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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2008

OR



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

For the transition period from  to

Commission file number: 0-20750





STERLING BANCSHARES, INC.

(Exact name of registrant as specified in its
charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Texas                                                          |  | 74-2175590                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                               |  |           
|---------------------------------------------- |  | ----------
|2550 North Loop West, Suite 600 Houston, Texas |  | 77092     
|(Address of principal executive offices)       |  | (Zip Code)

713-466-8300

(Registrants telephone number, including area code)

[None]

(Former name, former address and former fiscal year, if changed since last report)





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

Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule
12b-2 of the Exchange Act.

Large accelerated filer  x                Accelerated filer   ̈                Non-accelerated filer   ̈                Smaller Reporting Company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ̈    No  x

Indicate the number of shares outstanding of each
of the issuers classes of common stock, as of the latest practicable date.



|                                          |  |                              
|----------------------------------------- |  | -----------------------------
|Class                                     |  | Outstanding at August 1, 2008
|[Common Stock, $1.00 par value per share] |  | 73,174,293 shares            









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##### Table of Contents

STERLING BANCSHARES, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2008

TABLE OF CONTENTS



|           |  |                                                                                       |  |   
|---------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I.    |  | FINANCIAL INFORMATION                                                                 |  |   
|           |  |                                                                                      
|Item 1.    |  | Financial Statements (Unaudited)                                                      |  |   
|           |  |                                                                                      
|           |  | Consolidated Balance Sheets                                                           |  | 2 
|           |  |                                                                                      
|           |  | Consolidated Statements of Income                                                     |  | 3 
|           |  |                                                                                      
|           |  | Consolidated Statements of Shareholders Equity                                       |  | 4 
|           |  |                                                                                      
|           |  | Consolidated Statements of Cash Flows                                                 |  | 5 
|           |  |                                                                                      
|           |  | Notes to Consolidated Financial Statements                                            |  | 6 
|           |  |                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 20
|           |  |                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 34
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 35
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  |   
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 35
|           |  |                                                                                      
|Item 1A.   |  | Risk Factors                                                                          |  | 35
|           |  |                                                                                      
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 35
|           |  |                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 35
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 35
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 36
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 36
|           | 
|SIGNATURES |  | 37                                                                                   



1



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS.
|------- | ---------------------

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except
per share amounts)



|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                           |  | June 30,2008 |           |   | December 31,2007 |  
|ASSETS                                                                                                                                                                                     |  |              |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                  |  | $            | 142,964   |   |                  | $ | 133,670   |  
|Available-for-sale securities, at fair value                                                                                                                                               |  |              | 568,329   |   |                  |   | 476,690   |  
|Held-to-maturity securities, at amortized cost                                                                                                                                             |  |              | 175,635   |   |                  |   | 180,086   |  
|                                                                                                                                                                                           |  |             
|Loans held for sale                                                                                                                                                                        |  |              | 112,614   |   |                  |   | 78,447    |  
|Loans held for investment                                                                                                                                                                  |  |              | 3,542,994 |   |                  |   | 3,339,837 |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total loans                                                                                                                                                                                |  |              | 3,655,608 |   |                  |   | 3,418,284 |  
|Allowance for loan losses                                                                                                                                                                  |  |              | (41,651   | ) |                  |   | (34,446   | )
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Loans, net                                                                                                                                                                                 |  |              | 3,613,957 |   |                  |   | 3,383,838 |  
|                                                                                                                                                                                           |  |             
|Premises and equipment, net                                                                                                                                                                |  |              | 40,311    |   |                  |   | 27,905    |  
|Real estate acquired by foreclosure                                                                                                                                                        |  |              | 4,293     |   |                  |   | 3,683     |  
|Goodwill                                                                                                                                                                                   |  |              | 173,104   |   |                  |   | 168,815   |  
|Core deposit and other intangibles, net                                                                                                                                                    |  |              | 15,031    |   |                  |   | 15,971    |  
|Accrued interest receivable                                                                                                                                                                |  |              | 18,712    |   |                  |   | 19,701    |  
|Other assets                                                                                                                                                                               |  |              | 157,118   |   |                  |   | 125,550   |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|TOTAL ASSETS                                                                                                                                                                               |  | $            | 4,909,454 |   |                  | $ | 4,535,909 |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                       |  |              |           |   |                  |   |           |  
|LIABILITIES:                                                                                                                                                                               |  |              |           |   |                  |   |           |  
|Deposits:                                                                                                                                                                                  |  |              |           |   |                  |   |           |  
|Noninterest-bearing demand                                                                                                                                                                 |  | $            | 1,135,296 |   |                  | $ | 1,092,210 |  
|Interest-bearing demand                                                                                                                                                                    |  |              | 1,409,220 |   |                  |   | 1,403,227 |  
|Certificates and other time                                                                                                                                                                |  |              | 1,149,819 |   |                  |   | 1,178,274 |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total deposits                                                                                                                                                                             |  |              | 3,694,335 |   |                  |   | 3,673,711 |  
|Other borrowed funds                                                                                                                                                                       |  |              | 521,395   |   |                  |   | 197,147   |  
|Subordinated debt                                                                                                                                                                          |  |              | 73,816    |   |                  |   | 48,694    |  
|Junior subordinated debt                                                                                                                                                                   |  |              | 82,734    |   |                  |   | 82,734    |  
|Accrued interest payable and other liabilities                                                                                                                                             |  |              | 42,640    |   |                  |   | 53,364    |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                          |  |              | 4,414,920 |   |                  |   | 4,055,650 |  
|                                                                                                                                                                                           |  |             
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                              |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                           |  |             
|SHAREHOLDERS EQUITY:                                                                                                                                                                      |  |              |           |   |                  |   |           |  
|Preferred stock, $1 par value, 1,000,000 shares authorized, no shares issued and outstanding at June 30, 2008 and December 31, 2007                                                        |  |              |          |   |                  |   |          |  
|Common stock, $1 par value, 150,000,000 shares authorized, 75,027,721 and 74,926,449 issued and 73,160,221 and 73,158,949 outstanding at
June 30, 2008 and December 31, 2007, respectively |  |              | 75,028    |   |                  |   | 74,926    |  
|Capital surplus                                                                                                                                                                            |  |              | 112,402   |   |                  |   | 110,367   |  
|Retained earnings                                                                                                                                                                          |  |              | 323,765   |   |                  |   | 309,903   |  
|Treasury stock, at cost, 1,867,500 and 1,767,500 shares held at June 30, 2008 and December 31, 2007, respectively                                                                          |  |              | (21,399   | ) |                  |   | (20,493   | )
|Accumulated other comprehensive income, net of tax                                                                                                                                         |  |              | 4,738     |   |                  |   | 5,556     |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                                 |  |              | 494,534   |   |                  |   | 480,259   |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                 |  | $            | 4,909,454 |   |                  | $ | 4,535,909 |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  

See Notes to Consolidated Financial Statements.



2



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##### Table of Contents

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share amounts)



|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|----------------------------------------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|                                                      |  | Three MonthsEnded June 30, |        | Six MonthsEnded June 30,
|                                                      |  | 2008                       |        | 2007                     |   | 2008   |  | 2007
|Interest income:                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|Loans, including fees                                 |  | $                          | 60,082 |                          | $ | 65,489 |  | $    | 123,134 |  | $ | 126,839
|Securities:                                           |  |                            |        |                          |   |        |  |      |         |  |   |        
|Taxable                                               |  |                            | 7,408  |                          |   | 5,755  |  |      | 13,957  |  |   | 11,216 
|Non-taxable                                           |  |                            | 908    |                          |   | 853    |  |      | 1,816   |  |   | 1,730  
|Trading assets                                        |  |                            | 22     |                          |   | 4      |  |      | 43      |  |   | 5      
|Federal funds sold                                    |  |                            | 27     |                          |   | 274    |  |      | 66      |  |   | 422    
|Deposits in financial institutions                    |  |                            | 5      |                          |   | 7      |  |      | 8       |  |   | 24     
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|Total interest income                                 |  |                            | 68,452 |                          |   | 72,382 |  |      | 139,024 |  |   | 140,236
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|Interest expense:                                     |  |                            |        |                          |   |        |  |      |         |  |   |        
|Demand and savings deposits                           |  |                            | 3,889  |                          |   | 7,605  |  |      | 9,504   |  |   | 13,644 
|Certificates and other time deposits                  |  |                            | 8,662  |                          |   | 13,922 |  |      | 20,639  |  |   | 26,272 
|Other borrowed funds                                  |  |                            | 3,409  |                          |   | 1,257  |  |      | 5,761   |  |   | 3,752  
|Subordinated debt                                     |  |                            | 864    |                          |   | 1,162  |  |      | 1,896   |  |   | 2,312  
|Junior subordinated debt                              |  |                            | 1,384  |                          |   | 1,658  |  |      | 2,984   |  |   | 2,889  
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|Total interest expense                                |  |                            | 18,208 |                          |   | 25,604 |  |      | 40,784  |  |   | 48,869 
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|Net interest income                                   |  |                            | 50,244 |                          |   | 46,778 |  |      | 98,240  |  |   | 91,367 
|Provision for credit losses                           |  |                            | 8,167  |                          |   | 1,000  |  |      | 12,317  |  |   | 1,370  
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|Net interest income after provision for credit losses |  |                            | 42,077 |                          |   | 45,778 |  |      | 85,923  |  |   | 89,997 
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|Noninterest income:                                   |  |                            |        |                          |   |        |  |      |         |  |   |        
|Customer service fees                                 |  |                            | 4,148  |                          |   | 3,431  |  |      | 8,024   |  |   | 6,903  
|Net gain on the sale of loans                         |  |                            | 50     |                          |   | 73     |  |      | 356     |  |   | 577    
|Wealth management fees                                |  |                            | 2,363  |                          |   | 672    |  |      | 4,701   |  |   | 1,284  
|Other                                                 |  |                            | 4,309  |                          |   | 3,342  |  |      | 8,504   |  |   | 6,688  
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|Total noninterest income                              |  |                            | 10,870 |                          |   | 7,518  |  |      | 21,585  |  |   | 15,452 
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|Noninterest expense:                                  |  |                            |        |                          |   |        |  |      |         |  |   |        
|Salaries and employee benefits                        |  |                            | 20,865 |                          |   | 19,768 |  |      | 41,624  |  |   | 39,456 
|Occupancy                                             |  |                            | 5,360  |                          |   | 4,606  |  |      | 10,625  |  |   | 8,968  
|Technology                                            |  |                            | 2,305  |                          |   | 2,095  |  |      | 4,635   |  |   | 4,144  
|Professional fees                                     |  |                            | 1,215  |                          |   | 1,078  |  |      | 2,224   |  |   | 2,023  
|Postage, delivery and supplies                        |  |                            | 963    |                          |   | 943    |  |      | 2,036   |  |   | 1,754  
|Marketing                                             |  |                            | 724    |                          |   | 581    |  |      | 1,137   |  |   | 936    
|Core deposit and other intangibles amortization       |  |                            | 586    |                          |   | 517    |  |      | 1,171   |  |   | 937    
|Acquisition costs                                     |  |                            |       |                          |   | 166    |  |      | 562     |  |   | 920    
|Other                                                 |  |                            | 5,690  |                          |   | 4,588  |  |      | 11,082  |  |   | 9,038  
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|Total noninterest expense                             |  |                            | 37,708 |                          |   | 34,342 |  |      | 75,096  |  |   | 68,176 
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|Income before income taxes                            |  |                            | 15,239 |                          |   | 18,954 |  |      | 32,412  |  |   | 37,273 
|Provision for income taxes                            |  |                            | 4,932  |                          |   | 5,856  |  |      | 10,496  |  |   | 12,252 
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|Net Income                                            |  | $                          | 10,307 |                          | $ | 13,098 |  | $    | 21,916  |  | $ | 25,021 
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|Earnings per share:                                   |  |                            |        |                          |   |        |  |      |         |  |   |        
|Basic                                                 |  | $                          | 0.14   |                          | $ | 0.18   |  | $    | 0.30    |  | $ | 0.35   
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        
|Diluted                                               |  | $                          | 0.14   |                          | $ | 0.18   |  | $    | 0.30    |  | $ | 0.34   
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |        

See Notes to Consolidated Financial Statements.



3



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##### Table of Contents

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(UNAUDITED)

(In thousands)



|                                                                                                     |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------------------------------------- |  | --------------- |  | ------------ | - | ------ | -------------- | - | ------ | ---------------- | ------ | - | -------------- | - | ------- | ------------------------------------------- |  | ------ | ------- | - | ------ | ------ | - |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                     |  | Preferred Stock |  | Common Stock |   |        | CapitalSurplus |   |        | RetainedEarnings |        |   | Treasury Stock |   |         | Accumulated OtherComprehensive Income(Loss) |  |        | Total   |  
|                                                                                                     |  | Shares          |  | Amount       |   | Shares |                |   | Amount |                  |        |   |                |   |         |                                             |  | Shares |         |   | Amount |        |   |  |   |         |   | 
|BALANCE AT JANUARY 1, 2007                                                                           |  |                |  | $            |  |        | 71,938         |   |        | $                | 71,938 |   |                | $ | 80,927  |                                             |  | $      | 272,179 |   |        | (938   | ) |  | $ | (10,902 | ) |  | $ | (4,857 | ) |  | $ | 409,285 |  
|                                                                                                     |  |                 |  |              |   |        |                |   |        |                 
|Comprehensive income:                                                                                |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                           |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        | 25,021  |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 25,021  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of ($786)   |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   | (1,460 | ) |  |   | (1,460  | )
|Net change in unrealized gains on effective cash flow hedging derivatives, net of taxes of ($1,014)  |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   | (1,882 | ) |  |   | (1,882  | )
|                                                                                                     |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                           |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 21,679  |  
|                                                                                                     |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                             |  |                 |  |              |   |        | 441            |   |        |                  | 441    |   |                |   | 3,135   |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 3,576   |  
|Issuance of common stock in connection with the purchase of Partners Bank of Texas                   |  |                 |  |              |   |        | 2,345          |   |        |                  | 2,345  |   |                |   | 24,176  |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 26,521  |  
|Repurchase of common stock                                                                           |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        | (729   | ) |  |   | (8,511  | ) |  |   |        |   |  |   | (8,511  | )
|Cash dividends paid                                                                                  |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        | (7,571  | ) |        |        |   |  |   |         |   |  |   |        |   |  |   | (7,571  | )
|                                                                                                     |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT JUNE 30, 2007                                                                             |  |                |  | $            |  |        | 74,724         |   |        | $                | 74,724 |   |                | $ | 108,238 |                                             |  | $      | 289,629 |   |        | (1,667 | ) |  | $ | (19,413 | ) |  | $ | (8,199 | ) |  | $ | 444,979 |  
|                                                                                                     |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT JANUARY 1, 2008                                                                           |  |                |  | $            |  |        | 74,926         |   |        | $                | 74,926 |   |                | $ | 110,367 |                                             |  | $      | 309,903 |   |        | (1,768 | ) |  | $ | (20,493 | ) |  | $ | 5,556  |   |  | $ | 480,259 |  
|Comprehensive income:                                                                                |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                           |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        | 21,916  |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 21,916  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of ($1,074) |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   | (1,835 | ) |  |   | (1,835  | )
|Net change in unrealized gains on effective cash flow hedging derivatives, net of taxes of $548      |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   | 1,017  |   |  |   | 1,017   |  
|                                                                                                     |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                           |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 21,098  |  
|                                                                                                     |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                             |  |                 |  |              |   |        | 115            |   |        |                  | 115    |   |                |   | 2,150   |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 2,265   |  
|Shares held in Rabbi Trust                                                                           |  |                 |  |              |   |        | (13            | ) |        |                  | (13    | ) |                |   | (115    | )                                           |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | (128    | )
|Repurchase of common stock                                                                           |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        | (100   | ) |  |   | (906    | ) |  |   |        |   |  |   | (906    | )
|Cash dividends paid                                                                                  |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        | (8,054  | ) |        |        |   |  |   |         |   |  |   |        |   |  |   | (8,054  | )
|                                                                                                     |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT JUNE 30, 2008                                                                             |  |                |  | $            |  |        | 75,028         |   |        | $                | 75,028 |   |                | $ | 112,402 |                                             |  | $      | 323,765 |   |        | (1,868 | ) |  | $ | (21,399 | ) |  | $ | 4,738  |   |  | $ | 494,534 |  
|                                                                                                     |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                             |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  

See Notes to Consolidated Financial Statements.



4



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STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



|                                                                                                          |  |                           |          |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                          |  | Six Months ended June 30, |         
|                                                                                                          |  | 2008                      |          |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                     |  |                           |          |   |      |   |          |  
|Net income                                                                                                |  | $                         | 21,916   |   |      | $ | 25,021   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                         |  |                           |          |   |      |   |          |  
|Amortization and accretion of premiums and discounts on securities, net                                   |  |                           | 249      |   |      |   | 1,163    |  
|Net gain on sale of loans                                                                                 |  |                           | (356     | ) |      |   | (577     | )
|Provision for credit losses                                                                               |  |                           | 12,317   |   |      |   | 1,370    |  
|Writedowns, less gains on sale, of real estate acquired by foreclosure                                    |  |                           | (143     | ) |      |   | (158     | )
|Depreciation and amortization                                                                             |  |                           | 5,230    |   |      |   | 3,872    |  
|Proceeds from the sale of trading securities                                                              |  |                           |         |   |      |   | 6,631    |  
|Purchases of trading assets                                                                               |  |                           |         |   |      |   | (7,029   | )
|Stock-based compensation expense (net of tax benefit recognized)                                          |  |                           | 1,213    |   |      |   | 384      |  
|Excess tax benefits from share-based payment arrangements                                                 |  |                           | (5       | ) |      |   | (367     | )
|Net decrease (increase) in loans held for sale                                                            |  |                           | 11,102   |   |      |   | (2,989   | )
|Net gain on sale of bank assets                                                                           |  |                           | (376     | ) |      |   | (358     | )
|Net (increase) decrease in accrued interest receivable and other assets                                   |  |                           | (13,906  | ) |      |   | 5,752    |  
|Net decrease in accrued interest payable and other liabilities                                            |  |                           | (8,635   | ) |      |   | (4,836   | )
|                                                                                                          |  |                           |          |   |      |   |          |  
|Net cash provided by operating activities                                                                 |  |                           | 28,606   |   |      |   | 27,879   |  
|                                                                                                          |  |                          
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                     |  |                           |          |   |      |   |          |  
|Proceeds from the maturities or calls and paydowns of held-to-maturity securities                         |  |                           | 9,658    |   |      |   | 8,727    |  
|Proceeds from the maturities or calls and paydowns of available-for-sale securities                       |  |                           | 58,574   |   |      |   | 41,782   |  
|Purchases of available-for-sale securities                                                                |  |                           | (153,066 | ) |      |   | (58,151  | )
|Purchases of held-to-maturity securities                                                                  |  |                           | (5,239   | ) |      |   | (21,596  | )
|Net increase in loans held for investment                                                                 |  |                           | (205,512 | ) |      |   | (70,077  | )
|Purchase of bank-owned life insurance                                                                     |  |                           | (13,875  | ) |      |   |         |  
|Proceeds from sale of real estate acquired by foreclosure                                                 |  |                           | 2,269    |   |      |   | 1,154    |  
|Purchase of Partners Bank of Texas (including transaction costs)                                          |  |                           |         |   |      |   | (25,180  | )
|Cash and cash equivalents acquired with Partners Bank of Texas                                            |  |                           |         |   |      |   | 33,326   |  
|Purchase of MBM Advisors, Inc. (including transaction costs)                                              |  |                           |         |   |      |   | (6,000   | )
|Cash and cash equivalents acquired with MBM Advisors, Inc.                                                |  |                           |         |   |      |   | 104      |  
|Payment of earnout obligations related to the acquisition of MBM Advisors, Inc.                           |  |                           | (2,222   | ) |      |   |         |  
|Cash and cash equivalents acquired with First Horizon National Corp. branch acquisitions                  |  |                           | 15,301   |   |      |   |         |  
|Net change in interest-bearing deposits in financial institutions                                         |  |                           |         |   |      |   | 198      |  
|Proceeds from sale of loans held for investment                                                           |  |                           | 4,218    |   |      |   | 21,378   |  
|Proceeds from sale of premises and equipment                                                              |  |                           | 140      |   |      |   | 1,169    |  
|Purchase of premises and equipment                                                                        |  |                           | (5,640   | ) |      |   | (3,718   | )
|                                                                                                          |  |                           |          |   |      |   |          |  
|Net cash used in investing activities                                                                     |  |                           | (295,394 | ) |      |   | (76,884  | )
|                                                                                                          |  |                          
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                     |  |                           |          |   |      |   |          |  
|Net (decrease) increase in deposit accounts                                                               |  |                           | (64,670  | ) |      |   | 230,479  |  
|Net increase (decrease) in other borrowed funds                                                           |  |                           | 324,248  |   |      |   | (167,549 | )
|Issuance of trust preferred securities                                                                    |  |                           |         |   |      |   | 25,775   |  
|Proceeds from issuance of subordinated debt                                                               |  |                           | 25,000   |   |      |   |         |  
|Proceeds from issuance of common stock                                                                    |  |                           | 587      |   |      |   | 2,722    |  
|Repurchase of common stock                                                                                |  |                           | (1,034   | ) |      |   | (8,511   | )
|Excess tax benefits from share-based payment arrangements                                                 |  |                           | 5        |   |      |   | 367      |  
|Dividends paid                                                                                            |  |                           | (8,054   | ) |      |   | (7,571   | )
|                                                                                                          |  |                           |          |   |      |   |          |  
|Net cash provided by financing activities                                                                 |  |                           | 276,082  |   |      |   | 75,712   |  
|                                                                                                          |  |                           |          |   |      |   |          |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                                 |  |                           | 9,294    |   |      |   | 26,707   |  
|CASH AND CASH EQUIVALENTS:                                                                                |  |                           |          |   |      |   |          |  
|Beginning of period                                                                                       |  |                           | 133,670  |   |      |   | 134,775  |  
|                                                                                                          |  |                           |          |   |      |   |          |  
|End of period                                                                                             |  | $                         | 142,964  |   |      | $ | 161,482  |  
|                                                                                                          |  |                           |          |   |      |   |          |  
|Supplemental information:                                                                                 |  |                           |          |   |      |   |          |  
|Income taxes paid                                                                                         |  | $                         | 13,625   |   |      | $ | 12,750   |  
|Interest paid                                                                                             |  |                           | 21,148   |   |      |   | 25,547   |  
|Noncash investing and financing activities - Acquisition of real estate through foreclosure of collateral |  |                           | 2,736    |   |      |   | 2,595    |  
|Acquisition of Partners Bank of Texas                                                                     |  |                           |          |   |      |   |          |  
|Common stock issued                                                                                       |  |                           |         |   |      |   | 26,521   |  
|Payable to Partners Bank of Texas shareholders                                                            |  |                           |         |   |      |   | 300      |  
|Acquisition of MBM Advisors, Inc.                                                                         |  |                           |          |   |      |   |          |  
|Payable to MBM Advisors, Inc. shareholders                                                                |  |                           | 1,938    |   |      |   | 2,774    |  

See Notes to Consolidated Financial Statements



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##### Table of Contents

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|1. | ACCOUNTING POLICIES
|-- | -------------------

Basis of Presentation

The consolidated financial statements are unaudited and include the accounts of Sterling Bancshares, Inc. and its subsidiaries (the
Company) except for those subsidiaries where it has been determined that the Company is not the primary beneficiary. The Companys accounting and financial reporting policies are 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. The information furnished in these interim statements reflects all adjustments that are, in the opinion of management,
necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the
results that may be expected for the full year. The interim financial information should be read in conjunction with the Companys 2007 Annual Report on Form 10-K.

Recent Accounting Standards

In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157 (SFAS 157) Fair Value Measurements. SFAS 157 defined fair value, established a framework for measuring fair value in generally accepted accounting principles, and
expanded disclosures about fair value measurements. SFAS 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. FASB Staff Position (FSP)
No. 157-2, Effective Date of FASB Statement No. 157, delayed the application of SFAS 157 for non-financial assets and non-financial liabilities until January 1, 2009. The Company adopted SFAS 157 on January 1,
2008. The adoption of this accounting standard did not have a material impact on the Companys financial statements.

In February 2007, the FASB
issued SFAS No. 159 (SFAS 159) The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting
provisions. The Company adopted SFAS 159 on January 1, 2008. The adoption of this accounting standard did not have a material impact on the Companys financial statements.

In September 2006, the Emerging Issues Task Force (EITF) of the FASB ratified EITF Issue No. 06-4 (EITF 06-4) Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 provides that an employer should recognize a liability for future benefits based on the substantive agreement with the employee. The Issue should be applied to fiscal years
beginning after December 15, 2007, with earlier application permitted. The Company adopted EITF 06-4 on January 1, 2008. The adoption of this accounting standard did not have a material impact on the Companys financial statements.

In December 2007, the FASB issued SFAS No. 141(R) (SFAS 141R) Business Combinations (Revised 2007). SFAS 141R requires the
acquiring entity in a business combination to recognize the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This statement is effective for fiscal years beginning after
December 15, 2008. Management has not completed its evaluation of the impact of this standard; however, the Company does expect SFAS 141R to have a significant impact on the Companys accounting for business combinations closing on or
after January 1, 2009.

In December 2007, the FASB issued SFAS No. 160 (SFAS 160) Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51. SFAS 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity
transactions. This statement is effective for fiscal years beginning after December 15, 2008. Management has not completed its evaluation of this issue; however, the Company does not expect it to be material to its financial statements.



|2. | ACQUISITIONS
|-- | ------------

On February 8, 2008, the Company acquired ten
branches located in the Dallas and Fort Worth, Texas areas from First Horizon National Corp. (First Horizon). This transaction was accounted for using the purchase method of accounting in which the



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excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. In addition to these ten bank branches, the
Company also agreed to acquire land from First Horizon for possible future Sterling banking centers in Lewisville, Arlington and Fort Worth, Texas. This transaction allows the Company to achieve a critical presence in Dallas, Texas and an entry into
the growing Fort Worth, Texas market. The Company acquired approximately $85.9 million in total assets and assumed deposit accounts of approximately $85.3 million for a premium of $1.7 million. Assets consisted of approximately $54.0 million in
loans, $10.9 million in premises and equipment and $15.9 million in cash and other assets. The assets and liabilities have been recorded at fair value based on market conditions and risk characteristics at the acquisition date. Excess cost over
tangible net assets acquired totaled $5.2 million, of which $231 thousand and $5.0 million have been allocated to core deposits and goodwill, respectively, all of which is expected to be deductible for tax purposes. The allocation of the purchase
price is preliminary and subject to final valuation determinations.

On June 28, 2007, the Company acquired MBM Advisors, Inc. (MBM
Advisors). MBM Advisors was an independent investment advisory and pension administration/consulting firm with approximately $700 million in assets under management providing full-services in the design, administration, investment management,
and communication of retirement plans with offices in both Houston and Dallas, Texas. The acquisition of MBM Advisors provides for increased opportunities to serve the owners of small and medium-sized businesses and their employees while enhancing
noninterest income. The Company entered into a share exchange agreement with MBM Advisors and the shareholders of MBM Advisors in which the Company paid the shareholders an aggregate amount in cash equal to $6.0 million on the date of merger. An
unconditional guaranteed cash payment of $3.0 million, payable over a three year earn-out period was recorded as part of the purchase price at the estimated net present value. The agreement includes an earn-out which is contingent upon maintaining
or achieving specified earnings levels in future periods. When the contingency is resolved and additional consideration is distributable, the Company records the fair value of the consideration issued as an additional cost of the acquisition. During
2007, the Company recorded a $2.6 million payable as part of the earn-out as an additional cost of the acquisition. At June 30, 2008, the remaining maximum amount of future payments the Company could be required to make under contingent payment
provisions was approximately $4.4 million in the form of cash. This acquisition was accounted for using the purchase method of accounting in which the excess of the purchase price over the estimated fair value of the net assets acquired was recorded
as goodwill, all of which is expected to be deductible for tax purposes. The results of operations for this acquisition have been included in the Companys financial results since the third quarter of 2007.

On March 30, 2007, the Company acquired Partners Bank of Texas (Partners Bank). Partners Bank was a privately held bank which operated four banking
offices in the Houston area. The completion of the acquisition of Partners Bank has enabled the Company to fill out its footprint in Northeast Houston. As of March 30, 2007, Partners Bank had assets of approximately $191 million, loans of $142
million and deposits of $166 million. The purchase price of $52.3 million consisted of $26.5 million of the Companys common stock (2.3 million shares), cash totaling approximately $25.5 million and $264 thousand in acquisition-related costs.
The shares of the Companys common stock issued in the transaction were valued at the average of the closing price of the Companys common stock for the ten trading days immediately before the fifth trading day before March 30, 2007.
This acquisition was accounted for using the purchase method of accounting in which the excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill, none of which is expected to be deductible for
tax purposes. The results of operations for this acquisition have been included in the Companys financial results since the second quarter of 2007.



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|3. | SECURITIES
|-- | ----------

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



|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                                    |  | June 30, 2008    
|                                                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                 | 3,346   |                      | $ | 33                    |  | $ |           |   |  | $ | 3,379  
|Obligations of states of the U.S. and political subdivisions        |  |                   | 1,331   |                      |   | 19                    |  |   |           |   |  |   | 1,350  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 553,109 |                      |   | 1,949                 |  |   | (5,720     | ) |  |   | 549,338
|Other securities                                                    |  |                   | 16,009  |                      |   |                      |  |   | (1,747     | ) |  |   | 14,262 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 573,795 |                      | $ | 2,001                 |  | $ | (7,467     | ) |  | $ | 568,329
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                 | 96,844  |                      | $ | 662                   |  | $ | (550       | ) |  | $ | 96,956 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 78,791  |                      |   | 153                   |  |   | (4,736     | ) |  |   | 74,208 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 175,635 |                      | $ | 815                   |  | $ | (5,286     | ) |  | $ | 171,164
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|                                                                    | 
|                                                                    |  | December 31, 2007
|                                                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                 | 11,563  |                      | $ | 40                    |  | $ | (2         | ) |  | $ | 11,601 
|Obligations of states of the U.S. and political subdivisions        |  |                   | 1,693   |                      |   | 22                    |  |   | (1         | ) |  |   | 1,714  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 450,132 |                      |   | 2,023                 |  |   | (3,376     | ) |  |   | 448,779
|Other securities                                                    |  |                   | 15,993  |                      |   |                      |  |   | (1,397     | ) |  |   | 14,596 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 479,381 |                      | $ | 2,085                 |  | $ | (4,776     | ) |  | $ | 476,690
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                 | 96,593  |                      | $ | 905                   |  | $ | (111       | ) |  | $ | 97,387 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 83,493  |                      |   | 8                     |  |   | (1,225     | ) |  |   | 82,276 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 180,086 |                      | $ | 913                   |  | $ | (1,336     | ) |  | $ | 179,663
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        



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Expected maturities of securities will differ from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties. The contractual maturities of securities at June 30, 2008 are shown below (in thousands):



|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|------------------------------------------------------------------ |  | ------------------ | ------- | ---------------- | - | ------------- |  | ---------- | ------- |  | - | -------
|                                                                   |  | Available-for-Sale |         | Held-to-Maturity
|                                                                   |  | AmortizedCost      |         | Fair Value       |   | AmortizedCost |  | Fair Value
|Due in one year or less                                            |  | $                  | 3,706   |                  | $ | 3,740         |  | $          | 8,824   |  | $ | 8,954  
|Due after one year through five years                              |  |                    | 971     |                  |   | 989           |  |            | 48,693  |  |   | 48,931 
|Due after five years through ten years                             |  |                    |        |                  |   |              |  |            | 35,530  |  |   | 35,357 
|Due after ten years                                                |  |                    |        |                  |   |              |  |            | 3,797   |  |   | 3,714  
|Mortgage-backed securities and collateralized mortgage obligations |  |                    | 553,109 |                  |   | 549,338       |  |            | 78,791  |  |   | 74,208 
|Other securities                                                   |  |                    | 16,009  |                  |   | 14,262        |  |            |        |  |   |       
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|Total                                                              |  | $                  | 573,795 |                  | $ | 568,329       |  | $          | 175,635 |  | $ | 171,164
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        

There were no securities sold during the three or six months ended June 30, 2008 and 2007.

Securities with unrealized losses segregated by length of impairment as of June 30, 2008 are as follows (in thousands):



|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |            |   |        |   |  |   |       
|------------------------------------------------------------------- |  | ------------------- | ------- | --------------------- | - | ------ | ---------- |  | ------------- | ------- | --------------------- | - | ------ | ---------- | - | ------ | - |  | - | ------
|                                                                    |  | Less than 12 Months |         | More than 12 Months  
|                                                                    |  | AmortizedCost       |         | GrossUnrealizedLosses |   |        | Fair Value |  | AmortizedCost |         | GrossUnrealizedLosses |   |        | Fair Value
|Available-for-Sale                                                  |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |            |   |        |   |  |   |       
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                   |        |                       | $ |       |            |  | $             |        |                       | $ |       |            | $ |       |   |  | $ |      
|Obligations of states of the U.S. and political subdivisions        |  |                     |        |                       |   |       |            |  |               |        |                       |   |       |            |   |       |   |  |   |      
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 246,991 |                       |   | (3,931 | )          |  |               | 243,060 |                       |   | 68,658 |            |   | (1,789 | ) |  |   | 66,869
|Other securities                                                    |  |                     | 2,885   |                       |   | (187   | )          |  |               | 2,698   |                       |   | 13,124 |            |   | (1,560 | ) |  |   | 11,564
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |            |   |        |   |  |   |       
|Total                                                               |  | $                   | 249,876 |                       | $ | (4,118 | )          |  | $             | 245,758 |                       | $ | 81,782 |            | $ | (3,349 | ) |  | $ | 78,433
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |            |   |        |   |  |   |       
|Held-to-Maturity                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |            |   |        |   |  |   |       
|Obligations of states of the U.S. and political subdivisions        |  | $                   | 41,098  |                       | $ | (550   | )          |  | $             | 40,548  |                       | $ |       |            | $ |       |   |  | $ |      
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 37,899  |                       |   | (3,319 | )          |  |               | 34,580  |                       |   | 34,493 |            |   | (1,417 | ) |  |   | 33,076
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |            |   |        |   |  |   |       
|Total                                                               |  | $                   | 78,997  |                       | $ | (3,869 | )          |  | $             | 75,128  |                       | $ | 34,493 |            | $ | (1,417 | ) |  | $ | 33,076
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |            |   |        |   |  |   |       

Declines in the fair value of individual securities below their cost that are other-than-temporary would result in
writedowns, as a realized loss, to their fair value. In evaluating other-than-temporary impairment losses, management considers several factors including the severity and the duration that the fair value has been less than cost, the credit
quality of the issuer, and the intent and ability of the Company to hold the security until recovery of the fair value.

Other securities in an unrealized
loss position for more than 12 months include certain interest-only securities, which are tied to an underlying government guaranteed loan and are subject to prepayment and interest rate fluctuations. In addition, this category includes a
Community Reinvestment Act oriented mutual fund. Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be at maturity, the Company does not consider these investments to be
other-than-temporarily impaired at June 30, 2008.



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The Company does not own any securities of any one issuer (other than the U.S. government and its agencies) for which the
aggregate adjusted cost exceeds 10% of the consolidated shareholders equity at June 30, 2008.

Securities with carrying values totaling $310
million and fair values totaling $307 million were pledged to secure public deposits at June 30, 2008.



|4. | LOANS
|-- | -----

The loan portfolio is classified by major type as follows
(in thousands):



|                                |  |               |           |   |                   |   |        |   |           |  |       |  
|------------------------------- |  | ------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                |  | June 30, 2008 |           |   | December 31, 2007 |  
|                                |  | Amount        |           | % |                   |   | Amount |   | %         | 
|Loans held for sale             |  |               |           |   |                   |   |        |   |           |  |       |  
|Commercial and industrial       |  | $             | 1,578     |   | 0.0               | % |        | $ | 3,698     |  | 0.1   | %
|Real estate:                    |  |               |           |   |                   |   |        |   |           |  |       |  
|Commercial                      |  |               | 108,020   |   | 3.0               | % |        |   | 72,411    |  | 2.1   | %
|Construction                    |  |               | 3,016     |   | 0.1               | % |        |   | 2,338     |  | 0.1   | %
|                                |  |               |           |   |                   |   |        |   |           |  |       |  
|Total loans held for sale       |  |               | 112,614   |   | 3.1               | % |        |   | 78,447    |  | 2.3   | %
|                                |  |               |           |   |                   |   |        |   |           |  |       |  
|Loans held for investment       |  |               |           |   |                   |   |        |   |           |  |       |  
|Domestic:                       |  |               |           |   |                   |   |        |   |           |  |       |  
|Commercial and industrial       |  |               | 990,045   |   | 27.1              | % |        |   | 912,604   |  | 26.7  | %
|Real estate:                    |  |               |           |   |                   |   |        |   |           |  |       |  
|Commercial                      |  |               | 1,471,682 |   | 40.2              | % |        |   | 1,387,014 |  | 40.6  | %
|Construction                    |  |               | 728,217   |   | 19.9              | % |        |   | 714,600   |  | 20.9  | %
|Residential mortgage            |  |               | 258,552   |   | 7.1               | % |        |   | 226,033   |  | 6.6   | %
|Consumer/other                  |  |               | 73,824    |   | 2.0               | % |        |   | 75,626    |  | 2.2   | %
|Foreign                         |  |               |           |   |                   |   |        |   |           |  |       |  
|Commercial and industrial       |  |               | 18,365    |   | 0.5               | % |        |   | 21,571    |  | 0.6   | %
|Other loans                     |  |               | 2,309     |   | 0.1               | % |        |   | 2,389     |  | 0.1   | %
|                                |  |               |           |   |                   |   |        |   |           |  |       |  
|Total loans held for investment |  |               | 3,542,994 |   | 96.9              | % |        |   | 3,339,837 |  | 97.7  | %
|                                |  |               |           |   |                   |   |        |   |           |  |       |  
|Total loans                     |  | $             | 3,655,608 |   | 100.0             | % |        | $ | 3,418,284 |  | 100.0 | %
|                                |  |               |           |   |                   |   |        |   |           |  |       |  

Loan maturities and rate sensitivity of the loans held for investment, excluding residential mortgage and consumer
loans, at June 30, 2008 are as follows (in thousands):



|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|----------------------------------- |  | ---------------------- | --------- | ----------------------------------- | - | ------------------- |  | ----- | ------- |  | - | ---------
|                                    |  | Due in OneYear or Less |           | Due After OneYear ThroughFive Years |   | Due After FiveYears |  | Total
|Commercial and industrial           |  | $                      | 701,585   |                                     | $ | 228,296             |  | $     | 60,164  |  | $ | 990,045  
|Real estate - commercial            |  |                        | 196,893   |                                     |   | 673,105             |  |       | 601,684 |  |   | 1,471,682
|Real estate - construction          |  |                        | 333,649   |                                     |   | 272,763             |  |       | 121,805 |  |   | 728,217  
|Foreign loans                       |  |                        | 11,653    |                                     |   | 9,021               |  |       |        |  |   | 20,674   
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,243,780 |                                     | $ | 1,183,185           |  | $     | 783,653 |  | $ | 3,210,618
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|                                    |  |                        |           |                                    
|Loans with a fixed interest rate    |  | $                      | 243,781   |                                     | $ | 808,401             |  | $     | 266,580 |  | $ | 1,318,762
|Loans with a floating interest rate |  |                        | 999,999   |                                     |   | 374,784             |  |       | 517,073 |  |   | 1,891,856
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,243,780 |                                     | $ | 1,183,185           |  | $     | 783,653 |  | $ | 3,210,618
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          

The loan portfolio consists of various types of loans made principally to borrowers located in the Houston,
Dallas, Fort Worth and San Antonio metropolitan areas. As of June 30, 2008, there was no concentration of loans to any one type of industry exceeding 10% of total loans nor were there any loans classified as highly leveraged transactions.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported in the balance sheet as loans held for
investment stated at the principal amount outstanding adjusted for charge-offs, the allowance for loan



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losses, deferred fees or costs and unamortized premiums or discounts. Loans are classified as held for sale when management has positively determined that
the loans will be sold in the foreseeable future and the Company has the ability to do so. The classification may be made upon origination or subsequent to the origination or purchase. Once a decision has been made to sell loans not previously
classified as held for sale, such loans are transferred into the held for sale classification and carried at the lower of cost or fair value. As part of the Companys ongoing loan portfolio management, $71.1 million and $16.0 million of
performing commercial real estate loans acquired for investment purposes were transferred to the held for sale classification during the six months ended June 30, 2008 and June 30, 2007, respectively. During the six months ended
June 30, 2008 and 2007, the Company sold $2.2 million and $21.0 million, respectively, of performing commercial real estate loans that were originally acquired as held for investment. These sales resulted in net gains of $82 thousand and $362
thousand during the six month periods ended June 30, 2008 and 2007, respectively. These loans were sold as part of the Companys ongoing management of the size, concentrations and risk profile of the loan portfolio.

In the ordinary course of business, the Company has granted loans to certain directors, officers and their affiliates. In the opinion of management, all transactions
entered into between Sterling Bank (the Bank) and such related parties have been and are in the ordinary course of business and are made on the same terms and conditions as similar transactions with unaffiliated persons.

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



|                  |  |              |       |   |                  |   |       |  
|----------------- |  | ------------ | ----- | - | ---------------- | - | ----- | -
|                  |  | June 30,2008 |       |   | December 31,2007 |  
|Beginning balance |  | $            | 2,189 |   |                  | $ | 2,293 |  
|New loans         |  |              | 298   |   |                  |   | 747   |  
|Repayments        |  |              | (7    | ) |                  |   | (851  | )
|                  |  |              |       |   |                  |   |       |  
|Ending balance    |  | $            | 2,480 |   |                  | $ | 2,189 |  
|                  |  |              |       |   |                  |   |       |  

The recorded investment in impaired loans was $48.9 million and $23.4 million at June 30, 2008 and
December 31, 2007, respectively. Such impaired loans required an allowance for loan losses of $6.5 million and $3.9 million, respectively. The average recorded investment in impaired loans for the three and six months ended June 30, 2008
was $32.4 million and $28.6 million, respectively, and for the three and six months ended June 30, 2007 was $13.1 million and $12.9 million, respectively. No interest on impaired loans was received during the three and six months ended
June 30, 2008 and 2007.

Interest foregone on nonaccrual loans for the six months ended June 30, 2008 and 2007 was approximately $1.8 million and
$972 thousand, respectively. There were no restructured loans as of June 30, 2008. The Company had one restructured loan totaling $769 thousand as of December 31, 2007.

When management doubts a borrowers ability to meet payment obligations, which typically occurs when principal or interest payments are more than 90 days past due, the loans are placed on nonaccrual status. Loans
90 days or more past due, not on nonaccrual were $2.2 million and $1.3 million at June 30, 2008 and December 31, 2007, respectively.



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|5. | ALLOWANCE FOR CREDIT LOSSES
|-- | ---------------------------

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



|                                                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                |  | 2008                       |        |   | 2007                     |   |        | 2008 |  |   | 2007   |  
|Allowance for Credit Losses                                     |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Allowance for loan losses at beginning of period                |  | $                          | 35,681 |   |                          | $ | 33,487 |      |  | $ | 34,446 |   |  | $ | 32,027 |  
|Loans charged-off                                               |  |                            | 2,813  |   |                          |   | 1,761  |      |  |   | 6,318  |   |  |   | 2,741  |  
|Loan recoveries                                                 |  |                            | (616   | ) |                          |   | (724   | )    |  |   | (1,206 | ) |  |   | (1,298 | )
|                                                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net loans charged-off                                           |  |                            | 2,197  |   |                          |   | 1,037  |      |  |   | 5,112  |   |  |   | 1,443  |  
|Allowance for loan losses associated with acquired institutions |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   | 1,496  |  
|Provision for loan losses                                       |  |                            | 8,167  |   |                          |   | 1,000  |      |  |   | 12,317 |   |  |   | 1,370  |  
|                                                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Allowance for loan losses at end of period                      |  |                            | 41,651 |   |                          |   | 33,450 |      |  |   | 41,651 |   |  |   | 33,450 |  
|                                                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Reserve for unfunded loan commitments at beginning of period    |  |                            | 927    |   |                          |   | 927    |      |  |   | 927    |   |  |   | 927    |  
|Provision for losses on unfunded loan commitments               |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|                                                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Reserve for unfunded loan commitments at end of period          |  |                            | 927    |   |                          |   | 927    |      |  |   | 927    |   |  |   | 927    |  
|                                                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total allowance for credit losses                               |  | $                          | 42,578 |   |                          | $ | 34,377 |      |  | $ | 42,578 |   |  | $ | 34,377 |  
|                                                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



|6. | GOODWILL AND OTHER INTANGIBLES
|-- | ------------------------------

The changes in the carrying amount
of goodwill by reporting unit for the year ended December 31, 2007, and the period ended June 30, 2008 are as follows (in thousands):



|                                 |  |         |        |             |   |        |             |  |       |        |  |   |         |  
|-------------------------------- |  | ------- | ------ | ----------- | - | ------ | ----------- |  | ----- | ------ |  | - | ------- | -
|                                 |  | Houston |        | San Antonio |   |        | North Texas |  | Total |       
|Balance, January 1, 2007         |  | $       | 29,613 |             | $ | 73,037 |             |  | $     | 28,208 |  | $ | 130,858 |  
|BOTH, Inc. goodwill adjustment   |  |         |       |             |   | 6      |             |  |       |       |  |   | 6       |  
|Partners Bank acquisition        |  |         | 30,050 |             |   |       |             |  |       |       |  |   | 30,050  |  
|MBM Advisors acquisition         |  |         | 7,901  |             |   |       |             |  |       |       |  |   | 7,901   |  
|                                 |  |         |        |             |   |        |             |  |       |        |  |   |         |  
|Balance, December 31, 2007       |  |         | 67,564 |             |   | 73,043 |             |  |       | 28,208 |  |   | 168,815 |  
|First Horizon branch acquisition |  |         |       |             |   |       |             |  |       | 4,974  |  |   | 4,974   |  
|Purchase accounting adjustments  |  |         | 167    |             |   | (852   | )           |  |       |       |  |   | (685    | )
|                                 |  |         |        |             |   |        |             |  |       |        |  |   |         |  
|Balance, June 30, 2008           |  | $       | 67,731 |             | $ | 72,191 |             |  | $     | 33,182 |  | $ | 173,104 |  
|                                 |  |         |        |             |   |        |             |  |       |        |  |   |         |  

The changes in the carrying amounts of core deposit and other intangibles for the year ended December 31,
2007, and the period ended June 30, 2008 are as follows (in thousands):



|                                 |  |                         |        |   |                                 |   |       |       |  |   |        |  
|-------------------------------- |  | ----------------------- | ------ | - | ------------------------------- | - | ----- | ----- |  | - | ------ | -
|                                 |  | Core DepositIntangibles |        |   | CustomerRelationshipIntangibles |   |       | Total | 
|Balance, January 1, 2007         |  | $                       | 10,299 |   |                                 | $ |      |       |  | $ | 10,299 |  
|Amortization expense             |  |                         | (1,951 | ) |                                 |   | (186  | )     |  |   | (2,137 | )
|Partners Bank acquisition        |  |                         | 4,087  |   |                                 |   |      |       |  |   | 4,087  |  
|MBM Advisors acquisition         |  |                         |       |   |                                 |   | 3,722 |       |  |   | 3,722  |  
|                                 |  |                         |        |   |                                 |   |       |       |  |   |        |  
|Balance, December 31, 2007       |  |                         | 12,435 |   |                                 |   | 3,536 |       |  |   | 15,971 |  
|Amortization expense             |  |                         | (985   | ) |                                 |   | (186  | )     |  |   | (1,171 | )
|First Horizon branch acquisition |  |                         | 231    |   |                                 |   |      |       |  |   | 231    |  
|                                 |  |                         |        |   |                                 |   |       |       |  |   |        |  
|Balance, June 30, 2008           |  | $                       | 11,681 |   |                                 | $ | 3,350 |       |  | $ | 15,031 |  
|                                 |  |                         |        |   |                                 |   |       |       |  |   |        |  



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|7. | BANK OWNED LIFE INSURANCE
|-- | -------------------------

The Company purchases bank owned life
insurance (BOLI) policies on the lives of certain officers and is the owner and beneficiary of the policies. These policies provide funding for long-term retirement and other employee benefits costs. The recorded balance of BOLI was
$93.6 million and $78.1 million at June 30, 2008 and December 31, 2007, respectively. At June 30, 2008, approximately $25.0 million of BOLI funds were held in separate accounts with investments in U.S. government, mortgage-backed and
corporate debt securities. The cash surrender value of the life insurance policies contained in separate accounts is further supported by a stable value wrap agreement, which protects against changes in the fair value of the investments. BOLI
policies are recorded within other assets in the Consolidated Balance Sheets at each policys respective cash surrender value, including the value of the stable value wrapper, with changes recorded in noninterest income in the Consolidated
Statements of Income.



|8. | JUNIOR SUBORDINATED DEBT/COMPANY MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
|-- | ----------------------------------------------------------------------------------

As of June 30, 2008, the Company had the following issues of trust preferred securities outstanding and junior subordinated debt owed to trusts (dollars in thousands):



|                     |  |                    |  |                                     |        |               |                          |                                      |   |                     |  |                   
|-------------------- |  | ------------------ |  | ----------------------------------- | ------ | ------------- | ------------------------ | ------------------------------------ | - | ------------------- |  | ------------------
|Description          |  | Issuance Date      |  | TrustPreferredSecuritiesOutstanding |        | Interest Rate |                          | JuniorSubordinatedDebt Owed ToTrusts |   | Final Maturity Date
|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
|BOTH Capital Trust I |  | June 30, 2003      |  |                                     | 4,000  |               | 3-month LIBOR plus 3.10% |                                      |   | 4,124               |  | July 7, 2033      
|Capital Trust IV     |  | March 26, 2007     |  |                                     | 25,000 |               | 3-month LIBOR plus 1.60% |                                      |   | 25,774              |  | June 15, 2037     
|                     |  |                    |  |                                     |        |               |                          |                                      |   |                     |  |                   
|Total                |  |                    |  | $                                   | 80,250 |               |                          |                                      | $ | 82,734              |  |                   
|                     |  |                    |  |                                     |        |               |                          |                                      |   |                     |  |                   

Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and
investing the proceeds thereof in junior subordinated debentures of Sterling Bancshares. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory
redemption upon payments of the junior subordinated debentures held by the trust. The common securities of each trust are wholly-owned by Sterling Bancshares. Each trusts ability to pay amounts due on the trust preferred securities is solely
dependent upon Sterling Bancshares making payment on the related junior subordinated debentures. Sterling Bancshares obligations under the junior subordinated debentures and other relevant trust agreements, in aggregate, constitute a full and
unconditional guarantee by Sterling Bancshares of each respective trusts obligations under the trust securities issued by each respective trust.

Each issuance of trust preferred securities outstanding is mandatorily redeemable 30 years after issuance and is callable beginning five years after issuance if certain conditions are met (including the receipt of appropriate regulatory
approvals). The trust preferred securities may be prepaid earlier upon the occurrence and continuation of certain events including a change in their tax status or regulatory capital treatment. In each case, the redemption price is equal to 100% of
the face amount of the trust preferred securities, plus the accrued and unpaid distributions thereon through the redemption date.



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The trust preferred securities issued under Statutory Trust One were privately placed. The interest on these securities
is a floating rate that resets quarterly. As of June 30, 2008, the floating rate was 6.25% on these securities compared to 8.28% at December 31, 2007.

The BOTH Capital Trust I preferred securities bear interest at a floating rate equal to the three-month LIBOR, plus 3.10%; however, the calculated interest rate will not exceed 5.96% in the period to July 7, 2008. The rate on these
securities was 5.96% at June 30, 2008 and December 31, 2007.

On March 26, 2007, the Company completed the issuance and sale in a private
placement of $25.0 million in aggregate principal amount of trust preferred securities issued by the Companys newly formed subsidiary, Sterling Bancshares Capital Trust IV, a Delaware statutory trust (Trust IV). The trust preferred
securities may be called at par by the Company at any time after June 15, 2012 and require quarterly distributions of interest by Trust IV to the holder of the trust preferred securities. Distributions will be payable quarterly at a floating
interest rate equal to the 3-month LIBOR plus 1.60% per annum. Trust IV simultaneously issued 774 shares of its common securities to the Company for the purchase price of $774 thousand, which constitutes all of the issued and outstanding common
securities of Trust IV. As of June 30, 2008, the floating rate was 4.38% on these securities.



|9. | SUBORDINATED DEBT
|-- | -----------------

During April 2003, the Bank raised approximately
$50.0 million through a private offering of subordinated unsecured notes. These subordinated notes bear interest at a fixed rate of 7.375% and mature on April 15, 2013. Interest payments are due semi-annually. The subordinated notes may not be
redeemed or called prior to their maturity. Debt issuance costs of approximately $1.0 million are being amortized over the ten-year term of the notes on a straight-line basis. In June 2003, the Bank entered into an interest rate swap agreement with
a notional amount of $50.0 million in which the bank swapped the fixed rate to a floating rate (discussed in Note 10).

On June 30, 2008, the
Bank entered into a subordinated note in the aggregate principal amount of $25.0 million. The subordinated note bears interest at a rate equal to LIBOR plus 2.5% and will be reset quarterly. The unpaid principal balance plus all accrued and unpaid
interest on the subordinated debt shall be due and payable on September 15, 2018. The Bank may prepay the subordinated debt without penalty on any interest payment date on or after September 15, 2013.



|10. | DERIVATIVE FINANCIAL INSTRUMENTS
|--- | --------------------------------

The Companys interest rate
risk management strategy includes hedging the repricing characteristics of certain assets and liabilities so as to mitigate adverse effects on the Companys net interest margin and cash flows from changes in interest rates. The Company uses
certain derivative instruments to add stability to the Companys net interest income and to manage the Companys exposure to interest rate movements.

The Company may designate a derivative as either an accounting hedge of the fair value of a recognized fixed rate asset or an unrecognized firm commitment (fair value hedge) or an accounting hedge of a forecasted transaction or
of the variability of future cash flows of a floating rate asset or liability (cash flow hedge). All derivatives are recorded as other assets or other liabilities on the balance sheet at their respective fair values. To the extent a
hedge is considered effective, changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge is recorded in other comprehensive income, net of income taxes. For all hedge relationships, ineffectiveness resulting
from differences between the changes in fair value or cash flows of the hedged item and changes in fair value of the derivative are recognized as other income in the results of operations.

In June 2003, the Bank entered into an interest rate swap agreement with a notional amount of $50.0 million in which the Bank swapped the fixed rate to a floating rate.
Under the terms of the swap agreement, the Bank receives a fixed coupon rate of 7.375% and pays a variable interest rate equal to the three-month LIBOR that is reset on a quarterly basis, plus 3.62%. This swap is designated as a fair value hedge of
the Companys $50.0 million subordinated debentures and qualifies for the short-cut method of accounting (discussed in Note 9). The swaps fair value is included in other liabilities and was $1.2 million and $1.3 million
with a floating rate of 6.34% and 8.87% on June 30, 2008 and December 31, 2007, respectively. The Companys credit exposure on the interest rate swap is limited to its net favorable fair value, if any, and the interest payment
receivable from the counterparty.

During 2006, the Company purchased a prime interest rate floor with a notional amount of $113 million and a strike rate
of 8.00% and a prime interest rate collar contract with a notional amount of $250 million and an 8.42% interest rate cap and an 8.00% interest rate floor. These contracts are designated as cash flow hedges of the monthly interest receipts from a
portion of the Companys portfolio of prime-based variable rate loans. The interest rate floor and interest rate collar have termination dates of August 1, 2009 and August 1, 2010, respectively.



14



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For cash flow hedges, the gain or loss on the effective portion of the derivative hedging instrument is reported in other
comprehensive income, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge
transaction) is recorded in current earnings as other income or other expense. The accumulated net after-tax gain on the floor and collar contracts included in accumulated other comprehensive income totaled $8.3 million and $7.3 million at
June 30, 2008 and December 31, 2007, respectively. The total fair value of the interest-rate collar and floor was $13.3 million and $12.2 million at June 30, 2008 and December 31, 2007, respectively, and is included in other
assets.



|11. | OTHER BORROWED FUNDS
|--- | --------------------

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



|                                               |  |              |         |                  |   |        
|---------------------------------------------- |  | ------------ | ------- | ---------------- | - | -------
|                                               |  | June 30,2008 |         | December 31,2007
|Federal Home Loan Bank advances                |  | $            | 383,500 |                  | $ | 187,500
|Federal funds purchased                        |  |              | 78,460  |                  |   | 9,225  
|Securities sold under agreements to repurchase |  |              | 59,435  |                  |   | 422    
|                                               |  |              |         |                  |   |        
|Total                                          |  | $            | 521,395 |                  | $ | 197,147
|                                               |  |              |         |                  |   |        

Federal Home Loan Bank Advances  The Company has an available line of credit with the
Federal Home Loan Bank (FHLB) of Dallas, which allows the Company to borrow on a collateralized basis. At June 30, 2008, we had total funds of $1.1 billion available under this agreement of which $384 million was outstanding. At June 30,
2008, the Company had $40.0 million of FHLB advances with a maturity of ten years and $500 thousand of FHLB advances with a remaining maturity of three years. The remaining advances totaling $343 million had maturities of fewer than five days. The
weighted-average interest rate on these borrowings was 2.5% at June 30, 2008. These borrowings are collateralized by a blanket lien against all eligible real estate loans, certain pledged securities, FHLB stock owned by the Company and any
funds on deposit with the FHLB. The Company utilizes these borrowings to meet liquidity needs. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits.

Federal Funds Purchased The Company has federal funds purchased at correspondent banks. As of June 30, 2008, federal funds outstanding
with correspondent banks were $78.5 million and payable upon demand. These funds typically mature within one to ninety days.

Securities Sold Under
Agreements to RepurchaseSecurities sold under agreements to repurchase represent the purchase of interests in securities by banking customers and structured repurchase agreements with other financial institutions. Securities
sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. Repurchase agreements with banking customers are settled on the following business day, while structured repurchase agreements with
other financial institutions will have varying terms. All securities sold under agreements to repurchase are collateralized by certain pledged securities. The structured repurchase agreements are held in safekeeping by the purchasing financial
institution. At June 30, 2008 and December 31, 2007, the Company had securities sold under agreements to repurchase with banking customers of $9.4 million and $422 thousand, respectively. Structured repurchase agreements totaled $50.0
million at June 30, 2008 and consisted of agreements with two separate financial institutions. These agreements mature in 2015. The rate on these repurchase agreements was 1.70% and 1.81%, at June 30, 2008. The Company may be required to
provide additional collateral based on the fair value of the underlying securities. There were no structured repurchase agreements outstanding on December 31, 2007.



|12. | STOCK-BASED COMPENSATION
|--- | ------------------------

The 2003 Stock Incentive and Compensation
Plan (the 2003 Stock Plan), which has been approved by the shareholders, permits the grant of unrestricted stock units, restricted stock unit awards, phantom stock awards, stock appreciation rights or stock options. On August 31,
2007, the Board of Directors of the Company approved and adopted the Long-Term Incentive Stock Performance Program (the Program) pursuant to which the Human Resource Programs Committee of the Board of Directors (the
Committee) may award equity-based awards to employees who are actively employed by the Company. All awards will be made under the 2003 Stock Plan and vest over a three year period.



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Total stock-based compensation expense that was charged against income was $1.7 million and $487 thousand for the six
month periods ended June 30, 2008 and 2007, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $460 thousand and $103 thousand for the six months ended June 30, 2008
and 2007, respectively.

On December 20, 2007, the Company entered into an employment agreement with its chief executive officer (CEO).
This agreement replaces the existing agreement, in which the CEO was awarded 187,500 Performance Restricted Share Units (PRSUs), to be earned based on specified performance metrics. Under the revised agreement, the new performance
metrics include EPS Growth versus the Companys peers measure and a return on assets versus peers performance measure. In addition, the vesting period changed from four years to three years. Based on these performance metrics, the
CEO will earn a specific number of the eligible share units on December 31, 2009. As of June 30, 2008, there was $1.1 million of total unrecognized compensation expense related to the PRSUs. If the performance measures are not met, no
future compensation expense will be recognized and any previously recognized compensation expense will be reversed.

Stock Purchase Plan
 The Company offers the 2004 Employee Stock Purchase Plan (the Purchase Plan) to eligible employees. An aggregate of 2.3 million shares of the Companys common stock may be issued under the Purchase Plan subject
to adjustment upon changes in capitalization. During the three and six months ended June 30, 2008, 14,345 and 30,592 shares were subscribed for through payroll deductions under the Purchase Plan compared to 11,208 and 22,146 shares for the same
periods in 2007.



|13. | EARNINGS PER COMMON SHARE
|--- | -------------------------

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



|                                        |  |                             |        |                           |   |        |  |      |        |  |   |       
|--------------------------------------- |  | --------------------------- | ------ | ------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                        |  | Three months ended June 30, |        | Six months ended June 30,
|                                        |  | 2008                        |        | 2007                      |   | 2008   |  | 2007
|Net income                              |  | $                           | 10,307 |                           | $ | 13,098 |  | $    | 21,916 |  | $ | 25,021
|Basic:                                  |  |                             |        |                           |   |        |  |      |        |  |   |       
|Weighted average shares outstanding     |  |                             | 73,137 |                           |   | 73,295 |  |      | 73,144 |  |   | 72,196
|Diluted:                                |  |                             |        |                           |   |        |  |      |        |  |   |       
|Add incremental shares for:             |  |                             |        |                           |   |        |  |      |        |  |   |       
|Assumed exercise of outstanding options |  |                             | 282    |                           |   | 488    |  |      | 268    |  |   | 506   
|                                        |  |                             |        |                           |   |        |  |      |        |  |   |       
|Total                                   |  |                             | 73,419 |                           |   | 73,783 |  |      | 73,412 |  |   | 72,702
|                                        |  |                             |        |                           |   |        |  |      |        |  |   |       
|Earnings per share:                     |  |                             |        |                           |   |        |  |      |        |  |   |       
|Basic                                   |  | $                           | 0.14   |                           | $ | 0.18   |  | $    | 0.30   |  | $ | 0.35  
|                                        |  |                             |        |                           |   |        |  |      |        |  |   |       
|Diluted                                 |  | $                           | 0.14   |                           | $ | 0.18   |  | $    | 0.30   |  | $ | 0.34  
|                                        |  |                             |        |                           |   |        |  |      |        |  |   |       

The incremental shares for the assumed exercise of the outstanding options were determined by application of the
treasury stock method. The calculation of diluted earnings per share excludes 772,415 and 779,262 options outstanding for the three and six months ended June 30, 2008, respectively, and 216,001 and 214,161 options outstanding for the three and
six month periods ended June 30, 2007, respectively, which were antidilutive.



|14. | COMMITMENTS AND CONTINGENCIES
|--- | -----------------------------

Leases  The
Company leases certain office facilities and equipment under operating leases. Rent expense under all noncancelable operating lease obligations, net of income from noncancelable subleases aggregated, was approximately $2.6 million and $5.2 million
for the three and six months ended June 30, 2008, respectively, and $2.3 million and $4.4 million for the three and six months ended June 30, 2007, respectively. Refer to the 2007 Form 10-K for information regarding these commitments.

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



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Severance and non-competition agreements  The Company has entered into severance and non-competition
agreements with its chief executive officer and certain other executive officers. Under these agreements, upon a termination of employment pursuant to a change in control, each would receive: (i) two or three years base pay; (ii) an
annual bonus for two or three years in an amount equal to the highest annual bonus paid to the respective executive officer during the three years preceding termination or change in control (as defined in the agreement); (iii) continued
eligibility for Company perquisites, welfare and life insurance benefit plans, to the extent permitted, and in the event participation is not permitted, payment of the cost of such welfare benefits for a period of two years following termination of
employment; (iv) payment of job placement fees; and (v) to the extent permitted by law or the applicable plan, accelerated vesting and termination of all forfeiture provisions under all benefit plans, options, restricted stock grants or
other similar awards.



|15. | FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
|--- | -------------------------------------------------

The Company is a
party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Companys exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit is represented by the contractual or notional amount of these instruments. The Company uses the same credit policies in making these commitments and conditional obligations as it does for
on-balance sheet instruments.

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



|                             |  |              |           |                  |   |        
|---------------------------- |  | ------------ | --------- | ---------------- | - | -------
|                             |  | June 30,2008 |           | December 31,2007
|Commitments to extend credit |  | $            | 1,066,627 |                  | $ | 929,227
|Letters of credit            |  |              | 142,085   |                  |   | 135,345

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total
commitment amounts disclosed above do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company,
upon extension of credit, is based on managements credit evaluation of the customer.

Standby and commercial letters of credit are conditional
commitments issued by the Company to guarantee the performance of a customer to a third party. In the event of nonperformance by the customers, the Company has rights to the underlying collateral, which can include commercial real estate, physical
plant and property, inventory, receivables, cash and marketable securities. The credit risk to the Company in issuing letters of credit is essentially the same as that involved in extending loan facilities to its customers.

Off-balance sheet arrangements also include an interest rate swap, an interest rate floor, an interest rate collar (discussed in Note 10) and the Companys Trust
Preferred Securities (discussed in Note 8).



|16. | REGULATORY MATTERS
|--- | ------------------

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

To meet the capital adequacy requirements, Sterling Bancshares and the Bank must maintain minimum capital amounts and ratios as defined in the
regulations. Management believes, as of June 30, 2008 and December 31, 2007, that Sterling Bancshares and the Bank met all capital adequacy requirements to which they are subject.



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The most recent notification from the regulatory banking agencies categorized Sterling Bank as well
capitalized under the regulatory capital framework for prompt corrective action and there have been no events since that notification that management believes have changed the Banks category.

The Companys consolidated and the Banks capital ratios are presented in the following table:



|                                         |  |                                           |         |       |                              |   |        |                                                                              |       |     |   |        |            |       |      |  
|---------------------------------------- |  | ----------------------------------------- | ------- | ----- | ---------------------------- | - | ------ | ---------------------------------------------------------------------------- | ----- | --- | - | ------ | ---------- | ----- | ---- | -
|                                         |  | Actual                                    |         |       | For CapitalAdequacy Purposes |   |        | To Be Categorized asWell Capitalized UnderPrompt CorrectiveAction Provisions |      
|                                         |  | Amount                                    |         | Ratio |                              |   | Amount |                                                                              | Ratio |     |   | Amount |            | Ratio |     
|                                         |  | (In thousands, except percentage amounts) |        
|CONSOLIDATED:                            |  |                                           |         |       |                              |   |        |                                                                              |       |     |   |        |            |       |      |  
|As of June 30, 2008:                     |  |                                           |         |       |                              |   |        |                                                                              |       |     |   |        |            |       |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 488,218 |       | 11.7                         | % |        | $  333,862                                                                   |       | 8.0 | % |        | N/A        |       | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 381,589 |       | 9.1                          | % |        | 166,931                                                                      |       | 4.0 | % |        | N/A        |       | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 381,589 |       | 8.2                          | % |        | 186,081                                                                      |       | 4.0 | % |        | N/A        |       | N/A  |  
|                                         |  |                                           |         |       |                              |  
|As of December 31, 2007:                 |  |                                           |         |       |                              |   |        |                                                                              |       |     |   |        |            |       |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 454,030 |       | 11.1                         | % |        | $  327,180                                                                   |       | 8.0 | % |        | N/A        |       | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 369,965 |       | 9.1                          | % |        | 163,590                                                                      |       | 4.0 | % |        | N/A        |       | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 369,965 |       | 8.6                          | % |        | 172,366                                                                      |       | 4.0 | % |        | N/A        |       | N/A  |  
|                                         |  |                                           |         |       |                              |  
|STERLING BANK:                           |  |                                           |         |       |                              |   |        |                                                                              |       |     |   |        |            |       |      |  
|As of June 30, 2008:                     |  |                                           |         |       |                              |   |        |                                                                              |       |     |   |        |            |       |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 483,603 |       | 11.6                         | % |        | $  333,583                                                                   |       | 8.0 | % |        | $  416,978 |       | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 377,003 |       | 9.0                          | % |        | 166,791                                                                      |       | 4.0 | % |        | 250,187    |       | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 377,003 |       | 8.1                          | % |        | 185,937                                                                      |       | 4.0 | % |        | 232,421    |       | 5.0  | %
|                                         |  |                                           |         |       |                              |  
|As of December 31, 2007:                 |  |                                           |         |       |                              |   |        |                                                                              |       |     |   |        |            |       |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 448,314 |       | 11.0                         | % |        | $  326,896                                                                   |       | 8.0 | % |        | $  408,620 |       | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 364,248 |       | 8.9                          | % |        | 163,448                                                                      |       | 4.0 | % |        | 245,172    |       | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 364,248 |       | 8.5                          | % |        | 172,193                                                                      |       | 4.0 | % |        | 215,241    |       | 5.0  | %

On January 1, 2004, the Company deconsolidated the outstanding trust preferred securities from its
Consolidated Financial Statements. However, trust preferred securities are still considered in calculating the Companys Tier 1 capital ratios as permitted by the Federal Reserve rules. These rules, when fully transitioned and applicable on
March 31, 2009, will limit the aggregate amount of trust preferred securities and certain other capital elements to 25% of Tier 1 capital, net of goodwill. At June 30, 2008, the entire amount of the $80.3 million of trust preferred
securities outstanding would count as Tier 1 capital. The excess amount of trust preferred securities not qualifying for Tier 1 capital may be included in Tier 2 capital. This amount is limited to 50% of Tier 1 capital. Additionally, the final rules
provide that trust preferred securities no longer qualify for Tier 1 capital within five years of their maturity. Under the final transitioned rules, there would not be a material impact on the Companys consolidated capital ratios at
June 30, 2008.

Dividend restrictions  Dividends paid by the Bank are subject to certain restrictions imposed by regulatory
agencies. At June 30, 2008, the aggregate amount of dividends, which legally could be paid without prior approval of various regulatory agencies, totaled approximately $66.6 million by the Bank.



|17. | FAIR VALUE OF FINANCIAL INSTRUMENTS
|--- | -----------------------------------

On January 1, 2008, the
Company adopted SFAS 157. As discussed in Note 1, SFAS 157 applies to reported balances that are required or permitted to be measured at fair value under an existing accounting pronouncement. SFAS 157 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability and establishes a fair value
hierarchy. The fair value hierarchy consists of three levels of inputs that may be used to measure fair value as follows:

Level 1
 Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 1 assets and liabilities include debt and equity securities that are traded in an active
exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.



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Level 2  Inputs other than those quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly. These inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as
interest rates and yield curves that are observable at commonly quoted intervals. Level 2 assets and liabilities include available-for-sale securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative
contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Available-for-sale securities are valued using an independent
pricing service that considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, prepayment speeds, credit information and the bonds terms and conditions, among other things. Derivative
valuations utilize certain Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. The significance of the impact of these credit valuation adjustments on the overall
valuation of derivative positions are not significant to the overall valuation and result in all derivative valuations being classified in Level 2 of the fair value hierarchy.

Level 3  Inputs that are unobservable inputs for the asset or liability, which are typically based on an entitys own assumptions, as
there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire
fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or liability. This category includes certain interest-only strip securities where independent pricing information was not able to be obtained for a significant portion of the underlying
assets.

The table below presents the Companys assets and liabilities measured at fair value on a recurring basis as of June 30, 2008,
aggregated by the level in the fair value hierarchy within which those measurements fall (dollars in thousands).



|                              |  |                         |         |                                                                  |   |                                             |  |                                        |         |  |   |      
|----------------------------- |  | ----------------------- | ------- | ---------------------------------------------------------------- | - | ------------------------------------------- |  | -------------------------------------- | ------- |  | - | -----
|                              |  | Balance atJune 30, 2008 |         | Quoted Prices inActive Markets forIdentical Instruments(Level 1) |   | Significant OtherObservableInputs (Level 2) |  | SignificantUnobservableInputs(Level 3)
|Financial assets:             |  |                         |         |                                                                  |   |                                             |  |                                        |         |  |   |      
|Available-for-sale securities |  | $                       | 568,329 |                                                                  | $ |                                            |  | $                                      | 565,507 |  | $ | 2,822
|Cash flow hedges              |  |                         | 13,338  |                                                                  |   |                                            |  |                                        | 13,338  |  |   |     
|Financial liabilities:        |  |                         |         |                                                                  |   |                                             |  |                                        |         |  |   |      
|Interest rate swap            |  |                         | 1,155   |                                                                  |   |                                            |  |                                        | 1,155   |  |   |     

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is,
the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets measured on a nonrecurring basis include impaired loans
that are collateral dependent, other real estate owned and other repossessed assets which are measured using appraisals and third party estimates and are considered Level 2 inputs within the fair value hierarchy. For the six months ended
June 30, 2008, the Company had additions to impaired loans, other real estate owned and other repossessed assets of $35.8 million, $1.3 million and $59.5 thousand, respectively, which were outstanding at June 30, 2008 and measured using
the fair value hierarchy.

The table below presents a reconciliation for assets and liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) during 2008 and summarizes gains and losses due to changes in fair value. Level 3 available-for-sale securities include certain interest-only strips which are valued based on certain observable inputs such
as interest rates and credit spreads, as well as unobservable inputs such as estimated net charge-off and pre-payment rates.



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|                                                   |  |                                                                       |       |   |                                              |   |        |  
|-------------------------------------------------- |  | --------------------------------------------------------------------- | ----- | - | -------------------------------------------- | - | ------ | -
|                                                   |  | Fair Value Measurements UsingSignificant Unobservable Inputs(Level 3) |       |   | Unrealized gains (losses)on items still held |  
|                                                   |  | Available-for-Sale Securities                                         |       |  
|Balance, January 1, 2008                           |  | $                                                                     | 3,586 |   |                                              | $ | (1,039 | )
|Total gains or losses (realized/unrealized):       |  |                                                                       |       |   |                                              |   |        |  
|Included in earnings (or changes in net assets)    |  |                                                                       |      |   |                                              |   |       |  
|Included in other comprehensive income             |  |                                                                       | (26   | ) |                                              |   | (26    | )
|Purchases, issuances, settlements and amortization |  |                                                                       | (738  | ) |                                              |   |       |  
|Transfers in and/or out of Level 3                 |  |                                                                       |      |   |                                              |   |       |  
|                                                   |  |                                                                       |       |   |                                              |   |        |  
|Balance, June 30, 2008                             |  | $                                                                     | 2,822 |   |                                              | $ | (1,065 | )
|                                                   |  |                                                                       |       |   |                                              |   |        |  

There were no realized gains or losses related to Level 3 assets recorded during the three and six month periods
ended June 30, 2008 and 2007.



|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

FORWARD-LOOKING STATEMENTS

This report, other periodic reports filed by us under the Exchange Act, and other written
or oral statements made by or on behalf of the Company contain certain statements relating to future events and our future results which constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are typically identified by words such as expects, anticipates, intends, plans, believes, seeks, estimates, or words of
similar meaning, or future or conditional verbs such as should, could, or may.

Forward-looking statements reflect our
expectation or predictions of future conditions, events or results based on information currently available and involve risks and uncertainties that may cause actual results to differ materially from those in such statements. These risks and
uncertainties include, but are not limited to, the risks identified in Item 1A of this report and the following:



| |  |  | 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 FASB, 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.
| | - |  | ---------------------------------------------------------------------------------------

Forward-looking statements speak only as of the date of this report. We do not undertake to update forward-looking statements to reflect circumstances or events that
occur after the date of this report or to reflect the occurrence of unanticipated events except as required by federal securities laws.



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For additional discussion of such risks, uncertainties and assumptions, see our Annual Report on Form 10-K for the year
ended December 31, 2007, filed with the Securities and Exchange Commission.

OVERVIEW

For more than 33 years, Sterling Bancshares, Inc. and Sterling Bank have served the banking needs of small to medium-sized businesses. We provide a broad array of
financial services to Texas businesses and consumers through 59 banking centers in the greater metropolitan areas of Houston, San Antonio, Dallas and Fort Worth, Texas.

At June 30, 2008, we had consolidated total assets of $4.9 billion, total loans of $3.7 billion, total deposits of $3.7 billion and shareholders equity of $495 million.

We reported net income of $10.3 million, or $0.14 per diluted share for the quarter ended June 30, 2008, compared to $13.1 million or $0.18 per diluted share earned
for the second quarter of 2007. Net income for the six months ended June 30, 2008 was $21.9 million, or $0.30 per diluted share, compared with $25.0 million, or $0.34 per diluted share earned for the same period in 2007.

We recorded encouraging core operating results in the second quarter despite operating in an increasingly challenging nationwide banking environment. The combination of
growth in loans and deposits, a stable net interest margin, noninterest income growth and a reduction in our efficiency ratio on both a linked quarter and a year over year basis demonstrates the strength and position of our franchise. Our results
were negatively impacted at the end of the quarter by one large credit relationship, which accounted for $3.7 million in additional provision for the quarter and $20.0 million in additional nonperforming loans. During the third quarter of 2008, we
funded additional proceeds of $9.2 million to this borrower increasing our overall exposure to $29.2 million. We estimate approximately $600 thousand of provision will be recorded in the third quarter of 2008 related to this increased exposure.
This credit is an extremely unusual situation for us and is not representative of any systemic issues within the overall loan portfolio.

CRITICAL
ACCOUNTING POLICIES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America
requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our Consolidated Financial Statements and accompanying notes. We believe that the judgments,
estimates and assumptions used in the preparation of our Consolidated Financial Statements are appropriate given the factual circumstances as of June 30, 2008.

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. We have identified four accounting policies that,
due to the judgments, estimates and assumptions inherent in those policies, and the sensitivity of our Consolidated Financial Statements to those judgments, estimates and assumptions, are critical to an understanding of our Consolidated Financial
Statements. These policies relate to the methodology that determines our allowance for credit losses, accounting for goodwill and other intangibles, accounting for derivatives and the assumptions used in determining stock-based compensation.

These policies and the judgments, estimates and assumptions are described in greater detail in our 2007 Annual Report on Form 10-K in the Critical
Accounting Policies section of Managements Discussion and Analysis and in Note 1 to the Consolidated Financial Statements  Organization and Summary of Significant Accounting and Reporting Policies.



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RECENT ACCOUNTING STANDARDS

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157 (SFAS 157) Fair Value Measurements. SFAS 157 defined fair value, established a
framework for measuring fair value in generally accepted accounting principles, and expanded disclosures about fair value measurements. SFAS 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157, delayed the application of SFAS 157 for non-financial assets and non-financial liabilities until
January 1, 2009. The Company adopted SFAS 157 on January 1, 2008. The adoption of this accounting standard did not have a material impact on the Companys financial statements.

In February 2007, the FASB issued SFAS No. 159 (SFAS 159) The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits
entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted SFAS 159 on January 1, 2008. The adoption of this accounting standard did not have a material impact on the
Companys financial statements.

In September 2006, the Emerging Issues Task Force (EITF) of the FASB ratified EITF Issue No. 06-4
(EITF 06-4) Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 provides that an employer should recognize a liability for future benefits
based on the substantive agreement with the employee. The Issue should be applied to fiscal years beginning after December 15, 2007, with earlier application permitted. The Company adopted EITF 06-4 on January 1, 2008. The adoption of this
accounting standard did not have a material impact on the Companys financial statements.

In December 2007, the FASB issued SFAS No. 141(R)
(SFAS 141R) Business Combinations (Revised 2007). SFAS 141R requires the acquiring entity in a business combination to recognize the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the
business combination. This statement is effective for fiscal years beginning after December 15, 2008. Management has not completed its evaluation of the impact of this standard; however, the Company does expect SFAS 141R to have a significant
impact on the Companys accounting for business combinations closing on or after January 1, 2009.

In December 2007, the FASB issued SFAS
No. 160 (SFAS 160) Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No. 51. SFAS 160 eliminates the diversity that currently exists in accounting for transactions between an entity
and noncontrolling interests by requiring they be treated as equity transactions. This statement is effective for fiscal years beginning after December 15, 2008. Management has not completed its evaluation of this issue; however, the Company
does not expect it to be material to its financial statements.



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SELECTED FINANCIAL DATA



|                                                            |  |                                                             |           |   |                          |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|----------------------------------------------------------- |  | ----------------------------------------------------------- | --------- | - | ------------------------ | - | --------- | ---------------------- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                            |  | Three Months EndedJune 30,                                  |           |   | Six Months EndedJune 30, |   |           | Year EndedDecember 31, | 
|                                                            |  | 2008                                                        |           |   | 2007                     |   |           | 2008                   |  |   | 2007      |   |  | 2007 |          
|                                                            |  | (Dollars and shares in thousands, except per share amounts) |          
|INCOME STATEMENT DATA:                                      |  |                                                             |           |   |                          |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Net interest income                                         |  | $                                                           | 50,244    |   |                          | $ | 46,778    |                        |  | $ | 98,240    |   |  | $    | 91,367    |   |  | $ | 185,624   |  
|Provision for credit losses                                 |  |                                                             | 8,167     |   |                          |   | 1,000     |                        |  |   | 12,317    |   |  |      | 1,370     |   |  |   | 3,820     |  
|Noninterest income                                          |  |                                                             | 10,870    |   |                          |   | 7,518     |                        |  |   | 21,585    |   |  |      | 15,452    |   |  |   | 36,220    |  
|Noninterest expense                                         |  |                                                             | 37,708    |   |                          |   | 34,342    |                        |  |   | 75,096    |   |  |      | 68,176    |   |  |   | 139,354   |  
|Income before income taxes                                  |  |                                                             | 15,239    |   |                          |   | 18,954    |                        |  |   | 32,412    |   |  |      | 37,273    |   |  |   | 78,670    |  
|Net income                                                  |  |                                                             | 10,307    |   |                          |   | 13,098    |                        |  |   | 21,916    |   |  |      | 25,021    |   |  |   | 52,962    |  
|                                                            |  |                                                             |           |   |                         
|BALANCE SHEET DATA(at period-end):                          |  |                                                             |           |   |                          |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Total assets                                                |  | $                                                           | 4,909,454 |   |                          | $ | 4,412,794 |                        |  | $ | 4,909,454 |   |  | $    | 4,412,794 |   |  | $ | 4,535,909 |  
|Total loans                                                 |  |                                                             | 3,655,608 |   |                          |   | 3,322,544 |                        |  |   | 3,655,608 |   |  |      | 3,322,544 |   |  |   | 3,418,284 |  
|Allowance for loan losses                                   |  |                                                             | 41,651    |   |                          |   | 33,450    |                        |  |   | 41,651    |   |  |      | 33,450    |   |  |   | 34,446    |  
|Total securities                                            |  |                                                             | 743,964   |   |                          |   | 610,400   |                        |  |   | 743,964   |   |  |      | 610,400   |   |  |   | 656,776   |  
|Total deposits                                              |  |                                                             | 3,694,335 |   |                          |   | 3,730,856 |                        |  |   | 3,694,335 |   |  |      | 3,730,856 |   |  |   | 3,673,711 |  
|Other borrowed funds                                        |  |                                                             | 521,395   |   |                          |   | 57,840    |                        |  |   | 521,395   |   |  |      | 57,840    |   |  |   | 197,147   |  
|Subordinated debt                                           |  |                                                             | 73,816    |   |                          |   | 45,408    |                        |  |   | 73,816    |   |  |      | 45,408    |   |  |   | 48,694    |  
|Junior subordinated debt                                    |  |                                                             | 82,734    |   |                          |   | 82,734    |                        |  |   | 82,734    |   |  |      | 82,734    |   |  |   | 82,734    |  
|Shareholders equity                                        |  |                                                             | 494,534   |   |                          |   | 444,979   |                        |  |   | 494,534   |   |  |      | 444,979   |   |  |   | 480,259   |  
|                                                            |  |                                                             |           |   |                         
|COMMON SHARE DATA:                                          |  |                                                             |           |   |                          |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Earnings per share (1)                                      |  |                                                             |           |   |                          |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Basic shares                                                |  | $                                                           | 0.14      |   |                          | $ | 0.18      |                        |  | $ | 0.30      |   |  | $    | 0.35      |   |  | $ | 0.73      |  
|Diluted shares                                              |  | $                                                           | 0.14      |   |                          | $ | 0.18      |                        |  | $ | 0.30      |   |  | $    | 0.34      |   |  | $ | 0.72      |  
|Shares used in computing earnings per common share          |  |                                                             |           |   |                          |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Basic shares                                                |  |                                                             | 73,137    |   |                          |   | 73,295    |                        |  |   | 73,144    |   |  |      | 72,196    |   |  |   | 72,659    |  
|Diluted shares                                              |  |                                                             | 73,419    |   |                          |   | 73,783    |                        |  |   | 73,412    |   |  |      | 72,702    |   |  |   | 73,126    |  
|End of period common shares outstanding                     |  |                                                             | 73,160    |   |                          |   | 73,057    |                        |  |   | 73,160    |   |  |      | 73,057    |   |  |   | 73,159    |  
|Book value per common share at period-end                   |  |                                                             |           |   |                          |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Total                                                       |  | $                                                           | 6.76      |   |                          | $ | 6.09      |                        |  | $ | 6.76      |   |  | $    | 6.09      |   |  | $ | 6.56      |  
|Tangible                                                    |  | $                                                           | 4.19      |   |                          | $ | 3.59      |                        |  | $ | 4.19      |   |  | $    | 3.59      |   |  | $ | 4.04      |  
|Cash dividends paid per common share                        |  | $                                                           | 0.055     |   |                          | $ | 0.0525    |                        |  | $ | 0.110     |   |  | $    | 0.105     |   |  | $ | 0.210     |  
|Common stock dividend payout ratio                          |  |                                                             | 39.06     | % |                          |   | 29.35     | %                      |  |   | 36.74     | % |  |      | 30.26     | % |  |   | 28.77     | %
|                                                            |  |                                                             |           |   |                         
|SELECTED PERFORMANCE RATIOS AND OTHER DATA:                 |  |                                                             |           |   |                          |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Return on average common equity (2)                         |  |                                                             | 8.26      | % |                          |   | 11.66     | %                      |  |   | 8.84      | % |  |      | 11.63     | % |  |   | 11.77     | %
|Return on average assets (2)                                |  |                                                             | 0.86      | % |                          |   | 1.21      | %                      |  |   | 0.93      | % |  |      | 1.19      | % |  |   | 1.22      | %
|Tax equivalent net interest margin (3)                      |  |                                                             | 4.66      | % |                          |   | 4.81      | %                      |  |   | 4.67      | % |  |      | 4.86      | % |  |   | 4.77      | %
|Efficiency ratio (4)                                        |  |                                                             | 61.31     | % |                          |   | 61.76     | %                      |  |   | 61.81     | % |  |      | 62.16     | % |  |   | 61.84     | %
|Full-time equivalent employees                              |  |                                                             | 1,126     |   |                          |   | 1,048     |                        |  |   | 1,126     |   |  |      | 1,048     |   |  |   | 1,042     |  
|Number of banking centers                                   |  |                                                             | 59        |   |                          |   | 49        |                        |  |   | 59        |   |  |      | 49        |   |  |   | 49        |  
|                                                            |  |                                                             |           |   |                         
|LIQUIDITY AND CAPITAL RATIOS:                               |  |                                                             |           |   |                          |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Average loans to average deposits                           |  |                                                             | 102.02    | % |                          |   | 91.08     | %                      |  |   | 99.37     | % |  |      | 92.09     | % |  |   | 91.93     | %
|Period-end shareholders equity to total assets             |  |                                                             | 10.07     | % |                          |   | 10.08     | %                      |  |   | 10.07     | % |  |      | 10.08     | % |  |   | 10.59     | %
|Average shareholders equity to average assets              |  |                                                             | 10.38     | % |                          |   | 10.38     | %                      |  |   | 10.56     | % |  |      | 10.27     | % |  |   | 10.38     | %
|Period-end tangible capital to total tangible assets        |  |                                                             | 6.49      | % |                          |   | 6.20      | %                      |  |   | 6.49      | % |  |      | 6.20      | % |  |   | 6.79      | %
|Tier 1 capital to risk-weighted assets                      |  |                                                             | 9.14      | % |                          |   | 8.89      | %                      |  |   | 9.14      | % |  |      | 8.89      | % |  |   | 9.05      | %
|Total capital to risk-weighted assets                       |  |                                                             | 11.70     | % |                          |   | 10.91     | %                      |  |   | 11.70     | % |  |      | 10.91     | % |  |   | 11.10     | %
|Tier 1 leverage ratio (Tier 1 capital to average assets)    |  |                                                             | 8.20      | % |                          |   | 8.41      | %                      |  |   | 8.20      | % |  |      | 8.41      | % |  |   | 8.59      | %
|                                                            |  |                                                             |           |   |                         
|ASSET QUALITY RATIOS:                                       |  |                                                             |           |   |                          |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Period-end allowance for credit losses to period-end loans  |  |                                                             | 1.16      | % |                          |   | 1.03      | %                      |  |   | 1.16      | % |  |      | 1.03      | % |  |   | 1.03      | %
|Period-end allowance for loan losses to period-end loans    |  |                                                             | 1.14      | % |                          |   | 1.01      | %                      |  |   | 1.14      | % |  |      | 1.01      | % |  |   | 1.01      | %
|Period-end allowance for loan losses to nonperforming loans |  |                                                             | 85.14     | % |                          |   | 287.52    | %                      |  |   | 85.14     | % |  |      | 287.52    | % |  |   | 170.41    | %
|Nonperforming loans to period-end loans                     |  |                                                             | 1.34      | % |                          |   | 0.35      | %                      |  |   | 1.34      | % |  |      | 0.35      | % |  |   | 0.59      | %
|Nonperforming assets to period-end assets                   |  |                                                             | 1.09      | % |                          |   | 0.34      | %                      |  |   | 1.09      | % |  |      | 0.34      | % |  |   | 0.53      | %
|Net charge-offs to average loans (2)                        |  |                                                             | 0.24      | % |                          |   | 0.13      | %                      |  |   | 0.29      | % |  |      | 0.09      | % |  |   | 0.09      | %



|(1) | The calculation of diluted EPS excludes 772,415 and 779,262 options outstanding for the three and six months ended June 30, 2008, respectively, 550,505 options for the year
ended 2007, and 216,001 and 214,161 options for the three and six month periods ended June 30, 2007, respectively, which were antidilutive.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Interim periods annualized.
|--- | ---------------------------

|(3) | Taxable-equivalent basis assuming a 35% tax rate.
|--- | -------------------------------------------------

|(4) | During 2007, the efficiency ratio was changed to divide noninterest expense less acquisition costs, an employee severance payment, and Trust Preferred Securities debt issuance costs
by tax equivalent basis net interest income plus noninterest income less net gain (loss) on sales of investment securities and less net gain on sale/leaseback transactions. Prior period amounts have been restated to reflect the current methodology.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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RESULTS OF OPERATIONS

Net Income  Net income was $10.3 million, or $0.14 per diluted share, for the second quarter ended June 30, 2008, compared to $13.1 million, or $0.18 per diluted share, earned for the second quarter of 2007. Net
income for the six months ended June 30, 2008 was $21.9 million, or $0.30 per diluted share, compared with $25.0 million, or $0.34 per diluted share earned for the same period in 2007.

Details of the changes in the various components of net income are discussed below.

Net Interest Income Net interest income represents the amount by which interest income on interest-earning assets, including loans and securities, exceeds interest paid on interest-bearing liabilities, including
deposits and borrowings. Net interest income is our principal source of earnings. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to effect net interest income.

The Federal Reserve Board significantly influences market interest rates, including rates offered for loans and deposits by many financial institutions. Generally, when
the Federal Open Market Committee (FOMC) of the Federal Reserve Board changes the target overnight interest rate charged by banks, the market responds with a similar change in the prime lending rate. Our loan portfolio is impacted
significantly by changes in short-term interest rates. From June 2006 until September of 2007, overnight interest rates remained consistent at 5.25%. Beginning in September 2007, the FOMC gradually decreased overnight interest rates by 325 basis
points to 2.00% at June 30, 2008. This gradual decline in interest rates has negatively impacted our net interest income and margin during the first half of 2008.

Tax equivalent net interest income increased $3.5 million or 7.5% to $50.6 million and $7.0 million or 7.6% to $99.0 million for the three and six month periods ended June 30, 2008, respectively, compared to the
same time periods in 2007. This increase in net interest income was primarily due to a decline in interest expense resulting from a decrease in average cost of funds on deposits and the utilization of lower cost borrowings. The rate paid on
interest-bearing liabilities decreased 147 basis points and 105 basis points for the three and six month periods ended June 30, 2008, respectively, compared to the same periods in 2007. Our tax equivalent net interest margin was 4.66% and 4.67%
for the three and six month periods ended June 30, 2008, respectively, compared to 4.81% and 4.86% for the three and six month periods ended June 30, 2007, respectively. The decline in net interest margin was primarily due to the
significant decline in short-term interest rates that began in late 2007. The negative impact of the decline in short-term interest rates was partially mitigated by the work we have done in the past two years to position our balance sheet to be more
neutral to movements in short-term interest rates including the interest rate hedge that was established in 2006 and the strategic decision to utilize lower cost borrowings.

Total tax equivalent interest income decreased $3.9 million and $1.1 million for the three and six month periods ended June 30, 2008, respectively, over the comparable periods in 2007. Interest income on loans
decreased $5.4 million and $3.7 million for the three and six month periods ended June 30, 2008, respectively, compared to the same periods in 2007, due to a decrease in yield earned of 133 basis points and 102 basis points for the three and
six months ended June 30, 2008, respectively, compared to the same periods in 2007. The decrease in yield was partially offset by additional interest income from the interest rate hedge that we purchased in 2006 which provided additional
interest income of $2.6 million or 24 basis points to net interest margin and $4.2 million or 20 basis points to net interest margin for the three and six month periods ended June 30, 2008, respectively. The hedge effectively converts a portion
of our loan portfolio from variable rate loans to fixed rate loans. In addition, the decline in interest income resulting from decreases in interest rates was partially offset by an increase in average total loans of $342 million or 10.4% and $356
million or 11.1% for the three and six months ended June 30, 2008, respectively, over the comparable periods in 2007.

Tax equivalent interest income
on securities increased $1.8 million and $3.0 million for the three and six month periods ended June 30, 2008, respectively, compared to the same periods in 2007 due to an increase in the average securities portfolio (including trading assets)
and yield earned. Average securities increased $119 million or 19.7% and $101 million or 17.0% for the three and six month periods ended June 30, 2008, respectively, compared to the same periods in 2007. Tax equivalent yield earned on
securities increased 26 basis points and 18 basis points for the three and six month periods ended June 30, 2008, respectively.

Total interest
expense decreased $7.4 million and $8.1 million for the three and six month periods ended June 30, 2008, respectively, over the comparable periods in 2007. Average interest-bearing liabilities increased $468 million and $437 million for the
three and six month period ended June 30, 2008, respectively, compared to the same periods in 2007. The average rate paid on interest-bearing liabilities decreased 147 basis points and 105 basis points, for the same time frames.

This decrease in interest expense was primarily due to a decrease in interest expense on deposits of $9.0 million and $9.8 million for the three and six month periods
ended June 30, 2008, respectively, compared to the same periods in 2007. The reduction in short-term interest rates that began in late 2007 reduced the average rate paid on all interest-bearing deposits 144 basis points and 93 basis points for
the three and six month periods ended June 30, 2008, respectively, compared to the same periods in 2007.



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Beginning in the fourth quarter of 2007, we made the strategic decision to allow some of our higher cost time deposits to
mature and be replaced by lower cost borrowings. Average other borrowings for the three and six month periods ended June 30, 2008 increased $499 million and $317 million, respectively, compared to the same periods in 2007. These borrowings
provided additional funding at a rate of 2.30% and 2.52% for the three and six month periods ended June 30, 2008, respectively, a decrease in funding costs of 295 basis points and 281 basis points over the same periods in 2007. Overall,
interest expense on other borrowings increased $2.2 million and $2.0 million for the three and six month periods ended June 30, 2008, respectively, compared to the same periods in 2007.



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##### Table of Contents

Certain average balances, together with the total dollar amounts of interest income and expense and the average tax
equivalent interest yield/rates are included below (in thousands).



|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|----------------------------------------------------- |  | --------------------------- | --------- | - | -------- | - | ----------------- |  | ---- | -------------- |  | - | --------- | - | ----------------- | - | ------ |  | ----- | -
|                                                      |  | Three Months Ended June 30, |          
|                                                      |  | (Dollars in thousands)      |          
|                                                      |  | 2008                        |           |   | 2007     |  
|                                                      |  | AverageBalance              |           |   | Interest |   | AverageYield/Rate |  |      | AverageBalance |  |   | Interest  |   | AverageYield/Rate |  
|                                                      |  |                             |           |   |          |  
|Interest-Earning Assets:                              |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Loans held for sale (1)                               |  | $                           | 94,801    |   |          | $ | 1,540             |  | 6.53 | %              |  | $ | 54,986    |   |                   | $ | 1,102  |  | 8.04  | %
|Loans held for investment (1):                        |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Taxable                                               |  |                             | 3,538,656 |   |          |   | 58,510            |  | 6.65 | %              |  |   | 3,235,036 |   |                   |   | 64,337 |  | 7.98  | %
|Non-taxable (2)                                       |  |                             | 2,321     |   |          |   | 46                |  | 7.89 | %              |  |   | 3,575     |   |                   |   | 70     |  | 7.85  | %
|Securities:                                           |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Taxable                                               |  |                             | 622,794   |   |          |   | 7,408             |  | 4.78 | %              |  |   | 513,566   |   |                   |   | 5,755  |  | 4.49  | %
|Non-taxable (2)                                       |  |                             | 96,814    |   |          |   | 1,285             |  | 5.34 | %              |  |   | 90,899    |   |                   |   | 1,147  |  | 5.06  | %
|Trading assets                                        |  |                             | 4,395     |   |          |   | 22                |  | 1.98 | %              |  |   | 216       |   |                   |   | 4      |  | 6.72  | %
|Federal funds sold                                    |  |                             | 5,593     |   |          |   | 27                |  | 1.99 | %              |  |   | 24,975    |   |                   |   | 274    |  | 4.41  | %
|Deposits in financial institutions                    |  |                             | 1,010     |   |          |   | 5                 |  | 1.94 | %              |  |   | 648       |   |                   |   | 7      |  | 4.32  | %
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Total interest-earning assets                         |  |                             | 4,366,384 |   |          |   | 68,843            |  | 6.34 | %              |  |   | 3,923,901 |   |                   |   | 72,696 |  | 7.43  | %
|                                                      |  |                             |           |   |          |  
|Noninterest-earning assets:                           |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Cash and due from banks                               |  |                             | 97,745    |   |          |   |                   |  |      |                |  |   | 113,771   |   |                   |   |        |  |       |  
|Premises and equipment, net                           |  |                             | 40,980    |   |          |   |                   |  |      |                |  |   | 26,094    |   |                   |   |        |  |       |  
|Other assets                                          |  |                             | 367,250   |   |          |   |                   |  |      |                |  |   | 312,052   |   |                   |   |        |  |       |  
|Allowance for loan losses                             |  |                             | (34,894   | ) |          |   |                   |  |      |                |  |   | (33,361   | ) |                   |   |        |  |       |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Total noninterest-earning assets                      |  |                             | 471,081   |   |          |   |                   |  |      |                |  |   | 418,556   |   |                   |   |        |  |       |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Total assets                                          |  | $                           | 4,837,465 |   |          |   |                   |  |      |                |  | $ | 4,342,457 |   |                   |   |        |  |       |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|                                                      |  |                             |           |   |          |  
|Interest-bearing liabilities:                         |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Deposits:                                             |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Demand and savings                                    |  | $                           | 1,417,453 |   |          | $ | 3,889             |  | 1.10 | %              |  | $ | 1,318,839 |   |                   | $ | 7,605  |  | 2.31  | %
|Certificates and other time                           |  |                             | 1,056,022 |   |          |   | 8,662             |  | 3.30 | %              |  |   | 1,188,480 |   |                   |   | 13,922 |  | 4.70  | %
|Other borrowed funds                                  |  |                             | 595,081   |   |          |   | 3,409             |  | 2.30 | %              |  |   | 96,024    |   |                   |   | 1,257  |  | 5.25  | %
|Subordinated debt                                     |  |                             | 49,511    |   |          |   | 864               |  | 7.02 | %              |  |   | 46,232    |   |                   |   | 1,162  |  | 10.08 | %
|Junior subordinated debt                              |  |                             | 82,734    |   |          |   | 1,384             |  | 6.73 | %              |  |   | 82,734    |   |                   |   | 1,658  |  | 8.04  | %
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Total interest-bearing liabilities                    |  |                             | 3,200,801 |   |          |   | 18,208            |  | 2.29 | %              |  |   | 2,732,309 |   |                   |   | 25,604 |  | 3.76  | %
|                                                      |  |                             |           |   |          |  
|Noninterest-bearing sources:                          |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Demand deposits                                       |  |                             | 1,090,439 |   |          |   |                   |  |      |                |  |   | 1,108,895 |   |                   |   |        |  |       |  
|Other liabilities                                     |  |                             | 44,109    |   |          |   |                   |  |      |                |  |   | 50,515    |   |                   |   |        |  |       |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Total noninterest-bearing liabilities                 |  |                             | 1,134,548 |   |          |   |                   |  |      |                |  |   | 1,159,410 |   |                   |   |        |  |       |  
|                                                      |  |                             |           |   |          |  
|Shareholders equity                                  |  |                             | 502,116   |   |          |   |                   |  |      |                |  |   | 450,738   |   |                   |   |        |  |       |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Total liabilities and shareholders equity            |  | $                           | 4,837,465 |   |          |   |                   |  |      |                |  | $ | 4,342,457 |   |                   |   |        |  |       |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Tax equivalent net interest income and margin (2) (3) |  |                             |           |   |          |   | 50,635            |  | 4.66 | %              |  |   |           |   |                   |   | 47,092 |  | 4.81  | %
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|                                                      |  |                             |           |   |          |  
|Tax equivalent adjustment:                            |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Loans                                                 |  |                             |           |   |          |   | 14                |  |      |                |  |   |           |   |                   |   | 20     |  |       |  
|Securities                                            |  |                             |           |   |          |   | 377               |  |      |                |  |   |           |   |                   |   | 294    |  |       |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Total tax equivalent adjustment                       |  |                             |           |   |          |   | 391               |  |      |                |  |   |           |   |                   |   | 314    |  |       |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Net interest income                                   |  |                             |           |   |          | $ | 50,244            |  |      |                |  |   |           |   |                   | $ | 46,778 |  |       |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  



|(1) | For the purpose of calculating loan yields, average loan balances include nonaccrual loans with no related interest income.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(2) | Taxable-equivalent adjustments are the result of increasing income from nontaxable loans and securities by an amount equal to the taxes that would be paid if the income were fully
taxable based on a 35% federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The net interest margin is equal to net interest income divided by average total interest-earning assets.
|--- | ---------------------------------------------------------------------------------------------------------



26



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##### Table of Contents

|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|----------------------------------------------------- |  | ------------------------- | --------- | - | -------- | - | ----------------- |  | ---- | -------------- |  | - | --------- | - | ----------------- | - | ------- |  | ----- | -
|                                                      |  | Six Months Ended June 30, |          
|                                                      |  | (Dollars in thousands)    |          
|                                                      |  | 2008                      |           |   | 2007     |  
|                                                      |  | AverageBalance            |           |   | Interest |   | AverageYield/Rate |  |      | AverageBalance |  |   | Interest  |   | AverageYield/Rate |  
|                                                      |  |                           |           |   |          |  
|Interest-Earning Assets:                              |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Loans held for sale (1)                               |  | $                         | 86,566    |   |          | $ | 2,925             |  | 6.79 | %              |  | $ | 54,238    |   |                   | $ | 2,107   |  | 7.83  | %
|Loans held for investment (1):                        |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Taxable                                               |  |                           | 3,471,827 |   |          |   | 120,136           |  | 6.96 | %              |  |   | 3,147,148 |   |                   |   | 124,632 |  | 7.99  | %
|Non-taxable (2)                                       |  |                           | 2,648     |   |          |   | 106               |  | 8.10 | %              |  |   | 3,614     |   |                   |   | 141     |  | 7.87  | %
|Securities:                                           |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Taxable                                               |  |                           | 595,068   |   |          |   | 13,957            |  | 4.72 | %              |  |   | 503,444   |   |                   |   | 11,216  |  | 4.49  | %
|Non-taxable (2)                                       |  |                           | 97,113    |   |          |   | 2,536             |  | 5.25 | %              |  |   | 92,020    |   |                   |   | 2,334   |  | 5.11  | %
|Trading assets                                        |  |                           | 4,395     |   |          |   | 43                |  | 1.94 | %              |  |   | 145       |   |                   |   | 5       |  | 7.16  | %
|Federal funds sold                                    |  |                           | 5,291     |   |          |   | 66                |  | 2.53 | %              |  |   | 18,471    |   |                   |   | 422     |  | 4.61  | %
|Deposits in financial institutions                    |  |                           | 723       |   |          |   | 8                 |  | 2.26 | %              |  |   | 1,036     |   |                   |   | 24      |  | 4.61  | %
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Total interest-earning assets                         |  |                           | 4,263,631 |   |          |   | 139,777           |  | 6.59 | %              |  |   | 3,820,116 |   |                   |   | 140,881 |  | 7.44  | %
|                                                      |  |                           |           |   |          |  
|Noninterest-earning assets:                           |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Cash and due from banks                               |  |                           | 98,061    |   |          |   |                   |  |      |                |  |   | 114,133   |   |                   |   |         |  |       |  
|Premises and equipment, net                           |  |                           | 38,690    |   |          |   |                   |  |      |                |  |   | 24,641    |   |                   |   |         |  |       |  
|Other assets                                          |  |                           | 354,544   |   |          |   |                   |  |      |                |  |   | 298,125   |   |                   |   |         |  |       |  
|Allowance for loan losses                             |  |                           | (34,485   | ) |          |   |                   |  |      |                |  |   | (32,720   | ) |                   |   |         |  |       |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Total noninterest-earning assets                      |  |                           | 456,810   |   |          |   |                   |  |      |                |  |   | 404,179   |   |                   |   |         |  |       |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Total assets                                          |  | $                         | 4,720,441 |   |          |   |                   |  |      |                |  | $ | 4,224,295 |   |                   |   |         |  |       |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Interest-bearing liabilities:                         |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Deposits:                                             |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Demand and savings                                    |  | $                         | 1,424,169 |   |          | $ | 9,504             |  | 1.34 | %              |  | $ | 1,273,383 |   |                   | $ | 13,644  |  | 2.16  | %
|Certificates and other time                           |  |                           | 1,091,002 |   |          |   | 20,639            |  | 3.80 | %              |  |   | 1,136,877 |   |                   |   | 26,272  |  | 4.66  | %
|Other borrowed funds                                  |  |                           | 459,351   |   |          |   | 5,761             |  | 2.52 | %              |  |   | 142,041   |   |                   |   | 3,752   |  | 5.33  | %
|Subordinated debt                                     |  |                           | 49,392    |   |          |   | 1,896             |  | 7.72 | %              |  |   | 46,179    |   |                   |   | 2,312   |  | 10.10 | %
|Junior subordinated debt                              |  |                           | 82,734    |   |          |   | 2,984             |  | 7.25 | %              |  |   | 70,772    |   |                   |   | 2,889   |  | 8.23  | %
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Total interest-bearing liabilities                    |  |                           | 3,106,648 |   |          |   | 40,784            |  | 2.64 | %              |  |   | 2,669,252 |   |                   |   | 48,869  |  | 3.69  | %
|                                                      |  |                           |           |   |          |  
|Noninterest-bearing sources:                          |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Demand deposits                                       |  |                           | 1,068,426 |   |          |   |                   |  |      |                |  |   | 1,070,185 |   |                   |   |         |  |       |  
|Other liabilities                                     |  |                           | 46,832    |   |          |   |                   |  |      |                |  |   | 50,946    |   |                   |   |         |  |       |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Total noninterest-bearing liabilities                 |  |                           | 1,115,258 |   |          |   |                   |  |      |                |  |   | 1,121,131 |   |                   |   |         |  |       |  
|                                                      |  |                           |           |   |          |  
|Shareholders equity                                  |  |                           | 498,535   |   |          |   |                   |  |      |                |  |   | 433,912   |   |                   |   |         |  |       |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Total liabilities and shareholders equity            |  | $                         | 4,720,441 |   |          |   |                   |  |      |                |  | $ | 4,224,295 |   |                   |   |         |  |       |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Tax equivalent net interest income and margin (2) (3) |  |                           |           |   |          |   | 98,993            |  | 4.67 | %              |  |   |           |   |                   |   | 92,012  |  | 4.86  | %
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Tax equivalent adjustment:                            |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Loans                                                 |  |                           |           |   |          |   | 33                |  |      |                |  |   |           |   |                   |   | 41      |  |       |  
|Securities                                            |  |                           |           |   |          |   | 720               |  |      |                |  |   |           |   |                   |   | 604     |  |       |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Total tax equivalent adjustment                       |  |                           |           |   |          |   | 753               |  |      |                |  |   |           |   |                   |   | 645     |  |       |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Net interest income                                   |  |                           |           |   |          | $ | 98,240            |  |      |                |  |   |           |   |                   | $ | 91,367  |  |       |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  



|(1) | For the purpose of calculating loan yields, average loan balances include nonaccrual loans with no related interest income.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(2) | Taxable-equivalent adjustments are the result of increasing income from nontaxable loans and securities by an amount equal to the taxes that would be paid if the income were fully
taxable based on a 35% federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The net interest margin is equal to net interest income divided by average total interest-earning assets.
|--- | ---------------------------------------------------------------------------------------------------------



27



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##### Table of Contents

Noninterest Income  Noninterest income consisted of the following (in thousands):



|                                 |  |                                     |        |                                   |   |       |  |      |        |  |   |       
|-------------------------------- |  | ----------------------------------- | ------ | --------------------------------- | - | ----- |  | ---- | ------ |  | - | ------
|                                 |  | For the Three Months Ended June 30, |        | For the Six Months Ended June 30,
|                                 |  | 2008                                |        | 2007                              |   | 2008  |  | 2007
|Customer service fees            |  | $                                   | 4,148  |                                   | $ | 3,431 |  | $    | 8,024  |  | $ | 6,903 
|Net gain on the sale of loans    |  |                                     | 50     |                                   |   | 73    |  |      | 356    |  |   | 577   
|Bank owned life insurance        |  |                                     | 937    |                                   |   | 821   |  |      | 1,761  |  |   | 1,617 
|Wealth and asset management fees |  |                                     | 2,363  |                                   |   | 672   |  |      | 4,701  |  |   | 1,284 
|Debit card income                |  |                                     | 679    |                                   |   | 588   |  |      | 1,268  |  |   | 1,114 
|FHLB stock dividends             |  |                                     | 116    |                                   |   | 177   |  |      | 232    |  |   | 417   
|Other                            |  |                                     | 2,577  |                                   |   | 1,756 |  |      | 5,243  |  |   | 3,540 
|                                 |  |                                     |        |                                   |   |       |  |      |        |  |   |       
|Total                            |  | $                                   | 10,870 |                                   | $ | 7,518 |  | $    | 21,585 |  | $ | 15,452
|                                 |  |                                     |        |                                   |   |       |  |      |        |  |   |       

Total noninterest income for the three and six month periods ended June 30, 2008 increased $3.4 million and
$6.1 million, respectively, compared to the same periods in 2007. The overall increase in noninterest income has allowed us to diversify our income as a percentage of total revenue from 14% for the six months ended June 30, 2007 to 20% for the
same period in 2008. Details of the changes in the various components of noninterest income are discussed below.

Customer service fees for the three and
six months ended June 30, 2008 increased $717 thousand and $1.1 million, respectively, compared to the same periods in 2007. These increases can be partly attributed to the lower earnings credit rate on our commercial deposit accounts on
analysis, which is a direct result of lower short-term interest rates.

Net gain on the sale of loans decreased $23 thousand and $221 thousand for the
three and six months ended June 30, 2008, respectively, compared to the same periods in 2007. These decreases in gain on sale of loans were due to a decline in loan sale activity. During the first quarter of 2007, we sold approximately $20
million of performing commercial real estate loans as part of our ongoing management of the size, concentration, and risk profile of the commercial real estate portfolio for a net gain of $362 thousand.

Wealth and asset management fees increased $1.7 million and $3.4 million for the three and six months ended June 30, 2008, respectively, compared to the same
periods in 2007. These increases were due primarily to the addition of MBM Advisors in June of 2007.

Other noninterest income increased $821 thousand and
$1.7 million for the three and six months ended June 30, 2008, respectively, compared to the same periods in 2007. These increases were due primarily to an increase in lending fees of $520 thousand and $979 thousand for the three and six months
ended June 30, 2008, respectively. In addition, we received $323 thousand from the mandatory redemption of some of our shares of Visa, Inc. related to Visa Inc.s Initial Public Offering during the first quarter of 2008.

Noninterest Expense  Noninterest expense consisted of the following (in thousands):



|                                                                          |  |                                     |        |      |                                   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------- |  | ----------------------------------- | ------ | ---- | --------------------------------- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                          |  | For the Three Months Ended June 30, |        |      | For the Six Months Ended June 30, |       
|                                                                          |  | 2008                                |        | 2007 |                                   |        | 2008 |  |   | 2007   |  
|Salaries and employee benefits                                            |  | $                                   | 20,865 |      | $                                 | 19,768 |      |  | $ | 41,624 |   |  | $ | 39,456 |  
|Occupancy                                                                 |  |                                     | 5,360  |      |                                   | 4,606  |      |  |   | 10,625 |   |  |   | 8,968  |  
|Technology                                                                |  |                                     | 2,305  |      |                                   | 2,095  |      |  |   | 4,635  |   |  |   | 4,144  |  
|Professional fees                                                         |  |                                     | 1,215  |      |                                   | 1,078  |      |  |   | 2,224  |   |  |   | 2,023  |  
|Postage, delivery and supplies                                            |  |                                     | 963    |      |                                   | 943    |      |  |   | 2,036  |   |  |   | 1,754  |  
|Marketing                                                                 |  |                                     | 724    |      |                                   | 581    |      |  |   | 1,137  |   |  |   | 936    |  
|Core deposit and other intangibles amortization                           |  |                                     | 586    |      |                                   | 517    |      |  |   | 1,171  |   |  |   | 937    |  
|Acquisition costs                                                         |  |                                     |       |      |                                   | 166    |      |  |   | 562    |   |  |   | 920    |  
|Net gains and carrying costs of other real estate and foreclosed property |  |                                     | 63     |      |                                   | (40    | )    |  |   | (6     | ) |  |   | (74    | )
|Other                                                                     |  |                                     | 5,627  |      |                                   | 4,628  |      |  |   | 11,088 |   |  |   | 9,112  |  
|                                                                          |  |                                     |        |      |                                   |        |      |  |   |        |   |  |   |        |  
|Total                                                                     |  | $                                   | 37,708 |      | $                                 | 34,342 |      |  | $ | 75,096 |   |  | $ | 68,176 |  
|                                                                          |  |                                     |        |      |                                   |        |      |  |   |        |   |  |   |        |  



28



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##### Table of Contents

Total noninterest expense for the three and six month periods ended June 30, 2008 increased $3.4 million and $6.9
million, respectively, compared to the same periods in 2007. These increases were primarily due to the three acquisitions completed since the second quarter of 2007, which contributed $2.5 million and $5.1 million in noninterest expense for the
three and six month periods ended June 30, 2008, respectively. Details of the changes in the various components of noninterest expense are discussed below.

Salaries and employee benefits for the three and six month periods ended June 30, 2008 increased $1.1 million and $2.2 million, respectively, compared to the same periods in 2007. These increases were primarily due to three
acquisitions completed since the second quarter of 2007. Combined, these acquisitions resulted in additional salaries and benefits of approximately $1.5 million and $2.9 million for the three and six month periods ended June 30, 2008,
respectively. Excluding acquisitions, we were able to reduce overall salaries and benefits due to the management and modification of certain perquisite benefit programs.

Occupancy expense for the three and six month periods ended June 30, 2008 increased $754 thousand or 16% and $1.7 million or 18%, respectively, compared to the same periods in 2007. Since the first quarter of
2007, we have added fourteen banking centers in conjunction with the Partners Bank and First Horizon branch acquisitions.

Technology expense increased
$210 thousand or 10% and $491 thousand or 12% for the three and six month periods ended June 30, 2008, respectively, compared to the same periods in 2007. These increases were due, in part, to three acquisitions completed since the first
quarter of 2007 which contributed approximately $99 thousand and $234 thousand for the three and six months ended June 30, 2008, respectively. In addition, depreciation increased associated with additional hardware and customer products
including an upgrade in the Banks deposit system in 2006 and 2007.

During the first quarter of 2008, we recorded $562 thousand in
acquisition-related expenses incurred in connection with the First Horizon branch acquisition. During the first six months of 2007, we incurred acquisition costs of $920 thousand in connection with the acquisitions of Partners Bank and MBM Advisors,
Inc. Acquisition expenses include retention bonuses and data processing costs related to the conversion of computer systems.

Other noninterest expense
increased $999 thousand and $2.0 million for the three and six month periods ended June 30, 2008, respectively, compared to the same periods in 2007. These increases were due, in part, to an increase in FDIC assessment rates which were enacted
in 2007 resulting in additional expense of $496 thousand and $1.0 million for the three and six month periods ended June 30, 2008, respectively.

Income Taxes  We provided $4.9 million and $10.5 million for federal and state income taxes during the three and six month periods ended June 30, 2008, respectively, and $5.9 million and $12.3 million and for the
same periods in 2007. The effective tax rate was approximately 32% for the three and six month periods ended June 30, 2008 as compared to 31% and 33% for the same periods in 2007, respectively. The effective tax rate for the second quarter of
2007 was reduced as a result of an amendment to the Texas Margin Tax rules passed during the second quarter of 2007 that resulted in an overall reduction of approximately $350 thousand in state taxes, which we had previously recorded in the first
quarter of 2007.

FINANCIAL CONDITION

Loans Held
for Investment  The following table summarizes our loan portfolio by type, excluding loans held for sale (dollars in thousands):



|                                |  |               |           |   |                   |   |        |   |           |  |       |  
|------------------------------- |  | ------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                |  | June 30, 2008 |           |   | December 31, 2007 |  
|                                |  | Amount        |           | % |                   |   | Amount |   | %         | 
|Commercial and industrial       |  | $             | 990,045   |   | 27.9              | % |        | $ | 912,604   |  | 27.3  | %
|Real estate:                    |  |               |           |   |                   |   |        |   |           |  |       |  
|Commercial                      |  |               | 1,471,682 |   | 41.5              | % |        |   | 1,387,014 |  | 41.5  | %
|Construction                    |  |               | 728,217   |   | 20.7              | % |        |   | 714,600   |  | 21.4  | %
|Residential mortgage            |  |               | 258,552   |   | 7.3               | % |        |   | 226,033   |  | 6.8   | %
|Consumer/other                  |  |               | 73,824    |   | 2.1               | % |        |   | 75,626    |  | 2.3   | %
|Foreign loans                   |  |               | 20,674    |   | 0.5               | % |        |   | 23,960    |  | 0.7   | %
|                                |  |               |           |   |                   |   |        |   |           |  |       |  
|Total loans held for investment |  | $             | 3,542,994 |   | 100.0             | % |        | $ | 3,339,837 |  | 100.0 | %
|                                |  |               |           |   |                   |   |        |   |           |  |       |  

At June 30, 2008, loans held for investment were $3.5 billion, an increase of $203 million or 6.1% over loans
held for investment at December 31, 2007. Loans acquired as a result of the First Horizon branch acquisition on February 8, 2008 totaled $54.6 million. The remaining increase in loans was primarily due to internal loan growth.



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Our primary lending focus is commercial loans and owner-occupied real estate loans to businesses with annual sales
ranging up to $100 million. Typically, our customers have financing requirements between $50 thousand and $5 million. At June 30, 2008, commercial real estate loans and commercial and industrial loans were 41.5% and 27.9%, respectively, of
loans held for investment.

We make commercial loans primarily to small and medium-sized businesses and to professionals. Commercial loan products include
revolving lines of credit, letters of credit, working capital loans, loans to finance accounts receivable and inventory and equipment finance leases. Commercial loans typically have floating rates of interest and are for varying terms (generally not
exceeding three years). In most instances, these loans are personally guaranteed by the business owner and are secured by accounts receivable, inventory and/or other business assets. In addition to the commercial loans secured solely by non-real
estate business assets, we make commercial loans that are secured by owner-occupied real estate, as well as other business assets.

Our Capital Markets
group originates, co-originates or purchases first-lien, commercial real estate mortgage loans referred by other financial institutions nationwide. These loans generally have low loan-to-value ratios (below 60%) and many have a U.S. Small
Business Administration second lien behind our first lien. We utilize real estate appraisers familiar with the geographic region in which the property is located in evaluating potential loans. These appraisals are reviewed by a third-party
appraisal review vendor for accuracy and compliance with our underwriting standards and banking regulations. These loans supplement our growth in our niche market segment, small to medium-sized businesses.

As of June 30, 2008, there was no concentration of loans to any one industry exceeding 10% of total loans nor were there any loans classified as highly leveraged
transactions. Our largest concentration in any single industry is in our energy portfolio. At June 30, 2008 our energy portfolio totaled $337 million which represents approximately 9.5% of total loans held for investment. Our energy portfolio
consists primarily of upstream companies. The energy lending group participates in shared national credits, which are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. The
energy lending group is the only group that consistently participates in shared national credits.

At June 30, 2008, loans held for investment were
95.9% of deposits and 72.2% of total assets. Loans held for investment were 90.9% of deposits and 73.6% of total assets at December 31, 2007.

Loans Held for Sale  Loans held for sale totaled $113 million at June 30, 2008, as compared with $78.4 million at December 31, 2007. Loans held for sale include the guaranteed portion of Small Business
Administration (SBA) loans originated by the Bank and loans originated as part of the Banks Capital Markets group. Due to the timing of the purchases and sales of SBA and other loans to investors, the balance of loans in the held for sale
category at any given time may vary.

Loans are classified as held for sale when management has positively determined that the loans will be sold in the
foreseeable future and the Company has the ability to do so. The classification may be made upon origination or subsequent to the origination or purchase. Once a decision has been made to sell loans not previously classified as held for sale, such
loans are transferred into the held for sale classification and carried at the lower of cost or fair value.



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Securities  Our securities portfolio at June 30, 2008 totaled $744 million as compared to $657
million at December 31, 2007, an increase of $87.2 million or 13.3%.

Net unrealized losses on the available-for-sale securities were $5.5 million at
June 30, 2008 as compared to $2.7 million at December 31, 2007. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because we have the ability and intent to hold those investments
until a recovery of fair value, which may be at maturity, we do not consider those investments to be other-than-temporarily impaired at June 30, 2008.

Deposits  The following table summarizes our deposit portfolio by type (dollars in thousands):



|                                     |  |               |           |   |                   |   |        |   |           |  |       |  
|------------------------------------ |  | ------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                     |  | June 30, 2008 |           |   | December 31, 2007 |  
|                                     |  | Amount        |           | % |                   |   | Amount |   | %         | 
|Noninterest-bearing demand           |  | $             | 1,135,296 |   | 30.7              | % |        | $ | 1,092,210 |  | 29.7  | %
|Interest-bearing demand              |  |               | 1,409,220 |   | 38.1              | % |        |   | 1,403,227 |  | 38.3  | %
|Certificates and other time deposits |  |               |           |   |                   |   |        |   |           |  |       |  
|Jumbo                                |  |               | 674,891   |   | 18.4              | % |        |   | 756,980   |  | 20.6  | %
|Regular                              |  |               | 318,762   |   | 8.6               | % |        |   | 332,206   |  | 9.0   | %
|Brokered                             |  |               | 156,166   |   | 4.2               | % |        |   | 89,088    |  | 2.4   | %
|                                     |  |               |           |   |                   |   |        |   |           |  |       |  
|Total deposits                       |  | $             | 3,694,335 |   | 100.0             | % |        | $ | 3,673,711 |  | 100.0 | %
|                                     |  |               |           |   |                   |   |        |   |           |  |       |  

Total deposits as of June 30, 2008 increased $20.6 million to $3.7 billion, up 1.0% compared to $3.7 billion
at December 31, 2007. Deposits acquired in the First Horizon branch acquisition on February 8, 2008 totaled $85.3 million. At June 30, 2008, certificate and other time deposits decreased $28.5 million since December 31, 2007, due
to managements decision to allow certain higher priced certificates of deposit to mature and be replaced by lower cost borrowings. The percentage of interest-bearing and noninterest-bearing demand deposits to total deposits as of June 30,
2008 was 38.1% and 30.7%, respectively, and our loan to deposit ratio increased to 99.0%.

Other Borrowed Funds  As of June 30,
2008, we had $521 million in other borrowings compared to $197 million at December 31, 2007, an increase of $324 million. Our primary source of other borrowings is the Federal Home Loan Bank (FHLB). At June 30, 2008, borrowings
under FHLB advances totaled $384 million with an average interest rate of 2.5%. At June 30, 2008, we had $40.0 million of FHLB advances that mature in ten years and $500 thousand of FHLB advances that mature in three years. The remaining $343
million advances had maturities of fewer than five days. We utilize these borrowings to meet liquidity needs. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits.

We have federal funds purchased at correspondent banks that typically mature within one to ninety days. As of June 30, 2008, federal funds
outstanding with correspondent banks were $78.5 million and payable upon demand.

Securities sold under agreements to repurchase represent the purchase of
interests in securities by banking customers and structured repurchase agreements with other financial institutions. At June 30, 2008 and December 31, 2007, we had securities sold under agreements to repurchase with banking customers of
$9.4 million and $422 thousand, respectively. Structured repurchase agreements totaled $50.0 million at June 30, 2008 and consisted of agreements with two separate financial institutions totaling $25.0 million, each that will mature in 2015.
The rate on these repurchase agreements was 1.70% and 1.81%, respectively, at June 30, 2008. There were no structured repurchase agreements outstanding on December 31, 2007.

ASSET QUALITY

Risk Elements  Our nonperforming and past due loans are substantially
collateralized by assets, with any excess of loan balances over collateral values specifically allocated in the allowance for loan losses. On an ongoing basis, we receive updated appraisals on loans secured by real estate, particularly those
categorized as nonperforming loans and potential problem loans. In those instances where updated appraisals reflect reduced collateral values, an evaluation of the borrowers overall financial condition is made to determine the need, if any,
for possible write-downs or appropriate additions to the allowance for loan losses.



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Nonperforming assets consisted of the following (in thousands):



|                                          |  |              |        |   |                  |   |        |  
|----------------------------------------- |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                                          |  | June 30,2008 |        |   | December 31,2007 |  
|Nonperforming loans:                      |  |              |        |   |                  |   |        |  
|Nonaccrual                                |  | $            | 48,921 |   |                  | $ | 19,445 |  
|Restructured                              |  |              |       |   |                  |   | 769    |  
|Real estate acquired by foreclosure       |  |              | 4,293  |   |                  |   | 3,683  |  
|Other repossessed assets                  |  |              | 118    |   |                  |   | 152    |  
|                                          |  |              |        |   |                  |   |        |  
|Total nonperforming assets                |  | $            | 53,332 |   |                  | $ | 24,049 |  
|                                          |  |              |        |   |                  |   |        |  
|                                          |  |             
|Accruing loans past due 90 days or more   |  | $            | 2,224  |   |                  | $ | 1,304  |  
|                                          |  |              |        |   |                  |   |        |  
|                                          |  |             
|Nonperforming loans to period-end loans   |  |              | 1.34   | % |                  |   | 0.59   | %
|Nonperforming assets to period-end assets |  |              | 1.09   | % |                  |   | 0.53   | %

Nonperforming assets were $53.3 million at June 30, 2008, a $29.3 million increase from December 31,
2007 primarily due to one large credit relationship of $20.0 million that negatively impacted us at the end of the quarter. The borrower is an energy related business and the relationship is part of a shared national credit. The borrower filed for
Chapter 11 bankruptcy protection in July 2008. As a result, we recorded approximately $3.7 million of additional provision in the second quarter and $20.0 million in additional nonperforming loans. During the third quarter of 2008, we funded
additional proceeds of $9.2 million to this borrower increasing our overall exposure to $29.2 million. We estimate approximately $600 thousand of provision will be recorded in the third quarter of 2008 related to this increased exposure.

Accruing loans past due 90 days or more at June 30, 2008 totaled $2.2 million, up $920 thousand compared to $1.3 million at December 31, 2007.

Allowance for Credit Losses The allowance for credit losses and the related provision for credit losses are determined based on the historical
credit loss experience, changes in the loan portfolio, including size, mix and risk of the individual loans, and current economic conditions. We monitor economic conditions in our local market areas and the probable impact on borrowers, on past-due
amounts, on related collateral values, on the number and size of the non-performing loans and on the resulting amount of charges-offs for the period.

The provision for credit losses for the three and six months ended June 30, 2008 was $8.2 million and $12.3 million, respectively, as compared to $1.0 million and $1.4 million for the same periods in 2007. This increase in provision
was due in part to one commercial credit relationship totaling $20.0 million which resulted in additional provision of approximately $3.7 million. Net charge-offs were $2.2 million or 0.24% (annualized) and $5.1 million or 0.29% (annualized) of
average loans for the three and six months ended June 30, 2008, respectively, compared to $1.0 million or 0.13% (annualized) and $1.4 million or $0.09% (annualized) of average loans for the same periods in 2007. Net charge-offs increased $1.2
million and $3.7 million for the three and six months ended June 30, 2008, respectively, compared to the same periods in 2007. Of the $5.1 million in net charge-offs recorded for the six months ended June 30, 2008, approximately one
million was related to a single borrowing relationship. We have liquidated our collateral and are pursuing legal action against the guarantor for the deficiency. During the six month period ended June 30, 2008, we also took charge-offs on
several older nonperforming loans which we sold as part of a clean-up effort. During this process, we identified a few isolated nonperforming credits where we no longer had an ongoing relationship with the borrower.

The allowance for loan losses at June 30, 2008 was $41.7 million and represented 1.14% of total loans. The allowance for loan losses at June 30, 2008 was
85.14% of nonperforming loans, down from 170.41% at December 31, 2007. The reserve for unfunded lending commitments remained unchanged at $927 thousand as of June 30, 2008 and December 31, 2007.



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The following table presents an analysis of the allowance for credit losses and other related data (dollars in
thousands):



|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                  |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                  |  | 2008                       |        |   | 2007                     |   |        | 2008 |  |   | 2007   |  
|Allowance for loan losses at beginning of period                  |  | $                          | 35,681 |   |                          | $ | 33,487 |      |  | $ | 34,446 |   |  | $ | 32,027 |  
|Charge-offs:                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Commercial, financial, and industrial                             |  |                            | 2,210  |   |                          |   | 1,316  |      |  |   | 3,931  |   |  |   | 1,851  |  
|Real estate, mortgage and construction                            |  |                            | 252    |   |                          |   | 166    |      |  |   | 1,733  |   |  |   | 286    |  
|Consumer                                                          |  |                            | 351    |   |                          |   | 279    |      |  |   | 654    |   |  |   | 604    |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total charge-offs                                                 |  |                            | 2,813  |   |                          |   | 1,761  |      |  |   | 6,318  |   |  |   | 2,741  |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Recoveries:                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Commercial, financial, and industrial                             |  |                            | 477    |   |                          |   | 541    |      |  |   | 829    |   |  |   | 947    |  
|Real estate, mortgage and construction                            |  |                            | 23     |   |                          |   | 34     |      |  |   | 84     |   |  |   | 36     |  
|Consumer                                                          |  |                            | 116    |   |                          |   | 149    |      |  |   | 293    |   |  |   | 315    |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total recoveries                                                  |  |                            | 616    |   |                          |   | 724    |      |  |   | 1,206  |   |  |   | 1,298  |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net charge-offs                                                   |  |                            | 2,197  |   |                          |   | 1,037  |      |  |   | 5,112  |   |  |   | 1,443  |  
|Allowance for credit losses associated with acquired institutions |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   | 1,496  |  
|Provision for loan losses                                         |  |                            | 8,167  |   |                          |   | 1,000  |      |  |   | 12,317 |   |  |   | 1,370  |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Allowance for loan losses at end of period                        |  |                            | 41,651 |   |                          |   | 33,450 |      |  |   | 41,651 |   |  |   | 33,450 |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Reserve for unfunded loan commitments at beginning of period      |  |                            | 927    |   |                          |   | 927    |      |  |   | 927    |   |  |   | 927    |  
|Provision for losses on unfunded loan commitments                 |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Reserve for unfunded loan commitments at end of period            |  |                            | 927    |   |                          |   | 927    |      |  |   | 927    |   |  |   | 927    |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total allowance for credit losses                                 |  | $                          | 42,578 |   |                          | $ | 34,377 |      |  | $ | 42,578 |   |  | $ | 34,377 |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                                  |  |                            |        |  
|Period-end allowance for credit losses to period-end loans        |  |                            | 1.16   | % |                          |   | 1.03   | %    |  |   | 1.16   | % |  |   | 1.03   | %
|Period-end allowance for loan losses to period-end loans          |  |                            | 1.14   | % |                          |   | 1.01   | %    |  |   | 1.14   | % |  |   | 1.01   | %
|Period-end allowance for loan losses to nonperforming loans       |  |                            | 85.14  | % |                          |   | 287.52 | %    |  |   | 85.14  | % |  |   | 287.52 | %
|Nonperforming loans to period-end loans                           |  |                            | 1.34   | % |                          |   | 0.35   | %    |  |   | 1.34   | % |  |   | 0.35   | %
|Nonperforming assets to period-end assets                         |  |                            | 1.09   | % |                          |   | 0.34   | %    |  |   | 1.09   | % |  |   | 0.34   | %
|Net charge-offs to average loans (annualized)                     |  |                            | 0.24   | % |                          |   | 0.13   | %    |  |   | 0.29   | % |  |   | 0.09   | %

INTEREST RATE SENSITIVITY

We manage interest rate risk by positioning the balance sheet to maximize net interest income while maintaining an acceptable level of risk, remaining mindful of the relationship between profitability, liquidity and
interest rate risk. The overall interest rate risk position and strategies for the management of interest rate risk are reviewed by senior management, the Asset/Liability Management Committee and our Board of Directors on an ongoing basis.

We measure interest rate risk using a variety of methodologies including, but not limited to, dynamic simulation analysis and static balance sheet rate
shocks. Dynamic simulation analysis is the primary tool used to measure interest rate risk and allows us to model the effects of non-parallel movements in multiple yield curves, changes in borrower and depositor behaviors, changes in loan and
deposit pricing, and changes in loan and deposit portfolio compositions and growth rates over a 24-month horizon.

We utilize static balance sheet rate
shocks to estimate the potential impact on net interest income of changes in interest rates under various rate scenarios. This analysis estimates a percentage of change in these metrics from the stable rate base scenario versus alternative scenarios
of rising and falling market interest rates by instantaneously shocking a static balance sheet. The following table summarizes the simulated change over a 12-month horizon as of June 30, 2008 and December 31, 2007:



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|                                       |  |                                         |  
|-------------------------------------- |  | --------------------------------------- | -
|Changes inInterest Rates(Basis Points) |  | Increase(Decrease) inNet InterestIncome |  
|June 30, 2008                          |  |                                         |  
|+200                                   |  | -1.13                                   | %
|+100                                   |  | -0.09                                   | %
|Base                                   |  | 0.00                                    | %
|-100                                   |  | -0.68                                   | %
|                                       | 
|December 31, 2007                      |  |                                         |  
|+200                                   |  | -0.26                                   | %
|+100                                   |  | -0.08                                   | %
|Base                                   |  | 0.00                                    | %
|-100                                   |  | -0.56                                   | %

Each rate scenario reflects unique prepayment and repricing assumptions. Because of uncertainties related to
customer behaviors, loan and deposit pricing levels, competitor behaviors, and socio-economic factors that could effect the shape of the yield curve, this analysis is not intended to and does not provide a precise forecast of the effect actual
changes in market rates will have on us. The interest rate sensitivity analysis includes assumptions that (i) the composition of our interest sensitive assets and liabilities existing at period-end will remain constant over the measurement
period; and (ii) changes in market rates are parallel and instantaneous across the yield curve regardless of duration or repricing characteristics of specific assets or liabilities. Further, this analysis does not contemplate any actions that
we might undertake in response to changes in market factors. Accordingly, this analysis is not intended to and does not provide a precise forecast of the effect actual changes in market rates may have on us.

CAPITAL AND LIQUIDITY

CapitalAt June 30,
2008, shareholders equity totaled $495 million or 10.1% of total assets, as compared to $480 million or 10.6% of total assets at December 31, 2007. Our risk-based capital ratios together with the minimum capital amounts and ratios at
June 30, 2008 were as follows (dollars in thousands):



|                                         |  |        |         |       |                                      |   |        |   |         |  |     |  
|---------------------------------------- |  | ------ | ------- | ----- | ------------------------------------ | - | ------ | - | ------- |  | --- | -
|                                         |  | Actual |         |       | For Minimum CapitalAdequacy Purposes |  
|                                         |  | Amount |         | Ratio |                                      |   | Amount |   | Ratio   | 
|Total capital (to risk weighted assets)  |  | $      | 488,218 |       | 11.7                                 | % |        | $ | 333,862 |  | 8.0 | %
|Tier 1 capital (to risk weighted assets) |  |        | 381,589 |       | 9.1                                  | % |        |   | 166,931 |  | 4.0 | %
|Tier 1 capital (to average assets)       |  |        | 381,589 |       | 8.2                                  | % |        |   | 186,081 |  | 4.0 | %

See Note 16 to our Consolidated Financial Statements for further discussion of regulatory capital requirements.

Liquidity  The objectives of our liquidity management is to maintain our ability to meet day-to-day deposit withdrawals and other
payment obligations, to raise funds to support asset growth, to maintain reserve requirements and otherwise operate on an ongoing basis. We strive to manage a liquidity position sufficient to meet operating requirements while maintaining an
appropriate balance between assets and liabilities to meet the expectations of our shareholders. In recent years, our liquidity needs have primarily been met by growth in deposits including brokered certificates of deposit. In addition to deposits,
we have access to funds from correspondent banks and from the Federal Home Loan Bank, supplemented by amortizing securities and loan portfolios. For more information regarding liquidity, please refer to our 2007 Annual Report on Form 10-K.

Sterling Bancshares must provide for its own liquidity and fund its own obligations. The primary source of Sterling Bancshares revenues is from
dividends declared by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to Sterling Bancshares. At June 30, 2008, the aggregate amount of dividends, which legally could be paid
without prior approval of various regulatory agencies, totaled $66.6 million. It is not anticipated that such restrictions will have an impact on our ability to meet our ongoing cash obligations.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|------- | -----------------------------------------------------------

There
have been no material changes in market risk we face since December 31, 2007. For information regarding the market risk of our financial instruments, see Managements Discussion and Analysis of Financial Condition and Results of
Operations  Interest Rate Sensitivity. Our principal market risk exposure is to interest rates.



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|ITEM 4. | CONTROLS AND PROCEDURES.
|------- | ------------------------

Evaluation of Disclosure Controls
and Procedures  We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as amended (the Exchange Act), that are designed to provide
reasonable assurance that information required to be disclosed by us in the reports that we file, furnish or submit to the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified by the Commissions rules and forms, and that information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding
required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, such officers have concluded that the design and operation of these disclosure controls and procedures were effective.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the most
recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS.
|------- | ------------------

None.



|ITEM 1A. | RISK FACTORS.
|-------- | -------------

Information regarding risk factors appears in
Managements Discussion and Analysis of Financial Condition and Results of OperationsForward-Looking Statements, in Part IItem 2 of this Form 10-Q and in Part IItem 1A of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|------- | ------------------------------------------------------------

On
July 30, 2007, the Companys Board of Directors amended its existing common stock repurchase program (the Program) originally adopted by the Board on April 26, 2005. The aggregate number of shares originally approved by
the Board for repurchase under the Program remains unchanged at 3,750,000 shares. The Company may repurchase shares of common stock from time to time in the open market or through privately negotiated transactions from available cash or other
borrowings. No shares were repurchased by the Company during the three months ended June 30, 2008.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

None.



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

On
April 28, 2008, we held our 2008 Annual Meeting of Shareholders, at which meeting our Shareholders approved the following (all tabulations reflect share numbers on a post-split basis):

(a) Election of the following directors:



|                      |  |            |  |          
|--------------------- |  | ---------- |  | ---------
|Class III Directors   |  | FOR        |  | WITHHELD 
|George Beatty, Jr.    |  | 58,535,506 |  | 4,375,825
|Anat Bird             |  | 54,748,666 |  | 8,162,665
|J. Downey Bridgwater  |  | 58,097,394 |  | 4,813,937
|Roland Rodriguez      |  | 58,678,253 |  | 4,235,078
|Elizabeth C. Williams |  | 58,653,862 |  | 4,257,469



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The terms of directors Edward R. Bardgett, Bruce J. Harper, Bernard A. Harris, Jr., MD, David L. Hatcher,
Glenn H. Johnson, R. Bruce LaBoon, G. Edward Powell, Raimundo Riojas E. and Dan C. Tutcher continued beyond the 2008 Annual Meeting of Shareholders.

(b) Ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2008.



|           |  |           |  |        
|---------- |  | --------- |  | -------
|FOR        |  | AGAINST   |  | ABSTAIN
|60,194,611 |  | 2,534,988 |  | 181,731



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------

None.



|ITEM 6. | EXHIBITS.
|------- | ---------



|       |  |                                                                                                                                                                   
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|11     |  | Statement Regarding Computation of Earnings Per Share (included as Note 13) to Consolidated Financial Statements on page 16 of this Quarterly Report on Form 10-Q.
|       | 
|*31.1  |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of J. Downey Bridgwater, Chairman, President and Chief Executive Officer.                 
|       | 
|*31.2  |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Zach L. Wasson, Executive Vice President and Chief Financial Officer.                  
|       | 
|**32.1 |  | Section 1350 Certification of the Chief Executive Officer.                                                                                                        
|       | 
|**32.2 |  | Section 1350 Certification of the Chief Financial Officer.                                                                                                        



|* | As filed herewith.
|- | ------------------

|** | As furnished herewith.
|-- | ----------------------



36



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##### Table of Contents

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.
|                     |  |                          
|Date: August 8, 2008 |  | By:                       |  | /s/ J. Downey Bridgwater                            
|                     |  |                           |  | J. Downey Bridgwater                                
|                     |  |                           |  | Chairman, President and Chief Executive
Officer     
|                     |  |                           |  | (Principal Executive Officer)                       
|                     |  |                          
|Date: August 8, 2008 |  | By:                       |  | /s/ Zach L. Wasson                                  
|                     |  |                           |  | Zach L. Wasson                                      
|                     |  |                           |  | Executive Vice President and Chief Financial
Officer
|                     |  |                           |  | (Principal Financial and Accounting Officer)        



37



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##### Table of Contents

EXHIBIT INDEX



|        |  |                                                                                                                                                                   
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                       
|11      |  | Statement Regarding Computation of Earnings Per Share (included as Note 13) to Consolidated Financial Statements on page 16 of this Quarterly Report on Form 10-Q.
|        | 
|*31.1   |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of J. Downey Bridgwater, Chairman, President and Chief Executive Officer.                 
|        | 
|*31.2   |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Zach L. Wasson, Executive Vice President and Chief Financial Officer.                  
|        | 
|**32.1  |  | Section 1350 Certification of the Chief Executive Officer.                                                                                                        
|        | 
|**32.2  |  | Section 1350 Certification of the Chief Financial Officer.                                                                                                        



|* | As filed herewith.
|- | ------------------

|** | As furnished herewith.
|-- | ----------------------



38