##### Table of Contents









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K


|                                            |  |                                                                                             
|------------------------------------------- |  | --------------------------------------------------------------------------------------------
|(Mark One)                                  |  |                                                                                             
|þ                                           |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|                                           
|For the fiscal year ended December 31, 2004
|                                           
|OR                                         
|                                           
|o                                           |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934






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:






þ o


o


þ o






Documents incorporated by
reference:










---










STERLING BANCSHARES, INC.


2004 ANNUAL REPORT ON FORM 10-K


TABLE OF CONTENTS


|                                                         |  |                                                                                                                      |    |      |    | 
|-------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                         |  |                                                                                                                      |    | Page |   
|                                                         |  |                                                                                                                      |    |      |   
|PART I                                                  
|ITEM 1.                                                  |  | BUSINESS                                                                                                             |    |      | 2  | 
|                                                         |  | Overview                                                                                                             |    |      | 2  | 
|                                                         |  | Commercial Banking                                                                                                   |    |      | 2  | 
|                                                         |  | Company Growth Strategy                                                                                              |    |      | 3  | 
|                                                         |  | Competition                                                                                                          |    |      | 4  | 
|                                                         |  | Supervision and Regulation                                                                                           |    |      | 5  | 
|                                                         |  | Sterling Bancshares                                                                                                  |    |      | 5  | 
|                                                         |  | Sterling Bank                                                                                                        |    |      | 8  | 
|ITEM 2.                                                  |  | PROPERTIES                                                                                                           |    |      | 12 | 
|ITEM 3.                                                  |  | LEGAL PROCEEDINGS                                                                                                    |    |      | 13 | 
|ITEM 4.                                                  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS                                                              |    |      | 13 | 
|PART II                                                 
|ITEM 5.                                                  |  | MARKET FOR REGISTRANTS COMMON EQUITY,
    RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES |    |      | 13 | 
|ITEM 6.                                                  |  | SELECTED CONSOLIDATED FINANCIAL DATA                                                                                 |    |      | 14 | 
|ITEM 7.                                                  |  | MANAGEMENTS DISCUSSION AND ANALYSIS
    OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                            |    |      | 15 | 
|ITEM 7A.                                                 |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES
    ABOUT MARKET RISK                                                       |    |      | 41 | 
|ITEM 8.                                                  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                          |    |      | 41 | 
|ITEM 9.                                                  |  | CHANGES IN AND DISAGREEMENTS WITH
    ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                             |    |      | 41 | 
|ITEM 9A.                                                 |  | CONTROLS AND PROCEDURES                                                                                              |    |      | 41 | 
|ITEM 9B.                                                 |  | OTHER INFORMATION                                                                                                    |    |      | 44 | 
|PART III                                                
|ITEM 10.                                                 |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT                                                               |    |      | 45 | 
|ITEM 11.                                                 |  | EXECUTIVE COMPENSATION                                                                                               |    |      | 45 | 
|ITEM 12.                                                 |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT                                                   |    |      | 45 | 
|ITEM 13.                                                 |  | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS                                                                   |    |      | 45 | 
|ITEM 14.                                                 |  | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                               |    |      | 46 | 
|PART IV                                                 
|ITEM 15.                                                 |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                           |    |      | 46 | 
|SIGNATURES                                               |  |                                                                                                                      | 50 |     
|EXHIBIT TABLE                                            |  |                                                                                                                      | 89 |     
|Short Term Incentive Program for Shared Services        
|Short Term Incentive Program for Bank Offices           
|Subsidiaries of the Company                             
|Consent of Deloitte & Touche LLP                        
|Certification of President & CEO Pursuant to Section 302
|Certification of VP & CFO Pursuant to Section 302       
|Certification Pursuant to Section 906                   
|Certification Pursuant to Section 906                   



1



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PART I







|        |         
|------- | --------
|ITEM 1. | BUSINESS

The disclosures in this item are qualified by the section
entitled Forward-Looking Statements in
Managements Discussion and Analysis of Financial Condition
and Results of Operations included in Item 7 of this
report.





OVERVIEW



















Commercial Banking




2



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Business Banking Strategy.











Company Growth Strategy




3



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De Novo Offices.




Mergers and Acquisitions.


|                                     |  |                    |  |                  |             |  |                  |   |             |                   |  |   |             | 
|------------------------------------ |  | ------------------ |  | ---------------- | ----------- |  | ---------------- | - | ----------- | ----------------- |  | - | ----------- | 
|                                     |  |                    |  | Total Assets at  |             |  | Total Loans at   |   |             | Total Deposits at | 
|Acquired Entity                      |  | Acquisition Date   |  | Acquisition Date |             |  | Acquisition Date |   |             | Acquisition Date  | 
|                                     |  |                    |  |                  |             |  |                  |   |             |                   | 
|South Texas Capital Group, Inc.      |  | October 31, 2003   |  | $                | 83 million  |  |                  | $ | 65 million  |                   |  | $ | 68 million  | 
|ENB Bankshares, Inc.                 |  | September 13, 2002 |  |                  | 71 million  |  |                  |   | 64 million  |                   |  |   | 58 million  | 
|Community Bancshares, Inc.           |  | December 17, 2001  |  |                  | 118 million |  |                  |   | 80 million  |                   |  |   | 115 million | 
|Lone Star Bancorporation, Inc.(1)    |  | August 23, 2001    |  |                  | 165 million |  |                  |   | 126 million |                   |  |   | 153 million | 
|CaminoReal Bancshares of Texas, Inc. |  | March 22, 2001     |  |                  | 284 million |  |                  |   | 146 million |                   |  |   | 248 million | 






|    |                                                     
|--- | ----------------------------------------------------
|(1) | Accounted for using the pooling-of-interests method.



Strategic Divestitures of Banking Offices.







Competition






4



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SUPERVISION AND REGULATION







Sterling Bancshares




Permissible Activities.


Non-Banking Activities.


Gramm-Leach-Bliley.




USA PATRIOT Act.


5



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Safety and Soundness Standards.




Dividend Restrictions.




Capital Adequacy Requirements.




6



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Imposition of Liability for Undercapitalized Subsidiaries.


Acquisitions by Bank Holding Companies.


Community Reinvestment Act.


Interstate Banking.


7



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Sarbanes-Oxley Act of 2002.










| |   |                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | audit committees for all listed companies;                                                                                                                                                                                                                                                                                                             
|
| |  | certification of financial statements by the chief executive
    officer and the chief financial officer;                                                                                                                                                                                                                                              
|
| |  | the forfeiture of bonuses or other incentive-based compensation
    and profits from the sale of an issuers securities by
    directors and senior officers in the twelve month period
    following initial publication of any financial statements that
    later require restatement due to material noncompliance of the
    issuer or misconduct;
|
| |  | a prohibition on insider trading during pension plan black-out
    periods;                                                                                                                                                                                                                                                                            
|
| |  | disclosure of off-balance sheet transactions;                                                                                                                                                                                                                                                                                                          
|
| |  | a prohibition on personal loans to directors and officers except
    for financial institutions;                                                                                                                                                                                                                                                       
|
| |  | expedited filing requirements for Form 4s;                                                                                                                                                                                                                                                                                                            
|
| |  | disclosure of a code of ethics, if applicable, and filing a
    Form 8-K for a change or waiver of such code;                                                                                                                                                                                                                                          
|
| |  | accelerated filing of periodic reports;                                                                                                                                                                                                                                                                                                                
|
| |  | the formation of a public accounting oversight board;                                                                                                                                                                                                                                                                                                  
|
| |  | auditor independence; and                                                                                                                                                                                                                                                                                                                              
|
| |  | increased criminal penalties for violations of securities laws.                                                                                                                                                                                                                                                                                        




Sterling Bank




8



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Permissible Activities for State-Chartered Institutions.


Branching.


Restrictions on Transactions with Affiliates and Insiders.






Capital Adequacy Requirements.






9



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Corrective Measures for Capital Deficiencies.










Brokered Deposit Restrictions.


Restrictions on Subsidiary Banks.




Examinations.


10



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Audit Reports.


Deposit Insurance Assessments.




Expanding Enforcement Authority.


Effect on Economic Environment.




11



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Consumer Laws and Regulations.


Employees




Available Information











|        |           
|------- | ----------
|ITEM 2. | PROPERTIES



|                                                     |       |       |    |    |        |  |    |       |  |  |    |    | 
|---------------------------------------------------- | ----- | ----- | -- | -- | ------ |  | -- | ----- |  |  | -- | -- | 
|                                                     |       | Owned |    |    | Leased |  |    | Total | 
|                                                     |       |       |    |    |        |  |    |       | 
|Banking offices in the Houston metropolitan area     |       |       | 14 |    |        |  | 11 |       |  |  | 25 |   
|Banking offices in the San Antonio metropolitan area |       |       | 4  |    |        |  | 4  |       |  |  | 8  |   
|Banking offices in the Dallas metropolitan area      |       |       |   |    |        |  | 3  |       |  |  | 3  |   
|Loan production office                               |       |       |   |    |        |  | 1  |       |  |  | 1  |   
|Central department offices                           |       |       | 1  |    |        |  | 2  |       |  |  | 3  |   
|                                                     |       |       |    |    |        |  |    |       | 
|                                                     | Total |       |    | 19 |        |  |    | 21    |  |  |    | 40 | 
|                                                     |       |       |    |    |        |  |    |       | 



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|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS








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






PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
    SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES

COMMON STOCK MARKET PRICES AND DIVIDENDS




|     |                |             |   |       |     |  |   |          |  |  |   |       | 
|---- | -------------- | ----------- | - | ----- | --- |  | - | -------- |  |  | - | ----- | 
|     |                | Sales Price |   |       |    
|     |                | Per Share   |   |       |    
|     |                |             |   |       |    
|     |                | High        |   |       | Low |  |   | Dividend | 
|     |                |             |   |       |     |  |   |          | 
|2004 |                |             |   |       |     |  |   |          |  |  |   |      
|     | First quarter  |             | $ | 14.22 |     |  | $ | 11.92    |  |  | $ | 0.050 | 
|     | Second quarter |             |   | 14.19 |     |  |   | 12.17    |  |  |   | 0.050 | 
|     | Third quarter  |             |   | 14.00 |     |  |   | 12.30    |  |  |   | 0.050 | 
|     | Fourth quarter |             |   | 15.00 |     |  |   | 13.02    |  |  |   | 0.050 | 
|2003 |                |             |   |       |     |  |   |          |  |  |   |      
|     | First quarter  |             | $ | 12.89 |     |  | $ | 11.44    |  |  | $ | 0.045 | 
|     | Second quarter |             |   | 13.14 |     |  |   | 11.28    |  |  |   | 0.045 | 
|     | Third quarter  |             |   | 14.00 |     |  |   | 11.30    |  |  |   | 0.045 | 
|     | Fourth quarter |             |   | 13.73 |     |  |   | 11.12    |  |  |   | 0.045 | 







RECENT SALES OF UNREGISTERED SECURITIES




13



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|        |                                     
|------- | ------------------------------------
|ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA





|                                                      |         |                                                                 |           |      |  |      |           |      |  |      |           |      |  |   |           |      |  |   |           |      | 
|----------------------------------------------------- | ------- | --------------------------------------------------------------- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- | ---- |  | - | --------- | ---- |  | - | --------- | ---- | 
|                                                      |         | Year Ended December 31,                                        
|                                                      |         |                                                                
|                                                      |         | 2004                                                            |           | 2003 |  | 2002 |           | 2001 |  | 2000
|                                                      |         |                                                                 |           |      |  |      |           |      |  |     
|                                                      |         | (Dollars and shares in thousands, except for per share amounts)
|INCOME STATEMENT DATA:                                |         |                                                                 |           |      |  |      |           |      |  |      |           |      |  |   |           |      |  |   |           |     
|Net interest income                                   |         | $                                                               | 135,384   |      |  | $    | 138,235   |      |  | $    | 140,998   |      |  | $ | 117,690   |      |  | $ | 100,951   |     
|Provision for credit losses                           |         |                                                                 | 12,250    |      |  |      | 17,698    |      |  |      | 11,700    |      |  |   | 11,684    |      |  |   | 9,668     |     
|Noninterest income                                    |         |                                                                 | 30,922    |      |  |      | 33,270    |      |  |      | 29,792    |      |  |   | 24,791    |      |  |   | 19,926    |     
|Noninterest expense                                   |         |                                                                 | 119,609   |      |  |      | 111,416   |      |  |      | 110,190   |      |  |   | 99,359    |      |  |   | 76,115    |     
|Income from continuing operations before income taxes |         |                                                                 | 34,447    |      |  |      | 42,391    |      |  |      | 48,900    |      |  |   | 31,438    |      |  |   | 35,094    |     
|Income from continuing operations                     |         |                                                                 | 24,963    |      |  |      | 28,354    |      |  |      | 33,183    |      |  |   | 21,308    |      |  |   | 24,534    |     
|Income from discontinued operations                   |         |                                                                 |          |      |  |      | 20,756    |      |  |      | 3,368     |      |  |   | 9,093     |      |  |   | 3,006     |     
|Net income                                            |         |                                                                 | 24,963    |      |  |      | 49,110    |      |  |      | 36,551    |      |  |   | 30,401    |      |  |   | 27,540    |     
|BALANCE SHEET DATA(at period-end):                    |         |                                                                 |           |      |  |      |           |      |  |      |           |      |  |   |           |      |  |   |           |     
|Total assets                                          |         | $                                                               | 3,336,070 |      |  | $    | 3,206,880 |      |  | $    | 3,585,220 |      |  | $ | 2,779,868 |      |  | $ | 2,078,103 |     
|Total loans                                           |         |                                                                 | 2,344,977 |      |  |      | 2,157,039 |      |  |      | 2,644,862 |      |  |   | 1,928,293 |      |  |   | 1,484,990 |     
|Allowance for credit losses                           |         |                                                                 | 30,232    |      |  |      | 30,722    |      |  |      | 27,248    |      |  |   | 22,927    |      |  |   | 16,862    |     
|Total securities                                      |         |                                                                 | 658,118   |      |  |      | 565,093   |      |  |      | 313,054   |      |  |   | 329,416   |      |  |   | 295,392   |     
|Trading assets                                        |         |                                                                 | 36,720    |      |  |      | 172,825   |      |  |      | 142,803   |      |  |   | 118,511   |      |  |   |          |     
|Total deposits                                        |         |                                                                 | 2,443,967 |      |  |      | 2,418,369 |      |  |      | 2,673,072 |      |  |   | 2,268,980 |      |  |   | 1,718,822 |     
|Short-term borrowings                                 |         |                                                                 | 420,575   |      |  |      | 324,160   |      |  |      | 509,590   |      |  |   | 180,298   |      |  |   | 140,364   |     
|Notes payable                                         |         |                                                                 |          |      |  |      |          |      |  |      | 21,430    |      |  |   | 20,879    |      |  |   | 1,600     |     
|Subordinated debt                                     |         |                                                                 | 47,162    |      |  |      | 46,533    |      |  |      |          |      |  |   |          |      |  |   |          |     
|Junior subordinated debt                              |         |                                                                 | 82,475    |      |  |      | 82,475    |      |  |      | 82,475    |      |  |   | 59,278    |      |  |   | 29,639    |     
|Shareholders equity                                  |         |                                                                 | 313,172   |      |  |      | 292,596   |      |  |      | 249,327   |      |  |   | 217,369   |      |  |   | 166,825   |     
|COMMON SHARE DATA:                                    |         |                                                                 |           |      |  |      |           |      |  |      |           |      |  |   |           |      |  |   |           |     
|Earnings per share from continuing operations(1)      |         |                                                                 |           |      |  |      |           |      |  |      |           |      |  |   |           |      |  |   |           |     
|                                                      | Basic   |                                                                 | $         | 0.56 |  |      | $         | 0.64 |  |      | $         | 0.76 |  |   | $         | 0.51 |  |   | $         | 0.59 | 
|                                                      | Diluted |                                                                 |           | 0.55 |  |      |           | 0.64 |  |      |           | 0.74 |  |   |           | 0.50 |  |   |           | 0.58 | 
|Earnings per share from discontinued operations(1)    |         |                                                                 |           |      |  |      |           |      |  |      |           |      |  |   |           |      |  |   |           |     
|                                                      | Basic   |                                                                 |           |     |  |      |           | 0.47 |  |      |           | 0.08 |  |   |           | 0.22 |  |   |           | 0.07 | 
|                                                      | Diluted |                                                                 |           |     |  |      |           | 0.46 |  |      |           | 0.08 |  |   |           | 0.21 |  |   |           | 0.07 | 
|Earnings per share(1)                                 |         |                                                                 |           |      |  |      |           |      |  |      |           |      |  |   |           |      |  |   |           |     
|                                                      | Basic   |                                                                 |           | 0.56 |  |      |           | 1.11 |  |      |           | 0.83 |  |   |           | 0.72 |  |   |           | 0.66 | 
|                                                      | Diluted |                                                                 |           | 0.55 |  |      |           | 1.10 |  |      |           | 0.82 |  |   |           | 0.71 |  |   |           | 0.65 | 

14



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|                                                                   |            |                                                                 |        |        |      |  |        |        |   |  |        |        |   |      |        |        |   |  |        |        |  
|------------------------------------------------------------------ | ---------- | --------------------------------------------------------------- | ------ | ------ | ---- |  | ------ | ------ | - |  | ------ | ------ | - | ---- | ------ | ------ | - |  | ------ | ------ | -
|                                                                   |            | Year Ended December 31,                                         |       
|                                                                   |            |                                                                 |       
|                                                                   |            | 2004                                                            |        |        | 2003 |  |        | 2002   |   |  | 2001   |        |   | 2000 |       
|                                                                   |            |                                                                 |        |        |      |  |        |        |   |  |        |        |   |      |       
|                                                                   |            | (Dollars and shares in thousands, except for per share amounts) |       
|Shares used in computing earnings per common share                 |            |                                                                 |        |        |      |  |        |        |   |  |        |        |   |      |        |        |   |  |        |       
|                                                                   | Basic      |                                                                 |        | 44,839 |      |  |        | 44,180 |   |  |        | 43,872 |   |      |        | 42,180 |   |  |        | 41,596 |  
|                                                                   | Diluted    |                                                                 |        | 45,278 |      |  |        | 44,648 |   |  |        | 44,756 |   |      |        | 43,044 |   |  |        | 42,212 |  
|End of period common shares outstanding                            |            |                                                                 | 45,068 |        |      |  | 44,642 |        |   |  | 43,983 |        |   |      | 43,770 |        |   |  | 41,728 |       
|Book value per common share at period-end                          |            |                                                                 |        |        |      |  |        |        |   |  |        |        |   |      |        |        |   |  |        |       
|                                                                   | Total      |                                                                 |        | 6.95   |      |  |        | 6.55   |   |  |        | 5.65   |   |      |        | 4.96   |   |  |        | 3.98   |  
|                                                                   | Tangible   |                                                                 |        | 5.52   |      |  |        | 5.09   |   |  |        | 4.34   |   |      |        | 3.77   |   |  |        | 3.96   |  
|Cash dividends paid per common share                               |            |                                                                 | 0.20   |        |      |  | 0.18   |        |   |  | 0.16   |        |   |      | 0.15   |        |   |  | 0.13   |       
|Common Stock dividend payout ratio                                 |            |                                                                 | 35.91  | %      |      |  | 16.19  | %      |   |  | 19.21  | %      |   |      | 19.41  | %      |   |  | 18.99  | %     
|SELECTED PERFORMANCE RATIOS AND OTHER DATA:                        |            |                                                                 |        |        |      |  |        |        |   |  |        |        |   |      |        |        |   |  |        |       
|Return on average common equity                                    |            |                                                                 |        |        |      |  |        |        |   |  |        |        |   |      |        |        |   |  |        |       
|                                                                   | Total      |                                                                 |        | 8.23   | %    |  |        | 18.18  | % |  |        | 15.48  | % |      |        | 16.62  | % |  |        | 17.94  | %
|                                                                   | Continuing |                                                                 |        | 8.23   | %    |  |        | 10.50  | % |  |        | 14.06  | % |      |        | 11.65  | % |  |        | 15.98  | %
|Return on average assets                                           |            |                                                                 |        |        |      |  |        |        |   |  |        |        |   |      |        |        |   |  |        |       
|                                                                   | Total      |                                                                 |        | 0.78   | %    |  |        | 1.48   | % |  |        | 1.21   | % |      |        | 1.24   | % |  |        | 1.32   | %
|                                                                   | Continuing |                                                                 |        | 0.78   | %    |  |        | 0.86   | % |  |        | 1.10   | % |      |        | 0.87   | % |  |        | 1.17   | %
|Net interest margin                                                |            |                                                                 | 4.65   | %      |      |  | 4.68   | %      |   |  | 5.32   | %      |   |      | 5.46   | %      |   |  | 5.39   | %     
|Efficiency ratio                                                   |            |                                                                 | 71.92  | %      |      |  | 64.96  | %      |   |  | 64.52  | %      |   |      | 69.73  | %      |   |  | 62.97  | %     
|Full-time equivalent employees                                     |            |                                                                 | 961    |        |      |  | 1,036  |        |   |  | 1,065  |        |   |      | 1,014  |        |   |  | 743    |       
|Number of banking offices                                          |            |                                                                 | 36     |        |      |  | 37     |        |   |  | 40     |        |   |      | 38     |        |   |  | 24     |       
|LIQUIDITY AND CAPITAL RATIOS:                                      |            |                                                                 |        |        |      |  |        |        |   |  |        |        |   |      |        |        |   |  |        |       
|Average loans to average deposits                                  |            |                                                                 | 89.32  | %      |      |  | 99.91  | %      |   |  | 92.74  | %      |   |      | 84.28  | %      |   |  | 83.34  | %     
|Period-end shareholders equity to total assets                    |            |                                                                 | 9.39   | %      |      |  | 9.12   | %      |   |  | 6.95   | %      |   |      | 7.82   | %      |   |  | 8.03   | %     
|Average shareholders equity to average assets                     |            |                                                                 | 9.52   | %      |      |  | 8.16   | %      |   |  | 7.83   | %      |   |      | 7.49   | %      |   |  | 7.40   | %     
|Period-end tangible capital to total tangible assets               |            |                                                                 | 7.61   | %      |      |  | 7.24   | %      |   |  | 6.04   | %      |   |      | 8.52   | %      |   |  | 7.98   | %     
|Tier 1 capital to risk weighted assets                             |            |                                                                 | 11.78  | %      |      |  | 12.30  | %      |   |  | 8.41   | %      |   |      | 9.64   | %      |   |  | 10.51  | %     
|Total capital to risk weighted assets                              |            |                                                                 | 14.55  | %      |      |  | 15.40  | %      |   |  | 9.29   | %      |   |      | 10.66  | %      |   |  | 11.26  | %     
|Tier 1 leverage ratio (Tier 1 capital to total average
    assets) |            |                                                                 | 10.15  | %      |      |  | 10.38  | %      |   |  | 7.81   | %      |   |      | 8.40   | %      |   |  | 9.10   | %     
|ASSET QUALITY RATIOS:                                              |            |                                                                 |        |        |      |  |        |        |   |  |        |        |   |      |        |        |   |  |        |       
|Period-end allowance for credit losses to period-end loans         |            |                                                                 | 1.29   | %      |      |  | 1.42   | %      |   |  | 1.03   | %      |   |      | 1.19   | %      |   |  | 1.14   | %     
|Net charge-offs to average loans                                   |            |                                                                 | 0.58   | %      |      |  | 0.60   | %      |   |  | 0.37   | %      |   |      | 0.49   | %      |   |  | 0.51   | %     
|Period-end allowance for credit losses to nonperforming loans      |            |                                                                 | 146.72 | %      |      |  | 90.66  | %      |   |  | 138.64 | %      |   |      | 161.51 | %      |   |  | 175.74 | %     
|Nonperforming assets to period-end loans and foreclosed assets     |            |                                                                 | 0.95   | %      |      |  | 1.68   | %      |   |  | 0.87   | %      |   |      | 0.85   | %      |   |  | 0.77   | %     
|Nonperforming loans to period-end loans                            |            |                                                                 | 0.88   | %      |      |  | 1.57   | %      |   |  | 0.74   | %      |   |      | 0.74   | %      |   |  | 0.65   | %     
|Nonperforming assets to period-end assets                          |            |                                                                 | 0.67   | %      |      |  | 1.13   | %      |   |  | 0.64   | %      |   |      | 0.58   | %      |   |  | 0.55   | %     






|    |                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The calculation of diluted earning per share excludes 218,895,
    620,431, 267,458, 295,616 and 278,553 shares issuable upon
    options for year 2004, 2003, 2002, 2001 and 2000, respectively,
    which were antidilutive.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS




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| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 and the interest rate sensitivity of our balance
    sheet;                                                           
|
| |  | our liquidity requirements could be adversely affected by
    changes in our assets and liabilities;                                                                                                                                                           
|
| |  | the effect of legislative or regulatory developments including
    changes in laws concerning taxes, banking, securities, insurance
    and other aspects of the financial securities industry;                                                                
|
| |  | competitive factors among financial services organizations,
    including product and pricing pressures and our ability to
    attract, develop and retain qualified banking professionals;                                                                    
|
| |  | the effect of changes in accounting policies and practices, as
    may be adopted by the Financial Accounting Standards Board, the
    Securities and Exchange Commission, the Public Company
    Accounting Oversight Board and other regulatory agencies; and
|
| |  | the effect of fiscal and governmental policies of the United
    States federal government.                                                                                                                                                                    



OVERVIEW










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| |   |                                
| | - | -------------------------------
| |  | Sale of SCMC                   
|
| |  | Divestitures of banking offices
|
| |  | Acquisition of Plaza Bank      







CRITICAL ACCOUNTING POLICIES




Allowance for credit losses


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Stock-based Compensation 




RESULTS OF OPERATIONS


Performance Summary








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Net Interest Income














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|                                   |                               |                         |         |           |          |   |        |         |         |         |         |       |  |          |         |           |      |         |        |         |  |  |          |      |   |      |         |           |  |   |        |         |  |  |       |       | 
|---------------------------------- | ----------------------------- | ----------------------- | ------- | --------- | -------- | - | ------ | ------- | ------- | ------- | ------- | ----- |  | -------- | ------- | --------- | ---- | ------- | ------ | ------- |  |  | -------- | ---- | - | ---- | ------- | --------- |  | - | ------ | ------- |  |  | ----- | ----- | 
|                                   |                               | Year Ended December 31, |        
|                                   |                               |                         |        
|                                   |                               | 2004                    |         |           | 2003     |   |        | 2002    |        
|                                   |                               |                         |         |           |          |   |        |         |        
|                                   |                               |                         |         | Average   |          |   |        |         | Average |         |         |       |  | Average  |        
|                                   |                               | Average                 |         |           |          |   | Yield/ |         |         | Average |         |       |  |          | Yield/  |           |      | Average |        |         |  |  | Yield/   |     
|                                   |                               | Balance                 |         |           | Interest |   |        | Rate    |         |         | Balance |       |  | Interest |         |           | Rate |         |        | Balance |  |  | Interest |      |   | Rate |        
|                                   |                               |                         |         |           |          |   |        |         |         |         |         |       |  |          |         |           |      |         |        |         |  |  |          |      |   |      |        
|Interest-earning assets:           |                               |                         |         |           |          |   |        |         |         |         |         |       |  |          |         |           |      |         |        |         |  |  |          |      |   |      |         |           |  |   |        |         |  |  |       |      
|Loans held for sale(1)             |                               | $                       | 10,340  |           |          | $ | 727    |         |         |         | 7.03%   |       |  | $        | 441,377 |           |      | $       | 23,965 |         |  |  | 5.43     | %    |   | $    | 407,055 |           |  | $ | 27,660 |         |  |  | 6.80% |      
|Loans held for investment(1):      |                               |                         |         |           |          |   |        |         |         |         |         |       |  |          |         |           |      |         |        |         |  |  |          |      |   |      |         |           |  |   |        |         |  |  |       |      
|                                   | Taxable                       |                         |         | 2,176,445 |          |   |        | 137,039 |         |         |         | 6.30% |  |          |         | 2,019,903 |      |         |        | 130,102 |  |  |          | 6.44 | % |      |         | 1,785,490 |  |   |        | 128,935 |  |  |       | 7.22% | 
|                                   | Non-taxable                   |                         |         | 4,021     |          |   |        | 257     |         |         |         | 6.39% |  |          |         | 4,558     |      |         |        | 291     |  |  |          | 6.38 | % |      |         | 5,330     |  |   |        | 307     |  |  |       | 5.76% | 
|Securities:                        |                               |                         |         |           |          |   |        |         |         |         |         |       |  |          |         |           |      |         |        |         |  |  |          |      |   |      |         |           |  |   |        |         |  |  |       |      
|                                   | Taxable                       |                         |         | 536,793   |          |   |        | 21,307  |         |         |         | 3.97% |  |          |         | 293,198   |      |         |        | 10,947  |  |  |          | 3.73 | % |      |         | 242,004   |  |   |        | 13,957  |  |  |       | 5.77% | 
|                                   | Non-taxable                   |                         |         | 48,791    |          |   |        | 2,042   |         |         |         | 4.19% |  |          |         | 51,560    |      |         |        | 2,266   |  |  |          | 4.39 | % |      |         | 66,509    |  |   |        | 2,890   |  |  |       | 4.35% | 
|Trading assets                     |                               |                         | 124,272 |           |          |   | 4,569  |         |         |         | 3.68%   |       |  |          | 125,722 |           |      |         | 3,567  |         |  |  | 2.84     | %    |   |      | 114,752 |           |  |   | 4,540  |         |  |  | 3.96% |      
|Federal funds sold                 |                               |                         | 8,728   |           |          |   | 101    |         |         |         | 1.16%   |       |  |          | 17,763  |           |      |         | 176    |         |  |  | 0.99     | %    |   |      | 25,326  |           |  |   | 463    |         |  |  | 1.83% |      
|Deposits in financial institutions |                               |                         | 1,672   |           |          |   | 55     |         |         |         | 3.28%   |       |  |          | 1,392   |           |      |         | 69     |         |  |  | 4.96     | %    |   |      | 1,960   |           |  |   | 106    |         |  |  | 5.41% |      
|                                   |                               |                         |         |           |          |   |        |         |         |         |         |       |  |          |         |           |      |         |        |         |  |  |          |      |   |      |        
|                                   | Total interest-earning assets |                         |         | 2,911,062 |          |   |        | 166,097 |         |         |         | 5.71% |  |          |         | 2,955,473 |      |         |        | 171,383 |  |  |          | 5.80 | % |      |         | 2,648,426 |  |   |        | 178,858 |  |  |       | 6.75% | 

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|                                               |                                            |                         |         |           |          |   |         |        |         |         |         |       |  |          |         |           |      |         |         |         |  |  |          |      |   |      |         |           |  |   |         |        |  |  |       |       | 
|---------------------------------------------- | ------------------------------------------ | ----------------------- | ------- | --------- | -------- | - | ------- | ------ | ------- | ------- | ------- | ----- |  | -------- | ------- | --------- | ---- | ------- | ------- | ------- |  |  | -------- | ---- | - | ---- | ------- | --------- |  | - | ------- | ------ |  |  | ----- | ----- | 
|                                               |                                            | Year Ended December 31, |        
|                                               |                                            |                         |        
|                                               |                                            | 2004                    |         |           | 2003     |   |         | 2002   |        
|                                               |                                            |                         |         |           |          |   |         |        |        
|                                               |                                            |                         |         | Average   |          |   |         |        | Average |         |         |       |  | Average  |        
|                                               |                                            | Average                 |         |           |          |   | Yield/  |        |         | Average |         |       |  |          | Yield/  |           |      | Average |         |         |  |  | Yield/   |     
|                                               |                                            | Balance                 |         |           | Interest |   |         | Rate   |         |         | Balance |       |  | Interest |         |           | Rate |         |         | Balance |  |  | Interest |      |   | Rate |        
|                                               |                                            |                         |         |           |          |   |         |        |         |         |         |       |  |          |         |           |      |         |         |         |  |  |          |      |   |      |        
|Noninterest earning assets:                    |                                            |                         |         |           |          |   |         |        |         |         |         |       |  |          |         |           |      |         |         |         |  |  |          |      |   |      |         |           |  |   |         |        |  |  |       |      
|Cash and due from banks                        |                                            |                         | 100,292 |           |          |   |         |        |         |         |         |       |  |          | 99,902  |           |      |         |         |         |  |  |          |      |   |      | 97,404  |           |  |   |         |        |  |  |       |      
|Premises and equipment, net                    |                                            |                         | 45,284  |           |          |   |         |        |         |         |         |       |  |          | 48,163  |           |      |         |         |         |  |  |          |      |   |      | 51,879  |           |  |   |         |        |  |  |       |      
|Other assets                                   |                                            |                         | 162,289 |           |          |   |         |        |         |         |         |       |  |          | 204,690 |           |      |         |         |         |  |  |          |      |   |      | 205,660 |           |  |   |         |        |  |  |       |      
|Allowance for credit losses                    |                                            |                         | (28,879 | )         |          |   |         |        |         |         |         |       |  |          | (30,584 | )         |      |         |         |         |  |  |          |      |   |      | (25,056 | )         |  |   |         |        |  |  |       |      
|Assets related to discontinued operations      |                                            |                         |        |           |          |   |         |        |         |         |         |       |  |          | 35,636  |           |      |         |         |         |  |  |          |      |   |      | 44,315  |           |  |   |         |        |  |  |       |      
|                                               |                                            |                         |         |           |          |   |         |        |         |         |         |       |  |          |         |           |      |         |         |         |  |  |          |      |   |      |        
|                                               | Total noninterest earning assets           |                         |         | 278,986   |          |   |         |        |         |         |         |       |  |          |         | 357,807   |      |         |         |         |  |  |          |      |   |      |         | 374,202   |  |   |         |        |  |  |       |       | 
|                                               |                                            |                         |         |           |          |   |         |        |         |         |         |       |  |          |         |           |      |         |         |         |  |  |          |      |   |      |        
|                                               | Total assets                               |                         | $       | 3,190,048 |          |   |         |        |         |         |         |       |  |          | $       | 3,313,280 |      |         |         |         |  |  |          |      |   |      | $       | 3,022,628 |  |   |         |        |  |  |       |       | 
|                                               |                                            |                         |         |           |          |   |         |        |         |         |         |       |  |          |         |           |      |         |         |         |  |  |          |      |   |      |        
|Interest-bearing liabilities:                  |                                            |                         |         |           |          |   |         |        |         |         |         |       |  |          |         |           |      |         |         |         |  |  |          |      |   |      |         |           |  |   |         |        |  |  |       |      
|Deposits:                                      |                                            |                         |         |           |          |   |         |        |         |         |         |       |  |          |         |           |      |         |         |         |  |  |          |      |   |      |         |           |  |   |         |        |  |  |       |      
|                                               | Demand and savings                         |                         | $       | 961,059   |          |   | $       | 4,785  |         |         |         | 0.50% |  |          | $       | 898,377   |      |         | $       | 4,752   |  |  |          | 0.53 | % |      | $       | 887,544   |  |   | $       | 8,541  |  |  |       | 0.96% | 
|                                               | Certificates and other time                |                         |         | 655,488   |          |   |         | 12,694 |         |         |         | 1.94% |  |          |         | 664,923   |      |         |         | 14,608  |  |  |          | 2.20 | % |      |         | 638,048   |  |   |         | 17,479 |  |  |       | 2.74% | 
|Short-term borrowings                          |                                            |                         | 275,045 |           |          |   | 4,163   |        |         |         | 1.51%   |       |  |          | 392,548 |           |      |         | 4,921   |         |  |  | 1.25     | %    |   |      | 284,965 |           |  |   | 4,946   |        |  |  | 1.74% |      
|Notes payable                                  |                                            |                         |        |           |          |   |        |        |         |         |        |       |  |          | 18,667  |           |      |         | 585     |         |  |  | 3.13     | %    |   |      | 20,985  |           |  |   | 797     |        |  |  | 3.80% |      
|Subordinated debt                              |                                            |                         | 46,647  |           |          |   | 2,640   |        |         |         | 5.66%   |       |  |          | 34,649  |           |      |         | 1,903   |         |  |  | 5.49     | %    |   |      |        |           |  |   |        |        |  |  |      |      
|Junior subordinated debt                       |                                            |                         | 82,475  |           |          |   | 6,431   |        |         |         | 7.80%   |       |  |          | 82,475  |           |      |         | 6,379   |         |  |  | 7.73     | %    |   |      | 70,087  |           |  |   | 6,097   |        |  |  | 8.70% |      
|                                               |                                            |                         |         |           |          |   |         |        |         |         |         |       |  |          |         |           |      |         |         |         |  |  |          |      |   |      |        
|                                               | Total interest-bearing liabilities         |                         |         | 2,020,714 |          |   |         | 30,713 |         |         |         | 1.52% |  |          |         | 2,091,639 |      |         |         | 33,148  |  |  |          | 1.58 | % |      |         | 1,901,629 |  |   |         | 37,860 |  |  |       | 1.99% | 
|Noninterest-bearing liabilities:               |                                            |                         |         |           |          |   |         |        |         |         |         |       |  |          |         |           |      |         |         |         |  |  |          |      |   |      |         |           |  |   |         |        |  |  |       |      
|Demand deposits                                |                                            |                         | 836,258 |           |          |   |         |        |         |         |         |       |  |          | 904,711 |           |      |         |         |         |  |  |          |      |   |      | 844,401 |           |  |   |         |        |  |  |       |      
|Other liabilities                              |                                            |                         | 29,452  |           |          |   |         |        |         |         |         |       |  |          | 21,167  |           |      |         |         |         |  |  |          |      |   |      | 15,355  |           |  |   |         |        |  |  |       |      
|Liabilities related to discontinued operations |                                            |                         |        |           |          |   |         |        |         |         |         |       |  |          | 25,342  |           |      |         |         |         |  |  |          |      |   |      | 24,574  |           |  |   |         |        |  |  |       |      
|                                               |                                            |                         |         |           |          |   |         |        |         |         |         |       |  |          |         |           |      |         |         |         |  |  |          |      |   |      |        
|                                               | Total noninterest-bearing liabilities      |                         |         | 865,710   |          |   |         |        |         |         |         |       |  |          |         | 951,220   |      |         |         |         |  |  |          |      |   |      |         | 884,330   |  |   |         |        |  |  |       |       | 
|Shareholders equity                           |                                            |                         | 303,624 |           |          |   |         |        |         |         |         |       |  |          | 270,421 |           |      |         |         |         |  |  |          |      |   |      | 236,669 |           |  |   |         |        |  |  |       |      
|                                               |                                            |                         |         |           |          |   |         |        |         |         |         |       |  |          |         |           |      |         |         |         |  |  |          |      |   |      |        
|                                               | Total liabilities and shareholders equity |                         | $       | 3,190,048 |          |   |         |        |         |         |         |       |  |          | $       | 3,313,280 |      |         |         |         |  |  |          |      |   |      | $       | 3,022,628 |  |   |         |        |  |  |       |       | 
|                                               |                                            |                         |         |           |          |   |         |        |         |         |         |       |  |          |         |           |      |         |         |         |  |  |          |      |   |      |        
|Net interest income and margin(2)              |                                            |                         |         |           |          | $ | 135,384 |        |         |         | 4.65%   |       |  |          |         |           |      | $       | 138,235 |         |  |  | 4.68     | %    |   |      |         |           |  | $ | 140,998 |        |  |  | 5.32% |      
|                                               |                                            |                         |         |           |          |   |         |        |         |         |         |       |  |          |         |           |      |         |         |         |  |  |          |      |   |      |        






|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(1) | 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.                      

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|                                   |             |                             |         |       |                     |   |       |        |        |   |         |        |        |      |        |        |       |   |         |         |        |   |        |        |        |  
|---------------------------------- | ----------- | --------------------------- | ------- | ----- | ------------------- | - | ----- | ------ | ------ | - | ------- | ------ | ------ | ---- | ------ | ------ | ----- | - | ------- | ------- | ------ | - | ------ | ------ | ------ | -
|                                   |             | 2004 vs. 2003               |         |       | 2003 vs. 2002       |  
|                                   |             | Increase (Decrease)         |         |       | Increase (Decrease) |  
|                                   |             | Due to Changes in:          |         |       | Due to Changes in:  |  
|                                   |             |                             |         |       |                     |  
|                                   |             | Volume                      |         |       | Rate                |   |       | Total  |        |   | Volume  |        |        | Rate |        |        | Total |  
|                                   |             |                             |         |       |                     |   |       |        |        |   |         |        |        |      |        |        |       |  
|Interest-earning assets:           |             |                             |         |       |                     |   |       |        |        |   |         |        |        |      |        |        |       |   |         |         |        |   |        |       
|Loans held for sale                |             | $                           | (28,680 | )     |                     | $ | 5,442 |        |        | $ | (23,238 | )      |        | $    | 2,332  |        |       | $ | (6,027  | )       |        | $ | (3,695 | )     
|Loans held for investment:         |             |                             |         |       |                     |   |       |        |        |   |         |        |        |      |        |        |       |   |         |         |        |   |        |       
|                                   | Taxable     |                             |         | 9,894 |                     |   |       | (2,957 | )      |   |         | 6,937  |        |      |        | 16,928 |       |   |         | (15,761 | )      |   |        | 1,167  |       
|                                   | Non-taxable |                             |         | (34   | )                   |   |       |       |        |   |         | (34    | )      |      |        | (44    | )     |   |         | 28      |        |   |        | (16    | )     
|Securities:                        |             |                             |         |       |                     |   |       |        |        |   |         |        |        |      |        |        |       |   |         |         |        |   |        |       
|                                   | Taxable     |                             |         | 9,629 |                     |   |       | 731    |        |   |         | 10,360 |        |      |        | 2,952  |       |   |         | (5,962  | )      |   |        | (3,010 | )     
|                                   | Non-taxable |                             |         | (119  | )                   |   |       | (105   | )      |   |         | (224   | )      |      |        | (650   | )     |   |         | 26      |        |   |        | (624   | )     
|Trading assets                     |             |                             | (42     | )     |                     |   | 1,044 |        |        |   | 1,002   |        |        |      | 434    |        |       |   | (1,407  | )       |        |   | (973   | )     
|Federal funds sold                 |             |                             | (100    | )     |                     |   | 25    |        |        |   | (75     | )      |        |      | (138   | )      |       |   | (149    | )       |        |   | (287   | )     
|Deposits in financial institutions |             |                             | 12      |       |                     |   | (26   | )      |        |   | (14     | )      |        |      | (31    | )      |       |   | (6      | )       |        |   | (37    | )     
|                                   |             |                             |         |       |                     |   |       |        |        |   |         |        |        |      |        |        |       |  
|Total interest income              |             |                             | (9,440  | )     |                     |   | 4,154 |        |        |   | (5,286  | )      |        |      | 21,783 |        |       |   | (29,258 | )       |        |   | (7,475 | )     
|                                   |             |                             |         |       |                     |   |       |        |        |   |         |        |        |      |        |        |       |  
|Interest-bearing liabilities:      |             |                             |         |       |                     |   |       |        |        |   |         |        |        |      |        |        |       |   |         |         |        |   |        |       
|Deposits:                          |             |                             |         |       |                     |   |       |        |        |   |         |        |        |      |        |        |       |   |         |         |        |   |        |       
|                                   |             | Demand and savings          |         |       | 320                 |   |       |        | (287   | ) |         |        | 33     |      |        |        | 104   |   |         |         | (3,893 | ) |        |        | (3,789 | )
|                                   |             | Certificates and other time |         |       | (278                | ) |       |        | (1,636 | ) |         |        | (1,914 | )    |        |        | 736   |   |         |         | (3,607 | ) |        |        | (2,871 | )
|Short-term borrowings              |             |                             | (1,650  | )     |                     |   | 892   |        |        |   | (758    | )      |        |      | 1,867  |        |       |   | (1,892  | )       |        |   | (25    | )     
|Notes payable                      |             |                             | (585    | )     |                     |   |      |        |        |   | (585    | )      |        |      | (88    | )      |       |   | (124    | )       |        |   | (212   | )     
|Subordinated debt                  |             |                             | 678     |       |                     |   | 59    |        |        |   | 737     |        |        |      | 1,903  |        |       |   |        |         |        |   | 1,903  |       
|Junior subordinated debt           |             |                             |        |       |                     |   | 52    |        |        |   | 52      |        |        |      |       |        |       |   | 282     |         |        |   | 282    |       
|                                   |             |                             |         |       |                     |   |       |        |        |   |         |        |        |      |        |        |       |  
|Total interest expense             |             |                             | (1,515  | )     |                     |   | (920  | )      |        |   | (2,435  | )      |        |      | 4,522  |        |       |   | (9,234  | )       |        |   | (4,712 | )     
|                                   |             |                             |         |       |                     |   |       |        |        |   |         |        |        |      |        |        |       |  
|Net interest income                |             | $                           | (7,925  | )     |                     | $ | 5,074 |        |        | $ | (2,851  | )      |        | $    | 17,261 |        |       | $ | (20,024 | )       |        | $ | (2,763 | )     
|                                   |             |                             |         |       |                     |   |       |        |        |   |         |        |        |      |        |        |       |  

Noninterest Income




|                                               |  |      |        |   |      |   |        |      |  |   |        | 
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | 
|                                               |  | 2004 |        |   | 2003 |   |        | 2002 | 
|                                               |  |      |        |   |      |   |        |      | 
|Customer service fees                          |  | $    | 14,536 |   |      | $ | 16,214 |      |  | $ | 16,893 | 
|Net gain (loss) on the sale of banking offices |  |      | (27    | ) |      |   | 3,517  |      |  |   |       | 
|Bank-owned life insurance income               |  |      | 2,017  |   |      |   | 2,010  |      |  |   | 2,084  | 
|Debit card fees                                |  |      | 1,588  |   |      |   | 1,451  |      |  |   | 1,327  | 
|Net gain (loss) on trading assets              |  |      | (452   | ) |      |   | 1,186  |      |  |   | 1,018  | 
|Net gain on the sale of securities             |  |      | 4,941  |   |      |   | 905    |      |  |   | 110    | 
|Other                                          |  |      | 8,319  |   |      |   | 7,987  |      |  |   | 8,360  | 
|                                               |  |      |        |   |      |   |        |      | 
|Total                                          |  | $    | 30,922 |   |      | $ | 33,270 |      |  | $ | 29,792 | 
|                                               |  |      |        |   |      |   |        |      | 



22



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##### Table of Contents











Noninterest Expense




|                                                                                       |  |      |         |   |      |   |         |      |  |   |         | 
|-------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | 
|                                                                                       |  | 2004 |         |   | 2003 |   |         | 2002 | 
|                                                                                       |  |      |         |   |      |   |         |      | 
|Salaries and employee benefits                                                         |  | $    | 68,272  |   |      | $ | 65,525  |      |  | $ | 63,430  | 
|Occupancy expense                                                                      |  |      | 15,326  |   |      |   | 15,364  |      |  |   | 15,181  | 
|Technology                                                                             |  |      | 6,127   |   |      |   | 5,170   |      |  |   | 5,046   | 
|Professional fees                                                                      |  |      | 6,999   |   |      |   | 4,624   |      |  |   | 4,205   | 
|Postage, delivery and supplies                                                         |  |      | 3,179   |   |      |   | 3,474   |      |  |   | 3,690   | 
|Marketing                                                                              |  |      | 1,457   |   |      |   | 1,498   |      |  |   | 566     | 
|Core deposit intangible amortization                                                   |  |      | 487     |   |      |   | 465     |      |  |   | 426     | 
|Net losses (gains) and carrying costs of other real estate
    and foreclosed property |  |      | (31     | ) |      |   | (541    | )    |  |   | 481     | 
|Other                                                                                  |  |      | 17,793  |   |      |   | 15,837  |      |  |   | 17,165  | 
|                                                                                       |  |      |         |   |      |   |         |      | 
|Total                                                                                  |  | $    | 119,609 |   |      | $ | 111,416 |      |  | $ | 110,190 | 
|                                                                                       |  |      |         |   |      |   |         |      | 





23



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##### Table of Contents













Income Taxes






24



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##### Table of Contents



FINANCIAL CONDITION


Loans Held for Investment




|                          |              |        |           |           |      |  |       |        |   |   |           |         |  |        |       |      |   |   |           |         |  |  |       |      |   |        |           |         |   |  |       |      |   |   |           |         |  |  |       |      |  
|------------------------- | ------------ | ------ | --------- | --------- | ---- |  | ----- | ------ | - | - | --------- | ------- |  | ------ | ----- | ---- | - | - | --------- | ------- |  |  | ----- | ---- | - | ------ | --------- | ------- | - |  | ----- | ---- | - | - | --------- | ------- |  |  | ----- | ---- | -
|                          |              | 2004   |           |           | 2003 |  |       | 2002   |   |   | 2001      |         |  | 2000   |      
|                          |              |        |           |           |      |  |       |        |   |   |           |         |  |        |      
|                          |              | Amount |           |           | %    |  |       | Amount |   |   | %         |         |  | Amount |       |      | % |   |           | Amount  |  |  | %     |      |   | Amount |           |         | % | 
|                          |              |        |           |           |      |  |       |        |   |   |           |         |  |        |       |      |   |   |           |         |  |  |       |      |   |        |           |         |   | 
|Commercial and industrial |              | $      | 682,209   |           |      |  | 29.2  | %      |   | $ | 671,482   |         |  |        | 31.5  | %    |   | $ | 615,094   |         |  |  | 31.7  | %    |   | $      | 511,001   |         |   |  | 30.6  | %    |   | $ | 473,035   |         |  |  | 35.2  | %   
|Real estate:              |              |        |           |           |      |  |       |        |   |   |           |         |  |        |       |      |   |   |           |         |  |  |       |      |   |        |           |         |   |  |       |      |   |   |           |         |  |  |       |     
|                          | Commercial   |        |           | 1,015,114 |      |  |       | 43.4   | % |   |           | 829,199 |  |        |       | 38.9 | % |   |           | 670,459 |  |  |       | 34.5 | % |        |           | 560,982 |   |  |       | 33.7 | % |   |           | 467,901 |  |  |       | 34.7 | %
|                          | Construction |        |           | 363,044   |      |  |       | 15.5   | % |   |           | 327,295 |  |        |       | 15.4 | % |   |           | 323,768 |  |  |       | 16.7 | % |        |           | 250,729 |   |  |       | 15.0 | % |   |           | 115,588 |  |  |       | 8.6  | %
|                          | Residential  |        |           | 179,623   |      |  |       | 7.7    | % |   |           | 195,363 |  |        |       | 9.2  | % |   |           | 199,191 |  |  |       | 10.2 | % |        |           | 187,196 |   |  |       | 11.2 | % |   |           | 155,153 |  |  |       | 11.5 | %
|Consumer/other            |              |        | 72,997    |           |      |  | 3.1   | %      |   |   | 98,928    |         |  |        | 4.6   | %    |   |   | 122,616   |         |  |  | 6.3   | %    |   |        | 149,286   |         |   |  | 9.0   | %    |   |   | 129,358   |         |  |  | 9.6   | %   
|Foreign loans             |              |        | 25,109    |           |      |  | 1.1   | %      |   |   | 8,464     |         |  |        | 0.4   | %    |   |   | 12,433    |         |  |  | 0.6   | %    |   |        | 7,594     |         |   |  | 0.5   | %    |   |   | 4,807     |         |  |  | 0.4   | %   
|                          |              |        |           |           |      |  |       |        |   |   |           |         |  |        |       |      |   |   |           |         |  |  |       |      |   |        |           |         |   | 
|Total                     |              | $      | 2,338,096 |           |      |  | 100.0 | %      |   | $ | 2,130,731 |         |  |        | 100.0 | %    |   | $ | 1,943,561 |         |  |  | 100.0 | %    |   | $      | 1,666,788 |         |   |  | 100.0 | %    |   | $ | 1,345,842 |         |  |  | 100.0 | %   
|                          |              |        |           |           |      |  |       |        |   |   |           |         |  |        |       |      |   |   |           |         |  |  |       |      |   |        |           |         |   | 











25



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##### Table of Contents









|                                    |  |              |           |           |              |   |         |            |  |   |        |  |  |   |           | 
|----------------------------------- |  | ------------ | --------- | --------- | ------------ | - | ------- | ---------- |  | - | ------ |  |  | - | --------- | 
|                                    |  |              |           | Due After |              |   |         |            | 
|                                    |  |              |           | One Year  |              |   |         |            | 
|                                    |  | Due in One   |           |           | Through Five |   |         | Due After  |  |   |       
|                                    |  | Year or Less |           |           | Years        |   |         | Five Years |  |   | Total  | 
|                                    |  |              |           |           |              |   |         |            |  |   |        | 
|Commercial and industrial           |  | $            | 526,554   |           |              | $ | 145,439 |            |  | $ | 10,216 |  |  | $ | 682,209   | 
|Real estate  commercial            |  |              | 708,463   |           |              |   | 251,227 |            |  |   | 55,424 |  |  |   | 1,015,114 | 
|Real estate  construction          |  |              | 302,414   |           |              |   | 47,932  |            |  |   | 12,698 |  |  |   | 363,044   | 
|Foreign loans                       |  |              | 10,041    |           |              |   | 15,068  |            |  |   |       |  |  |   | 25,109    | 
|                                    |  |              |           |           |              |   |         |            |  |   |        | 
|Total loans                         |  | $            | 1,547,472 |           |              | $ | 459,666 |            |  | $ | 78,338 |  |  | $ | 2,085,476 | 
|                                    |  |              |           |           |              |   |         |            |  |   |        | 
|Loans with a fixed interest rate    |  | $            | 220,675   |           |              | $ | 436,731 |            |  | $ | 74,487 |  |  | $ | 731,893   | 
|Loans with a floating interest rate |  |              | 1,326,797 |           |              |   | 22,935  |            |  |   | 3,851  |  |  |   | 1,353,583 | 
|                                    |  |              |           |           |              |   |         |            |  |   |        | 
|Total loans                         |  | $            | 1,547,472 |           |              | $ | 459,666 |            |  | $ | 78,338 |  |  | $ | 2,085,476 | 
|                                    |  |              |           |           |              |   |         |            |  |   |        | 





Loans Held for Sale




26



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##### Table of Contents



Securities




|                                                                        |  |        |         |  |      |  |       |        |  |   |         |  |  |        |       |   |   |   |         |  |  |  |       |  
|----------------------------------------------------------------------- |  | ------ | ------- |  | ---- |  | ----- | ------ |  | - | ------- |  |  | ------ | ----- | - | - | - | ------- |  |  |  | ----- | -
|                                                                        |  | 2004   |         |  | 2003 |  |       | 2002   | 
|                                                                        |  |        |         |  |      |  |       |        | 
|                                                                        |  | Amount |         |  | %    |  |       | Amount |  |   | %       |  |  | Amount |       |   | % |  
|                                                                        |  |        |         |  |      |  |       |        |  |   |         |  |  |        |       |   |   |  
|Available-for-Sale                                                      |  |        |         |  |      |  |       |        |  |   |         |  |  |        |       |   |   |   |         |  |  |  |       |  
|Obligations of the U.S. Treasury and other U.S. government
    agencies |  | $      | 8,194   |  |      |  | 1.5   | %      |  | $ | 86,108  |  |  |        | 16.5  | % |   | $ | 39,388  |  |  |  | 15.7  | %
|Obligations of states of the U.S. and political subdivisions            |  |        | 4,133   |  |      |  | 0.8   | %      |  |   | 4,433   |  |  |        | 0.8   | % |   |   | 4,695   |  |  |  | 1.9   | %
|Mortgage-backed securities and collateralized mortgage
    obligations  |  |        | 516,325 |  |      |  | 95.5  | %      |  |   | 398,774 |  |  |        | 76.3  | % |   |   | 183,799 |  |  |  | 73.1  | %
|Other securities                                                        |  |        | 12,052  |  |      |  | 2.2   | %      |  |   | 33,621  |  |  |        | 6.4   | % |   |   | 23,283  |  |  |  | 9.3   | %
|                                                                        |  |        |         |  |      |  |       |        |  |   |         |  |  |        |       |   |   |  
|Total                                                                   |  | $      | 540,704 |  |      |  | 100.0 | %      |  | $ | 522,936 |  |  |        | 100.0 | % |   | $ | 251,165 |  |  |  | 100.0 | %
|                                                                        |  |        |         |  |      |  |       |        |  |   |         |  |  |        |       |   |   |  
|Held-to-Maturity                                                        |  |        |         |  |      |  |       |        |  |   |         |  |  |        |       |   |   |   |         |  |  |  |       |  
|Obligations of states of the U.S. and political subdivisions            |  | $      | 61,956  |  |      |  | 52.8  | %      |  | $ | 38,336  |  |  |        | 90.9  | % |   | $ | 56,128  |  |  |  | 90.7  | %
|Mortgage-backed securities and collateralized mortgage
    obligations  |  |        | 55,458  |  |      |  | 47.2  | %      |  |   | 3,821   |  |  |        | 9.1   | % |   |   | 5,761   |  |  |  | 9.3   | %
|                                                                        |  |        |         |  |      |  |       |        |  |   |         |  |  |        |       |   |   |  
|Total                                                                   |  | $      | 117,414 |  |      |  | 100.0 | %      |  | $ | 42,157  |  |  |        | 100.0 | % |   | $ | 61,889  |  |  |  | 100.0 | %
|                                                                        |  |        |         |  |      |  |       |        |  |   |         |  |  |        |       |   |   |  



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|                                                                        |  |              |        |          |                    |  |      |                      |          |   |           |  |  |          |      |   |       |   |          |        |  |  |       |   |  |       |        |  |  |  |      |   |  |   |         | 
|----------------------------------------------------------------------- |  | ------------ | ------ | -------- | ------------------ |  | ---- | -------------------- | -------- | - | --------- |  |  | -------- | ---- | - | ----- | - | -------- | ------ |  |  | ----- | - |  | ----- | ------ |  |  |  | ---- | - |  | - | ------- | 
|                                                                        |  | Due in one   |        |          | Due after one year |  |      | Due after five years |          |   | Due after |  |  |         
|                                                                        |  | year or less |        |          | through five years |  |      | through ten years    |          |   | ten years |  |  |         
|                                                                        |  |              |        |          |                    |  |      |                      |          |   |           |  |  |         
|                                                                        |  |              |        | Weighted |                    |  |      |                      | Weighted |   |           |  |  | Weighted |      |   |       |   | Weighted |        |  | 
|                                                                        |  |              |        | Average  |                    |  |      |                      | Average  |   |           |  |  | Average  |      |   |       |   | Average  |        |  | 
|                                                                        |  | Amount       |        |          | Yield              |  |      | Amount               |          |   | Yield     |  |  | Amount   |      |   | Yield |   |          | Amount |  |  | Yield |   |  | Total |       
|                                                                        |  |              |        |          |                    |  |      |                      |          |   |           |  |  |          |      |   |       |   |          |        |  |  |       |   |  |       |       
|Available-for-Sale                                                      |  |              |        |          |                    |  |      |                      |          |   |           |  |  |          |      |   |       |   |          |        |  |  |       |   |  |       |        |  |  |  |      |   |  |   |         | 
|Obligations of the U.S. Treasury and other U.S. government
    agencies |  | $            | 5,659  |          |                    |  | 2.09 | %                    |          | $ | 2,535     |  |  |          | 3.09 | % |       | $ |         |        |  |  |      |   |  | $     |       |  |  |  |     |   |  | $ | 8,194   | 
|Obligations of states of the U.S. and political subdivisions            |  |              | 853    |          |                    |  | 3.64 | %                    |          |   | 1,944     |  |  |          | 6.19 | % |       |   | 1,336    |        |  |  | 6.36  | % |  |       |       |  |  |  |     |   |  |   | 4,133   | 
|Mortgage-backed securities and collateralized mortgage
    obligations  |  |              | 9,715  |          |                    |  | 2.77 | %                    |          |   | 228,693   |  |  |          | 4.09 | % |       |   | 193,973  |        |  |  | 4.00  | % |  |       | 83,944 |  |  |  | 4.31 | % |  |   | 516,325 | 
|Other securities                                                        |  |              | 12,052 |          |                    |  | 6.69 | %                    |          |   |          |  |  |          |     |   |       |   |         |        |  |  |      |   |  |       |       |  |  |  |     |   |  |   | 12,052  | 
|                                                                        |  |              |        |          |                    |  |      |                      |          |   |           |  |  |          |      |   |       |   |          |        |  |  |       |   |  |       |       
|                                                                        |  | $            | 28,279 |          |                    |  | 4.33 | %                    |          | $ | 233,172   |  |  |          | 4.10 | % |       | $ | 195,309  |        |  |  | 4.02  | % |  | $     | 83,944 |  |  |  | 4.31 | % |  | $ | 540,704 | 
|                                                                        |  |              |        |          |                    |  |      |                      |          |   |           |  |  |          |      |   |       |   |          |        |  |  |       |   |  |       |       
|Held-to-Maturity                                                        |  |              |        |          |                    |  |      |                      |          |   |           |  |  |          |      |   |       |   |          |        |  |  |       |   |  |       |        |  |  |  |      |   |  |   |         | 
|Obligations of states of the U.S. and political subdivisions            |  | $            | 6,512  |          |                    |  | 5.07 | %                    |          | $ | 24,906    |  |  |          | 6.55 | % |       | $ | 30,538   |        |  |  | 5.02  | % |  |       |       |  |  |  |     |   |  | $ | 61,956  | 
|Mortgage-backed securities and collateralized mortgage
    obligations  |  |              | 1,948  |          |                    |  | 2.95 | %                    |          |   | 1,164     |  |  |          | 4.25 | % |       |   | 987      |        |  |  | 4.45  | % |  |       | 51,359 |  |  |  | 4.90 | % |  |   | 55,458  | 
|                                                                        |  |              |        |          |                    |  |      |                      |          |   |           |  |  |          |      |   |       |   |          |        |  |  |       |   |  |       |       
|                                                                        |  | $            | 8,460  |          |                    |  | 4.58 | %                    |          | $ | 26,070    |  |  |          | 6.45 | % |       | $ | 31,525   |        |  |  | 5.00  | % |  | $     | 51,359 |  |  |  | 4.90 | % |  | $ | 117,414 | 
|                                                                        |  |              |        |          |                    |  |      |                      |          |   |           |  |  |          |      |   |       |   |          |        |  |  |       |   |  |       |       





Deposits






28



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##### Table of Contents





|                                             |  |         |           |  |         |  |      |         |  |   |           |  |  |         |      |   |         |   |           |  |  |  |      |  
|-------------------------------------------- |  | ------- | --------- |  | ------- |  | ---- | ------- |  | - | --------- |  |  | ------- | ---- | - | ------- | - | --------- |  |  |  | ---- | -
|                                             |  | 2004    |           |  | 2003    |  |      | 2002    | 
|                                             |  |         |           |  |         |  |      |         | 
|                                             |  | Average |           |  | Average |  |      | Average |  |   | Average   |  |  | Average |      |   | Average |  
|                                             |  | Balance |           |  | Rate    |  |      | Balance |  |   | Rate      |  |  | Balance |      |   | Rate    |  
|                                             |  |         |           |  |         |  |      |         |  |   |           |  |  |         |      |   |         |  
|Noninterest bearing demand deposits          |  | $       | 836,258   |  |         |  |      |         |  | $ | 904,711   |  |  |         |      |   |         | $ | 844,401   |  |  |  |      |  
|Interest bearing demand and savings deposits |  |         | 961,059   |  |         |  | 0.50 | %       |  |   | 898,377   |  |  |         | 0.53 | % |         |   | 887,544   |  |  |  | 0.96 | %
|Time deposits                                |  |         | 554,664   |  |         |  | 1.99 | %       |  |   | 577,090   |  |  |         | 2.27 | % |         |   | 603,155   |  |  |  | 2.74 | %
|Brokered deposits                            |  |         | 100,824   |  |         |  | 1.65 | %       |  |   | 87,833    |  |  |         | 1.71 | % |         |   | 34,893    |  |  |  | 2.74 | %
|                                             |  |         |           |  |         |  |      |         |  |   |           |  |  |         |      |   |         |  
|Total deposits                               |  | $       | 2,452,805 |  |         |  | 1.08 | %       |  | $ | 2,468,011 |  |  |         | 1.24 | % |         | $ | 2,369,993 |  |  |  | 1.71 | %
|                                             |  |         |           |  |         |  |      |         |  |   |           |  |  |         |      |   |         |  







|                               |  |      |         | 
|------------------------------ |  | ---- | ------- | 
|                               |  | 2004 |        
|                               |  |      |        
|Three months or less           |  | $    | 182,693 | 
|Over three through six months  |  |      | 89,778  | 
|Over six through twelve months |  |      | 57,296  | 
|Thereafter                     |  |      | 62,340  | 
|                               |  |      |        
|                               |  | $    | 392,107 | 
|                               |  |      |        

Short-Term Borrowings




29



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##### Table of Contents





|                                               |                                               |                                 |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------- | --------------------------------------------- | ------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                               |                                               | For the Year Ended December 31, |  
|                                               |                                               |                                 |  
|                                               |                                               | 2004                            |   |         | 2003 |  |   | 2002    |  
|                                               |                                               |                                 |   |         |      |  |   |         |  
|Federal Home Loan Bank advances                |                                               |                                 |   |         |      |  |   |         |   |  |   |        
|                                               | Balance outstanding at period-end             |                                 | $ | 418,000 |      |  | $ | 311,735 |   |  | $ | 490,790 |  
|                                               | Weighted average interest rate at period-end  |                                 |   | 2.23    | %    |  |   | 1.06    | % |  |   | 1.30    | %
|                                               | Maximum outstanding at any month-end          |                                 | $ | 418,000 |      |  | $ | 642,500 |   |  | $ | 490,790 |  
|                                               | Daily average balance                         |                                 |   | 251,188 |      |  |   | 365,390 |   |  |   | 251,410 |  
|                                               | Weighted average interest rate for the period |                                 |   | 1.50    | %    |  |   | 1.24    | % |  |   | 1.77    | %
|Federal funds purchased                        |                                               |                                 |   |         |      |  |   |         |   |  |   |        
|                                               | Balance outstanding at period-end             |                                 | $ | 2,575   |      |  | $ | 12,425  |   |  | $ | 18,800  |  
|                                               | Weighted average interest rate at period-end  |                                 |   | 2.31    | %    |  |   | 1.31    | % |  |   | 1.75    | %
|                                               | Maximum outstanding at any month-end          |                                 | $ | 25,750  |      |  | $ | 45,800  |   |  | $ | 18,800  |  
|                                               | Daily average balance                         |                                 |   | 23,693  |      |  |   | 27,158  |   |  |   | 19,996  |  
|                                               | Weighted average interest rate for the period |                                 |   | 1.69    | %    |  |   | 1.61    | % |  |   | 2.10    | %
|Securities sold under agreements to repurchase |                                               |                                 |   |         |      |  |   |         |   |  |   |        
|                                               | Balance outstanding at period-end             |                                 | $ |        |      |  | $ |        |   |  | $ |        |  
|                                               | Weighted average interest rate at period-end  |                                 |   |        |      |  |   |        |   |  |   |        |  
|                                               | Maximum outstanding at any month-end          |                                 | $ |        |      |  | $ |        |   |  | $ | 19,796  |  
|                                               | Daily average balance                         |                                 |   |        |      |  |   |        |   |  |   | 13,559  |  
|                                               | Weighted average interest rate for the period |                                 |   |        |      |  |   |        |   |  |   | 0.96    | %



Notes Payable




Subordinated Debt




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Junior Subordinated Debt/Company Obligated Mandatorily
Redeemable Trust Preferred Securities


Consolidation of Variable Interest Entities




|                    |  |               |                    |                 |             |   |        |               |                     |  |                          |  |  |                     |        |  |  |  |                    | 
|------------------- |  | ------------- | ------------------ | --------------- | ----------- | - | ------ | ------------- | ------------------- |  | ------------------------ |  |  | ------------------- | ------ |  |  |  | ------------------ | 
|                    |  |               |                    | Trust Preferred |             |   |        |               | Junior Subordinated |  |                          | 
|                    |  |               |                    | Securities      |             |   |        |               | Debt Owed To        |  |                          | 
|Description         |  | Issuance Date |                    |                 | Outstanding |   |        | Interest Rate |                     |  | Trusts                   |  |  | Final Maturity Date |       
|                    |  |               |                    |                 |             |   |        |               |                     |  |                          |  |  |                     |       
|Capital Trust II    |  |               | March 21, 2001     |                 |             | $ | 28,750 |               |                     |  | 9.20% Fixed              |  |  | $                   | 29,639 |  |  |  | March 21, 2031     | 
|Statutory Trust One |  |               | August 30, 2002    |                 |             |   | 20,000 |               |                     |  | 3-month LIBOR plus 3.45% |  |  |                     | 20,619 |  |  |  | August 30, 2032    | 
|Capital Trust III   |  |               | September 26, 2002 |                 |             |   | 31,250 |               |                     |  | 8.30% Fixed              |  |  |                     | 32,217 |  |  |  | September 26, 2032 | 
|                    |  |               |                    |                 |             |   |        |               |                     |  |                          |  |  |                     |       
|Total               |  |               |                    |                 |             | $ | 80,000 |               |                     |  |                          |  |  | $                   | 82,475 |  |  |  |                    | 
|                    |  |               |                    |                 |             |   |        |               |                     |  |                          |  |  |                     |       







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ASSET QUALITY


Risk Elements








|                                                                         |                                     |      |        |        |      |   |        |        |  |   |        |        |  |      |        |        |  |   |        |        | 
|------------------------------------------------------------------------ | ----------------------------------- | ---- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                                         |                                     | 2004 |        |        | 2003 |   |        | 2002   |  |   | 2001   |        |  | 2000 |       
|                                                                         |                                     |      |        |        |      |   |        |        |  |   |        |        |  |      |       
|Nonperforming loans:                                                     |                                     |      |        |        |      |   |        |        |  |   |        |        |  |      |        |        |  |   |        |       
|                                                                         | Nonaccrual loans                    |      | $      | 20,605 |      |   | $      | 33,887 |  |   | $      | 19,654 |  |      | $      | 14,179 |  |   | $      | 8,297  | 
|                                                                         | Restructured loans                  |      |        |       |      |   |        |       |  |   |        |       |  |      |        | 16     |  |   |        | 1,298  | 
|                                                                         |                                     |      |        |        |      |   |        |        |  |   |        |        |  |      |       
|                                                                         | Total nonperforming loans           |      |        | 20,605 |      |   |        | 33,887 |  |   |        | 19,654 |  |      |        | 14,195 |  |   |        | 9,595  | 
|Foreclosed assets:                                                       |                                     |      |        |        |      |   |        |        |  |   |        |        |  |      |        |        |  |   |        |       
|                                                                         | Real estate acquired by foreclosure |      |        | 1,536  |      |   |        | 2,124  |  |   |        | 3,358  |  |      |        | 1,837  |  |   |        | 1,702  | 
|                                                                         | Other repossessed assets            |      |        | 216    |      |   |        | 169    |  |   |        | 66     |  |      |        | 127    |  |   |        | 192    | 
|                                                                         |                                     |      |        |        |      |   |        |        |  |   |        |        |  |      |       
|                                                                         | Total foreclosed assets             |      |        | 1,752  |      |   |        | 2,293  |  |   |        | 3,424  |  |      |        | 1,964  |  |   |        | 1,894  | 
|                                                                         |                                     |      |        |        |      |   |        |        |  |   |        |        |  |      |       
|                                                                         | Total nonperforming assets          |      | $      | 22,357 |      |   | $      | 36,180 |  |   | $      | 23,078 |  |      | $      | 16,159 |  |   | $      | 11,489 | 
|                                                                         |                                     |      |        |        |      |   |        |        |  |   |        |        |  |      |       
|Nonperforming loans to period-end loans                                  |                                     |      | 0.88   | %      |      |   | 1.57   | %      |  |   | 0.74   | %      |  |      | 0.74   | %      |  |   | 0.65   | %     
|Nonperforming assets to period-end assets                                |                                     |      | 0.67   | %      |      |   | 1.13   | %      |  |   | 0.64   | %      |  |      | 0.58   | %      |  |   | 0.55   | %     
|Nonperforming assets to total period-end loans and foreclosed
    assets |                                     |      | 0.95   | %      |      |   | 1.68   | %      |  |   | 0.87   | %      |  |      | 0.85   | %      |  |   | 0.77   | %     
|Potential problem loans                                                  |                                     | $    | 54,293 |        |      | $ | 66,482 |        |  | $ | 62,189 |        |  | $    | 51,456 |        |  | $ | 38,753 |       
|                                                                         |                                     |      |        |        |      |   |        |        |  |   |        |        |  |      |       
|Accruing loans past due 90 days or more                                  |                                     | $    | 2,395  |        |      | $ | 35     |        |  | $ | 984    |        |  | $    | 1,360  |        |  |   | 626    |       
|                                                                         |                                     |      |        |        |      |   |        |        |  |   |        |        |  |      |       





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Allowance for Credit Losses




















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|                                                  |                                             |                         |           |        |        |   |           |        |        |   |           |        |       |      |           |        |       |   |           |        |       | 
|------------------------------------------------- | ------------------------------------------- | ----------------------- | --------- | ------ | ------ | - | --------- | ------ | ------ | - | --------- | ------ | ----- | ---- | --------- | ------ | ----- | - | --------- | ------ | ----- | 
|                                                  |                                             | Year Ended December 31, |          
|                                                  |                                             |                         |          
|                                                  |                                             | 2004                    |           |        | 2003   |   |           | 2002   |        |   | 2001      |        |       | 2000 |          
|                                                  |                                             |                         |           |        |        |   |           |        |        |   |           |        |       |      |          
|Average loans outstanding                         |                                             | $                       | 2,190,806 |        |        | $ | 2,465,838 |        |        | $ | 2,197,875 |        |       | $    | 1,693,867 |        |       | $ | 1,331,282 |       
|                                                  |                                             |                         |           |        |        |   |           |        |        |   |           |        |       |      |          
|Loans outstanding at period-end                   |                                             | $                       | 2,344,977 |        |        | $ | 2,157,039 |        |        | $ | 2,644,862 |        |       | $    | 1,928,293 |        |       | $ | 1,484,990 |       
|                                                  |                                             |                         |           |        |        |   |           |        |        |   |           |        |       |      |          
|Allowance for credit losses at January 1          |                                             | $                       | 30,722    |        |        | $ | 27,248    |        |        | $ | 22,927    |        |       | $    | 16,862    |        |       | $ | 13,998    |       
|Charge-offs:                                      |                                             |                         |           |        |        |   |           |        |        |   |           |        |       |      |           |        |       |   |           |       
|                                                  | Commercial and industrial                   |                         |           | 10,365 |        |   |           | 10,597 |        |   |           | 7,384  |       |      |           | 6,969  |       |   |           | 7,061  |      
|                                                  | Real estate, mortgage and construction      |                         |           | 3,405  |        |   |           | 4,486  |        |   |           | 1,249  |       |      |           | 1,057  |       |   |           | 643    |      
|                                                  | Consumer/other                              |                         |           | 1,446  |        |   |           | 1,590  |        |   |           | 1,122  |       |      |           | 1,797  |       |   |           | 63     |      
|                                                  |                                             |                         |           |        |        |   |           |        |        |   |           |        |       |      |          
|                                                  |                                             | Total charge-offs       |           |        | 15,216 |   |           |        | 16,673 |   |           |        | 9,755 |      |           |        | 9,823 |   |           |        | 7,767 | 
|Recoveries:                                       |                                             |                         |           |        |        |   |           |        |        |   |           |        |       |      |           |        |       |   |           |       
|                                                  | Commercial and industrial                   |                         |           | 2,094  |        |   |           | 1,447  |        |   |           | 1,400  |       |      |           | 871    |       |   |           | 861    |      
|                                                  | Real estate, mortgage and construction      |                         |           | 159    |        |   |           | 157    |        |   |           | 75     |       |      |           | 111    |       |   |           | 33     |      
|                                                  | Consumer/other                              |                         |           | 223    |        |   |           | 343    |        |   |           | 245    |       |      |           | 464    |       |   |           | 69     |      
|                                                  |                                             |                         |           |        |        |   |           |        |        |   |           |        |       |      |          
|                                                  |                                             | Total recoveries        |           |        | 2,476  |   |           |        | 1,947  |   |           |        | 1,720 |      |           |        | 1,446 |   |           |        | 963   | 
|                                                  |                                             |                         |           |        |        |   |           |        |        |   |           |        |       |      |          
|Net charge-offs                                   |                                             |                         | 12,740    |        |        |   | 14,726    |        |        |   | 8,035     |        |       |      | 8,377     |        |       |   | 6,804     |       
|Acquired allowance for credit losses              |                                             |                         |          |        |        |   | 855       |        |        |   | 656       |        |       |      | 2,758     |        |       |   |          |       
|Allowance for credit losses sold with divestiture |                                             |                         |          |        |        |   | (353      | )      |        |   |          |        |       |      |          |        |       |   |          |       
|Provision for credit losses                       |                                             |                         | 12,250    |        |        |   | 17,698    |        |        |   | 11,700    |        |       |      | 11,684    |        |       |   | 9,668     |       
|                                                  |                                             |                         |           |        |        |   |           |        |        |   |           |        |       |      |          
|Allowance for credit losses at December 31        |                                             | $                       | 30,232    |        |        | $ | 30,722    |        |        | $ | 27,248    |        |       | $    | 22,927    |        |       | $ | 16,862    |       
|                                                  |                                             |                         |           |        |        |   |           |        |        |   |           |        |       |      |          
|Ratios:                                           |                                             |                         |           |        |        |   |           |        |        |   |           |        |       |      |           |        |       |   |           |       
|                                                  | Allowance to average loans                  |                         |           | 1.38   | %      |   |           | 1.25   | %      |   |           | 1.24   | %     |      |           | 1.35   | %     |   |           | 1.27   | %    
|                                                  | Allowance to period end loans               |                         |           | 1.29   | %      |   |           | 1.42   | %      |   |           | 1.03   | %     |      |           | 1.19   | %     |   |           | 1.14   | %    
|                                                  | Net charge-offs to average loans            |                         |           | 0.58   | %      |   |           | 0.60   | %      |   |           | 0.37   | %     |      |           | 0.49   | %     |   |           | 0.51   | %    
|                                                  | Allowance to period-end nonperforming loans |                         |           | 146.72 | %      |   |           | 90.66  | %      |   |           | 138.64 | %     |      |           | 161.51 | %     |   |           | 175.74 | %    

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|                                       |  |                        |        |             |            |  |     |        |             |   |            |  |  |             |     |   |            |   |             |        |  |  |            |             |  |        |        |  |            |  |     |   |  |   |        |  |  |  |     |  
|-------------------------------------- |  | ---------------------- | ------ | ----------- | ---------- |  | --- | ------ | ----------- | - | ---------- |  |  | ----------- | --- | - | ---------- | - | ----------- | ------ |  |  | ---------- | ----------- |  | ------ | ------ |  | ---------- |  | --- | - |  | - | ------ |  |  |  | --- | -
|                                       |  | December 31,           |       
|                                       |  |                        |       
|                                       |  | 2004                   |        |             | 2003       |  |     | 2002   |             |   | 2001       |  |  | 2000        |    
|                                       |  |                        |        |             |            |  |     |        |             |   |            |  |  |             |    
|                                       |  |                        |        | % of loans  |            |  |     |        | % of loans  |   |            |  |  | % of loans  |     |   |            |   | % of loans  |        |  |  |            | % of loans  | 
|                                       |  |                        |        | in each     |            |  |     |        | in each     |   |            |  |  | in each     |     |   |            |   | in each     |        |  |  |            | in each     | 
|                                       |  |                        |        | Category to |            |  |     |        | Category to |   |            |  |  | Category to |     |   |            |   | Category to |        |  |  |            | Category to | 
|Balance of allowance for               |  |                        |        | Total Loans |            |  |     |        | Total Loans |   |            |  |  | Total Loans |     |   |            |   | Total Loans |        |  |  |            | Total Loans | 
|credit losses at end of period         |  |                        |        | Held for    |            |  |     |        | Held for    |   |            |  |  | Held for    |     |   |            |   | Held for    |        |  |  |            | Held for    | 
|applicable to:                         |  | Amount                 |        |             | Investment |  |     | Amount |             |   | Investment |  |  | Amount      |     |   | Investment |   |             | Amount |  |  | Investment |             |  | Amount |        |  | Investment | 
|                                       |  |                        |        |             |            |  |     |        |             |   |            |  |  |             |     |   |            |   |             |        |  |  |            |             |  |        |        |  |            | 
|                                       |  | (Dollars in thousands) |       
|Commercial and industrial              |  | $                      | 8,925  |             |            |  | 30  | %      |             | $ | 11,844     |  |  |             | 32  | % |            | $ | 9,188       |        |  |  | 32         | %           |  | $      | 8,361  |  |            |  | 31  | % |  | $ | 7,521  |  |  |  | 35  | %
|Real estate, mortgage and construction |  |                        | 10,647 |             |            |  | 67  | %      |             |   | 8,855      |  |  |             | 64  | % |            |   | 7,738       |        |  |  | 61         | %           |  |        | 5,538  |  |            |  | 60  | % |  |   | 3,348  |  |  |  | 55  | %
|Consumer/other                         |  |                        | 764    |             |            |  | 3   | %      |             |   | 1,009      |  |  |             | 4   | % |            |   | 1,323       |        |  |  | 7          | %           |  |        | 868    |  |            |  | 9   | % |  |   | 1,073  |  |  |  | 10  | %
|Unallocated                            |  |                        | 9,896  |             |            |  | N/A |        |             |   | 9,014      |  |  |             | N/A |   |            |   | 8,999       |        |  |  | N/A        |             |  |        | 8,160  |  |            |  | N/A |   |  |   | 4,920  |  |  |  | N/A |  
|                                       |  |                        |        |             |            |  |     |        |             |   |            |  |  |             |     |   |            |   |             |        |  |  |            |             |  |        |        |  |            | 
|                                       |  | $                      | 30,232 |             |            |  | 100 | %      |             | $ | 30,722     |  |  |             | 100 | % |            | $ | 27,248      |        |  |  | 100        | %           |  | $      | 22,927 |  |            |  | 100 | % |  | $ | 16,862 |  |  |  | 100 | %
|                                       |  |                        |        |             |            |  |     |        |             |   |            |  |  |             |     |   |            |   |             |        |  |  |            |             |  |        |        |  |            | 

INTEREST RATE SENSITIVITY AND LIQUIDITY










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|                                                |                                    |                                                          |           |           |             |    |         |           |  |   |         |         |  |       |         |         |       |   |         |         |  |   |           |           | 
|----------------------------------------------- | ---------------------------------- | -------------------------------------------------------- | --------- | --------- | ----------- | -- | ------- | --------- |  | - | ------- | ------- |  | ----- | ------- | ------- | ----- | - | ------- | ------- |  | - | --------- | --------- | 
|                                                |                                    |                                                          |           |           |             |    |         | 5-10      |  |   | Over 10 |         |  |      
|                                                |                                    | 0-90 Days                                                |           |           | 90-365 Days |    |         | 1-5 Years |  |   | Years   |         |  | Years |         |         | Total |  
|                                                |                                    |                                                          |           |           |             |    |         |           |  |   |         |         |  |       |         |         |       |  
|                                                |                                    | (In thousands, except for data expressed in percentages) |          
|Interest-earning assets:                        |                                    |                                                          |           |           |             |    |         |           |  |   |         |         |  |       |         |         |       |   |         |         |  |   |           |          
|Cash and cash equivalents                       |                                    | $                                                        | 208       |           |             | $  |        |           |  | $ |        |         |  | $     |        |         |       | $ |        |         |  | $ | 208       |          
|Deposits in other financial institutions        |                                    |                                                          | 397       |           |             |    | 99      |           |  |   | 99      |         |  |       |        |         |       |   |        |         |  |   | 595       |          
|Trading assets                                  |                                    |                                                          | 36,720    |           |             |    |        |           |  |   |        |         |  |       |        |         |       |   |        |         |  |   | 36,720    |          
|Securities                                      |                                    |                                                          | 24,395    |           |             |    | 12,166  |           |  |   | 259,417 |         |  |       | 226,835 |         |       |   | 135,305 |         |  |   | 658,118   |          
|Loans                                           |                                    |                                                          | 1,526,583 |           |             |    | 159,007 |           |  |   | 583,051 |         |  |       | 50,857  |         |       |   | 25,479  |         |  |   | 2,344,977 |          
|                                                |                                    |                                                          |           |           |             |    |         |           |  |   |         |         |  |       |         |         |       |  
|                                                | Total interest-earning assets      |                                                          |           | 1,588,303 |             |    |         | 171,272   |  |   |         | 842,567 |  |       |         | 277,692 |       |   |         | 160,784 |  |   |           | 3,040,618 | 
|Interest-bearing liabilities:                   |                                    |                                                          |           |           |             |    |         |           |  |   |         |         |  |       |         |         |       |   |         |         |  |   |           |          
|Demand and savings deposits                     |                                    |                                                          | 970,281   |           |             |    |        |           |  |   |        |         |  |       |        |         |       |   |        |         |  |   | 970,281   |          
|Certificates of deposit and other time deposits |                                    |                                                          | 250,382   |           |             |    | 235,123 |           |  |   | 104,118 |         |  |       | 46      |         |       |   |        |         |  |   | 589,669   |          
|Short-term borrowings                           |                                    |                                                          | 420,575   |           |             |    |        |           |  |   |        |         |  |       |        |         |       |   |        |         |  |   | 420,575   |          
|Subordinated debt                               |                                    |                                                          |          |           |             |    |        |           |  |   |        |         |  |       |        |         |       |   | 47,162  |         |  |   | 47,162    |          
|Junior subordinated debt                        |                                    |                                                          | 20,619    |           |             |    |         |           |  |   |         |         |  |       |         |         |       |   | 61,856  |         |  |   | 82,475    |          
|                                                |                                    |                                                          |           |           |             |    |         |           |  |   |         |         |  |       |         |         |       |  
|                                                | Total interest-bearing liabilities |                                                          |           | 1,661,857 |             |    |         | 235,123   |  |   |         | 104,118 |  |       |         | 46      |       |   |         | 109,018 |  |   |           | 2,110,162 | 
|                                                |                                    |                                                          |           |           |             |    |         |           |  |   |         |         |  |       |         |         |       |  
|GAP before effect of interest rate swap         |                                    |                                                          | (73,554   | )         |             |    | (63,851 | )         |  |   | 738,449 |         |  |       | 277,646 |         |       |   | 51,766  |         |  |   | 930,456   |          
|Effect of interest rate swap  pay floating     |                                    |                                                          | 47,162    |           |             |    |        |           |  |   |        |         |  |       |        |         |       |   | (47,162 | )       |  |   |          |          
|                                                |                                    |                                                          |           |           |             |    |         |           |  |   |         |         |  |       |         |         |       |  
|Period GAP                                      |                                    |                                                          | (120,716  | )         |             |    | (63,851 | )         |  |   | 738,449 |         |  |       | 277,646 |         |       |   | 98,928  |         |  |   | 930,456   |          
|Cumulative GAP                                  |                                    | ($                                                       | 120,716   | )         |             | ($ | 184,567 | )         |  | $ | 553,882 |         |  | $     | 831,528 |         |       | $ | 930,456 |         |  |   |           |          
|                                                |                                    |                                                          |           |           |             |    |         |           |  |   |         |         |  |       |         |         |       |  
|Period GAP to total assets                      |                                    |                                                          | (3.62%    | )         |             |    | (1.91%  | )         |  |   | 22.14   | %       |  |       | 8.32    | %       |       |   | 2.97    | %       |  |   |           |          
|                                                |                                    |                                                          |           |           |             |    |         |           |  |   |         |         |  |       |         |         |       |  
|Cumulative GAP to total assets                  |                                    |                                                          | (3.62%    | )         |             |    | (5.53%  | )         |  |   | 16.60   | %       |  |       | 24.93   | %       |       |   | 27.89   | %       |  |   |           |          
|                                                |                                    |                                                          |           |           |             |    |         |           |  |   |         |         |  |       |         |         |       |  



36



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|                                         |  |                        |        |   |               |  |       |  
|---------------------------------------- |  | ---------------------- | ------ | - | ------------- |  | ----- | -
|                                         |  | Increase (Decrease) in |       
|                                         |  |                        |       
|                                         |  | Net                    |        |   |              
|                                         |  | Interest               |        |   | Present Value | 
|Changes in Interest Rates (Basis Points) |  | Income                 |        |   | of Equity     | 
|                                         |  |                        |        |   |               | 
|December 31, 2004                        |  |                        |        |   |               |  |       |  
|+200                                     |  |                        | 5.96   | % |               |  | -4.13 | %
|+100                                     |  |                        | 3.14   | % |               |  | -3.29 | %
|Base                                     |  |                        | 0.00   | % |               |  | 0.00  | %
|-100                                     |  |                        | -5.43  | % |               |  | -0.79 | %
|-200                                     |  |                        | -6.69  | % |               |  | -0.77 | %
|December 31, 2003                        |  |                        |        |   |               |  |       |  
|+200                                     |  |                        | 6.03   | % |               |  | -7.00 | %
|+100                                     |  |                        | 3.14   | % |               |  | -2.72 | %
|Base                                     |  |                        | 0.00   | % |               |  | 0.00  | %
|-100                                     |  |                        | -3.80  | % |               |  | 0.62  | %
|-200                                     |  |                        | -13.17 | % |               |  | 3.25  | %









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OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS, GUARANTEES
AND


CONTRACTUAL OBLIGATIONS




|                             |       |           |         |         |       |   |        |        |  |   |        |        |  |       |        |        |  |   |         |         | 
|---------------------------- | ----- | --------- | ------- | ------- | ----- | - | ------ | ------ |  | - | ------ | ------ |  | ----- | ------ | ------ |  | - | ------- | ------- | 
|                             |       | Less than |         |         | 1-3   |   |        | 3-5    |  |   | Over 5 |        |  |      
|                             |       | One Year  |         |         | Years |   |        | Years  |  |   | Years  |        |  | Total |       
|                             |       |           |         |         |       |   |        |        |  |   |        |        |  |       |       
|Commitments to extend credit |       | $         | 467,127 |         |       | $ | 83,434 |        |  | $ | 65,030 |        |  | $     | 42,149 |        |  | $ | 657,740 |        
|Standby letters of credit    |       |           | 26,613  |         |       |   | 1,724  |        |  |   | 98     |        |  |       |       |        |  |   | 28,435  |        
|                             |       |           |         |         |       |   |        |        |  |   |        |        |  |       |       
|                             | Total |           | $       | 493,740 |       |   | $      | 85,158 |  |   | $      | 65,128 |  |       | $      | 42,149 |  |   | $       | 686,175 | 
|                             |       |           |         |         |       |   |        |        |  |   |        |        |  |       |       







|                                           |       |           |         |         |       |   |        |        |  |   |        |        |  |       |         |         |  |   |         |         | 
|------------------------------------------ | ----- | --------- | ------- | ------- | ----- | - | ------ | ------ |  | - | ------ | ------ |  | ----- | ------- | ------- |  | - | ------- | ------- | 
|                                           |       | Less than |         |         | 1-3   |   |        | 3-5    |  |   | Over 5 |        |  |      
|                                           |       | One Year  |         |         | Years |   |        | Years  |  |   | Years  |        |  | Total |        
|                                           |       |           |         |         |       |   |        |        |  |   |        |        |  |       |        
|Junior subordinated debt                   |       | $         |        |         |       | $ |       |        |  | $ |       |        |  | $     | 82,475  |         |  | $ | 82,475  |        
|Subordinated debt                          |       |           |        |         |       |   |       |        |  |   |       |        |  |       | 50,000  |         |  |   | 50,000  |        
|Interest expense related to long-term debt |       |           | 7,463   |         |       |   | 14,926 |        |  |   | 14,946 |        |  |       | 148,903 |         |  |   | 186,238 |        
|Operating leases                           |       |           | 3,825   |         |       |   | 7,350  |        |  |   | 7,102  |        |  |       | 6,722   |         |  |   | 24,999  |        
|Certificates and other time deposits       |       |           | 485,505 |         |       |   | 73,119 |        |  |   | 30,999 |        |  |       | 46      |         |  |   | 589,669 |        
|                                           |       |           |         |         |       |   |        |        |  |   |        |        |  |       |        
|                                           | Total |           | $       | 496,793 |       |   | $      | 95,395 |  |   | $      | 53,047 |  |       | $       | 288,146 |  |   | $       | 933,381 | 
|                                           |       |           |         |         |       |   |        |        |  |   |        |        |  |       |        





38



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CAPITAL RESOURCES




|                                         |  |        |         |             |                   |  |       |        |  |   |         |  |  |  |     |  
|---------------------------------------- |  | ------ | ------- | ----------- | ----------------- |  | ----- | ------ |  | - | ------- |  |  |  | --- | -
|                                         |  |        |         | For Capital |                  
|                                         |  | Actual |         |             | Adequacy Purposes | 
|                                         |  |        |         |             |                   | 
|                                         |  | Amount |         |             | Ratio             |  |       | Amount |  |   | Ratio   | 
|                                         |  |        |         |             |                   |  |       |        |  |   |         | 
|Total Capital (to Risk Weighted Assets)  |  | $      | 406,343 |             |                   |  | 14.55 | %      |  | $ | 223,457 |  |  |  | 8.0 | %
|Tier 1 Capital (to Risk Weighted Assets) |  |        | 328,948 |             |                   |  | 11.78 | %      |  |   | 111,729 |  |  |  | 4.0 | %
|Tier 1 Capital (to Average Assets)       |  |        | 328,948 |             |                   |  | 10.15 | %      |  |   | 129,625 |  |  |  | 4.0 | %



RISK FACTORS


In addition to the other information contained in this
report, the following risks may affect us. If any of these risks
occurs, our business, financial condition or operating results
could be adversely affected.


Our profitability depends significantly on economic
conditions.




We rely on an owner-operated business market.




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




39



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Fluctuations in interest rates could reduce our
profitability.








| |   |                                                       
| | - | ------------------------------------------------------
| |  | inflation;                                            
|
| |  | recession;                                            
|
| |  | a rise in unemployment;                               
|
| |  | tightening money supply;                              
|
| |  | international disorder; and                           
|
| |  | instability in domestic and foreign financial markets.



Competition with other financial institutions could adversely
affect our profitability.




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




40



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




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









|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK








|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA








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








|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES





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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING




Internal
Control  Integrated Framework,


















42



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








Internal Control-Integrated Framework Consolidated
Financial Statements for Bank Holding Companies (Form FR
Y-9C)








Internal
Control-Integrated Framework Internal Control-Integrated Framework











43



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##### Table of Contents








|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION











44



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##### Table of Contents










PART III







|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT








|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION








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








|         |                                               
|-------- | ----------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



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|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES






PART IV







|         |                                           
|-------- | ------------------------------------------
|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





| |    |                                                                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Consolidated Financial Statements.The following
    Consolidated Financial Statements and Report of Independent
    Registered Public Accounting Firm are included in this Annual
    Report on Form 10-K.



| |                                                        
| | -------------------------------------------------------
| | REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
| | CONSOLIDATED FINANCIAL STATEMENTS:                     













| |    |                                                                                                                                                                                                                          
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Consolidated Financial Statement Schedules.These
    schedules are omitted as the required information is
    inapplicable or the information is presented in the consolidated
    financial statements or related notes.

3. Exhibits.


|            |   |    |  |                                                                                                                                                                                                                                                                                                                                                              
|----------- | - | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No.
|           
|            | 2 | .1 |  | 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 | .2 |  | 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 reference to
    Exhibit 2 of the Companys Quarterly Report on
    Form 10-Q filed on May 14, 2001 (File No. 000-20750).]                                                         
|            | 2 | .3 |  | 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. [Incorporated by
    reference to Exhibit 2.7 of the Companys Annual
    Report on Form 10-K (File No. 000-20750).]                                                      
|            | 2 | .4 |  | Agreement and Plan of Merger Among Sterling Bancshares, Inc.,
    Sterling Bancorporation, Inc. and ENB Bankshares Inc. dated as
    of May 22, 2002. [Incorporated by reference to Exhibit 2.1
    of the Companys Quarterly Report on Form 10-Q filed
    on August 14, 2002 (File No. 000-20750).]                                                       
|            | 2 | .5 |  | Purchase and Assumption Agreement dated July 12, 2002 between
    Sterling Bank Inc. and James Wilson as amended by First
    Amendment to Purchase and Assumption Agreement dated as of
    August 2, 2002. [Incorporated by reference to Exhibit 2.2
    of the Companys Quarterly Report on Form 10-Q filed
    on August 13, 2002 (File No. 000-20750).]
|            | 2 | .6 |  | Purchase and Assumption Agreement dated as of October 29, 2002
    between Sterling Bank Inc. and South Texas National Bank of
    Laredo. [Incorporated by reference to Exhibit 2.9 of the
    Companys Annual Report on Form 10-K (File
    No. 000-20750).]                                                                                              

46



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|            |   |     |  |                                                                                                                                                                                                                                                                                                                                            
|----------- | - | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No.
|           
|            | 2 | .7  |  | Stock Purchase Agreement dated as of July 16, 2003 by and among
    Sterling Bancshares, Inc., Sterling Bank, CMCR Holding Company
    and RBC Mortgage Company. [Incorporated by reference to
    Exhibit 2.1 to the Companys Current Report on
    Form 8-K filed on October 15, 2003 (File
    No. 000-20750).]                        
|            | 2 | .8  |  | Amendment No. 1 to Stock Purchase Agreement dated as of
    September 30, 2003 by and among Sterling Bancshares, Inc.,
    Sterling Bank, CMCR Holding Company and RBC Mortgage Company.
    [Incorporated by reference to Exhibit 2.2 to the
    Companys Current Report on Form 8-K filed on October
    15, 2003 (File No. 000-20750).]
|            | 2 | .9  |  | Agreement and Plan of Merger dated August 18, 2003 by and among
    Sterling Bancshares, Inc., SB 2003, Inc. and South Texas Capital
    Group, Inc. [Incorporated by reference to Exhibit 10.3 of
    the Companys Quarterly Report on Form 10-Q filed on
    November 14, 2003 (File No. 000-20750).]                                   
|            | 3 | .1  |  | Restated and Amended Articles of Incorporation of the Company,
    as amended. [Incorporated by reference to Exhibit 3.1 to
    the Registration Statement on Form S-3 (File
    Nos. 333-55724, 333-55724-01, and 333-55724-02).]                                                                                                         
|            | 3 | .2  |  | Articles of Amendment to the Restated and Amended Articles of
    Incorporation of Sterling Bancshares, Inc. [Incorporated by
    reference to Exhibit 3.2 of the Companys Quarterly
    Report on Form 10-Q filed on August 13, 2002 (File
    No. 000-20750).]                                                                          
|            | 3 | .3  |  | Amended and Restated Bylaws of Sterling Bancshares, Inc.
    [Incorporated by reference to Exhibit 3.1 of the
    Companys Current Report on Form 8-K filed on
    October 26, 2004 (File No. 000-20750).]                                                                                                                                
|            | 4 | .1  |  | Preferred Securities Guarantee Agreement dated March 21,
    2001. [Incorporated by reference to Exhibit 4.2 of the
    Companys Current Report on Form 8-K filed on
    March 21, 2001 (File No. 000-20750).]                                                                                                                            
|            | 4 | .2  |  | Indenture dated March 21, 2001. [Incorporated by reference
    to Exhibit 4.4 of the Companys Current Report on Form
    8-K filed on March 21, 2001 (File No. 000-20750).]                                                                                                                                                               
|            | 4 | .3  |  | First Supplemental Indenture dated March 21, 2001.
    [Incorporated by reference to Exhibit 4.5 of the
    Companys Current Report on Form 8-K filed on
    March 21, 2001 (File No. 000-20750).]                                                                                                                                        
|            | 4 | .4  |  | 9.20% Subordinated Deferrable Interest Debenture due
    March 21, 2031. [Incorporated by reference to
    Exhibit 4.7 of the Companys Current Report on
    Form 8-K filed on March 21, 2001 (File
    No. 000-20750).]                                                                                                                  
|            | 4 | .5  |  | Indenture dated August 30, 2002. [Incorporated by reference to
    Exhibit 4.4 of the Companys Current Report on Form
    8-K filed on September 12, 2002 (File No. 000-20750).]                                                                                                                                                          
|            | 4 | .6  |  | Junior Subordinated Deferrable Interest Debenture due
    August 30, 2032. [Incorporated by reference to
    Exhibit 4.6 of the Companys Current Report on
    Form 8-K filed on September 12, 2002 (File
    No. 000-20750).]                                                                                                            
|            | 4 | .7  |  | Guarantee Agreement dated August 30, 2002. [Incorporated by
    reference to Exhibit 4.6 of the Companys Current
    Report on Form 8-K filed on September 12, 2002 (File No.
    000-20750).]                                                                                                                                            
|            | 4 | .8  |  | Preferred Securities Guarantee Agreement dated September 26,
    2002. [Incorporated by reference to Exhibit 4.2 of the
    Companys Current Report on Form 8-K dated September
    26, 2002 (File No. 000-20750).]                                                                                                                       
|            | 4 | .9  |  | Second Supplemental Indenture dated September 26, 2002.
    [Incorporated by reference to Exhibit 4.9 of the
    Companys Current Report on Form 8-K dated September
    26, 2002 (File No. 000-20750).]                                                                                                                                  
|            | 4 | .10 |  | 8.30% Junior Subordinated Deferrable Interest Debenture due
    September 26, 2032. [Incorporated by reference to
    Exhibit 4.8 of the Companys Current Report on
    Form 8-K dated September 26, 2002 (File
    No. 000-20750).]                                                                                                      
|            | 4 | .11 |  | Fiscal and Paying Agency Agreement dated April 10, 2003
    between Sterling Bank and Deutsche Bank Trust Company Americas.
    [Incorporated by reference to Exhibit 4.1 of the
    Companys Current Report on Form 8-K filed
    April 15, 2003 (File No. 000-20750).]                                                                  

47



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|            |    |        |  |                                                                                                                                                                                                                                                                                                               
|----------- | -- | ------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No.
|           
|            | 4  | .12    |  | Form of Global Certificate representing Sterling Banks
    7.375% Subordinated Noted due 2013. [Incorporated by reference
    to Exhibit 4.2 of the Companys Current Report on
    Form 8-K filed April 15, 2003 (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*    |  | Credit Agreement dated October 1, 2004 made by and between
    Sterling Bancshares, Inc. and Wells Fargo Bank, National
    Association regarding a line of credit in the amount of
    $20,000,000.                                                                                                          
|            | 10 | .6*    |  | First Amendment to Credit Agreement dated as of March 8,
    2005 by and between Sterling Bancshares, Inc. and Wells Fargo
    Bank, National Association.                                                                                                                                                    
|            | 10 | .7***  |  | 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 Current Report on
    Form 8-K filed on October 14, 2001 (File
    No. 000-207500).]
|            | 10 | .8***  |  | Sterling Bancshares, Inc. 2003 Stock Incentive and Compensation
    Plan [Incorporated by reference to Exhibit 4.4 of the
    Companys Registration Statement on Form S-8 (File No.
    333-105307).]                                                                                                        
|            | 10 | .9***  |  | Consulting Agreement between Sterling Bancshares, Inc. and
    George Martinez executed on June 9, 2004 and effective as of
    June 1, 2004. [Incorporated by reference to Exhibit 10.1 of
    the Companys Quarterly Report on Form 10-Q filed on August
    5, 2004 (File No. 000-207501)].               
|            | 10 | .10*** |  | Form of Severance and Non-Competition Agreements between
    Sterling Bancshares, Inc., Sterling Bank and the following named
    executive officers:                                                                                                                                                         

| |  |                                                                                                 |  |                                                                                
| |  | ----------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------
| |  | Daryl D. Bohls
    Danny L. Buck
    Wanda S. Dalton
    Clinton Dunn
    James W. Goolsby, Jr. |  | Travis Jaggers
    Graham B. Painter
    Stephen C. Raffaele
    Mike Skowronek

| |    |        |  |                                                                                                                                                                                                                                                                                                                     
| | -- | ------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |        |  | [Incorporated by reference to Exhibit 10.2 of the
    Companys Quarterly Report on Form 10-Q filed on
    August 5, 2004 (File No. 000-207501)].                                                                                                                                                                   
| | 10 | .11*** |  | Form of Restricted Stock Agreement [Incorporated by reference to
    Exhibit 10.1 of the Companys Current Report on
    Form 8-K filed on February 4, 2005(File
    No. 000-207500).]                                                                                                                              
| | 10 | .12*** |  | Form of Incentive Stock Agreement [Incorporated by reference to
    Exhibit 10.2 of the Companys Current Report on
    Form 8-K filed on February 4, 2005 (File
    No. 000-207500).]                                                                                                                              
| | 10 | .13*** |  | Severance and Non-Competition Agreement between Sterling
    Bancshares, Inc., Sterling Bank and Allen Brown executed and
    effective as of December 1, 2004. [Incorporated by
    reference to Exhibit 10.1 of the Companys Current
    Report on Form 8-K filed on December 7, 2004 (File
    No. 000-207500).]
| | 10 | .14*** |  | Short Term Incentive Program For Shared Services                                                                                                                                                                                                                                                                    
| | 10 | .15*** |  | Short Term Incentive Program For Bank Offices.                                                                                                                                                                                                                                                                      
| | 21 | *      |  | Subsidiaries of the Company                                                                                                                                                                                                                                                                                         
| | 23 | .1*    |  | Consent of Deloitte & Touche LLP, Independent Registered
    Public Accounting Firm                                                                                                                                                                                                                                 
| | 31 | .1*    |  | Certification of J. Downey Bridgwater, President and Chief
    Executive Officer, as required pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                        

48



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|            |    |      |  |                                                                                                                                                                           
|----------- | -- | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No.
|           
|            | 31 | .2*  |  | Certification of Stephen C. Raffaele, Executive Vice President
    and Chief Financial Officer, as required pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002.
|            | 32 | .1** |  | Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.                                           
|            | 32 | .2** |  | Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.                                           










49



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SIGNATURES






| |                          
| | -------------------------
| | STERLING BANCSHARES, INC.



| |    |                         
| | -- | ------------------------
| | By | /s/ J. Downey Bridgwater

| |                                      
| | -------------------------------------
| |                                      
| | J. Downey Bridgwater,                
| | Chief Executive Officer and President





|                                                 |  |                                                                                                       |  | 
|------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------- |  | 
|SIGNATURE                                        |  | TITLE                                                                                                
|                                                 |  |                                                                                                      
|                                                
|/s/ J. Downey BridgwaterJ.
    Downey Bridgwater |  | Chief Executive Officer, President and Director (Principal
    Executive Officer)                    
|                                                
|/s/ Stephen C. RaffaeleStephen
    C. Raffaele   |  | Executive Vice President and Chief Financial Officer (Principal
    Financial and Accounting Officer)
|                                                
|/s/ Steven F. RetzloffSteven
    F. Retzloff     |  | Chairman and Director                                                                                
|                                                
|/s/ George MartinezGeorge
    Martinez           |  | Director                                                                                             
|                                                
|/s/ George Beatty, Jr.George
    Beatty, Jr.     |  | Director                                                                                             
|                                                
|/s/ Anat BirdAnat
    Bird                       |  | Director                                                                                             
|                                                
|/s/ R. Bruce LaBoonR.
    Bruce LaBoon           |  | Director                                                                                             
|                                                
|/s/ James D. CalawayJames
    D. Calaway         |  | Director                                                                                             
|                                                
|/s/ Bruce J. HarperBruce
    J. Harper           |  | Director                                                                                             
|                                                
|/s/ David L. HatcherDavid
    L. Hatcher         |  | Director                                                                                             

50



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|                                                         |  |          |  | 
|-------------------------------------------------------- |  | -------- |  | 
|SIGNATURE                                                |  | TITLE   
|                                                         |  |         
|                                                        
|/s/ Glenn H. JohnsonGlenn
    H. Johnson                 |  | Director
|                                                        
|/s/ James J. KearneyJames
    J. Kearney                 |  | Director
|                                                        
|/s/ Paul Michael Mann, M.D.Paul
    Michael Mann, M.D.   |  | Director
|                                                        
|/s/ G. Edward PowellG.
    Edward Powell                 |  | Director
|                                                        
|/s/ Thomas A. ReiserThomas
    A. Reiser                 |  | Director
|                                                        
|/s/ Raimundo Riojas E.Raimundo
    Riojas E.             |  | Director
|                                                        
|/s/ Howard T. Tellepsen, Jr.Howard
    T. Tellepsen, Jr. |  | Director

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STERLING BANCSHARES, INC.


TABLE OF CONTENTS


|                                                        |                                                 |      |    |    | 
|------------------------------------------------------- | ----------------------------------------------- | ---- | -- | -- | 
|                                                        |                                                 | Page |   
|                                                        |                                                 |      |   
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |                                                 |      | 53 |   
|                                                       
|CONSOLIDATED FINANCIAL STATEMENTS:                      |                                                 |      |    |   
|                                                        | Consolidated Balance Sheets                     |      |    | 54 | 
|                                                        | Consolidated Statements of Income               |      |    | 55 | 
|                                                        | Consolidated Statements of Shareholders Equity |      |    | 56 | 
|                                                        | Consolidated Statements of Cash Flows           |      |    | 57 | 
|                                                        | Notes to Consolidated Financial Statements      |      |    | 59 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











Internal Control 
Integrated Framework








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STERLING BANCSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


|                                                    |                                                                                                                                                                                |                                      |                |           |           |           |           |           |           |           | 
|--------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------ | -------------- | --------- | --------- | --------- | --------- | --------- | --------- | --------- | 
|                                                    |                                                                                                                                                                                | December 31,                         |               
|                                                    |                                                                                                                                                                                |                                      |               
|                                                    |                                                                                                                                                                                | 2004                                 |                |           | 2003      |          
|                                                    |                                                                                                                                                                                |                                      |                |           |           |          
|                                                    |                                                                                                                                                                                | (In thousands, except share          |               
|                                                    |                                                                                                                                                                                | amounts)                             |               
|ASSETS                                             
|Cash and cash equivalents                           |                                                                                                                                                                                | $                                    | 88,439         |           |           | $         | 136,764   |          
|Interest-bearing deposits in financial institutions |                                                                                                                                                                                |                                      | 595            |           |           |           | 1,358     |          
|Trading assets                                      |                                                                                                                                                                                |                                      | 36,720         |           |           |           | 172,825   |          
|Available-for-sale securities, at fair value        |                                                                                                                                                                                |                                      | 540,704        |           |           |           | 522,936   |          
|Held-to-maturity securities, at amortized cost      |                                                                                                                                                                                |                                      | 117,414        |           |           |           | 42,157    |          
|Loans held for sale                                 |                                                                                                                                                                                |                                      | 6,881          |           |           |           | 26,308    |          
|Loans held for investment                           |                                                                                                                                                                                |                                      | 2,338,096      |           |           |           | 2,130,731 |          
|                                                    |                                                                                                                                                                                |                                      |                |           |           |          
|                                                    | Total loans                                                                                                                                                                    |                                      |                | 2,344,977 |           |           |           | 2,157,039 |          
|Allowance for credit losses                         |                                                                                                                                                                                |                                      | (30,232        | )         |           |           | (30,722   | )        
|                                                    |                                                                                                                                                                                |                                      |                |           |           |          
|                                                    | Loans, net                                                                                                                                                                     |                                      |                | 2,314,745 |           |           |           | 2,126,317 |          
|Premises and equipment, net                         |                                                                                                                                                                                |                                      | 40,171         |           |           |           | 48,541    |          
|Real estate acquired by foreclosure                 |                                                                                                                                                                                |                                      | 1,536          |           |           |           | 2,124     |          
|Goodwill                                            |                                                                                                                                                                                |                                      | 62,480         |           |           |           | 62,933    |          
|Core deposit intangibles, net                       |                                                                                                                                                                                |                                      | 1,839          |           |           |           | 2,326     |          
|Accrued interest receivable                         |                                                                                                                                                                                |                                      | 11,964         |           |           |           | 12,046    |          
|Other assets                                        |                                                                                                                                                                                |                                      | 119,463        |           |           |           | 76,553    |          
|                                                    |                                                                                                                                                                                |                                      |                |           |           |          
|TOTAL ASSETS                                        |                                                                                                                                                                                | $                                    | 3,336,070      |           |           | $         | 3,206,880 |          
|                                                    |                                                                                                                                                                                |                                      |                |           |           |          
|LIABILITIES AND SHAREHOLDERS EQUITY               
|LIABILITIES:                                        |                                                                                                                                                                                |                                      |                |           |           |           |           |          
|                                                    | Deposits:                                                                                                                                                                      |                                      |                |           |           |           |           |           |          
|                                                    |                                                                                                                                                                                | Noninterest-bearing demand           |                | $         | 884,017   |           |           | $         | 834,313   |          
|                                                    |                                                                                                                                                                                | Interest-bearing demand              |                |           | 970,281   |           |           |           | 929,577   |          
|                                                    |                                                                                                                                                                                | Certificates and other time deposits |                |           | 589,669   |           |           |           | 654,479   |          
|                                                    |                                                                                                                                                                                |                                      |                |           |           |          
|                                                    |                                                                                                                                                                                |                                      | Total deposits |           |           | 2,443,967 |           |           |           | 2,418,369 | 
|                                                    | Short-term borrowings                                                                                                                                                          |                                      |                | 420,575   |           |           |           | 324,160   |          
|                                                    | Subordinated debt                                                                                                                                                              |                                      |                | 47,162    |           |           |           | 46,533    |          
|                                                    | Junior subordinated debt                                                                                                                                                       |                                      |                | 82,475    |           |           |           | 82,475    |          
|                                                    | Accrued interest payable and other liabilities                                                                                                                                 |                                      |                | 28,719    |           |           |           | 42,747    |          
|                                                    |                                                                                                                                                                                |                                      |                |           |           |          
|                                                    |                                                                                                                                                                                | Total liabilities                    |                |           | 3,022,898 |           |           |           | 2,914,284 |          
|COMMITMENTS AND CONTINGENCIES                       |                                                                                                                                                                                |                                      |               |           |           |           |          |          
|SHAREHOLDERS EQUITY                                |                                                                                                                                                                                |                                      |                |           |           |           |           |          
|                                                    | Convertible preferred stock, $1 par value; 1,000,000 shares
    authorized, 20,000 issued and outstanding at December 31,
    2003. No shares outstanding at December 31, 2004 |                                      |                |          |           |           |           | 20        |          
|                                                    | Common stock, $1 par value; 100,000,000 shares authorized,
    45,068,048 and 44,642,109 issued and outstanding at
    December 31, 2004 and 2003, respectively                |                                      |                | 45,068    |           |           |           | 44,642    |          
|                                                    | Capital surplus                                                                                                                                                                |                                      |                | 54,522    |           |           |           | 48,953    |          
|                                                    | Retained earnings                                                                                                                                                              |                                      |                | 213,814   |           |           |           | 197,819   |          
|                                                    | Accumulated other comprehensive income (loss), net of tax                                                                                                                      |                                      |                | (232      | )         |           |           | 1,162     |          
|                                                    |                                                                                                                                                                                |                                      |                |           |           |          
|                                                    |                                                                                                                                                                                | Total shareholders equity           |                |           | 313,172   |           |           |           | 292,596   |          
|                                                    |                                                                                                                                                                                |                                      |                |           |           |          
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY          |                                                                                                                                                                                | $                                    | 3,336,070      |           |           | $         | 3,206,880 |          
|                                                    |                                                                                                                                                                                |                                      |                |           |           |          



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STERLING BANCSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME


|                                                        |                                                |                                          |         |         |         |   |         |         |         |   |         |         |         | 
|------------------------------------------------------- | ---------------------------------------------- | ---------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                        |                                                | For the Years Ended December 31,         |        
|                                                        |                                                |                                          |        
|                                                        |                                                | 2004                                     |         |         | 2003    |   |         | 2002    |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|                                                        |                                                | (In thousands, except per share amounts) |        
|Interest income:                                        |                                                |                                          |         |         |         |   |         |         |         |   |         |        
|                                                        | Loans, including fees                          |                                          | $       | 138,023 |         |   | $       | 154,358 |         |   | $       | 156,902 |        
|                                                        | Securities:                                    |                                          |         |         |         |   |         |         |         |   |         |         |        
|                                                        |                                                | Taxable                                  |         |         | 21,307  |   |         |         | 10,947  |   |         |         | 13,957  | 
|                                                        |                                                | Non-taxable                              |         |         | 2,042   |   |         |         | 2,266   |   |         |         | 2,890   | 
|                                                        | Trading assets                                 |                                          |         | 4,569   |         |   |         | 3,567   |         |   |         | 4,540   |        
|                                                        | Federal funds sold                             |                                          |         | 101     |         |   |         | 176     |         |   |         | 463     |        
|                                                        | Deposits in financial institutions             |                                          |         | 55      |         |   |         | 69      |         |   |         | 106     |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|                                                        |                                                | Total interest income                    |         |         | 166,097 |   |         |         | 171,383 |   |         |         | 178,858 | 
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|Interest expense:                                       |                                                |                                          |         |         |         |   |         |         |         |   |         |        
|                                                        | Demand and savings deposits                    |                                          |         | 4,785   |         |   |         | 4,752   |         |   |         | 8,541   |        
|                                                        | Certificates and other time deposits           |                                          |         | 12,694  |         |   |         | 14,608  |         |   |         | 17,479  |        
|                                                        | Short-term borrowings                          |                                          |         | 4,163   |         |   |         | 4,921   |         |   |         | 4,946   |        
|                                                        | Notes payable                                  |                                          |         |        |         |   |         | 585     |         |   |         | 797     |        
|                                                        | Subordinated debt                              |                                          |         | 2,640   |         |   |         | 1,903   |         |   |         |        |        
|                                                        | Junior subordinated debt                       |                                          |         | 6,431   |         |   |         | 6,379   |         |   |         | 6,097   |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|                                                        |                                                | Total interest expense                   |         |         | 30,713  |   |         |         | 33,148  |   |         |         | 37,860  | 
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|Net interest income                                     |                                                |                                          | 135,384 |         |         |   | 138,235 |         |         |   | 140,998 |        
|Provision for credit losses                             |                                                |                                          | 12,250  |         |         |   | 17,698  |         |         |   | 11,700  |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|Net interest income after provision for credit losses   |                                                |                                          | 123,134 |         |         |   | 120,537 |         |         |   | 129,298 |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|Noninterest income:                                     |                                                |                                          |         |         |         |   |         |         |         |   |         |        
|                                                        | Customer service fees                          |                                          |         | 14,536  |         |   |         | 16,214  |         |   |         | 16,893  |        
|                                                        | Net gain (loss) on the sale of banking offices |                                          |         | (27     | )       |   |         | 3,517   |         |   |         |        |        
|                                                        | Net gain on the sale of securities             |                                          |         | 4,941   |         |   |         | 905     |         |   |         | 110     |        
|                                                        | Net gain (loss) on trading assets              |                                          |         | (452    | )       |   |         | 1,186   |         |   |         | 1,018   |        
|                                                        | Other                                          |                                          |         | 11,924  |         |   |         | 11,448  |         |   |         | 11,771  |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|                                                        |                                                | Total noninterest income                 |         |         | 30,922  |   |         |         | 33,270  |   |         |         | 29,792  | 
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|Noninterest expense:                                    |                                                |                                          |         |         |         |   |         |         |         |   |         |        
|                                                        | Salaries and employee benefits                 |                                          |         | 68,272  |         |   |         | 65,525  |         |   |         | 63,430  |        
|                                                        | Occupancy expense                              |                                          |         | 15,326  |         |   |         | 15,364  |         |   |         | 15,181  |        
|                                                        | Technology                                     |                                          |         | 6,127   |         |   |         | 5,170   |         |   |         | 5,046   |        
|                                                        | Professional fees                              |                                          |         | 6,999   |         |   |         | 4,624   |         |   |         | 4,205   |        
|                                                        | Postage, delivery and supplies                 |                                          |         | 3,179   |         |   |         | 3,474   |         |   |         | 3,690   |        
|                                                        | Marketing                                      |                                          |         | 1,457   |         |   |         | 1,498   |         |   |         | 566     |        
|                                                        | Acquisition-related expenses                   |                                          |         |        |         |   |         | 66      |         |   |         | 822     |        
|                                                        | Core deposit intangible amortization           |                                          |         | 487     |         |   |         | 465     |         |   |         | 426     |        
|                                                        | Other                                          |                                          |         | 17,762  |         |   |         | 15,230  |         |   |         | 16,824  |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|                                                        |                                                | Total noninterest expense                |         |         | 119,609 |   |         |         | 111,416 |   |         |         | 110,190 | 
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|Income from continuing operations before income taxes   |                                                |                                          | 34,447  |         |         |   | 42,391  |         |         |   | 48,900  |        
|                                                        | Provision for income taxes                     |                                          |         | 9,484   |         |   |         | 14,037  |         |   |         | 15,717  |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|Income from continuing operations                       |                                                |                                          | 24,963  |         |         |   | 28,354  |         |         |   | 33,183  |        
|Income from discontinued operations before income taxes |                                                |                                          |        |         |         |   | 45,820  |         |         |   | 5,729   |        
|                                                        | Provision for income taxes                     |                                          |         |        |         |   |         | 25,064  |         |   |         | 2,361   |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|Income from discontinued operations                     |                                                |                                          |        |         |         |   | 20,756  |         |         |   | 3,368   |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|Net income                                              |                                                | $                                        | 24,963  |         |         | $ | 49,110  |         |         | $ | 36,551  |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|Earnings per share from continuing operations           |                                                |                                          |         |         |         |   |         |         |         |   |         |        
|                                                        | Basic                                          |                                          | $       | 0.56    |         |   | $       | 0.64    |         |   | $       | 0.76    |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|                                                        | Diluted                                        |                                          | $       | 0.55    |         |   | $       | 0.64    |         |   | $       | 0.74    |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|Earnings per share                                      |                                                |                                          |         |         |         |   |         |         |         |   |         |        
|                                                        | Basic                                          |                                          | $       | 0.56    |         |   | $       | 1.11    |         |   | $       | 0.83    |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        
|                                                        | Diluted                                        |                                          | $       | 0.55    |         |   | $       | 1.10    |         |   | $       | 0.82    |        
|                                                        |                                                |                                          |         |         |         |   |         |         |        

.


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STERLING BANCSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


|                             |                               |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        |        |   |       |   |        |   |         |        |        |        | 
|---------------------------- | ----------------------------- | ------------------------------------------------------------------------------------------------------ | -------------------------- | --- | ------------ | ----------- | -- | ------- | ----- | ------------- | -------- | --- |  | ------- | ------ | --- | -------- | - | ------ | ------ | - | - | ------- | ------ | ------ | - | ----- | - | ------ | - | ------- | ------ | ------ | ------ | 
|                             |                               | For the Years Ended December 31,                                                                       |                           
|                             |                               |                                                                                                        |                           
|                             |                               |                                                                                                        |                            |     |              | Accumulated |    |         |      
|                             |                               | Convertible                                                                                            |                            |     |              |             |    |         | Other |               |          |    
|                             |                               | Preferred Stock                                                                                        |                            |     | Common Stock |             |    |         |       | Comprehensive |          |     | 
|                             |                               |                                                                                                        |                            |     |              |             |    | Capital |       |               | Retained |     |  | Income  |        |     |         
|                             |                               | Shares                                                                                                 |                            |     | Amount       |             |    | Shares  |       |               | Amount   |     |  | Surplus |        |     | Earnings |   |        | (Loss) |   |   | Total   |       
|                             |                               |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |       
|                             |                               | (In thousands)                                                                                         |                           
|BALANCE AT JANUARY 1, 2002   |                               |                                                                                                        | 39                         |     |              | $           | 39 |         |       |               | 43,770   |     |  | $       | 43,770 |     |          | $ | 42,526 |        |   | $ | 127,144 |        |        | $ | 3,890 |   |        | $ | 217,369 |       
|                             | Comprehensive income:         |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        |        |   |       |   |        |   |         |        |       
|                             |                               | Net income                                                                                             |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        | 36,551 |   |       |   |        |   |         |        | 36,551 |       
|                             |                               | Net change in unrealized gains and losses on available-for-sale
    securities, net of taxes of $91    |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        |        |   |       |   | 170    |   |         |        | 170    |       
|                             |                               | Less: Reclassification adjustment for net gains included in net
    income, net of taxes of $39        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        |        |   |       |   | (72    | ) |         |        | (72    | )     
|                             |                               |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |       
|                             |                               |                                                                                                        | Total comprehensive income |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        |        |   |       |   |        |   |         |        |        | 36,649 | 
|                             |                               |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |       
|                             | Issuance of common stock      |                                                                                                        |                            |     |              |             |    |         |       |               |          | 213 |  |         |        | 213 |          |   |        | 1,885  |   |   |         |        |        |   |       |   |        |   |         | 2,098  |       
|                             | Issuance of preferred stock   |                                                                                                        |                            | 20  |              |             |    | 20      |       |               |          |     |  |         |        |     |          |   |        | 222    |   |   |         |        |        |   |       |   |        |   |         | 242    |       
|                             | Cash dividends paid           |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         | (7,031 | )      |   |       |   |        |   |         | (7,031 | )     
|                             |                               |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |       
|BALANCE AT DECEMBER 31, 2002 |                               |                                                                                                        | 59                         |     |              |             | 59 |         |       |               | 43,983   |     |  |         | 43,983 |     |          |   | 44,633 |        |   |   | 156,664 |        |        |   | 3,988 |   |        |   | 249,327 |       
|                             | Comprehensive income:         |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        |        |   |       |   |        |   |         |        |       
|                             |                               | Net income                                                                                             |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        | 49,110 |   |       |   |        |   |         |        | 49,110 |       
|                             |                               | Net change in unrealized gains and losses on available-for-sale
    securities, net of taxes of $1,204 |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        |        |   |       |   | (2,238 | ) |         |        | (2,238 | )     
|                             |                               | Less: Reclassification adjustment for net gains included in net
    income, net of taxes of $317       |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        |        |   |       |   | (588   | ) |         |        | (588   | )     
|                             |                               |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |       
|                             |                               |                                                                                                        | Total comprehensive income |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        |        |   |       |   |        |   |         |        |        | 46,284 | 
|                             |                               |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |       
|                             | Issuance of common stock      |                                                                                                        |                            |     |              |             |    |         |       |               |          | 595 |  |         |        | 595 |          |   |        | 4,345  |   |   |         |        |        |   |       |   |        |   |         | 4,940  |       
|                             | Conversion of preferred stock |                                                                                                        |                            | (39 | )            |             |    | (39     | )     |               |          | 64  |  |         |        | 64  |          |   |        | (25    | ) |   |         |        |        |   |       |   |        |   |         |       |       
|                             | Cash dividends paid           |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         | (7,955 | )      |   |       |   |        |   |         | (7,955 | )     
|                             |                               |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |       
|BALANCE AT DECEMBER 31, 2003 |                               |                                                                                                        | 20                         |     |              |             | 20 |         |       |               | 44,642   |     |  |         | 44,642 |     |          |   | 48,953 |        |   |   | 197,819 |        |        |   | 1,162 |   |        |   | 292,596 |       
|                             | Comprehensive income:         |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        |        |   |       |   |        |   |         |        |       
|                             |                               | Net income                                                                                             |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        | 24,963 |   |       |   |        |   |         |        | 24,963 |       
|                             |                               | Net change in unrealized gains and losses on available-for-sale
    securities, net of taxes of $874   |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        |        |   |       |   | (1,623 | ) |         |        | (1,623 | )     
|                             |                               | Less: Reclassification adjustment for net losses included in net
    income, net of taxes of $123      |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        |        |   |       |   | 229    |   |         |        | 229    |       
|                             |                               |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |       
|                             |                               |                                                                                                        | Total comprehensive income |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |        |        |   |       |   |        |   |         |        |        | 23,569 | 
|                             |                               |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |       
|                             | Issuance of common stock      |                                                                                                        |                            |     |              |             |    |         |       |               |          | 406 |  |         |        | 406 |          |   |        | 5,569  |   |   |         |        |        |   |       |   |        |   |         | 5,975  |       
|                             | Conversion of preferred stock |                                                                                                        |                            | (20 | )            |             |    | (20     | )     |               |          | 20  |  |         |        | 20  |          |   |        |        |   |   |         |        |        |   |       |   |        |   |         |       |       
|                             | Cash dividends paid           |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         | (8,968 | )      |   |       |   |        |   |         | (8,968 | )     
|                             |                               |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |       
|BALANCE AT DECEMBER 31, 2004 |                               |                                                                                                        |                           |     |              | $           |   |         |       |               | 45,068   |     |  | $       | 45,068 |     |          | $ | 54,522 |        |   | $ | 213,814 |        |        | $ | (232  | ) |        | $ | 313,172 |       
|                             |                               |                                                                                                        |                            |     |              |             |    |         |       |               |          |     |  |         |        |     |          |   |        |        |   |   |         |       



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STERLING BANCSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                      |                                                                                                                        |                                                                             |                                                                                    |          |          |          |   |          |          |          |   |          |          |          |  
|------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | -------- | -------- | -------- | - | -------- | -------- | -------- | - | -------- | -------- | -------- | -
|                                      |                                                                                                                        | For The Years Ended December 31,                                            |                                                                                   
|                                      |                                                                                                                        |                                                                             |                                                                                   
|                                      |                                                                                                                        | 2004                                                                        |                                                                                    |          | 2003     |          |   | 2002     |         
|                                      |                                                                                                                        |                                                                             |                                                                                    |          |          |          |   |          |         
|                                      |                                                                                                                        | (In thousands)                                                              |                                                                                   
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                                                                        |                                                                             |                                                                                    |          |          |          |   |          |          |          |   |         
|                                      | Income from continuing operations                                                                                      |                                                                             | $                                                                                  | 24,963   |          |          | $ | 28,354   |          |          | $ | 33,183   |         
|                                      | Adjustments to reconcile income from continuing operations to
    net cash provided by (used in) operating activities: |                                                                             |                                                                                    |          |          |          |   |          |          |          |   |          |         
|                                      |                                                                                                                        | Amortization and accretion of premiums and discounts on
    securities, net |                                                                                    |          | 6,069    |          |   |          | 8,807    |          |   |          | 2,537    |         
|                                      |                                                                                                                        | Provision for credit losses                                                 |                                                                                    |          | 12,250   |          |   |          | 17,698   |          |   |          | 11,700   |         
|                                      |                                                                                                                        | Deferred income tax expense                                                 |                                                                                    |          | 1,151    |          |   |          | 522      |          |   |          | 2,610    |         
|                                      |                                                                                                                        | Net gain on the sale of securities                                          |                                                                                    |          | (4,941   | )        |   |          | (905     | )        |   |          | (110     | )       
|                                      |                                                                                                                        | Net loss (gain) on the sale of banking offices                              |                                                                                    |          | 27       |          |   |          | (3,517   | )        |   |          |         |         
|                                      |                                                                                                                        | Net gain on sale of bank assets                                             |                                                                                    |          | (195     | )        |   |          |         |          |   |          |         |         
|                                      |                                                                                                                        | Net loss (gain) on trading assets                                           |                                                                                    |          | 452      |          |   |          | (1,186   | )        |   |          | (1,018   | )       
|                                      |                                                                                                                        | Depreciation and amortization                                               |                                                                                    |          | 9,206    |          |   |          | 8,728    |          |   |          | 9,116    |         
|                                      |                                                                                                                        | Write-downs, less gains on sale of real estate acquired by
    foreclosure  |                                                                                    |          | (58      | )        |   |          | (651     | )        |   |          | 484      |         
|                                      |                                                                                                                        | Write-downs of bank assets                                                  |                                                                                    |          | 1,388    |          |   |          |         |          |   |          |         |         
|                                      |                                                                                                                        | Net decrease (increase) in loans held for sale                              |                                                                                    |          | 1,440    |          |   |          | 674,993  |          |   |          | (439,796 | )       
|                                      |                                                                                                                        | Purchases of trading assets                                                 |                                                                                    |          | (341,926 | )        |   |          | (493,894 | )        |   |          | (529,176 | )       
|                                      |                                                                                                                        | Proceeds from sale and principal paydowns on trading securities             |                                                                                    |          | 453,735  |          |   |          | 465,058  |          |   |          | 505,903  |         
|                                      |                                                                                                                        | (Increase) decrease in accrued interest receivable and other
    assets     |                                                                                    |          | (20,763  | )        |   |          | 110,250  |          |   |          | (73,351  | )       
|                                      |                                                                                                                        | (Decrease) increase in accrued interest payable and other
    liabilities   |                                                                                    |          | (13,405  | )        |   |          | 18,252   |          |   |          | 3,855    |         
|                                      |                                                                                                                        |                                                                             |                                                                                    |          |          |          |   |          |         
|                                      |                                                                                                                        |                                                                             | Net cash provided by (used in) operating activities from
    continuing operations |          |          | 129,393  |   |          |          | 832,509  |   |          |          | (474,063 | )
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                                                                        |                                                                             |                                                                                    |          |          |          |   |          |          |          |   |         
|                                      | Decrease in securities purchased under agreements to resell                                                            |                                                                             |                                                                                    |         |          |          |   |         |          |          |   | 12,313   |         
|                                      | Proceeds from the maturities or calls of securities and paydowns
    of held-to-maturity securities                    |                                                                             |                                                                                    | 9,587    |          |          |   | 19,580   |          |          |   | 16,306   |         
|                                      | Proceeds from the sale and calls of available-for-sale securities                                                      |                                                                             |                                                                                    | 161,834  |          |          |   | 32,487   |          |          |   | 6,477    |         
|                                      | Proceeds from maturities and paydowns of available-for-sale
    securities                                             |                                                                             |                                                                                    | 141,739  |          |          |   | 193,307  |          |          |   | 131,761  |         
|                                      | Purchases of available-for-sale securities                                                                             |                                                                             |                                                                                    | (300,581 | )        |          |   | (503,222 | )        |          |   | (140,361 | )       
|                                      | Purchases of held-to-maturity securities                                                                               |                                                                             |                                                                                    | (84,975  | )        |          |   |         |          |          |   |         |         
|                                      | Net increase in loans held for investment                                                                              |                                                                             |                                                                                    | (206,252 | )        |          |   | (178,418 | )        |          |   | (223,777 | )       
|                                      | Purchase of bank-owned life insurance                                                                                  |                                                                             |                                                                                    | (20,000  | )        |          |   | (2,010   | )        |          |   | (2,084   | )       
|                                      | Proceeds from sale of real estate acquired by foreclosure                                                              |                                                                             |                                                                                    | 5,199    |          |          |   | 6,796    |          |          |   | 2,969    |         
|                                      | Proceeds from sale of land held for sale                                                                               |                                                                             |                                                                                    | 729      |          |          |   |         |          |          |   |         |         
|                                      | Net decrease (increase) in interest-bearing deposits in
    financial institutions                                     |                                                                             |                                                                                    | 763      |          |          |   | (74      | )        |          |   | 812      |         
|                                      | Cash & cash equivalents related to sales of banking
    offices                                                        |                                                                             |                                                                                    |         |          |          |   | (106,652 | )        |          |   |         |         
|                                      | Purchase of Plaza Bank (net of acquired cash and cash
    equivalents)                                                 |                                                                             |                                                                                    |         |          |          |   | (5,212   | )        |          |   |         |         
|                                      | Purchase of ENB Bankshares, Inc. (net of acquired cash and cash
    equivalents)                                       |                                                                             |                                                                                    |         |          |          |   |         |          |          |   | (7,948   | )       
|                                      | Proceeds from sale of premises and equipment                                                                           |                                                                             |                                                                                    | 731      |          |          |   | 2,886    |          |          |   | 4,768    |         
|                                      | Purchase of premises and equipment                                                                                     |                                                                             |                                                                                    | (5,512   | )        |          |   | (5,436   | )        |          |   | (10,449  | )       
|                                      |                                                                                                                        |                                                                             |                                                                                    |          |          |          |   |          |         
|                                      |                                                                                                                        |                                                                             | Net cash used in investing activities from continuing
    operations               |          |          | (296,738 | ) |          |          | (545,968 | ) |          |          | (209,213 | )

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STERLING BANCSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS  Continued


|                                                                                    |                                                      |                                                              |                                                                                    |        |       |         |         |          |       |          |         |         |       |         | 
|----------------------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------------------------------------------ | ---------------------------------------------------------------------------------- | ------ | ----- | ------- | ------- | -------- | ----- | -------- | ------- | ------- | ----- | ------- | 
|                                                                                    |                                                      | For The Years Ended December 31,                             |                                                                                   
|                                                                                    |                                                      |                                                              |                                                                                   
|                                                                                    |                                                      | 2004                                                         |                                                                                    |        | 2003  |         |         | 2002     |      
|                                                                                    |                                                      |                                                              |                                                                                    |        |       |         |         |          |      
|                                                                                    |                                                      | (In thousands)                                               |                                                                                   
|CASH FLOWS FROM FINANCING ACTIVITIES:                                               |                                                      |                                                              |                                                                                    |        |       |         |         |          |       |          |         |        
|                                                                                    | Net increase (decrease) in deposit accounts          |                                                              |                                                                                    | 25,598 |       |         |         | (171,755 | )     |          |         | 346,070 |      
|                                                                                    | Net increase (decrease) in short-term borrowings     |                                                              |                                                                                    | 96,415 |       |         |         | (194,930 | )     |          |         | 322,292 |      
|                                                                                    | Repayments of notes payable                          |                                                              |                                                                                    |       |       |         |         | (21,430  | )     |          |         | (602    | )    
|                                                                                    | Issuance of subordinated debt                        |                                                              |                                                                                    |       |       |         |         | 49,944   |       |          |         |        |      
|                                                                                    | Issuance of trust preferred securities               |                                                              |                                                                                    |       |       |         |         |         |       |          |         | 51,250  |      
|                                                                                    | Redemption of trust preferred securities             |                                                              |                                                                                    |       |       |         |         |         |       |          |         | (28,750 | )    
|                                                                                    | Proceeds from issuance of common and preferred stock |                                                              |                                                                                    | 5,975  |       |         |         | 4,940    |       |          |         | 2,340   |      
|                                                                                    | Payments of cash dividends                           |                                                              |                                                                                    | (8,968 | )     |         |         | (7,955   | )     |          |         | (7,031  | )    
|                                                                                    |                                                      |                                                              |                                                                                    |        |       |         |         |          |      
|                                                                                    |                                                      |                                                              | Net cash provided by (used in) financing activities from
    continuing operations |        |       | 119,020 |         |          |       | (341,186 | )       |         |       | 685,569 | 
|                                                                                    |                                                      |                                                              |                                                                                    |        |       |         |         |          |      
|Net (decrease) increase in cash and cash equivalents from
    continuing operations |                                                      |                                                              | (48,325                                                                            | )      |       |         | (54,645 | )        |       |          | 2,293   |        
|Net cash provided by (used in) discontinued operations                              |                                                      |                                                              |                                                                                   |        |       |         | 44,409  |          |       |          | (3,588  | )      
|Cash and cash equivalents at beginning of year                                      |                                                      |                                                              | 136,764                                                                            |        |       |         | 147,000 |          |       |          | 148,295 |        
|                                                                                    |                                                      |                                                              |                                                                                    |        |       |         |         |          |      
|Cash and cash equivalents at end of year                                            |                                                      | $                                                            | 88,439                                                                             |        |       | $       | 136,764 |          |       | $        | 147,000 |        
|                                                                                    |                                                      |                                                              |                                                                                    |        |       |         |         |          |      
|Supplemental information:                                                           |                                                      |                                                              |                                                                                    |        |       |         |         |          |       |          |         |        
|                                                                                    | Income taxes paid                                    |                                                              | $                                                                                  | 29,704 |       |         | $       | 27,443   |       |          | $       | 14,173  |      
|                                                                                    | Interest paid                                        |                                                              |                                                                                    | 30,316 |       |         |         | 27,246   |       |          |         | 27,423  |      
|                                                                                    | Noncash investing and financing activities          |                                                              |                                                                                    |        |       |         |         |          |       |          |         |         |      
|                                                                                    |                                                      | Loan to finance the sale of premises and equipment           |                                                                                    |        | 419   |         |         |          |      |          |         |         |      |        
|                                                                                    |                                                      | Acquisition of real estate through foreclosure of collateral |                                                                                    |        | 4,553 |         |         |          | 4,917 |          |         |         | 3,981 |        



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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                                              
|-- | -----------------------------------------------------------------------------
|1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
    REPORTING POLICIES

Organization 




Summary of Significant Accounting and Reporting
Policies 


Basis of Presentation  Consolidation of Variable Interest Entities


Use of Estimates 


Trading Assets 


Securities 




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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Loans Held for Sale 


Loans Held for Investment 






Nonperforming Loans and Past-Due Loans 






Allowance for Credit Losses 




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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Premises and Equipment 




Goodwill and Other Intangibles


Real Estate Acquired by Foreclosure 


Income Taxes 




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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Stock-based Compensation 




|                                                                                                                             |                       |      |        |      |      |   |        |      |  |   |        |      | 
|---------------------------------------------------------------------------------------------------------------------------- | --------------------- | ---- | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                             |                       | 2004 |        |      | 2003 |   |        | 2002 | 
|                                                                                                                             |                       |      |        |      |      |   |        |      | 
|Net income, as reported                                                                                                      |                       | $    | 24,963 |      |      | $ | 49,110 |      |  | $ | 36,551 |     
|Add: Stock-based employee compensation expense included in
    reported net income, net of related taxes                     |                       |      | 546    |      |      |   | 177    |      |  |   | 170    |     
|Less: total stock-based employee compensation expense determined
    under fair value based method,
    net of related taxes |                       |      | (1,203 | )    |      |   | (1,197 | )    |  |   | (1,220 | )   
|                                                                                                                             |                       |      |        |      |      |   |        |      | 
|Pro forma net income                                                                                                         |                       | $    | 24,306 |      |      | $ | 48,090 |      |  | $ | 35,501 |     
|                                                                                                                             |                       |      |        |      |      |   |        |      | 
|Earnings per share:                                                                                                          |                       |      |        |      |      |   |        |      |  |   |        |     
|                                                                                                                             | Basic  as reported   |      | $      | 0.56 |      |   | $      | 1.11 |  |   | $      | 0.83 | 
|                                                                                                                             |                       |      |        |      |      |   |        |      | 
|                                                                                                                             | Basic  pro forma     |      | $      | 0.54 |      |   | $      | 1.09 |  |   | $      | 0.81 | 
|                                                                                                                             |                       |      |        |      |      |   |        |      | 
|                                                                                                                             | Diluted  as reported |      | $      | 0.55 |      |   | $      | 1.10 |  |   | $      | 0.82 | 
|                                                                                                                             |                       |      |        |      |      |   |        |      | 
|                                                                                                                             | Diluted  pro forma   |      | $      | 0.54 |      |   | $      | 1.08 |  |   | $      | 0.79 | 
|                                                                                                                             |                       |      |        |      |      |   |        |      | 



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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Profit Sharing Plan 


Statements of Cash Flows 


Earnings Per Share 


Comprehensive Income 


Reclassifications 


Recent Accounting Standards Consolidation of Variable Interest Entities


Accounting for Certain Loans or Debt
Securities Acquired in a Transfer


, Application
of Accounting Principles to Loan Commitments


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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments. Implementation Guidance for the Application of
Paragraph 16 of EITF Issue No. 03-1,


SFAS No. 123R, Share-Based Payment (Revised 2004)




|   |                              
|-- | -----------------------------
|2. | ACQUISITIONS AND DIVESTITURES

Acquisitions.




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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Divestiture of SCMC.




Divestitures of Banking Offices.






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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


3.     SECURITIES




|                                                                        |  |                   |         |       |            |   |       |            |  |   |            |   |  |   |         | 
|----------------------------------------------------------------------- |  | ----------------- | ------- | ----- | ---------- | - | ----- | ---------- |  | - | ---------- | - |  | - | ------- | 
|                                                                        |  | December 31, 2004 |        
|                                                                        |  |                   |        
|                                                                        |  |                   |         | Gross |            |   | Gross |            |  |  
|                                                                        |  | Amortized         |         |       | Unrealized |   |       | Unrealized |  |   |           
|                                                                        |  | Cost              |         |       | Gains      |   |       | Losses     |  |   | Fair Value |  
|                                                                        |  |                   |         |       |            |   |       |            |  |   |            |  
|Available-for-Sale                                                      |  |                   |         |       |            |   |       |            |  |   |            |   |  |   |         | 
|Obligations of the U.S. Treasury and other U.S. government
    agencies |  | $                 | 8,254   |       |            | $ |      |            |  | $ | (60        | ) |  | $ | 8,194   | 
|Obligations of states of the U.S. and political subdivisions            |  |                   | 4,035   |       |            |   | 99    |            |  |   | (1         | ) |  |   | 4,133   | 
|Mortgage-backed securities and collateralized mortgage
    obligations  |  |                   | 516,865 |       |            |   | 2,112 |            |  |   | (2,652     | ) |  |   | 516,325 | 
|Other securities                                                        |  |                   | 11,908  |       |            |   | 354   |            |  |   | (210       | ) |  |   | 12,052  | 
|                                                                        |  |                   |         |       |            |   |       |            |  |   |            |  
|Total                                                                   |  | $                 | 541,062 |       |            | $ | 2,565 |            |  | $ | (2,923     | ) |  | $ | 540,704 | 
|                                                                        |  |                   |         |       |            |   |       |            |  |   |            |  
|Held-to-Maturity                                                        |  |                   |         |       |            |   |       |            |  |   |            |   |  |   |         | 
|Obligations of states of the U.S. and political subdivisions            |  | $                 | 61,956  |       |            | $ | 1,928 |            |  | $ | (71        | ) |  | $ | 63,813  | 
|Mortgage-backed securities and collateralized mortgage
    obligations  |  |                   | 55,458  |       |            |   | 57    |            |  |   | (306       | ) |  |   | 55,209  | 
|                                                                        |  |                   |         |       |            |   |       |            |  |   |            |  
|Total                                                                   |  | $                 | 117,414 |       |            | $ | 1,985 |            |  | $ | (377       | ) |  | $ | 119,022 | 
|                                                                        |  |                   |         |       |            |   |       |            |  |   |            |  

|                                                                        |  |                   |         |       |            |   |       |            |  |   |            |   |  |   |         | 
|----------------------------------------------------------------------- |  | ----------------- | ------- | ----- | ---------- | - | ----- | ---------- |  | - | ---------- | - |  | - | ------- | 
|                                                                        |  | December 31, 2003 |        
|                                                                        |  |                   |        
|                                                                        |  |                   |         | Gross |            |   | Gross |            |  |  
|                                                                        |  | Amortized         |         |       | Unrealized |   |       | Unrealized |  |   |           
|                                                                        |  | Cost              |         |       | Gains      |   |       | Losses     |  |   | Fair Value |  
|                                                                        |  |                   |         |       |            |   |       |            |  |   |            |  
|Available-for-Sale                                                      |  |                   |         |       |            |   |       |            |  |   |            |   |  |   |         | 
|Obligations of the U.S. Treasury and other U.S. government
    agencies |  | $                 | 86,006  |       |            | $ | 141   |            |  | $ | (39        | ) |  | $ | 86,108  | 
|Obligations of states of the U.S. and political subdivisions            |  |                   | 4,255   |       |            |   | 178   |            |  |   |           |   |  |   | 4,433   | 
|Mortgage-backed securities and collateralized mortgage
    obligations  |  |                   | 397,146 |       |            |   | 2,793 |            |  |   | (1,165     | ) |  |   | 398,774 | 
|Other securities                                                        |  |                   | 33,798  |       |            |   |      |            |  |   | (177       | ) |  |   | 33,621  | 
|                                                                        |  |                   |         |       |            |   |       |            |  |   |            |  
|Total                                                                   |  | $                 | 521,205 |       |            | $ | 3,112 |            |  | $ | (1,381     | ) |  | $ | 522,936 | 
|                                                                        |  |                   |         |       |            |   |       |            |  |   |            |  
|Held-to-Maturity                                                        |  |                   |         |       |            |   |       |            |  |   |            |   |  |   |         | 
|Obligations of states of the U.S. and political subdivisions            |  | $                 | 38,336  |       |            | $ | 2,367 |            |  | $ |           |   |  | $ | 40,703  | 
|Mortgage-backed securities and collateralized mortgage
    obligations  |  |                   | 3,821   |       |            |   | 41    |            |  |   | (4         | ) |  |   | 3,858   | 
|                                                                        |  |                   |         |       |            |   |       |            |  |   |            |  
|Total                                                                   |  | $                 | 42,157  |       |            | $ | 2,408 |            |  | $ | (4         | ) |  | $ | 44,561  | 
|                                                                        |  |                   |         |       |            |   |       |            |  |   |            |  



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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                                       |  |                  |         |  |                    |   |           |      |  |   |            |  |  |   |         | 
|---------------------------------------------------------------------- |  | ---------------- | ------- |  | ------------------ | - | --------- | ---- |  | - | ---------- |  |  | - | ------- | 
|                                                                       |  | Held-to-Maturity |         |  | Available-for-Sale |  
|                                                                       |  |                  |         |  |                    |  
|                                                                       |  | Amortized        |         |  |                    |   | Amortized |      |  |  
|                                                                       |  | Cost             |         |  | Fair Value         |   |           | Cost |  |   | Fair Value | 
|                                                                       |  |                  |         |  |                    |   |           |      |  |   |            | 
|Due in one year or less                                                |  | $                | 6,512   |  |                    | $ | 6,566     |      |  | $ | 6,552      |  |  | $ | 6,512   | 
|Due after one year through five years                                  |  |                  | 24,906  |  |                    |   | 26,438    |      |  |   | 4,447      |  |  |   | 4,479   | 
|Due after five years through ten years                                 |  |                  | 30,538  |  |                    |   | 30,809    |      |  |   | 1,290      |  |  |   | 1,336   | 
|Mortgage-backed securities and collateralized mortgage
    obligations |  |                  | 55,458  |  |                    |   | 55,209    |      |  |   | 516,865    |  |  |   | 516,325 | 
|Other securities                                                       |  |                  |        |  |                    |   |          |      |  |   | 11,908     |  |  |   | 12,052  | 
|                                                                       |  |                  |         |  |                    |   |           |      |  |   |            | 
|Total                                                                  |  | $                | 117,414 |  |                    | $ | 119,022   |      |  | $ | 541,062    |  |  | $ | 540,704 | 
|                                                                       |  |                  |         |  |                    |   |           |      |  |   |            | 



|                              |  |              |         |   |      |   |        |      |  |   |       |  
|----------------------------- |  | ------------ | ------- | - | ---- | - | ------ | ---- |  | - | ----- | -
|                              |  | December 31, |        
|                              |  |              |        
|                              |  | 2004         |         |   | 2003 |   |        | 2002 | 
|                              |  |              |         |   |      |   |        |      | 
|Proceeds from sales and calls |  | $            | 161,834 |   |      | $ | 32,487 |      |  | $ | 6,477 |  
|Gross realized gains          |  |              | 5,860   |   |      |   | 907    |      |  |   | 122   |  
|Gross realized losses         |  |              | (919    | ) |      |   | (2     | )    |  |   | (12   | )





|                                                                        |  |                     |         |       |                     |   |        |            |  |           |         |  |            |        |        |  |            |           |      |      |            |   |        |  |  |            |         |  |  |   |        |   |  |   |         | 
|----------------------------------------------------------------------- |  | ------------------- | ------- | ----- | ------------------- | - | ------ | ---------- |  | --------- | ------- |  | ---------- | ------ | ------ |  | ---------- | --------- | ---- | ---- | ---------- | - | ------ |  |  | ---------- | ------- |  |  | - | ------ | - |  | - | ------- | 
|                                                                        |  | Less than 12 Months |         |       | More than 12 Months |   |        | Total      | 
|                                                                        |  |                     |         |       |                     |   |        |            | 
|                                                                        |  |                     |         | Gross |                     |   |        |            |  |           | Gross   |  |            |        |        |  |            | Gross     |      |      |           
|                                                                        |  | Amortized           |         |       | Unrealized          |   |        |            |  | Amortized |         |  | Unrealized |        |        |  |            | Amortized |      |      | Unrealized |   |        | 
|                                                                        |  | Cost                |         |       | Losses              |   |        | Fair Value |  |           | Cost    |  |            | Losses |        |  | Fair Value |           |      | Cost |            |   | Losses |  |  | Fair Value |        
|                                                                        |  |                     |         |       |                     |   |        |            |  |           |         |  |            |        |        |  |            |           |      |      |            |   |        |  |  |            |        
|Available-for-Sale                                                      |  |                     |         |       |                     |   |        |            |  |           |         |  |            |        |        |  |            |           |      |      |            |   |        |  |  |            |         |  |  |   |        |   |  |   |         | 
|Obligations of the U.S. Treasury and other U.S. government
    agencies |  | $                   | 8,254   |       |                     | $ | (60    | )          |  | $         | 8,194   |  |            | $      |       |  |            | $         |     |      |            | $ |       |  |  | $          | 8,254   |  |  | $ | (60    | ) |  | $ | 8,194   | 
|Obligations of states of the U.S. and political subdivisions            |  |                     | 227     |       |                     |   | (1     | )          |  |           | 226     |  |            |        |       |  |            |           |     |      |            |   |       |  |  |            | 227     |  |  |   | (1     | ) |  |   | 226     | 
|Mortgage-backed securities and collateralized mortgage
    obligations  |  |                     | 328,810 |       |                     |   | (2,566 | )          |  |           | 326,244 |  |            |        | 5,159  |  |            |           | (86  | )    |            |   | 5,073  |  |  |            | 333,969 |  |  |   | (2,652 | ) |  |   | 331,317 | 
|Other securities                                                        |  |                     |        |       |                     |   |       |            |  |           |        |  |            |        | 5,970  |  |            |           | (210 | )    |            |   | 5,760  |  |  |            | 5,970   |  |  |   | (210   | ) |  |   | 5,760   | 
|                                                                        |  |                     |         |       |                     |   |        |            |  |           |         |  |            |        |        |  |            |           |      |      |            |   |        |  |  |            |        
|Total                                                                   |  | $                   | 337,291 |       |                     | $ | (2,627 | )          |  | $         | 334,664 |  |            | $      | 11,129 |  |            | $         | (296 | )    |            | $ | 10,833 |  |  | $          | 348,420 |  |  | $ | (2,923 | ) |  | $ | 345,497 | 
|                                                                        |  |                     |         |       |                     |   |        |            |  |           |         |  |            |        |        |  |            |           |      |      |            |   |        |  |  |            |        

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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                                        |  |                     |        |       |                     |   |       |            |  |           |        |            |        |   |            |           |       |   |            |        |  |   |            |  |  |   |        |  |  |   |      |   |  |   |        | 
|----------------------------------------------------------------------- |  | ------------------- | ------ | ----- | ------------------- | - | ----- | ---------- |  | --------- | ------ | ---------- | ------ | - | ---------- | --------- | ----- | - | ---------- | ------ |  | - | ---------- |  |  | - | ------ |  |  | - | ---- | - |  | - | ------ | 
|                                                                        |  | Less than 12 Months |        |       | More than 12 Months |   | Total |           
|                                                                        |  |                     |        |       |                     |   |       |           
|                                                                        |  |                     |        | Gross |                     |   |       |            |  |           | Gross  |            |        |   |            |           | Gross |   |            |       
|                                                                        |  | Amortized           |        |       | Unrealized          |   |       |            |  | Amortized |        | Unrealized |        |   |            | Amortized |       |   | Unrealized |        |  |  
|                                                                        |  | Cost                |        |       | Losses              |   |       | Fair Value |  |           | Cost   |            | Losses |   | Fair Value |           | Cost  |   |            | Losses |  |   | Fair Value | 
|                                                                        |  |                     |        |       |                     |   |       |            |  |           |        |            |        |   |            |           |       |   |            |        |  |   |            | 
|Held-to-Maturity                                                        |  |                     |        |       |                     |   |       |            |  |           |        |            |        |   |            |           |       |   |            |        |  |   |            |  |  |   |        |  |  |   |      |   |  |   |        | 
|Obligations of the U.S. Treasury and other U.S. government
    agencies |  | $                   | 5,838  |       |                     | $ | (71   | )          |  | $         | 5,767  |            |        | $ |           |           |       | $ |           |        |  | $ |           |  |  | $ | 5,838  |  |  | $ | (71  | ) |  | $ | 5,767  | 
|Mortgage-backed securities and collateralized mortgage
    obligations  |  |                     | 44,693 |       |                     |   | (306  | )          |  |           | 44,387 |            |        |   |           |           |       |   |           |        |  |   |           |  |  |   | 44,693 |  |  |   | (306 | ) |  |   | 44,387 | 
|                                                                        |  |                     |        |       |                     |   |       |            |  |           |        |            |        |   |            |           |       |   |            |        |  |   |            |  |  |   |       
|Total                                                                   |  | $                   | 50,531 |       |                     | $ | (377  | )          |  | $         | 50,154 |            |        | $ |           |           |       | $ |           |        |  | $ |           |  |  | $ | 50,531 |  |  | $ | (377 | ) |  | $ | 50,154 | 
|                                                                        |  |                     |        |       |                     |   |       |            |  |           |        |            |        |   |            |           |       |   |            |        |  |   |            |  |  |   |       







4.     LOANS




|                    |                           |                      |   |       |       |  |   |        |        | 
|------------------- | ------------------------- | -------------------- | - | ----- | ----- |  | - | ------ | ------ | 
|                    |                           | December 31,         |  
|                    |                           |                      |  
|                    |                           | 2004                 |   |       | 2003  | 
|                    |                           |                      |   |       |       | 
|Loans held for sale |                           |                      |   |       |       |  |   |       
|                    | Commercial and industrial |                      | $ | 1,433 |       |  | $ | 3,010  |       
|                    | Real Estate:              |                      |   |       |       |  |   |        |       
|                    |                           | Commercial           |   |       | 3,746 |  |   |        | 5,303  | 
|                    |                           | Construction         |   |       | 1,702 |  |   |        | 8      | 
|                    |                           | Residential mortgage |   |       |      |  |   |        | 17,987 | 
|                    |                           |                      |   |       |       | 
|                    | Total loans held for sale |                      |   | 6,881 |       |  |   | 26,308 |       
|                    |                           |                      |   |       |       | 

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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                          |          |                                 |                      |   |           |           |  |   |           |         | 
|------------------------- | -------- | ------------------------------- | -------------------- | - | --------- | --------- |  | - | --------- | ------- | 
|                          |          | December 31,                    |                     
|                          |          |                                 |                     
|                          |          | 2004                            |                      |   | 2003      |          
|                          |          |                                 |                      |   |           |          
|Loans held for investment |          |                                 |                      |   |           |           |  |  
|                          | Domestic |                                 |                      |   |           |           |  |   |          
|                          |          | Commercial and industrial       |                      |   | 682,209   |           |  |   | 671,482   |        
|                          |          | Real Estate:                    |                      |   |           |           |  |   |           |        
|                          |          |                                 | Commercial           |   |           | 1,015,114 |  |   |           | 829,199 | 
|                          |          |                                 | Construction         |   |           | 363,044   |  |   |           | 327,295 | 
|                          |          |                                 | Residential mortgage |   |           | 179,623   |  |   |           | 195,363 | 
|                          |          |                                 | Consumer/other       |   |           | 72,997    |  |   |           | 98,928  | 
|                          | Foreign  |                                 |                      |   |           |           |  |   |          
|                          |          | Commercial and industrial       |                      |   | 21,785    |           |  |   | 7,886     |        
|                          |          | Other loans                     |                      |   | 3,324     |           |  |   | 578       |        
|                          |          |                                 |                      |   |           |          
|                          |          | Total loans held for investment |                      |   | 2,338,096 |           |  |   | 2,130,731 |        
|                          |          |                                 |                      |   |           |          
|                          |          | Total loans                     |                      | $ | 2,344,977 |           |  | $ | 2,157,039 |        
|                          |          |                                 |                      |   |           |          



|                                    |  |              |           |           |              |   |         |            |  |   |        |  |  |   |           | 
|----------------------------------- |  | ------------ | --------- | --------- | ------------ | - | ------- | ---------- |  | - | ------ |  |  | - | --------- | 
|                                    |  |              |           | Due After |              |   |         |            | 
|                                    |  |              |           | One Year  |              |   |         |            | 
|                                    |  | Due in One   |           |           | Through Five |   |         | Due After  |  |   |       
|                                    |  | Year or Less |           |           | Years        |   |         | Five Years |  |   | Total  | 
|                                    |  |              |           |           |              |   |         |            |  |   |        | 
|Commercial and industrial           |  | $            | 526,554   |           |              | $ | 145,439 |            |  | $ | 10,216 |  |  | $ | 682,209   | 
|Real estate  commercial            |  |              | 708,463   |           |              |   | 251,227 |            |  |   | 55,424 |  |  |   | 1,015,114 | 
|Real estate  construction          |  |              | 302,414   |           |              |   | 47,932  |            |  |   | 12,698 |  |  |   | 363,044   | 
|Foreign loans                       |  |              | 10,041    |           |              |   | 15,068  |            |  |   |       |  |  |   | 25,109    | 
|                                    |  |              |           |           |              |   |         |            |  |   |        | 
|Total                               |  | $            | 1,547,472 |           |              | $ | 459,666 |            |  | $ | 78,338 |  |  | $ | 2,085,476 | 
|                                    |  |              |           |           |              |   |         |            |  |   |        | 
|Loans with a fixed interest rate    |  | $            | 220,675   |           |              | $ | 436,731 |            |  | $ | 74,487 |  |  |   | 731,893   | 
|Loans with a floating interest rate |  |              | 1,326,797 |           |              |   | 22,935  |            |  |   | 3,851  |  |  |   | 1,353,583 | 
|                                    |  |              |           |           |              |   |         |            |  |   |        | 
|Total                               |  | $            | 1,547,472 |           |              | $ | 459,666 |            |  | $ | 78,338 |  |  | $ | 2,085,476 | 
|                                    |  |              |           |           |              |   |         |            |  |   |        | 







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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








5.     ALLOWANCE FOR CREDIT
LOSSES




|                             |                                                                   |                         |        |        |        |   |        |        |        |   |        |        |       | 
|---------------------------- | ----------------------------------------------------------------- | ----------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ----- | 
|                             |                                                                   | Year Ended December 31, |       
|                             |                                                                   |                         |       
|                             |                                                                   | 2004                    |        |        | 2003   |   |        | 2002   |       
|                             |                                                                   |                         |        |        |        |   |        |        |       
|Balance at beginning of year |                                                                   | $                       | 30,722 |        |        | $ | 27,248 |        |        | $ | 22,927 |       
|                             | Loans charged off                                                 |                         |        | 15,216 |        |   |        | 16,673 |        |   |        | 9,755  |      
|                             | Loan recoveries                                                   |                         |        | (2,476 | )      |   |        | (1,947 | )      |   |        | (1,720 | )    
|                             |                                                                   |                         |        |        |        |   |        |        |       
|                             |                                                                   | Net loans charged off   |        |        | 12,740 |   |        |        | 14,726 |   |        |        | 8,035 | 
|                             | Allowance for credit losses associated with acquired institutions |                         |        |       |        |   |        | 855    |        |   |        | 656    |      
|                             | Allowance for credit losses associated with divested offices      |                         |        |       |        |   |        | (353   | )      |   |        |       |      
|                             | Provision for credit losses                                       |                         |        | 12,250 |        |   |        | 17,698 |        |   |        | 11,700 |      
|                             |                                                                   |                         |        |        |        |   |        |        |       
|Balance at end of year       |                                                                   | $                       | 30,232 |        |        | $ | 30,722 |        |        | $ | 27,248 |       
|                             |                                                                   |                         |        |        |        |   |        |        |       

6.     PREMISES AND EQUIPMENT




|                                               |  |              |         |   |      |   |         |  
|---------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                               |  | December 31, |        
|                                               |  |              |        
|                                               |  | 2004         |         |   | 2003 |  
|                                               |  |              |         |   |      |  
|Land                                           |  | $            | 10,627  |   |      | $ | 14,173  |  
|Buildings and improvements                     |  |              | 40,326  |   |      |   | 39,773  |  
|Furniture, fixtures and equipment              |  |              | 41,733  |   |      |   | 40,071  |  
|                                               |  |              |         |   |      |  
|                                               |  |              | 92,686  |   |      |   | 94,017  |  
|Less accumulated depreciation and amortization |  |              | (52,515 | ) |      |   | (45,476 | )
|                                               |  |              |         |   |      |  
|Total                                          |  | $            | 40,171  |   |      | $ | 48,541  |  
|                                               |  |              |         |   |      |  





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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




7.     GOODWILL AND OTHER
INTANGIBLES




|                           |                                 |         |        |   |             |   |        |        |   |   |       |   |  |       |       |        |   |   |        |        |  
|-------------------------- | ------------------------------- | ------- | ------ | - | ----------- | - | ------ | ------ | - | - | ----- | - |  | ----- | ----- | ------ | - | - | ------ | ------ | -
|                           |                                 |         |        |   |             |   |        | South  |   |   |      
|                           |                                 | Houston |        |   | San Antonio |   |        | Dallas |   |   | Texas |   |  | Total |      
|                           |                                 |         |        |   |             |   |        |        |   |   |       |   |  |       |      
|Balance, January 1, 2003   |                                 | $       | 29,613 |   |             | $ | 15,079 |        |   | $ | 5,662 |   |  | $     | 5,312 |        |   | $ | 55,666 |       
|                           | Sale of rural banking offices   |         |        |  |             |   |        |       |   |   |       |  |  |       |       | (5,312 | ) |   |        | (5,312 | )
|                           | Plaza Bank acquisition          |         |        |  |             |   |        | 12,579 |   |   |       |  |  |       |       |       |   |   |        | 12,579 |  
|                           |                                 |         |        |   |             |   |        |        |   |   |       |   |  |       |      
|Balance, December 31, 2003 |                                 |         | 29,613 |   |             |   | 27,658 |        |   |   | 5,662 |   |  |       |      |        |   |   | 62,933 |       
|                           | Plaza Bank goodwill adjustments |         |        |  |             |   |        | (453   | ) |   |       |  |  |       |       |       |   |   |        | (453   | )
|                           |                                 |         |        |   |             |   |        |        |   |   |       |   |  |       |      
|Balance, December 31, 2004 |                                 | $       | 29,613 |   |             | $ | 27,205 |        |   | $ | 5,662 |   |  | $     |      |        |   | $ | 62,480 |       
|                           |                                 |         |        |   |             |   |        |        |   |   |       |   |  |       |      



|                           |                        |              |       |      |  
|-------------------------- | ---------------------- | ------------ | ----- | ---- | -
|                           |                        | Core Deposit |      
|                           |                        | Intangibles  |      
|                           |                        |              |      
|Balance, January 1, 2003   |                        | $            | 2,096 |     
|                           | Amortization expense   |              |       | (465 | )
|                           | Plaza Bank acquisition |              |       | 695  |  
|                           |                        |              |      
|Balance, December 31, 2003 |                        |              | 2,326 |     
|                           | Amortization expense   |              |       | (487 | )
|                           |                        |              |      
|Balance, December 31, 2004 |                        | $            | 1,839 |     
|                           |                        |              |      



|           |  |              |       | 
|---------- |  | ------------ | ----- | 
|           |  | Core Deposit |      
|           |  | Intangibles  |      
|           |  |              |      
|2005       |  | $            | 399   | 
|2006       |  |              | 330   | 
|2007       |  |              | 278   | 
|2008       |  |              | 234   | 
|2009       |  |              | 201   | 
|Thereafter |  |              | 397   | 
|           |  |              |      
|Total      |  | $            | 1,839 | 
|           |  |              |      

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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


8.     DEPOSITS




|                               |  |   |         | 
|------------------------------ |  | - | ------- | 
|Three months or less           |  | $ | 182,693 | 
|Over three through six months  |  |   | 89,778  | 
|Over six through twelve months |  |   | 57,296  | 
|Thereafter                     |  |   | 62,340  | 
|                               |  |   |        
|Total                          |  | $ | 392,107 | 
|                               |  |   |        







9.     SHORT-TERM BORROWINGS




|                                |  |              |         |  |      |   |         | 
|------------------------------- |  | ------------ | ------- |  | ---- | - | ------- | 
|                                |  | December 31, |        
|                                |  |              |        
|                                |  | 2004         |         |  | 2003 |  
|                                |  |              |         |  |      |  
|Federal Home Loan Bank advances |  | $            | 418,000 |  |      | $ | 311,735 | 
|Federal funds purchased         |  |              | 2,575   |  |      |   | 12,425  | 
|                                |  |              |         |  |      |  
|Total                           |  | $            | 420,575 |  |      | $ | 324,160 | 
|                                |  |              |         |  |      |  







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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


10.     SUBORDINATED DEBT










|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|11. | JUNIOR SUBORDINATED DEBT/ COMPANY MANDATORILY REDEEMABLE
    TRUST PREFERRED SECURITIES

Consolidation of Variable Interest Entities




|                    |  |               |                    |            |             |   |        |               |                     |                          |                     |  |        |                     |        |  |                 |  |                    | 
|------------------- |  | ------------- | ------------------ | ---------- | ----------- | - | ------ | ------------- | ------------------- | ------------------------ | ------------------- |  | ------ | ------------------- | ------ |  | --------------- |  | ------------------ | 
|                    |  |               |                    | Trust      |             |   |        |               |                     |                          |                    
|                    |  |               |                    | Preferred  |             |   |        |               |                     |                          |                    
|                    |  |               |                    | Securities |             |   |        |               | Junior Subordinated |                          |                     | 
|Description         |  | Issuance Date |                    |            | Outstanding |   |        | Interest Rate |                     |                          | Debt Owed To Trusts |  |        | Final Maturity Date |       
|                    |  |               |                    |            |             |   |        |               |                     |                          |                     |  |        |                     |       
|Capital Trust II    |  |               | March 21, 2001     |            |             | $ | 28,750 |               |                     |                          | 9.20% Fixed         |  |        | $                   | 29,639 |  |                 |  | March 21, 2031     | 
|Statutory Trust One |  |               | August 30, 2002    |            |             |   | 20,000 |               |                     | 3-month LIBOR plus 3.45% |                     |  | 20,619 |                     |        |  | August 30, 2032 | 
|Capital Trust III   |  |               | September 26, 2002 |            |             |   | 31,250 |               |                     |                          | 8.30% Fixed         |  |        |                     | 32,217 |  |                 |  | September 26, 2032 | 
|                    |  |               |                    |            |             |   |        |               |                     |                          |                     |  |        |                     |       
|Total               |  |               |                    |            |             | $ | 80,000 |               |                     |                          |                     |  |        | $                   | 82,475 |  |                 |  |                    | 
|                    |  |               |                    |            |             |   |        |               |                     |                          |                     |  |        |                     |       



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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








12.     INCOME TAXES




|                                                      |  |                         |       |  |      |   |        |      |  |   |        | 
|----------------------------------------------------- |  | ----------------------- | ----- |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                                      |  | Year Ended December 31, |      
|                                                      |  |                         |      
|                                                      |  | 2004                    |       |  | 2003 |   |        | 2002 | 
|                                                      |  |                         |       |  |      |   |        |      | 
|Current                                               |  | $                       | 8,333 |  |      | $ | 13,515 |      |  | $ | 13,107 | 
|Deferred                                              |  |                         | 1,151 |  |      |   | 522    |      |  |   | 2,610  | 
|                                                      |  |                         |       |  |      |   |        |      | 
|Income tax expense from continuing operation          |  |                         | 9,484 |  |      |   | 14,037 |      |  |   | 15,717 | 
|Income tax expense related to discontinued operations |  |                         |      |  |      |   | 25,064 |      |  |   | 2,361  | 
|                                                      |  |                         |       |  |      |   |        |      | 
|Total                                                 |  | $                       | 9,484 |  |      | $ | 39,101 |      |  | $ | 18,078 | 
|                                                      |  |                         |       |  |      |   |        |      | 



|                                              |                                                  |                         |        |        |      |   |        |      |   |   |        |        |  
|--------------------------------------------- | ------------------------------------------------ | ----------------------- | ------ | ------ | ---- | - | ------ | ---- | - | - | ------ | ------ | -
|                                              |                                                  | Year Ended December 31, |       
|                                              |                                                  |                         |       
|                                              |                                                  | 2004                    |        |        | 2003 |   |        | 2002 |  
|                                              |                                                  |                         |        |        |      |   |        |      |  
|Taxes calculated at statutory rate            |                                                  | $                       | 12,056 |        |      | $ | 14,837 |      |   | $ | 17,115 |       
|Increase (decrease) resulting from:           |                                                  |                         |        |        |      |   |        |      |   |   |        |       
|                                              | Change in estimate                               |                         |        | (1,200 | )    |   |        |     |   |   |        |       |  
|                                              | Tax-exempt interest income                       |                         |        | (762   | )    |   |        | (859 | ) |   |        | (1,011 | )
|                                              | Tax-exempt income from bank-owned life insurance |                         |        | (706   | )    |   |        | (703 | ) |   |        | (729   | )
|                                              | Other, net                                       |                         |        | 96     |      |   |        | 762  |   |   |        | 342    |  
|                                              |                                                  |                         |        |        |      |   |        |      |  
|Income tax expense from continuing operations |                                                  | $                       | 9,484  |        |      | $ | 14,037 |      |   | $ | 15,717 |       
|                                              |                                                  |                         |        |        |      |   |        |      |  



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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                   |                                                       |                                |        |       |        |   |       |       |        | 
|-------------------------------------------------- | ----------------------------------------------------- | ------------------------------ | ------ | ----- | ------ | - | ----- | ----- | ------ | 
|                                                   |                                                       | December 31,                   |       
|                                                   |                                                       |                                |       
|                                                   |                                                       | 2004                           |        |       | 2003   |  
|                                                   |                                                       |                                |        |       |        |  
|Deferred tax assets:                               |                                                       |                                |        |       |        |   |       |      
|                                                   | Real estate acquired by foreclosure                   |                                | $      | 74    |        |   | $     | 176   |       
|                                                   | Allowance for credit losses                           |                                |        | 9,786 |        |   |       | 9,025 |       
|                                                   | Net operating loss carryforward                       |                                |        | 315   |        |   |       | 438   |       
|                                                   | Deferred compensation                                 |                                |        | 1,493 |        |   |       | 1,056 |       
|                                                   | Net unrealized loss on available-for-sale securities  |                                |        | 125   |        |   |       |      |       
|                                                   | Other                                                 |                                |        | 669   |        |   |       | 1,138 |       
|                                                   |                                                       |                                |        |       |        |  
|                                                   |                                                       | Total deferred tax assets      |        |       | 12,462 |   |       |       | 11,833 | 
|Deferred tax liabilities:                          |                                                       |                                |        |       |        |   |       |      
|                                                   | Net unrealized gains on available-for-sale securities |                                |        |      |        |   |       | 567   |       
|                                                   | Depreciable assets                                    |                                |        | 573   |        |   |       | 431   |       
|                                                   | Federal Home Loan Bank stock dividends                |                                |        | 208   |        |   |       | 1,230 |       
|                                                   | Other                                                 |                                |        | 1,028 |        |   |       | 794   |       
|                                                   |                                                       |                                |        |       |        |  
|                                                   |                                                       | Total deferred tax liabilities |        |       | 1,809  |   |       |       | 3,022  | 
|                                                   |                                                       |                                |        |       |        |  
|Net deferred tax assets before valuation allowance |                                                       |                                | 10,653 |       |        |   | 8,811 |      
|Valuation allowance                                |                                                       |                                | (262   | )     |        |   | (262  | )    
|                                                   |                                                       |                                |        |       |        |  
|Net deferred tax assets                            |                                                       | $                              | 10,391 |       |        | $ | 8,549 |      
|                                                   |                                                       |                                |        |       |        |  



13. EMPLOYEE BENEFITS


Profit sharing plan 


Stock-based compensation




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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                               |                         |                         |       |          |       |   |       |        |          |  |       |      |   |          |       |       |       |  |       |      |   |   |      |       | 
|-------------------------------------------------------------- | ----------------------- | ----------------------- | ----- | -------- | ----- | - | ----- | ------ | -------- |  | ----- | ---- | - | -------- | ----- | ----- | ----- |  | ----- | ---- | - | - | ---- | ----- | 
|                                                               |                         | Year Ended December 31, |      
|                                                               |                         |                         |      
|                                                               |                         | 2004                    |       |          | 2003  |   |       | 2002   |         
|                                                               |                         |                         |       |          |       |   |       |        |         
|                                                               |                         |                         |       | Weighted |       |   |       |        | Weighted |  |       |      |   | Weighted |      
|                                                               |                         |                         |       | Average  |       |   |       |        | Average  |  |       |      |   | Average  |      
|                                                               |                         |                         |       | Exercise |       |   |       |        | Exercise |  |       |      |   | Exercise |      
|                                                               |                         | Shares                  |       |          | Price |   |       | Shares |          |  | Price |      |   | Shares   |       |       | Price | 
|                                                               |                         |                         |       |          |       |   |       |        |          |  |       |      |   |          |       |       |       | 
|Shares under option, beginning of year                         |                         |                         | 2,081 |          |       | $ | 10.03 |        |          |  | 2,270 |      |   | $        | 9.07  |       |       |  | 2,301 |      |   | $ | 8.63 |      
|                                                               | Shares granted          |                         |       | 103      |       |   |       | 13.71  |          |  |       | 350  |   |          |       | 12.13 |       |  |       | 221  |   |   |      | 12.23 | 
|                                                               | Shares canceled/expired |                         |       | (183     | )     |   |       | 12.86  |          |  |       | (105 | ) |          |       | 12.46 |       |  |       | (88  | ) |   |      | 11.85 | 
|                                                               | Shares exercised        |                         |       | (315     | )     |   |       | 6.67   |          |  |       | (434 | ) |          |       | 5.43  |       |  |       | (164 | ) |   |      | 5.75  | 
|                                                               |                         |                         |       |          |       |   |       |        |          |  |       |      |   |          |       |       |       | 
|Shares under option, end of year                               |                         |                         | 1,686 |          |       | $ | 10.63 |        |          |  | 2,081 |      |   | $        | 10.03 |       |       |  | 2,270 |      |   | $ | 9.07 |      
|                                                               |                         |                         |       |          |       |   |       |        |          |  |       |      |   |          |       |       |       | 
|Shares exercisable, end of year                                |                         |                         | 1,183 |          |       | $ | 9.74  |        |          |  | 1,221 |      |   | $        | 8.63  |       |       |  | 1,222 |      |   | $ | 7.07 |      
|                                                               |                         |                         |       |          |       |   |       |        |          |  |       |      |   |          |       |       |       | 
|Weighted average fair value of options granted during the year |                         |                         |       |          |       | $ | 3.40  |        |          |  |       |      |   | $        | 3.01  |       |       |  |       |      |   | $ | 3.35 |      
|                                                               |                         |                         |       |          |       |   |       |        |          |  |       |      |   |          |       |       |       | 
|Remaining authorized shares under approved plans, end of year  |                         |                         | 2,377 |          |       |   |       |        |          |  | 1,892 |      |   |          |       |       |       |  | 408   |      |   |   |      |      
|                                                               |                         |                         |       |          |       |   |       |        |          |  |       |      |   |          |       |       |       | 



|                        |  |      |       |   |      |  |       |      |  |  |       |  
|----------------------- |  | ---- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                        |  | 2004 |       |   | 2003 |  |       | 2002 | 
|                        |  |      |       |   |      |  |       |      | 
|Expected life (years)   |  |      | 4.41  |   |      |  | 4.33  |      |  |  | 4.52  |  
|Risk free interest rate |  |      | 3.49  | % |      |  | 2.93  | %    |  |  | 2.55  | %
|Volatility              |  |      | 27.85 | % |      |  | 29.27 | %    |  |  | 29.29 | %
|Dividend yield          |  |      | 1.40  | % |      |  | 1.50  | %    |  |  | 1.47  | %



|                         |  |                     |       |                  |                     |   |       |                |  |  |             |  |  |                  |       |  |  |   |       | 
|------------------------ |  | ------------------- | ----- | ---------------- | ------------------- | - | ----- | -------------- |  |  | ----------- |  |  | ---------------- | ----- |  |  | - | ----- | 
|                         |  | Options Outstanding |       |                  | Options Exercisable |  
|                         |  |                     |       |                  |                     |  
|                         |  |                     |       | Weighted-Average |                     |   |      
|                         |  | Number              |       |                  | Weighted-Average    |   |       | Remaining Life |  |  | Number      |  |  | Weighted-Average |      
|Range of Exercise Prices |  | Outstanding         |       |                  | Exercise Price      |   |       | (Years)        |  |  | Exercisable |  |  | Exercise Price   |      
|                         |  |                     |       |                  |                     |   |       |                |  |  |             |  |  |                  |      
|$ 3.13  $ 4.69          |  |                     | 54    |                  |                     | $ | 3.94  |                |  |  | 1.2         |  |  |                  | 54    |  |  | $ | 3.94  | 
|$ 4.70  $ 6.26          |  |                     | 54    |                  |                     |   | 5.92  |                |  |  | 3.0         |  |  |                  | 54    |  |  |   | 5.92  | 
|$ 6.27  $ 7.82          |  |                     | 269   |                  |                     |   | 7.12  |                |  |  | 4.4         |  |  |                  | 269   |  |  |   | 7.12  | 
|$ 7.83  $ 9.39          |  |                     | 246   |                  |                     |   | 8.76  |                |  |  | 3.9         |  |  |                  | 246   |  |  |   | 8.76  | 
|$ 9.40  $10.95          |  |                     | 76    |                  |                     |   | 10.13 |                |  |  | 4.6         |  |  |                  | 75    |  |  |   | 10.13 | 
|$10.96  $12.51          |  |                     | 507   |                  |                     |   | 11.80 |                |  |  | 6.9         |  |  |                  | 253   |  |  |   | 11.72 | 
|$12.52  $14.08          |  |                     | 328   |                  |                     |   | 13.09 |                |  |  | 6.7         |  |  |                  | 156   |  |  |   | 13.00 | 
|$14.09  $15.64          |  |                     | 152   |                  |                     |   | 14.98 |                |  |  | 7.2         |  |  |                  | 76    |  |  |   | 15.33 | 
|                         |  |                     |       |                  |                     |   |       |                |  |  |             |  |  |                  |      
|Total                    |  |                     | 1,686 |                  |                     | $ | 10.63 |                |  |  | 5.8         |  |  |                  | 1,183 |  |  | $ | 9.74  | 
|                         |  |                     |       |                  |                     |   |       |                |  |  |             |  |  |                  |      

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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Stock purchase plan 


14.     SHAREHOLDERS EQUITY


Preferred stock




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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


15.     EARNINGS PER COMMON SHARE




|                                              |                                     |                                                                               |        |        |      |   |        |        |     |   |        |        |     | 
|--------------------------------------------- | ----------------------------------- | ----------------------------------------------------------------------------- | ------ | ------ | ---- | - | ------ | ------ | --- | - | ------ | ------ | --- | 
|                                              |                                     | Year Ended December 31,                                                       |       
|                                              |                                     |                                                                               |       
|                                              |                                     | 2004                                                                          |        |        | 2003 |   |        | 2002   |    
|                                              |                                     |                                                                               |        |        |      |   |        |        |    
|Income from continuing operations             |                                     | $                                                                             | 24,963 |        |      | $ | 28,354 |        |     | $ | 33,183 |       
|Income from discontinued operations           |                                     |                                                                               |       |        |      |   | 20,756 |        |     |   | 3,368  |       
|                                              |                                     |                                                                               |        |        |      |   |        |        |    
|                                              | Net income                          |                                                                               | $      | 24,963 |      |   | $      | 49,110 |     |   | $      | 36,551 |    
|                                              |                                     |                                                                               |        |        |      |   |        |        |    
|Basic:                                        |                                     |                                                                               |        |        |      |   |        |        |     |   |        |       
|                                              | Weighted average shares outstanding |                                                                               |        | 44,839 |      |   |        | 44,180 |     |   |        | 43,872 |    
|Diluted:                                      |                                     |                                                                               |        |        |      |   |        |        |     |   |        |       
|                                              | Add incremental shares for:         |                                                                               |        |        |      |   |        |        |     |   |        |        |    
|                                              |                                     | Assumed exercise of outstanding options and non-vested stock
    grant awards |        |        | 422  |   |        |        | 439 |   |        |        | 790 | 
|                                              |                                     | Assumed conversion of preferred stock                                         |        |        | 17   |   |        |        | 29  |   |        |        | 94  | 
|                                              |                                     |                                                                               |        |        |      |   |        |        |    
|Total                                         |                                     |                                                                               | 45,278 |        |      |   | 44,648 |        |     |   | 44,756 |       
|                                              |                                     |                                                                               |        |        |      |   |        |        |    
|Earnings per share                            |                                     |                                                                               |        |        |      |   |        |        |     |   |        |       
|                                              | Basic                               |                                                                               | $      | 0.56   |      |   | $      | 1.11   |     |   | $      | 0.83   |    
|                                              |                                     |                                                                               |        |        |      |   |        |        |    
|                                              | Diluted                             |                                                                               | $      | 0.55   |      |   | $      | 1.10   |     |   | $      | 0.82   |    
|                                              |                                     |                                                                               |        |        |      |   |        |        |    
|Earnings per share from continuing operations |                                     |                                                                               |        |        |      |   |        |        |     |   |        |       
|                                              | Basic                               |                                                                               | $      | 0.56   |      |   | $      | 0.64   |     |   | $      | 0.76   |    
|                                              |                                     |                                                                               |        |        |      |   |        |        |    
|                                              | Diluted                             |                                                                               | $      | 0.55   |      |   | $      | 0.64   |     |   | $      | 0.74   |    
|                                              |                                     |                                                                               |        |        |      |   |        |        |    



16.     COMMITMENTS AND
CONTINGENCIES


Leases 


|           |  |   |        | 
|---------- |  | - | ------ | 
|2005       |  | $ | 3,825  | 
|2006       |  |   | 3,766  | 
|2007       |  |   | 3,584  | 
|2008       |  |   | 3,153  | 
|2009       |  |   | 3,949  | 
|Thereafter |  |   | 6,722  | 
|           |  |   |       
|Total      |  | $ | 24,999 | 
|           |  |   |       

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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Litigation 


Severance and non-competition agreements 


17.     FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK






|                             |  |              |         |  |      |   |         | 
|---------------------------- |  | ------------ | ------- |  | ---- | - | ------- | 
|                             |  | December 31, |        
|                             |  |              |        
|                             |  | 2004         |         |  | 2003 |  
|                             |  |              |         |  |      |  
|Commitments to extend credit |  | $            | 657,740 |  |      | $ | 483,046 | 
|Standby letters of credit    |  |              | 28,435  |  |      |   | 24,455  | 





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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




18.     REGULATORY MATTERS


Capital requirements 






|                                         |  |                                           |         |             |                   |  |                   |              |  |                     |         |  |  |        |     |   |       |  |     |  |  |  |     | 
|---------------------------------------- |  | ----------------------------------------- | ------- | ----------- | ----------------- |  | ----------------- | ------------ |  | ------------------- | ------- |  |  | ------ | --- | - | ----- |  | --- |  |  |  | --- | 
|                                         |  |                                           |         |             |                   |  |                   |              |  | To Be Categorized   |        
|                                         |  |                                           |         |             |                   |  |                   |              |  | as Well Capitalized |        
|                                         |  |                                           |         |             |                   |  |                   | Under Prompt | 
|                                         |  |                                           |         | For Capital |                   |  | Corrective Action |             
|                                         |  | Actual                                    |         |             | Adequacy Purposes |  |                   | Provisions   | 
|                                         |  |                                           |         |             |                   |  |                   |              | 
|                                         |  | Amount                                    |         |             | Ratio             |  |                   | Amount       |  |                     | Ratio   |  |  | Amount |     |   | Ratio | 
|                                         |  |                                           |         |             |                   |  |                   |              |  |                     |         |  |  |        |     |   |       | 
|                                         |  | (In thousands, except percentage amounts) |        
|CONSOLIDATED:                            |  |                                           |         |             |                   |  |                   |              |  |                     |         |  |  |        |     |   |       |  |     |  |  |  |     | 
|As of December 31, 2004:                 |  |                                           |         |             |                   |  |                   |              |  |                     |         |  |  |        |     |   |       |  |     |  |  |  |     | 
|Total capital (to risk weighted assets)  |  | $                                         | 406,343 |             |                   |  | 14.6              | %            |  | $                   | 223,457 |  |  |        | 8.0 | % |       |  | N/A |  |  |  | N/A | 
|Tier 1 capital (to risk weighted assets) |  |                                           | 328,948 |             |                   |  | 11.8              | %            |  |                     | 111,729 |  |  |        | 4.0 | % |       |  | N/A |  |  |  | N/A | 
|Tier 1 capital (to average assets)       |  |                                           | 328,948 |             |                   |  | 10.1              | %            |  |                     | 129,625 |  |  |        | 4.0 | % |       |  | N/A |  |  |  | N/A | 
|As of December 31, 2003:                 |  |                                           |         |             |                   |  |                   |              |  |                     |         |  |  |        |     |   |       |  |     |  |  |  |     | 
|Total capital (to risk weighted assets)  |  | $                                         | 383,252 |             |                   |  | 15.4              | %            |  | $                   | 199,095 |  |  |        | 8.0 | % |       |  | N/A |  |  |  | N/A | 
|Tier 1 capital (to risk weighted assets) |  |                                           | 305,997 |             |                   |  | 12.3              | %            |  |                     | 99,547  |  |  |        | 4.0 | % |       |  | N/A |  |  |  | N/A | 
|Tier 1 capital (to average assets)       |  |                                           | 305,997 |             |                   |  | 10.4              | %            |  |                     | 117,883 |  |  |        | 4.0 | % |       |  | N/A |  |  |  | N/A | 

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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                         |  |                                           |         |             |                   |  |                   |              |  |                     |         |  |  |        |     |   |       |   |         |  |  |  |      |  
|---------------------------------------- |  | ----------------------------------------- | ------- | ----------- | ----------------- |  | ----------------- | ------------ |  | ------------------- | ------- |  |  | ------ | --- | - | ----- | - | ------- |  |  |  | ---- | -
|                                         |  |                                           |         |             |                   |  |                   |              |  | To Be Categorized   |        
|                                         |  |                                           |         |             |                   |  |                   |              |  | as Well Capitalized |        
|                                         |  |                                           |         |             |                   |  |                   | Under Prompt | 
|                                         |  |                                           |         | For Capital |                   |  | Corrective Action |             
|                                         |  | Actual                                    |         |             | Adequacy Purposes |  |                   | Provisions   | 
|                                         |  |                                           |         |             |                   |  |                   |              | 
|                                         |  | Amount                                    |         |             | Ratio             |  |                   | Amount       |  |                     | Ratio   |  |  | Amount |     |   | Ratio |  
|                                         |  |                                           |         |             |                   |  |                   |              |  |                     |         |  |  |        |     |   |       |  
|                                         |  | (In thousands, except percentage amounts) |        
|STERLING BANK:                           |  |                                           |         |             |                   |  |                   |              |  |                     |         |  |  |        |     |   |       |   |         |  |  |  |      |  
|As of December 31, 2004:                 |  |                                           |         |             |                   |  |                   |              |  |                     |         |  |  |        |     |   |       |   |         |  |  |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 399,808 |             |                   |  | 14.3              | %            |  | $                   | 222,987 |  |  |        | 8.0 | % |       | $ | 278,734 |  |  |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 322,413 |             |                   |  | 11.6              | %            |  |                     | 111,494 |  |  |        | 4.0 | % |       |   | 167,241 |  |  |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 322,413 |             |                   |  | 9.9               | %            |  |                     | 129,387 |  |  |        | 4.0 | % |       |   | 161,733 |  |  |  | 5.0  | %
|As of December 31, 2003:                 |  |                                           |         |             |                   |  |                   |              |  |                     |         |  |  |        |     |   |       |   |         |  |  |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 372,563 |             |                   |  | 15.4              | %            |  | $                   | 193,441 |  |  |        | 8.0 | % |       | $ | 241,802 |  |  |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 296,147 |             |                   |  | 12.3              | %            |  |                     | 96,721  |  |  |        | 4.0 | % |       |   | 145,081 |  |  |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 296,147 |             |                   |  | 10.3              | %            |  |                     | 115,542 |  |  |        | 4.0 | % |       |   | 144,427 |  |  |  | 5.0  | %



|                                         |  |  |      |  
|---------------------------------------- |  |  | ---- | -
|Pro forma Ratio:                         |  |  |      |  
|Total capital (to risk weighted assets)  |  |  | 14.6 | %
|Tier 1 capital (to risk weighted assets) |  |  | 11.1 | %
|Tier 1 capital (to average assets)       |  |  | 9.6  | %

Dividend restrictions 


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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


19.     DISCONTINUED OPERATIONS




|                                                             |                                                       |                           |        |        |         |   |        |        |        | 
|------------------------------------------------------------ | ----------------------------------------------------- | ------------------------- | ------ | ------ | ------- | - | ------ | ------ | ------ | 
|                                                             |                                                       | For the Year Ended        |       
|                                                             |                                                       | December 31,              |       
|                                                             |                                                       |                           |       
|                                                             |                                                       | 2003                      |        |        | 2002    |  
|                                                             |                                                       |                           |        |        |         |  
|Net interest income (loss) after provision for credit losses |                                                       | $                         | (4,407 | )      |         | $ | (2,318 | )     
|Noninterest income:                                          |                                                       |                           |        |        |         |   |        |       
|                                                             | Gain on the sale of mortgage loans                    |                           |        | 34,621 |         |   |        | 32,385 |       
|                                                             | Mortgage origination income                           |                           |        | 23,823 |         |   |        | 23,641 |       
|                                                             | Gain on the sale of Sterling Capital Mortgage Company |                           |        | 47,783 |         |   |        |       |       
|                                                             | Other                                                 |                           |        | 8,064  |         |   |        | 10,987 |       
|                                                             |                                                       |                           |        |        |         |  
|                                                             |                                                       | Total noninterest income  |        |        | 114,291 |   |        |        | 67,013 | 
|                                                             |                                                       |                           |        |        |         |  
|Noninterest expense:                                         |                                                       |                           |        |        |         |   |        |       
|                                                             | Salaries and employee benefits                        |                           |        | 24,246 |         |   |        | 26,814 |       
|                                                             | Occupancy expense                                     |                           |        | 9,420  |         |   |        | 8,663  |       
|                                                             | Technology                                            |                           |        | 878    |         |   |        | 676    |       
|                                                             | Professional fees                                     |                           |        | 773    |         |   |        | 536    |       
|                                                             | Postage and delivery charges                          |                           |        | 1,231  |         |   |        | 1,119  |       
|                                                             | Mortgage servicing rights amortization and impairment |                           |        | 16,615 |         |   |        | 13,150 |       
|                                                             | Minority interest expense for SCMC                    |                           |        | 40     |         |   |        | 842    |       
|                                                             | Other                                                 |                           |        | 10,861 |         |   |        | 7,166  |       
|                                                             |                                                       |                           |        |        |         |  
|                                                             |                                                       | Total noninterest expense |        |        | 64,064  |   |        |        | 58,966 | 
|                                                             |                                                       |                           |        |        |         |  
|Income from discontinued operations before income taxes      |                                                       |                           | 45,820 |        |         |   | 5,729  |       
|                                                             | Provision for income taxes                            |                           |        | 25,064 |         |   |        | 2,361  |       
|                                                             |                                                       |                           |        |        |         |  
|Income from discontinued operations                          |                                                       | $                         | 20,756 |        |         | $ | 3,368  |       
|                                                             |                                                       |                           |        |        |         |  
|Earnings per share from discontinued operations:             |                                                       |                           |        |        |         |   |        |       
|                                                             | Basic                                                 |                           | $      | 0.47   |         |   | $      | 0.08   |       
|                                                             |                                                       |                           |        |        |         |  
|                                                             | Diluted                                               |                           | $      | 0.46   |         |   | $      | 0.08   |       
|                                                             |                                                       |                           |        |        |         |  



20.     DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS




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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Cash and Short-term Investments 


Securities 


Trading Assets 


Loans Held for Sale 


Loans Held for Investment 


Deposit Liabilities 


Subordinated Debt 


Junior Subordinated Debt 


Short-Term Borrowings 


Off-Balance Sheet Financial Instruments 


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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                       |                                  |              |           |           |            |   |           |           |   |   |            |           |   |   |           |           |  
|---------------------- | -------------------------------- | ------------ | --------- | --------- | ---------- | - | --------- | --------- | - | - | ---------- | --------- | - | - | --------- | --------- | -
|                       |                                  | December 31, |          
|                       |                                  |              |          
|                       |                                  | 2004         |           |           | 2003       |  
|                       |                                  |              |           |           |            |  
|                       |                                  | Carrying     |           |           | Estimated  |   |           | Carrying  |   |   | Estimated  |          
|                       |                                  | Amount       |           |           | Fair Value |   |           | Amount    |   |   | Fair Value |          
|                       |                                  |              |           |           |            |   |           |           |   |   |            |          
|Financial assets:      |                                  |              |           |           |            |   |           |           |   |   |            |           |   |   |           |          
|                       | Cash and short-term investments  |              | $         | 89,034    |            |   | $         | 89,034    |   |   | $          | 138,122   |   |   | $         | 138,122   |  
|                       | Trading assets                   |              |           | 36,720    |            |   |           | 36,720    |   |   |            | 172,825   |   |   |           | 172,825   |  
|                       | Available-for-sale securities    |              |           | 540,704   |            |   |           | 540,704   |   |   |            | 522,936   |   |   |           | 522,936   |  
|                       | Held-to-maturity securities      |              |           | 117,414   |            |   |           | 119,022   |   |   |            | 42,157    |   |   |           | 44,561    |  
|                       | Loans held for sale              |              |           | 6,881     |            |   |           | 6,881     |   |   |            | 26,308    |   |   |           | 26,308    |  
|                       | Loans held for investment        |              |           | 2,338,096 |            |   |           | 2,433,474 |   |   |            | 2,130,731 |   |   |           | 2,257,296 |  
|                       | Less allowance for credit losses |              |           | (30,232   | )          |   |           | (30,232   | ) |   |            | (30,722   | ) |   |           | (30,722   | )
|                       |                                  |              |           |           |            |   |           |           |   |   |            |          
|Total                  |                                  | $            | 3,098,617 |           |            | $ | 3,195,603 |           |   | $ | 3,002,357  |           |   | $ | 3,131,326 |          
|                       |                                  |              |           |           |            |   |           |           |   |   |            |          
|Financial liabilities: |                                  |              |           |           |            |   |           |           |   |   |            |           |   |   |           |          
|                       | Deposits                         |              | $         | 2,443,967 |            |   | $         | 2,358,599 |   |   | $          | 2,418,369 |   |   | $         | 2,384,270 |  
|                       | Junior subordinated debt         |              |           | 82,475    |            |   |           | 82,475    |   |   |            | 82,475    |   |   |           | 82,475    |  
|                       | Subordinated debt                |              |           | 47,162    |            |   |           | 47,162    |   |   |            | 46,533    |   |   |           | 46,533    |  
|                       | Interest rate swap               |              |           | 2,788     |            |   |           | 2,788     |   |   |            | 3,411     |   |   |           | 3,411     |  
|                       | Short-term borrowings            |              |           | 420,575   |            |   |           | 420,599   |   |   |            | 324,160   |   |   |           | 324,160   |  
|                       |                                  |              |           |           |            |   |           |           |   |   |            |          
|Total                  |                                  | $            | 2,996,967 |           |            | $ | 2,911,623 |           |   | $ | 2,874,948  |           |   | $ | 2,840,849 |          
|                       |                                  |              |           |           |            |   |           |           |   |   |            |          

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STERLING BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


21.     SELECTED QUARTERLY FINANCIAL
DATA (UNAUDITED)




|                                                                   |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |        |      |   |        |        |      |   |        |        |      | 
|------------------------------------------------------------------ | ------------------------------------ | ------- | ------ | ------ | ------- | - | ------ | ------- | ---- | - | ------- | ------ | ---- | ------- | ------ | ------ | ------- | - | ------ | ------- | ---- | - | ------- | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ------ | ---- | 
|                                                                   |                                      | 2004    |        |        | 2003    |  
|                                                                   |                                      |         |        |        |         |  
|                                                                   |                                      | Fourth  |        |        | Third   |   |        | Second  |      |   | First   |        |      | Fourth  |        |        | Third   |   |        | Second  |      |   | First   |       
|                                                                   |                                      | Quarter |        |        | Quarter |   |        | Quarter |      |   | Quarter |        |      | Quarter |        |        | Quarter |   |        | Quarter |      |   | Quarter |       
|                                                                   |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |       
|Interest income                                                    |                                      | $       | 44,560 |        |         | $ | 41,837 |         |      | $ | 39,494  |        |      | $       | 40,206 |        |         | $ | 38,175 |         |      | $ | 43,988  |        |      | $ | 44,895 |        |      | $ | 44,325 |       
|Interest expense                                                   |                                      |         | 8,794  |        |         |   | 7,586  |         |      |   | 7,148   |        |      |         | 7,185  |        |         |   | 6,932  |         |      |   | 8,255   |        |      |   | 9,161  |        |      |   | 8,800  |       
|                                                                   |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |       
|                                                                   | Net interest income                  |         |        | 35,766 |         |   |        | 34,251  |      |   |         | 32,346 |      |         |        | 33,021 |         |   |        | 31,243  |      |   |         | 35,733 |      |   |        | 35,734 |      |   |        | 35,525 |     
|Provision for credit losses                                        |                                      |         | 3,854  |        |         |   | 2,115  |         |      |   | 2,781   |        |      |         | 3,500  |        |         |   | 3,000  |         |      |   | 4,150   |        |      |   | 6,098  |        |      |   | 4,450  |       
|                                                                   |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |       
|Net interest income after provision for credit losses              |                                      |         | 31,912 |        |         |   | 32,136 |         |      |   | 29,565  |        |      |         | 29,521 |        |         |   | 28,243 |         |      |   | 31,583  |        |      |   | 29,636 |        |      |   | 31,075 |       
|Noninterest income                                                 |                                      |         | 6,133  |        |         |   | 6,795  |         |      |   | 10,777  |        |      |         | 7,217  |        |         |   | 7,429  |         |      |   | 7,478   |        |      |   | 7,087  |        |      |   | 11,276 |       
|Noninterest expense                                                |                                      |         | 30,967 |        |         |   | 29,495 |         |      |   | 30,085  |        |      |         | 29,062 |        |         |   | 27,892 |         |      |   | 27,929  |        |      |   | 27,504 |        |      |   | 28,091 |       
|                                                                   |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |       
|Income from continuing operations before income taxes              |                                      |         | 7,078  |        |         |   | 9,436  |         |      |   | 10,257  |        |      |         | 7,676  |        |         |   | 7,780  |         |      |   | 11,132  |        |      |   | 9,219  |        |      |   | 14,260 |       
|                                                                   | Provision for income taxes           |         |        | 908    |         |   |        | 2,950   |      |   |         | 3,184  |      |         |        | 2,442  |         |   |        | 2,583   |      |   |         | 3,707  |      |   |        | 3,028  |      |   |        | 4,719  |     
|                                                                   |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |       
|Income from continuing operations                                  |                                      |         | 6,170  |        |         |   | 6,486  |         |      |   | 7,073   |        |      |         | 5,234  |        |         |   | 5,197  |         |      |   | 7,425   |        |      |   | 6,191  |        |      |   | 9,541  |       
|                                                                   |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |       
|Income (loss) from discontinued operations before income
    taxes |                                      |         |       |        |         |   |       |         |      |   |        |        |      |         |       |        |         |   | 1,101  |         |      |   | 44,426  |        |      |   | (2,534 | )      |      |   | 2,827  |       
|                                                                   | Provision (benefit) for income taxes |         |        |       |         |   |        |        |      |   |         |       |      |         |        |       |         |   |        | 407     |      |   |         | 24,510 |      |   |        | (984   | )    |   |        | 1,131  |     
|                                                                   |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |       
|Income (loss) from discontinued operations                         |                                      |         |       |        |         |   |       |         |      |   |        |        |      |         |       |        |         |   | 694    |         |      |   | 19,916  |        |      |   | (1,550 | )      |      |   | 1,696  |       
|                                                                   |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |       
|Net income                                                         |                                      | $       | 6,170  |        |         | $ | 6,486  |         |      | $ | 7,073   |        |      | $       | 5,234  |        |         | $ | 5,891  |         |      | $ | 27,341  |        |      | $ | 4,641  |        |      | $ | 11,237 |       
|                                                                   |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |       
|Earnings per share:                                                |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |        |      |   |        |        |      |   |        |       
|                                                                   |                                      | Basic   |        | $      | 0.14    |   |        | $       | 0.14 |   |         | $      | 0.16 |         |        | $      | 0.12    |   |        | $       | 0.13 |   |         | $      | 0.62 |   |        | $      | 0.11 |   |        | $      | 0.26 | 
|                                                                   |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |       
|                                                                   |                                      | Diluted |        | $      | 0.14    |   |        | $       | 0.14 |   |         | $      | 0.16 |         |        | $      | 0.12    |   |        | $       | 0.13 |   |         | $      | 0.61 |   |        | $      | 0.10 |   |        | $      | 0.25 | 
|                                                                   |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |       
|Earnings per share from continuing operations:                     |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |        |      |   |        |        |      |   |        |       
|                                                                   |                                      | Basic   |        | $      | 0.14    |   |        | $       | 0.14 |   |         | $      | 0.16 |         |        | $      | 0.12    |   |        | $       | 0.12 |   |         | $      | 0.17 |   |        | $      | 0.14 |   |        | $      | 0.22 | 
|                                                                   |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |       
|                                                                   |                                      | Diluted |        | $      | 0.14    |   |        | $       | 0.14 |   |         | $      | 0.16 |         |        | $      | 0.12    |   |        | $       | 0.12 |   |         | $      | 0.17 |   |        | $      | 0.14 |   |        | $      | 0.21 | 
|                                                                   |                                      |         |        |        |         |   |        |         |      |   |         |        |      |         |        |        |         |   |        |         |      |   |         |       



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22.     PARENT-ONLY FINANCIAL
STATEMENTS


STERLING BANCSHARES, INC.


(Parent Company Only)


CONDENSED BALANCE SHEETS


DECEMBER 31, 2004 AND 2003


|                                                 |                                                           |                            |         |         |         |   |         |         |         | 
|------------------------------------------------ | --------------------------------------------------------- | -------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                 |                                                           | 2004                       |         |         | 2003    |  
|                                                 |                                                           |                            |         |         |         |  
|                                                 |                                                           | (In thousands)             |        
|ASSETS                                           |                                                           |                            |         |         |         |   |         |        
|Cash and cash equivalents                        |                                                           | $                          | 2,358   |         |         | $ | 383     |        
|Accrued interest receivable and other assets     |                                                           |                            | 4,229   |         |         |   | 3,942   |        
|Goodwill                                         |                                                           |                            | 527     |         |         |   | 527     |        
|Investment in subsidiaries                       |                                                           |                            | 386,116 |         |         |   | 367,892 |        
|Investment in Sterling Bancshares Capital Trusts |                                                           |                            | 2,475   |         |         |   | 2,475   |        
|                                                 |                                                           |                            |         |         |         |  
|TOTAL ASSETS                                     |                                                           | $                          | 395,705 |         |         | $ | 375,219 |        
|                                                 |                                                           |                            |         |         |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY             |                                                           |                            |         |         |         |   |         |        
|LIABILITIES:                                     |                                                           |                            |         |         |         |   |         |        
|                                                 | Accrued interest payable and other liabilities            |                            | $       | 58      |         |   | $       | 148     |        
|                                                 | Junior subordinated debt                                  |                            |         | 82,475  |         |   |         | 82,475  |        
|                                                 |                                                           |                            |         |         |         |  
|                                                 |                                                           | Total liabilities          |         |         | 82,533  |   |         |         | 82,623  | 
|COMMITMENTS AND CONTINGENCIES                    |                                                           |                            |        |         |         |   |        |        
|SHAREHOLDERS EQUITY:                            |                                                           |                            |         |         |         |   |         |        
|                                                 | Convertible preferred stock                               |                            |         |        |         |   |         | 20      |        
|                                                 | Common stock                                              |                            |         | 45,068  |         |   |         | 44,642  |        
|                                                 | Capital surplus                                           |                            |         | 54,522  |         |   |         | 48,953  |        
|                                                 | Retained earnings                                         |                            |         | 213,814 |         |   |         | 197,819 |        
|                                                 | Accumulated other comprehensive income (loss), net of tax |                            |         | (232    | )       |   |         | 1,162   |        
|                                                 |                                                           |                            |         |         |         |  
|                                                 |                                                           | Total shareholders equity |         |         | 313,172 |   |         |         | 292,596 | 
|                                                 |                                                           |                            |         |         |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY       |                                                           | $                          | 395,705 |         |         | $ | 375,219 |        
|                                                 |                                                           |                            |         |         |         |  

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STERLING BANCSHARES, INC.


(Parent Company Only)


CONDENSED STATEMENTS OF INCOME


FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002


|                                                                                        |                                           |                          |        |        |        |   |        |        |        |   |        |        |        | 
|--------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------ | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                                        |                                           | 2004                     |        |        | 2003   |   |        | 2002   |       
|                                                                                        |                                           |                          |        |        |        |   |        |        |       
|                                                                                        |                                           | (In thousands)           |       
|REVENUES:                                                                               |                                           |                          |        |        |        |   |        |        |        |   |        |       
|                                                                                        | Dividends received from bank subsidiaries |                          | $      | 10,095 |        |   | $      | 47,589 |        |   | $      | 12,650 |       
|                                                                                        | Other income                              |                          |        | 193    |        |   |        | 191    |        |   |        | 333    |       
|                                                                                        |                                           |                          |        |        |        |   |        |        |       
|                                                                                        |                                           | Total revenues           |        |        | 10,288 |   |        |        | 47,780 |   |        |        | 12,983 | 
|EXPENSES:                                                                               |                                           |                          |        |        |        |   |        |        |        |   |        |       
|                                                                                        | Interest expense:                         |                          |        |        |        |   |        |        |        |   |        |        |       
|                                                                                        |                                           | Notes payable            |        |        |       |   |        |        | 585    |   |        |        | 797    | 
|                                                                                        |                                           | Junior subordinated debt |        |        | 6,431  |   |        |        | 6,379  |   |        |        | 6,097  | 
|                                                                                        | General and administrative                |                          |        | 1,666  |        |   |        | 1,731  |        |   |        | 2,811  |       
|                                                                                        |                                           |                          |        |        |        |   |        |        |       
|                                                                                        |                                           | Total expenses           |        |        | 8,097  |   |        |        | 8,695  |   |        |        | 9,705  | 
|Income before equity in undistributed earnings of subsidiaries
    and
    income taxes |                                           |                          | 2,191  |        |        |   | 39,085 |        |        |   | 3,278  |       
|Equity in undistributed earnings of subsidiaries                                        |                                           |                          | 20,009 |        |        |   | 7,084  |        |        |   | 30,021 |       
|                                                                                        |                                           |                          |        |        |        |   |        |        |       
|Income before income tax benefit                                                        |                                           |                          | 22,200 |        |        |   | 46,169 |        |        |   | 33,299 |       
|Income tax benefit                                                                      |                                           |                          | 2,763  |        |        |   | 2,941  |        |        |   | 3,252  |       
|                                                                                        |                                           |                          |        |        |        |   |        |        |       
|Net income                                                                              |                                           | $                        | 24,963 |        |        | $ | 49,110 |        |        | $ | 36,551 |       
|                                                                                        |                                           |                          |        |        |        |   |        |        |       

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STERLING BANCSHARES, INC.


(Parent Company Only)


CONDENSED STATEMENTS OF CASH FLOWS


FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002


|                                                     |                                                                                       |                                                |                                                |                                                     |         |      |        |         |        |       |         |         |         |        |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------------- | ---------------------------------------------- | --------------------------------------------------- | ------- | ---- | ------ | ------- | ------ | ----- | ------- | ------- | ------- | ------ | ------- | -
|                                                     |                                                                                       | 2004                                           |                                                |                                                     | 2003    |      |        | 2002    |       
|                                                     |                                                                                       |                                                |                                                |                                                     |         |      |        |         |       
|                                                     |                                                                                       | (In thousands)                                 |                                               
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                       |                                                |                                                |                                                     |         |      |        |         |        |       |         |        
|                                                     | Net income                                                                            |                                                | $                                              | 24,963                                              |         |      | $      | 49,110  |        |       | $       | 36,551  |        
|                                                     | Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                |                                                |                                                     |         |      |        |         |        |       |         |         |        
|                                                     |                                                                                       | Equity in undistributed earnings of subsidiary |                                                |                                                     | (20,009 | )    |        |         | (7,084 | )     |         |         | (30,021 | )     
|                                                     |                                                                                       | Change in operating assets and liabilities:    |                                                |                                                     |         |      |        |         |        |       |         |         |         |       
|                                                     |                                                                                       |                                                | Accrued interest receivable and other assets   |                                                     |         | (287 | )      |         |        | 1,246 |         |         |         | (1,565 | )      
|                                                     |                                                                                       |                                                | Accrued interest payable and other liabilities |                                                     |         | 1    |        |         |        | (194  | )       |         |         | (263   | )      
|                                                     |                                                                                       |                                                |                                                |                                                     |         |      |        |         |       
|                                                     |                                                                                       |                                                |                                                | Net cash provided by operating activities           |         |      | 4,668  |         |        |       | 43,078  |         |         |        | 4,702   |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                                                                       |                                                |                                                |                                                     |         |      |        |         |        |       |         |        
|                                                     | Purchase of Plaza Bank                                                                |                                                |                                                |                                                    |         |      |        | (18,329 | )      |       |         |        |        
|                                                     | Purchase of ENB Bankshares, Inc.                                                      |                                                |                                                |                                                    |         |      |        |        |        |       |         | (10,376 | )      
|                                                     | Proceeds from sale of Plaza Bank Charter                                              |                                                |                                                | 300                                                 |         |      |        |        |        |       |         |        |        
|                                                     | Capital contribution to Sterling Bancshares Capital
    Trust III                     |                                                |                                                |                                                    |         |      |        |        |        |       |         | (967    | )      
|                                                     | Capital contribution to Sterling Bancshares Statutory
    Trust One                   |                                                |                                                |                                                    |         |      |        |        |        |       |         | (619    | )      
|                                                     | Redemption of investment in Sterling Bancshares Capital
    Trust I                   |                                                |                                                |                                                    |         |      |        |        |        |       |         | 889     |        
|                                                     | Capital investment in subsidiary banks                                                |                                                |                                                |                                                    |         |      |        |        |        |       |         | (12,000 | )      
|                                                     |                                                                                       |                                                |                                                |                                                     |         |      |        |         |       
|                                                     |                                                                                       |                                                |                                                | Net cash provided by (used in) investing activities |         |      | 300    |         |        |       | (18,329 | )       |         |        | (23,073 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                                       |                                                |                                                |                                                     |         |      |        |         |        |       |         |        
|                                                     | Repayments of notes payable                                                           |                                                |                                                |                                                    |         |      |        | (21,430 | )      |       |         | (602    | )      
|                                                     | Proceeds from issuance of common stock                                                |                                                |                                                | 5,975                                               |         |      |        | 4,940   |        |       |         | 2,098   |        
|                                                     | Proceeds from issuance of preferred stock                                             |                                                |                                                |                                                    |         |      |        |        |        |       |         | 242     |        
|                                                     | Payments of cash dividends                                                            |                                                |                                                | (8,968                                              | )       |      |        | (7,955  | )      |       |         | (7,031  | )      
|                                                     | Proceeds from issuance of junior subordinated debentures                              |                                                |                                                |                                                    |         |      |        |        |        |       |         | 52,836  |        
|                                                     | Redemption of junior subordinated debentures                                          |                                                |                                                |                                                    |         |      |        |        |        |       |         | (29,639 | )      
|                                                     |                                                                                       |                                                |                                                |                                                     |         |      |        |         |       
|                                                     |                                                                                       |                                                |                                                | Net cash (used in) provided by financing activities |         |      | (2,993 | )       |        |       | (24,445 | )       |         |        | 17,904  |  
|                                                     |                                                                                       |                                                |                                                |                                                     |         |      |        |         |       
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                       |                                                | 1,975                                          |                                                     |         |      | 304    |         |        |       | (467    | )      
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR       |                                                                                       |                                                | 383                                            |                                                     |         |      | 79     |         |        |       | 546     |        
|                                                     |                                                                                       |                                                |                                                |                                                     |         |      |        |         |       
|CASH AND CASH EQUIVALENTS AT END OF YEAR             |                                                                                       | $                                              | 2,358                                          |                                                     |         | $    | 383    |         |        | $     | 79      |        
|                                                     |                                                                                       |                                                |                                                |                                                     |         |      |        |         |       

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EXHIBIT TABLE


|            |   |    |  |                                                                                                                                                                                                                                                                                                                                                              
|----------- | - | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No.
|           
|            | 2 | .1 |  | 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 | .2 |  | 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 reference to
    Exhibit 2 of the Companys Quarterly Report on
    Form 10-Q filed on May 14, 2001 (File No. 000-20750).]                                                         
|            | 2 | .3 |  | 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. [Incorporated by
    reference to Exhibit 2.7 of the Companys Annual
    Report on Form 10-K (File No. 000-20750).]                                                      
|            | 2 | .4 |  | Agreement and Plan of Merger Among Sterling Bancshares, Inc.,
    Sterling Bancorporation, Inc. and ENB Bankshares Inc. dated as
    of May 22, 2002. [Incorporated by reference to Exhibit 2.1
    of the Companys Quarterly Report on Form 10-Q filed
    on August 14, 2002 (File No. 000-20750).]                                                       
|            | 2 | .5 |  | Purchase and Assumption Agreement dated July 12, 2002 between
    Sterling Bank Inc. and James Wilson as amended by First
    Amendment to Purchase and Assumption Agreement dated as of
    August 2, 2002. [Incorporated by reference to Exhibit 2.2
    of the Companys Quarterly Report on Form 10-Q filed
    on August 13, 2002 (File No. 000-20750).]
|            | 2 | .6 |  | Purchase and Assumption Agreement dated as of October 29, 2002
    between Sterling Bank Inc. and South Texas National Bank of
    Laredo. [Incorporated by reference to Exhibit 2.9 of the
    Companys Annual Report on Form 10-K (File
    No. 000-20750).]                                                                                              
|            | 2 | .7 |  | Stock Purchase Agreement dated as of July 16, 2003 by and among
    Sterling Bancshares, Inc., Sterling Bank, CMCR Holding Company
    and RBC Mortgage Company. [Incorporated by reference to
    Exhibit 2.1 to the Companys Current Report on
    Form 8-K filed on October 15, 2003 (File
    No. 000-20750).]                                          
|            | 2 | .8 |  | Amendment No. 1 to Stock Purchase Agreement dated as of
    September 30, 2003 by and among Sterling Bancshares, Inc.,
    Sterling Bank, CMCR Holding Company and RBC Mortgage Company.
    [Incorporated by reference to Exhibit 2.2 to the
    Companys Current Report on Form 8-K filed on October
    15, 2003 (File No. 000-20750).]                  
|            | 2 | .9 |  | Agreement and Plan of Merger dated August 18, 2003 by and among
    Sterling Bancshares, Inc., SB 2003, Inc. and South Texas Capital
    Group, Inc. [Incorporated by reference to Exhibit 10.3 of
    the Companys Quarterly Report on Form 10-Q filed on
    November 14, 2003 (File No. 000-20750).]                                                     
|            | 3 | .1 |  | Restated and Amended Articles of Incorporation of the Company,
    as amended. [Incorporated by reference to Exhibit 3.1 to
    the Registration Statement on Form S-3 (File
    Nos. 333-55724, 333-55724-01, and 333-55724-02).]                                                                                                                           
|            | 3 | .2 |  | Articles of Amendment to the Restated and Amended Articles of
    Incorporation of Sterling Bancshares, Inc. [Incorporated by
    reference to Exhibit 3.2 of the Companys Quarterly
    Report on Form 10-Q filed on August 13, 2002 (File
    No. 000-20750).]                                                                                            
|            | 3 | .3 |  | Amended and Restated Bylaws of Sterling Bancshares, Inc.
    [Incorporated by reference to Exhibit 3.1 of the
    Companys Current Report on Form 8-K filed on
    October 26, 2004 (File No. 000-20750).]                                                                                                                                                  
|            | 4 | .1 |  | Preferred Securities Guarantee Agreement dated March 21,
    2001. [Incorporated by reference to Exhibit 4.2 of the
    Companys Current Report on Form 8-K filed on
    March 21, 2001 (File No. 000-20750).]                                                                                                                                              
|            | 4 | .2 |  | Indenture dated March 21, 2001. [Incorporated by reference
    to Exhibit 4.4 of the Companys Current Report on Form
    8-K filed on March 21, 2001 (File No. 000-20750).]                                                                                                                                                                                 

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|            |    |       |  |                                                                                                                                                                                                                                                                                                               
|----------- | -- | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No.
|           
|            | 4  | .3    |  | 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  | .4    |  | 9.20% Subordinated Deferrable Interest Debenture due
    March 21, 2031. [Incorporated by reference to
    Exhibit 4.7 of the Companys Current Report on
    Form 8-K filed on March 21, 2001 (File
    No. 000-20750).]                                                                                     
|            | 4  | .5    |  | Indenture dated August 30, 2002. [Incorporated by reference to
    Exhibit 4.4 of the Companys Current Report on Form
    8-K filed on September 12, 2002 (File No. 000-20750).]                                                                                                                             
|            | 4  | .6    |  | Junior Subordinated Deferrable Interest Debenture due
    August 30, 2032. [Incorporated by reference to
    Exhibit 4.6 of the Companys Current Report on
    Form 8-K filed on September 12, 2002 (File
    No. 000-20750).]                                                                               
|            | 4  | .7    |  | Guarantee Agreement dated August 30, 2002. [Incorporated by
    reference to Exhibit 4.6 of the Companys Current
    Report on Form 8-K filed on September 12, 2002 (File No.
    000-20750).]                                                                                                               
|            | 4  | .8    |  | Preferred Securities Guarantee Agreement dated September 26,
    2002. [Incorporated by reference to Exhibit 4.2 of the
    Companys Current Report on Form 8-K dated September
    26, 2002 (File No. 000-20750).]                                                                                          
|            | 4  | .9    |  | Second Supplemental Indenture dated September 26, 2002.
    [Incorporated by reference to Exhibit 4.9 of the
    Companys Current Report on Form 8-K dated September
    26, 2002 (File No. 000-20750).]                                                                                                     
|            | 4  | .10   |  | 8.30% Junior Subordinated Deferrable Interest Debenture due
    September 26, 2032. [Incorporated by reference to
    Exhibit 4.8 of the Companys Current Report on
    Form 8-K dated September 26, 2002 (File
    No. 000-20750).]                                                                         
|            | 4  | .11   |  | Fiscal and Paying Agency Agreement dated April 10, 2003
    between Sterling Bank and Deutsche Bank Trust Company Americas.
    [Incorporated by reference to Exhibit 4.1 of the
    Companys Current Report on Form 8-K filed
    April 15, 2003 (File No. 000-20750).]                                     
|            | 4  | .12   |  | Form of Global Certificate representing Sterling Banks
    7.375% Subordinated Noted due 2013. [Incorporated by reference
    to Exhibit 4.2 of the Companys Current Report on
    Form 8-K filed April 15, 2003 (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*   |  | Credit Agreement dated October 1, 2004 made by and between
    Sterling Bancshares, Inc. and Wells Fargo Bank, National
    Association regarding a line of credit in the amount of
    $20,000,000.                                                                                                          
|            | 10 | .6*   |  | First Amendment to Credit Agreement dated as of March 8,
    2005 by and between Sterling Bancshares, Inc. and Wells Fargo,
    National Association.                                                                                                                                                         
|            | 10 | .7*** |  | 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 Current Report on
    Form 8-K filed on October 14, 2001 (File
    No. 000-207500).]
|            | 10 | .8*** |  | Sterling Bancshares, Inc. 2003 Stock Incentive and Compensation
    Plan [Incorporated by reference to Exhibit 4.4 of the
    Companys Registration Statement on Form S-8
    (File No. 333-105307).]                                                                                                        
|            | 10 | .9*** |  | Consulting Agreement between Sterling Bancshares, Inc. and
    George Martinez executed on June 9, 2004 and effective as of
    June 1, 2004. [Incorporated by reference to Exhibit 10.1 of
    the Companys Quarterly Report on Form 10-Q filed on August
    5, 2004 (File No. 000-207501)].               

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|            |    |        |  |                                                                                                                                                      
|----------- | -- | ------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No.
|           
|            | 10 | .10*** |  | Form of Severance and Non-Competition Agreements between
    Sterling Bancshares, Inc., Sterling Bank and the following named
    executive officers:

| |                                                                                                 |  |                                                                                
| | ----------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------
| | Daryl D. Bohls
    Danny L. Buck
    Wanda S. Dalton
    Clinton Dunn
    James W. Goolsby, Jr. |  | Travis Jaggers
    Graham B. Painter
    Stephen C. Raffaele
    Mike Skowronek

| |          |  |  |                                                                                                                                                                                                                                                                                                                     
| | -------- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |          |  |  | [Incorporated by reference to Exhibit 10.2 of the
    Companys Quarterly Report on Form 10-Q filed on
    August 5, 2004 (File No. 000-207501)].                                                                                                                                                                   
| | 10.11*** |  |  | Form of Restricted Stock Agreement [Incorporated by reference to
    Exhibit 10.1 of the Companys Current Report on
    Form 8-K filed on February 4, 2005(File
    No. 000-207500).]                                                                                                                              
| | 10.12*** |  |  | Form of Incentive Stock Agreement [Incorporated by reference to
    Exhibit 10.2 of the Companys Current Report on
    Form 8-K filed on February 4, 2005 (File
    No. 000-207500).]                                                                                                                              
| | 10.13*** |  |  | Severance and Non-Competition Agreement between Sterling
    Bancshares, Inc., Sterling Bank and Allen Brown executed and
    effective as of December 1, 2004. [Incorporated by
    reference to Exhibit 10.1 of the Companys Current
    Report on Form 8-K filed on December 7, 2004 (File
    No. 000-207500).]
| | 10.14*** |  |  | Short Term Incentive Program for Shared Services.                                                                                                                                                                                                                                                                   
| | 10.15*** |  |  | Short Term Incentive Program for Bank Offices.                                                                                                                                                                                                                                                                      
| | 21*      |  |  | Subsidiaries of the Company                                                                                                                                                                                                                                                                                         
| | 23.1*    |  |  | Consent of Deloitte & Touche LLP, Independent Registered
    Public Accounting Firm                                                                                                                                                                                                                                 
| | 31.1*    |  |  | Certification of J. Downey Bridgwater, President and Chief
    Executive Officer, as required pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                        
| | 31.2*    |  |  | Certification of Stephen C. Raffaele, Executive Vice President
    and Chief Financial Officer, as required pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002.                                                                                                                                          
| | 32.1**   |  |  | Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.                                                                                                                                                                                     
| | 32.2**   |  |  | Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.                                                                                                                                                                                     










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