,931     3.0%        29,884      5.0%
</TABLE>


V.    DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL STATEMENTS

      Fair values were estimated by management as of December 31, 1996 and
      1995, and required considerable judgment. Accordingly, the estimates
      presented herein are not necessarily indicative of the amounts the
      Company could realize in a current market exchange. The use of different
      market assumptions and/or estimation methodologies may have a material
      effect on the estimated fair values presented.

      The following methods and assumptions were used to estimate the fair
      value of cash and of financial instruments for which it is practicable to
      estimate that value:

      CASH AND SHORT-TERM INVESTMENTS - For short-term investments, the
      carrying amount is a reasonable estimate of fair value.

      INVESTMENT SECURITIES - For securities held as investment, fair value
      equals quoted market prices, if available. If a quoted market price is
      not available, fair value is estimated using quoted market prices for
      similar securities.

      LOANS HELD FOR SALE - For loans held for sale, fair value equals quoted
      market prices, if available. If a quoted market price is not available,
      fair value is estimated using quoted market prices for similar loans.


                                      59

<PAGE>   60

      LOAN RECEIVABLES - For certain homogeneous categories of loans (such as
      some residential mortgages and other consumer loans), fair value is
      estimated using the quoted market prices for securities backed by similar
      loans, adjusted for differences in loan characteristics. The carrying
      value of variable rate loans approximates fair value because these loans
      reprice frequently to current market rates. The fair value of other types
      of loans is estimated by discounting the future cash flows using the
      current rates at which similar loans would be made to borrowers with
      similar credit ratings and for the same remaining maturities.

      DEPOSIT LIABILITIES - The fair value of demand deposits, savings accounts
      and certain money market deposits is the amount payable on demand at the
      reporting date. The fair value of fixed-maturity certificates of deposit
      is estimated using the rates currently offered for deposits of similar
      remaining maturities.

      SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The carrying amounts
      approximate fair value because these borrowings reprice at market rates
      generally within four days.

      LONG-TERM DEBT - Rates currently available to the Company for debt with
      similar terms and remaining maturities are used to estimate fair value of
      existing debt.

      COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL
      GUARANTEES WRITTEN - The fair value of commitments is estimated using the
      fees currently charged to enter into similar agreements, taking into
      account the remaining terms of the agreements and the present
      creditworthiness of the counterparties. For fixed-rate loan commitments,
      fair value also considers the difference between current levels of
      interest rates and the committed rates. The fair value of guarantees and
      letters of credit is based on fees currently charged for similar
      agreements or on the estimated cost to terminate them or otherwise settle
      the obligations with the counterparties at the reporting date.



                                      60

<PAGE>   61
     The estimated fair values of the Company's financial instruments are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                DECEMBER 31,              DECEMBER 31,
                                         --------------------------------------------------
                                                    1996                      1995
                                         -----------------------   ------------------------
                                         CARRYING     ESTIMATED      CARRYING    ESTIMATED
                                          AMOUNT      FAIR VALUE      AMOUNT     FAIR VALUE

Financial assets:
<S>                                      <C>          <C>          <C>          <C>      
   Cash and cash equivalents             $ 108,442    $ 108,442    $  65,075    $  65,075
   Interest-bearing deposits in
      financial institutions                    22           22        1,135        1,135
   Available-for-sale investment
      securities                             4,170        4,170        3,931        3,931
   Held-to-maturity investment
      securities                           148,083      147,665      163,581      164,111
   Loans held for sale                      40,731       40,731        7,868        7,868
   Loans                                   456,698      457,990      384,777      385,266
   Less allowance for credit losses         (6,578)      (6,578)      (5,907)      (5,907)
                                         ---------    ---------    ---------    ---------
Total                                    $ 751,568    $ 752,442    $ 620,460    $ 621,479
                                         =========    =========    =========    =========

Financial liabilities:
   Deposits                              $ 717,413    $ 705,878    $ 574,724    $ 557,581
   Securities sold under agreements to
      repurchase                             3,751        3,751       12,083       12,083
   Notes payable and senior debentures       4,000        3,999        5,800        5,808
                                         ---------    ---------    ---------    ---------
Total                                    $ 725,164    $ 713,628    $ 592,607    $ 575,472
                                         =========    =========    =========    =========

Off-balance-sheet instruments:
   Commitments to extend credit                           ( - )                     ( - )
   Standby letters of credit                              ( - )                     ( - )
</TABLE>



                                      61

<PAGE>   62
W.    PARENT-ONLY FINANCIAL STATEMENTS


STERLING BANCSHARES, INC.
(Parent Company Only)

BALANCE SHEETS,
DECEMBER 31, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
                                                        DECEMBER 31,
                                                    ---------------------
ASSETS                                                  1996        1995
<S>                                                      <C>         <C>
Cash                                                $  1,734    $    487
Accrued interest receivable and other assets             131         398
Goodwill, net                                            666         694
Investment in subsidiaries                            60,905      53,916
                                                    --------    --------
TOTAL                                               $ 63,436    $ 55,495
                                                    ========    ========

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
   Accrued interest payable and other liabilities   $     29    $      4
   Notes payable                                       4,000       5,600
   Senior debentures                                    --           200
                                                    --------    --------
                Total liabilities                      4,029       5,804
                                                    --------    --------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
   Preferred stock                                        88          49
   Common stock                                        7,965       7,859
   Capital surplus                                    16,059      14,985
   Retained earnings                                  35,426      27,005
   Unrealized loss on subsidiaries' investment
      securities transferred, net of taxes              (131)       (207)
                                                    --------    --------

                Total shareholders' equity            59,407      49,691
                                                    --------    --------
TOTAL                                               $ 63,436    $ 55,495
                                                    ========    ========
</TABLE>




                                      62

<PAGE>   63
STERLING BANCSHARES, INC.
(Parent Company Only)

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------

                                            YEAR ENDED DECEMBER 31,
                                          --------------------------
                                           1996      1995      1994

REVENUES:
<S>                                       <C>       <C>      <C>   
   Dividends received from subsidiaries   $ 4,200   $3,540   $3,421

   Interest income                              1        1        7
                                          -------   ------   ------
                Total revenues              4,201    3,541    3,428
                                          -------   ------   ------

EXPENSES:
   Interest expense:
      Notes payable                           384      525      486
      Senior debentures                         1       62      110
   Goodwill amortization                       28       27       27
   General and administrative                 271      225      244
                                          -------   ------   ------
                Total expenses                684      839      867
                                          -------   ------   ------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
   EARNINGS OF SUBSIDIARIES AND INCOME
   TAXES                                    3,517    2,702    2,561

EQUITY IN UNDISTRIBUTED EARNINGS
   OF SUBSIDIARIES                          6,913    5,893    4,303
                                          -------   ------   ------
INCOME BEFORE BENEFIT FOR INCOME TAXES     10,430    8,595    6,864

BENEFIT FOR INCOME TAXES                      224      271      287
                                          -------   ------   ------
NET INCOME                                $10,654   $8,866   $7,151
                                          =======   ======   ======
</TABLE>



                                     63

<PAGE>   64
STERLING BANCSHARES, INC.
(Parent Company Only)

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------

                                                               YEAR ENDED DECEMBER 31,
                                                             ------------------------------

                                                             1996       1995        1994

<S>                                                         <C>         <C>        <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                               $ 10,654    $ 8,866     $ 7,151
   Adjustments to reconcile net income to net cash
      provided by operating activities:
      Amortization of goodwill                                    28         27          27
      Equity in undistributed earnings of subsidiary          (6,913)    (5,893)     (4,303)
      Change in operating assets:
         Accrued interest receivable and other assets            267       (337)         75
         Accrued interest payable and other liabilities           25        (48)       (735)
                                                             -------     ------     -------  
                Net cash provided by operating activities      4,061      2,615       2,215
                                                             -------     ------     -------  

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from note payable                                   --         --         1,400
   Repayments of notes payable                                (1,600)    (1,600)       (800)
   Proceeds from issuance of common stock                        633        210         219
   Proceeds from issuance of preferred stock                     575        645        --
   Payments of cash dividends                                 (2,222)    (1,674)     (1,311)
   Repayment of senior debentures                               (200)      (650)       (450)
   Payments made to Enterprise Bank shareholders                --         --       (15,000)
   Payments made to Guardian Bancshares preferred
      shareholders                                              --         --        (2,031)
                                                             -------     ------     -------  
                Net cash used in investing activities         (2,814)    (3,069)    (17,973)
                                                             -------     ------     -------  
NET INCREASE (DECREASE) IN CASH                                1,247       (454)    (15,758)

CASH, BEGINNING OF PERIOD                                        487        941      16,699
                                                             --------    -------    -------  
CASH, END OF PERIOD                                          $  1,734    $   487    $   941
                                                             ========    =======    =======  
</TABLE>



                                     ******



                                      64

<PAGE>   65
X.    SUBSEQUENT EVENT

      On March 18, 1997, the Company entered into an Agreement and Plan of
      Merger (the "Agreement") with First Houston Bancshares, Inc. ("First
      Houston"). The terms of the Agreement provide that each share of First
      Houston's $1.00 par value common stock will be canceled and converted into
      the right to receive a fractional share of the Company's common stock. It
      is estimated that approximately 1,720,000 shares of the Company's common
      stock will be issued to the shareholders of First Houston. The shares of
      First Houston's $40 preferred stock will be converted into common stock
      and are included in the share exchange amount referenced above. This
      Agreement is subject to approval by the shareholders of First Houston and
      applicable banking regulatory authorities. The merger is expected to be
      accounted for as a pooling of interests. Pro forma total assets and
      shareholders' equity on a combined basis are approximately $922.3 million
      and $67.0 million, respectively, at December 31, 1996. Pro forma combined
      operating data for 1996, as if the acquisition had been consummated on
      December 31, 1996, are as follows (in thousands except per share data):

<TABLE>
<CAPTION>
                                                            1996
                                                          -------
<S>                                                        <C>   
Interest income                                           $62,171
Interest expense                                           19,807
                                                          -------
Net interest income                                        42,364

Provision for credit losses                                 2,343
                                                          -------

Net interest income after provision for credit losses      40,021

Noninterest income                                          8,598
Noninterest expense                                        32,354
                                                          -------
Income before income taxes                                 16,265

Provision for income taxes                                  5,112
                                                          -------
Net income                                                $11,153
                                                          =======

Net income per common share                               $  0.80
                                                          =======

Average common and common equivalent shares outstanding    13,971

</TABLE>




                                      65
<PAGE>   66





                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER       DESCRIPTION
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<S>         <C>
2.1         Merger Agreement dated as of October 21, 1993, between Sterling Bancshares, Inc., and Guardian Bancshares,
            Inc. [Incorporated by reference to exhibit 2(a) of the Company's Registration Statement on Form S-4,
            effective February 10, 1994 (Registration No. 33-71660)]

2.2         Amendment No. 1 dated as of January 26, 1994, to the Merger Agreement dated as of October 21, 1993, between
            Sterling Bancshares, Inc., and Guardian Bancshares, Inc. [Incorporated by reference to exhibit 2(b) of the
            Company's Registration Statement on Form S-4, effective February 10, 1994 (Registration No. 33-71660)]

2.3         Stock Purchase Agreement dated as of September 10, 1993, among Sterling Bancshares, Inc., Sterling
            Bancorporation, Inc., Enterprise Bank--Houston, and the Shareholder Representatives of Enterprise Bank--
            Houston, Inc. [Incorporated by reference to exhibit 2(c) of the Company's Registration Statement on Form S-
            4, effective February 10, 1994 (Registration No. 33-71660)]

3.1         Articles of Incorporation of the Registrant and all amendments thereto [Incorporated by reference to
            Exhibits 4.1 to 4.6 of the Company's Report on Form 10-Q for the quarter ended June 30, 1996]

3.2         Restated By-Laws of the Registrant [Incorporated by reference to Exhibit 4.2 of the Company's Registration
            Statement on Form S-8, effective November 25, 1996 (File No. 333-16719)]

10.1*       1994 Incentive Stock Option Plan of the Registrant [Incorporated by reference to Exhibit 10.1 of the
            Company's Annual Report on Form 10-K for the year ended December 31, 1994]

10.2        1994 Employee Stock Purchase Plan of the Registrant [Incorporated by reference to Exhibit 10.2 of the
            Company's Annual Report on Form 10-K for the year ended December 31, 1994]

10.3*       1984 Incentive Stock Option Plan of the Registrant [Incorporated by reference to Exhibit 10.1 of the
            Company's Registration Statement on Form S-1, effective October 22, 1992 (Registration No. 33-51476)]

10.4        Loan Agreement dated November 24, 1993, between Sterling Bancshares, Inc., Sterling Bancorporation, Inc.,
            and First Interstate Bank of Texas, N.A [Incorporated by reference to exhibit 10(j) of the Company's
            Registration Statement on Form S-4, effective February 10, 1994 (Registration No. 33-71660)]

10.5*       Settlement and Release Agreement dated October 2, 1995, between Sterling Bancshares, Inc., and C. Frank
            Kurtin [Incorporated by reference to Exhibit 10.5 of the Company's annual report on Form 10-K for the 
            year ended December 31, 1995]

10.6*       Consulting Contract dated October 2, 1995, between Sterling Bancshares, Inc., and C. Frank Kurtin
            [Incorporated by reference to Exhibit 10.6 of the Company's annual report on Form 10-K for the year ended 
            December 31, 1995]

10.7*       1995 Non-Employee Director Stock Compensation Plan [Incorporated by reference to Exhibit 5.1 of the
            Company's Registration Statement on Form S-8, effective November 25, 1996 (File No. 333-16719)]

21          Subsidiaries of the Registrant [Incorporated by reference to Exhibit 21 of the Company's Registration
            Statement on Form S-1, effective October 22, 1992 (Registration No. 33-51476)]

27          Financial Data Schedule [The required Financial Data Schedule has been included as Exhibit 27 of the 
            Form 10-K filed electronically with the Securities and Exchange Commission] 
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*Management Compensation Agreement