STERLING BANCSHARES INC - 10-Q Quarterly Report

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

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FORM 10-Q

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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH
31, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 0-20750

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

TEXAS 74-2175590
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)

2550 NORTH LOOP WEST, SUITE 600
HOUSTON, TEXAS 77092
(Address of principal executive office) (Zip Code)

713-466-8300
(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes [X] No [ ]

As of May 7, 2003, there were outstanding 44,064,511 shares of common stock, par
value $1.00 per share, of the registrant.

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PART I. FINANCIAL INFORMATION

ITEM 1. INTERIM FINANCIAL STATEMENTS (UNAUDITED)

STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL
PART OF THESE INTERIM CONSOLIDATED FINANCIAL STATEMENTS.

2

STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL
PART OF THESE INTERIM CONSOLIDATED FINANCIAL STATEMENTS.

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STERLING BANCSHARES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(In thousands)

SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL
PART OF THESE INTERIM CONSOLIDATED FINANCIAL STATEMENTS.

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STERLING BANCSHARES, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003

1. BASIS OF PRESENTATION:

The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial
information and in accordance with the instructions to Form 10-Q as
prescribed by the Securities and Exchange Commission. Accordingly, they
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring items) considered necessary for a fair presentation
have been included. Operating results for the three-month period ended
March 31, 2003, are not necessarily indicative of the results that may
be expected for the entire year or any interim period. For further
information, refer to the consolidated financial statements and notes
thereto included in the Annual Report on Form 10-K of Sterling
Bancshares, Inc. (the "Company") for the year ended December 31, 2002.
Certain reclassifications have been made to prior year amounts to
conform to current year presentation. All reclassifications have been
applied consistently for the periods presented and had no effect on
net income or stockholders' equity.

2. EARNINGS PER COMMON SHARE

Earnings per common share ("EPS") were computed based on the following
(in thousands, except per share amounts):

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3. SHAREHOLDERS' EQUITY

The following table displays the changes in shareholders' equity for
the three-month periods ended March 31, 2003 and 2002 (in thousands):

4. SEGMENTS

The Company has two reportable operating segments: commercial banking
and mortgage banking. Sterling Bank (the "Bank") has an 80 percent
ownership interest in Sterling Capital Mortgage Company ("SCMC") and
reports its financial position and results of operations on a
consolidated basis. The commercial banking and mortgage banking
segments are managed separately because each business requires
different marketing strategies and each offers different products and
services.

Summarized below is the financial information by operating segment as
of and for the three-month periods ended March 31, (in thousands).

Intersegment interest was paid to the Bank by SCMC in the amount of
$6.9 million for the three-month period ended March 31, 2003. Total
loans of $395.0 million in the mortgage warehouse were eliminated in
consolidation as of March 31, 2003.

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5. DISCONTINUED OPERATIONS

On October 29, 2002, the Bank entered into an agreement to sell its
banking office located in Eagle Pass, Texas. On March 20, 2003, the
Bank completed the sale of its banking office located in Eagle Pass,
Texas to South Texas National Bank of Laredo. Assets of $18.7 million,
loans of $16.8 million and deposits of $95.7 million were sold in the
transaction.

On July 16, 2002, the Bank entered into an agreement to sell its
banking offices located in Carrizo Springs, Crystal City and Pearsall
to an investor group headed by the current executive officers of these
three locations. As of March 31, 2003, these three banking offices had
combined assets of $16.2 million, loans of $14.9 million and deposits
of $43.4 million. The sale of these three banking offices was completed
on May 8, 2003. Assets of $16.6 million, loans of $15.2 million and
deposits of $42.1 million were sold in the transaction.

The business related to these four offices is accounted for as
discontinued operations and therefore, the results of operations and
cash flows have been removed from the Company's results of continuing
operations for all periods presented in this document. The results of
these four offices are presented as discontinued in a separate category
on the income statement following results from continuing operations.

The assets and liabilities of the Carrizo Springs, Crystal City and
Pearsall banking offices are stated separately as discontinued
operations as of March 31, 2003 and December 31, 2002 on the
Consolidated Balance Sheet. While the assets and liabilities relating
to the Eagle Pass office were separately stated as discontinued
operations on the Consolidated Balance Sheet as of December 31, 2002,
these assets and liabilities were not included in March 31, 2003
Consolidated Balance Sheet due to the consummation of the sale on March
20, 2003. The major asset and liability categories are as follows (in
thousands):

6. STOCK OPTIONS

The Company accounts for its employee stock options using the intrinsic
value-based method. If the compensation cost for the Company's
stock-based compensation plan had been determined based on the fair
value at the grant dates for awards, there would have been no material
impact on the Company's reported net income or earnings per share. Pro
forma information regarding net income and earnings per share is
required under Statement of Financial Accounting Standard No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation" and has been
determined as if the Company accounted for its employee stock option
plans under the fair value method of SFAS 123. The fair value of
options was estimated using a Black-Scholes option pricing model.
Option valuation models require use of highly subjective assumptions.
Also, employee stock options have characteristics that are
significantly different from those of traded options, including vesting
provisions and trading limitations that impact their liquidity. Because
employee stock options have differing characteristics and changes in
the subjective input assumptions can materially affect the fair value
estimate, the Black-Scholes valuation model does not necessarily
provide a

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reliable measure of the fair value of employee stock options. The
following table shows information related to stock-based compensation
in both the reported and pro forma earnings per share amounts (dollars
in thousands except for per share amounts):

7. INTANGIBLE ASSETS

The changes in the carrying amount of goodwill by reportable segment
for the year ended December 31, 2002 and the three months ended March
31, 2003 are as follows (in thousands):

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The changes in the carrying amounts of intangible assets other than
goodwill for the year ended December 31, 2002 and three months ended
March 31, 2003 are as follows (in thousands):

8. SUBSEQUENT EVENTS

On April 10, 2003, the Bank completed a private placement of $50
million of subordinated unsecured notes. The subordinated notes issued
by the Bank bear interest at a fixed rate of 7.375% and mature over a
ten year period ending April 15, 2013, with semi-annual interest
payments. The subordinated notes are not convertible or redeemable. The
Bank intends to use the proceeds from the sale of the subordinated
notes, after the payment of expenses related to the private placement,
for general corporate purposes.

On May 8, 2003, the Bank completed the sale of its banking offices
located in Carrizo Springs, Crystal City and Pearsall, Texas to an
investor group headed by the current executive officers of these three
locations. Assets of $16.6 million, loans of $15.2 million and deposits
of $42.1 million were sold.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including Management's Discussion
and Analysis of Financial Condition and Results of Operations, contains
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements
discuss future expectations, activities or events and by their nature,
they are subject to risks and uncertainties. Forward-looking statements
can be identified by the fact that they do not relate strictly to
historical or current facts. They often include words such as
"believe," "expect," "anticipate," "intend," "plan," "estimate," or
words of similar meaning, or future or conditional verbs such as
"will," "would," "should," "could," or "may." Forward-looking
statements speak only as of the date they are made. The Company will
not update these forward-looking statements to reflect circumstances or
events that occur after the date the forward-looking statements are
made.

Many possible factors could affect the Company's future financial
performance and actual results may differ materially from what is
expressed in any forward-looking statement. Important factors that
could cause actual results to differ materially from estimates or
projections contained in forward-looking statements include, but are
not limited to, the following: general business and economic conditions
in the markets the Company serves 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; the
Company's liquidity requirements could be adversely affected by changes
in its assets and

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liabilities; legislative or regulatory developments including changes
in laws concerning taxes, banking, securities, insurance and other
aspects of the financial securities industry; competitive factors,
including product and pricing pressures among financial services
organizations, may increase; and changes in fiscal and governmental
policies of the United States federal government could have an adverse
effect on the Company's business. For additional discussion of such
risks, uncertainties and assumptions, see the Company's Annual Report
on Form 10-K for the year ended December 31, 2002, filed with the
Securities and Exchange Commission under the Securities Exchange Act of
1934.

CRITICAL ACCOUNTING POLICIES

The Company's accounting policies are integral to understanding the
results reported. Accounting policies are described in detail in Note A
to the consolidated financial statements in the 2002 Annual Report. The
Company believes that of its significant accounting policies, the
allowance for credit losses may involve a higher degree of judgment and
complexity

Allowance for credit losses - The allowance for credit losses is a
valuation allowance for probable losses incurred on loans. Loans are
charged to the allowance when the loss actually occurs or when a
determination is made that a probable loss has occurred. Recoveries are
credited to the allowance at the time of recovery. Throughout the year,
management estimates the probable level of losses to determine whether
the allowance for credit losses is adequate to absorb losses in the
existing portfolio. Based on these estimates, an amount is charged to
the provision for credit losses and credited to the allowance for
credit losses in order to adjust the allowance to a level determined to
be adequate to absorb losses. Management's judgment as to the level of
probable losses on existing loans involves the consideration of current
economic conditions and their estimated effects on specific borrowers;
an evaluation of the existing relationships among loans, potential
credit losses and the present level of the allowance; results of
examinations of the loan portfolio by regulatory agencies; and
management's internal review of the loan portfolio. In determining the
collectibility of certain loans, management also considers the fair
value of any underlying collateral. The amount ultimately realized may
differ from the carrying value of these assets because of economic,
operating or other conditions beyond the Company's control. Please
refer to the subsequent discussion of "Allowance for Credit Losses"
below as well as Note A to the consolidated financial statements in the
annual report for additional insight into management's approach and
methodology in estimating the allowance for credit losses.

SIGNIFICANT DEVELOPMENTS

On July 12, 2002, the Company entered into a definitive agreement to
sell three offices in south Texas to an investor group headed by the
current executive officers of the three locations. As of March 31,
2003, the three offices, Carrizo Springs, Crystal City and Pearsall,
had combined assets of $16.2 million, loans of $14.9 million and
deposits of $43.4 million. The sale of these three banking offices was
completed on May 8, 2003. Assets of $16.6 million, loans of $15.2
million and deposits of $42.1 million were sold in the transaction.

On March 20, 2003, the Bank sold its banking office located in Eagle
Pass, Texas to South Texas National Bank of Laredo. Assets of $18.7
million, loans of $16.8 million and deposits of $95.7 million were
sold in the transaction.

On April 10, 2003, the Bank completed a private placement of $50
million of subordinated unsecured notes. The subordinated notes issued
by the Bank bear interest at a fixed rate of 7.375% and mature over a
ten year period ending April 15, 2013, with semi-annual interest
payments. The subordinated notes are not convertible or redeemable. The
Bank intends to use the proceeds from the sale of the subordinated
notes, after the payment of expenses related to the private placement,
for general corporate purposes.

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NON-GAAP PRESENTATIONS

The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains financial information
determined by methods other than in accordance with Generally Accepted
Accounting Principles ("GAAP"). Management uses these non-GAAP measures
in their analysis of the business and its performance. In particular,
net interest income and net interest margin as reflected in the
Consolidated Yield Analysis table are calculated on both a GAAP based
measurement and on a fully tax-equivalent basis ("FTE"). Management
believes that these measures calculated on a FTE basis provide a useful
picture of net interest income and net interest margin for comparative
purposes. The GAAP based measures do not take into consideration the
tax-exempt status of certain income. Net interest income and net
interest margin calculated on a FTE basis are determined by adjusting
net interest income to reflect tax-exempt interest income on an
equivalent before-tax basis. Non-GAAP information presented by other
companies may not be comparable to that presented herein, since each
company may define non-GAAP measured differently.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO SAME PERIOD IN 2002

NET INCOME - Net income for the three-month period ended March 31, 2003
was $11.2 million as compared to $8.3 million for the same period in
2002, an increase of approximately $2.9 million or 35.4%. Included in
net income is a before-tax net gain of $3.2 million related to the sale
of the Eagle Pass office. Income from continuing operations for the
three-month period ended March 31, 2003 was $9.2 million as compared to
$8.4 million for the same period in 2002, an increase of approximately
$853 thousand or 10.2%. The increase is primarily attributable to
continued loan and deposit growth.

NET INTEREST INCOME - Net interest income for the three-month period
ended March 31, 2003, was $37.0 million, as compared to $32.9 million
for the same period in 2002, an increase of $4.1 million or 12.4%. The
increase is primarily due to the average loan growth of 31.4%. The
growth in average loans related to the acquisition of Eagle National
was 2.9%. In November 2002, the Federal Reserve Bank decreased the
discount rate 50 basis points. Consequently, the Bank's yields
decreased in the first quarter of 2003 as a result of the Bank lowering
its prime rate in the fourth quarter of 2002 in relation to the Federal
Reserve decrease. While average earning assets for the period ended
March 31, 2003 increased over a year ago, the yield decreased 87 basis
points from 6.96% for the three-month period ended March 31, 2002, to
6.09% for the same period in 2003. As of March 31, 2003, average
interest bearing liabilities were $2.0 billion, an increase of $425.3
million or 27.8% from March 31, 2002. Average interest bearing deposits
at March 31, 2003 were $1.5 billion, an increase of 13.8% from March
31, 2002. The increase in average interest bearing deposits related to
the acquisition of Eagle National was 3.1%. The cost of interest
bearing liabilities decreased 51 basis points from 1.92% for the three
months end March 31, 2002 to 1.41% during the same period in 2003. The
decrease in the cost of interest bearing liabilities is primarily the
result of the decrease in the Federal Reserve Bank's discount rate in
November 2002. The Company's 5.14% net interest margin for the three
months ended March 31, 2003 decreased from the 5.70% net interest
margin recorded during the same period in 2002. Additionally, the
Company's 5.19% tax equivalent net interest margin for the three months
ended March 31, 2003 decreased from the 5.77% tax equivalent net
interest margin recorded during the same period in 2002.

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The following schedule gives a comparative analysis of the Company's
daily average interest-earning assets and interest-bearing liabilities
for the three-month periods ended March 31, 2003 and 2002,
respectively:

CONSOLIDATED YIELD ANALYSIS
THREE MONTHS ENDED MARCH 31,
(DOLLARS IN THOUSANDS)

(1) In order to present pretax income and resultant yields on
tax-exempt investments and loans on a comparable basis to those on
taxable investments and loans, a tax-equivalent adjustment has been
made equally to interest income and income tax expense with no effect
on after tax income. The tax equivalent adjustment has been computed
using a federal income tax rate of 35%.

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PROVISION FOR CREDIT LOSSES - The provision for credit losses for the
first quarter of 2003 was $5.4 million, as compared to $2.6 million for
the same period in 2002, an increase of $2.8 million or 105.6%. A
provision for credit losses of $1.0 million was recorded in the first
quarter of 2003 for loans purchased with Eagle National. Additionally,
the increase in the provision for credit losses is to support the loan
growth for the quarter ended March 31, 2003. The Company's allowance
for credit losses increased by $1.9 million from $27.6 million at
December 31, 2002, to $29.5 million on March 31, 2003. The increase in
the allowance for credit losses is primarily due to the $5.4 million
provision for credit losses offset by $3.2 million in net charge-offs.
Additionally, an allowance of credit losses of $353 thousand was sold
with the Eagle Pass office. Please refer to the subsequent discussion
of ALLOWANCE FOR CREDIT LOSSES for additional insight to management's
approach and methodology in estimating the allowance for credit losses.

NONINTEREST INCOME - Total noninterest income for the quarter ended
March 31, 2003 was $29.5 million, as compared to $15.7 million for the
same period in 2002, an increase of $13.8 million or 87.6%.

Noninterest income for the three months ended March 31, 2003 and 2002,
respectively, is summarized as follows (in thousands):

COMMERCIAL BANKING SEGMENT - Noninterest income from commercial banking
for the three-month period ended March 31, 2003 was $7.4 million, as
compared to $6.3 million for the same period in 2002, an increase of
$1.1 million or 17.2%. Customer service fees increased $294 thousand as
a result in the growth in deposit transaction accounts and the
acquisition of Eagle National in September 2002. During the first
quarter of 2003, the Bank had a gain on the sale of securities of $374
thousand. Also the Bank had an increase of $226 thousand in gains on
the sale of trading assets. For the first quarter of 2003, a premium of
$175 thousand was recognized from the Company's sale of the guaranteed
portion of SBA loans. The Bank began selling the guaranteed portion of
SBA loans in the second quarter of 2002.

MORTGAGE BANKING SEGMENT - Total noninterest income from the mortgage
banking segment increased 134.7% from $9.4 million for the first
quarter of 2003 to $22.1 million for the same period in 2003. The
income from the mortgage banking segment typically consists of
origination fees and gains on sale of mortgage loans. During the first
quarter of 2003, SCMC had $1.5 billion in loan fundings as compared to
$676.5 million for the same period in 2002, an increase of 117.0%.

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NONINTEREST EXPENSE - Noninterest expense increased $13.5 million or
40.0%, to $47.2 million for the three-month period ending March 31,
2003 as compared to $33.7 million for the same period in 2002.

Noninterest expense for the three months ended March 31, 2003 and 2002,
respectively, is summarized as follows (in thousands):

COMMERCIAL BANKING SEGMENT - Noninterest expenses related to commercial
banking for the first quarter of 2003 were $28.8 million, as compared
to $25.7 million for the same period in 2002, an increase of $3.1
million or 12.0%. Salaries and employee benefits from commercial
banking for the three-month period ended March 31, 2003 were $16.8
million, as compared to $14.6 million for the same period in 2002, an
increase of $2.3 million or 15.5%. Total full-time equivalent employees
increased 6.7% from 973 at March 31, 2002 to 1,038 at March 31, 2003.
Increased salaries and employee benefits expenses related to the
acquisition of Eagle National were $335 thousand. Expenses related to
hospital and medical insurance increased $284 thousand.

Minority interest expense increased $222 thousand or 16.7% from the
three months ended March 31, 2002 as compared to the same period in
2003. The increase is related to the interest due on the additional
trust preferred securities issued in August 2002 and September 2002
offset by the redemption of trust preferred securities in November
2002.

MORTGAGE BANKING SEGMENT - Noninterest expenses related to mortgage
banking for the three-month period ended March 31, 2003 were $18.4
million, as compared to $8.0 million for the same period in 2002, an
increase of $10.4 million or 130.4%. The increase in expenses is due to
variable expenses related to the increase in loan fundings. During the
first quarter of 2003, SCMC had $1.5 billion in loan fundings as
compared to $676.5 million for the same period in 2002, an increase of
117.0%.

PROVISION FOR INCOME TAXES - The provision for income taxes as a
percent of net income before taxes increased from 32.3% for the first
quarter of 2002 to 34.2% for the same period in 2003.

FINANCIAL CONDITION

TOTAL ASSETS - The total consolidated assets of the Company decreased
$340.4 million from $3.6 billion at December 31, 2002 to $3.2 billion
at March 31, 2003. Assets sold with the Eagle Pass office in March 2003
totaled $18.7 million.

CASH AND CASH EQUIVALENTS - The Company had cash and cash equivalents
of $124.3 million at March 31, 2003. Comparatively, the Company had
$139.2 million in cash and cash equivalents on December 31, 2002, a
decrease of $14.9 million.

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TRADING ASSETS - The Company trades government guaranteed loans and
pools. Trading assets as of March 31, 2003 were $100.3 million, a
decrease of $42.6 million from December 31, 2002. These assets are
generally held up to 120 days. The trading assets are carried at fair
market value. The realized and unrealized gains and losses are included
in income.

SECURITIES - The Company's securities portfolio as of March 31, 2003,
totaled $288.8 million, as compared to $313.1 million on December 31,
2002, a decrease of $24.3 million or 7.8%. During the first quarter of
2003, the Bank sold $16.5 million of SBA originator's fees. At March
31, 2003, the unrealized gain on the available for sale securities was
$5.7 million.

LOANS HELD FOR SALE - Total loans held for sale decreased from $701.3
million at December 31, 2002 to $481.8 million at March 31, 2003, a
decrease of $219.5 million, or 31.3%. These loans represent loans
funded by the Bank through a mortgage warehouse line to SCMC. Due to
the timing of the sales of loans to investors, the balance of these
loans at any given time is somewhat volatile.

LOANS HELD FOR INVESTMENT - As of March 31, 2003, loans held for
investment were $1.96 billion which was a $54.0 million increase from
the balance of $1.91 billion at December 31, 2002. At March 31, 2003,
loans held for investment as a percentage of total assets and total
deposits were 60.6% and 79.0%, respectively.

The following table summarizes the Company's held for investment loan
portfolio by type of loan as of March 31, 2003 (in thousands):

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ALLOWANCE FOR CREDIT LOSSES - The following is a summary of the changes
in the allowance for credit losses for the three months ended March 31,
2003 and March 31, 2002, respectively, (in thousands):

The following is a summary of the relationship of the allowance for
credit losses to total loans at March 31, 2003, and December 31, 2002
(in thousands):

In order to determine the adequacy of the allowance for credit losses,
management considers the risk classification and delinquency status of
loans and other factors. Management also establishes specific
allowances for credits which management believes require allowances
greater than those allocated according to their risk classification. An
unallocated allowance is also established based on the Company's
historical charge-off experience. The Company will continue to monitor
the adequacy of the allowance for credit losses to determine the
appropriate accrual for the Company's provision for credit losses.

RISK ELEMENTS - Nonperforming, past-due, and restructured loans are
fully or substantially secured by assets, with any excess of loan
balances over collateral values specifically allocated in the allowance
for credit losses. Twenty-seven properties make up the $5.2 million of
other real estate owned ("ORE") at March 31, 2003. All properties are
carried at the lower of cost or fair market value.

The Company defines potential problem loans as those loans for which
information known by management indicates serious doubt that the
borrower will be able to comply with the present payment terms.
Management identifies these loans through its continuous loan review
process and defines potential problem loans as those loans classified
as "substandard", "doubtful", or "loss". As of March 31, 2003, the
Company has no material foreign loans outstanding or loan
concentrations.

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The following table summarizes total nonperforming assets and potential
problem loans at December 31, 2002 and at March 31, 2003:

PREMISES AND EQUIPMENT - The Company's premises and equipment, net of
depreciation and discontinued operations, as of March 31, 2003, was
$53.3 million, as compared to $54.9 million as of December 31, 2002, a
decrease of $1.6 million.

DEPOSITS - Total deposits as of March 31, 2003, were $2.49 billion, as
compared to $2.53 billion on December 31, 2002, a decrease of $46.6
million. The percentage of noninterest bearing deposits to total
deposits as of March 31, 2003 was 38.3%.

DISCONTINUED OPERATIONS - On October 29, 2002, the Bank entered into an
agreement to sell its banking office located in Eagle Pass, Texas. On
March 20, 2003, the Bank completed the sale of its banking office
located in Eagle Pass, Texas to South Texas National Bank of Laredo.
Assets of $18.7 million, loans of $16.8 million and deposits of $95.7
million were sold in the transaction. Additionally, on July 16, 2002,
the Bank entered into an agreement to sell its banking offices located
in Carrizo Springs, Crystal City and Pearsall to an investor group
headed by the current executive officers of these three locations. As
of March 31, 2003, these three banking offices had combined assets of
$16.2 million, loans of $14.9 million and deposits of $43.4 million.
The sale of these three banking offices was completed on May 8, 2003.
Assets of $16.6 million, loans of $15.2 million and deposits of $42.1
million were sold in the transaction.

The business related to these four offices is accounted for as
discontinued operations in accordance to Statement of Financial
Accounting Standards No. 144 ("SFAS 144") and therefore, the results of
operations and cash flows have been removed from the Company's results
of continuing operations for all periods presented in this document.
Additionally, the assets and liabilities of the discontinued operations
are presented in the Company's Consolidated Balance Sheet in the line
items entitled " Assets related to discontinued operations" and
"Liabilities related to discontinued operations".

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The following table sets forth the historical Consolidated Balance
Sheets (in thousands) for the periods indicated which have been
restated to present the discontinued operations in accordance with SFAS
144.

CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDERS' EQUITY - At March 31, 2003, shareholders' equity totaled
$258.4 million, as compared to $249.3 million at December 31, 2002. The
Company's risk-based capital ratios remain above the levels designated
by regulatory agencies for the Company to be considered as "well
capitalized" on March 31, 2003, with Tier 1 capital, total risk-based
capital, and leverage capital ratios of 10.03%, 11.10%, and 8.44%,
respectively.

LIQUIDITY - Effective management of balance sheet liquidity is
necessary to fund growth in earning assets and to pay liability
maturities, depository withdrawals and shareholders' dividends. The
Company has instituted asset/liability management policies, including
but not limited to a computer simulation model, to improve liquidity
controls and to enhance its management of interest rate risk and
financial condition. The Company has numerous sources of liquidity
including a significant portfolio of short-term assets, marketable
investment securities (excluding those presently classified as
"held-to-maturity"), loans available-for-sale, core deposits and access
to borrowing arrangements. Available borrowing arrangements

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maintained by the Company include federal funds lines with other
commercial banks and Federal Home Loan Bank ("FHLB") advances. Also in
2002, the Bank began accepting brokered certificates of deposits.

During April, 2003, the Bank raised approximately $50 million through a
private offering of subordinated unsecured notes. The subordinated
notes issued by the Bank bear interest at a fixed rate of 7.375% and
mature over a ten year period ending April 15, 2013, with semi-annual
interest payment. These subordinated notes are not convertible or
redeemable.

As of March 31, 2003, the Company had $20.0 million outstanding under a
term loan with Wells Fargo Bank, National Association ("Wells Fargo").
The term note bears interest at a rate per annum of 1.95% above the
federal funds rate from time to time. The federal funds rate is a
fluctuating interest rate per annum set daily by Wells Fargo as the
rate at which funds are offered to Wells Fargo by federal funds
brokers. The indebtedness evidenced by the term note is payable in
quarterly installments with a final maturity date of February 1, 2006.
The Credit Agreement requires the Company and the Bank to maintain
certain financial ratios and includes other restrictive covenants. At
March 31, 2003, the Company and Bank were in compliance with all
related financial covenants for this credit facility.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There have been no material changes in market risks faced by the
Company since December 31, 2002. For more information regarding
quantitative and qualitative disclosures about market risk, please
refer to the Company's Annual Report on Form 10-K as of and for the
year ended December 31, 2002, and in particular, Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Interest Rate Sensitivity and Liquidity".

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of disclosure controls and procedures - Within 90 days prior
to the date of this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and its Chief
Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based on this
evaluation, the Company's Chief Executive Officer and its Chief
Financial Officer concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934) are effective to ensure that
information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported to the Company's management within
the time periods specified in the Securities and Exchange Commission's
rules and forms.

Changes in internal controls - Subsequent to the date of their
evaluation, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the
Company's disclosure controls and procedures, and there were no
corrective actions with regard to significant deficiencies and material
weaknesses based on such evaluation.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Not applicable.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

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

Not applicable.

ITEM 5. OTHER INFORMATION.

Not applicable.

19

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

10.1 -- First Amendment to Credit Agreement dated
February 2, 2003 made by and between the
Company and Wells Fargo Bank, National
Association regarding a line of credit of
$20,000,000 [Incorporated by reference to
Exhibit 10.6 of the Company's Annual Report
of Form 10-K for the year ended December 31,
2002.]

11 -- Statement Regarding Computation of Earnings
Per Share (included as Note (2) to Interim
Consolidated Financial Statements on page 5
of this Quarterly Report on Form 10-Q).

*99.1 -- Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

*99.2 -- Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

- ----------

*As filed herewith.

(b) Reports on Form 8-K:

(1) Current Report on Form 8-K filed January 16,
2003 announcing the release of Sterling
Bancshares' preliminary earnings report for
the fourth quarter and year ended December
31, 2002.

(2) Current Report on Form 8-K filed January 23,
2003 announcing the correction of the
capital ratios reported in Sterling
Bancshares' preliminary earnings report for
the fourth quarter and year ended December
31, 2002 on January 16, 2003.

20

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.

STERLING BANCSHARES, INC.
(Registrant)

DATE: May 14, 2003 BY: /s/ J. Downey Bridgwater
------------------------ -------------------------------------
J. DOWNEY BRIDGWATER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER

DATE: May 14, 2003 BY: /s/ Stephen C. Raffaele
------------------------ -------------------------------------
STEPHEN C. RAFFAELE
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER

21

CERTIFICATION

I, J. Downey Bridgwater, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sterling Bancshares,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: May 14, 2003 /s/ J. Downey Bridgwater
--------------------------------------
J. DOWNEY BRIDGWATER
PRESIDENT AND CHIEF EXECUTIVE OFFICER

22

CERTIFICATION

I, Stephen C. Raffaele, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sterling Bancshares,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: May 14, 2003 /s/ Stephen C. Raffaele
--------------------------------------
STEPHEN C. RAFFAELE
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER

23

EXHIBIT INDEX

- ----------

*As filed herewith.

24