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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, 2001

                                      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               (I.R.S. employer
    Incorporation or organization)             Identification number)


    2550 North Loop West, Suite 600                     77092
            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: NONE

          Securities registered pursuant to Section 12(g) of the Act:

<TABLE>
<CAPTION>
            Title of Each Class        Shares Outstanding at December 31, 2001
            -------------------        ---------------------------------------
      <S>                              <C>
      Common Stock, $1.00 Par Value...               43,769,664
</TABLE>

   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 mark 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. [_]

   The aggregate market value of the registrant's Common Stock held by non-
affiliates as of March 1, 2002, was $520,041,486 based on the closing sales
price of $13.66 on such date. For purposes of this calculation, non-affiliates
are defined as all directors and executive officers.

   As of March 1, 2002, registrant had outstanding 43,782,080 shares of Common
Stock, $1.00 par value.

   Documents incorporated by reference: Portions of Sterling Bancshares,
Inc.'s definitive proxy statement relating to the registrant's 2002 Annual
Meeting of Shareholders, which proxy statement will be filed under the
Securities Exchange Act of 1934 within 120 days of the end of the registrant's
fiscal year ended December 31, 2001, are incorporated by reference into Part
III of this Form 10-K.

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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
primarily in the Houston, Dallas and San Antonio metropolitan areas through
the banking offices of Sterling Bank, Lone Star Bank and Community Bank, which
are banking associations chartered under the laws of the State of Texas.
(Sterling Bank, Lone Star Bank and Community Bank are collectively referred to
as the "Bank" or the "Banks".) The Company also provides mortgage banking
services through its 80 percent owned subsidiary, Sterling Capital Mortgage
Company ("SCMC").

   The Company's principal executive offices are located at 2550 North Loop
West, Suite 600, Houston, Texas, 77092 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 Sterling Bank in 1981.
During 2001, the Company completed the acquisitions of CaminoReal Bancshares
of Texas, Inc., Lone Star Bancorporation, Inc. and Community Bancshares, Inc.
and as a result, became the parent bank holding company of CaminoReal Bank,
National Association, Lone Star Bank and Community Bank. CaminoReal Bank was
merged into Sterling Bank during 2001. Sterling Bank was chartered in 1974.
Lone Star Bank was chartered as a national bank in 1985 under the name First
National Bank of Highlands. Lone Star Bank changed its name to Lone Star Bank,
N.A. in July 1988, and on July 20, 1999, converted to a Texas banking
association under the name Lone Star Bank. The Company completed its initial
public offering on October 22, 1992.

   The Company had approximately 1,014 and 622 full time equivalent employees,
including 274 and 61 officers, in its commercial banking and mortgage banking
segments, respectively, as of December 31, 2001. At December 31, 2001, the
Company had total assets of $2.8 billion, deposits of $2.3 billion, and
shareholders' equity of $217.4 million.

   The Company has two operating segments: commercial banking and mortgage
banking. The segments are managed separately as they require different
marketing strategies and offer different products and services. See Note U to
the Consolidated Financial Statements for summarized financial information by
operating segment.

Commercial Banking

   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; and cash and
asset management services. In addition, the Bank facilitates sales of
brokerage, mutual fund, alternative financing 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 providing commercial loans and
owner-occupied real estate loans to local businesses with annual sales ranging
from $300,000 to $30 million. Typically, the Bank's customers have financing
requirements between $50,000 and $500,000. The Bank does not seek loans of
more than $2 million but will consider larger lending relationships which
involve exceptional levels of credit quality. The Bank's credit range, while
well below its legal lending limit of $20 million, allows for greater
diversity in the loan portfolio, less competition from large banks, and better
pricing opportunities.

   Business Banking Strategy. Under its business banking strategy, the Bank
focuses on a broad line of financial products and services to small and
medium-sized businesses through full service banking offices. Each banking
office has senior management with extensive lending experience. These managers
exercise substantial authority over credit and pricing decisions, subject to
loan committee approval for larger credits. This decentralized

                                       2
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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, 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, religious and community development
activities. Each banking office may also appoint 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 customers and the convenience and service of the Company's thirty-eight
banking offices, lending and investing activities are funded primarily by core
deposits, over one-third of which are noninterest bearing demand deposits.

   The Bank centralizes operational and support 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
provides services such as data processing, bookkeeping, accounting, treasury
management, loan administration, loan review, compliance, risk management and
internal auditing to enhance their delivery of quality service. The Company
also provides overall direction in the areas of credit policy and
administration, strategic planning, marketing, investment portfolio management
and other financial and administrative services. The banking offices work
closely with the Company to develop new products and services needed by their
customers and to introduce enhancements to existing products and services.

Mortgage Banking

   The Company originates, sells and services single family residential
mortgages through its 80 percent ownership of SCMC. SCMC has production
offices in Texas and eleven other states, with corporate offices in Houston,
Texas and Seattle, Washington. The typical mortgage originated by SCMC is
approximately $135,000. A substantial portion of SCMC's loan production is
generated through joint ventures known as affiliated business arrangements
with established home builders and realtor-based organizations. SCMC is an
approved Government National Mortgage Association ("GNMA") issuer of mortgage-
backed securities. SCMC is also an approved Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC")
seller/servicer and a HUD-Approved Title II nonsupervised mortgagee. During
2001, SCMC funded approximately $2.6 billion in residential mortgage loans.

Expansion

   The Company's growth strategy has been concentrated on increasing its
banking presence in the greater Houston area and on entering both the Dallas
and San Antonio markets. The Company has grown through a combination of
internal growth, mergers and acquisitions and the opening of new banking
offices.

   De Novo Offices. In March 2001, the Company opened a new banking office in
Deer Park.

   In December 2000, the Company opened a new banking office in Dallas. This
is the Company's first office outside of the Houston market. In connection
with the opening of this office, the Company's Board designated 50,000 shares
of Series I convertible preferred stock and authorized the offering and sale
of such shares to investors who may assist in the business development efforts
of the office. Subscriptions for a total of 20,000 of the preferred shares
have been received by the Company. The offering of the Series I convertible
preferred stock has terminated and it is anticipated that the shares will be
issued prior to March 31, 2002. The Series I convertible preferred shares will
be convertible into a maximum of 25,000 shares of the Company's common stock.
The conversion ratio is dependent upon the Dallas office meeting certain
performance goals.

   In April 2000, the Company opened a new banking office in Bellaire. In
conjunction with the opening of this office, the Company's Board designated
50,000 shares of Series H convertible preferred stock and authorized the
offering and sale of such shares to investors who may assist in the business
development efforts of the office. A total of 39,000 of the preferred shares
were actually sold. The Series H preferred shares will be convertible into a
maximum of 73,125 shares of the Company's common stock. The conversion ratio
is dependent upon the Bellaire office meeting certain performance goals.

                                       3
<PAGE>

   Mergers and Acquisitions. On December 17, 2001, the Company acquired
Community Bancshares, Inc. and its subsidiary bank, Community Bank in a stock
and cash merger. The shareholders of Community Bancshares, Inc. received $14.6
million in cash and 1,443,753 shares of the Company's common stock for all of
the outstanding shares of common stock of Community Bancshares, Inc. The stock
issuance occurred after the three-for-two stock split effected by the Company
in September 2001. Community Bank operates two banking offices in west
Houston. As of December 31, 2001, Community Bank had total assets of $155
million, loans of $80 million and deposits of $114 million. The Company plans
to merge Community Bank into Sterling Bank in the second quarter of 2002. This
acquisition was accounted for using the purchase method of accounting.
Goodwill of $28.7 was recorded in connection with this acquisition.

   On August 23, 2001, the Company acquired Lone Star Bancorporation, Inc. and
its subsidiary bank, Lone Star Bank in a stock-for-stock merger. The
shareholders of Lone Star Bancorporation, Inc. received an aggregate of 1.76
million shares of the Company's common stock for all of the outstanding shares
of common stock of Lone Star Bancorporation, Inc. The stock issuance occurred
prior to the three-for-two stock split effected by the Company in September
2001. All previously reported amounts have been restated to reflect this
transaction which was accounted for using the "pooling of interests" method.
Lone Star Bank operated four banking offices in the Houston metropolitan area.
As of December 31, 2001, Lone Star Bank had total assets of $170 million,
loans of $123 million and deposits of $154 million. The Company merged Lone
Star Bank into Sterling Bank in February 2002.

   On March 22, 2001, the Company acquired CaminoReal Bancshares of Texas,
Inc. and its subsidiary bank, CaminoReal Bank, National Association, for an
aggregate cash purchase price of $51.8 million. CaminoReal Bank has four
banking offices in San Antonio, Texas and four banking offices in the south
Texas cities of Eagle Pass, Carrizo Springs, Crystal City and Pearsall. During
June 2001, the Company completed the operational integration of CaminoReal
Bank and Sterling Bank. This acquisition was accounted for using the purchase
method of accounting. Goodwill of $21.2 million was recorded in connection
with this acquisition.

   On June 1, 1999, the Company acquired B.O.A. Bancshares, Inc. and its
subsidiary Houston Commerce Bank in exchange for 1,854,600 shares of the
Company's common stock. All previously reported amounts have been restated to
reflect this transaction which was accounted for using the "pooling of
interests" method. The acquisition of B.O.A. Bancshares added $115 million in
total assets and $103 million in total deposits to the Company's balance
sheet. Houston Commerce Bank operated three locations in Houston. During
October 1999, the Company merged Houston Commerce Bank into Sterling Bank.

   On November 20, 1998, the Company acquired Hometown Bancshares, Inc., which
was the bank holding company for Clear Lake National Bank, in a stock-for-
stock merger. The acquisition of Hometown added $92 million in total assets
and $84 million in total deposits to the Company's balance sheet. Clear Lake
National Bank operated two locations in the Clear Lake area of southeast
Houston. All previously reported amounts have been restated to reflect this
transaction which was accounted for using the "pooling of interests" method.
During April 1999, the Company merged Clear Lake National Bank into Sterling
Bank.

   On June 30, 1998, Humble National Bank was acquired by the Company in a
stock-for-stock merger. The acquisition of Humble added $54 million in total
assets and $49 million in total deposits to the Company's balance sheet.
Humble operated a full service banking office in the Humble area of northeast
Houston. All previously reported amounts have been restated to reflect this
transaction which was accounted for using the "pooling of interests" method.
During August 1998, the Company merged Humble into Sterling Bank.

   On September 30, 1997, the Company completed the acquisition of First
Houston Bancshares, Inc. and its wholly owned subsidiary bank, Houston
National Bank, in a stock-for-stock merger. The acquisition of First Houston
added $135 million in total assets and $125 million in total deposits to the
Company's balance sheet. All previously reported amounts have been restated to
reflect this transaction which was accounted for using the "pooling of
interests" method. In October 1997, Houston National was merged into the Bank
adding the Bayou Bend Office to the Bank's expanding office network.

   The Company will continue to seek acquisition and new office opportunities
when available and consistent with its business banking philosophy. To
accommodate further growth, the Company will continue to upgrade its

                                       4
<PAGE>

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.

Competition

   The Company engages in highly competitive activities. Each activity and
market served involves competition with other banks and mortgage companies, as
well as with non-banking and non-financial enterprises that offer financial
products and services that compete directly with the Company's product and
service offerings. The Company actively competes with other banks, mortgage
companies and other financial service companies 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 banks and mortgage companies, the
Company 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, real estate investment trusts, certain
governmental agencies, credit card organizations and other enterprises. In
recent years, competition for money market accounts from securities brokers
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 providing brokerage services.

                          SUPERVISION AND REGULATION

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

The Bank Holding 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 Federal Reserve Board. Federal laws subject bank holding companies to
particular restrictions on the types of activities in which they 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 Texas Department of Banking 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 entities which are controlled by the Company or of 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 Federal Reserve Board
determines to be incidental or closely related to banking or managing or
controlling banks. However, the Gramm-Leach-Bliley Act enacted in 2000 amended
the BHCA and granted certain expanded powers to bank holding companies. See
discussion below under "Recently Enacted Legislative and Regulatory Changes."
In approving acquisitions by the Company of entities engaged in banking-
related activities, the Federal Reserve Board 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 weighted against the
risks of possible adverse effects, such as an attempt to monopolize the
business of banking, undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices.

Mortgage Company

   SCMC is an approved GNMA issuer of mortgage-backed securities. SCMC is also
an approved FNMA and FHLMC seller/servicer and a HUD-Approved Title II
nonsupervised mortgagee. As such, SCMC must operate

                                       5
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under certain guidelines set forth by GNMA, FNMA, FHLMC and HUD. As a majority
owned subsidiary of a bank holding company, SCMC is also subject to the
regulatory authority of the FDIC, the Texas Department of Banking and the
Federal Reserve Board.

Non-Banking Activities

   The BHCA sets forth exceptions to its general prohibition against bank
holding company ownership of voting shares in any company engaged in non-
banking activities. The exceptions include certain activities exempt based
upon the type of activity and those determined by the Federal Reserve Board to
be closely related to banking or managing or controlling banks. The Economic
Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA"), streamlined
the non-banking activities application process for bank holding companies
which qualify as well-capitalized and well-managed. Also, see discussion of
the Gramm-Leach-Bliley Act, which amends certain portions of the BHCA, under
the "Recently Enacted Legislative and Regulatory Changes" caption below.

Recently Enacted Legislative and Regulatory Changes

   The Gramm-Leach-Bliley ("G-L-B") Act, which became effective in 2000,
authorizes affiliations between banking, securities and insurance firms and
authorizes bank holding companies and state banks, if permitted by state law,
to engage in a variety of new financial activities. Bank holding companies may
also elect to become financial holding companies if they meet certain
requirements relating to capitalization and management and have filed a
declaration with the Federal Reserve Board electing to be a financial holding
company. Among the new activities that will be permitted by bank holding
companies are securities and insurance brokerage, securities underwriting,
insurance underwriting and merchant banking. The Federal Reserve Board, in
consultation with the Department of Treasury, may approve additional financial
activities.

   The G-L-B Act also imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the G-
L-B Act. The privacy provisions became effective on July 1, 2001.

   The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee.

   The Company has not filed an election to be a financial holding company. At
this time, the Company is unable to predict the impact of the authorized
affiliations and new financial activities permitted by the G-L-B Act on its
operations. However, the Company is currently in compliance with the customer
privacy requirements of the G-L-B Act.

   On October 26, 2001, President Bush signed the USA Patriot Act of 2001.
Enacted in response to the terrorist attacks in New York, Pennsylvania and
Washington, D.C. on September 11, 2001, the Patriot Act is intended to
strengthen U.S. law enforcement's and the intelligence communities' ability to
work cohesively to combat terrorism on a variety of fronts. The potential
impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and requires various regulations,
including:

  . due diligence requirements for financial institutions that administer,
    maintain, or manage private bank accounts or correspondent accounts for
    non-U.S. persons;

  . standards for verifying customer identification at account opening;

  . rules to promote cooperation among financial institutions, regulators,
    and law enforcement entities in identifying parties that may be involved
    in terrorism or money laundering;

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  . reports by nonfinancial trades and business filed with the Treasury
    Department's Financial Crimes Enforcement Network for transactions
    exceeding $10,000; and

  . filing of suspicious activities reports involving securities by brokers
    and dealers if they believe a customer may be violating U.S. laws and
    regulations.

   The Company is not able to predict the impact of such law on its financial
condition or results of operations at this time.

Safety and Soundness Standards

   The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") expanded the Federal Reserve Board's authority to prohibit
activities of bank holding companies and their non-banking 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 that the Federal Reserve Board can assess for certain activities
conducted on a knowing and reckless basis, if those activities cause 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, Federal Reserve Board, the Office of the Comptroller of
the Currency and the Office of Thrift Supervision) jointly issued guidelines
for safe and sound banking operations (Interagency Guidelines Establishing
Standards for Safety and Soundness) as required by Section 132 of the Federal
Deposit Insurance Corporation Improvement Act ("FDICIA"). The guidelines
identify the fundamental standards that the four agencies follow when
evaluating the operational and managerial controls at insured institutions. An
institution's performance will be evaluated against these standards during the
regulators' periodic on-site examinations.

Dividend Restrictions

   It is the policy of the Federal Reserve Board that bank holding companies
should pay cash dividends on common stock only out of income available over
the past year and only if prospective earnings retention is consistent with
the organization's expected future needs and financial condition. The policy
provides that bank holding companies should not maintain a level of cash
dividends that undermines the bank holding company's ability to serve as a
source of strength to its banking subsidiaries.

   Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to each of its banking subsidiaries and
commit resources to their support. Such support may be required at times when,
absent this Federal Reserve Board policy, a bank holding company may not be
inclined to provide it.

Capital Adequacy Requirements

   The Bank is subject to the capital adequacy requirements promulgated by the
FDIC and the Texas Department of Banking. In addition, the Federal Reserve
Board monitors the capital adequacy of bank holding companies.

   The Federal Reserve Board has adopted a system using 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-related" asset base. Certain off balance
sheet items 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 each of the capital components. Total capital
is defined as the sum of "core capital elements" ("Tier 1") and "supplemental
capital elements" ("Tier 2"), with "Tier 2" being limited to 100% of "Tier 1."
For bank holding companies, "Tier 1"

                                       7
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capital includes, with certain restrictions, common shareholders' equity,
perpetual preferred stock, and minority interest 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,
2001, the Company's ratios of "Tier 1" and "Total" capital-to-risk-weighted
assets were 9.64%, and 10.66%, respectively.

   In addition to the risk-based capital guidelines, the Federal Reserve Board
and the FDIC have adopted the use of a minimum "Tier 1" leverage ratio as an
additional tool to evaluate the capital adequacy of banks and bank holding
companies. The banking organization's "Tier 1" leverage ratio is defined to be
a company's "Tier 1" capital divided by its average total consolidated assets.
The leverage ratio adopted by the federal banking agencies requires a minimum
3.0% "Tier 1" capital to total assets ratio for institutions with the highest
regulatory rating. All other institutions will be expected to maintain a
leverage ratio of 4.0% to 5.0%. The Company's leverage ratio at December 31,
2001 of 8.40% significantly exceeded the regulatory minimum.

Imposition of Liability for Undercapitalized Subsidiaries

   A bank holding company that fails to meet the applicable risk-based capital
standards will be at a disadvantage. For example, Federal Reserve Board policy
discourages the payment of dividends by a bank holding company from borrowed
funds as well as payments that would adversely affect capital adequacy.
Failure to meet the capital guidelines may result in the institution of
supervisory or enforcement actions by the Federal Reserve Board. FDICIA
requires bank regulators to take "prompt corrective action" to resolve
problems associated with insured depository institutions whose capital
declines below certain levels.

Audit Reports

   The regulations promulgated by the FDIC to implement FDICIA subjects
depository institutions with assets of $500 million or more to certain audit
and reporting requirements. 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 FDICIA. The annual audit report must 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, independent auditors may be required to review quarterly
financial statements. FDICIA requires that independent audit committees be
formed, consisting solely of outside directors. The Company has an audit
committee comprised soley of outside directors with at least one certified
public accountant and, therefore, is in compliance with the requirements for
large institutions.

Acquisitions by Bank Holding Companies

   The BHCA requires a bank holding company to obtain the prior approval of
the Federal Reserve Board before it acquires 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 that 5% of the voting shares of such bank. In approving bank
acquisitions, the Federal Reserve Board considers 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 Federal Reserve Board,
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.

                                       8
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Community Reinvestment Act

   The Community Reinvestment Act of 1977 ("CRA") and the regulations
promulgated by the FDIC to implement CRA are intended to ensure that banks
meet the credit needs of their service area, including low and moderate income
communities and individuals, consistent with safe and sound banking practices.
The CRA regulations also require the banking regulatory authorities to
evaluate a bank's record in meeting the needs of its service area when
considering applications to establish new offices or consummate any merger or
acquisition transaction. Under FIRREA, the federal banking agencies are
required to rate each insured institution's performance under CRA and to make
such information publicly available. In the case of an acquisition by a bank
holding company, the CRA performance records of the banks involved in the
transaction are reviewed as part of the processing of the acquisition
application. A CRA rating other than "outstanding" or "satisfactory" can
substantially delay or block a transaction. Based upon its most recent
examination, Sterling Bank has a satisfactory CRA rating.

Interstate Banking

   The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Branching Act") increased the ease and likelihood of
interstate branching throughout much of the United States. The Interstate
Branching Act removes state law barriers to acquisitions in all states and
allows multi-state 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
reciprocal agreements, thus creating opportunities for expansion into markets
that were previously closed. Under the Interstate Branching Act, bank holding
companies are now able to acquire banks in any state, subject to certain
conditions. Banks acquired pursuant to this authority may subsequently be
converted to branches. Interstate branching is permitted by allowing banks to
merge across state lines to form a single institution. Interstate merger
transactions can be used to consolidate existing multi-state operations or to
acquire new branches. A bank may 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 Federal Reserve Board, 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 acquisitions. The interstate
branching provisions became effective on June 1, 1997, unless a state took
action before that time. Texas elected to "opt out" of the Interstate
Branching Act. Despite Texas' having opted out of the Interstate Branching
Act, the Texas Banking Act permits, in certain circumstances, out-of-state
bank holding companies to acquire certain existing banks and bank holding
companies in Texas.

Sterling Bank, Lone Star Bank and Community Bank

   Sterling Bank, Lone Star Bank and Community Bank are Texas-chartered
banking associations. The Banks' deposits are insured by the FDIC. Therefore,
the Banks are subject to supervision and regulation by both the Texas
Department of Banking and the FDIC. Pursuant to such regulation, the Banks are
subject to special restrictions, supervisory requirements and potential
enforcement actions. Sterling Bank is not a member of the Federal Reserve
System; however, the Federal Reserve Board also has supervisory authority that
directly affects the Bank. Lone Star and Community Bank are members of the
Federal Reserve System and are therefore subject to the supervision and
regulation of the Federal Reserve Board. Sterling Bank and Community Bank are
members of the Federal Home Loan Bank and, therefore, are also subject to
compliance with its requirements.

Permissible Activities for State-Chartered Institutions

   The Texas Constitution provides that a Texas-chartered bank has the same
rights and privileges that are or may be granted to national banks domiciled
in Texas. To the extent that the Texas laws and regulations may have allowed
state-chartered banks to engage in a broader range of activities than national
banks, FDICIA has

                                       9
<PAGE>

operated to limit this authority. FDICIA provides that 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 Bank Insurance Fund ("BIF").

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 non-member state
banks to branch across state lines; however, such branching would be subject
to applicable state law restrictions.

Restrictions on Subsidiary Banks

   Dividends paid by the Bank provided substantially all of the Company's cash
flow during 2001 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, 2001, there was an aggregate of
approximately $60.6 million available for the payment of dividends by the Bank
to the Company without prior regulatory approval.

   Other requirements in Texas law affecting the operation of subsidiary banks
include requirements relating to maintenance of reserves against deposits,
restrictions on the nature and amount of loans that may be made and the
interest that may be charged thereon and limitations relating to investments
and other activities.

Examinations

   The FDIC periodically examines and evaluates insured banks. FDIC
examinations are conducted every 12 months. The FDIC may, however, accept the
result of a Texas Department of Banking examination in lieu of conducting an
independent examination. 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. However, since
the total assets of the Bank exceed $1 billion, the FDIC and the Texas
Department of Banking jointly examine the Bank on an annual basis.

Deposit Insurance Assessments

   The FDIC assesses deposit insurance premiums on all banks in order to
adequately fund the BIF so as to resolve any insured institution that is
declared insolvent by its primary regulator. The FDIC has established a risk-
based deposit insurance premium system to calculate a depository institution's
semi-annual deposit insurance assessment. The FDIC's semi-annual assessment is
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 the 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.

   The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
new system, the FDIC has the flexibility to adjust the assessment rate
schedule twice a year without seeking prior public comment, but only within a
range of five cents per $100 above or below the premium schedule adopted. The
FDIC can make changes in the rate schedule outside the five-cent range above
or below the current schedule only after a full rulemaking with opportunity
for public comment.


                                      10
<PAGE>

   In 1996, a law was passed that contained a comprehensive approach to
recapitalizing the Savings Association Insurance Fund ("SAIF") and to assure
the payment of the Financing Corporation's ("FICO") bond obligations. Under
this 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 Corporation in 1987. With regard to the
assessment for the FICO obligation, the current BIF and SAIF rate is .0182% of
deposits.

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 Federal
Reserve Board 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.

Effect on Economic Environment

   The policies of regulatory authorities, including the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results
of bank holding companies and their subsidiaries. Among the means available to
the Federal Reserve Board 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.

   Federal Reserve Board 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.

Consumer Laws and Regulations

   In addition to the banking laws and regulations discussed above, banks are
also subject to certain consumer laws and regulations that are designed to
protect consumers in transactions with banks. Among the more prominent of such
laws and regulations are the Truth in Lending Act, the Truth in Savings Act,
the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, and the Fair
Housing Act. These laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial institutions must deal
with customers when taking deposits or making loans to such customers. The
Bank must comply with the applicable provisions of these consumer protection
laws and regulations as part of their ongoing customer relations. Also, see
discussion of the consumer privacy protection provision of the Gramm-Leach-
Bliley Act under the "Recently Enacted Legislative and Regulatory Changes"
caption above.

                                      11
<PAGE>

Item 2--Properties

   The principal executive offices of the Company and the Bank are located at
2550 North Loop West, Houston, Texas, 77092, in spaced leased by the Company.
In addition to its principal office, the Company operates the following
locations:

<TABLE>
<CAPTION>
                                    Owned Leased Total
                                    ----- ------ -----
      <S>                           <C>   <C>    <C>
      Banking offices in the
       Houston metropolitan area..    17    12     29
      Banking offices in the San
       Antonio metropolitan area..     2     2      4
      Banking offices in the South
       Texas......................     4    --      4
      Banking offices in the
       Dallas metropolitan area...    --     1      1
      Central department offices..     1     2      3
      Mortgage production offices
       Arizona....................    --     6      6
       Colorado...................    --     1      1
       California.................    --     1      1
       Illinois...................    --     1      1
       Kentucky...................    --     1      1
       Louisiana..................    --     1      1
       Nevada.....................    --     1      1
       Oregon.....................    --     2      2
       Texas......................    --    17     17
       Virginia...................    --     1      1
       Washington.................    --     5      5
                                     ---   ---    ---
          Total...................    24    54     78
                                     ===   ===    ===
</TABLE>

Item 3--Legal Proceedings

   From time to time, the Bank is a party to various legal proceeding incident
to its business. Currently, neither the Company nor any of its subsidiaries is
involved in any material legal proceedings.

Item 4--Submission of Matters to a Vote of Security Holders

   None.

                                      12
<PAGE>

                                    PART II

Item 5--Market for Registrant's Common Stock and Related Shareholder Matters

   The Company's stock trades through the Nasdaq Stock Market under the symbol
SBIB. The following table sets forth the high and low closing stock prices of
the Company's common stock, as quoted on the Nasdaq Stock Market, and the
dividends paid thereon for each quarter of the last two fiscal years. This
information has been restated to reflect all stock splits occurring prior to
the issuance of this report.

<TABLE>
<CAPTION>
                                                           High   Low   Dividend
                                                          ------ ------ --------
      <S>                                                 <C>    <C>    <C>
      2001
        First quarter.................................... $14.00 $10.83 $0.03667
        Second quarter...................................  12.79  11.08 $0.03667
        Third quarter....................................  15.65  12.34 $0.03667
        Fourth quarter...................................  13.47  11.56 $0.03667
      2000
        First quarter.................................... $ 7.29 $ 5.81 $0.03333
        Second quarter...................................   7.92   6.33 $0.03333
        Third quarter....................................  10.63   6.79 $0.03333
        Fourth quarter...................................  13.42   9.67 $0.03333
</TABLE>

   On January 28, 2002, the Company's Board of Directors declared a quarterly
cash dividend of $0.04 per share payable on February 22, 2002, to shareholders
of record on February 8, 2002. The Company intends to continue to pay a
dividend at the rate of $0.040 per share quarterly throughout 2002.

   On July 24, 2001, the Company's Board of Directors declared a three-for-two
stock split to be effected in the form of a stock dividend on its common stock
to shareholders of record on September 4, 2001. Cash paid in lieu of
fractional shares was based on the average of the high and low bids on the
record date, as adjusted for the split. The payment date for the stock
dividend was September 18, 2001.

   As of February 8, 2001, there were 1,122 shareholders of record of common
stock. The number of beneficial shareholders is unknown to the Company at this
time.

                         DESCRIPTION OF CAPITAL STOCK

Authorized Capital Stock

   The authorized capital stock of the Company consists of (i) 50,000,000
shares of Common Stock, $1.00 per share par value, of which 43,769,664 shares
were issued and outstanding as of December 31, 2001 and (ii) 1,000,000 shares
of Preferred Stock, $1.00 per share par value ("Preferred Stock"), issuable in
series, of which 39,000 shares of Series H Convertible Preferred Stock were
issued and outstanding as of December 31, 2001. The number of outstanding
shares of the Series H Convertible Preferred Stock was not increased as a
result of the stock split effected by the Company in September 2001; however,
the conversion ratio for the Series H Convertible Preferred Stock has been
adjusted so that upon conversion of the preferred stock, the number of shares
of Common Stock issuable upon the conversion will be increased to give effect
to the stock split. The Company's Board has also designated 50,000 shares of
Series I convertible preferred. It is anticipated that the 20,000 shares of
the Series I convertible preferred stock will be issued prior to March 31,
2002. All series of Preferred Stock prior to the Series H Convertible
Preferred Stock have been converted into shares of common stock in accordance
with the relative rights and preferences of each such series. As of December
31, 2001, an additional 943,239 shares of Common Stock were issuable upon
exercise of the Company's vested 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, which were previously filed as exhibits.

                                      13
<PAGE>

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 requiring a shareholder vote. 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 therefore. 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 primarily
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 that 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 Banks have been required to meet a minimum ratio of total capital
to risk weighted assets of 8.0%. As of December 31, 2001, the Banks were in
compliance with all capital requirements.

   American Stock Transfer & Trust Company presently serves as the transfer
agent and registrar for the Common Stock.

Preferred Stock

   The Board, without any further action by the shareholders but subject to
limits contained in the Articles of Incorporation, is authorized to issue up
to 1,000,000 shares of Preferred Stock, in one or more series. The Board may
fix by resolution the terms of a series of Preferred Stock, such as: dividend
rates and preference of dividends, if any; conversion rights; voting rights;
terms of redemption and liquidation preferences; and, the number of shares
constituting each such series.

   Holders of Preferred Stock have no right or power to vote on any matter
except as otherwise as required by law in which case they are entitled to one
vote for each share of Preferred Stock held. Upon the Company's dissolution,
liquidation or winding up, the holders of shares of Preferred Stock are
entitled to receive out of the Company's assets an amount per share equal to
the respective liquidation preference before any payment or distribution is
made on the Common Stock or any other class of capital stock that ranks junior
to the particular series of Preferred Stock. All outstanding series of
Preferred Stock rank equal. If the Company's assets available for distribution
upon dissolution, liquidation or winding up are insufficient to pay in full
the liquidation preference payable to the holders of shares of all series of
Preferred Stock, distributions are to be made proportionately on all
outstanding shares of Preferred Stock.

                                      14
<PAGE>

Item 6--Selected Financial Data

   The following table sets forth summary historical data for the Company for
the periods indicated. During the periods indicated, the Company completed
seven acquisitions of bank holding companies and/or banks in merger
transactions that were accounted for using either the purchase method of
accounting or the "pooling of interests" method of accounting. With respect to
the five mergers completed during the reported periods which were accounted
for using the "pooling of interests" method, all financial data relating to
such entities prior to the respective mergers have been restated to include
the merged entities' balance sheet data and historical results of operations.
In addition, data has been restated to reflect the effect of stock splits
where applicable.

<TABLE>
<CAPTION>
                                         Year Ended December 31,
                          ----------------------------------------------------------
                             2001        2000        1999        1998        1997
                          ----------  ----------  ----------  ----------  ----------
                               (In thousands, except for per share amounts)
<S>                       <C>         <C>         <C>         <C>         <C>
SUMMARY OF INCOME:
Interest income.........  $  173,053  $  167,517  $  129,658  $  115,839  $   99,814
Interest expense........      50,052      62,824      37,470      34,600      31,841
                          ----------  ----------  ----------  ----------  ----------
Net interest income.....     123,001     104,693      92,188      81,239      67,973
Provision for credit
 losses.................      11,684       9,668       9,236       6,275       3,321
Noninterest income......      66,171      40,648      30,265      22,761      13,895
Noninterest expense.....     130,677      95,492      81,778      69,699      55,321
                          ----------  ----------  ----------  ----------  ----------
Income before income
 taxes..................      46,811      40,181      31,439      28,026      23,226
Provision for income
 taxes..................      16,410      12,641       9,803       9,116       7,777
                          ----------  ----------  ----------  ----------  ----------
Net income..............  $   30,401  $   27,540  $   21,636  $   18,910  $   15,449
                          ==========  ==========  ==========  ==========  ==========

COMMON SHARE DATA:
Basic earnings per
 share..................  $     0.72  $     0.66  $     0.52  $     0.47  $     0.40
Diluted earnings per
 share..................  $     0.71  $     0.65  $     0.51  $     0.46  $     0.38
Book value per share at
 period-end.............  $     4.96  $     3.98  $     3.40  $     2.98  $     2.47
Tangible book value per
 share at period-end....  $     3.70  $     3.84  $     3.25  $     2.83  $     2.43
Weighted average common
 shares.................      42,180      41,596      41,422      39,830      38,973
Weighted average common
 and common equivalent
 shares.................      43,044      42,212      42,218      41,276      40,522

BALANCE SHEET DATA (at
 period-end):
Total assets............  $2,778,090  $2,077,214  $2,060,112  $1,591,284  $1,466,798
Loans, net of unearned
 discount...............   1,928,293   1,484,990   1,261,273   1,079,657     907,201
Allowance for credit
 losses.................      22,927      16,862      13,998      11,352       8,820
Total securities........     342,899     308,202     545,148     267,819     327,550
Deposits................   2,268,980   1,718,822   1,508,789   1,410,076   1,279,381
Other borrowed funds....     180,298     140,364     362,332      15,333      46,669
Notes payable...........      20,879       1,600          --       2,069       2,621
Company-obligated
 mandatorily redeemable
 trust preferred
 securities of
 subsidiary trust.......      57,500      28,750      28,750      28,750      28,750
Shareholders' equity....     217,369     166,825     141,070     122,040      98,261

SELECTED PERFORMANCE
 RATIOS:
Return on average
 assets.................        1.24%       1.32%       1.26%       1.25%       1.20%
Return on average
 shareholders' equity...       16.58%      17.82%      16.37%      17.02%      16.92%
Dividend payout ratio...       19.45%      19.04%      20.85%      21.71%      20.01%
Net interest margin (tax
 equivalent)............        5.75%       5.61%       6.05%       6.02%       5.93%

ASSET QUALITY RATIOS:
Period-end nonperforming
 loans to total loans...        0.74%       0.65%       0.48%       0.51%       0.55%
Period-end nonperforming
 assets to total
 assets.................        0.58%       0.55%       0.37%       0.49%       0.45%
Period-end allowance for
 credit losses to
 nonperforming loans....      161.51%     175.74%     229.89%     207.53%     176.47%
Period-end allowance for
 credit losses to total
 loans..................        1.19%       1.14%       1.11%       1.05%       0.97%
Net charge-offs to
 average loans..........        0.49%       0.51%       0.59%       0.38%       0.36%

LIQUIDITY AND CAPITAL
 RATIOS:
Average loans to average
 deposits...............       84.28%      83.34%      77.70%      74.37%      68.68%
Period-end shareholders'
 equity to total
 assets.................        7.82%       8.03%       6.85%       7.67%       6.70%
Average shareholders'
 equity to average
 assets.................        7.50%       7.41%       7.70%       7.36%       7.06%
Period-end Tier 1
 capital to risk
 weighted assets........        9.64%      10.51%      10.82%      11.56%      12.23%
Period-end total capital
 to risk weighted
 assets.................       10.66%      11.26%      11.74%      12.45%      13.27%
Period-end Tier 1
 leverage ratio (Tier 1
 capital to total
 average assets)........        8.40%       9.10%       8.21%       9.39%       9.72%
</TABLE>

                                      15
<PAGE>

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 income. This section should be
read in conjunction with the Company's consolidated financial statements and
accompanying notes and other detailed information incorporated by reference.
Management believes that the most critical accounting policies relate to the
determination of the allowance for credit losses. During the periods
indicated, the Company completed seven acquisitions of bank holding companies
and/or banks in merger transactions that were accounted for using either the
purchase method of accounting or the "pooling of interests" method of
accounting. With respect to the five mergers completed during the reported
periods which were accounted for using the "pooling of interests" method, all
financial data relating to such entities to the respective mergers have been
restated to include the merged entities' balance sheet data and historical
results of operations.

                             RESULTS OF OPERATIONS

Performance Summary

   Net income for 2001 was $30.4 million or $.71 per diluted share. Included
in this amount is $2.1 million in after-tax charges relating to the
acquisitions of CaminoReal Bancshares, Inc., Lone Star Bancorporation, Inc.
and Community Bancshares, Inc. Excluding the acquisition charges, operating
income for 2001 was $32.5 million or $.75 per diluted share, an increase of
$4.9 million, up 15% over the $.65 per diluted share earned in 2000. Net
income of $27.5 million in 2000 increased $5.9 million, or 27.3% over the
$21.6 million recorded for 1999. Diluted earnings per share for 2000 was $.65
as compared to $.51 for 1999. All per share amounts have been restated to
reflect the stock splits effected as stock dividends through September 18,
2001.

   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 2001,
the Company's ROA was 1.24%, as compared to 1.32% and 1.26% for 2000 and 1999,
respectively. During 2001, the Company's return on equity was 16.58% compared
to 17.82% and 16.37% for 2000 and 1999, respectively.

Net Interest Income and Net Interest Margin

   Net interest income represents the amount by which interest income on
interest earning assets, including 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 2001 was $123.0 million, up $18.3 million or 17.5%
from $104.7 million for 2000. The growth in net interest income is primarily
attributable to the 27.2% increase in average loans. The loan growth related
to the CaminoReal Bancshares and Community Bancshares acquisitions was 8.9%.
Since the Lone Star Bancorporation acquisition was accounted for using the
"pooling of interests" accounting method, the financial data was restated to
include Lone Star Bancorporation's balance sheet data and historical results
of operations and there is no loan growth separately attributable to the
acquisition of Lone Star Bancorporation. Average earning assets increased
14.7% from 2000 to 2001. During the latter part of 2000, the Bank deleveraged
its balance sheet resulting in a decrease in average securities of 29.9% from
2000 to 2001. The yield on interest earning assets decreased 88 basis points
from 8.86% in 2000 to 7.98% in 2001. Additionally during 2000, the Board of
Governors of the Federal Reserve System ("Federal Reserve") increased the
discount rate a total of 100 basis points whereas in 2001, the Federal Reserve
decreased the discount rate 11 times for a total of 475 basis points. The cost
of interest bearing liabilities decreased 133 basis points from 4.64% in 2000
to 3.31% in 2001. This decrease in rates was due to a combination of the
Federal Reserve rate decreases as well as the deleverageing of the balance
sheet. For 2001, the tax equivalent net interest margin (net interest income
divided by average total interest earning assets) increased 14 basis points to
5.75% from 5.61% for 2000.

                                      16
<PAGE>

   Net interest income for 2000 was $104.7 million, compared to $92.2 million
for 1999, an increase of $12.5 million or 13.6%, primarily due to a 22%
increase in average earning assets. During 2001, the yield on interest earning
assets increased 48 basis points from 8.38% in 1999 to 8.86% in 2000.
Throughout the second half of 1999 and the first half of 2000, the Federal
Reserve System increased the discount rate six times. The cost of interest
bearing liabilities increased 107 basis points from 3.57% in 1999 to 4.64% in
2000. This increase was due to the Federal Reserve rate increases as well as
new FHLB advances resulting from the leveraging program initiated in 1999 by
the Bank. For 2000, the tax equivalent net interest margin (net interest
income divided by average total interest earning assets) decreased 44 basis
points to 5.61% from 6.05% for 1999.

   Also of note, during the third quarter of 1999, the Bank initiated a
temporary leveraging strategy in order to enhance earnings by better utilizing
current levels of capital. Prior to the commencement of this leverage program,
the Bank's balance sheet was asset sensitive. This leveraging was achieved by
borrowing funds (primarily short-term FHLB advances) and investing these funds
in fixed and variable rate mortgage-backed securities and variable rate
collateralized mortgage obligations. The spread on these assets over the cost
of borrowed funds averaged 163 basis points. The leverage program, taken
alone, creates an interest rate mismatch. However, taken together with the
core assets and liabilities of the Bank, the leverage program serves to
mitigate the interest rate risk of the Bank.

                                      17
<PAGE>

   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,
                          --------------------------------------------------------------------------------------
                                     2001                         2000                         1999
                          ---------------------------- ---------------------------- ----------------------------
                           Average             Average  Average             Average  Average             Average
                           Balance    Interest  Yield   Balance    Interest  Yield   Balance    Interest  Yield
                          ----------  -------- ------- ----------  -------- ------- ----------  -------- -------
                                                            (in thousands)
<S>                       <C>         <C>      <C>     <C>         <C>      <C>     <C>         <C>      <C>
Interest earning assets:
Deposits in financial
 institutions...........  $    1,235  $     79  6.40%  $    1,225  $     74  6.04%  $    3,492  $   180   5.15%
Federal funds sold and
 securities purchased
 under agreements to
 resell.................      74,229     3,578  4.82%      60,401     4,471  7.40%      69,359    3,972   5.73%
Trading assets..........      49,352     2,787  5.65%          --        --    --           --       --     --
Securities (taxable)....     277,842    17,121  6.16%     417,062    28,208  6.76%     276,704   17,338   6.27%
Securities (non-
 taxable)...............      70,814     3,304  4.67%      80,282     3,503  4.36%      75,568    3,341   4.42%
Loans, net of unearned
 discount (taxable)
 (1)....................   1,689,627   145,899  8.63%   1,330,357   131,203  9.86%   1,122,250  104,784   9.34%
Loans, net of unearned
 discount
 (non-taxable)..........       4,240       285  6.72%         925        58  6.27%         584       43   7.36%
                          ----------  --------  ----   ----------  --------  ----   ----------  -------   ----
   Total interest
    earning assets......   2,167,339   173,053  7.98%   1,890,252   167,517  8.86%   1,547,957  129,658   8.38%
Noninterest earning
 assets:
Cash and due from
 banks..................      88,773                       68,710                       74,501
Premises and equipment,
 net....................      53,525                       45,892                       41,915
Other assets............     156,427                       98,134                       65,529
Allowance for credit
 losses.................     (20,296)                     (15,454)                     (13,125)
                          ----------                   ----------                   ----------
   Total noninterest
    earning assets......     278,429                      197,282                      168,820
                          ----------                   ----------                   ----------
   Total assets.........  $2,445,768                   $2,087,534                   $1,716,777
                          ==========                   ==========                   ==========
Interest bearing
 liabilities:
Demand and savings
 deposits...............  $  784,054  $ 16,915  2.16%  $  621,038  $ 19,879  3.20%  $  564,747  $13,671   2.42%
Certificates and other
 time deposits..........     547,600    26,141  4.77%     440,062    24,256  5.51%     388,953   18,421   4.74%
Other borrowed funds....     175,106     6,861  3.92%     293,556    18,653  6.35%      96,038    5,310   5.53%
Notes payable...........       3,369       135  4.01%         416        36  8.65%         955       68   7.12%
                          ----------  --------  ----   ----------  --------  ----   ----------  -------   ----
   Total interest
    bearing
    liabilities.........   1,510,129    50,052  3.31%   1,355,072    62,824  4.64%   1,050,693   37,470   3.57%
Noninterest bearing
 liabilities:
Demand deposits.........     678,134                      536,351                      491,415
Other liabilities.......      21,330                       12,772                       13,721
                          ----------                   ----------                   ----------
   Total noninterest
    bearing
    liabilities.........     699,464                      549,123                      505,136
Trust preferred
 securities.............      52,853                       28,750                       28,750
Shareholders' equity....     183,322                      154,589                      132,198
                          ----------                   ----------                   ----------
   Total liabilities and
    shareholders'
    equity..............  $2,445,768                   $2,087,534                   $1,716,777
                          ==========                   ==========                   ==========
Net interest income and
 margin (2).............              $123,001  5.68%              $104,693  5.54%              $92,188   5.96%
                                      ========  ====               ========  ====               =======   ====
Net interest income and
 margin
 (tax-equivalent basis)
 (3)....................              $124,644  5.75%              $106,127  5.61%              $93,680   6.05%
                                      ========  ====               ========  ====               =======   ====
</TABLE>
--------
(1) Loan origination fees are considered adjustments to interest income. These
    fees aggregated $2,776,000, $2,232,000 and $2,041,000 for the years ended
    December 31, 2001, 2000 and 1999, 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
    total 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 35%.

                                      18
<PAGE>

   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 analysis have been allocated to the
volume or rate change in proportion to the absolute amounts of the change in
each (in thousands):

<TABLE>
<CAPTION>
                                2001 vs. 2000              2000 vs. 1999
                             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...........  $     1  $      4  $      5  $  (137) $   31  $  (106)
Federal funds sold and
 securities purchased
 under agreements to
 resell.................      667    (1,560)     (893)    (663)  1,162      499
Trading assets..........    2,787        --     2,787       --      --       --
Securities (taxable)....   (8,579)   (2,508)  (11,087)   9,493   1,377   10,870
Securities (non-
 taxable)...............     (442)      243      (199)     206     (44)     162
Loans, net of unearned
 discount (taxable).....   31,023   (16,327)   14,696   20,524   5,895   26,419
Loans, net of unearned
 discount (non-
 taxable)...............      223         4       227       21      (6)      15
                          -------  --------  --------  -------  ------  -------
Total interest income...   25,680   (20,144)    5,536   29,444   8,415   37,859
                          -------  --------  --------  -------  ------  -------
Interest bearing
 liabilities:
Demand and savings
 deposits...............    3,517    (6,481)   (2,964)   1,802   4,406    6,208
Certificates and other
 time deposits..........    5,134    (3,249)    1,885    2,817   3,018    5,835
Other borrowed funds....   (4,641)   (7,151)  (11,792)  12,551     792   13,343
Notes payable...........       99        --        99      (47)     15      (32)
                          -------  --------  --------  -------  ------  -------
Total interest expense..    4,109   (16,881)  (12,772)  17,123   8,231   25,354
                          -------  --------  --------  -------  ------  -------
Net interest income.....  $21,571  $ (3,263) $ 18,308  $12,321  $  184  $12,505
                          =======  ========  ========  =======  ======  =======
</TABLE>

Noninterest Income

   The Company's non-interest income consists primarily of customer service
fees, gains arising from the sale of mortgage loans and origination fees
relating to mortgage loans. Total noninterest income for 2001 totaled $66.2
million, an increase of $25.5 million or 62.8% over $40.6 million in 2000. For
2000, noninterest income totaled $40.6 million, an increase of $10.4 million
or 34.3% over $30.3 million in 1999.

   The following table shows the breakout of noninterest income between
commercial banking and mortgage banking for 2001, 2000 and 1999 (in
thousands):

<TABLE>
<CAPTION>
                                     2001                         2000                         1999
                         ---------------------------- ---------------------------- ----------------------------
                         Commercial Mortgage          Commercial Mortgage          Commercial Mortgage
                          Banking   Banking  Combined  Banking   Banking  Combined  Banking   Banking  Combined
                         ---------- -------- -------- ---------- -------- -------- ---------- -------- --------
<S>                      <C>        <C>      <C>      <C>        <C>      <C>      <C>        <C>      <C>
Customer service fees...  $ 14,834  $    --  $14,834   $10,832   $    --  $10,832   $10,361   $    --  $10,361
Bank-owned life
 insurance income.......     2,049       --    2,049     1,888        --    1,888       606        --      606
Gain on the sale of
 University of Houston
 office.................        --       --       --        --        --       --       450        --      450
Gain on the sale of
 credit card loan
 portfolio..............        --       --       --       237        --      237        --        --       --
Gain on the sale of
 land...................        --       --       --       244        --      244        --        --       --
Gains on sale of
 mortgage loans.........        --   24,206   24,206        --    11,959   11,959        --    10,898   10,898
Debit card fees.........       877       --      877       223        --      223        --        --       --
Origination fees........        --   10,392   10,392        --     5,892    5,892        --       451      451
Servicing fees..........        --    1,051    1,051        --       426      426        --       611      611
Other...................     6,436    6,326   12,762     5,428     3,519    8,947     5,263     1,625    6,888
                          --------  -------  -------   -------   -------  -------   -------   -------  -------
                          $ 24,196  $41,975  $66,171   $18,852   $21,796  $40,648   $16,680   $13,585  $30,265
                          ========  =======  =======   =======   =======  =======   =======   =======  =======
</TABLE>


                                      19
<PAGE>

   Commercial Banking Segment. For 2001, noninterest income from commercial
banking was $24.2 million, as compared to $18.9 million for 2000, an increase
of $5.3 million or 28.3%. During 2001, customer service fees increased $4.0
million or 36.9%, primarily as a result of an overall increase in average
demand and savings accounts of 26.2% from volume growth in deposit accounts
and the acquisition of CaminoReal Bank. Also during the latter half of 2000,
the bank introduced its debit card. Fees related to the debit cards totaled
$877 thousand in 2001 as compared to $223 thousand in 2000. In December 2000,
the Bank sold land for a gain of $244 thousand. Finally, during the first
quarter of 2000, the Bank sold its credit card portfolio to a correspondent
bank for a net gain of $237 thousand. For 2000, noninterest income from
commercial banking totaled $18.9 million, an increase of $2.2 million or 13.0%
compared to $16.7 million in 1999. The increase is primarily attributed to
volume growth in deposit accounts. During the latter half of 1999 the Bank
purchased bank-owned life insurance ("BOLI") policies. Interest credits for
these BOLI policies totaled $1.9 million for 2000 as compared to $606 thousand
for 1999, an increase of $1.3 million. Also, during 1999, the Bank sold its
University of Houston office which had approximately $10 million in student
loans. A gain of $450 thousand was recognized on the sale.

   Mortgage Banking Segment. For 2001, noninterest income from the mortgage
banking segment increased $20.2 million or 92.6% from $21.8 million for 2000.
Income from the mortgage banking segment primarily consists of origination
fees and gains on the sale of mortgage loans. The average length of time a
mortgage loan is held in the portfolio of SCMC is approximately twenty-five to
thirty days. During 2001, SCMC had $2.6 billion in loan fundings as compared
to $1.4 billion in 2000. The increase in noninterest income and noninterest
expense is primarily due to the favorable interest rate environment which led
to increased loan refinancing and new loan activity. In addition, new retail
locations were opened in 2001.

Noninterest Expense

   For 2001, noninterest expenses totaled $130.7 million, an increase of $35.2
million or 36.8% over $95.5 million in 2000. For 2000, noninterest expense
totaled $95.5 which was a $13.7 million increase over $81.8 million in 1999.
Noninterest expenses are shown as follows (in thousands):

<TABLE>
<CAPTION>
                                      2001                         2000                         1999
                          ---------------------------- ---------------------------- ----------------------------
                          Commercial Mortgage          Commercial Mortgage          Commercial Mortgage
                           Banking   Banking  Combined  Banking   Banking  Combined  Banking   Banking  Combined
                          ---------- -------- -------- ---------- -------- -------- ---------- -------- --------
<S>                       <C>        <C>      <C>      <C>        <C>      <C>      <C>        <C>      <C>
Salaries and employee
 benefits...............   $ 55,115  $13,916  $ 69,031  $44,660   $ 8,803  $53,463   $38,049   $ 6,781  $44,830
Occupancy expenses......     13,964    4,320    18,284   10,229     3,533   13,762     9,006     2,190   11,196
Net losses and carrying
 costs of real estate
 acquired by
 forclosure.............        176       --       176      284        --      284        29        --       29
FDIC assessment.........        470       --       470      316        --      316       374        --      374
Technology..............      5,053      288     5,341    3,851       122    3,973     3,695        97    3,792
Postage and delivery
 charges................      2,049      528     2,577    1,476       325    1,801     1,540       167    1,707
Supplies................      1,512      514     2,026    1,391       428    1,819     1,542       359    1,901
Professional fees.......      2,966      237     3,203    2,117       246    2,363     1,919       131    2,050
Minority interest
 expense................      4,716    2,273     6,989    2,668       752    3,420     2,668       352    3,020
Conversion costs related
 to acquisitions........      3,181       --     3,181       --        --       --       774        --      774
Other...................     14,873    4,526    19,399   11,791     2,500   14,291    10,974     1,131   12,105
                           --------  -------  --------  -------   -------  -------   -------   -------  -------
                           $104,075  $26,602  $130,677  $78,783   $16,709  $95,492   $70,570   $11,208  $81,778
                           ========  =======  ========  =======   =======  =======   =======   =======  =======
</TABLE>

   Commercial Banking Segment. For 2001, noninterest expenses related to
commercial banking were $104.1 million, as compared to $78.8 million for 2000,
an increase of $25.3 million or 32.1%.

   Salaries and employee benefits in the commercial banking segment for 2001
totaled $55.1 million, an increase of $10.5 million or 23.4% over $44.7
million for 2000. Salaries and employee benefit expense related to the
CaminoReal Bank offices since acquisition was $4.0 million. The increase is
also attributable to the hiring of personnel for two de novo offices (Dallas
and Deer Park) as well as new central departments such as internet banking,
document imaging and community affairs. Additionally, medical insurance
expense increased $1.2

                                      20
<PAGE>

million during 2001. Salaries and employee benefits in the commercial banking
segment for 2000 totaled $44.7 million, an increase of $6.6 million or 17.4%
over $38.0 million for 1999. The largest part of the increase is due to the
hiring of new employees to expand the Bank's lending force and its credit
analyst pool, personnel for two de novo offices (Bellaire and Dallas) and two
new senior credit officers. The Bank increased its number of full-time
equivalent personnel by 38 or 5.7% during 2000, from 670 at year-end 1999 to
708 at year-end 2000. The increases in full-time equivalents are due to
staffing requirements to propel and sustain growth in loans and deposits as
well as increases in central support functions.

   Occupancy expense in the commercial banking segment totaled $14.0 million
in 2001 as compared to $10.2 million in 2000, an increase of $3.7 million, or
36.5%. The increase is primarily due to leasing additional space for central
departments and the new Dallas office as well as the acquisition of CaminoReal
Bank. The 2001 occupancy expenses related to the CaminoReal Bank offices was
$1.2 million. Occupancy expense in the commercial banking segment totaled
$10.2 million in 2000, an increase of $1.2 million or 13.6% over $9.0 million
in 1999. This increase primarily resulted from the opening of the two de novo
offices during 2000.

   Technology expense in 2001 totaled $5.1 million, an increase of $1.2
million or 31.2% from $3.9 million in 2000. This increase is the result of the
purchase of a new intranet wire transfer system and technology charges related
to the new departments such as internet banking and document imaging.
Technology expense in 2000 totaled $3.9 million, an increase of $156 thousand
or 4.2% from $3.7 million in 1999.

   Minority interest expense increased $2.0 million or 76.8% from 2000 as
compared to 2001. The increase is related to the interest on the additional
$28.75 million in trust preferred securities issued in March 2001. Please
refer to the subsequent discussion of Company-Obligated Mandatorily Redeemable
Trust Preferred Securities for additional details of the issuance.

   Conversion costs related to the acquisition of Community Bancshares, Inc.
in December 2001, Lone Star Bancshares, Inc. in August 2001 and CaminoReal
Bancshares in March 2001 totaled $957 thousand, $1.2 million and $1.0 million,
respectively. The costs include retention and severance expenses as well as
data processing costs related to the conversion of Community Banchares', Lone
Star Bancshares' and CaminoReal Bancshares' systems.

   Other expenses in the commercial banking segment totaled $14.9 million in
2001, an increase of $3.1 million or 26.1%, from $12.0 million in 2000. The
increase in goodwill amortization related to the CaminoReal Bancshares
acquisition was $787.5 thousand. Also, charges related to the new debit card
program increased $251.3 thousand from 2000. Other expenses in the commercial
banking segment totaled $12.0 million in 2000, an increase of $817 thousand or
7.4%, from $11.0 million in 1999. This increase is due to an expanding
infrastructure to support growth.

   Mortgage Banking Segment. Noninterest expense for the mortgage banking
segment for 2001 was $26.6 million, as compared to $16.7 million for 2000, an
increase $9.9 million or 59.2%. This increase in noninterest expense is
primarily due to the favorable interest rate environment which led to
increased loan refinancing and new loan activity. In addition, new retail
locations were opened in 2001. At December 31, 2001 loan fundings were $2.6
billion, a 90.7% increase over the $1.4 billion at December 31, 2000.
Noninterest expense for the mortgage banking segment for 2000 was $16.7
million, as compared to $11.2 million for 1999, an increase $5.5 million or
49.1%.

Income Taxes

   The Company provided $16.4 million for federal income taxes for 2001, $12.6
million for 2000, and $9.8 million for 1999. The effective tax rates for 2001,
2000, and 1999 were 35.1%, 31.5%, and 31.2%, respectively.

                                      21
<PAGE>

                              FINANCIAL CONDITION

Loans Held for Investment

   At December 31, 2001, loans held for investment totaled $1.7 billion, an
increase of $320.9 million or 23.8% over loans at December 31, 2000 of $1.3
billion. Loans acquired as a result of the acquisitions of CaminoReal
Bancshares and Community Bancshares totaled $149.6 million and $82.3 million,
respectively. Excluding the loans acquired in the acquisitions of CaminoReal
Bancshares and Community Bancshares, loans held for investment at December 31,
2001 totaled $1.4 billion, an increase of $89.4 million or 6.6% of loans at
December 31, 2000 of $1.3 billion.

   At December 31, 2001, total loans were 85.0% of deposits and 69.4% of total
assets. At December 31, 2000, total loans were 86.4% of deposits and 71.5% of
total assets.

   The following table summarizes the loan portfolio of the Bank by type of
loan as of December 31 of the year indicated, excluding loans held for sale
(in thousands):

<TABLE>
<CAPTION>
                                2001              2000              1999             1998            1997
                          ----------------  ----------------  ----------------  --------------  --------------
                            Amount     %      Amount     %      Amount     %     Amount    %     Amount    %
                          ---------- -----  ---------- -----  ---------- -----  -------- -----  -------- -----
<S>                       <C>        <C>    <C>        <C>    <C>        <C>    <C>      <C>    <C>      <C>
Commercial, financial
 and industrial:
 US addressees..........  $  506,272  30.4% $  472,392  35.1% $  436,518  36.7% $357,872  36.0% $315,709  37.6%
 Non-US addressees......       7,594   0.5%      4,807   0.4%      5,917   0.5%    4,047   0.4%      771   0.1%
Real estate mortgage:
 Commercial.............     530,076  31.8%    449,007  33.4%    360,092  30.2%  273,067  27.4%  226,543  27.0%
 Residential............     186,527  11.2%    155,796  11.5%    141,661  11.9%  122,252  12.3%  105,132  12.5%
Real estate
 construction...........     282,304  16.9%    134,482  10.0%    115,761   9.7%  114,502  11.5%   74,639   8.9%
Installment.............     154,015   9.2%    129,358   9.6%    130,920  11.0%  123,057  12.4%  116,259  13.9%
                          ---------- -----  ---------- -----  ---------- -----  -------- -----  -------- -----
                          $1,666,788 100.0% $1,345,842 100.0% $1,190,869 100.0% $994,797 100.0% $839,053 100.0%
                          ========== =====  ========== =====  ========== =====  ======== =====  ======== =====
</TABLE>

   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, the Bank's customers have financing
requirements between $50,000 and $500,000. Although the Bank's legal lending
limit was $20 million at December 31, 2001, the Bank has not maintained an
exposure greater than $15 million on any single 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 business owner and are secured by accounts
receivable, inventory and/or other business assets. In addition to the
commercial loans secured solely by non-real estate business assets, the Bank
makes commercial loans that are secured by owner-occupied real estate, as well
as other business assets.

   The Bank's commercial mortgage loans are secured by first liens on real
estate, typically have floating interest rates, and are amortized 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
lesser extent, nonresidential properties, such as churches. Generally,
construction loans 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.

                                      22
<PAGE>

   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. During the first quarter of 2000, the Bank sold
its credit card portfolio to a correspondent bank.

   The Bank seeks to compete effectively in its chosen markets by consistent
application of its business strategy. See further discussion of "BUSINESS--
Business Banking Strategy" and "BUSINESS--Competition".

   As of December 31, 2001, 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.

Loans Held for Sale

   Loans held for sale totaled $261.5 million at December 31, 2001, an
increase from $139.1 million at December 31, 2000. The $122.4 million increase
is due to the increase in loans funded by the Bank through an intercompany
mortgage warehouse with SCMC. Mortgage loans originated by SCMC are held for
sale and are typically sold to investors within one month of origination. Due
to the timing of the sales of loans to investors, the balance of these loans
at any given time is somewhat volatile. See Note E to the Consolidated
Financial Statements for loan maturities and rate sensitivity of the loan
portfolio, excluding real estate--mortgage, consumer and foreign loans and
unearned discount at December 31, 2001.

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 receives,
on an ongoing basis, updated appraisals on loans secured by real estate,
particularly those categorized as nonperforming loans and potential problem
loans. In those 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 write-downs or appropriate additions
to the allowance for credit losses.

   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's increase in
potential problem loans can be directly attributed to acquisitions, loan
growth and economic conditions.

   The Bank had no material foreign loans outstanding or loan concentrations
for the years ended December 31, 1997 through 2001. The Bank, however,
continues to monitor the potential risk of foreign borrowers and
concentrations of credit.

                                      23
<PAGE>

   The following table presents information regarding non-performing loans and
assets as of December 31, 1997 through 2001 (in thousands):

<TABLE>
<CAPTION>
                            2001        2000        1999        1998        1997
                         ----------  ----------  ----------  ----------  ----------
<S>                      <C>         <C>         <C>         <C>         <C>
Nonaccrual loans........ $   14,179  $    8,297  $    5,871  $    5,158  $    4,779
Restructured loans......         16       1,298         218         312         217
                         ----------  ----------  ----------  ----------  ----------
Total nonperforming
 loans..................     14,195       9,595       6,089       5,470       4,996
Real estate acquired by
 foreclosure............      1,837       1,702       1,323       1,969       1,086
Other repossessed
 assets.................        127         192         264         356         537
                         ----------  ----------  ----------  ----------  ----------
Total nonperforming
 assets................. $   16,159  $   11,489  $    7,676  $    7,795  $    6,619
                         ==========  ==========  ==========  ==========  ==========
Nonperforming loans to
 total loans............       0.74%       0.65%       0.48%       0.51%       0.55%
Nonperforming assets to
 total assets...........       0.58%       0.55%       0.37%       0.49%       0.45%
Potential problem
 loans.................. $   51,456  $   38,753  $   25,565  $   21,983  $   14,401
                         ==========  ==========  ==========  ==========  ==========
Accruing loans past due
 90 days or more........ $    1,360         626         351         824         527
                         ==========  ==========  ==========  ==========  ==========
Total loans............. $1,928,293  $1,484,990  $1,261,273  $1,079,657  $  907,201
                         ==========  ==========  ==========  ==========  ==========
Total assets............ $2,778,090  $2,077,214  $2,060,112  $1,591,284  $1,466,798
                         ==========  ==========  ==========  ==========  ==========
</TABLE>


Allowance for Credit Losses

   The Bank has several systems in place to assist in maintaining the overall
quality of its loan portfolios. The Bank has established underwriting
guidelines to be followed by its bank offices. The Bank also monitors its
delinquency levels for any negative or adverse trends and particularly
monitors credits which have a 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 creditworthiness
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 portfolio, 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.

   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 that are in the process of
being charged off.

                                      24
<PAGE>

   At December 31, 2001, substandard loans totaled $61.2 million, of which
$14.4 million were loans designated as delinquent or nonaccrual; and doubtful
loans totaled $4.5 million of which $4.3 million 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, 2001, watch list loans totaled $90.4
million.

   Management assigns loan grades by loan and allocations are made within each
loan grade so that double allocations are avoided. Loans are assigned a grade
according to payment history, collateral values, and financial condition of
the borrower.

   The Bank maintains an adequate allowance for credit losses through its
watchlist classifications, allocating an increasing reserve amount as the
severity of a problem loan increases. The Bank maintains an unallocated
reserve for satisfactory non-classified credits based on the average of the
last three year's actual net charge-offs.

   The Company's Board of Directors formed a sub-committee for Asset Quality
in 1999 which meets eight times each year. That committee is composed of three
outside Board of Directors and five senior management members. This committee
reviews all large loans, past-dues, and overdrafts, as well as ratio and trend
analysis and approves all charge-offs over $25 thousand. This committee also
mandates action items for future meetings to evaluate potential problems and
assess the potential need for additional reserve requirements by any
particular sector.

                                      25
<PAGE>

   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,
                          --------------------------------------------------------
                             2001        2000        1999        1998       1997
                          ----------  ----------  ----------  ----------  --------
<S>                       <C>         <C>         <C>         <C>         <C>
Average loans
 outstanding............  $1,693,867  $1,331,282  $1,122,834  $  991,769  $790,208
                          ==========  ==========  ==========  ==========  ========
Loans outstanding at
 period end.............  $1,928,293  $1,484,990  $1,261,273  $1,079,657  $907,201
                          ==========  ==========  ==========  ==========  ========
Allowance for credit
 losses at January 1....  $   16,862  $   13,998  $   11,352  $    8,820  $  8,323
Charge-offs:
  Commercial, financial,
   and industrial.......       6,969       7,061       5,485       2,723     1,845
  Real estate, mortgage
   and construction.....       1,057         643         162         510       140
  Installment...........       1,797          63       1,925       1,134     1,381
                          ----------  ----------  ----------  ----------  --------
    Total charge-offs...       9,823       7,767       7,572       4,367     3,366
Recoveries:
  Commercial, financial,
   and industrial.......         871         861         750         229       301
  Real estate, mortgage
   and construction.....         111          33          42         120        47
  Installment...........         464          69         190         275       194
                          ----------  ----------  ----------  ----------  --------
    Total recoveries....       1,446         963         982         624       542
                          ----------  ----------  ----------  ----------  --------
Net charge-offs.........       8,377       6,804       6,590       3,743     2,824
Acquisition of
 CaminoReal and
 Community..............       2,758          --          --          --        --
Provision for credit
 losses.................      11,684       9,668       9,236       6,275     3,321
                          ----------  ----------  ----------  ----------  --------
Allowance for credit
 losses at December 31..  $   22,927  $   16,862  $   13,998  $   11,352  $  8,820
                          ==========  ==========  ==========  ==========  ========
Ratios:
Allowance to average
 loans..................        1.35%       1.27%       1.25%       1.14%     1.12%
Allowance to period end
 loans..................        1.19%       1.14%       1.11%       1.05%     0.97%
Net charge-offs to
 average loans..........        0.49%       0.51%       0.59%       0.38%     0.36%
Allowance to period-end
 nonperforming loans....      161.51%     175.74%     229.89%     207.53%   176.47%
</TABLE>

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 category of
loans.

<TABLE>
<CAPTION>
                                                           Year ended December 31,
                                                                (In thousands)
                        ----------------------------------------------------------------------------------------------
                               2001                2000               1999               1998              1997
                        ------------------- ------------------ ------------------ ------------------ -----------------
                                    % of               % of               % of               % of              % of
                                  Category           Category           Category           Category          Category
Balance of allowance              to Loans           to Loans           to Loans           to Loans          to Loans
for credit losses at              Held for           Held for           Held for           Held for          Held for
end of period            Amount  Investment Amount  Investment Amount  Investment Amount  Investment Amount Investment
applicable to:          -------- ---------- ------- ---------- ------- ---------- ------- ---------- ------ ----------
<S>                     <C>      <C>        <C>     <C>        <C>     <C>        <C>     <C>        <C>    <C>
Commercial, financial
 and industrial........ $  8,361     31%    $ 7,521     35%    $ 5,461     37%    $ 3,548     37%    $1,926     38%
Real estate, mortgage
 and construction......    5,538     60%      3,348     55%      3,014     52%      1,712     51%       751     48%
Installment............      868      9%      1,073     10%        909     11%        770     12%       690     14%
Unallocated............    8,160    N/A       4,920    N/A       4,614    N/A       5,322    N/A      5,453    N/A
                        --------    ---     -------    ---     -------    ---     -------    ---     ------    ---
                        $ 22,927    100%    $16,862    100%    $13,998    100%    $11,352    100%    $8,820    100%
                        ========    ===     =======    ===     =======    ===     =======    ===     ======    ===
</TABLE>


                                      26
<PAGE>

Securities

   The following table summarizes the book value of 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 securities portfolios.

<TABLE>
<CAPTION>
                                          Year ended December 31,
                                ----------------------------------------------
                                  2001     %      2000     %      1999     %
                                -------- -----  -------- -----  -------- -----
                                               (In thousands)
<S>                             <C>      <C>    <C>      <C>    <C>      <C>
U.S. Treasury securities and
 obligations of U.S.
 government agencies..........  $ 28,937   8.4% $ 36,120  11.7% $118,005  21.6%
Obligations of states and
 political subdivisions.......    74,985  21.9%   79,065  25.6%   82,300  15.1%
Mortgage-backed securities and
 collateralized mortgage
 obligations..................   220,355  64.3%  180,207  58.5%  328,313  60.2%
Other securities..............    18,622   5.4%   12,810   4.2%   16,530   3.1%
                                -------- -----  -------- -----  -------- -----
                                $342,899 100.0% $308,202 100.0% $545,148 100.0%
                                ======== =====  ======== =====  ======== =====
</TABLE>

   At December 31, 2001, securities of $342.9 million increased $34.7 million
from $308.2 million at December 31, 2000. Securities acquired with CaminoReal
Bancshares and Community Bancshares totaled $95.7 million and $17.7 million,
respectively. At December 31, 2001 and 2000, securities represented 15.1% and
17.9% of total deposits and 12.3% and 14.8% of total assets, respectively.

   The yield on the Bank's securities portfolio at December 31, 2001, was
5.8%. At December 31, 2001, the weighted-average life of the portfolio was
approximately 2.8 years and the duration was approximately 2.0 years. The
yield on the Bank's securities portfolio at December 31, 2000, was 6.5%. At
December 31, 2000, the weighted-average life of the portfolio was
approximately 6.2 years and the duration was approximately 4.2 years.

   The maturity distribution and weighted average yield of the Bank's debt
security portfolio as of December 31, 2001, are summarized in the following
table (in thousands).

<TABLE>
<CAPTION>
                                                           Due 5-10       Due >10
                          Due <1 Year    Due 1-5 Years       Years         Years       Total
                         --------------  --------------  -------------  ------------  --------
                          Amount  Yield   Amount  Yield  Amount  Yield  Amount Yield
                         -------- -----  -------- -----  ------- -----  ------ -----
<S>                      <C>      <C>    <C>      <C>    <C>     <C>    <C>    <C>    <C>
Obligations of U.S.
 government agencies.... $ 12,285 6.03%  $ 13,126 6.08%  $ 3,526 7.22%  $   --   --   $ 28,937
Obligations of states
 and political
 subdivisions...........   12,529 5.80%    38,028 6.20%   22,174 6.62%   2,254 8.18%    74,985
Mortgage-backed
 securities and
 collateralized mortgage
 obligations............    2,494 5.58%   183,044 6.47%   32,990 5.87%   1,827 4.65%   220,355
                         -------- ----   -------- ----   ------- ----   ------ ----   --------
                         $ 27,308 5.90%  $234,198 6.41%  $58,690 6.24%  $4,081 6.60%  $324,277
                         ======== ====   ======== ====   ======= ====   ====== ====   ========
</TABLE>

Deposits

   The Bank's lending and investing activities are funded almost entirely by
core deposits, approximately 85.9%, of which are total deposits excluding time
deposits over $100 thousand. Noninterest bearing deposits at December 31, 2001
were $797.9 million as compared to $598.3 million at December 31, 2000, an
increase of $199.6 million or 33.4% of which $57.0 million and $36.4 million
related to the acquisitions of CaminoReal Bancshares and Community Bancshares,
respectively. Approximately 35.2% of deposits at December 31, 2001 were
noninterest bearing as compared to 34.8% at December 31, 2000.

   The Bank's average total deposits for 2001 were $2.0 billion, or $412.3
million and 25.8% over average total deposits during 2000 that were $1.6
billion. The increase in the Bank's average total deposits is primarily
attributable to the acquisition of CaminoReal Bancshares. Deposits acquired
with CaminoReal Bancshares and Community Bankcshares totaled $248.8 million
and $114.2 million, respectively. Deposit growth continues to be concentrated
primarily in core deposits, consisting of all deposits other than retail and
public fund certificates of deposit in excess of $100,000. The Bank's average
total deposits at December 31, 2000 were $1.6 billion, up $152.3 million or
10.5% over total deposits of $1.4 billion at year-end 1999.

                                      27
<PAGE>

   The average balances and weighted average rates paid on deposits for each of
the years ended December 31, 2001, 2000, and 1999 are presented below (in
thousands):

<TABLE>
<CAPTION>
                                2001                2000               1999
                         ------------------- ------------------ ------------------
                           Average   Average  Average   Average  Average   Average
                           Balance    Rate    Balance    Rate    Balance    Rate
                         ----------- ------- ---------- ------- ---------- -------
<S>                      <C>         <C>     <C>        <C>     <C>        <C>
Noninterest bearing
 demand deposits........ $   678,134         $  536,351         $  491,415
Interest bearing demand
 and savings deposits...     784,054  2.16%     621,038  3.20%     564,747  2.42%
Time deposits...........     547,600  4.77%     440,062  5.51%     388,953  4.74%
                         -----------  ----   ----------  ----   ----------  ----
                         $ 2,009,788  3.23%  $1,597,451  4.16%  $1,445,115  3.36%
                         ===========  ====   ==========  ====   ==========  ====
</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. See Note
J of the consolidated financial statements for maturities of certificates of
deposits of $100,000 or more.

Other Borrowed Funds

   Deposits are the primary source of funds for the Bank's lending and
investment activities and for its general business purposes. Additionally, the
Bank has available borrowing facilities through the Federal Home Loan Bank and
numerous correspondent banking relationships.

Notes Payable

   Effective February 2, 2002, the Company entered into a Credit Agreement with
Wells Fargo Bank Minnesota, National Association which provides for a $20
million revolving credit facility. The Company currently has $20 million
outstanding under the terms of the credit facility. The term of the credit
facility is for a one year period ending on February 2, 2003. The interest rate
payable by the Company on all funds drawn under the credit facility is 1.95% in
excess of the Federal Funds Rate in effect from time to time. In addition, the
Company pays an annual fee equal to one-eighth of one percent (0.125%) of the
average daily unused portion of the credit facility. The indebtedness under the
credit facility is guaranteed by Sterling Bancorporation, Inc. The Credit
Agreement contains various covenants and restrictions including, among other
things, (i) limitations on dividends, redemptions and repurchases of capital
stock, (ii) limitations on the incurrence of indebtedness, (iii) limitations on
mergers, acquisitions and the sale of all or substantially all of the Company's
assets, and (iv) maintenance of certain financial covenants by the Company and
the Bank. Although such restrictions could restrict the Company's corporate
activities, the Company does not anticipate that the credit facility or the
covenants and conditions contained therein will have any material impact upon
the Company or its operations.

Company-Obligated Mandatorily Redeemable Trust Preferred Securities

   In June 1997, the Company formed Sterling Bancshares Capital Trust I, a
trust formed under the laws of the State of Delaware ("Trust I"). Trust I
issued $28,750,000 of 9.28% Trust Preferred Securities and invested the
proceeds thereof in the 9.28% Junior Subordinated Deferrable Interest
Debentures ("9.28% Junior Subordinated Debentures") issued by the Company. The
9.28% Junior Subordinated Debentures will mature on June 6, 2027, which date
may be shortened to a date not earlier than June 6, 2002 if certain conditions
are met (including the Company having received prior approval of the Federal
Reserve and any other required regulatory approvals). The 9.28% Trust Preferred
Securities will be subject to mandatory redemption in a like amount
contemporaneously with the optional prepayment of the 9.28% Junior Subordinated
Debentures by the Company. The 9.28% Junior Subordinated Debentures may be
prepaid upon the occurrence and continuation of certain events including a
change in the tax status or regulatory capital treatment of the 9.28% Trust
Preferred Securities. In each case, redemption will be made at a price equal to
100% of the face amount of the 9.28% Trust Preferred Securities, plus the
accrued and unpaid distributions thereon through the redemption date.

   In February 2001, the Company formed Sterling Bancshares Capital Trust II
("Trust II") and Sterling Bancshares Capital Trust III, each is a trust formed
under the laws of the State of Delaware. On March 21, 2001,

                                       28
<PAGE>

Trust II issued $28,750,000 of 9.20% Trust Preferred Securities and invested
the proceeds thereof in the 9.20% Junior Subordinated Deferrable Interest
Debentures (the "9.20% Junior Subordinated Debentures") issued by the Company.
The 9.20% Junior Subordinated Debentures will mature on March 21, 2031, which
date may be shortened to a date not earlier than March 21, 2006 if certain
conditions are met (including the Company having received prior approval of the
Federal Reserve and any other required regulatory approvals). The 9.20% Trust
Preferred Securities will be subject to mandatory redemption in a like amount
contemporaneously with the optional prepayment of the 9.20% Junior Subordinated
Debentures by the Company. The 9.20% Junior Subordinated Debentures may be
prepaid upon the occurrence and continuation of certain events including a
change in the tax statutes or regulatory capital treatment of the 9.20% Trust
Preferred Securities. In each case, redemption will be made at a price equal to
100% of the face amount of the 9.20% Trust Preferred Securities, plus the
accrued and unpaid distributions thereon through the redemption date.

Interest Rate Sensitivity and Liquidity

   The Company manages its interest rate risk through structuring the balance
sheet to maximize net interest income while maintaining an acceptable level of
risk to changes in market interest rates. This process requires a balance
between profitability, liquidity, and interest rate risk.

   To effectively measure and manage interest rate risk, the Company uses
simulation analysis to determine the impact on net interest income of changes
in interest rates under various interest rate scenarios, balance sheet trends,
and strategies. From these simulations, interest rate risk is quantified and
appropriate strategies are developed and implemented. The overall interest rate
risk position and strategies are reviewed by senior management, the
Asset/Liability Management Committee and the Company's Board of Directors on an
ongoing basis.

   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. When analyzing its GAP
position, the Company emphasizes the next twelve-month period.

   Based on simulation analysis of the interest rate sensitivity inherent in
the Company's net interest income and market value of portfolio equity, as of
December 31, 2001 and as adjusted by instantaneous rate changes upward and
downward of up to 100 basis points, the Company is slightly asset sensitive.
The Company's analysis indicates that an instantaneous 100 basis point move
downward in interest rates would decrease net interest income by 2.76% and
decrease the present value of equity by 0.60%; likewise, an instantaneous 100
basis point move upward in interest rates would increase net interest income by
2.63% and increase the present value of equity by 1.22%. These sensitivities
are all within the threshold set by the Company's Asset/Liability Committee.
Each rate scenario reflects unique prepayment and repricing assumptions. Since
there are limitations inherent in any methodology used to estimate the exposure
to changes in market interest rates, this analysis is not intended to be a
forecast of the actual effect of a change in market interest rates on the
Company. The Company's interest rate sensitivity analysis includes assumptions
that (i) the composition of the Company's interest sensitive assets and
liabilities existing at fiscal year end will remain constant over the
measurement period; and (ii) that changes in market rates are parallel and
instantaneous across the yield curve regardless of duration or repricing

                                       29
<PAGE>

characteristics of specific assets or liabilities. Further, the analysis does
not contemplate any actions that the Company might undertake in response to
changes in market interest rates. Accordingly, this analysis is not intended
to and does not provide a precise forecast of the effect actual changes in
market rates will have on the Company.

   The following table sets forth the expected maturity and repricing
characteristics of the Company's interest earning assets and interest bearing
liabilities as of December 31, 2001:

<TABLE>
<CAPTION>
                            0-90       90-365       1-3       3-5       Over
                            Days        Days       Years     Years    5 Years     Total
                          ---------   ---------   --------  --------  --------  ---------
                          (In thousands, except for data expressed in percentages)
<S>                       <C>         <C>         <C>       <C>       <C>       <C>
Interest earning assets:
Cash and cash
 equivalents............  $  23,049   $      --   $     --  $     --  $     --  $  23,049
Securities purchased
 under agreements to
 resell.................     12,313          --         --        --        --     12,313
Deposits in other
 financial
 institutions...........      1,117         199        798        --        --      2,114
Trading assets..........    118,511          --         --        --        --    118,511
Securities..............     50,935      61,336     81,900    66,983    81,745    342,899
Loans...................    979,092     162,088    343,398   340,226   103,489  1,928,293
                          ---------   ---------   --------  --------  --------  ---------
  Total interest earning
   assets...............  1,185,017     223,623    426,096   407,209   185,234  2,427,179
Interest bearing
 liabilities:
Demand and savings
 deposits...............    879,542          --         --        --        --    879,542
Certificates of deposit
 and other time
 deposits...............    212,752     291,305     62,429    24,485       617    591,588
Other borrowed funds....    180,298          --         --        --        --    180,298
Notes payable...........        879      20,000         --        --        --     20,879
                          ---------   ---------   --------  --------  --------  ---------
Total interest bearing
 liabilities............  1,273,471     311,305     62,429    24,485       617  1,672,307
                          ---------   ---------   --------  --------  --------  ---------
Period GAP..............  $ (88,454)  $ (87,682)  $363,667  $382,724  $184,617  $ 754,872
                          =========   =========   ========  ========  ========  =========
Cumulative GAP..........  $ (88,454)  $(176,136)  $187,531  $570,255  $754,872
                          =========   =========   ========  ========  ========
Period GAP to total
 assets.................      (3.18)%     (3.16)%    13.09%    13.78%     6.65%
                          =========   =========   ========  ========  ========
Cumulative GAP to total
 assets.................      (3.18)%     (6.34)%     6.75%    20.53%    27.17%
                          =========   =========   ========  ========  ========
</TABLE>


   Shortcomings are inherent in any GAP analysis since certain assets and
liabilities may not reprice 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.

   The objectives of the Company's liquidity management is to maintain the
Bank's ability to meet day-to-day deposit withdrawals and other payment
obligations, to raise funds to support asset growth, to maintain reserve
requirements and otherwise operate the Company on an ongoing basis. The
Company strives to manage its liquidity position to allow the Bank to meet its
requirements while maintaining an appropriate balance between assets and
liabilities to meet the return on investment expectations of the Company's
shareholders. In recent years, the Company's liquidity needs have primarily
been met by growth in core deposits. The acquisitions of CaminoReal Bancshares
and Community Bancshares during 2001 resulted in the receipt of an additional
$302.1 in core deposits. In addition to core deposits, the Bank has access to
purchased funds from correspondent banks and from the Federal Home Loan Bank,
supplemented by amortizing investment and loan portfolios.

   The Company is a separate and distinct entity from the Bank and must
provide for its own liquidity and fund its obligations. The primary source of
the Company's revenues are from dividends declared by the Bank. There are
statutory and regulatory provisions that could limit the ability of the Bank
to pay dividends to the

                                      30
<PAGE>

Company. At December 31, 2001, the Bank had approximately $60.6 million in the
aggregate available to be paid as dividends to the Company. It is not
anticipated that such restrictions will have an impact on the ability of the
Company to meet its ongoing cash obligations. As of December 31, 2001, the
Company did not have any material commitments for capital expenditures.

Capital Resources

   At December 31, 2001, shareholders' equity totaled $217.4 million or 7.8%
of total assets, as compared to $166.8 million and 8.0% of total assets at
December 31, 2000.

   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
compared to the risk profile of its assets. Tier 1 capital includes common
shareholders' equity, minority interest in consolidated subsidiaries, 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.

   In March 2001, the Sterling Bancshares Capital Trust II completed the
issuance of $28,750,000 of 9.20% Trust Preferred Securities and invested the
proceeds in the 9.20% Junior Subordinated Debentures issued by the Company.
The proceeds received by the Company were used, in part, to fund the
acquisition of CaminoReal Bancshares. Under applicable regulatory guidelines,
the 9.20% Trust Preferred Securities qualify as Tier 1 capital up to a maximum
of 25% of Tier 1 capital. Any additional portion of the 9.20% Trust Preferred
Securities would qualify as Tier 2 capital.

   Banking regulators have also issued leverage ratio requirements. The
leverage ratio requirement is measured as the ratio of Tier 1 capital to
adjusted assets. See Note T to the Company's consolidated financial statements
for further discussion of the Company's and the Bank's regulatory capital
requirements.

   The Bank's capital levels at December 31, 2001 and 2000 qualify it as
"well-capitalized," the highest of five tiers under applicable regulatory
definitions.

  Risk Factors and Cautionary Statement for Purposes of the Provisions of the
  "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of
                                     1995

   Some of the statements and information contained in this Annual Report may
contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements discuss
future expectations, activities or events and by their nature, they are
subject to risks and uncertainties. Forward-looking statements can be
identified by the fact that they do not relate strictly to historical or
current facts. They often include words such as "believe," "expect,"
"anticipate," "intend," "plan," "estimate," or words of similar meaning, or
future or conditional verbs such as "will," "would," "should," "could," or
"may." Forward-looking statements speak only as of the date they are made. We
will not update these forward-looking statements to reflect circumstances or
events that occur after the date the forward-looking statements are made.

   Many possible factors could affect our future financial performance. Our
actual results may differ materially from what is expressed in any forward-
looking statement. Important factors that could cause actual results to differ
materially from estimates or projections contained in forward-looking
statements include:

  . general business and economic conditions in the markets we serve may be
    less favorable than anticipated which could decrease the demand for loan,
    deposit and other financial services and increase loan delinquencies and
    defaults;

  . changes in market rates and prices may adversely impact the value of
    securities, loans, deposits and other financial instruments;

  . our liquidity requirements could be adversely affected by changes in our
    assets and liabilities;

                                      31
<PAGE>

  . legislative or regulatory developments including changes in laws
    concerning taxes, banking, securities, insurance and other aspects of the
    financial securities industry;

  . competitive factors, including product and pricing pressures among
    financial services organizations, may increase; and

  . fiscal and governmental policies of the United States federal government.

   With this in mind, you should consider the following important factors that
could cause actual results to differ materially from those expressed in any
forward-looking statement made by us or on our behalf:

Our profitability depends significantly on local economic conditions.

   Our success depends primarily on the general economic conditions of the
Houston metropolitan area. Unlike larger banks that are more geographically
diversified, we provide banking and financial services to customers primarily
in the Houston metropolitan area. We also provide, to a lesser extent, banking
and financial services to customers in the San Antonio and Dallas metropolitan
areas. The local economic conditions of Houston, and to a lesser extent, San
Antonio and Dallas, have a significant impact on our commercial, real estate
and construction loans, the ability of the borrowers to repay these loans and
the value of the collateral securing these loans. A significant decline in
general economic conditions, such as inflation, recession, unemployment and
other factors beyond our control will impact these local economic conditions
and will negatively affect the financial results of our banking operations. In
addition, since Houston remains largely dependent on the energy industry, a
downturn in the energy industry and energy-related businesses could adversely
affect our results of operations and financial condition.

We rely on an owner-operated business market.

   We target our business development and marketing strategy primarily to
serve the banking and financial needs of owner-operated businesses with credit
needs of up to $2 million. These owner-operated businesses represent a major
sector of the Houston and national economies. If general economic conditions
negatively impact this economic sector in the Houston metropolitan area or the
other Texas markets in which we operate, our results of operations and
financial condition will be significantly affected.

If our allowance for loan losses is not sufficient to cover actual loan
losses, our earnings could decrease.

   Our loan customers may not repay their loans according to the terms of
these loans and the collateral securing the payment of these loans may be
insufficient to assure repayment. We may experience significant credit losses
which could have a material adverse effect on our operating results. We make
various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of our borrowers and the value of
the real estate and other assets serving as collateral for the repayment of
many of our loans. In determining the size of the allowance, we rely on our
experience and our evaluation of economic conditions. If our assumptions prove
to be incorrect, our current allowance may not be sufficient to cover future
loan losses and adjustments may be necessary to allow for different economic
conditions or adverse developments in our loan portfolio. Material additions
to our allowance would materially decrease our net income.

   In addition, federal and state regulators periodically review our allowance
for loan losses and may require us to increase our provision for loan losses
or recognize further loan charge-offs, based on judgments different than those
or our management. Any increase in our loan allowance or loan charge-offs as
required by these regulatory agencies could have a negative effect on us.

Fluctuations in interest rates could reduce our profitability.

   We realize income primarily from the difference between interest earned on
loans and investments and the interest paid on deposits and borrowings. We
expect that we will periodically experience "gaps" in the interest

                                      32
<PAGE>

rate sensitivities of our assets and liabilities, meaning that either our
interest-bearing liabilities will be more sensitive to changes in market
interest rates than our interest-earning assets, or vice versa. In either
event, if market interest rates should move contrary to our position, this
"gap" will work against us, and our earnings may be negatively affected.

   We are unable to predict fluctuations of market interest rates, which are
affected by the following factors:

  . inflation;

  . recession;

  . a rise in unemployment;

  . tightening money supply; and

  . international disorder and instability in domestic and foreign financial
    markets.

   Our asset liability management strategy, which is designed to control our
risk from changes in market interest rates, may not be able to prevent changes
in interest rates from having a material adverse effect on our results of
operation and financial condition.

Competition with other financial institutions could adversely affect our
profitability.

   We face vigorous competition from banks and other financial institutions,
including savings and loan associations, savings banks, finance companies and
credit unions. A number of these banks and other financial institutions have
substantially greater resources and lending limits, larger branch systems and
a wider array of banking services. To a limited extent, we also compete with
other providers of financial services, such as money market mutual funds,
brokerage firms, consumer finance companies and insurance companies. This
competition may reduce or limit our margins on banking services, reduce our
market share and adversely affect our results of operations and financial
condition.

We may not be able to maintain our historical growth rate which may adversely
impact our results of operations and financial condition.

   To achieve our growth, we have initiated internal growth programs,
completed various acquisitions and opened additional offices in the past few
years. We may not be able to sustain our historical rate of growth or may not
even be able to grow at all. We may not be able to obtain the financing
necessary to fund additional growth and may not be able to find suitable
candidates for acquisition. Various factors, such as economic conditions and
competition, may impede or prohibit the opening of new branch offices.
Further, our inability to attract and retain experienced bankers may adversely
affect our internal growth. A significant decrease in our historical rate of
growth may adversely impact our results of operation and financial condition.

We may be unable to complete acquisitions, and once complete, may not be able
to integrate our acquisitions successfully.

   Our growth strategy is dependent on our ability to acquire other financial
institutions. We may not be able to complete any future acquisitions and, if
completed, we may not be able to successfully integrate the operations,
management, products and services of the entities we acquire. Following each
acquisition, we must expend substantial managerial, operating, financial and
other resources to integrate these entities. In particular, we may be required
to install and standardize adequate operational and control systems, deploy or
modify equipment, implement marketing efforts in new as well as existing
locations and employ and maintain qualified personnel. Our failure to
successfully integrate the entities we acquire into our existing operations
may adversely affect our financial condition and results of operations.

                                      33
<PAGE>

We operate in a highly regulated environment and may be adversely affected by
changes in federal and local laws and regulations.

   We are subject to extensive regulation, supervision and examination by
federal and state banking authorities. Any change in applicable regulations or
federal or state legislation could have a substantial impact on us and our
subsidiary, Sterling Bank, and its operations. Additional legislation and
regulations may be enacted or adopted in the future that could significantly
affect our powers, authority and operations, which could have a material
adverse effect on our financial condition and results of operations. Further,
regulators have significant discretion and power to prevent or remedy unsafe
or unsound practices or violations of laws by banks and bank holding companies
in the performance of their supervisory and enforcement duties. The exercise
of this regulatory discretion and power may have a negative impact on us.

Item 7A--Qualitative Disclosures About Market Risk.

   For information regarding the market risk of the Company's financial
instruments, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Interest Rate Sensitivity and Liquidity." The
Company's principal market risk exposure is to interest rates.

Item 8--Financial Statements and Supplementary Data

   See the index included on page 40 and the Consolidated Financial Statements
which begin on page 42 of this Form 10-K.

Item 9--Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure

   None.

                                      34
<PAGE>

                                   PART III

Item 10--Directors and Executive Officers of the Registrant

   The information required by this Item as to the directors and executive
officers of the Company is hereby incorporated by reference from the
information appearing under the captions "Election of Directors" in the
Company's definitive proxy statement which involves the election of directors
and is to be filed with the Securities and Exchange Commission ("Commission")
pursuant to the Securities Exchange Act of 1934 within 120 days of the end of
the Company's fiscal year on December 31, 2001.

Item 11--Executive Compensation

   The information required by this Item as to the management of the Company
is hereby incorporated by reference from the information appearing under the
captions "Executive Compensation" in the Company's definitive proxy statement
which involves the election of directors and is to be filed with the
Commission pursuant to the Securities Exchange Act of 1934 within 120 days of
the end of the Company's fiscal year on December 31, 2001. Notwithstanding the
foregoing, in accordance with the instructions to Item 402 of Regulation S-K,
the information contained in the Company's proxy statement under the
subheading "Human Resources Programs Committee Report" and "Performance Graph"
shall not be deemed to be filed as part of or incorporated by reference into
this Form 10-K.

Item 12--Security Ownership of Certain Beneficial Owners and Management

   The information required by this Item as to the ownership by management and
others of securities of the Company is hereby incorporated by reference from
the information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" to the Company's definitive proxy statement
which involves the election of directors and is to be filed with the
Commission pursuant to the Securities Exchange Act of 1934 within 120 days of
the end of the Company's fiscal year on December 31, 2001.

Item 13--Certain Relationships and Related Transactions

   The information required by this Item as to certain business relationships
and transactions with management and other related parties of the Company is
hereby incorporated by reference to such information appearing under the
captions "Certain Transactions" in the Company's definitive proxy statement
which involves the election of directors and is to be filed with the
Commission pursuant to the Securities Exchange Act of 1934 within 120 days of
the end of the Company's fiscal year on December 31, 2001.

                                      35
<PAGE>

                                    PART IV

Item 14--Exhibits, Financial Statement Schedules and Reports on Form 8-k

<TABLE>
 <C>    <S>
 (a)(1) List of documents filed as part of this report
         INDEPENDENT AUDITORS' REPORT
         CONSOLIDATED FINANCIAL STATEMENTS:
          Balance Sheets
          Statements of Income
          Statements of Shareholders' Equity
          Statements of Cash Flows
          Notes to Consolidated Financial Statements
        No financial statement schedules are required to be filed as a part of
 (a)(2) this report.
 (a)(3) See Item 14(c) below.
 (b)    During the fourth quarter of 2001, the Company filed the following
        current reports on Form 8-k: (1) October 2, 2001 (reporting under Items
        5 and 7 the Company's execution of an Agreement and Plan of Merger
        between Community Bancshares, Inc. and the Company providing for the
        merger of Community Bancshares, Inc. with Sterling Bancorporation,
        Inc.); (2) October 18, 2001 (reporting under Items 5 and 7 the release
        of the Company's third quarter 2001 financial results); (3) October 31,
        2001 (reporting under Items 5 and 7 the appointment of J. Downey
        Bridgwater as Chief Executive Officer and the Company's execution of
        employment agreements with George Martinez and J. Downey Bridgwater);
        and (4) December 20, 2001 (reporting under Items 5 and 7 the
        consummation of the Company's acquisition of Community Bancshares,
        Inc.).
 (c)    Exhibits
 2.1    Agreement and Plan of Merger dated as of March 18, 1997, by and among
        the Company, Sterling Bancorporation, Inc. and First Houston
        Bancshares, Inc. [Incorporated by reference to the Company's
        Registration Statement on Form S-4 (File No. 333-28153).]
 2.2    Agreement and Plan of Consolidation dated as of February 17, 1998, by
        and between the Company and Humble National Bank [Incorporated by
        reference to the Company's Report on Form 8-K filed on February 27,
        1998 (File No. 000-20750).]
 2.3    Agreement and Plan of Merger dated as of June 12, 1998 among the
        Company, Sterling Bancorporation, and Hometown Bancshares, Inc., as
        amended. [Incorporated by reference to Exhibit 2.6 of the Company's
        Annual Report on Form 10-K (File No. 000-20750).]
 2.4    Agreement and Plan of Merger dated as of February 24, 1999 among the
        Company, Sterling Bancorporation, and B. O. A. Bancshares, Inc., as
        amended. [Incorporated by reference to the Company's Report on Form 8-K
        filed on June 2, 1999 (File No. 000-20750).]
 2.5    Agreement and Plan of Merger dated as of October 23, 2000 among the
        Company, Sterling Bancorporation, Inc. and CaminoReal Bancshares of
        Texas, Inc., as amended. [Incorporated by reference to Exhibit 2.5 of
        the Company's Annual Report on Form 10-K (File No. 000-20750).]
 2.6    Agreement and Plan of Merger dated as of March 1, 2001, by and between
        Sterling Bancshares, Inc. and Lone Star Bancorporation, Inc., as
        amended. [Incorporated by referenced to Exhibit 2 of the Company's
        Quarterly Report on Form 10-Q filed on May 14, 2001 (File No. 000-
        20750).]
 2.7*   Agreement and Plan of Merger dated as of October 1, 2001 by and among
        Sterling Bancshares, Inc., Sterling Bancorporation, Inc. and Community
        Bancshares, Inc., as amended.
 3.1    Restated and Amended Articles of Incorporation of the Company, as
        amended. [Incorporated by reference to the Company's Annual Report on
        Form 10-K (File No. 000-20750).]
 3.2    Restated By-Laws of the Company [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).]
</TABLE>

                                       36
<PAGE>

<TABLE>
 <C>    <S>
  4.1   Form of Indenture to be dated as of June 6, 1997 [Incorporated by
        reference to Exhibit 4.1 to the Company's Registration Statement on
        Form S-3 (File No. 333-27185).]
  4.2   Form of Junior Subordinated Debenture [Included as an exhibit to the
        Form of Indenture that is incorporated by reference to Exhibit 4.1 to
        the Company's Registration Statement on Form S-3 (File No. 333-27185).]
  4.3   Form of Trust Preferred Securities Guarantee Agreement of the Company
        [Incorporated by reference to Exhibit 4.7 to the Company's Registration
        Statement on Form S-3 (File No. 333-27185).]
  4.4   Preferred Securities Guarantee Agreement dated March 21, 2001
        [Incorporated by reference to Exhibit 4.2 of the Company's Report on
        Form 8-K filed on March 21, 2001 (File No. 000-20750).]
  4.5   Indenture dated March 21, 2001 [Incorporated by reference to Exhibit
        4.4 of the Company's Report on Form 8-K filed on March 21, 2001 (File
        No. 000-20750).]
  4.6   First Supplemental Indenture dated March 21, 2001 [Incorporated by
        reference to Exhibit 4.5 of the Company's Report on Form 8-K filed on
        March 21, 2001 (File No. 000-20750).]
  4.7   9.20% Subordinated Deferrable Interest Debenture due March 21, 2031
        [Incorporated by reference to Exhibit 4.7 of the Company's Report on
        Form 8-K filed on March 21, 2001 (File No. 000-20750).]
 10.1** 1994 Incentive Stock Option Plan of the Company [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 Company [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 Company [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** 1995 Non-Employee Director Stock Compensation Plan [Incorporated by
        reference to Exhibit 4.3 of the Company's Registration Statement on
        Form S-8 (File No. 333-16719).]
 10.5   Letter Agreement dated February 2, 2000 made by and between the Company
        and Wells Fargo Bank Minnesota, National Association regarding a line
        of credit in the amount of $20,000,000 [Incorporated by reference to
        Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year
        ended December 31, 2000.]
 10.6   First Amendment to Letter Agreement dated February 2, 2001 made by and
        between the Company and Wells Fargo Bank Minnesota, National
        Association regarding a line of credit in the amount of $20,000,000
        [Incorporated by reference to Exhibit 10.6 of the Company's Annual
        Report on Form 10-K for the year ended December 31, 2000.]
 10.7*  Credit Agreement dated February 2, 2002 made by and between the Company
        and Wells Fargo Bank Minnesota, National Association regarding a line
        of credit in the amount of $20,000,000.
 10.8** Employment Agreement between Sterling Bancshares, Inc. and George
        Martinez executed on October 31, 2001 and effective as of January 1,
        2002. [Incorporated by reference to Exhibit 99.2 of the Company's
        report on Form 8-K filed on October 14, 2001 (File No. 000-207500).]
 10.9** Employment Agreement between Sterling Bancshares, Inc. and J. Downey
        Bridgwater executed on October 31, 2001 and effective as of January 1,
        2002. [Incorporated by reference to Exhibit 99.3 of the Company's
        report on Form 8-K filed on October 14, 2001 (File No. 000-207500).]
 21*    Subsidiaries of the Company
 23.1*  Consent of Deloitte & Touche LLP, Independent Auditors
</TABLE>
--------
   *  As filed herewith.
   ** Management Compensation Agreement

                                       37
<PAGE>

                                  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.

                                               /s/ J. Downey Bridgwater
                                          By:__________________________________
                                                  J. Downey Bridgwater,
DATE: March 15, 2002                           Chief Executive Officer and
                                                        President

   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 and in the capacity indicated on this the 15th day of March, 2002.

<TABLE>
<CAPTION>
               Signature                Title
               ---------                -----

 <C>                                    <S>
      /s/ J. Downey Bridgwater          President and Director
 ______________________________________
          J. Downey Bridgwater

     /s/ Eugene S. Putnam, Jr.          Executive Vice President
 ______________________________________  and Chief Financial
            Eugene S. Putnam             Officer

                                        Chairman and Director
 ______________________________________
            George Martinez

           /s/ Anat Bird                Director
 ______________________________________
               Anat Bird

        /s/ L.S. "Pat" Brown            Director
 ______________________________________
           L. S. "Pat" Brown

          /s/ John H. Buck              Director
 ______________________________________
              John H. Buck

        /s/ James D. Calaway            Director
 ______________________________________
            James D. Calaway

       /s/ Charles I. Castro            Director
 ______________________________________
           Charles I. Castro

        /s/ James M. Clepper            Director
 ______________________________________
            James M. Clepper

      /s/ Walter P. Gibbs, Jr.          Director
 ______________________________________
          Walter P. Gibbs, Jr.
</TABLE>

                                      38
<PAGE>

<TABLE>
<CAPTION>
               Signature                Title
               ---------                -----

 <C>                                    <S>
        /s/ Bruce J. Harper             Director
 ______________________________________
            Bruce J. Harper

         /s/ David Hatcher              Director
 ______________________________________
             David Hatcher

        /s/ Glenn H. Johnson            Director
 ______________________________________
            Glenn H. Johnson

        /s/ James J. Kearney            Director
 ______________________________________
            James J. Kearney

    /s/ Paul Michael Mann, M.D.         Director
 ______________________________________
        Paul Michael Mann, M.D.

        /s/ David B. Moulton            Director
 ______________________________________
            David B. Moulton

        /s/ G. Edward Powell            Director
 ______________________________________
            G. Edward Powell

       /s/ Christian A. Rasch           Director
 ______________________________________
           Christian A. Rasch

        /s/ Thomas A. Reiser            Director
 ______________________________________
            Thomas A. Reiser

       /s/ Steven F. Retzloff           Director
 ______________________________________
           Steven F. Retzloff

       /s/ Raimundo Riojas E.           Director
 ______________________________________
           Raimundo Riojas E.

       /s/ Gregory A. Stirman           Director
 ______________________________________
           Gregory A. Stirman

    /s/ Howard T. Tellepsen, Jr.        Director
 ______________________________________
        Howard T. Tellepsen, Jr.
</TABLE>

                                       39
<PAGE>

                           STERLING BANCSHARES, INC.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
INDEPENDENT AUDITORS' REPORT...............................................  41

CONSOLIDATED FINANCIAL STATEMENTS:
  Balance Sheets...........................................................  42
  Statements of Income.....................................................  43
  Statements of Shareholders' Equity.......................................  44
  Statements of Cash Flows.................................................  46
  Notes to Consolidated Financial Statements...............................  47
</TABLE>

                                       40
<PAGE>

                         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, 2001 and
2000, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2001. 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Houston, Texas
March 8, 2002

                                      41
<PAGE>

                   STERLING BANCSHARES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 2001 AND 2000
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                            2001        2000
                        ASSETS                           ----------  ----------
<S>                                                      <C>         <C>
Cash and cash equivalents (Note C).....................  $  148,295  $  122,112
Interest-bearing deposits in financial institutions....       2,114         440
Securities purchased with an agreement to resell.......      12,313      37,863
Trading assets.........................................     118,511          --
Available-for-sale securities, at fair value (amortized
 cost of $258,602 and $215,680 at December 31, 2001 and
 2000, respectively) (Note D)..........................     264,491     217,275
Held-to-maturity securities, at amortized cost (fair
 value of $79,928 and $91,061 at December 31, 2001 and
 2000, respectively) (Note D)..........................      78,408      90,927
Loans held for sale (Note E)...........................     261,505     139,148

Loans held for investment (Notes E and F)..............   1,666,788   1,345,842
Allowance for credit losses (Note G)...................     (22,927)    (16,862)
                                                         ----------  ----------
  Loans, net...........................................   1,643,861   1,328,980
Accrued interest receivable............................      11,593      12,159
Real estate acquired by foreclosure....................       1,837       1,702
Premises and equipment, net (Note H)...................      54,175      47,099
Goodwill, net (Note I).................................      54,812       5,952
Mortgage servicing rights (Note I).....................      19,592         907
Other assets...........................................     106,583      72,650
                                                         ----------  ----------
TOTAL ASSETS...........................................  $2,778,090  $2,077,214
                                                         ==========  ==========

<CAPTION>
         LIABILITIES AND SHAREHOLDERS' EQUITY
<S>                                                      <C>         <C>
LIABILITIES:
 Demand deposits:
  Noninterest-bearing..................................  $  797,850  $  598,251
  Interest-bearing.....................................     879,542     642,918
 Certificates of deposit and other time deposits (Note
  J)...................................................     591,588     477,653
                                                         ----------  ----------
  Total deposits.......................................   2,268,980   1,718,822
 Other borrowed funds (Note K).........................     180,298     140,364
 Notes payable (Note L)................................      20,879       1,600
 Accrued interest payable and other liabilities........      28,832      18,801
                                                         ----------  ----------
  Total liabilities....................................   2,498,989   1,879,587
COMMITMENTS AND CONTINGENCIES (Notes R and S)
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST
 PREFERRED SECURITIES (Note M).........................      57,500      28,750
MINORITY INTEREST IN STERLING CAPITAL MORTGAGE
 COMPANY...............................................       4,232       2,052
SHAREHOLDERS' EQUITY (Notes O, P and T):
 Convertible Preferred stock, $1 par value; 1,000,000
  shares authorized, 39,000 and 50,500 issued and
  outstanding at December 31, 2001 and 2000,
  respectively.........................................          39          51
 Common stock, $1 par value; 50,000,000 shares
  authorized, 43,769,664 and 41,727,850 issued and
  outstanding at December 31, 2001 and 2000,
  respectively.........................................      43,770      41,728
 Capital surplus.......................................      42,526      21,357
 Retained earnings.....................................     127,144     102,652
 Accumulated other comprehensive income--net unrealized
  gain on available-for-sale securities, net of tax....       3,890       1,037
                                                         ----------  ----------
  Total shareholders' equity...........................     217,369     166,825
                                                         ----------  ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............  $2,778,090  $2,077,214
                                                         ==========  ==========
</TABLE>

                See notes to consolidated financial statements.

                                       42
<PAGE>

                   STERLING BANCSHARES, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME
             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

                    (In thousands except per share amounts)

<TABLE>
<CAPTION>
                                                       2001     2000     1999
                                                     -------- -------- --------
<S>                                                  <C>      <C>      <C>
Interest income:
 Loans, including fees.............................. $146,184 $131,261 $104,827
 Securities:
  Taxable...........................................   17,121   28,208   17,338
  Non-taxable.......................................    3,304    3,503    3,341
 Trading assets.....................................    2,787       --       --
 Federal funds sold and securities purchased under
  agreements to resell..............................    3,578    4,471    3,972
 Deposits in financial institutions.................       79       74      180
                                                     -------- -------- --------
  Total interest income.............................  173,053  167,517  129,658
                                                     -------- -------- --------
Interest expense:
 Demand and savings deposits........................   16,915   19,879   13,671
 Certificates and other time deposits...............   26,141   24,256   18,421
 Other borrowed funds...............................    6,861   18,653    5,310
 Notes payable and ESOP indebtedness................      135       36       68
                                                     -------- -------- --------
  Total interest expense............................   50,052   62,824   37,470
                                                     -------- -------- --------
Net interest income.................................  123,001  104,693   92,188
Provision for credit losses (Note G)................   11,684    9,668    9,236
                                                     -------- -------- --------
Net interest income after provision for credit
 losses.............................................  111,317   95,025   82,952
                                                     -------- -------- --------
Noninterest income:
 Customer service fees..............................   14,834   10,832   10,361
 Gain on sale of mortgage loans.....................   24,206   11,959   10,898
 Other..............................................   27,131   17,857    9,006
                                                     -------- -------- --------
  Total noninterest income..........................   66,171   40,648   30,265
                                                     -------- -------- --------
Noninterest expense:
 Salaries and employee benefits (Note O)............   69,031   53,463   44,830
 Occupancy expense..................................   18,284   13,762   11,196
 Technology.........................................    5,341    3,973    3,792
 Professional fees..................................    3,203    2,363    2,050
 Postage and delivery charges.......................    2,577    1,801    1,707
 Supplies...........................................    2,026    1,819    1,901
 FDIC assessment....................................      470      316      374
 Net losses and carrying costs of real estate
  acquired by foreclosure...........................      176      284       29
 Minority interest expense:
  Company-obligated mandatorily redeemable trust
   preferred securities of subsidiary trust (Note
   M)...............................................    4,716    2,668    2,668
  Sterling Capital Mortgage Company.................    2,273      752      352
 Conversion costs related to acquisitions...........    3,181       --      774
 Other..............................................   19,399   14,291   12,105
                                                     -------- -------- --------
  Total noninterest expense.........................  130,677   95,492   81,778
                                                     -------- -------- --------
Income before income taxes..........................   46,811   40,181   31,439
Provision for income taxes (Note N).................   16,410   12,641    9,803
                                                     -------- -------- --------
Net income.......................................... $ 30,401 $ 27,540 $ 21,636
                                                     ======== ======== ========
Earnings per share (Note Q):
 Basic.............................................. $   0.72 $   0.66 $   0.52
                                                     ======== ======== ========
 Diluted............................................ $   0.71 $   0.65 $   0.51
                                                     ======== ======== ========
</TABLE>

                See notes to consolidated financial statements.

                                       43
<PAGE>

                   STERLING BANCSHARES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

                      (In thousands except share amounts)

<TABLE>
<CAPTION>
                                                  Convertible
                                                   Preferred
                                                     Stock      Common Stock
                                                 ------------- ---------------
                                                 Shares Amount Shares  Amount
                                                 ------ ------ ------  -------
<S>                                              <C>    <C>    <C>     <C>
BALANCE AT JANUARY 1, 1999......................   137   $137  40,269  $40,269
 Net income
 Net change in unrealized gain (loss) on
  available-for-sale securities, net of tax.....
  Total comprehensive income....................
 Issuance of common stock (Note P)..............                  630      630
  Sale of preferred stock.......................   266    266
 Conversion of preferred stock to common stock..   (50)   (50)    126      126
 Cash dividends paid............................
 Transfer to capital surplus....................
 ESOP indebtedness repayments...................
                                                  ----   ----  ------  -------
BALANCE AT DECEMBER 31, 1999....................   353    353  41,025   41,025
 Net income
 Net change in unrealized gain (loss) on
  available-for-sale securities, net of tax.....
  Total comprehensive income....................
 Issuance of common stock (Note P)..............                  235      235
 Sale of preferred stock........................    39     39
 Conversion of preferred stock to common stock..  (341)  (341)    536      536
 Cash dividends paid............................
 Purchase of treasury stock.....................                  (68)     (68)
 Transfer to capital surplus....................
                                                  ----   ----  ------  -------
BALANCE AT DECEMBER 31, 2000....................    51     51  41,728   41,728
 Net income
 Net change in unrealized gain on available-for-
  sale securities, net of tax...................
  Total comprehensive income....................
 Issuance of common stock (Note P)..............                  581      581
 Issuance of common stock for Community Bank....                1,444    1,444
 Conversion of preferred stock to common stock..   (12)   (12)     17       17
 Cash dividends paid............................
                                                  ----   ----  ------  -------
BALANCE AT DECEMBER 31, 2001....................    39   $ 39  43,770  $43,770
                                                  ====   ====  ======  =======
</TABLE>

                See notes to consolidated financial statemenst.

                                       44
<PAGE>

                   STERLING BANCSHARES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

                      (In thousands except share amounts)

<TABLE>
<CAPTION>
                                            Accumulated Other
                                           Comprehensive Income
                                           Net Unrealized Gain
                                           (Loss) on Available-     Total
          Capital   Retained      ESOP     for-Sale Securities, Shareholders'
          Surplus   Earnings  Indebtedness      Net of Tax         Equity
          --------  --------  ------------ -------------------- -------------
<S>       <C>       <C>       <C>          <C>                  <C>
          $ 16,637  $ 64,688     $(186)           $  495          $122,040
                      21,636                                        21,636

                                                  (1,857)           (1,857)
                                                                  --------
                                                                    19,779
                                                                  --------
             1,415                                                   2,045
             1,265                                                   1,531
               (76)                                                     --
                      (4,511)                                       (4,511)
               458      (458)                                           --
                                   186                                 186
          --------  --------     -----            ------          --------
            19,699    81,355        --            (1,362)          141,070
                      27,540                                        27,540

                                                   2,399             2,399
                                                                  --------
                                                                    29,939
                                                                  --------
             1,051                                                   1,286
               346                                                     385
              (195)                                                     --
                      (5,243)                                       (5,243)
              (544)                                                   (612)
             1,000    (1,000)                                           --
          --------  --------     -----            ------          --------
            21,357   102,652        --             1,037           166,825
                      30,401                                        30,401

                                                   2,853             2,853
                                                                  --------
                                                                    33,254
                                                                  --------
             3,170                                                   3,751
            18,004                                                  19,448
                (5)                                                     --
                      (5,909)                                       (5,909)
          --------  --------     -----            ------          --------
          $ 42,526  $127,144     $  --            $3,890          $217,369
          ========  ========     =====            ======          ========
</TABLE>

                See notes to consolidated financial statemenst.

                                       45
<PAGE>

                   STERLING BANCSHARES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

                                 (In thousands)
<TABLE>
<CAPTION>
                                                     2001      2000      1999
                                                   --------  --------  --------
<S>                                                <C>       <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income....................................... $ 30,401  $ 27,540  $ 21,636
 Adjustments to reconcile net income to net cash
  provided by (used in) operating activities:
 Amortization and accretion of premiums and
  discounts on securities, net....................      479       333       464
 Provision for credit losses......................   11,684     9,668     9,236
 Deferred income tax expense......................    9,128      (370)   (1,744)
 Gain on sale of assets...........................  (24,540)  (12,020)  (11,415)
 Gain on the sale of University of Houston office
  location........................................       --        --      (450)
 Depreciation and amortization....................    9,806     7,713     6,147
 Write-down of real estate acquired by
  foreclosure.....................................       94       254        --
 Net loans originated or purchased for sale or
  resale..........................................  (98,151)  (56,785)   14,432
 Purchases of trading assets...................... (336,019)       --        --
 Proceeds from sale of trading assets.............  216,705        --        --
 Capitalized mortgage servicing rights............  (19,839)     (678)     (687)
 Amortization of mortgage servicing rights........    1,154       252       268
 Increase in accrued interest receivable and
  other assets....................................  (36,836)   (6,148)  (21,148)
 Increase in accrued interest payable and other
  liabilities.....................................    8,686     1,682     6,255
                                                   --------  --------  --------
   Net cash (used in) provided by operating
    activities.................................... (227,248)  (28,559)   22,994

CASH FLOWS FROM INVESTING ACTIVITIES:
 Increase in securities purchased under agreements
  to resell.......................................   25,550     2,971    (7,842)
 Proceeds from maturities and principal paydowns
  of held-to-maturity securities..................   12,275    18,831    23,586
 Purchases of held-to-maturity securities.........       --        --   (32,046)
 Proceeds from sale of available-for-sale
  securities......................................   87,144   158,374        --
 Proceeds from maturities and principal paydowns
  of available-for-sale securities................   88,125    77,287    43,404
 Purchases of available-for-sale securities....... (105,249)  (14,195) (315,584)
 Proceeds from maturities and principal paydowns
  of trading securities...........................    1,101        --        --
 Net increase in loans............................  (99,121) (162,970) (203,299)
 Purchase of Bank Owned Life Insurance............   (2,049)   (5,988)  (25,606)
 Proceeds from sale of real estate acquired by
  foreclosure.....................................    1,881       605     1,488
 Net (increase) decrease in interest-bearing
  deposits in financial institutions..............      396     1,189       863
 Purchase of CaminoReal Bancshares, Inc...........  (51,813)       --        --
 Cash and cash equivalents acquired with
  CaminoReal Bancshares, Inc......................   33,390        --        --
 Purchase of Community Bancshares, Inc............  (14,552)       --        --
 Cash and cash equivalents acquired with Community
  Bancshares, Inc.................................   18,531        --        --
 Proceeds from sale of University of Houston
  office location.................................       --        --     5,545
 Proceeds from sale of premises and equipment.....    8,370       391     3,041
 Purchase of premises and equipment...............  (17,525)  (11,682)  (10,900)
                                                   --------  --------  --------
   Net cash (used in) provided by investing
    activities....................................  (13,546)   64,813  (517,350)
CASH FLOWS FROM FINANCING ACTIVITIES:
 Net increase in deposit accounts.................  186,265   210,021   104,912
 Net increase (decrease) in repurchase agreements
  and federal funds purchased.....................   35,720  (221,968)  346,999
 Proceeds from notes payable......................   20,000     1,600        --
 Repayments of notes payable......................   (1,600)       --    (1,883)
 Issuance of company-obligated mandatorily
  redeemable trust preferred securities...........   28,750        --        --
 Proceeds from issuance of common and preferred
  stock...........................................    3,751     1,671     3,576
 Purchase of treasury stock.......................       --      (612)       --
 Payments of cash dividends.......................   (5,909)   (5,243)   (4,511)
                                                   --------  --------  --------
   Net cash provided by (used in) financing
    activities....................................  266,977   (14,531)  449,093
                                                   --------  --------  --------
Net increase (decrease) in cash and cash
 equivalents......................................   26,183    21,723   (45,263)
Cash and cash equivalents at beginning of year....  122,112   100,389   145,662
                                                   --------  --------  --------
Cash and cash equivalents at end of year.......... $148,295  $122,112  $100,399
                                                   ========  ========  ========
Supplemental information:
 Income taxes paid................................ $ 18,700  $ 18,959  $  7,422
                                                   ========  ========  ========
 Interest paid.................................... $ 50,896  $ 62,956  $ 36,099
                                                   ========  ========  ========
 Noncash investing and financing activities:
   Acquisition of real estate through foreclosure
    of collateral................................. $  1,932  $  1,192  $    643
                                                   ========  ========  ========
</TABLE>


                See notes to consolidated financial statements.

                                       46
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

   Organization--Sterling Bancshares, Inc. (hereinafter, collectively with its
subsidiaries, the "Company" or "Bancshares"), headquartered in Houston, Texas,
is a bank holding company that provides commercial and retail banking services
in the greater metro areas of Dallas, Houston, San Antonio, and South Texas
through the community banking offices of Sterling Bank, Lone Star Bank and
Community Bank, banking associations chartered under the laws of the State of
Texas (collectively, the"Bank"). Also, the Company provides mortgage banking
services through its 80 percent ownership of Sterling Capital Mortgage Company
("SCMC").

   Summary of Significant Accounting and Reporting Policies--The accounting
and reporting policies of the Company conform to accounting principles
generally accepted in the United States of America 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 subsidiaries. Intercompany transactions have
been eliminated in consolidation. The consolidated financial statements have
been restated to present the combined financial information of acquisitions
accounted for using the pooling of interests method (see Note B).

   Use of Estimates--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for
credit losses, and the valuation of foreclosed real estate, deferred tax
assets, goodwill, sercicing rights and trading activities.

   Trading Assets--Securities classified as trading assets are bought with the
anticipation of sale in the near term are carried at fair market value. These
securities consist primarily of the government-guaranteed portion of SBA
loans. The realized and unrealized gains and losses of trading assets are
included in income during the period.

   Securities--Securities classified as 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 until their maturities. Under certain circumstances (including
the deterioration of the issuer's creditworthiness or a change in tax law or
statutory or regulatory requirements), these securities may be sold or
transferred to another portfolio.

   Securities classified as available-for-sale are carried at fair value.
Unrealized gains and losses are excluded from earnings and reported, net of
tax, as accumulated comprehensive income 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 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.

   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. Premiums, discounts and loan fees (net of certain direct loan
origination costs) on loans held for sale are deferred until the related loans
are sold or repaid. Gains or losses on loan sales are recognized at the time
of sale and determined using the specific identification method.

                                      47
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


   Loans Held for Investment--Loans held for investment 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.

   Impaired loans, with the exception of groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment, are defined as loans for
which, 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. The allowance for
credit losses related to impaired loans is 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.

   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 and
classified as impaired 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 evaluate the appropriateness of the accruing status of the loan.
When a loan is placed on nonaccrual status, interest accrued and uncollected
during the current year prior to the judgment of noncollectibility is charged
to operations. Interest accrued and uncollected 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 for probable 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 probable 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 probable losses on existing loans
involves the consideration of current economic conditions and their estimated
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 amount ultimately realized may differ from the
carrying value of these assets because of economic, operating or other
conditions beyond the Company's control.

                                      48
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


   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 primarily using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the periods of the leases or the estimated
useful lives, whichever is shorter.

   Goodwill--Goodwill is amortized using the straight-line method over a
period of 10 to 25 years. Management periodically performs an evaluation to
determine whether any impairment of goodwill has occurred. If any such
impairment is identified, a write-down of the goodwill is recorded.

   Mortgage Servicing Rights--SCMC determines the fair value of capitalized
mortgage servicing rights ("MSRs") using assumptions regarding economic
factors as they relate to the servicing portfolio. These assumptions are
obtained from an independent servicing consultant and agreed to by management.
SCMC evaluates impairment of the servicing rights by stratifying the portfolio
based on predominant risk characteristics of the underlying loans including
loan type and interest rate.

   Real Estate Acquired by Foreclosure--The Bank records real estate acquired
by foreclosure at fair value less estimated costs to sell. 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. Operating expenses of such properties, net of
related income, and gains and losses on their disposition are included in
noninterest expense.

   Income Taxes--Bancshares files a consolidated federal income tax return
with its subsidiaries. Each computes 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-based Compensation--The Company accounts for stock-based employee
compensation plans using the intrinsic value-based method of accounting as
permitted and discloses pro forma information assuming the fair value-based
method as prescribed by SFAS No. 123.

   Profit Sharing Plan--The Company has a profit sharing plan that covers
substantially all employees. 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, due from banks and federal
funds sold. Generally, federal funds are sold for one-day periods.

                                      49
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


   Earnings Per Share--Basic earnings per share is computed using the weighted
average number of shares outstanding. Diluted earnings per share is computed
using the weighted average number of shares outstanding adjusted for the
incremental shares issuable upon conversion of preferred stock and issuable
upon exercise of outstanding stock options.

   Comprehensive Income--Comprehensive income includes all changes in equity
during the period presented that result from transactions and other econmic
events other than transactions with shareholders. The Company reports
comprehensive income in the consolidated statements of shareholders' equity.

   Segment Information--The Company considers its business as two operating
segments: commercial banking and mortgage banking. The company has disclosed
separately results of operations relating to the two segments in Note S to the
consolidated financial statements.

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

   Recent Accounting Standards--In June 2001, FASB issued Statement No. 141,
"Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). These statements establish new
standards for accounting and reporting for business combinations and for
goodwill and intangible assets resulting from business combinations. SFAS 141
applies to all business combinations initiated after June 30, 2001, and
requires the application of the purchase method of accounting to all business
combinations. The Company implemented SFAS 141 on July 1, 2001 and SFAS 142 on
January 1, 2002. This standard terminates the amortization of the goodwill
presently on the Company's books. Such amortization was $1.3 million for the
year ended December 31, 2001. Under SFAS 142, the Company is required to
periodically assess its goodwill and other intangible assets for potential
impairment, based on the fair value of the reporting unit at which the
goodwill is recorded. Management is currently evaluating whether an impairment
exists under SFAS 142.

   In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"), and Statement No. 144, Accounting for
Impairment or Disposal of Long Lived Assets ("SFAS 144"). SFAS 143 requires
the recording of the fair value of a liability for an asset retirement
obligation in the period in which it is incurred, and is effective January 1,
2003. SFAS 144 is effective January 1, 2002, and supersedes existing
accounting literature dealing with impairment and disposal of long lived
assets, including discontinued operations. It addresses financial accounting
and reporting for the impairment of long lived assets and for long lived
assets to be disposed of, and expands current reporting for discontinued
operations to include disposals of a "component" of an entity that has been
disposed of or is classified as held for sale. The Company's management does
not believe that the implementation of these two standards will have a
material impact on the Company's consolidated financial statements.

   Effective October 1, 2000, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" which establishes
accounting and reporting standards for derivative instruments and requires
that an entity recognize all derivatives as either assets or liabilities in
the balance sheet and measure those instruments at fair value. Upon
implementation of SFAS No. 133, $56.1 million of securities classified as
held-to-maturity were redesignated as available-for-sale or trading. The
securities had a fair value of $56.1 million. The Company has no derivative
instruments. Management believes the implementation of this pronouncement did
not have any other material effect on the Company's financial statements.

                                      50
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


B.ACQUISITIONS

   On December 17, 2001, the Company acquired Community Bancshares, Inc. and
its subsidiary bank, Community Bank in a stock and cash merger. The
shareholders of Community Bancshares, Inc. received $14.6 million in cash and
1,443,753 shares of the Company's common stock for all the outstanding common
stock of Community Bancshares, Inc. Community Bank operates two banking
offices in west Houston. As of December 31, 2001, Community Bank had total
assets of $155 million, loans of $80 million and deposits of $114 million. The
Company plans to merge Community Bank into Sterling Bank in the second quarter
of 2002. Goodwill of $28.7 was recorded.

   On August 23, 2001, the Company acquired Lone Star Bancorporation, Inc. and
its subsidiary bank, Lone Star Bank in a stock-for-stock merger. The
shareholders of Lone Star Bancorporation, Inc. received an aggregate of 1.76
million shares of the Company's common stock for all the outstanding common
stock of Lone Star Bancorporation, Inc. The stock issuance occurred prior to
the stock split in September 2001. All previously reported amounts have been
restated to reflect this transaction which was accounted for using the
"pooling of interests" method. Lone Star Bank operates four banking offices in
the Houston metropolitan area. As of December 31, 2001, Lone Star Bank had
total assets of $170 million, loans of $123 million and deposits of $154
million. The Company has merged Lone Star Bank into Sterling Bank in the first
quarter of 2002.

   On March 22, 2001, the Company acquired CaminoReal Bancshares of Texas,
Inc. and its subsidiary bank, CaminoReal Bank, National Association, for an
aggregate cash purchase price of $51.8 million. CaminoReal Bank has four
banking offices in San Antonio, Texas and four banking offices in the south
Texas cities of Eagle Pass, Carrizo Springs, Crystal City and Pearsall. During
June 2001, the Company completed the operational integration of CaminoReal
Bank and Sterling Bank. Goodwill of $21.2 million was recorded.

C.CASH AND CASH EQUIVALENTS

   The Bank is required by the Board of Governors of the Federal Reserve
System (the "FRB") to maintain average reserve balances. "Cash and cash
equivalents" in the consolidated balance sheets includes amounts so restricted
of approximately $5.6 million at December 31, 2001 and $500 thousand at
December 31, 2000.

                                      51
<PAGE>

                   STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


D.SECURITIES

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

<TABLE>
<CAPTION>
                                                 December 31, 2001
                                      ----------------------------------------
                                                  Gross      Gross
                                      Amortized Unrealized Unrealized   Fair
                                        Cost      Gains      Losses    Value
                                      --------- ---------- ---------- --------
<S>                                   <C>       <C>        <C>        <C>
Available-for-Sale
Obligations of U.S. government
 agencies............................ $ 25,217    $  767      $ 44    $ 25,940
Obligations of states and political
 subdivisions........................    7,432       174        --       7,606
Mortgage-backed securities and
 collateralized mortgage
 obligations.........................  207,235     5,141        53     212,323
Federal Home Loan Bank stock and
 other equity securities.............   18,718        --        96      18,622
                                      --------    ------      ----    --------
Total................................ $258,602    $6,082      $193    $264,491
                                      ========    ======      ====    ========
Held-to-Maturity
Obligations of U.S. government
 agencies............................ $  2,997    $   25      $ --    $  3,022
Obligations of states and political
 subdivisions........................   67,379     1,569         5      68,943
Mortgage-backed securities and
 collateralized mortgage
 obligations.........................    8,032        77       146       7,963
                                      --------    ------      ----    --------
Total................................ $ 78,408    $1,671      $151    $ 79,928
                                      ========    ======      ====    ========
</TABLE>

<TABLE>
<CAPTION>
                                                 December 31, 2000
                                      ----------------------------------------
                                                  Gross      Gross
                                      Amortized Unrealized Unrealized   Fair
                                        Cost      Gains      Losses    Value
                                      --------- ---------- ---------- --------
<S>                                   <C>       <C>        <C>        <C>
Available-for-Sale
U.S. Treasury securities and
 obligations of U.S. government
 agencies............................ $ 27,897    $  285      $ 66    $ 28,116
Obligations of states and political
 subdivisions........................    6,067        31        33       6,065
Mortgage-backed securities
 collateralized mortgage
 obligations.........................  168,906     1,806       428     170,284
Federal Home Loan Bank stock and
 other equity securities.............   12,810        --        --      12,810
                                      --------    ------      ----    --------
Total................................ $215,680    $2,122      $527    $217,275
                                      ========    ======      ====    ========
Held-to-Maturity
U.S. Treasury securities and
 obligations of U.S. government
 agencies............................ $  8,004    $   47      $ --    $  8,051
Obligations of states and political
 subdivisions........................   73,000       425       163      73,262
Mortgage-backed securities and
 collateralized mortgage
 obligations.........................    9,923         2       177       9,748
                                      --------    ------      ----    --------
Total................................ $ 90,927    $  474      $340    $ 91,061
                                      ========    ======      ====    ========
</TABLE>

                                       52
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


   The amortized cost and fair value of securities at December 31, 2001, 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>     <C>       <C>
Due in one year or less.................. $ 11,568  $11,676 $ 13,081  $ 13,246
Due after one year through five years....   34,273   35,256   16,266    16,881
Due after five years through ten years...   24,535   25,033    1,127     1,165
Due after ten years......................       --       --    2,175     2,254
Mortgage-backed securities and
 collateralized mortgage obligations.....    8,032    7,963  207,235   212,323
FHLB stock and other equity securities...       --       --   18,718    18,622
                                          --------  ------- --------  --------
                                          $ 78,408  $79,928 $258,602  $264,491
                                          ========  ======= ========  ========
</TABLE>

   The Company does not own any securities of any one issuer (other than the
U.S. government and its agencies) of which aggregate adjusted cost exceeds 10%
of the consolidated shareholders' equity at December 31, 2001 or 2000.

   Securities with carrying values totaling $193.6 million and fair values
totaling $198.2 million at December 31, 2001 were pledged to secure public
deposits, securities sold under repurchase agreements and Federal Home Loan
Bank advances.

E.LOANS

     The loan portfolio consists of various types of loans made principally
  to borrowers located in the Houston, Dallas and San Antonio metropolitan
  areas, and is classified by major type as follows (in thousands):
<TABLE>
<CAPTION>
                                                             December 31,
                                                         ----------------------
                                                            2001        2000
                                                         ----------  ----------
      <S>                                                <C>         <C>
      Commercial, financial and industrial.............. $  506,272  $  472,392
      Real estate--commercial...........................    530,076     449,007
      Real estate--mortgage.............................    186,527     155,796
      Real estate--construction.........................    282,304     134,482
      Consumer..........................................    154,075     129,076
      Foreign commercial and industrial.................      7,594       4,807
      Unearned premium (discount).......................        (60)        282
                                                         ----------  ----------
      Total loans held for investment...................  1,666,788   1,345,842
        Loans held for sale.............................    261,505     139,148
                                                         ----------  ----------
      Total loans....................................... $1,928,293  $1,484,990
                                                         ==========  ==========
</TABLE>

   The recorded investment in impaired loans under SFAS No. 114 is
approximately $65.6 million and $48.8 million, at December 31, 2001 and 2000,
respectively. Under SFAS No. 114, such impaired loans required an allowance
for credit losses of approximately $16.4 million and $9.2 million,
respectively.

                                      53
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


   The average recorded investment in impaired loans for the years ended
December 31, 2001, 2000 and 1999 was $56.4 million, $40.6 million and $28.7
million, respectively.

   Loan maturities and rate sensitivity of the loan portfolio, excluding real
estate--mortgage, consumer and foreign loans and unearned discount, at
December 31, 2001 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                   Due
                                                  After
                                                 One Year
                                         Due in  Through
                                        One Year   Five   Due After
                                        or Less   Years   Five Years   Total
                                        -------- -------- ---------- ----------
<S>                                     <C>      <C>      <C>        <C>
Commercial, financial and industrial... $361,366 $138,153  $ 6,753   $  506,272
Real estate--commercial................  224,577  270,570   33,897      529,044
Real estate--construction..............  199,129   73,583    8,676      281,388
                                        -------- --------  -------   ----------
Total.................................. $785,072 $482,306  $49,326   $1,316,704
                                        ======== ========  =======   ==========
Loans with a fixed interest rate....... $122,100 $450,999  $48,603   $  621,702
Loans with a floating interest rate....  662,972   31,307      723      695,002
                                        -------- --------  -------   ----------
Total.................................. $785,072 $482,306  $49,326   $1,316,704
                                        ======== ========  =======   ==========
</TABLE>

   As of December 31, 2001 and 2000, loans outstanding to directors, officers
and their affiliates were approximately $13.0 million and $15.0 million,
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,
                                                               ----------------
                                                                2001     2000
                                                               -------  -------
      <S>                                                      <C>      <C>
      Beginning balance....................................... $14,971  $12,945
      New loans and reclassified related loans................  18,573   11,208
      Loans to insiders/directors who resigned................  (3,653)      --
      Repayments.............................................. (16,743)  (9,182)
                                                               -------  -------
      Ending balance.......................................... $13,148  $14,971
                                                               =======  =======
</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,
                                                              ----------------
                                                                2001    2000
                                                              -------- -------
      <S>                                                     <C>      <C>
      Nonaccrual loans....................................... $ 14,179 $ 8,297
      Loans 90 days or more past due, not on nonaccrual
       status................................................    1,360     626
      Restructured loans, performing.........................       16   1,298
                                                              -------- -------
                                                              $ 15,555 $10,221
                                                              ======== =======
</TABLE>

   As of December 31, 2001 and 2000, interest foregone on nonaccrual loans was
$766 thousand and $471 thousand, respectively.

                                      54
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


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,
                                                      -------------------------
                                                       2001     2000     1999
                                                      -------  -------  -------
      <S>                                             <C>      <C>      <C>
      Balance at beginning of year................... $16,862  $13,998  $11,352
       Provisions....................................  11,684    9,668    9,236
       Loans charged off.............................   9,823    7,767    7,572
       Loan recoveries...............................  (1,446)    (963)    (982)
                                                      -------  -------  -------
        Net loans charged off........................   8,377    6,804    6,590
       Acquisition of CaminoReal Bank................   1,896       --       --
       Acquisition of Community Bank.................     862       --       --
                                                      -------  -------  -------
      Balance at end of year......................... $22,927  $16,862  $13,998
                                                      =======  =======  =======
</TABLE>

H.PREMISES AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 2001    2000
                                                                ------- -------
      <S>                                                       <C>     <C>
      Land..................................................... $11,151 $10,214
      Buildings and improvements...............................  41,926  32,797
      Furniture, fixtures and equipment........................  43,294  36,979
                                                                ------- -------
                                                                 96,371  79,990
      Less accumulated depreciation and amortization...........  42,196  32,891
                                                                ------- -------
      Total.................................................... $54,175 $47,099
                                                                ======= =======
</TABLE>
I.INTANGIBLE ASSETS

   Intangible asssets are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                  2001    2000
                                                                -------- ------
      <S>                                                       <C>      <C>
      Goodwill................................................. $ 54,812 $5,952
      Mortgage servicing rights................................   19,592    907
      Core deposit intangible..................................    2,036     --
                                                                -------- ------
                                                                $ 76,440 $6,859
                                                                ======== ======
</TABLE>

   Goodwill of $21.2 million and $28.7 million was recorded with the
acquisitions of CaminoReal Bancshares, Inc. and Community Bancshares, Inc.,
respectively.

   As of December 31, 2001 and 2000, SCMC serviced loans with unpaid principal
balances of approximately $1.3 billion and $173 million, respectively. These
amounts include loans that are held in the warehouse until shipped to the
investor, typically 30 days. Escrow funds totaling approximately $6.1 million
and $560.8 thousand at December 31, 2001 and 2000, respectively are held in
trust for mortgagors at various financial institutions. The loans and escrow
funds are not included in the accompanying balance sheet.

                                      55
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


J.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 of December 31, 2001 as
follows (in thousands):

<TABLE>
      <S>                                                             <C>
      Three months or less........................................... $ 164,605
      Four through six months........................................    74,259
      Seven through twelve months....................................    64,991
      Thereafter.....................................................    29,236
                                                                      ---------
                                                                      $ 333,091
                                                                      =========
</TABLE>

   Interest expense for certificates of deposit in excess of $100,000 was
approximately $15.0 million, $14.1 million, and $9.3 million for the years
ended December 31, 2001, 2000 and 1999, respectively.

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

K.OTHER BORROWED FUNDS

   Other borrowed funds are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                              2001      2000
                                                            --------- --------
      <S>                                                   <C>       <C>
      Federal Home Loan Bank advances...................... $ 146,000 $128,000
      Federal funds purchased with correspondent banks.....    10,950       --
      Securities sold under agreements to repurchase.......    18,248    8,745
      Promissory notes payable to unaffiliated third
       party...............................................     5,100    3,619
                                                            --------- --------
                                                            $ 180,298 $140,364
                                                            ========= ========
</TABLE>

   The Bank has an available line of credit with the Federal Home Loan Bank of
Dallas, which allows the Bank to borrow on a collateralized basis. At December
31, 2001, the Bank had $146 million, of which $120 million bearing an interest
rate of 1.93% and $26 million bearing an interest rate of 2.03%, borrowed
under this line of credit, with a maturity of three days. These borrowings are
collaterilized by single family residential mortgage loans. This amount was
repaid in January 2002.

   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 (dollars in
thousands):

<TABLE>
<CAPTION>
                                                                2001     2000
                                                               -------  -------
      <S>                                                      <C>      <C>
      Average balance during the year......................... $15,074  $10,124
      Average interest rate during the year...................    2.67%    5.52%
      Maximum month-end balance during the year............... $18,248  $ 8,745
      Average interest rate at the end of the year............    1.16%    5.94%
</TABLE>

   At December 31, 2001, the Bank had a promissory note outstanding bearing an
interest rate of 4.8%. The note matures in April 2002.

                                      56
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


   Finally, the Bank has available lines for federal funds purchased at
correspondent banks. These funds are generally outstanding for periods of less
than one week. As of December 31, 2001, federal funds outstanding with
correspondent banks was $11.0 million. The amounts were repaid in January
2002.

L.NOTES PAYABLE

   Lone Star Bancorporation, Inc. had a revolving draw note with a bank,
secured by the stock of Lone Star Bancorporation of Delaware and Lone Star
Bank with a balance of $1.6 million at December 31, 2000. The loan was repaid
in 2001.

   Effective February 2, 2002, the Company entered into a Credit Agreement
with Wells Fargo Bank Minnesota, National Association which provides for a $20
million revolving credit facility. The Company currently has $20 million
outstanding under the terms of the credit facility. The term of the credit
facility is for a one year period ending on February 2, 2003. The interest
rate payable by the Company on all funds drawn under the credit facility is
1.95% in excess of the Federal Funds Rate in effect from time to time. In
addition, the Company pays an annual fee equal to one-eighth of one percent
(0.125%) of the average daily unused portion of the credit facility. The
indebtedness under the credit facility is guaranteed by Sterling
Bancorporation, Inc. The Credit Agreement contains various covenants and
restrictions including, among other things, (i) limitations on dividends,
redemptions and repurchases of capital stock, (ii) limitations on the
incurrence of indebtedness, (iii) limitations on mergers, acquisitions and the
sale of all or substantially all of the Company's assets, and (iv) maintenance
of certain financial covenants by the Company and the Bank. Although such
restrictions could restrict the Company's corporate activities, the Company
does not anticipate that the credit facility or the covenants and conditions
contained therein will have any material impact upon the Company or its
operations.

   Community Bancshares, Inc. had unsecured notes payable to two executives
with a balance of $879 thousand. The notes mature January 11, 2004.

M.TRUST PREFERRED SECURITIES

   In June 1997, the Company formed Sterling Bancshares Capital Trust I, a
trust formed under the laws of the State of Delaware (the "Trust I"). The
Trust I issued $28,750,000 of 9.28% Trust Preferred Securities and invested
the proceeds thereof in the 9.28% Junior Subordinated Deferrable Interest
Debentures (the "9.28% Junior Subordinated Debentures") issued by the Company.
The 9.28% Junior Subordinated Debentures will mature on June 6, 2027, which
date may be shortened to a date not earlier than June 6, 2002 if certain
conditions are met (including the Company having received prior approval of
the Federal Reserve and any other required regulatory approvals). The 9.28%
Trust Preferred Securities will be subject to mandatory redemption if the
9.28% Junior Subordinated Debentures are repaid by the Company. The 9.28%
Junior Subordinated Debentures may be prepaid if certain events occur,
including a change in the tax status or regulatory capital treatment of the
9.28% Trust Preferred Securities. In each case, redemption will be made at
par, plus the accrued and unpaid distributions thereon through the redemption
date.

   In February 2001, the Company formed Sterling Bancshares Capital Trust II
("Trust II") and Sterling Bancshares Capital Trust III, each trust formed
under the laws of the State of Delaware. Trust II issued $28,750,000 of 9.20%
Trust Preferred Securities and invested the proceeds thereof in the 9.20%
Junior Subordinated Deferrable Interest Debentures (the "9.20% Junior
Subordinated Debentures") issued by the Company. The 9.20% Junior Subordinated
Debentures will mature on March 21, 2031, which date may be shortened to a
date not earlier than March 21, 2006 if certain conditions are met (including
the Company having received prior approval of the Federal Reserve and any
other required regulatory approvals). The 9.20% Trust Preferred Securities
will be subject to mandatory redemption if the 9.20% Junior Subordinated
Debentures are repaid by the Company. The 9.20% Junior Subordinated Debentures
may be prepaid if certain events occur,

                                      57
<PAGE>

                   STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

including a change in the tax status or regulatory capital treatment of the
9.20% Trust Preferred Securities. In each case, redemption will be made at par,
plus the accrued and unpaid distributions thereon through the redemption date.

N.INCOME TAXES

   The components of the provision for income taxes follow (in thousands):
<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                       ------------------------
                                                        2001    2000     1999
                                                       ------- -------  -------
<S>                                                    <C>     <C>      <C>
Current expense....................................... $ 7,282 $13,011  $11,547
Deferred benefit......................................   9,128    (370)  (1,744)
                                                       ------- -------  -------
  Total............................................... $16,410 $12,641  $ 9,803
                                                       ======= =======  =======
</TABLE>

   The provision for 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,
                                                     -------------------------
                                                      2001     2000     1999
                                                     -------  -------  -------
<S>                                                  <C>      <C>      <C>
Taxes calculated at statutory rate.................. $16,384  $14,063  $11,004
Increase (decrease) resulting from:
Tax-exempt interest income..........................  (1,104)  (1,255)  (1,069)
Tax-exempt income from bank-owned life insurance....    (717)    (661)    (212)
Goodwill amortization...............................     342      157      151
Adjustments to valuation allowance..................      --       --       --
Other, net..........................................   1,505      337      (71)
                                                     -------  -------  -------
Income tax expense.................................. $16,410  $12,641  $ 9,803
                                                     =======  =======  =======
</TABLE>

   Significant deferred tax assets and liabilities at December 31, 2001 and
2000, were as follows (in thousands):
<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 2001     2000
                                                                -------  ------
<S>                                                             <C>      <C>
Deferred tax assets:
 Net unrealized loss on available-for-sale securities.......... $    --  $   --
 Real estate acquired by foreclosure...........................      31     143
 Allowance for credit losses...................................   7,455   5,792
 Net operating loss carryforward...............................     174     215
 Deferred compensation.........................................   1,314     850
 Other.........................................................     128       7
                                                                -------  ------
  Total deferred tax assets....................................   9,102   7,007
Deferred tax liabilities:
 Net unrealized gains on available-for-sale securities.........   1,939     566
 Depreciable assets............................................   1,159     955
 Earnings from Sterling Capital Mortgage Company...............     396     396
 Federal Home Loan Bank stock dividends........................     867     711
 Orginated mortgage servicing rights...........................   7,385      --
 Other.........................................................     831     412
                                                                -------  ------
  Total deferred tax liabilities...............................  12,577   3,040
                                                                -------  ------
Net deferred tax assets before valuation allowance.............  (3,475)  3,967
Valuation allowance............................................     262     262
                                                                -------  ------
Net deferred tax assets........................................ $(3,737) $3,705
                                                                =======  ======
</TABLE>

                                       58
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

O.EMPLOYEE BENEFITS

   Profit sharing plan--The Company's profit sharing plan includes
substantially all employees. Contributions to the plan are made at the
discretion of the Board of Directors but generally equal up to 10% of the
Company's pretax income, subject to IRS limitations. Employee contributions to
401(K) plan accounts are optional. Beginning in 1997, the Company matched 50
percent of the employee's contribution, up to 6 percent of the employee's base
pay. Profit sharing contributions are accrued and funded currently. Total
profit sharing expense for 2001, 2000 and 1999 was approximately $3.9 million,
$2.9 million, and $2.5 million, respectively.

   Stock-based compensation--During April 1994, the Company adopted the "1994
Stock Incentive Plan (the "Stock Plan"). The Stock Plan provides for a maximum
of 3,900,000 shares of the Company's common stock to be issued. No options or
performance shares may be granted under the Stock Plan after April 2004.
Options are granted to officers and employees at exercise prices determined by
the Compensation Committee of the Board of Directors. These options generally
have exercise prices equal to the fair market value of the common stock at the
date of grant and 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.
Stock grant awards may also be made under the Stock Plan with compensation
expense recognized for any stock grant awards. A total of 20,264, 4,250, and
200 stock grants were awarded under the Stock Plan during 2001, 2000 and 1999,
respectively.

   A summary of changes in outstanding options, as restated for stock splits,
is as follows (shares in thousands):

<TABLE>
<CAPTION>
                                         Year Ended December 31,
                             --------------------------------------------------
                                  2001             2000             1999
                             ---------------- ---------------- ----------------
                                     Weighted         Weighted         Weighted
                                     Average          Average          Average
                                     Exercise         Exercise         Exercise
                             Shares   Price   Shares   Price   Shares   Price
                             ------  -------- ------  -------- ------  --------
<S>                          <C>     <C>      <C>     <C>      <C>     <C>
Shares under option,
 beginning of year.........  1,800    $6.45   1,574    $6.12   1,427    $5.00
 Shares granted............    880    12.28     455     7.88     481     8.05
 Shares canceled/expired...   (122)    9.48     (80)    7.61    (110)    7.88
 Shares exercised..........   (257)    5.40    (149)    3.31    (224)    2.31
                             -----    -----   -----    -----   -----    -----
Shares under option, end of
 year......................  2,301    $8.63   1,800    $6.45   1,574    $6.12
                             =====    =====   =====    =====   =====    =====
Shares exercisable, end of
 year......................    935              870              753
                             =====            =====            =====
Shares reserved for future
 granting of options, end
 of year...................    635              615            1,070
                             =====            =====            =====
Weighted average fair value
 of options granted during
 the year..................           $3.64            $2.81            $2.58
                                      =====            =====            =====
Range of exercise prices of
 options granted during the
 year......................  $10.52 - $15.64  $5.92 - $13.31    $6.92 - $9.89
Range of exercise prices of
 options exercised during
 the year..................   $0.81 - $9.90    $0.70 - $9.17    $0.63 - $8.44
</TABLE>

   If compensation cost for the Company's stock-based compensation plan had
been determined based on the fair value at the grant dates for awards, there
would have been no material impact on the Company's reported net income or
earnings per share.

                                      59
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


   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>
                                                            2001   2000   1999
                                                            -----  -----  -----
      <S>                                                   <C>    <C>    <C>
      Expected life (years)................................  4.82   5.17   5.51
      Risk free interest rate..............................  4.22%  5.03%  6.63%
      Volatility........................................... 29.35% 28.97% 26.88%
      Dividend yield.......................................  1.28%  1.11%  1.79%
</TABLE>

   Stock purchase plan--The Company offers the 1994 Employee Stock Purchase
Plan (the "Purchase Plan"), which is a compensatory benefit plan, to all
employees who are employed for more than 20 hours per week and meet minimum
length-of-service requirements of three months. The Purchase Plan provides for
an aggregate of 675,000 shares of the Company's common stock to be issued
under the Plan with no more than 67,500 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 2001 and
2000, 450 and 1,361 shares, respectively, were purchased and 5,448 and 9,779
shares, respectively, were subscribed for through payroll deduction for a
maximum of two years. Shares are issued upon full payment.

P.SHAREHOLDERS' EQUITY

   Stock splits--On July 24, 2001, the Board of Directors declared a three-
for-two stock split that was effected in the form of a stock dividend on its
common stock. Stockholders of record on September 4, 2001 received one
additional share of common stock for every two shares of the Company's common
stock held on that date. Cash paid in lieu of fractional shares was based on
the average of the high and low bids on the record date, as adjusted for the
split. The payment date for the stock dividend was September 18, 2001.

   Preferred stock--The Board of Directors has approved the sale of
convertible preferred stock in series pursuant to confidential private
placement memoranda upon the opening of various banking offices. The shares
are sold to investors who may assist in the business development efforts of
the opening office and are convertible to common shares dependent on that
banking office meeting certain performance and deposit growth goals. During
2001, 11,500 shares of preferred stock under Series F issued in 1998 were
converted into 11,500 common shares prior to the stock split in September
2001. At December 31, 2001, there are 39,000 convertible preferred shares
outstanding. These shares are convertible into a maximum of 73,125 shares of
common stock if the performance and deposit growth goals of the banking
offices are achieved.

Q.EARNINGS PER COMMON SHARE

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

<TABLE>
<CAPTION>
                                          2001          2000          1999
                                      ------------- ------------- -------------
                                               Per           Per           Per
                                      Amount  Share Amount  Share Amount  Share
                                      ------- ----- ------- ----- ------- -----
<S>                                   <C>     <C>   <C>     <C>   <C>     <C>
Net income........................... $30,401       $27,540       $21,636
                                      =======       =======       =======
Basic:
 Weighted average shares
  outstanding........................  42,180 $0.72  41,596 $0.66  41,422 $0.52
                                              =====         =====         =====
Diluted:
 Add incremental shares for:
  Assumed exercise of outstanding
   options...........................     803           509           547
  Assumed conversion of preferred
   stock.............................      61           107           249
                                      -------       -------       -------
Total................................  43,044 $0.71  42,212 $0.65  42,218 $0.51
                                      ======= ===== ======= ===== ======= =====
</TABLE>

                                      60
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


   The incremental shares for the assumed exercise of the outstanding options
was determined by application of the treasury stock method. The incremental
shares for the conversion of the preferred stock was determined assuming
applicable performance goals had been met.

R.COMMITMENTS AND CONTINGENCIES

   Leases--A summary as of December 31, 2001, of noncancelable future
operating lease commitments follows (in thousands):

<TABLE>
      <S>                                                                <C>
      2002.............................................................. $ 3,389
      2003..............................................................   3,544
      2004..............................................................   3,221
      2005..............................................................   2,486
      2006..............................................................   2,202
      Thereafter........................................................   6,522
                                                                         -------
      Total............................................................. $21,364
                                                                         =======
</TABLE>

   Rent expense under all noncancelable operating lease obligations, net of
income from noncancelable subleases aggregated, was approximately $5.6
million, $3.7 million, and $2.2 million for the years ended December 31, 2001,
2000 and 1999, respectively.

   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.

S.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. 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,
                                                              -----------------
                                                                2001     2000
                                                              -------- --------
      <S>                                                     <C>      <C>
      Financial instruments whose contract amount
       represents credit risk:
        Commitments to extend credit......................... $344,507 $231,468
        Standby letters of credit............................   19,470   19,698
        Mortgages sold with recourse.........................  272,894  383,301
</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

                                      61
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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.

   The Bank's mortgage subsidiary, SCMC, sells mortgages in the secondary
market. A portion of these loans are sold with recourse for a period which
generally does not exceed one year.

T.REGULATORY MATTERS

   Capital requirements--The Company is 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 its 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 capital
amount and the Bank's classification under the regulatory framework for prompt
corrective action are also subject to qualitative judgments by the regulators.

   To meet the capital adequacy requirements, the Company must maintain
minimum capital amounts and ratios as defined in the regulations. Management
believes, as of December 31, 2001 and 2000, that the Company and the Bank met
all capital adequacy requirements to which they are subject.

                                      62
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


   As of December 31, 2001, the most recent notification categorized the Bank
as "well capitalized" under the regulatory capital framework for prompt
corrective action and there have been no events since that notification that
management believes have changed the Bank's category. 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:
<TABLE>
<CAPTION>
                                           For Capital    To Be Well Capitalized
                                             Adequacy    Under Prompt Corrective
                              Actual         Purposes        Action Provision
                          --------------  -------------- -------------------------
                           Amount  Ratio   Amount  Ratio    Amount       Ratio
                          -------- -----  -------- ----- ------------- -----------
<S>                       <C>      <C>    <C>      <C>   <C>           <C>
CONSOLIDATED:
As of December 31, 2001:
Total Capital (to Risk
 Weighted Assets).......  $239,234 10.66% $179,538  8.0%
Tier I Capital (to Risk
 Weighted Assets).......   216,307  9.64%   89,754  4.0%
Tier I Capital (to
 Average Assets)........   216,307  8.40%  103,003  4.0%

As of December 31, 2000:
Total Capital (to Risk
 Weighted Assets).......  $204,200 11.26% $145,088  8.0%
Tier I Capital (to Risk
 Weighted Assets).......   190,547 10.51%   72,544  4.0%
Tier I Capital (to
 Average Assets)........   190,547  9.10%   83,797  4.0%

STERLING BANK:
As of December 31, 2001:
Total Capital (to Risk
 Weighted Assets).......  $231,694 11.37% $163,021  8.0%      $203,777      10.0%
Tier I Capital (to Risk
 Weighted Assets).......   211,356 10.38%   81,447  4.0%       122,171       6.0%
Tier I Capital (to
 Average Assets)........   211,356  8.73%   96,841  4.0%       121,052       5.0%

As of December 31, 2000:
Total Capital (to Risk
 Weighted Assets).......  $181,934 10.73% $135,645  8.0%      $169,556      10.0%
Tier I Capital (to Risk
 Weighted Assets).......   169,450 10.00%   67,780  4.0%       101,670       6.0%
Tier I Capital (to
 Average Assets)........   169,450  8.73%   77,652  4.0%        97,065       5.0%

LONE STAR BANK:
As of December 31, 2001:
Total Capital (to Risk
 Weighted Assets).......  $ 15,623 11.94% $ 10,468  8.0%      $ 13,085      10.0%
Tier I Capital (to Risk
 Weighted Assets).......    14,025 10.72%    5,233  4.0%         7,850       6.0%
Tier I Capital (to
 Average Assets)........    14,025  8.23%    6,817  4.0%         8,521       5.0%

As of December 31, 2000:
Total Capital (to Risk
 Weighted Assets).......  $ 10,464  8.92% $  9,385  8.0%      $ 11,731      10.0%
Tier I Capital (to Risk
 Weighted Assets).......     9,295  7.93%    4,689  4.0%         7,033       6.0%
Tier I Capital (to
 Average Assets)........     9,295  6.30%    5,902  4.0%         7,377       5.0%

COMMUNITY BANK:
As of December 31, 2001:
Total Capital (to Risk
 Weighted Assets).......  $  9,421 12.10% $  6,229  8.0%      $  7,786      10.0%
Tier I Capital (to Risk
 Weighted Assets).......     8,449 10.86%    3,112  4.0%         4,668       6.0%
Tier I Capital (to
 Average Assets)........     8,449  5.46%    6,190  4.0%         7,737       5.0%

As of December 31, 2000:
Total Capital (to Risk
 Weighted Assets).......  $  7,115  9.57% $  5,950  8.0%      $  7,437      10.0%
Tier I Capital (to Risk
 Weighted Assets).......     6,359  8.55%    2,975  4.0%         4,462       6.0%
Tier I Capital (to
 Average Assets)........     6,359  5.96%    4,265  4.0%         5,331       5.0%
</TABLE>


                                      63
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


   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 $60.6 million and $62.7
million available for payment of dividends at December 31, 2001, by the Bank
and the Company, respectively.

U.SEGMENTS

   The Company has two operating segments: commercial banking and mortgage
banking. Each segment is managed separately because each business requires
different marketing strategies and each offers different products and
services.

   The accounting policies of the segments are the same as those described in
Note A. The Company evaluates each segment's performance based on the profit
or loss from its operations before income taxes, excluding non-recurring
items. Intersegment financing arrangements are accounted for at current market
rates as if they were with third parties.

   Summarized financial information by operating segment for the years ended
December 31, 2001 and 2000 follows:

<TABLE>
<CAPTION>
                                      2001                           2000
                         ------------------------------ ------------------------------
                         Commercial Mortgage            Commercial Mortgage
                          Banking   Banking    Total     Banking   Banking    Total
                         ---------- -------- ---------- ---------- -------- ----------
<S>                      <C>        <C>      <C>        <C>        <C>      <C>
Net interest income..... $  123,001 $    --  $  123,001 $  104,693  $   --  $  104,693
Noninterest income......     24,196  41,975      66,171     18,852  21,796      40,648
                         ---------- -------  ---------- ----------  ------  ----------
  Total revenue.........    147,197  41,975     189,172    123,545  21,796     145,341
Provision for credit
 losses.................     11,684      --      11,684      9,668      --       9,668
Noninterest expense.....    104,075  26,602     130,677     78,783  16,709      95,492
                         ---------- -------  ---------- ----------  ------  ----------
Income before income
 taxes..................     31,438  15,373      46,811     35,094   5,087      40,181
Provision for income
 taxes..................     10,130   6,280      16,410     10,560   2,081      12,641
                         ---------- -------  ---------- ----------  ------  ----------
  Net income............ $   21,308 $ 9,093  $   30,401 $   24,534  $3,006  $   27,540
                         ========== =======  ========== ==========  ======  ==========
Total assets............ $2,762,463 $15,627  $2,778,090 $2,072,410  $4,804  $2,077,214
                         ========== =======  ========== ==========  ======  ==========
</TABLE>

   Intersegment interest was paid to Sterling Bank by SCMC in the amount of
$13.5 million and $7.4 million for the years ended December 31, 2001 and 2000,
respectively. Total loans in the mortgage warehouse of $253.7 million and
$136.0 million were eliminated in consolidation at December 31, 2001 and 2000,
respectively.

V.DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL STATEMENTS

   Fair values were estimated by management as of December 31, 2001 and 2000,
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:

   Short-term investments--For short-term investments, the carrying amount is
a reasonable estimate of fair value.

                                      64
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


   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, the
fair value 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.

   Loans Held for Investment--The fair value 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 certificates of deposit is estimated using
the rates currently offered for deposits of similar remaining maturities.

   Other Borrowed Funds--The carrying amounts approximate fair value because
these borrowings reprice at market rates generally within four days.

   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.

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

<TABLE>
<CAPTION>
                                               December 31,
                                ----------------------------------------------
                                        2001                    2000
                                ----------------------  ----------------------
                                 Carrying   Estimated    Carrying   Estimated
                                  Amount    Fair Value    Amount    Fair Value
                                ----------  ----------  ----------  ----------
<S>                             <C>         <C>         <C>         <C>
Financial assets:
 Cash and short-term
  investments.................. $  162,722  $  162,722  $  160,415  $  160,415
 Available-for-sale
  securities...................    264,491     264,491     217,275     217,275
 Held-to-maturity securities...     78,408      79,928      90,927      91,061
 Trading assets................    118,511     118,511          --          --
 Loans held for sale...........    261,505     261,505     139,148     139,148
 Loans held for investment.....  1,666,788   1,681,843   1,345,842   1,335,720
 Less allowance for credit
  losses.......................    (22,927)    (22,927)    (16,862)    (16,862)
                                ----------  ----------  ----------  ----------
Total.......................... $2,529,498  $2,546,073  $1,936,745  $1,926,757
                                ==========  ==========  ==========  ==========
Financial liabilities:
 Deposits...................... $2,268,980  $2,275,987  $1,718,822  $1,719,237
 Other borrowed funds..........    180,298     180,298     140,364     140,364
                                ----------  ----------  ----------  ----------
Total.......................... $2,449,278  $2,456,285  $1,859,186  $1,859,601
                                ==========  ==========  ==========  ==========
Off-balance-sheet instruments:
Commitments to extend credit...                    (--)                    (--)
Standby letters of credit......                    (--)                    (--)
</TABLE>

                                      65
<PAGE>

                  STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

W.SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

   The table below sets forth unaudited financial information for each quarter
of the last two years (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                       2001                            2000
                          ------------------------------- -------------------------------
                          Fourth   Third  Second   First  Fourth   Third  Second   First
                          Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
                          ------- ------- ------- ------- ------- ------- ------- -------
<S>                       <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>
Interest income.........  $41,353 $44,895 $45,618 $41,187 $43,299 $43,469 $41,332 $39,417
Interest expense........    9,317  12,556  14,201  13,978  16,221  17,021  15,292  14,290
                          ------- ------- ------- ------- ------- ------- ------- -------
  Net interest income...   32,036  32,339  31,417  27,209  27,078  26,448  26,040  25,127
Provision for credit
 losses.................    3,092   3,120   3,112   2,360   2,894   2,405   2,244   2,125
                          ------- ------- ------- ------- ------- ------- ------- -------
Net interest income
 after provision for
 credit losses..........   28,944  29,219  28,305  24,849  24,184  24,043  23,796  23,002
Noninterest income......   19,787  14,171  19,392  12,821  12,639  10,477  10,105   7,427
Noninterest expense.....   35,206  29,907  35,361  27,022  26,245  24,089  23,686  21,472
Conversion costs related
 to acquistions.........      957   1,194      --   1,030      --      --      --      --
                          ------- ------- ------- ------- ------- ------- ------- -------
  Income before income
   taxes................   12,568  12,289  12,336   9,618  10,578  10,431  10,215   8,957
Provision for income
 taxes..................    4,569   4,416   4,448   2,977   3,436   3,232   3,247   2,726
                          ------- ------- ------- ------- ------- ------- ------- -------
  Net income............  $ 7,999 $ 7,873 $ 7,888 $ 6,641 $ 7,142 $ 7,199 $ 6,968 $ 6,231
                          ======= ======= ======= ======= ======= ======= ======= =======
  Earnings per share:
  Basic.................  $  0.19 $  0.19 $  0.19 $  0.16 $  0.17 $  0.17 $  0.17 $  0.15
                          ======= ======= ======= ======= ======= ======= ======= =======
  Diluted...............  $  0.18 $  0.18 $  0.18 $  0.16 $  0.17 $  0.17 $  0.17 $  0.15
                          ======= ======= ======= ======= ======= ======= ======= =======
Shares used in computing
 earnings per share:
  Basic.................   42,558  42,263  42,080  41,809  41,693  41,645  41,583  41,462
                          ======= ======= ======= ======= ======= ======= ======= =======
  Diluted...............   43,346  43,224  42,886  42,711  42,525  42,323  42,068  41,929
                          ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

   Earnings per common share are computed independently for each of the
quarters presented and therefore may not sum to the totals for the year.

   All quarters have been restated to present the combined financial
information of acquisitions accounted for using the pooling of interests
method.

                                      66
<PAGE>

                   STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

X.PARENT-ONLY FINANCIAL STATEMENTS

                           STERLING BANCSHARES, INC.
                             (Parent Company Only)

                                 BALANCE SHEETS
                           DECEMBER 31, 2001 AND 2000
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                                2001     2000
                                                              -------- --------
<S>                                                           <C>      <C>
ASSETS
Cash and cash equivalents.................................... $    546 $ 11,609
Accrued interest receivable and other assets.................    3,527    2,056
Goodwill, net................................................      527      555
Investment in bank subsidiaries..............................  291,496  183,206
Investment in Sterling Bancshares Capital Trusts.............    1,778      889
                                                              -------- --------
TOTAL........................................................ $297,874 $198,315
                                                              ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
 Accrued interest payable and other liabilities.............. $    348 $    251
 Notes payable...............................................   20,879    1,600
 Junior subordinated debentures..............................   59,278   29,639
                                                              -------- --------
  Total liabilities..........................................   80,505   31,490
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
 Preferred stock.............................................       39       51
 Common stock................................................   43,770   41,728
 Capital surplus.............................................   42,526   21,357
 Retained earnings...........................................  127,144  102,652
 ESOP indebtedness...........................................
 Accumulated other comprehensive income--net unrealized loss
  on available-for-sale securities, net of tax...............    3,890    1,037
                                                              -------- --------
                                                               217,369  166,825
                                                              -------- --------
TOTAL........................................................ $297,874 $198,315
                                                              ======== ========
</TABLE>


                                       67
<PAGE>

                   STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

                           STERLING BANCSHARES, INC.
                             (Parent Company Only)

                              STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                                 (In thousands)

<TABLE>
<CAPTION>
                                                      2001    2000     1999
                                                     ------- -------  -------
<S>                                                  <C>     <C>      <C>
REVENUES:
 Dividends received from bank subsidiaries.......... $26,200 $    --  $    33
 Interest income....................................      --      --       --
                                                     ------- -------  -------
  Total revenues....................................  26,200      --       33
EXPENSES:
 Interest expense:
  Notes payable.....................................     135      36       68
  Junior subordinated debentures....................   4,716   2,668    2,668
 Goodwill amortization..............................      28      28       27
 General and administrative.........................   1,171     990      733
                                                     ------- -------  -------
  Total expenses....................................   6,050   3,722    3,496
Income (deficit) before equity in undistributed
 earnings of subsidiaries and income taxes..........  20,150  (3,722)  (3,463)
Equity in undistributed earnings of subsidiaries....   8,162  29,982   23,631
                                                     ------- -------  -------
Income before income tax benefit....................  28,312  26,260   20,168
Income tax benefit..................................   2,089   1,280    1,468
                                                     ------- -------  -------
Net income.......................................... $30,401 $27,540  $21,636
                                                     ======= =======  =======
</TABLE>

                                       68
<PAGE>

                   STERLING BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

                           STERLING BANCSHARES, INC.
                             (Parent Company Only)

                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                                 (In thousands)

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                     -------------------------
                                                      2001     2000     1999
                                                     -------  -------  -------
<S>                                                  <C>      <C>      <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income......................................... $30,401  $27,540  $21,636
 Adjustments to reconcile net income to net cash
  provided by operating activities:
  Amortization of goodwill..........................      28       28       27
  Equity in undistributed earnings of subsidiary....  (8,162) (29,982) (23,631)
  Change in operating assets and liabilities:
   Accrued interest receivable and other assets.....  (1,471)   2,392     (323)
   Accrued interest payable and other liabilities...      59      128     (314)
                                                     -------  -------  -------
      Net cash provided by (used in) operating
       activities...................................  20,855      106   (2,605)

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of CaminoReal Bancshares, Inc............. (51,813)      --       --
 Cash acquired with CaminoReal Bancshares, Inc......     115       --       --
 Purchase of Community Bancshares, Inc.............. (14,552)      --       --
 Cash acquired with Community Bancshares, Inc.......      90       --       --
 Capital contribution to Sterling Bancshares Capital
  Trust II..........................................    (889)      --       --
 Capital investment in subsidiary banks............. (10,750)      --       --
                                                     -------  -------  -------
      Net cash used in investing activities......... (77,799)      --       --

CASH FLOWS FROM FINANCING ACTIVITIES:
 Repayments of notes payable........................  (1,600)      --   (1,883)
 Additions to long term debt........................  20,000       --       --
 Proceeds from issuance of common stock.............   3,751    1,275    2,045
 Proceeds from issuance of preferred stock..........      --      385       31
 Redemption of common stock.........................      --       --       --
 Purchase of treasury stock.........................      --     (612)      --
 Payments of cash dividends.........................  (5,909)  (5,243)  (4,511)
 Issuance of company-obligated mandatorily
  redeemable trust preferred securities.............  29,639       --       --
                                                     -------  -------  -------
      Net cash provided by (used in) financing
       activities...................................  45,881   (4,195)  (4,318)
                                                     -------  -------  -------
NET DECREASE IN CASH ............................... (11,063)  (4,089)  (6,923)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ..................................  11,609   15,698   22,621
                                                     -------  -------  -------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........... $   546  $11,609  $15,698
                                                     =======  =======  =======
</TABLE>


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<PAGE>

                                                                      EXHIBIT 21

                   SUBSIDIARIES OF STERLING BANCSHARES, INC.

   The following is a list of the subsidiaries of Sterling Bancshares, Inc.:

<TABLE>
   <S>                                    <C>
   Sterling Bancorporation, Inc.          Sterling Bank
   A Delaware corporation                 A Texas state banking association
   PO Box 631                             15000 Northwest Freeway
   Wilmington, Delaware 19899             Houston, Texas 77040

   Sterling Bancshares Capital Trust I    Lone Star Bank
   A Delaware statutory business trust    A Texas state banking association
   15000 Northwest Freeway                12727 East Freeway
   Houston, Texas 77040                   Houston, Texas 77213

   Sterling Bancshares Capital Trust II   Community Bank
   A Delaware statutory business trust    A Texas state banking association
   15000 Northwest Freeway                20045 Katy Freeway
   Houston, Texas 77040                   Katy, Texas 77450

   Sterling Bancshares Capital Trust III
   A Delaware statutory business trust
   15000 Northwest Freeway
   Houston, Texas 77040

   CMCR Holding Company
   A Delaware corporation
   13100 Northwest Freeway
   Houston, Texas 77040
</TABLE>

   CMCR Holding Company is the parent company of Sterling Capital Mortgage
Company, an originator and servicer of one-to-four single family residential
mortgage loans. Sterling Capital Mortgage Company originates a significant
portion of its mortgage business through twenty-five subsidiary entities.


                                       70
<PAGE>

                                                                   EXHIBIT 23.1

                         INDEPENDENT AUDITORS' CONSENT

   We consent to the incorporation by reference in Registration Statement No.
333-46346 of Sterling Bancshares, Inc. on Form S-4 and in Registration
Statements Nos. 33-75444, 33-75442, 333-16719 and 333-57171 of Sterling
Bancshares, Inc. on Forms S-8 and in Registration Statement No. 333-55724 of
Sterling Bancshares, Inc. on Form S-3 of our report dated March 8, 2002,
appearing in this Annual Report on Form 10-K of Sterling Bancshares, Inc. for
the year ended December 31, 2001.

DELOITTE & TOUCHE LLP
Houston, Texas
March 8, 2002

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