##### Table of Contents





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, 2009

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.)



|                                         |  |           
|---------------------------------------- |  | ----------
|10260 Westheimer Houston, Texas          |  | 77042     
|(Address of principal executive offices) |  | (Zip Code)

713-466-8300

(Registrants telephone number, including area code)

2550 North Loop West, Suite 600

Houston, Texas 77092

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    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   ̈             Accelerated filer  x            
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 July 31, 2009
|[Common Stock, $1.00 par value per share] |  | 81,694,096 shares           









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##### Table of Contents

STERLING BANCSHARES, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2009

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 |  | 28
|           |  |                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 44
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 44
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  |   
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 44
|           |  |                                                                                      
|Item 1A.   |  | Risk Factors                                                                          |  | 44
|           |  |                                                                                      
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 44
|           |  |                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 45
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 45
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 45
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 46
|           | 
|SIGNATURES |  | 47                                                                                   



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 30,2009 |           |   | December 31,2008 |  
|ASSETS                                                                                                                                                                                     |  |              |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                  |  | $            | 74,736    |   |                  | $ | 113,163   |  
|Available-for-sale securities, at fair value                                                                                                                                               |  |              | 766,536   |   |                  |   | 633,357   |  
|Held-to-maturity securities, at amortized cost                                                                                                                                             |  |              | 163,611   |   |                  |   | 172,039   |  
|                                                                                                                                                                                           |  |             
|Loans held for sale                                                                                                                                                                        |  |              | 1,642     |   |                  |   | 1,524     |  
|Loans held for investment                                                                                                                                                                  |  |              | 3,537,221 |   |                  |   | 3,792,290 |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total loans                                                                                                                                                                                |  |              | 3,538,863 |   |                  |   | 3,793,814 |  
|Allowance for loan losses                                                                                                                                                                  |  |              | (53,075   | ) |                  |   | (49,177   | )
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Loans, net                                                                                                                                                                                 |  |              | 3,485,788 |   |                  |   | 3,744,637 |  
|                                                                                                                                                                                           |  |             
|Premises and equipment, net                                                                                                                                                                |  |              | 50,272    |   |                  |   | 46,875    |  
|Real estate acquired by foreclosure                                                                                                                                                        |  |              | 8,095     |   |                  |   | 5,625     |  
|Goodwill                                                                                                                                                                                   |  |              | 173,210   |   |                  |   | 173,210   |  
|Core deposit and other intangibles, net                                                                                                                                                    |  |              | 12,744    |   |                  |   | 13,874    |  
|Accrued interest receivable                                                                                                                                                                |  |              | 18,189    |   |                  |   | 19,428    |  
|Other assets                                                                                                                                                                               |  |              | 159,186   |   |                  |   | 157,771   |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|TOTAL ASSETS                                                                                                                                                                               |  | $            | 4,912,367 |   |                  | $ | 5,079,979 |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|                                                                                                                                                                                           |  |             
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                       |  |              |           |   |                  |   |           |  
|LIABILITIES:                                                                                                                                                                               |  |              |           |   |                  |   |           |  
|Deposits:                                                                                                                                                                                  |  |              |           |   |                  |   |           |  
|Noninterest-bearing demand                                                                                                                                                                 |  | $            | 1,127,717 |   |                  | $ | 1,123,746 |  
|Interest-bearing demand                                                                                                                                                                    |  |              | 1,670,437 |   |                  |   | 1,523,969 |  
|Certificates and other time                                                                                                                                                                |  |              | 1,160,081 |   |                  |   | 1,171,422 |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total deposits                                                                                                                                                                             |  |              | 3,958,235 |   |                  |   | 3,819,137 |  
|Other borrowed funds                                                                                                                                                                       |  |              | 176,631   |   |                  |   | 408,586   |  
|Subordinated debt                                                                                                                                                                          |  |              | 77,028    |   |                  |   | 78,335    |  
|Junior subordinated debt                                                                                                                                                                   |  |              | 82,734    |   |                  |   | 82,734    |  
|Accrued interest payable and other liabilities                                                                                                                                             |  |              | 47,631    |   |                  |   | 48,048    |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                          |  |              | 4,342,259 |   |                  |   | 4,436,840 |  
|                                                                                                                                                                                           |  |             
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                              |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                           |  |             
|SHAREHOLDERS EQUITY:                                                                                                                                                                      |  |              |           |   |                  |   |           |  
|Preferred stock, $1 par value, 1,000,000 shares authorized, no shares issued or outstanding at June 30, 2009, 125,198 shares issued and
outstanding at December 31, 2008.                  |  |              |          |   |                  |   | 118,012   |  
|Common stock, $1 par value, 150,000,000 shares authorized, 83,552,134 and 75,127,636 issued and 81,684,634 and 73,260,136 outstanding at
June 30, 2009 and December 31, 2008, respectively |  |              | 83,552    |   |                  |   | 75,128    |  
|Capital surplus                                                                                                                                                                            |  |              | 170,708   |   |                  |   | 121,918   |  
|Retained earnings                                                                                                                                                                          |  |              | 324,619   |   |                  |   | 332,009   |  
|Treasury stock, at cost, 1,867,500 shares held at June 30, 2009 and December 31, 2008                                                                                                      |  |              | (21,399   | ) |                  |   | (21,399   | )
|Accumulated other comprehensive income, net of tax                                                                                                                                         |  |              | 12,628    |   |                  |   | 17,471    |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                                 |  |              | 570,108   |   |                  |   | 643,139   |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                 |  | $            | 4,912,367 |   |                  | $ | 5,079,979 |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  

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,
|                                                                                 |  | 2009                       |        |                          | 2008 |   | 2009   |  |   | 2008   
|Interest income:                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Loans, including fees                                                            |  | $                          | 51,691 |                          |      | $ | 60,082 |  | $ | 104,691 |   |  | $ | 123,134
|Securities:                                                                      |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Taxable                                                                          |  |                            | 8,815  |                          |      |   | 7,408  |  |   | 17,373  |   |  |   | 13,957 
|Non-taxable                                                                      |  |                            | 890    |                          |      |   | 908    |  |   | 1,790   |   |  |   | 1,816  
|Other earning assets                                                             |  |                            | 26     |                          |      |   | 54     |  |   | 32      |   |  |   | 117    
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Total interest income                                                            |  |                            | 61,422 |                          |      |   | 68,452 |  |   | 123,886 |   |  |   | 139,024
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|                                                                                 |  |                            |        |                         
|Interest expense:                                                                |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Demand and savings deposits                                                      |  |                            | 3,886  |                          |      |   | 3,889  |  |   | 7,378   |   |  |   | 9,504  
|Certificates and other time deposits                                             |  |                            | 6,503  |                          |      |   | 8,662  |  |   | 13,970  |   |  |   | 20,639 
|Other borrowed funds                                                             |  |                            | 425    |                          |      |   | 3,409  |  |   | 1,237   |   |  |   | 5,761  
|Subordinated debt                                                                |  |                            | 885    |                          |      |   | 864    |  |   | 1,864   |   |  |   | 1,896  
|Junior subordinated debt                                                         |  |                            | 1,155  |                          |      |   | 1,384  |  |   | 2,359   |   |  |   | 2,984  
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Total interest expense                                                           |  |                            | 12,854 |                          |      |   | 18,208 |  |   | 26,808  |   |  |   | 40,784 
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Net interest income                                                              |  |                            | 48,568 |                          |      |   | 50,244 |  |   | 97,078  |   |  |   | 98,240 
|Provision for credit losses                                                      |  |                            | 11,500 |                          |      |   | 8,167  |  |   | 20,500  |   |  |   | 12,317 
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Net interest income after provision for credit losses                            |  |                            | 37,068 |                          |      |   | 42,077 |  |   | 76,578  |   |  |   | 85,923 
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|                                                                                 |  |                            |        |                         
|Noninterest income:                                                              |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Customer service fees                                                            |  |                            | 3,752  |                          |      |   | 4,148  |  |   | 7,864   |   |  |   | 8,024  
|Net gain on securities                                                           |  |                            | 12     |                          |      |   |       |  |   | 27      |   |  |   |       
|Impairment loss on debt security held-to-maturity:                               |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Impairment loss on debt security held-to-maturity                                |  |                            | (2,893 | )                        |      |   |       |  |   | (2,893  | ) |  |   |       
|Noncredit-related loss on debt security recognized in other comprehensive income |  |                            | 2,879  |                          |      |   |       |  |   | 2,879   |   |  |   |       
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Net impairment loss on debt security held-to-maturity                            |  |                            | (14    | )                        |      |   |       |  |   | (14     | ) |  |   |       
|Wealth management fees                                                           |  |                            | 1,840  |                          |      |   | 2,363  |  |   | 4,042   |   |  |   | 4,701  
|Other                                                                            |  |                            | 4,903  |                          |      |   | 4,359  |  |   | 9,372   |   |  |   | 8,860  
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Total noninterest income                                                         |  |                            | 10,493 |                          |      |   | 10,870 |  |   | 21,291  |   |  |   | 21,585 
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|                                                                                 |  |                            |        |                         
|Noninterest expense:                                                             |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Salaries and employee benefits                                                   |  |                            | 24,152 |                          |      |   | 20,865 |  |   | 46,429  |   |  |   | 41,624 
|Occupancy                                                                        |  |                            | 6,168  |                          |      |   | 5,360  |  |   | 12,037  |   |  |   | 10,625 
|Technology                                                                       |  |                            | 2,475  |                          |      |   | 2,305  |  |   | 4,980   |   |  |   | 4,635  
|Professional fees                                                                |  |                            | 1,157  |                          |      |   | 1,215  |  |   | 2,354   |   |  |   | 2,224  
|Postage, delivery and supplies                                                   |  |                            | 760    |                          |      |   | 963    |  |   | 1,481   |   |  |   | 2,036  
|Marketing                                                                        |  |                            | 499    |                          |      |   | 724    |  |   | 930     |   |  |   | 1,137  
|Core deposit and other intangibles amortization                                  |  |                            | 565    |                          |      |   | 586    |  |   | 1,130   |   |  |   | 1,171  
|Acquisition costs                                                                |  |                            |       |                          |      |   |       |  |   |        |   |  |   | 562    
|FDIC insurance assessments                                                       |  |                            | 4,001  |                          |      |   | 596    |  |   | 5,233   |   |  |   | 1,201  
|Other                                                                            |  |                            | 4,244  |                          |      |   | 5,094  |  |   | 9,045   |   |  |   | 9,881  
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Total noninterest expense                                                        |  |                            | 44,021 |                          |      |   | 37,708 |  |   | 83,619  |   |  |   | 75,096 
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|                                                                                 |  |                            |        |                         
|Income before income taxes                                                       |  |                            | 3,540  |                          |      |   | 15,239 |  |   | 14,250  |   |  |   | 32,412 
|                                                                                 |  |                            |        |                         
|Provision for income taxes                                                       |  |                            | 933    |                          |      |   | 4,932  |  |   | 4,236   |   |  |   | 10,496 
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|                                                                                 |  |                            |        |                         
|Net income                                                                       |  | $                          | 2,607  |                          |      | $ | 10,307 |  | $ | 10,014  |   |  | $ | 21,916 
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|                                                                                 |  |                            |        |                         
|Preferred stock dividends                                                        |  |                            | 7,458  |                          |      |   |       |  |   | 9,342   |   |  |   |       
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Net income (loss) applicable to common shareholders                              |  | $                          | (4,851 | )                        |      | $ | 10,307 |  | $ | 672     |   |  | $ | 21,916 
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|                                                                                 |  |                            |        |                         
|Earnings (loss) per common share:                                                |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Basic                                                                            |  | $                          | (0.06  | )                        |      | $ | 0.14   |  | $ | 0.01    |   |  | $ | 0.30   
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        
|Diluted                                                                          |  | $                          | (0.06  | )                        |      | $ | 0.14   |  | $ | 0.01    |   |  | $ | 0.30   
|                                                                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |        

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 OtherComprehensiveIncome (Loss) |   |        | Total |        
|                                                                                                                 |  | Shares          |   |  | Amount       |          |   | Shares         |        |   | Amount           |   |        |                |  | Shares |                                             |   | Amount |       |         |  
|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 and losses on effective cash flow hedging derivatives, net of taxes of $548       |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       |         |   |  |        |   |  |   |         |   |  |   | 1,017  |   |  |   | 1,017    |  
|                                                                                                                 |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |          |  
|Total comprehensive income                                                                                       |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 21,098   |  
|                                                                                                                 |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |          |  
|Issuance of common stock under incentive compensation plans                                                      |  |                 |   |  |              |          |   |                | 87     |   |                  |   | 87     |                |  |        | 505                                         |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 592      |  
|Common stock issued for vested restricted stock, net of shares forfeited                                         |  |                 |   |  |              |          |   |                | 28     |   |                  |   | 28     |                |  |        | (28                                         | ) |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Stock-based compensation expense                                                                                 |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        | 1,673                                       |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 1,673    |  
|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  |  
|                                                                                                                 |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |          |  
|                                                                                                                 |  |                 |   |  |              |          |   |                |        |  
|BALANCE AT JANUARY 1, 2009                                                                                       |  | 125,198         |   |  | $            | 118,012  |   |                | 75,128 |   |                  | $ | 75,128 |                |  | $      | 121,918                                     |   |        | $     | 332,009 |   |  | (1,868 | ) |  | $ | (21,399 | ) |  | $ | 17,471 |   |  | $ | 643,139  |  
|                                                                                                                 |  |                 |   |  |              |          |   |                |        |  
|Comprehensive income:                                                                                            |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |          |  
|Net income                                                                                                       |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       | 10,014  |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 10,014   |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $1,836               |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       |         |   |  |        |   |  |   |         |   |  |   | 3,410  |   |  |   | 3,410    |  
|Net change in unrealized gains and losses on effective cash flow hedging derivatives, net of taxes of ($3,436)   |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       |         |   |  |        |   |  |   |         |   |  |   | (6,381 | ) |  |   | (6,381   | )
|Noncredit-related impairment loss on held-to-maturity security not expected to be sold, net of taxes of ($1,007) |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       |         |   |  |        |   |  |   |         |   |  |   | (1,872 | ) |  |   | (1,872   | )
|                                                                                                                 |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |          |  
|Total comprehensive income                                                                                       |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 5,171    |  
|                                                                                                                 |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |          |  
|Issuance of common stock                                                                                         |  |                 |   |  |              |          |   |                | 8,280  |   |                  |   | 8,280  |                |  |        | 46,347                                      |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 54,627   |  
|Issuance of common stock under incentive compensation plans                                                      |  |                 |   |  |              |          |   |                | 130    |   |                  |   | 130    |                |  |        | 441                                         |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 571      |  
|Common stock issued for vested restricted stock, net of shares forfeited                                         |  |                 |   |  |              |          |   |                | 26     |   |                  |   | 26     |                |  |        | (26                                         | ) |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Stock-based compensation expense                                                                                 |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        | 2,092                                       |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 2,092    |  
|Shares held in Rabbi Trust                                                                                       |  |                 |   |  |              |          |   |                | (12    | ) |                  |   | (12    | )              |  |        | (64                                         | ) |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | (76      | )
|Preferred stock redemption, accelerated dividend and amortization of preferred stock discount                    |  | (125,198        | ) |  |              | (118,012 | ) |                |        |   |                  |   |        |                |  |        |                                             |   |        |       | (7,186  | ) |  |        |   |  |   |         |   |  |   |        |   |  |   | (125,198 | )
|Preferred stock dividends paid                                                                                   |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       | (2,156  | ) |  |        |   |  |   |         |   |  |   |        |   |  |   | (2,156   | )
|Common stock dividends paid                                                                                      |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       | (8,062  | ) |  |        |   |  |   |         |   |  |   |        |   |  |   | (8,062   | )
|                                                                                                                 |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |          |  
|BALANCE AT JUNE 30, 2009                                                                                         |  |                |   |  | $            |         |   |                | 83,552 |   |                  | $ | 83,552 |                |  | $      | 170,708                                     |   |        | $     | 324,619 |   |  | (1,868 | ) |  | $ | (21,399 | ) |  | $ | 12,628 |   |  | $ | 570,108  |  
|                                                                                                                 |  |                 |   |  |              |          |   |                |        |   |                  |   |        |                |  |        |                                             |   |        |       |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |          |  

See Notes to Consolidated Financial Statements.



4



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##### Table of Contents

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



|                                                                                        |  |                          |          |   |      |   |          |  
|--------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                        |  | Six Months EndedJune 30, |         
|                                                                                        |  | 2009                     |          |   | 2008 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |  |                          |          |   |      |   |          |  
|Net income                                                                              |  | $                        | 10,014   |   |      | $ | 21,916   |  
|Adjustments to reconcile net income to net cash provided by operating activities:       |  |                          |          |   |      |   |          |  
|Amortization and accretion of premiums and discounts on securities, net                 |  |                          | 780      |   |      |   | 249      |  
|Net gain on securities                                                                  |  |                          | (27      | ) |      |   |         |  
|Credit-related other-than-temporary impairment on debt security held-to-maturity        |  |                          | 14       |   |      |   |          |  
|Net gain on loans                                                                       |  |                          | (319     | ) |      |   | (356     | )
|Provision for credit losses                                                             |  |                          | 20,500   |   |      |   | 12,317   |  
|Writedowns, less gains on sale, of real estate acquired by foreclosure                  |  |                          | 40       |   |      |   | (143     | )
|Depreciation and amortization                                                           |  |                          | 5,332    |   |      |   | 5,230    |  
|Stock-based compensation expense (net of tax benefit recognized)                        |  |                          | 1,536    |   |      |   | 1,213    |  
|Excess tax benefits from share-based payment arrangements                               |  |                          | (27      | ) |      |   | (5       | )
|Net decrease in loans held for sale                                                     |  |                          | 48       |   |      |   | 11,102   |  
|Net gain on sale of bank assets                                                         |  |                          | (198     | ) |      |   | (376     | )
|Net increase in accrued interest receivable and other assets                            |  |                          | (5,395   | ) |      |   | (13,906  | )
|Net increase (decrease) in accrued interest payable and other liabilities               |  |                          | 1,331    |   |      |   | (8,635   | )
|                                                                                        |  |                          |          |   |      |   |          |  
|Net cash provided by operating activities                                               |  |                          | 33,629   |   |      |   | 28,606   |  
|                                                                                        |  |                         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |  |                          |          |   |      |   |          |  
|Proceeds from the maturities or calls and paydowns of held-to-maturity securities       |  |                          | 12,848   |   |      |   | 9,658    |  
|Proceeds from the sale of available-for-sale securities                                 |  |                          | 2,040    |   |      |   |         |  
|Proceeds from the maturities or calls and paydowns of available-for-sale securities     |  |                          | 102,793  |   |      |   | 58,574   |  
|Purchases of available-for-sale securities                                              |  |                          | (235,153 | ) |      |   | (153,066 | )
|Purchases of held-to-maturity securities                                                |  |                          | (8,976   | ) |      |   | (5,239   | )
|Net decrease (increase) in loans held for investment                                    |  |                          | 233,751  |   |      |   | (205,512 | )
|Purchase of bank-owned life insurance                                                   |  |                          |         |   |      |   | (13,875  | )
|Proceeds from sale of real estate acquired by foreclosure                               |  |                          | 1,808    |   |      |   | 2,269    |  
|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 acquisition |  |                          |         |   |      |   | 15,301   |  
|Proceeds from sale of loans originated as held for investment                           |  |                          |         |   |      |   | 4,218    |  
|Proceeds from sale of premises and equipment                                            |  |                          | 36       |   |      |   | 140      |  
|Purchase of premises and equipment                                                      |  |                          | (7,721   | ) |      |   | (5,640   | )
|                                                                                        |  |                          |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                                     |  |                          | 101,426  |   |      |   | (295,394 | )
|                                                                                        |  |                         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                   |  |                          |          |   |      |   |          |  
|Net increase (decrease) in deposit accounts                                             |  |                          | 139,098  |   |      |   | (64,670  | )
|Net (decrease) increase in short-term other borrowed funds                              |  |                          | (231,955 | ) |      |   | 324,248  |  
|Proceeds from issuance of subordinated debt                                             |  |                          |         |   |      |   | 25,000   |  
|Proceeds from issuance of common stock under incentive compensation plans               |  |                          | 543      |   |      |   | 587      |  
|Proceeds from issuance of common stock, net of expenses                                 |  |                          | 54,627   |   |      |   |         |  
|Repurchase of common stock for Rabbi Trust                                              |  |                          | (76      | ) |      |   | (1,034   | )
|Excess tax benefits from share-based payment arrangements                               |  |                          | 27       |   |      |   | 5        |  
|Redemption of preferred stock                                                           |  |                          | (125,198 | ) |      |   |         |  
|Preferred stock dividends paid                                                          |  |                          | (2,486   | ) |      |   |         |  
|Common stock dividends paid                                                             |  |                          | (8,062   | ) |      |   | (8,054   | )
|                                                                                        |  |                          |          |   |      |   |          |  
|Net cash (used in) provided by financing activities                                     |  |                          | (173,482 | ) |      |   | 276,082  |  
|                                                                                        |  |                          |          |   |      |   |          |  
|                                                                                        |  |                         
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                    |  |                          | (38,427  | ) |      |   | 9,294    |  
|CASH AND CASH EQUIVALENTS:                                                              |  |                          |          |   |      |   |          |  
|Beginning of period                                                                     |  |                          | 113,163  |   |      |   | 133,670  |  
|                                                                                        |  |                          |          |   |      |   |          |  
|End of period                                                                           |  | $                        | 74,736   |   |      | $ | 142,964  |  
|                                                                                        |  |                          |          |   |      |   |          |  
|                                                                                        |  |                         
|Supplemental information:                                                               |  |                          |          |   |      |   |          |  
|Income taxes paid                                                                       |  | $                        | 13,500   |   |      | $ | 13,625   |  
|Interest paid                                                                           |  |                          | 28,891   |   |      |   | 21,148   |  
|Noncash investing and financing activities -                                            |  |                          |          |   |      |   |          |  
|Acquisition of real estate through foreclosure of collateral                            |  |                          | 4,318    |   |      |   | 2,736    |  

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 2008 Annual Report on Form 10-K.

The Company has evaluated subsequent events through August 6, 2009, the date the financials statements were issued.

Recent Accounting Standards

In December 2007, the Financial Accounting Standards Board (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 will apply to future acquisitions by the Company subsequent to January 1, 2009.

In March
2008, the FASB issued SFAS No. 161 (SFAS 161)Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133.SFAS 161 amends SFAS 133 Accounting for Derivative Instruments and Hedging
Activities, to amend and expand the disclosure requirements of SFAS 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under
SFAS 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entitys financial position, results of operations and cash flows. To meet those objectives, SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative
agreements. SFAS 161 became effective for the Company on January 1, 2009 and the required disclosures are reported in Note 10  Derivative Financial Instruments.

In October 2008, the FASB issued FASB Staff Position 157-3 (FSP FAS 157-3) Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP FAS 157-3 applies to
financial assets within the scope of SFAS 157. FSP FAS 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. In situations in which there is little, if any, market activity for an asset at the measurement date, the fair value measurement objective remains the same, that is, the price that would be received by
the holder of the financial asset in an orderly transaction (an exit price notion) that is not a forced liquidation or distressed sale at the measurement date. Additionally, in determining fair value for a financial asset, the use of a reporting
entitys own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. Broker (or pricing service) quotes may be an appropriate input when measuring fair
value, but they are not necessarily determinative if an active market does not exist for the financial asset. SFAS 157-3 became effective for the interim financial statements as of September 30, 2008 and did not significantly impact the
methods by which the Company determines the fair values of its financial assets. The enhanced disclosures related to FSP FAS 157-3 are included in Note 16Disclosures about Fair Value of Financial Instruments.

In April 2009, the FASB issued FASB Staff Position No. FAS 115-2, FAS 124-2 and EITF 99-20-2 (FSP FAS 115-2) Recognition and Presentation of
Other-Than-Temporary Impairments. FSP FAS 115-2 amends the other-than-temporary impairment guidance in United States Generally Accepted Accounting Principles (GAAP) for debt securities to make the guidance more operational and to
improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP FAS 115-2 does not amend existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities. FSP FAS 115-2 requires an entity to recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the noncredit component in other comprehensive income when the entity does
not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery. FSP FAS 115-2 became effective for interim and annual reporting periods ending after June 15, 2009. The
Company adopted FSP FAS 115-2 during the quarter ended June 30, 2009. As a result of the adoption of FSP FAS 115-2, $2.9 million of other-than-temporary impairment remained in other comprehensive income that would have been reported in the
income statement under prior guidance. The expanded disclosures and discussion of other-than-temporarily impaired debt securities related to FSP FAS 115-2 are included in Note 3Securities.

In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1 (FSP FAS 107-1) Interim Disclosures about Fair Value of Financial
Instruments. FSP FAS 107-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require expanded disclosures about fair value of financial instruments for interim reporting periods of publicly
traded companies as well as in annual financial statements. The expanded disclosure requirements for FSP FAS 107-1 are effective for the Companys quarterly financial statements for the three months ended June 30, 2009 and are included in
Note 16  Disclosures about Fair Value of Financial Instruments.



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##### Table of Contents

In April 2009, the FASB issued FASB Staff Position No. FAS 157-4 (FSP FAS 157-4) Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for estimating fair value in accordance with FASB Statement
No. 157 (SFAS 157), Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate a transaction is not
orderly. The Company adopted FSP FAS 157-4 on June 15, 2009. FSP FAS 157-4 did not have a significant impact on the Companys financial condition and results of operations. The enhanced disclosures related to FSP FAS 157-4 are included in
Note 16Disclosures about Fair Value of Financial Instruments.

In April 2009, the FASB issued FASB Staff Position No. FAS 141(R)-1
(FSP FAS 141R-1) Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies whereby assets acquired and liabilities assumed in a business combination that arise from
contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using
existing accounting guidance. This Statement will apply to acquisitions by the Company subsequent to January 1, 2009.

In May 2009, the FASB issued
SFAS No. 165 (SFAS 165) Subsequent Events. This standard incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards, but the rules concerning
recognition and disclosure of subsequent events will remain essentially unchanged. Subsequent events guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under SFAS 165 as under current
practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions
that did not exist at the balance sheet date. The Company adopted SFAS 165 for the quarter ended June 30, 2009 and has included the required disclosures in Note 1Accounting Policies.

In June 2009, the FASB issued SFAS No. 166 (SFAS 166) Accounting for Transfers of Financial Assetsan amendment of FASB Statement No. 140.SFAS 166 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. This Statement shall be effective for annual reporting periods that begin after November 15, 2009, for
interim periods within the first annual reporting period and for interim and annual reporting periods thereafter, with early adoption prohibited. This Statement must be applied to transfers occurring on or after the effective date. Management has
not completed its evaluation of this pronouncement; however, the Company does not expect it to be material to its financial statements.

In June 2009, the
FASB issued SFAS No. 167 (SFAS 167) Amendments to FASB Interpretation No. 46(R). SFAS 167 improves financial reporting by enterprises involved with variable interest entities. This Statement shall be effective as of the
beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter, with earlier
adoption prohibited. Management has not completed its evaluation of this pronouncement; however, the Company does not expect it to be material to its financial statements.

In June 2009, the FASB issued SFAS No. 168 (SFAS 168) The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement
No. 162 (the Codification). The Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become
nonauthoritative. FASB Statement No. 162 (SFAS 162), The Hierarchy of Generally Accepted Accounting Principles, which became effective on November 13, 2008, identified the sources of accounting principles and the
framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. Once the Codification is in effect, the GAAP hierarchy will be modified to include only two
levels of GAAP, authoritative and nonauthoritative. As a result, this Statement replaces SFAS 162 to indicate this change to the GAAP hierarchy. This Statement is effective for financial statements issued for interim and annual periods ending after
September 15, 2009. The adoption of SFAS 168 is not expected to impact the Companys accounting policies or practices. However, beginning with the Companys interim financial statements for the quarter ended September 30, 2009,
references to prior statements of financial accounting standards or other accounting pronouncements will be changed to refer to the Codification.



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|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 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 $5.3 million, of which $231 thousand and $5.1 million have been allocated to core deposits and
goodwill, respectively, 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 February 8, 2008.



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

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



|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                                    |  | June 30, 2009    
|                                                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                 | 39,905  |                      | $ | 10                    |  | $ | (472       | ) |  | $ | 39,443 
|Obligations of states of the U.S. and political subdivisions        |  |                   | 1,235   |                      |   | 32                    |  |   |           |   |  |   | 1,267  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 699,943 |                      |   | 14,499                |  |   | (2,552     | ) |  |   | 711,890
|Other securities                                                    |  |                   | 13,992  |                      |   | 191                   |  |   | (247       | ) |  |   | 13,936 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 755,075 |                      | $ | 14,732                |  | $ | (3,271     | ) |  | $ | 766,536
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                 | 96,353  |                      | $ | 1,842                 |  | $ | (313       | ) |  | $ | 97,882 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 67,258  |                      |   | 165                   |  |   | (13,705    | ) |  |   | 53,718 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 163,611 |                      | $ | 2,007                 |  | $ | (14,018    | ) |  | $ | 151,600
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|                                                                    | 
|                                                                    |  | December 31, 2008
|                                                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                 | 1,749   |                      | $ | 25                    |  | $ |           |   |  | $ | 1,774  
|Obligations of states of the U.S. and political subdivisions        |  |                   | 1,331   |                      |   | 27                    |  |   |           |   |  |   | 1,358  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 608,811 |                      |   | 8,487                 |  |   | (1,270     | ) |  |   | 616,028
|Other securities                                                    |  |                   | 15,252  |                      |   |                      |  |   | (1,055     | ) |  |   | 14,197 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 627,143 |                      | $ | 8,539                 |  | $ | (2,325     | ) |  | $ | 633,357
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                 | 95,910  |                      | $ | 1,930                 |  | $ | (228       | ) |  | $ | 97,612 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 76,129  |                      |   | 86                    |  |   | (9,967     | ) |  |   | 66,248 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 172,039 |                      | $ | 2,016                 |  | $ | (10,195    | ) |  | $ | 163,860
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        



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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, 2009 are shown below (in thousands):



|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|------------------------------------------------------------------ |  | ------------------ | ------- | ---------------- | - | ------------- |  | ---------- | ------- |  | - | -------
|                                                                   |  | Available-for-Sale |         | Held-to-Maturity
|                                                                   |  | AmortizedCost      |         | Fair Value       |   | AmortizedCost |  | Fair Value
|Due in one year or less                                            |  | $                  | 25,360  |                  | $ | 25,060        |  | $          | 9,468   |  | $ | 9,562  
|Due after one year through five years                              |  |                    | 15,780  |                  |   | 15,650        |  |            | 52,672  |  |   | 53,973 
|Due after five years through ten years                             |  |                    |        |                  |   |              |  |            | 29,791  |  |   | 29,951 
|Due after ten years                                                |  |                    |        |                  |   |              |  |            | 4,422   |  |   | 4,396  
|Mortgage-backed securities and collateralized mortgage obligations |  |                    | 699,943 |                  |   | 711,890       |  |            | 67,258  |  |   | 53,718 
|Other securities                                                   |  |                    | 13,992  |                  |   | 13,936        |  |            |        |  |   |       
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|Total                                                              |  | $                  | 755,075 |                  | $ | 766,536       |  | $          | 163,611 |  | $ | 151,600
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        

The Company does not own 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, 2009.

Securities with carrying values totaling $277
million and fair values totaling $275 million were pledged to secure public deposits at June 30, 2009.



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##### Table of Contents

Gross Unrealized Losses and Fair Value

The following table shows the gross unrealized losses and fair value of securities by length of time that individual securities in each category had been in a continuous loss position (in thousands). Debt securities
on which we have taken only credit-related other-than-temporary impairment (OTTI) write-downs are categorized as being less than 12 months or more than 12 months in a continuous loss position based on
the point in time that the fair value declined to below the cost basis and not the period of time since the OTTI write-down.



|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |           |   |         |   |  |   |       
|------------------------------------------------------------------- |  | ------------------- | ------- | --------------------- | - | ------ | ---------- |  | ------------- | ------- | --------------------- | - | ------ | --------- | - | ------- | - |  | - | ------
|                                                                    |  | June 30, 2009      
|                                                                    |  | Less than 12 Months |         | More than 12 Months  
|                                                                    |  | AmortizedCost       |         | GrossUnrealizedLosses |   |        | Fair Value |  | AmortizedCost |         | GrossUnrealizedLosses |   |        | FairValue
|Available-for-Sale                                                  |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |           |   |         |   |  |   |       
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                   | 34,947  |                       | $ | (472   | )          |  | $             | 34,475  |                       | $ |       |           | $ |        |   |  | $ |      
|Obligations of states of the U.S. and political subdivisions        |  |                     |        |                       |   |       |            |  |               |        |                       |   |       |           |   |        |   |  |   |      
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 155,090 |                       |   | (1,677 | )          |  |               | 153,413 |                       |   | 8,112  |           |   | (875    | ) |  |   | 7,237 
|Other securities                                                    |  |                     | 2,203   |                       |   |       |            |  |               | 2,203   |                       |   | 11,789 |           |   | (247    | ) |  |   | 11,542
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |           |   |         |   |  |   |       
|Total                                                               |  | $                   | 192,240 |                       | $ | (2,149 | )          |  | $             | 190,091 |                       | $ | 19,901 |           | $ | (1,122  | ) |  | $ | 18,779
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |           |   |         |   |  |   |       
|                                                                    |  |                     |         |                       |   |       
|Held-to-Maturity                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |           |   |         |   |  |   |       
|Obligations of states of the U.S. and political subdivisions        |  | $                   | 20,295  |                       | $ | (266   | )          |  | $             | 20,029  |                       | $ | 808    |           | $ | (47     | ) |  | $ | 761   
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 4,733   |                       |   | (490   | )          |  |               | 4,243   |                       |   | 58,936 |           |   | (13,215 | ) |  |   | 45,721
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |           |   |         |   |  |   |       
|Total                                                               |  | $                   | 25,028  |                       | $ | (756   | )          |  | $             | 24,272  |                       | $ | 59,744 |           | $ | (13,262 | ) |  | $ | 46,482
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |           |   |         |   |  |   |       
|                                                                    | 
|                                                                    |  | December 31, 2008  
|                                                                    |  | Less than 12 Months |         | More than 12 Months  
|                                                                    |  | AmortizedCost       |         | GrossUnrealizedLosses |   |        | Fair Value |  | AmortizedCost |         | GrossUnrealizedLosses |   |        | FairValue
|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  |  |                     | 83,184  |                       |   | (603   | )          |  |               | 82,581  |                       |   | 33,961 |           |   | (667    | ) |  |   | 33,294
|Other securities                                                    |  |                     | 3,152   |                       |   | (483   | )          |  |               | 2,669   |                       |   | 12,100 |           |   | (572    | ) |  |   | 11,528
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |           |   |         |   |  |   |       
|Total                                                               |  | $                   | 86,336  |                       | $ | (1,086 | )          |  | $             | 85,250  |                       | $ | 46,061 |           | $ | (1,239  | ) |  | $ | 44,822
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |           |   |         |   |  |   |       
|                                                                    |  |                     |         |                       |   |       
|Held-to-Maturity                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |           |   |         |   |  |   |       
|Obligations of the U.S. Treasury and other U.S. government agencies |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |           |   |         |   |  |   |       
|Obligations of states of the U.S. and political subdivisions        |  | $                   | 13,392  |                       | $ | (228   | )          |  | $             | 13,164  |                       | $ |       |           | $ |        |   |  | $ |      
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 39,557  |                       |   | (5,506 | )          |  |               | 34,051  |                       |   | 30,499 |           |   | (4,461  | ) |  |   | 26,038
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |           |   |         |   |  |   |       
|Total                                                               |  | $                   | 52,949  |                       | $ | (5,734 | )          |  | $             | 47,215  |                       | $ | 30,499 |           | $ | (4,461  | ) |  | $ | 26,038
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |           |   |         |   |  |   |       



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For all security types discussed below where no OTTI is considered necessary at June 30, 2009, the Company does not
intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost basis.

Obligations of the U.S. Treasury and other U.S. government agencies: Unrealized losses were caused by changes in interest rates. The agency securities consist of discount notes and medium term notes issued by
the Federal Home Loan Bank (FHLB), Federal Home Loan Mortgage Corporation (FHLMC), and Federal National Mortgage Association (FNMA). These securities are fixed rate and may be callable at the option of the issuer.
They were purchased at premiums or discounts. They have maturity dates up to seven years and have contractual cash flows guaranteed by agencies of the U.S. Government. The decline in fair value is generally attributable to interest rates and not
credit quality. As such, no OTTI is considered necessary for these securities at June 30, 2009.

Obligations of states of the U.S. and political
subdivisions: Unrealized losses were caused by changes in interest rates and not due to the credit quality of the securities. The municipal bonds are largely comprised of General Obligation (GO) bonds issued by school districts or
municipalities. These bonds have fixed-rates and maturities of 15-years or less. During 2008, there were credit rating downgrades announced with regard to most of the insurers of the Companys municipal bonds. These insurers provide a credit
enhancement for the vast majority of municipal bond securities owned by the Company. Despite these downgrades, the municipal bonds owned by the Company are all considered to be investment grade due either to the underlying credit rating of the
issuer or the current credit rating of the insurer. These securities will continue to be monitored as part of our ongoing impairment analysis, but are expected to perform, even if the nationally recognized statistical ratings organizations
(NRSROs) further reduce the credit rating of the bond insurers. As a result, no OTTI is considered necessary for these securities at June 30, 2009.

Mortgage-backed securities and collateralized mortgage obligations (CMO): Unrealized losses were caused by changes in interest rates. The agency mortgage-backed securities are comprised largely of
fixed and variable rate residential mortgage-backed securities issued by the Government National Mortgage Association (GNMA), FNMA, or FHLMC. They have maturity dates of up to 40 years and have contractual cash flows guaranteed by
agencies of the U.S. Government. The decline in fair value is generally attributable to changes in interest rates and not credit quality. As such, no OTTI is considered necessary for these securities at June 30, 2009, except as discussed below.

Other-Than-Temporarily Impaired Debt Securities

Declines in the fair value of individual securities below their amortized cost are assessed to determine whether the impairment is other-than-temporary. The initial indication of OTTI for both debt and equity securities is the duration and
length of time the market value has been below cost. Additionally, the Company considers recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions within its industry, and whether it is more
likely than not that the Company will be required to sell the security before a recovery in value.

For debt securities, the Company assesses whether OTTI
is present when it is probable that we will be unable to collect all amounts due according to the contractual terms of the security. When assessing whether the entire amortized cost basis of the security will be recovered, the Company compares the
present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If present value of cash flows expected to be collected is less than the amortized cost basis of the security, the entire amortized
cost basis of the security will not be recovered (that is, a credit loss exists), and an OTTI is considered to have occurred.

For debt securities where
the Company has determined that an OTTI exists and the Company does not intend to sell the security or if it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis, the
impairment is separated into the amount that is credit-related and the amount due to all other factors. The credit-related impairment is recognized in earnings, and is the difference between a securitys amortized cost basis and the present
value of expected future cash flows discounted at the securitys effective interest rate. The noncredit-related impairment is recognized in other comprehensive income. For debt securities classified as held-to-maturity, the amount of impairment
is recognized in other comprehensive income and accreted over the remaining life of the debt security as an increase in the carrying value of the security.

The Company recorded a $14 thousand credit-related OTTI on a held-to-maturity debt security during the second quarter of 2009, based on its cash flow analysis. This security was issued in 2007 and is backed by hybrid adjustable-rate
residential mortgage loans. As of June 30, 2009, this security was rated triple-A by Standard and Poors (S&P) and single-B by Fitch Ratings, Ltd. (Fitch) (Moodys Investor Service (Moodys) does
not rate this security). The Company does not intend to sell the security, and it is not more likely than not that the Company will be required to sell the investment before recovery of its remaining amortized cost basis. Therefore, the amount of
the credit-related OTTI, $14 thousand, was recognized in earnings and the amount of the noncredit-related impairment of $2.9 million, was recognized in other comprehensive income at June 30, 2009. The management of the Company believes that it
will fully collect the carrying value of securities on which it has recorded a noncredit-related impairment in other comprehensive income. The following table sets forth additional information for the OTTI security as of June 30, 2009 (in
thousands):



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##### Table of Contents

|                                                 |  |                             |       |                     |   |            |  |                    |       |                             |   |    |  |   |      
|------------------------------------------------ |  | --------------------------- | ----- | ------------------- | - | ---------- |  | ------------------ | ----- | --------------------------- | - | -- |  | - | -----
|                                                 |  | Amortized CostPrior to OTTI |       | EstimatedFair Value |   | Impairment |  | Credit-relatedOTTI |       | Noncredit-relatedImpairment
|Private Label Collateralized Mortgage Obligation |  | $                           | 7,275 |                     | $ | 4,382      |  | $                  | 2,893 |                             | $ | 14 |  | $ | 2,879
|                                                 |  |                             |       |                     |   |            |  |                    |       |                             |   |    |  |   |      

The following table presents a rollforward of the credit-related portion of the OTTI that the Company recognized
in earnings (in thousands):



|                                                            |  |                               |   
|----------------------------------------------------------- |  | ----------------------------- | --
|                                                            |  | Six Months EndedJune 30, 2009
|Balance of credit-related OTTI at January 1, 2009           |  | $                             |  
|Additions for credit-related OTTI not previously recognized |  |                               | 14
|                                                            |  |                               |   
|Balance of credit-related OTTI at June 30, 2009             |  | $                             | 14
|                                                            |  |                               |   

In addition to the Private Label CMO referenced above, the Company owned 21 other Private Label CMOs with a total
amortized cost basis of $64.5 million as of June 30, 2009. These securities are carried as either held-to-maturity or available-for-sale. The unrealized losses on the Companys Private Label CMO portfolio as of June 30, 2009 are
generally attributable to the widespread deterioration in economic and credit market conditions over the last 24 months. All of the Companys Private Label CMO securities are backed by residential mortgage loans and were rated in the
highest available investment grade category at the time of their purchase. They continue to be rated by one or more of the following NRSROs: Moodys, S&P and/or Fitch. As of June 30, 2009, nine of the other 21 Private Label
CMOs owned by the Company have been downgraded by one grade or more by at least one of the NRSROs.

The Company regularly reviews various credit quality
metrics relating to individual Private Label CMOs such as the ratio of credit enhancement to expected losses along with the ratio of credit enhancement to severely delinquent loans (loans 60 days or more delinquent). For certain securities, the
Company develops more detailed loss projections by more specifically evaluating the residential mortgage loans collateralizing the security along with expected default rates and loss severities. Based upon this analysis, a cash flow analysis is
conducted of the security to determine if the Company will recover its entire amortized cost basis in the securities.

Because the Company currently
expects to recover the entire amortized cost basis of these 21 Private Label CMOs and because the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before
recovery of their amortized cost basis, the Company does not consider any of its other Private Label CMOs to be other-than-temporarily impaired at June 30, 2009.

Realized Gains and Losses

The following table shows the gross realized gains on the sales of securities (in
thousands). There was no OTTI recorded on available-for-sale securities during the three and six month periods ended June 30, 2009 and 2008, respectively.



|                              |  |                            |       |                          |   |      |  |      |       |  |   |  
|----------------------------- |  | -------------------------- | ----- | ------------------------ | - | ---- |  | ---- | ----- |  | - | -
|                              |  | Three monthsended June 30, |       | Six monthsended June 30,
|                              |  | 2009                       |       | 2008                     |   | 2009 |  | 2008
|Proceeds from sales and calls |  | $                          | 1,665 |                          | $ |     |  | $    | 2,040 |  | $ | 
|Gross realized gains          |  |                            | 12    |                          |   |     |  |      | 27    |  |   | 



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

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



|                                |  |              |           |   |                  |   |        |   |           |  |       |  
|------------------------------- |  | ------------ | --------- | - | ---------------- | - | ------ | - | --------- |  | ----- | -
|                                |  | June 30,2009 |           |   | December 31,2008 |  
|                                |  | Amount       |           | % |                  |   | Amount |   | %         | 
|Loans held for sale             |  | $            | 1,642     |   | 0.0              | % |        | $ | 1,524     |  | 0.0   | %
|Loans held for investment:      |  |              |           |   |                  |   |        |   |           |  |       |  
|Domestic:                       |  |              |           |   |                  |   |        |   |           |  |       |  
|Commercial and industrial       |  |              | 918,125   |   | 25.9             | % |        |   | 1,093,942 |  | 28.8  | %
|Real estate:                    |  |              |           |   |                  |   |        |   |           |  |       |  
|Commercial                      |  |              | 1,766,721 |   | 50.0             | % |        |   | 1,763,712 |  | 46.5  | %
|Construction                    |  |              | 458,386   |   | 13.0             | % |        |   | 545,303   |  | 14.4  | %
|Residential mortgage            |  |              | 323,483   |   | 9.1              | % |        |   | 309,622   |  | 8.2   | %
|Consumer/other                  |  |              | 55,812    |   | 1.6              | % |        |   | 63,883    |  | 1.7   | %
|Foreign                         |  |              |           |   |                  |   |        |   |           |  |       |  
|Commercial and industrial       |  |              | 12,320    |   | 0.3              | % |        |   | 13,577    |  | 0.4   | %
|Other loans                     |  |              | 2,374     |   | 0.1              | % |        |   | 2,251     |  | 0.0   | %
|                                |  |              |           |   |                  |   |        |   |           |  |       |  
|Total loans held for investment |  |              | 3,537,221 |   | 100.0            | % |        |   | 3,792,290 |  | 100.0 | %
|                                |  |              |           |   |                  |   |        |   |           |  |       |  
|Total loans                     |  | $            | 3,538,863 |   | 100.0            | % |        | $ | 3,793,814 |  | 100.0 | %
|                                |  |              |           |   |                  |   |        |   |           |  |       |  

Loan maturities and rate sensitivity of the loans held for investment, excluding residential mortgage and consumer
loans, at June 30, 2009 were as follows (in thousands):



|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|----------------------------------- |  | ---------------------- | --------- | ----------------------------------- | - | ------------------- |  | ----- | ------- |  | - | ---------
|                                    |  | Due in OneYear or Less |           | Due After OneYear ThroughFive Years |   | Due After FiveYears |  | Total
|Commercial and industrial           |  | $                      | 621,009   |                                     | $ | 255,744             |  | $     | 41,372  |  | $ | 918,125  
|Real estate - commercial            |  |                        | 269,553   |                                     |   | 761,068             |  |       | 736,100 |  |   | 1,766,721
|Real estate - construction          |  |                        | 238,369   |                                     |   | 129,443             |  |       | 90,574  |  |   | 458,386  
|Foreign loans                       |  |                        | 8,927     |                                     |   | 2,780               |  |       | 2,716   |  |   | 14,423   
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,137,858 |                                     | $ | 1,149,035           |  | $     | 870,762 |  | $ | 3,157,655
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|                                    |  |                        |           |                                    
|Loans with a fixed interest rate    |  | $                      | 207,711   |                                     | $ | 728,996             |  | $     | 245,400 |  | $ | 1,182,107
|Loans with a floating interest rate |  |                        | 930,147   |                                     |   | 420,039             |  |       | 625,362 |  |   | 1,975,548
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,137,858 |                                     | $ | 1,149,035           |  | $     | 870,762 |  | $ | 3,157,655
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          

The loan portfolio consists of various types of loans made principally to borrowers located in the Houston, San
Antonio, Dallas and Fort Worth, Texas metropolitan areas.

As of June 30, 2009, 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. The Companys largest concentration in any single industry is in the energy



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loan portfolio. At June 30, 2009, the energy loan portfolio totaled $334 million which represents 9.5% of total loans held for investment. The
petroleum industry is usually divided into three major components: upstream, midstream and downstream. The composition of the collateral of the upstream energy portfolio, at June 30, 2009, consists of 54% gas reserves and 46% oil
reserves. The upstream oil sector is a term commonly used to refer to the exploration for and the recovery and production of crude oil and natural gas. The upstream oil sector is also known as the exploration and production sector. These
reserve-based loans represent approximately 70% of the energy loan portfolio. The remaining energy loan portfolio consists of well-secured loans to companies that would be classified as midstream energy companies. A midstream energy
company is a company that processes and transports crude oil and natural gas. 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.

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 30,2009 |       |   | December 31,2008 |  
|Beginning balance |  | $            | 2,100 |   |                  | $ | 2,189 |  
|New loans         |  |              | 24    |   |                  |   |      |  
|Repayments        |  |              | (178  | ) |                  |   | (89   | )
|                  |  |              |       |   |                  |   |       |  
|Ending balance    |  | $            | 1,946 |   |                  | $ | 2,100 |  
|                  |  |              |       |   |                  |   |       |  

A loan is impaired when, based on current information, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. The recorded investment in impaired loans was $117 million and $87.5 million at June 30, 2009 and December 31, 2008, respectively. Such impaired loans required an
allowance for loan losses of $18.6 million and $16.1 million, respectively. The balance of impaired loans with an allocated allowance for loan losses at June 30, 2009 and December 31, 2008 was $104 million and $78.3 million, respectively,
and the balance of impaired loans without an allocated allowance for loan losses at June 30, 2009 and December 31, 2008 was $13.2 million and $9.2 million, respectively. The average recorded investment in impaired loans for the three and
six months ended June 30, 2009 was $112 million and $103 million, respectively, and for the three and six months ended June 30, 2008 was $32.4 million and $28.6 million, respectively. No interest on impaired loans was received during the
three and six months ended June 30, 2009 and 2008, respectively.

Nonperforming loans of $117 million and $87.5 million at June 30, 2009 and
December 31, 2008, respectively, have been categorized by management as nonaccrual loans. Interest foregone on nonaccrual loans was $2.2 million and $3.5 million for the three and six months ended June 30, 2009, respectively, and $632
thousand and $1.1 million for the same time periods in 2008. The Company has one restructured commercial real estate loan totaling $2.8 million as of June 30, 2009. The Company has no further commitments to lend additional funds to this
borrower. There were no restructured loans as of December 31, 2008.

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. Accruing loans 90 days past due or more were $2.1 million and $8.4 million at June 30, 2009 and
December 31, 2008, respectively. The balance at June 30, 2009 consists primarily of three loans that are well-secured and in the process of collection.



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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, |  
|                                                               |  | 2009                       |        |   | 2008                     |   |        | 2009 |  |   | 2008   |  
|Allowance for Credit Losses                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Allowance for loan losses at beginning of period               |  | $                          | 56,703 |   |                          | $ | 35,681 |      |  | $ | 49,177 |   |  | $ | 34,446 |  
|Loans charged-off                                              |  |                            | 15,757 |   |                          |   | 2,813  |      |  |   | 18,615 |   |  |   | 6,318  |  
|Loan recoveries                                                |  |                            | (629   | ) |                          |   | (616   | )    |  |   | (1,461 | ) |  |   | (1,206 | )
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net loans charged-off                                          |  |                            | 15,128 |   |                          |   | 2,197  |      |  |   | 17,154 |   |  |   | 5,112  |  
|Provision for loan losses                                      |  |                            | 11,500 |   |                          |   | 8,167  |      |  |   | 21,052 |   |  |   | 12,317 |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Allowance for loan losses at end of period                     |  |                            | 53,075 |   |                          |   | 41,651 |      |  |   | 53,075 |   |  |   | 41,651 |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                               |  |                            |        |  
|Allowance for unfunded loan commitments at beginning of period |  |                            | 1,102  |   |                          |   | 927    |      |  |   | 1,654  |   |  |   | 927    |  
|Provision (credit) for losses on unfunded loan commitments     |  |                            |       |   |                          |   |       |      |  |   | (552   | ) |  |   |       |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Allowance for unfunded loan commitments at end of period       |  |                            | 1,102  |   |                          |   | 927    |      |  |   | 1,102  |   |  |   | 927    |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total allowance for credit losses                              |  | $                          | 54,177 |   |                          | $ | 42,578 |      |  | $ | 54,177 |   |  | $ | 42,578 |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  

Net charge-offs were $15.1 million and $17.2 million for the three and six months ended June 30, 2009,
respectively, compared to $2.2 million and $5.1 million for the same periods in 2008, respectively. Charge-offs during the quarter ended June 30, 2009 included a $9.6 million charge-off related to an energy customer that is currently in Chapter
11 bankruptcy which had previously been provided for in our allowance for loan losses.



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

Goodwill totaled $173 million
at June 30, 2009 and December 31, 2008, respectively. During the first quarter of 2008, goodwill increased $5.1 million due to the acquisition of First Horizon. This increase was offset by final purchase accounting adjustments related to
prior acquisitions.

The Company reviews its goodwill for impairment annually or more frequently if indicators of impairment exist. Goodwill is assigned to
reporting units for purposes of impairment testing. Reporting units used for the goodwill impairment testing include our banking operations and MBM Advisors. At June 30, 2009, due to the present uncertainty surrounding the global economy and
volatility in the Companys stock price, management concluded a triggering event had occurred. As part of the process for performing step one of the impairment test of goodwill, the Company estimated the fair value of both reporting units and
reconciled to the Companys overall estimated market capitalization. The estimated market capitalization considers recent trends in the Companys market capitalization and an expected control premium, based on comparable transactional
history. Based on the results of the step one impairment test, no impairment of goodwill was indicated at June 30, 2009.

Other intangible assets
totaled $12.7 million at June 30, 2009 including $9.7 million related to core deposits and $3.0 million related to customer relationships. Other intangible assets totaled $13.9 million at December 31, 2008 including
$10.7 million related to core deposits and $3.2 million related to customer relationships. The changes in intangibles related to core deposits and customer relationships during 2008 were related to the First Horizon branch acquisition, net
of amortization. Core deposit and other intangibles are amortized on an accelerated basis over their estimated useful lives of 10 years. The total amortization expense related to intangible assets was $565 thousand and $1.1 million for the three and
six month periods ended June 30, 2009, respectively, and $586 thousand and $1.2 million for the same time periods in 2008, respectively. The projected amortization for core deposits and other intangibles as of June 30, 2009 is as follows
(in thousands):



|           |  |   |       
|---------- |  | - | ------
|2009       |  | $ | 1,117 
|2010       |  |   | 2,149 
|2011       |  |   | 2,011 
|2012       |  |   | 1,801 
|2013       |  |   | 1,695 
|Thereafter |  |   | 3,971 
|           |  |   |       
|Total      |  | $ | 12,744
|           |  |   |       



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|7. | OTHER BORROWED FUNDS
|-- | --------------------

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



|                                |  |              |         |                  |   |        
|------------------------------- |  | ------------ | ------- | ---------------- | - | -------
|                                |  | June 30,2009 |         | December 31,2008
|Federal Home Loan Bank advances |  | $            | 50,500  |                  | $ | 212,500
|Repurchase agreements           |  |              | 59,806  |                  |   | 59,936 
|Federal funds purchased         |  |              | 26,325  |                  |   | 36,150 
|Treasury auction facility       |  |              | 40,000  |                  |   | 100,000
|                                |  |              |         |                  |   |        
|Total                           |  | $            | 176,631 |                  | $ | 408,586
|                                |  |              |         |                  |   |        

Federal Home Loan Bank Advances  The Company has an available line of credit with the
FHLB of Dallas, which allows the Company to borrow on a collateralized basis. At June 30, 2009, the Company had total funds of $1.1 billion available under this agreement of which $50.5 million was outstanding with an average interest rate of
2.37%. At June 30, 2009, the Company had $40.0 million of FHLB advances with a maturity of nine years and $500 thousand of FHLB advances with a remaining maturity of one year. The remaining $10.0 million of FHLB advances had a maturity of one
day. These borrowings are collateralized by mortgage 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.

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 securities underlying the structured repurchase agreements are held in safekeeping by the
purchasing financial institution. At June 30, 2009 and December 31, 2008, the Company had securities sold under agreements to repurchase with banking customers of $9.8 million and $9.9 million, respectively. Structured repurchase
agreements totaled $50.0 million at June 30, 2009 and December 31, 2008, and consisted of agreements with two separate financial institutions totaling $25.0 million, each that will mature in 2015. These repurchase agreements bear interest
at a rate equal to LIBOR less 100 basis points and reset quarterly until the first quarter of 2010 at which time the rate will become fixed at 3.88% and 3.50%, respectively. The rate on these repurchase agreements was zero at June 30, 2009. The
rate on these repurchase agreements was 1.22% and 0.87%, respectively, at December 31, 2008. The Company may be required to provide additional collateral based on the fair value of the underlying securities.

Treasury Auction Facility Treasury Auction Facilities (TAF) are term funds auctioned to depository institutions by the Federal Reserve
Board. Each TAF auction is for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate). All advances must be fully collateralized. At June 30, 2009, the Company had $40.0 million of TAF borrowings
outstanding at a rate of 0.25%. At December 31, 2008, the Company had $100 million of TAF borrowings outstanding at a rate of 0.42%.



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##### Table of Contents

Federal Funds Purchased  The Company has federal funds purchased at correspondent banks. As of
June 30, 2009, federal funds outstanding with correspondent banks were $26.3 million and payable upon demand. These funds typically mature within one to ninety days.



|8. | 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 2.50% 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. As of June 30, 2009, the floating
rate was 3.13% on the subordinated note compared to 4.50% at December 31, 2008.



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|9. | JUNIOR SUBORDINATED DEBT/COMPANY MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
|-- | ----------------------------------------------------------------------------------

As of June 30, 2009 and December 31, 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-monthLIBOR 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-monthLIBOR plus 3.10% |                                      |   | 4,124               |  | July 7, 2033      
|Capital Trust IV     |  | March 26, 2007     |  |                                     | 25,000 |               | 3-monthLIBOR 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.

The trust preferred
securities issued under Statutory Trust One, BOTH Capital Trust I, and Capital Trust IV bear interest on a floating rate that resets quarterly. As of June 30, 2009, the floating rate on these securities was 4.05%, 4.23% and 2.23%, respectively,
compared to 4.91%, 7.92% and 3.60%, respectively, at December 31, 2008.



|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.



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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.

The Company estimates the fair value of its interest rate derivatives using a standardized
methodology that nets the discounted expected future cash receipts and cash payments (based on observable market inputs). These future net cash flows, however, are susceptible to change due primarily to fluctuations in interest rates. As a result,
the estimated values of these derivatives will typically change over time as cash is received and paid and also as market conditions change. As these changes take place, they may have a positive or negative impact on our estimated valuations.

The table below presents the fair value of the Companys derivative financial instruments as well as their classification on the Balance Sheet as of
June 30, 2009 (in thousands):



|                                                    |  |                |             |            |                  |        |  |   |  
|--------------------------------------------------- |  | -------------- | ----------- | ---------- | ---------------- | ------ |  | - | -
|                                                    |  | NotionalAmount |             | Fair Value
|                                                    |  |                | OtherAssets |            | OtherLiabilities
|Derivatives designated as hedging instruments:      |  |                |             |            |                  |        |  |   |  
|Fair value hedge of interest rate risk:             |  |                |             |            |                  |        |  |   |  
|Interest rate swap                                  |  | $              | 50,000      |            | $                | 2,051  |  | $ | 
|Cash flow hedge of interest rate risk:              |  |                |             |            |                  |        |  |   |  
|Interest rate floor and collar                      |  |                | 363,000     |            |                  | 12,880 |  |   | 
|                                                    |  |                |             |            |                  |        |  |   |  
|Total derivatives designated as hedging instruments |  | $              | 413,000     |            | $                | 14,931 |  | $ | 
|                                                    |  |                |             |            |                  |        |  |   |  

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in interest rates. 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 8).

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the
offsetting loss or gain on the hedged item are recognized in earnings. As the fair value hedge qualifies for the short-cut method, the gain or loss on the derivative exactly offsets the loss or gain on the hedged item, resulting in zero
net earnings impact. The Company recognized a net reduction to interest expense of $322 thousand and $582 thousand for the three and six months ended June 30, 2009, respectively, related to the Companys fair value hedge. For the three and six
months ended June 30, 2008, the Company recognized a net reduction to interest expense of $91 thousand and a net addition to interest expense of $2 thousand, respectively.

The tables below presents the effect of the Companys fair value derivative financial instruments on the Income Statement for the three and six months ended June 30, 2009 (in thousands):



|                                        |  |                                                           |        |   |                                                            |   |        |                   |  |                 |       |  |   |      
|--------------------------------------- |  | --------------------------------------------------------- | ------ | - | ---------------------------------------------------------- | - | ------ | ----------------- |  | --------------- | ----- |  | - | -----
|                                        |  | Amount of Gain or (Loss)Recognized in Income onDerivative |        |   | Amount of Gain or (Loss)Recognized in Income onHedged Item
|                                        |  | Interest expense                                          |        |   | Interest expense                                          
|                                        |  | Three MonthsEnded                                         |        |   | Six MonthsEnded                                            |   |        | Three MonthsEnded |  | Six MonthsEnded
|Fair value hedge of interest rate risk: |  |                                                           |        |   |                                                            |   |        |                   |  |                 |       |  |   |      
|Interest rate swap                      |  | $                                                         | (1,284 | ) |                                                            | $ | (1,310 | )                 |  | $               | 1,284 |  | $ | 1,310
|                                        |  |                                                           |        |   |                                                            |   |        |                   |  |                 |       |  |   |      

Cash Flow Hedges of Interest Rate Risk

The Companys objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company
uses interest rate floors and collars as part of its interest rate risk management strategy. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike
rate on the contract in exchange for an up front premium. Interest rate collars designated as cash flow hedges involve the payments of variable-rate amounts if interest rates rise above the cap strike rate on the contract and receipts of
variable-rate amounts if interest rates fall below the floor strike rate on the contract. 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. During the second quarter, the Company re-designated, the interest rate collar
contract to hedge a larger portion of the Companys prime-based loans. On the date of re-designation, the collar had a fair value of approximately $13.5 million. The aforementioned terms of the interest rate collar have not changed including
its August 1, 2010 termination date.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is
recorded in other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and six months ended June 30, 2009 and 2008, such derivatives were used to
hedge the forecasted variable cash inflows associated with existing pools of prime-based loan assets. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended
June 30, 2009, the Company recognized gains of $1.4 million and $2.2 million, respectively, for hedge ineffectiveness attributable to the aggregate principal amount of the designated loan pools falling below the notional amount. No hedge
ineffectiveness was recognized during the three and six months ended June 30, 2008.

Amounts reported in other comprehensive income related to derivatives
will be reclassified to interest income or expense, as applicable, as interest payments are received/made on the Companys variable-rate assets/liabilities. During the next twelve months, the Company estimates that approximately $11.0 million
will be reclassified as an increase to interest income.

The table below presents the effect of the Companys cash flow derivative financial
instruments on the Income Statement for the three and six months ended June 30, 2009 (in thousands):



|                                       |  |                                                                          |    |                                                                               |   |                                                                                                                             |  |                        |       |                  |   |                        |  |                        |       |                        |   |       |  |   |       |  |   |      
|-------------------------------------- |  | ------------------------------------------------------------------------ | -- | ----------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | ---------------- | - | ---------------------- |  | ---------------------- | ----- | ---------------------- | - | ----- |  | - | ----- |  | - | -----
|                                       |  | Amount of Gain or(Loss) Recognizedin OCI onDerivative(Effective Portion) |    | Amount of Gain or (Loss) Reclassifiedfrom OCI into Income
(Effective Portion) |   | Amount of Gain or (Loss)Recognized in Income onDerivative (IneffectivePortion and AmountExcluded
fromEffectiveness Testing)
|                                       |  | ThreeMonthsEnded                                                         |    | SixMonthsEnded                                                                |   | Three Months Ended                                                                                                          |  | Six Months Ended       |       | ThreeMonthsEnded |   | SixMonthsEnded        
|Cash flow hedge of interest rate risk: |  |                                                                          |    |                                                                               |   | Interestincome                                                                                                              |  | Othernoninterestincome |       | Interestincome   |   | Othernoninterestincome |  | Othernoninterestincome |       | Othernoninterestincome
|Interest rate floor and collar         |  | $                                                                        | 86 |                                                                               | $ | 661                                                                                                                         |  | $                      | 3,848 |                  | $ | 1,619                  |  | $                      | 7,888 |                        | $ | 2,488 |  | $ | 1,392 |  | $ | 2,156
|                                       |  |                                                                          |    |                                                                               |   |                                                                                                                             |  |                        |       |                  |   |                        |  |                        |       |                        |   |       |  |   |       |  |   |      



|11. | 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 units, 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.

Total stock-based compensation expense that was charged against income was $2.1 million and $1.7 million for the six month periods
ended June 30, 2009 and 2008, respectively. The total income tax benefit recognized in the income statement for stock-based compensation arrangements was $556 thousand and $460 thousand for the six months ended June 30, 2009 and 2008,
respectively.



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On December 20, 2007, the Company entered into a new employment agreement with its chief executive officer
(CEO). This agreement replaced the existing agreement, in which the CEO was awarded 187,500 Performance Restricted Share Units (PRSUs), to be earned based on specified performance metrics. The total value of this stock grant
was based on the current market price on the date of grant. Under the revised agreement, the new performance metrics include earnings per share growth versus the Companys peer banks and return on assets performance versus the Companys
peer banks. 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, 2009, there was
$351 thousand 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, 2009, 20,655 and 43,920
shares, respectively, were subscribed for through payroll deductions under the Purchase Plan compared to 14,345 and 30,592 shares for the same periods in 2008, respectively.



|12. | EARNINGS PER COMMON SHARE
|--- | -------------------------

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



|                                                                   |  |                            |        |                          |      |   |        |  |      |        |  |   |       
|------------------------------------------------------------------ |  | -------------------------- | ------ | ------------------------ | ---- | - | ------ |  | ---- | ------ |  | - | ------
|                                                                   |  | Three months endedJune 30, |        | Six months endedJune 30,
|                                                                   |  | 2009                       |        |                          | 2008 |   | 2009   |  | 2008
|Net income (loss) applicable to common shareholders                |  | $                          | (4,851 | )                        |      | $ | 10,307 |  | $    | 672    |  | $ | 21,916
|                                                                   |  |                            |        |                          |      |   |        |  |      |        |  |   |       
|Basic:                                                             |  |                            |        |                          |      |   |        |  |      |        |  |   |       
|Weighted average shares outstanding                                |  |                            | 77,894 |                          |      |   | 73,137 |  |      | 75,602 |  |   | 73,144
|Diluted:                                                           |  |                            |        |                          |      |   |        |  |      |        |  |   |       
|Add incremental shares for:                                        |  |                            |        |                          |      |   |        |  |      |        |  |   |       
|Assumed exercise of outstanding options and nonvested share awards |  |                            |       |                          |      |   | 282    |  |      | 260    |  |   | 268   
|                                                                   |  |                            |        |                          |      |   |        |  |      |        |  |   |       
|Total                                                              |  |                            | 77,894 |                          |      |   | 73,419 |  |      | 75,862 |  |   | 73,412
|                                                                   |  |                            |        |                          |      |   |        |  |      |        |  |   |       
|                                                                   |  |                            |        |                         
|Earnings (loss) per common share:                                  |  |                            |        |                          |      |   |        |  |      |        |  |   |       
|Basic                                                              |  | $                          | (0.06  | )                        |      | $ | 0.14   |  | $    | 0.01   |  | $ | 0.30  
|                                                                   |  |                            |        |                          |      |   |        |  |      |        |  |   |       
|Diluted                                                            |  | $                          | (0.06  | )                        |      | $ | 0.14   |  | $    | 0.01   |  | $ | 0.30  
|                                                                   |  |                            |        |                          |      |   |        |  |      |        |  |   |       

The incremental shares for the assumed exercise of the outstanding options and nonvested share awards were
determined by application of the treasury stock method. The calculation of diluted earnings per common share excludes 1,470,431 and 1,504,079 options and nonvested share awards outstanding for the three and six months ended June 30, 2009,
respectively, and 772,415 and 779,262 options and nonvested share awards outstanding for the three and six month periods ended June 30, 2008, respectively, which were antidilutive. In addition, the calculation excludes the Warrant to purchase
2.6 million shares of common stock outstanding for the six month period ended June 30, 2009, which were antidilutive. Options and nonvested share awards have been excluded from the computation of diluted loss per share for the three months
ended June 30, 2009, as the effect would have been antidilutive.



|13. | 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 $2.8 million and $5.9 million
for the three and six months ended June 30, 2009, respectively, and $2.6 million and $5.2 million for the three and six months ended June 30, 2008, respectively. For information regarding these commitments refer to the Companys
Annual Report on Form 10-K for the year ended December 31, 2008.

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 years base pay; (ii) an annual
bonus for two 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 up to $20 thousand in 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.



|14. | 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 and commercial 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 30,2009 |         | December 31,2008
|Commitments to extend credit             |  | $            | 695,580 |                  | $ | 870,088
|Standby and commercial letters of credit |  |              | 73,037  |                  |   | 104,079

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.



|15. | 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, the Company and the Bank must maintain minimum capital amounts and ratios as defined in the
regulations. Management believes, as of June 30, 2009 and December 31, 2008, that the Company and the Bank met all capital adequacy requirements to which they are subject.

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.



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On December 12, 2008, as part of the TARP Capital Purchase Program, the Company entered into a Securities Purchase
Agreement with the U.S. Treasury, pursuant to which the Company for a purchase price of $125 million in cash (i) sold 125,198 shares of the Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series J and (ii) issued a Warrant
to purchase 2.6 million shares of the Companys common stock, for a price of $7.18 per share. The Series J Preferred Stock was nonvoting and qualified as Tier 1 Capital. The Preferred Stock dividend reduced earnings available to common
shareholders and was computed at an annual rate of 5% per year.

During the second quarter of 2009, the Company fully redeemed the $125 million
preferred stock that it sold to the U.S. Treasury in December 2008. The Company was approved to pay the funds back without any conditions from regulators. As a result of the redemption, the Company recorded a one-time $7.5 million charge in the form
of an accelerated deemed dividend to account for the difference between the amount at which the preferred stock sale had been initially recorded and its redemption price.

Additionally, during the second quarter of 2009, the Company issued 8.3 million shares of its common stock through a public stock offering, which resulted in net proceeds of approximately $54.6 million, after
deducting underwriting fees and estimated offering expenses. The Company intends to use the proceeds from the equity offering for general corporate purposes.

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, 2009:                     |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 556,820 |       | 13.7                         | % |        | $                                                                            | 325,237 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 449,744 |       | 11.1                         | % |        |                                                                              | 162,618 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 449,744 |       | 9.4                          | % |        |                                                                              | 191,796 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                              |  
|As of December 31, 2008:                 |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 632,015 |       | 14.9                         | % |        | $                                                                            | 338,491 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 513,518 |       | 12.1                         | % |        |                                                                              | 169,245 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 513,518 |       | 10.6                         | % |        |                                                                              | 194,316 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                              |  
|STERLING BANK:                           |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|As of June 30, 2009:                     |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 544,146 |       | 13.4                         | % |        | $                                                                            | 324,970 |  | 8.0 | %      |  | $     | 406,212 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 437,111 |       | 10.8                         | % |        |                                                                              | 162,485 |  | 4.0 | %      |  |       | 243,727 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 437,111 |       | 9.1                          | % |        |                                                                              | 191,660 |  | 4.0 | %      |  |       | 239,575 |  | 5.0  | %
|                                         |  |                                           |         |       |                              |  
|As of December 31, 2008:                 |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 627,695 |       | 14.9                         | % |        | $                                                                            | 338,224 |  | 8.0 | %      |  | $     | 422,780 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 509,198 |       | 12.0                         | % |        |                                                                              | 169,112 |  | 4.0 | %      |  |       | 253,668 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 509,198 |       | 10.5                         | % |        |                                                                              | 194,180 |  | 4.0 | %      |  |       | 242,725 |  | 5.0  | %



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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,
2011, will limit the aggregate amount of cumulative perpetual preferred stock, trust preferred securities and certain other capital elements; require bank holding companies to deduct goodwill, less any associated deferred tax liability, from the sum
of core capital elements in calculating the amount of restricted core capital elements that may be included in Tier 1 capital. At June 30, 2009, the entire amount of the $80.3 million of trust preferred securities outstanding counted 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 transitioned rules, there is not a material impact on the Companys consolidated capital ratios at June 30, 2009.

Dividend restrictions  Dividends paid by the Bank are subject to certain restrictions imposed by regulatory agencies. At June 30, 2009, the
aggregate amount of dividends, which legally could be paid without prior approval of various regulatory agencies, totaled approximately $62.6 million by the Bank.



|16. | DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
|--- | -----------------------------------------------------

The Company
measures fair value 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.

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 and held-to-maturity 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 and held-to-maturity
securities are valued using 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 and loans held for sale.

We use fair value to measure certain assets and liabilities on a recurring basis when fair value is the primary measure
for accounting. This is done primarily for available-for-sale securities and derivatives.



24



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##### Table of Contents

The table below presents the Companys financial assets measured at fair value on a recurring basis aggregated by
the level in the fair value hierarchy within which those measurements fall (in thousands):



|                              |  |                             |         |                                                                  |   |                                            |  |                                        |         |  |   |      
|----------------------------- |  | --------------------------- | ------- | ---------------------------------------------------------------- | - | ------------------------------------------ |  | -------------------------------------- | ------- |  | - | -----
|                              |  | Balance atJune 30, 2009     |         | Quoted Prices inActive Markets forIdentical Instruments(Level 1) |   | Significant OtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level
3)
|Financial assets:             |  |                             |         |                                                                  |   |                                            |  |                                        |         |  |   |      
|Available-for-sale securities |  | $                           | 766,536 |                                                                  | $ |                                           |  | $                                      | 764,142 |  | $ | 2,394
|Cash flow hedges              |  |                             | 12,880  |                                                                  |   |                                           |  |                                        | 12,880  |  |   |     
|Interest rate swap            |  |                             | 2,051   |                                                                  |   |                                           |  |                                        | 2,051   |  |   |     
|                              |  |                             |         |                                                                 
|                              |  | Balance atDecember 31, 2008 |         | Quoted Prices inActive Markets forIdentical Instruments(Level 1) |   | Significant OtherObservableInputs(Level
2) |  | SignificantUnobservableInputs(Level 3)
|Financial assets:             |  |                             |         |                                                                  |   |                                            |  |                                        |         |  |   |      
|Available-for-sale securities |  | $                           | 633,357 |                                                                  | $ |                                           |  | $                                      | 630,841 |  | $ | 2,516
|Cash flow hedges              |  |                             | 20,967  |                                                                  |   |                                           |  |                                        | 20,967  |  |   |     
|Interest rate swap            |  |                             | 3,361   |                                                                  |   |                                           |  |                                        | 3,361   |  |   |     



25



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##### Table of Contents

The table below presents a reconciliation for assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during 2009 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 prepayment rates.



|                                                                                                     |  |                                                                                 |       |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ----- | -
|                                                                                                     |  | Level 3 InstrumentsFair Value Measurements UsingSignificant Unobservable Inputs |      
|                                                                                                     |  | Three Months Ended June 30, 2009                                                |      
|                                                                                                     |  | Available-for-Sale Securities                                                   |      
|Balance, March 31, 2009                                                                              |  | $                                                                               | 2,467 |  
|                                                                                                     | 
|Total gains or losses for the period included in:                                                    |  |                                                                                 |       |  
|Noninterest income                                                                                   |  |                                                                                 |      |  
|Other comprehensive income                                                                           |  |                                                                                 | 115   |  
|Purchases, issuances, settlements and amortization                                                   |  |                                                                                 | (188  | )
|Transfers in and/or out of Level 3                                                                   |  |                                                                                 |      |  
|                                                                                                     |  |                                                                                 |       |  
|                                                                                                     | 
|Balance, June 30, 2009                                                                               |  | $                                                                               | 2,394 |  
|                                                                                                     |  |                                                                                 |       |  
|                                                                                                     | 
|Net unrealized losses included in net income for the period relating to assets held at June 30, 2009 |  | $                                                                               |      |  
|                                                                                                     |  |                                                                                 |       |  
|                                                                                                     | 
|                                                                                                     |  | Level 3 InstrumentsFair Value Measurements
UsingSignificant Unobservable Inputs |      
|                                                                                                     |  | Six Months Ended June 30, 2009                                                  |      
|                                                                                                     |  | Available-for-Sale Securities                                                   |      
|Balance, January 1, 2009                                                                             |  | $                                                                               | 2,516 |  
|                                                                                                     | 
|Total gains or losses for the period included in:                                                    |  |                                                                                 |       |  
|Noninterest income                                                                                   |  |                                                                                 |      |  
|Other comprehensive income                                                                           |  |                                                                                 | 268   |  
|Purchases, issuances, settlements and amortization                                                   |  |                                                                                 | (390  | )
|Transfers in and/or out of Level 3                                                                   |  |                                                                                 |      |  
|                                                                                                     |  |                                                                                 |       |  
|                                                                                                     | 
|Balance, June 30, 2009                                                                               |  | $                                                                               | 2,394 |  
|                                                                                                     |  |                                                                                 |       |  
|                                                                                                     | 
|Net unrealized losses included in net income for the period relating to assets held at June 30, 2009 |  | $                                                                               |      |  
|                                                                                                     |  |                                                                                 |       |  

There were no realized gains or losses related to Level 3 assets recorded for the three and six month periods
ended June 30, 2009 and 2008, respectively.

Certain financial assets 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). Fair value is used on a nonrecurring basis to measure certain assets when applying
lower of cost or market accounting or when adjusting carrying values. Assets measured on a nonrecurring basis include held-to-maturity debt securities, impaired loans that are collateral dependent, other real estate owned, other repossessed assets
and loans held for sale. Assets measured at fair value on a nonrecurring basis are summarized below.

Impaired loans are reported at the fair value of
the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. During the six months
ended June 30, 2009, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. Impaired loans
with a carrying value of $88.2 million were reduced by specific valuation allowance allocations during the six months ended June 30, 2009 totaling $13.1 million to a total reported fair value of $68.8 million based on collateral.



26



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##### Table of Contents

The Company recorded additions to other real estate owned and other repossessed assets of $3.8 million and $420 thousand,
respectively, which were outstanding at June 30, 2009 and measured using Level 2 inputs within the fair value hierarchy. The Company recorded a loss on other real estate owned of $24 thousand and a gain on other repossessed assets of $25 thousand
for the six months ended June 30, 2009.

The Company recorded a $14 thousand credit-related OTTI on a held-to-maturity debt security with a fair value
of $7.3 million, during the second quarter of 2009, based on its cash flow analysis using Level 2 inputs within the fair value hierarchy. The Company does not intend to sell the security and it is not more likely than not that the Company will be
required to sell the investment before recovery of its remaining amortized cost basis. Therefore, the amount of the credit-related OTTI, $14 thousand, was recognized in earnings, and the amount of the noncredit-related impairment of $2.9 million,
was recognized in other comprehensive income at June 30, 2009.

As of June 30, 2009, the Company had a balance of $1.6 million in loans held for
sale. Loans held for sale are considered a Level 3 input within the fair value hierarchy based on current investor market pricing from investors in these types of loans.

During the second quarter of 2009, the Company fully redeemed the $125 million preferred stock that it sold to the U.S. Treasury in December 2008. In 2008, the Company sold 125,198 preferred shares and issued a
Warrant to purchase 2.6 million shares of the Companys common stock. The proceeds from the TARP Capital Purchase Program were allocated between the Preferred Shares and the Warrant based on relative fair values. The Preferred shares were
determined using Level 3 inputs based on similar types of securities. The fair value of the preferred stock was determined based on assumptions regarding the discount rate (market rate) on the preferred stock which was estimated to be approximately
11% at the date of issuance. The discount on the preferred stock was accreted to par value using a constant effective yield of 6.4% over a five-year term, which is the expected life of the preferred stock. The fair value of the Warrant was
determined based on Level 2 inputs using the Black-Scholes-Merton option pricing model which incorporated assumptions at the date of issuance including the Companys common stock price, dividend yield, stock price volatility and the risk-free
interest rate.

The Company did not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis at June
30, 2009.

The following is a summary of the carrying values and estimated fair values of certain financial instruments (in thousands):



|                                            |  |                |           |                     |   |                |  |                     |           |  |   |          
|------------------------------------------- |  | -------------- | --------- | ------------------- | - | -------------- |  | ------------------- | --------- |  | - | ---------
|                                            |  | June 30, 2009  |           | December 31, 2008  
|                                            |  | CarryingAmount |           | EstimatedFair Value |   | CarryingAmount |  | EstimatedFair Value
|Financial assets:                           |  |                |           |                     |   |                |  |                     |           |  |   |          
|Held-to-maturity securities                 |  | $              | 163,611   |                     | $ | 151,600        |  | $                   | 172,039   |  | $ | 163,860  
|Loans held for sale                         |  |                | 1,642     |                     |   | 1,646          |  |                     | 1,524     |  |   | 1,524    
|Loans held for investment, net of allowance |  |                | 3,484,146 |                     |   | 3,589,324      |  |                     | 3,743,113 |  |   | 3,835,965
|                                            |  |                |           |                    
|Financial liabilities:                      |  |                |           |                     |   |                |  |                     |           |  |   |          
|Time deposits                               |  |                | 1,160,081 |                     |   | 1,162,003      |  |                     | 1,171,422 |  |   | 1,175,389
|Subordinated debt, variable                 |  |                | 25,000    |                     |   | 17,022         |  |                     | 25,000    |  |   | 14,259   
|Junior subordinated debt                    |  |                | 82,734    |                     |   | 47,004         |  |                     | 82,734    |  |   | 82,734   
|Other borrowed funds                        |  |                | 176,631   |                     |   | 183,939        |  |                     | 408,586   |  |   | 399,879  

The summary above excludes financial assets and liabilities for which carrying value approximates fair value. For
financial assets, these include cash and short-term investments. For financial liabilities, these include demand, savings, and money market deposits and the Companys senior subordinated debt. The estimated fair value of demand, savings, and
money market deposits is the amount payable on demand at the reporting date because the accounts have no stated maturity and the customer has the ability to withdraw funds immediately. Also excluded from the summary are financial instruments
recorded at fair value on a recurring basis, as previously described.

Held-to-Maturity Securities- These securities are classified within
Level 2 of the fair value hierarchy. Securities are valued based on quoted prices in an active market when available. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted
prices of securities with similar characteristics or discounted cash flows. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities can be classified within Level 3 of the valuation hierarchy.
These securities would be 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 prepayment rates.

Loans Held for Sale - Fair value equals quoted market prices, if available. If a quoted market price is not available, the fair value is estimated by
discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same original maturities or the fair value of the collateral if the loan is collateral dependent.
When assumptions are made using significant unobservable inputs, such loans are classified within Level 3 of the fair value hierarchy.



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Loans Held for Investment - The fair value of loans is estimated by discounting the future cash flows on
pass grade loans using the LIBOR yield curve adjusted by a factor which reflects the credit and interest rate risk inherent in the loan. These future cash flows are then reduced by the estimated life-of-the-loan aggregate
credit losses in the loan portfolio. These adjustments for lifetime future credit losses are highly judgmental because the Company does not have a validated model to estimate lifetime losses on large portions of its loan portfolio. Impaired loans
are not included in this credit adjustment as they are already considered to be held at fair value. Loans, other than those held for sale, are not normally purchased and sold by the Company, and there are no active trading markets for most of this
portfolio.

Deposit Liabilities -The fair value of time deposits is estimated by discounting future cash flows using the LIBOR yield curve
plus a spread to represent current rates at which similar deposits would be priced.

Junior Subordinated Debt -Fair value equals quoted
market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar subordinated debentures and adjusted for the Companys credit quality.

Other Borrowed Funds - Fair value is generally estimated based on the discounted cash flow method using the LIBOR yield curve plus credit spread, adjusted
for an estimate of the Companys credit quality. Contractual cash flows are discounted using rates currently offered for new borrowings with similar remaining maturities and, as such, these discount rates include our current spread levels.

These fair value disclosures represent the Companys estimates based on relevant market information and information about the financial instruments.
Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates.



|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;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | our investment securities portfolio is subject to credit risk, market risk, and illiquidity;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the effect of fiscal and governmental policies of the United States federal government;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | due to our participation in various programs, sponsored by the U.S. Government, we are subject to certain restrictions on our business and these programs are
subject to change beyond our control;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | federal and state governments could pass legislation responsive to current credit conditions; and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | we could experience higher credit losses because of federal or state legislation or regulatory action that reduces the amount the Banks borrowers are
otherwise contractually required to pay under existing loan contracts. Also, we could experience higher credit losses because of federal or state legislation or regulatory action that limits the Banks ability to foreclose on property or other
collateral or makes foreclosure less economically feasible. New legislation and regulatory changes could also result in the loss of revenue or require us to change our business practices such as by limiting the fees we may charge.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

For additional discussion of such risks, uncertainties and assumptions, see our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission.

OVERVIEW

For more than 34 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 61 banking centers in the greater metropolitan areas of Houston, San Antonio,
Dallas and Fort Worth, Texas.

At June 30, 2009, we had consolidated total assets of $4.9 billion, total loans of $3.5 billion, total deposits of $4.0
billion and shareholders equity of $570 million.

We reported a net loss applicable to common shareholders of $4.9 million, or $0.06 per diluted
common share for the quarter ended June 30, 2009, compared to net income applicable to common shareholders of $10.3 million or $0.14 per diluted common share earned for the second quarter of 2008. Net income applicable to common shareholders
for the six months ended June 30, 2009 was $672 thousand, or $0.01 per diluted common share, compared with $21.9 million, or $0.30 per diluted common share earned for the same period in 2008.

Our second quarter earnings reflect several important steps we have taken to help improve our competitiveness, strengthen the quality of our capital base, and better
position Sterling to take full advantage of future growth opportunities. Our second quarter 2009 earnings were impacted by certain unusual items, which included a special FDIC insurance assessment of $2.3 million, a one-time severance charge of $2.1
million and a one-time accelerated dividend of $7.5 million related to the early redemption of preferred stock issued under the TARP. Combined, these three charges reduced net income applicable to common shareholders $0.13 per diluted common share
for the second quarter of 2009.

During the quarter, we raised $55 million in new common equity, became the first Texas bank to repay the TARP investment,
and continued to execute our company-wide expense reduction initiative to further align our expense base with our revenues. We continued to improve our loan to deposit ratio by growing deposits and reducing our energy and non-owner occupied
commercial real estate loans. While the current economic environment has caused our nonperforming assets to increase, we continue to aggressively monitor and actively work through these assets to help minimize associated
costs.

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, 2009.

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques,
valuation assumptions and other subjective assessments. We have identified five accounting policies that, due to the judgments, estimates and



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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 valuation of financial instruments, 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 2008 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.

RECENT ACCOUNTING STANDARDS

In December 2007, the Financial Accounting Standards Board (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 will apply
to future acquisitions by the Company subsequent to January 1, 2009.

In March 2008, the FASB issued SFAS No. 161 (SFAS 161)Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133.SFAS 161 amends SFAS 133 Accounting for Derivative Instruments and Hedging Activities, to amend and expand the disclosure
requirements of SFAS 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS 133 and its related interpretations, and (iii)
how derivative instruments and related hedged items affect an entitys financial position, results of operations and cash flows. To meet those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 became effective for the Company on January
1, 2009 and the required disclosures are reported in Note 10  Derivative Financial Instruments.

In October 2008, the FASB issued FASB Staff Position
157-3 (FSP FAS 157-3) Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP FAS 157-3 applies to financial assets within the scope of SFAS 157. FSP FAS 157-3 clarifies the application of
SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. In situations in which there is little, if
any, market activity for an asset at the measurement date, the fair value measurement objective remains the same, that is, the price that would be received by the holder of the financial asset in an orderly transaction (an exit price notion) that is
not a forced liquidation or distressed sale at the measurement date. Additionally, in determining fair value for a financial asset, the use of a reporting entitys own assumptions about future cash flows and appropriately risk-adjusted discount
rates is acceptable when relevant observable inputs are not available. Broker (or pricing service) quotes may be an appropriate input when measuring fair value, but they are not necessarily determinative if an active market does not exist for the
financial asset. SFAS 157-3 became effective for the interim financial statements as of September 30, 2008 and did not significantly impact the methods by which the Company determines the fair values of its financial assets. The enhanced
disclosures related to FSP FAS 157-3 are included in Note 16Disclosures about Fair Value of Financial Instruments.

In April 2009, the FASB
issued FASB Staff Position No. FAS 115-2, FAS 124-2 and EITF 99-20-2 (FSP FAS 115-2) Recognition and Presentation of Other-Than-Temporary Impairments. FSP FAS 115-2 amends the other-than-temporary impairment guidance in United
States Generally Accepted Accounting Principles (GAAP) for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the
financial statements. FSP FAS 115-2 does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 requires an entity to recognize the credit component of an
other-than-temporary impairment of a debt security in earnings and the noncredit component in other comprehensive income when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell
the security prior to recovery. FSP FAS 115-2 became effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted FSP FAS 115-2 during the quarter ended June 30, 2009. As a result of the adoption of
FSP FAS 115-2, $2.9 million of other-than-temporary impairment remained in other comprehensive income that would have been reported in the income statement under prior guidance. The expanded disclosures and discussion of other-than-temporarily
impaired debt securities related to FSP FAS 115-2 are included in Note 3 - Securities.

In April 2009, the FASB issued FASB Staff Position No. FAS
107-1 and APB 28-1 (FSP FAS 107-1) Interim Disclosures about Fair Value of Financial Instruments. FSP FAS 107-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require expanded
disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The expanded disclosure requirements for FSP FAS 107-1 are effective for the Companys
quarterly financial statements for the three months ended June 30, 2009 and are included in Note 16  Disclosures about Fair Value of Financial Instruments.



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In April 2009, the FASB issued FASB Staff Position No. FAS 157-4 (FSP FAS 157-4) Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for estimating fair value in accordance with FASB Statement
No. 157 (SFAS 157), Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate a transaction is not
orderly. The Company adopted FSP FAS 157-4 on June 15, 2009. FSP FAS 157-4 did not have a significant impact on the Companys financial condition and results of operations. The enhanced disclosures related to FSP FAS 157-4 are included in
Note 16Disclosures about Fair Value of Financial Instruments.

In April 2009, the FASB issued FASB Staff Position No. FAS 141(R)-1
(FSP FAS 141R-1) Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies whereby assets acquired and liabilities assumed in a business combination that arise from
contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using
existing accounting guidance. This Statement will apply to acquisitions by the Company subsequent to January 1, 2009.

In May 2009, the FASB issued
SFAS No. 165 (SFAS 165) Subsequent Events. This standard incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards, but the rules concerning
recognition and disclosure of subsequent events will remain essentially unchanged. Subsequent events guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under SFAS 165 as under
current practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about
conditions that did not exist at the balance sheet date. The Company adopted SFAS 165 for the quarter ended June 30, 2009 and has included the required disclosures in Note 1Accounting Policies.

In June 2009, the FASB issued SFAS No. 166 (SFAS 166) Accounting for Transfers of Financial Assetsan amendment of FASB Statement No. 140.SFAS 166 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. This Statement shall be effective for annual reporting periods that begin after November 15, 2009, for
interim periods within the first annual reporting period and for interim and annual reporting periods thereafter, with early adoption prohibited. This Statement must be applied to transfers occurring on or after the effective date. Management has
not completed its evaluation of this pronouncement; however, the Company does not expect it to be material to its financial statements.

In June 2009, the
FASB issued SFAS No. 167 (SFAS 167) Amendments to FASB Interpretation No. 46(R). SFAS 167 improves financial reporting by enterprises involved with variable interest entities. This Statement shall be effective as of the
beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter, with earlier
adoption prohibited. Management has not completed its evaluation of this pronouncement; however, the Company does not expect it to be material to its financial statements.

In June 2009, the FASB issued SFAS No. 168 (SFAS 168) The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement
No. 162 (the Codification). The Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become
nonauthoritative. FASB Statement No. 162 (SFAS 162), The Hierarchy of Generally Accepted Accounting Principles, which became effective on November 13, 2008, identified the sources of accounting principles and the
framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. Once the Codification is in effect, the GAAP hierarchy will be modified to include only two
levels of GAAP, authoritative and nonauthoritative. As a result, this Statement replaces SFAS 162 to indicate this change to the GAAP hierarchy. This Statement is effective for financial statements issued for interim and annual periods ending after
September 15, 2009. The adoption of SFAS 168 is not expected to impact the Companys accounting policies or practices. However, beginning with the Companys interim financial statements for the quarter ended September 30, 2009,
references to prior statements of financial accounting standards or other accounting pronouncements will be changed to refer to the Codification.



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SELECTED FINANCIAL DATA



|                                                            |  |                                                             |           |    |                          |   |           |                            |  |   |           |   |  |   |           |   |  |   |           |  
|----------------------------------------------------------- |  | ----------------------------------------------------------- | --------- | -- | ------------------------ | - | --------- | -------------------------- |  | - | --------- | - |  | - | --------- | - |  | - | --------- | -
|                                                            |  | Three Months EndedJune 30,                                  |           |    | Six Months EndedJune 30, |   |           | Year EndedDecember 31,2008 | 
|                                                            |  | 2009                                                        |           |    | 2008                     |   |           | 2009                       |  |   | 2008      |   | 
|                                                            |  | (Dollars and shares in thousands, except per share amounts) |          
|INCOME STATEMENT DATA:                                      |  |                                                             |           |    |                          |   |           |                            |  |   |           |   |  |   |           |   |  |   |           |  
|Net interest income                                         |  | $                                                           | 48,568    |    |                          | $ | 50,244    |                            |  | $ | 97,078    |   |  | $ | 98,240    |   |  | $ | 198,084   |  
|Provision for credit losses                                 |  |                                                             | 11,500    |    |                          |   | 8,167     |                            |  |   | 20,500    |   |  |   | 12,317    |   |  |   | 29,917    |  
|Noninterest income                                          |  |                                                             | 10,493    |    |                          |   | 10,870    |                            |  |   | 21,291    |   |  |   | 21,585    |   |  |   | 41,027    |  
|Noninterest expense                                         |  |                                                             | 44,021    |    |                          |   | 37,708    |                            |  |   | 83,619    |   |  |   | 75,096    |   |  |   | 153,210   |  
|Income before income taxes                                  |  |                                                             | 3,540     |    |                          |   | 15,239    |                            |  |   | 14,250    |   |  |   | 32,412    |   |  |   | 55,984    |  
|Net income                                                  |  |                                                             | 2,607     |    |                          |   | 10,307    |                            |  |   | 10,014    |   |  |   | 21,916    |   |  |   | 38,619    |  
|Net income (loss) applicable to common shareholders         |  |                                                             | (4,851    | )  |                          |   | 10,307    |                            |  |   | 672       |   |  |   | 21,916    |   |  |   | 38,221    |  
|                                                            |  |                                                             |           |    |                         
|BALANCE SHEET DATA (at period-end):                         |  |                                                             |           |    |                          |   |           |                            |  |   |           |   |  |   |           |   |  |   |           |  
|Total assets                                                |  | $                                                           | 4,912,367 |    |                          | $ | 4,909,454 |                            |  | $ | 4,912,367 |   |  | $ | 4,909,454 |   |  | $ | 5,079,979 |  
|Total loans                                                 |  |                                                             | 3,538,863 |    |                          |   | 3,655,608 |                            |  |   | 3,538,863 |   |  |   | 3,655,608 |   |  |   | 3,793,814 |  
|Allowance for loan losses                                   |  |                                                             | 53,075    |    |                          |   | 41,651    |                            |  |   | 53,075    |   |  |   | 41,651    |   |  |   | 49,177    |  
|Total securities                                            |  |                                                             | 930,147   |    |                          |   | 743,964   |                            |  |   | 930,147   |   |  |   | 743,964   |   |  |   | 805,396   |  
|Total deposits                                              |  |                                                             | 3,958,235 |    |                          |   | 3,694,335 |                            |  |   | 3,958,235 |   |  |   | 3,694,335 |   |  |   | 3,819,137 |  
|Other borrowed funds                                        |  |                                                             | 176,631   |    |                          |   | 521,395   |                            |  |   | 176,631   |   |  |   | 521,395   |   |  |   | 408,586   |  
|Subordinated debt                                           |  |                                                             | 77,028    |    |                          |   | 73,816    |                            |  |   | 77,028    |   |  |   | 73,816    |   |  |   | 78,335    |  
|Junior subordinated debt                                    |  |                                                             | 82,734    |    |                          |   | 82,734    |                            |  |   | 82,734    |   |  |   | 82,734    |   |  |   | 82,734    |  
|Common equity                                               |  |                                                             | 570,108   |    |                          |   | 494,534   |                            |  |   | 570,108   |   |  |   | 494,534   |   |  |   | 525,127   |  
|Preferred equity                                            |  |                                                             |          |    |                          |   |          |                            |  |   |          |   |  |   |          |   |  |   | 118,012   |  
|                                                            |  |                                                             |           |    |                         
|COMMON SHARE DATA:                                          |  |                                                             |           |    |                          |   |           |                            |  |   |           |   |  |   |           |   |  |   |           |  
|Earnings (loss) per common share (1):                       |  |                                                             |           |    |                          |   |           |                            |  |   |           |   |  |   |           |   |  |   |           |  
|Basic shares                                                |  | $                                                           | (0.06     | )  |                          | $ | 0.14      |                            |  | $ | 0.01      |   |  | $ | 0.30      |   |  | $ | 0.52      |  
|Diluted shares                                              |  | $                                                           | (0.06     | )  |                          | $ | 0.14      |                            |  | $ | 0.01      |   |  | $ | 0.30      |   |  | $ | 0.52      |  
|Shares used in computing earnings per common share:         |  |                                                             |           |    |                          |   |           |                            |  |   |           |   |  |   |           |   |  |   |           |  
|Basic shares                                                |  |                                                             | 77,894    |    |                          |   | 73,137    |                            |  |   | 75,602    |   |  |   | 73,144    |   |  |   | 73,177    |  
|Diluted shares                                              |  |                                                             | 77,894    |    |                          |   | 73,419    |                            |  |   | 75,862    |   |  |   | 73,412    |   |  |   | 73,488    |  
|End of period common shares outstanding                     |  |                                                             | 81,685    |    |                          |   | 73,160    |                            |  |   | 81,685    |   |  |   | 73,160    |   |  |   | 73,260    |  
|Book value per common share at period-end                   |  | $                                                           | 6.98      |    |                          | $ | 6.79      |                            |  | $ | 6.98      |   |  | $ | 6.79      |   |  | $ | 7.17      |  
|Cash dividends paid per common share                        |  | $                                                           | 0.055     |    |                          | $ | 0.055     |                            |  | $ | 0.110     |   |  | $ | 0.110     |   |  | $ | 0.220     |  
|Common stock dividend payout ratio                          |  |                                                             | 154.89    | %  |                          |   | 39.06     | %                          |  |   | 80.61     | % |  |   | 36.74     | % |  |   | 41.72     | %
|                                                            |  |                                                             |           |    |                         
|SELECTED PERFORMANCE RATIOS AND OTHER DATA:                 |  |                                                             |           |    |                          |   |           |                            |  |   |           |   |  |   |           |   |  |   |           |  
|Return on average common equity (2)                         |  |                                                             | (3.46     | )% |                          |   | 8.26      | %                          |  |   | 0.25      | % |  |   | 8.84      | % |  |   | 7.60      | %
|Return on average assets (2)                                |  |                                                             | 0.21      | %  |                          |   | 0.86      | %                          |  |   | 0.40      | % |  |   | 0.93      | % |  |   | 0.80      | %
|Tax equivalent net interest margin (3)                      |  |                                                             | 4.33      | %  |                          |   | 4.66      | %                          |  |   | 4.32      | % |  |   | 4.67      | % |  |   | 4.55      | %
|Efficiency ratio (4)                                        |  |                                                             | 70.54     | %  |                          |   | 61.31     | %                          |  |   | 68.33     | % |  |   | 61.81     | % |  |   | 63.04     | %
|Full-time equivalent employees                              |  |                                                             | 1,038     |    |                          |   | 1,126     |                            |  |   | 1,038     |   |  |   | 1,126     |   |  |   | 1,116     |  
|Number of banking centers                                   |  |                                                             | 61        |    |                          |   | 59        |                            |  |   | 61        |   |  |   | 59        |   |  |   | 59        |  
|                                                            |  |                                                             |           |    |                         
|LIQUIDITY AND CAPITAL RATIOS:                               |  |                                                             |           |    |                          |   |           |                            |  |   |           |   |  |   |           |   |  |   |           |  
|Average loans to average deposits                           |  |                                                             | 91.81     | %  |                          |   | 102.02    | %                          |  |   | 94.95     | % |  |   | 99.37     | % |  |   | 101.31    | %
|Period-end shareholders equity to total assets             |  |                                                             | 11.61     | %  |                          |   | 10.07     | %                          |  |   | 11.61     | % |  |   | 10.07     | % |  |   | 12.66     | %
|Average shareholders equity to average assets              |  |                                                             | 12.14     | %  |                          |   | 10.38     | %                          |  |   | 12.48     | % |  |   | 10.56     | % |  |   | 10.50     | %
|Tier 1 capital to risk-weighted assets                      |  |                                                             | 11.08     | %  |                          |   | 9.14      | %                          |  |   | 11.08     | % |  |   | 9.14      | % |  |   | 12.14     | %
|Total capital to risk-weighted assets                       |  |                                                             | 13.72     | %  |                          |   | 11.70     | %                          |  |   | 13.72     | % |  |   | 11.70     | % |  |   | 14.94     | %
|Tier 1 leverage ratio (Tier 1 capital to average assets)    |  |                                                             | 9.38      | %  |                          |   | 8.20      | %                          |  |   | 9.38      | % |  |   | 8.20      | % |  |   | 10.57     | %
|                                                            |  |                                                             |           |    |                         
|ASSET QUALITY RATIOS:                                       |  |                                                             |           |    |                          |   |           |                            |  |   |           |   |  |   |           |   |  |   |           |  
|Period-end allowance for credit losses to period-end loans  |  |                                                             | 1.53      | %  |                          |   | 1.16      | %                          |  |   | 1.53      | % |  |   | 1.16      | % |  |   | 1.34      | %
|Period-end allowance for loan losses to period-end loans    |  |                                                             | 1.50      | %  |                          |   | 1.14      | %                          |  |   | 1.50      | % |  |   | 1.14      | % |  |   | 1.30      | %
|Period-end allowance for loan losses to nonperforming loans |  |                                                             | 45.40     | %  |                          |   | 85.14     | %                          |  |   | 45.40     | % |  |   | 85.14     | % |  |   | 56.21     | %
|Nonperforming loans to period-end loans                     |  |                                                             | 3.30      | %  |                          |   | 1.34      | %                          |  |   | 3.30      | % |  |   | 1.34      | % |  |   | 2.31      | %
|Nonperforming assets to period-end assets                   |  |                                                             | 2.55      | %  |                          |   | 1.09      | %                          |  |   | 2.55      | % |  |   | 1.09      | % |  |   | 1.84      | %
|Net charge-offs to average loans (2)                        |  |                                                             | 1.67      | %  |                          |   | 0.24      | %                          |  |   | 0.93      | % |  |   | 0.29      | % |  |   | 0.40      | %



|(1) | The calculation of diluted earnings per common share excludes 1,470,431 and 1,504,079 options and nonvested share awards outstanding for the three and six months ended June 30,
2009, respectively, 837,381 options and nonvested share awards outstanding for the year 2008, and 772,415 and 779,262 options and nonvested share awards outstanding for the three and six month periods ended June 30, 2008, respectively, which
were antidilutive. In addition, the calculation excludes the Warrant to purchase 2.6 million shares of common stock outstanding for the three and six months ended June 30, 2009, which were antidilutive. Options and nonvested share awards
have been excluded from the computation of diluted less per share for the three months ended June 30, 2009, as the effect would have been antidilutive.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(4) | The efficiency ratio is calculated by dividing noninterest expense less acquisition costs, hurricane related costs and a one-time severance charge by tax equivalent basis net
interest income plus noninterest income less net gain (loss) on investment securities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



32



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RESULTS OF OPERATIONS

Net Income (Loss) Applicable to Common Shareholders Net loss applicable to common shareholders was $4.9 million, or $0.06 per diluted common share, for the second quarter ended June 30, 2009, compared to net income
applicable to common shareholders of $10.3 million, or $0.14 per diluted common share, earned for the second quarter of 2008. Net income applicable to common shareholders for the six months ended June 30, 2009 was $672 thousand, or $0.01 per
diluted common share, compared to $21.9 million, or $0.30 per diluted common share earned for the same period in 2008.

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. During 2008, the FOMC significantly reduced overnight interest rates by 225 basis points to 2.00% at June 30, 2008 and an additional 175 basis points to 0.25% at December 31, 2008.
Rates remained at this historically low level throughout the first half of 2009. This decline in interest rates negatively impacted our net interest income and margin during 2008 and 2009.



33



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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)      |          
|                                                      |  | 2009                        |           |   | 2008     |  
|                                                      |  | AverageBalance              |           |   | Interest |   | AverageYield/Rate |  |      | AverageBalance |  |   | Interest  |   | AverageYield/Rate |  
|Interest-Earning Assets:                              |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Loans held for sale (1)                               |  | $                           | 2,714     |   |          | $ | 40                |  | 5.84 | %              |  | $ | 94,801    |   |                   | $ | 1,540  |  | 6.53 | %
|Loans held for investment (1):                        |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Taxable                                               |  |                             | 3,634,159 |   |          |   | 51,598            |  | 5.69 | %              |  |   | 3,538,656 |   |                   |   | 58,510 |  | 6.65 | %
|Non-taxable (2)                                       |  |                             | 5,294     |   |          |   | 77                |  | 5.87 | %              |  |   | 2,321     |   |                   |   | 46     |  | 7.89 | %
|Securities:                                           |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Taxable                                               |  |                             | 761,249   |   |          |   | 8,815             |  | 4.64 | %              |  |   | 622,794   |   |                   |   | 7,408  |  | 4.78 | %
|Non-taxable (2)                                       |  |                             | 96,447    |   |          |   | 1,292             |  | 5.37 | %              |  |   | 96,814    |   |                   |   | 1,285  |  | 5.34 | %
|Other interest-earning assets                         |  |                             | 39,815    |   |          |   | 26                |  | 0.26 | %              |  |   | 10,998    |   |                   |   | 54     |  | 1.98 | %
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total interest-earning assets                         |  |                             | 4,539,678 |   |          |   | 61,848            |  | 5.46 | %              |  |   | 4,366,384 |   |                   |   | 68,843 |  | 6.34 | %
|                                                      |  |                             |           |   |          |  
|Noninterest-earning assets:                           |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Cash and due from banks                               |  |                             | 91,647    |   |          |   |                   |  |      |                |  |   | 97,745    |   |                   |   |        |  |      |  
|Premises and equipment, net                           |  |                             | 50,869    |   |          |   |                   |  |      |                |  |   | 40,980    |   |                   |   |        |  |      |  
|Other assets                                          |  |                             | 365,025   |   |          |   |                   |  |      |                |  |   | 367,250   |   |                   |   |        |  |      |  
|Allowance for loan losses                             |  |                             | (55,899   | ) |          |   |                   |  |      |                |  |   | (34,894   | ) |                   |   |        |  |      |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total noninterest-earning assets                      |  |                             | 451,642   |   |          |   |                   |  |      |                |  |   | 471,081   |   |                   |   |        |  |      |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|                                                      |  |                             |           |   |          |  
|Total Assets                                          |  | $                           | 4,991,320 |   |          |   |                   |  |      |                |  | $ | 4,837,465 |   |                   |   |        |  |      |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|                                                      |  |                             |           |   |          |  
|Interest-Bearing Liabilities:                         |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Deposits:                                             |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Demand and savings                                    |  | $                           | 1,674,468 |   |          | $ | 3,886             |  | 0.93 | %              |  | $ | 1,417,453 |   |                   | $ | 3,889  |  | 1.10 | %
|Certificates and other time                           |  |                             | 1,175,434 |   |          |   | 6,503             |  | 2.22 | %              |  |   | 1,056,022 |   |                   |   | 8,662  |  | 3.30 | %
|Other borrowed funds                                  |  |                             | 216,342   |   |          |   | 425               |  | 0.79 | %              |  |   | 595,081   |   |                   |   | 3,409  |  | 2.30 | %
|Subordinated debt                                     |  |                             | 77,701    |   |          |   | 885               |  | 4.57 | %              |  |   | 49,511    |   |                   |   | 864    |  | 7.02 | %
|Junior subordinated debt                              |  |                             | 82,734    |   |          |   | 1,155             |  | 5.60 | %              |  |   | 82,734    |   |                   |   | 1,384  |  | 6.73 | %
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total interest-bearing liabilities                    |  |                             | 3,226,679 |   |          |   | 12,854            |  | 1.60 | %              |  |   | 3,200,801 |   |                   |   | 18,208 |  | 2.29 | %
|                                                      |  |                             |           |   |          |  
|Noninterest-bearing sources:                          |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Demand deposits                                       |  |                             | 1,117,335 |   |          |   |                   |  |      |                |  |   | 1,090,439 |   |                   |   |        |  |      |  
|Other liabilities                                     |  |                             | 41,548    |   |          |   |                   |  |      |                |  |   | 44,109    |   |                   |   |        |  |      |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total noninterest-bearing liabilities                 |  |                             | 1,158,883 |   |          |   |                   |  |      |                |  |   | 1,134,548 |   |                   |   |        |  |      |  
|                                                      |  |                             |           |   |          |  
|Shareholders equity                                  |  |                             | 605,758   |   |          |   |                   |  |      |                |  |   | 502,116   |   |                   |   |        |  |      |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|                                                      |  |                             |           |   |          |  
|Total Liabilities and Shareholders Equity            |  | $                           | 4,991,320 |   |          |   |                   |  |      |                |  | $ | 4,837,465 |   |                   |   |        |  |      |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|                                                      |  |                             |           |   |          |  
|Tax Equivalent Net Interest Income and Margin (2) (3) |  |                             |           |   |          |   | 48,994            |  | 4.33 | %              |  |   |           |   |                   |   | 50,635 |  | 4.66 | %
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|                                                      |  |                             |           |   |          |  
|Tax Equivalent Adjustment:                            |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Loans                                                 |  |                             |           |   |          |   | 24                |  |      |                |  |   |           |   |                   |   | 14     |  |      |  
|Securities                                            |  |                             |           |   |          |   | 402               |  |      |                |  |   |           |   |                   |   | 377    |  |      |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total tax equivalent adjustment                       |  |                             |           |   |          |   | 426               |  |      |                |  |   |           |   |                   |   | 391    |  |      |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Net Interest Income                                   |  |                             |           |   |          | $ | 48,568            |  |      |                |  |   |           |   |                   | $ | 50,244 |  |      |  
|                                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  



|(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.
|--- | ---------------------------------------------------------------------------------------------------------



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##### Table of Contents

|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|----------------------------------------------------- |  | ------------------------- | --------- | - | -------- | - | ----------------- |  | ---- | -------------- |  | - | --------- | - | ----------------- | - | ------- |  | ---- | -
|                                                      |  | Six Months Ended June 30, |          
|                                                      |  | (Dollars in thousands)    |          
|                                                      |  | 2009                      |           |   | 2008     |  
|                                                      |  | AverageBalance            |           |   | Interest |   | AverageYield/Rate |  |      | AverageBalance |  |   | Interest  |   | AverageYield/Rate |  
|Interest-Earning Assets:                              |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|Loans held for sale (1)                               |  | $                         | 2,297     |   |          | $ | 66                |  | 5.77 | %              |  | $ | 86,566    |   |                   | $ | 2,925   |  | 6.79 | %
|Loans held for investment (1):                        |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|Taxable                                               |  |                           | 3,704,239 |   |          |   | 104,512           |  | 5.69 | %              |  |   | 3,471,827 |   |                   |   | 120,136 |  | 6.96 | %
|Non-taxable (2)                                       |  |                           | 5,172     |   |          |   | 165               |  | 6.44 | %              |  |   | 2,648     |   |                   |   | 106     |  | 8.10 | %
|Securities:                                           |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|Taxable                                               |  |                           | 735,655   |   |          |   | 17,373            |  | 4.76 | %              |  |   | 595,068   |   |                   |   | 13,957  |  | 4.72 | %
|Non-taxable (2)                                       |  |                           | 96,668    |   |          |   | 2,595             |  | 5.41 | %              |  |   | 97,113    |   |                   |   | 2,536   |  | 5.25 | %
|Other interest-earning assets                         |  |                           | 24,989    |   |          |   | 32                |  | 0.26 | %              |  |   | 10,409    |   |                   |   | 117     |  | 2.26 | %
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|Total interest-earning assets                         |  |                           | 4,569,020 |   |          |   | 124,743           |  | 5.51 | %              |  |   | 4,263,631 |   |                   |   | 139,777 |  | 6.59 | %
|                                                      |  |                           |           |   |          |  
|Noninterest-earning assets:                           |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|Cash and due from banks                               |  |                           | 97,310    |   |          |   |                   |  |      |                |  |   | 98,061    |   |                   |   |         |  |      |  
|Premises and equipment, net                           |  |                           | 49,805    |   |          |   |                   |  |      |                |  |   | 38,690    |   |                   |   |         |  |      |  
|Other assets                                          |  |                           | 367,613   |   |          |   |                   |  |      |                |  |   | 354,544   |   |                   |   |         |  |      |  
|Allowance for loan losses                             |  |                           | (52,341   | ) |          |   |                   |  |      |                |  |   | (34,485   | ) |                   |   |         |  |      |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|Total noninterest-earning assets                      |  |                           | 462,387   |   |          |   |                   |  |      |                |  |   | 456,810   |   |                   |   |         |  |      |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|                                                      |  |                           |           |   |          |  
|Total Assets                                          |  | $                         | 5,031,407 |   |          |   |                   |  |      |                |  | $ | 4,720,441 |   |                   |   |         |  |      |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|                                                      |  |                           |           |   |          |  
|Interest-Bearing Liabilities:                         |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|Deposits:                                             |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|Demand and savings                                    |  | $                         | 1,620,419 |   |          | $ | 7,378             |  | 0.92 | %              |  | $ | 1,424,169 |   |                   | $ | 9,504   |  | 1.34 | %
|Certificates and other time                           |  |                           | 1,164,985 |   |          |   | 13,970            |  | 2.42 | %              |  |   | 1,091,002 |   |                   |   | 20,639  |  | 3.80 | %
|Other borrowed funds                                  |  |                           | 290,463   |   |          |   | 1,237             |  | 0.86 | %              |  |   | 459,351   |   |                   |   | 5,761   |  | 2.52 | %
|Subordinated debt                                     |  |                           | 77,760    |   |          |   | 1,864             |  | 4.83 | %              |  |   | 49,392    |   |                   |   | 1,896   |  | 7.72 | %
|Junior subordinated debt                              |  |                           | 82,734    |   |          |   | 2,359             |  | 5.75 | %              |  |   | 82,734    |   |                   |   | 2,984   |  | 7.25 | %
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|Total interest-bearing liabilities                    |  |                           | 3,236,361 |   |          |   | 26,808            |  | 1.67 | %              |  |   | 3,106,648 |   |                   |   | 40,784  |  | 2.64 | %
|                                                      |  |                           |           |   |          |  
|Noninterest-bearing sources:                          |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|Demand deposits                                       |  |                           | 1,123,747 |   |          |   |                   |  |      |                |  |   | 1,068,426 |   |                   |   |         |  |      |  
|Other liabilities                                     |  |                           | 43,613    |   |          |   |                   |  |      |                |  |   | 46,832    |   |                   |   |         |  |      |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|Total noninterest-bearing liabilities                 |  |                           | 1,167,360 |   |          |   |                   |  |      |                |  |   | 1,115,258 |   |                   |   |         |  |      |  
|                                                      |  |                           |           |   |          |  
|Shareholders equity                                  |  |                           | 627,686   |   |          |   |                   |  |      |                |  |   | 498,535   |   |                   |   |         |  |      |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|                                                      |  |                           |           |   |          |  
|Total Liabilities and Shareholders Equity            |  | $                         | 5,031,407 |   |          |   |                   |  |      |                |  | $ | 4,720,441 |   |                   |   |         |  |      |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|                                                      |  |                           |           |   |          |  
|Tax Equivalent Net Interest Income and Margin (2) (3) |  |                           |           |   |          |   | 97,935            |  | 4.32 | %              |  |   |           |   |                   |   | 98,993  |  | 4.67 | %
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|                                                      |  |                           |           |   |          |  
|Tax Equivalent Adjustment:                            |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|Loans                                                 |  |                           |           |   |          |   | 52                |  |      |                |  |   |           |   |                   |   | 33      |  |      |  
|Securities                                            |  |                           |           |   |          |   | 805               |  |      |                |  |   |           |   |                   |   | 720     |  |      |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|Total tax equivalent adjustment                       |  |                           |           |   |          |   | 857               |  |      |                |  |   |           |   |                   |   | 753     |  |      |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  
|Net Interest Income                                   |  |                           |           |   |          | $ | 97,078            |  |      |                |  |   |           |   |                   | $ | 98,240  |  |      |  
|                                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |      |  



|(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.
|--- | ---------------------------------------------------------------------------------------------------------



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Tax equivalent net interest income decreased $1.6 million or 3.2% to $49.0 million and $1.1 million or 1.1% to $97.9
million for the three and six month periods ended June 30, 2009, respectively, compared to the same time periods in 2008. Our tax equivalent net interest margin was 4.33% and 4.32% for the three and six month periods ended June 30, 2009,
respectively, compared to 4.66% and 4.67% for the three and six month periods ended June 30, 2008, respectively. This decline in net interest margin was due, in part, to the significant decline in short-term interest rates and an increase
in nonperforming assets. The negative impact of the decline in short-term interest rates was partially mitigated by the work we have done in recent 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.

Tax equivalent interest income on loans decreased $8.4 million and $18.4 million for the
three and six month periods ended June 30, 2009, respectively, compared to the same periods in 2008, due primarily to a decrease in yield earned of 95 basis points and 127 basis points for the three and six months ended June 30, 2009,
respectively, compared to the same periods in 2008. This decrease in yield was due to the decline in interest rates during 2008 and an increase in nonperforming loans during 2008 and 2009. For the purpose of calculating loan yields, average loan
balances include nonaccrual loans with no related interest income. Nonaccrual loans increased $65.1 million to $114 million at June 30, 2009 compared to June 30, 2008. Interest forgone on nonaccrual loans was $2.2 million and $3.5 million
for the three and six month periods ended June 30, 2009, respectively, compared to $632 thousand and $1.1 million for the same periods in 2008. This increase in nonaccrual loans resulted in a reduction in net interest margin of 14 basis points
and 11 basis points for the three and six month period ended June 30, 2009, respectively. The decrease in yield was partially offset by an increase in average total loans of $151 million or 4.2% for the six months ended June 30, 2009 over
the comparable period in 2008, and additional interest income from the interest rate hedge that we purchased in 2006 which provided additional interest income of $1.2 million or 10 basis points and $3.7 million or 16 basis points to net interest
margin for the three and six month periods ended June 30, 2009, respectively, compared to the same periods in 2008. The hedge converts a portion of our loan portfolio from variable rate loans to fixed rate loans.

Tax equivalent interest income on securities increased $1.4 million and $3.4 million for the three and six month periods ended June 30, 2009, respectively, compared
to the same periods in 2008 due to an increase in the average securities and yield earned. Average securities increased $138 million or 19.2% and $140 million or 20% for the three and six month periods ended June 30, 2009, respectively,
compared to the same periods in 2008.

Total interest expense decreased $5.4 million and $14.0 million for the three and six month periods ended
June 30, 2009, respectively, over the comparable periods in 2008 due primarily to a decline in interest rates and the utilization of lower cost noninterest and interest-bearing demand and savings deposits. The decline in interest rates was
partially offset by an increase in average interest-bearing liabilities for the three and six month periods ended June 30, 2009 of $26 million or 1.0% and $130 million or 4.2%, respectively, compared to the same periods in 2008. This decrease
in interest expense was primarily due to a decrease in interest expense on deposits of $2.2 million and $8.8 million for the three and six month periods ended June 30, 2009, respectively, compared to the same periods in 2008 resulting from a
decrease in the average rate paid on all interest-bearing deposits of 58 basis points and 86 basis points for the three and six month periods ended June 30, 2009, respectively, compared to the same periods in 2008.

Average other borrowed funds for the three and six month periods ended June 30, 2009 decreased $379 million and $169 million, respectively, compared to the same
periods in 2008. These borrowings provided additional funding at a rate of 0.79% and 0.86% for the three and six month periods ended June 30, 2009, respectively, for a decrease in funding costs of 151 basis points and 166 basis points for the
three and six month periods ended June 30, 2009, respectively, compared to the same periods in 2008. The decreased borrowings and interest rates contributed to a decrease in interest expense on other borrowings of $3.0 million and $4.5 million
for the three and six month periods ended June 30, 2009, respectively, compared to the same periods in 2008.

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



|                              |  |                                     |        |                                   |      |   |        |  |      |        |  |   |       
|----------------------------- |  | ----------------------------------- | ------ | --------------------------------- | ---- | - | ------ |  | ---- | ------ |  | - | ------
|                              |  | For the Three Months Ended June 30, |        | For the Six Months Ended June 30,
|                              |  | 2009                                |        |                                   | 2008 |   | 2009   |  | 2008
|Customer service fees         |  | $                                   | 3,752  |                                   |      | $ | 4,148  |  | $    | 7,864  |  | $ | 8,024 
|Net gain (loss) on securities |  |                                     | (2     | )                                 |      |   |       |  |      | 13     |  |   |      
|Wealth management fees        |  |                                     | 1,840  |                                   |      |   | 2,363  |  |      | 4,042  |  |   | 4,701 
|Bank-owned life insurance     |  |                                     | 861    |                                   |      |   | 937    |  |      | 1,767  |  |   | 1,761 
|Debit card income             |  |                                     | 596    |                                   |      |   | 679    |  |      | 1,171  |  |   | 1,268 
|Other                         |  |                                     | 3,446  |                                   |      |   | 2,743  |  |      | 6,434  |  |   | 5,831 
|                              |  |                                     |        |                                   |      |   |        |  |      |        |  |   |       
|Total                         |  | $                                   | 10,493 |                                   |      | $ | 10,870 |  | $    | 21,291 |  | $ | 21,585
|                              |  |                                     |        |                                   |      |   |        |  |      |        |  |   |       



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Total noninterest income for the three and six month periods ended June 30, 2009 decreased $377 thousand and $294
thousand, respectively, compared to the same periods 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, 2009 decreased $396 thousand and $160 thousand, respectively, compared to the same periods in 2008. This decrease was primarily due to lower transaction activity.

Wealth management fees decreased $523 thousand and $659 thousand for the three and six months ended June 30, 2009, respectively, compared to the same
periods in 2008. The decrease in wealth management fees was due primarily to a decline in investment management fees which are assessed based on the market value of managed assets. Our total assets under management have decreased over the prior year
due to recent market conditions. Our wealth management group provides customized solutions for high net worth customers by integrating financial services with traditional banking products and services such as private banking, money management,
full-service brokerage, financial planning, personal and institutional trust and retirement services, as well as insurance and risk management services.

Other noninterest income increased $703 thousand and $603 thousand for the three and six months ended June 30, 2009, respectively, compared to the same periods in 2008. This increase was due primarily to $1.4 million and $2.2 million
in gains recorded as a result of the cash flow hedge ineffectiveness for the three and six months ended June 30, 2009, respectively. These increases were partially offset by a decrease in lending fees of approximately $500 thousand and $800
thousand for the three and six months ended June 30, 2009, respectively, compared to the same periods in 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, |     
|                                                                          |  | 2009                                |        |                                   | 2008 |   | 2009   |  | 2008 |       
|Salaries and employee benefits                                            |  | $                                   | 24,152 |                                   |      | $ | 20,865 |  | $    | 46,429 |  | $ | 41,624 |  
|Occupancy                                                                 |  |                                     | 6,168  |                                   |      |   | 5,360  |  |      | 12,037 |  |   | 10,625 |  
|Technology                                                                |  |                                     | 2,475  |                                   |      |   | 2,305  |  |      | 4,980  |  |   | 4,635  |  
|Professional fees                                                         |  |                                     | 1,157  |                                   |      |   | 1,215  |  |      | 2,354  |  |   | 2,224  |  
|Postage, delivery and supplies                                            |  |                                     | 760    |                                   |      |   | 963    |  |      | 1,481  |  |   | 2,036  |  
|Marketing                                                                 |  |                                     | 499    |                                   |      |   | 724    |  |      | 930    |  |   | 1,137  |  
|Core deposit and other intangibles amortization                           |  |                                     | 565    |                                   |      |   | 586    |  |      | 1,130  |  |   | 1,171  |  
|Acquisition costs                                                         |  |                                     |       |                                   |      |   |       |  |      |       |  |   | 562    |  
|FDIC insurance assessments                                                |  |                                     | 4,001  |                                   |      |   | 596    |  |      | 5,233  |  |   | 1,201  |  
|Net gains and carrying costs of other real estate and foreclosed property |  |                                     | (103   | )                                 |      |   | 63     |  |      | 55     |  |   | (6     | )
|Other                                                                     |  |                                     | 4,347  |                                   |      |   | 5,031  |  |      | 8,990  |  |   | 9,887  |  
|                                                                          |  |                                     |        |                                   |      |   |        |  |      |        |  |   |        |  
|Total                                                                     |  | $                                   | 44,021 |                                   |      | $ | 37,708 |  | $    | 83,619 |  | $ | 75,096 |  
|                                                                          |  |                                     |        |                                   |      |   |        |  |      |        |  |   |        |  

Total noninterest expense for the three and six month periods ended June 30, 2009 increased $6.3 million and
$8.5 million, respectively, compared to the same periods in 2008. 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, 2009 increased $3.3 million and $4.8 million, respectively, compared to the same periods in 2008. These increases were primarily due to a one-time
severance charge of $2.1 million recorded during the second quarter of 2009 as part of our ongoing company-wide expense reduction initiative. The remaining increase was due primarily to a decrease in cost deferrals related to lending activities and
increases in employee benefits, including stock-based compensation, deferred compensation and additional employer matches due to changes in our 401(k) Plan.

Occupancy expense for the three and six month periods ended June 30, 2009 increased $808 thousand and $1.4 million compared to the same periods in 2008. This increase was due primarily to the consolidation of our central and corporate
offices into one central location in Houston. We expect to complete this move over the next two years as the timing of the move is aligned with the renewals and expirations of our existing leases. In addition, during 2009 we opened two new banking
centers in Houston.



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During the first quarter of 2008, we recorded $562 thousand in acquisition-related expenses incurred in connection with
the First Horizon branch acquisition. Acquisition expenses include retention bonuses and data processing costs related to the conversion of computer systems.

We have chosen to participate in the FDICs Temporary Liquidity Guarantee Program which allows funds in noninterest-bearing transaction deposit accounts to be fully FDIC-insured. FDIC insurance premiums increased $3.4 million and $4.0
million for the three and six month periods ended June 30, 2009, respectively, compared to the same periods in 2008, primarily due to increased FDIC assessment rates and higher average deposits. In addition, we recorded a special FDIC
assessment of $2.3 million during the second quarter of 2009. As of June 30 2009, the FDIC levied a special assessment to all insured depository institutions totaling five basis points of each institutions total assets less
Tier 1 capital. The special assessment is part of the FDICs efforts to rebuild the Deposit Insurance Fund. It is possible that an additional special assessment will be necessary in the fourth quarter, although the amount of such a special
assessment is uncertain. These special assessments depend upon a variety of factors which are beyond our control.

Other noninterest expense decreased $684
thousand and $897 thousand for the three and six month periods ended June 30, 2009, respectively, compared to the same periods in 2008. These decreases can be attributed to our ongoing company-wide expense reduction plan as we have identified
additional ways to reduce expenses in areas within the bank, which include consolidating certain banking centers, cutting vendor costs, and eliminating unnecessary service agreements. These actions are all part of building and maintaining a
long-term sustainable cost discipline throughout the entire organization.

Income Taxes - We provided $933 thousand and $4.2 million
for federal and state income taxes during the three and six month periods ended June 30, 2009, respectively, and $4.9 million and $10.5 million for the same periods in 2008, respectively. The effective tax rate was approximately 26% for the
three month period ended June 30, 2009 as compared to 32% for the same period in 2008. The effective tax rate was 30% for the six month period ended June 30, 2009 as compared to 32% for the same period in 2008. We expect the effective tax
rate to revert back to the 30% range for the remainder of 2009.

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, 2009 |           |   | December 31, 2008 |  
|                                                          |  | Amount        |           | % |                   |   | Amount |   | %         | 
|Commercial and industrial                                 |  | $             | 918,125   |   | 26.0              | % |        | $ | 1,093,942 |  | 28.8  | %
|Real estate:                                              |  |               |           |   |                   |   |        |   |           |  |       |  
|Commercial                                                |  |               | 1,766,721 |   | 49.9              | % |        |   | 1,763,712 |  | 46.5  | %
|Construction                                              |  |               | 458,386   |   | 13.0              | % |        |   | 545,303   |  | 14.4  | %
|Residential mortgage (including multi-family residential) |  |               | 323,483   |   | 9.1               | % |        |   | 309,622   |  | 8.2   | %
|Consumer/other                                            |  |               | 55,812    |   | 1.6               | % |        |   | 63,883    |  | 1.7   | %
|Foreign loans                                             |  |               | 14,694    |   | 0.4               | % |        |   | 15,828    |  | 0.4   | %
|                                                          |  |               |           |   |                   |   |        |   |           |  |       |  
|Total loans held for investment                           |  | $             | 3,537,221 |   | 100.0             | % |        | $ | 3,792,290 |  | 100.0 | %
|                                                          |  |               |           |   |                   |   |        |   |           |  |       |  

At June 30, 2009, loans held for investment were $3.5 billion, a decrease of $255 million or 6.7% over loans
held for investment at December 31, 2008. The decline in loan growth during 2009 was due in part to principal reductions in energy loans and a slowing demand resulting from customer decisions to defer new projects, reduce inventory positions,
and pay down lines of credit.

Our primary lending focus is commercial loans and owner-occupied real estate loans to businesses with annual revenues of
$100 million or less. Typically, our customers have financing requirements between $50 thousand and $5 million. At June 30, 2009, commercial real estate loans and commercial and industrial loans were 49.9% and 26.0%, respectively, of loans held
for investment.

We make commercial loans primarily to small and medium-sized businesses and to professionals. Our 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.



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

The following table summarizes our commercial, construction and multifamily residential real estate loan portfolios, excluding foreign loans, by the type of property securing the credit (dollars in thousands).
Multifamily residential real estate is included in the residential mortgage real estate loan category.



|                                 |  |               |           |   |       |  
|-------------------------------- |  | ------------- | --------- | - | ----- | -
|                                 |  | June 30, 2009 |          
|                                 |  | Amount        |           | % |      
|Property type:                   |  |               |           |   |       |  
|Office and office warehouse      |  | $             | 462,621   |   | 20.5  | %
|Retail                           |  |               | 383,991   |   | 17.0  | %
|Acquisition and land development |  |               | 250,379   |   | 11.1  | %
|Hospitality                      |  |               | 297,149   |   | 13.2  | %
|1-4 family                       |  |               | 120,069   |   | 5.3   | %
|Industrial warehouse             |  |               | 87,393    |   | 3.9   | %
|Multi-family residential         |  |               | 35,804    |   | 1.6   | %
|Other                            |  |               | 620,054   |   | 27.4  | %
|                                 |  |               |           |   |       |  
|                                 |  | $             | 2,257,460 |   | 100.0 | %
|                                 |  |               |           |   |       |  

The Bank makes automobile, boat, home improvement and other loans to consumers. These loans are primarily made to
customers who have other business relationships with us.

As of June 30, 2009, 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. Our largest concentration in any single industry is in the energy loan portfolio. At June 30, 2009, our energy loan portfolio totaled $334
million which represents 9.5% of total loans held for investment. The petroleum industry is usually divided into three major components: upstream, midstream and downstream. The composition of the collateral of our upstream energy portfolio, at
June 30, 2009, consists of 54% gas reserves and 46% oil reserves. The upstream oil sector is a term commonly used to refer to the exploration for and the recovery and production of crude oil and natural gas. The upstream oil sector is also
known as the exploration and production sector. These reserve-based loans represent approximately 70% of our energy loan portfolio. The remaining energy loan portfolio consists of well-secured loans to companies that would be classified as
midstream energy companies. A midstream energy company is a company that processes and transports crude oil and natural gas. 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, 2009, loans held for investment were 89.4% of deposits and 72.0% of total assets. Loans held for investment were 99.3% of deposits and 74.7% of total
assets at December 31, 2008.

Securities -Our securities portfolio at June 30, 2009 totaled $930 million as compared to $805
million at December 31, 2008, an increase of $125 million or 15.5%.

Net unrealized gains on the available-for-sale securities were $11.5 million at
June 30, 2009 as compared to $6.2 million at December 31, 2008.

We review investment securities on an ongoing basis for the presence of OTTI
with formal reviews performed quarterly. Net OTTI losses on individual investment securities are recognized as a realized loss through earnings when it is more likely than not that we will not collect all of the contractual cash flows or we are
unable to hold the securities to recovery.



39



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##### Table of Contents

For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be
required to sell prior to recovery of our amortized cost basis, we separate OTTI into the amount that is credit-related and the amount that is due to all other factors. The credit loss component is recognized in earnings and is the difference
between a securitys amortized cost basis and the present value of expected future cash flows discounted at the securitys effective interest rate. The amount due to all other factors is recognized in other comprehensive income.

During the second quarter of 2009, we recorded a $2.9 million OTTI on one held-to-maturity debt security which includes $14 thousand of
credit-related OTTI and $2.9 million recorded directly to other comprehensive income for the noncredit-related impairment amount.

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



|                                      |  |               |           |   |                   |   |        |   |           |  |       |  
|------------------------------------- |  | ------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                      |  | June 30, 2009 |           |   | December 31, 2008 |  
|                                      |  | Amount        |           | % |                   |   | Amount |   | %         | 
|Noninterest-bearing demand            |  | $             | 1,127,717 |   | 28.5              | % |        | $ | 1,123,746 |  | 29.4  | %
|Interest-bearing demand               |  |               | 1,670,437 |   | 42.1              | % |        |   | 1,523,969 |  | 39.9  | %
|Certificates and other time deposits: |  |               |           |   |                   |   |        |   |           |  |       |  
|Jumbo                                 |  |               | 644,965   |   | 16.3              | % |        |   | 660,427   |  | 17.3  | %
|Regular                               |  |               | 306,988   |   | 7.8               | % |        |   | 317,719   |  | 8.3   | %
|Brokered                              |  |               | 208,128   |   | 5.3               | % |        |   | 193,276   |  | 5.1   | %
|                                      |  |               |           |   |                   |   |        |   |           |  |       |  
|Total deposits                        |  | $             | 3,958,235 |   | 100.0             | % |        | $ | 3,819,137 |  | 100.0 | %
|                                      |  |               |           |   |                   |   |        |   |           |  |       |  

Total deposits as of June 30, 2009 increased $139 million to $4.0 billion, up 3.6% compared to $3.8 billion
at December 31, 2008. This increase was due to internal deposit growth. The percentage of interest-bearing and noninterest-bearing demand deposits to total deposits as of June 30, 2009 was 42.1% and 28.5%, respectively, and our loan to
deposit ratio was 89.4%.

Other Borrowed Funds  As of June 30, 2009, we had $177 million in other borrowings compared to $409
million at December 31, 2008, a decrease of $232 million. This decline in borrowings was the result of an increase in total deposits. Our primary source of other borrowings is the Federal Home Loan Bank (FHLB). These borrowings are
collateralized by mortgage loans, certain pledged securities, FHLB stock and any funds on deposit with the FHLB. FHLB advances are available to us under a security and pledge agreement. At June 30, 2009, we had total funds of $1.1 billion
available under this agreement of which $50.5 million was outstanding with an average interest rate of 2.37%. At June 30, 2009, we had $40.0 million of FHLB advances that mature in nine years and $500 thousand of FHLB advances with a remaining
maturity of one year. The remaining $10.0 million of FHLB advances had a maturity of one day. 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.

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, 2009 and December 31, 2008, we had securities sold under agreements to repurchase with banking customers of $9.8 million and $9.9 million, respectively.
Structured repurchase agreements totaled $50.0 million at June 30, 2009 and December 31, 2008 and consisted of agreements with two separate financial institutions totaling $25.0 million, each that will mature in 2015. These repurchase
agreements bear interest at a rate equal to LIBOR less 100 basis points and reset quarterly until the first quarter of 2010 at which time the rate will become fixed at 3.88% and 3.50%, respectively. The rate on these repurchase agreements was zero
at June 30, 2009. The rate on these repurchase agreements was 1.22% and 0.87%, respectively, at December 31, 2008.

Treasury Auction Facilities
(TAF) are term funds auctioned to depository institutions by the Federal Reserve Board. Each TAF auction is for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate). All advances must be fully
collateralized. At June 30, 2009, we had $40 million of TAF borrowings outstanding at a rate of 0.25%. At December 31, 2008, we had $100 million of TAF borrowings outstanding at a rate 0.42%.

We have federal funds purchased at correspondent banks that typically mature within one to ninety days. As of June 30, 2009, federal funds outstanding with
correspondent banks were $26.3 million and payable upon demand.



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##### Table of Contents

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.

Nonperforming assets consisted of the following (in thousands):



|                                          |  |              |         |   |                  |   |        |  
|----------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------ | -
|                                          |  | June 30,2009 |         |   | December 31,2008 |  
|Nonperforming loans:                      |  |              |         |   |                  |   |        |  
|Nonaccrual                                |  | $            | 114,069 |   |                  | $ | 87,491 |  
|Restructured                              |  |              | 2,828   |   |                  |   |        |  
|Real estate acquired by foreclosure       |  |              | 8,095   |   |                  |   | 5,625  |  
|Other repossessed assets                  |  |              | 419     |   |                  |   | 154    |  
|                                          |  |              |         |   |                  |   |        |  
|Total nonperforming assets                |  | $            | 125,411 |   |                  | $ | 93,270 |  
|                                          |  |              |         |   |                  |   |        |  
|                                          |  |             
|Accruing loans past due 90 days or more   |  | $            | 2,112   |   |                  | $ | 8,448  |  
|                                          |  |              |         |   |                  |   |        |  
|                                          |  |             
|Nonperforming loans to period-end loans   |  |              | 3.30    | % |                  |   | 2.31   | %
|Nonperforming assets to period-end assets |  |              | 2.55    | % |                  |   | 1.84   | %

Nonperforming assets were $125 million at June 30, 2009, a $32.1 million increase from December 31, 2008. The
increase in nonaccrual loans was due primarily to eight loan relationships totaling approximately $28 million. The largest of these loans is a $9.0 million multi-use land development loan that is not performing as agreed, however, we are in a
favorable position due to the underlying collateral. The remaining increase was primarily related to loans secured by owner-occupied commercial real estate. These loans are expected to have minimal losses due to the low loan to value of each of
these real estate secured credits.

Included in the nonperforming loans balance are nonperforming loans related to an energy customer that is currently in
Chapter 11 bankruptcy. Total exposure to this customer as of June 30, 2009 and December 31, 2008 was $18.1 million and $29.2 million, respectively, as we recorded a $9.6 million charge-off on this relationship during the second quarter of 2009.
While completing the Companys analysis of the allowance for credit losses for the quarter ended June 30, 2008, the Company was notified that this borrower was in the process of filing for Chapter 11 bankruptcy protection. This borrower was
part of a shared national credit totaling approximately $2.4 billion. The Companys participation was approximately $20 million at June 30, 2008. Due to the announced bankruptcy and the significance of this credit relationship to the Company,
management immediately placed the loan on nonaccrual and disclosed it as part of the Companys nonperforming loans as of June 30, 2008. At June 30, 2008 the Company recorded a provision for credit losses of $3.7 million. As legally required,
the Company funded additional proceeds of $9.2 million (net of an $800 thousand purchase discount) related to this borrower in July 2008, increasing the Companys overall exposure to $29.2 million in the third quarter of 2008. The Company
recorded an additional provision for credit losses of $600 thousand in the third quarter of 2008 due to this increased exposure. The estimated provision for both the second and third quarter of 2008 were based on managements review of
information indicating that the customer had significant, valuable energy and fixed assets.

During the first quarter of 2009, the borrower announced its
intentions to liquidate its various business units through direct sales and auctions and submitted an analysis of the expected sales proceeds of the various business units. After analyzing the information as submitted through the bankruptcy
proceedings and the new direction of the bankruptcy, management determined an additional $5.3 million provision was prudent bringing the total amount reserved on this relationship to $9.6 million, approximately 36% of the amount of debt outstanding
at March 31, 2009.

During the second quarter of 2009, the borrower filed its plan of reorganization with the Bankruptcy court which included firm
estimates of each creditors losses as well as the remaining assets of the company. As such, the Company recorded a charge-off of $9.6 million, the entire allowance for credit losses related to this relationship. No additional provision for
credit losses was necessary based on the valuations as presented in the bankruptcy proceedings. The Companys remaining net loan balance for this relationship is $18.1 million at June 30, 2009. It is expected that this relationship will be
fully resolved during the fourth quarter of 2009 when the plan of reorganization is expected to receive confirmation. The Company does not anticipate taking any additional material losses associated with this relationship in the future.

Accruing loans past due 90 days or more at June 30, 2009 totaled $2.1 million, down $6.3 million compared to $8.4 million at December 31, 2008.

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 nonperforming loans and on the resulting amount of charge-offs for the period.

The provision for credit losses for the three and six months ended June 30, 2009 was $11.5 million and $20.5 million, respectively, as compared to $8.2 million and $12.3 million for the same periods in 2008, respectively.

In the third quarter of 2008, we recorded a $2.7 million provision for credit losses related to Hurricane Ike. Approximately $220 million in outstanding loans had
been identified that had collateral located in areas within the Hurricane Evacuation Zones. In the months since the storm, we have closely monitored the performance of these loans. After a thorough review during the first quarter of 2009, it was
determined that the majority of these loans are expected to perform as agreed. A small number of these loans have moved to our monitored loan listing and have been allocated a specific reserve from the original Hurricane Ike reserve. As a result,
during the first quarter of 2009, we reduced the amount of unallocated allowance related to Hurricane Ike by $1.7 million.

Net charge-offs were $15.1
million or 1.67% (annualized) and $17.2 million or 0.93% of average total loans for the three and six months ended June 30, 2009, respectively, compared to $2.2 million or 0.24% (annualized) and $5.1 million or 0.29% of average total loans for
the same periods in 2008, respectively. The increase in charge-offs during the quarter ended June 30, 2009 included a $9.6 million charge-off related to an energy customer that is currently in Chapter 11 bankruptcy which had previously been
provided for in our allowance for loan losses as discussed above.



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The allowance for loan losses at June 30, 2009 was $53.1 million and represented 1.50% of total loans. The allowance
for loan losses at June 30, 2009 was 45.40% of nonperforming loans, down from 56.21% at December 31, 2008. The allowance for unfunded lending commitments was $1.1 million as of June 30, 2009 compared to $1.7 million as of
December 31, 2008.

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, |  
|                                                               |  | 2009                       |        |   | 2008                     |   |        | 2009 |  |   | 2008   |  
|Allowance for loan losses at beginning of period               |  | $                          | 56,703 |   |                          | $ | 35,681 |      |  | $ | 49,177 |   |  | $ | 34,446 |  
|Charge-offs:                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Commercial, financial, and industrial                          |  |                            | 13,523 |   |                          |   | 2,210  |      |  |   | 15,483 |   |  |   | 3,931  |  
|Real estate, mortgage and construction                         |  |                            | 1,903  |   |                          |   | 252    |      |  |   | 2,341  |   |  |   | 1,733  |  
|Consumer                                                       |  |                            | 331    |   |                          |   | 351    |      |  |   | 791    |   |  |   | 654    |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total charge-offs                                              |  |                            | 15,757 |   |                          |   | 2,813  |      |  |   | 18,615 |   |  |   | 6,318  |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Recoveries                                                     |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Commercial, financial, and industrial                          |  |                            | 286    |   |                          |   | 477    |      |  |   | 926    |   |  |   | 829    |  
|Real estate, mortgage and construction                         |  |                            | 180    |   |                          |   | 23     |      |  |   | 278    |   |  |   | 84     |  
|Consumer                                                       |  |                            | 163    |   |                          |   | 116    |      |  |   | 257    |   |  |   | 293    |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total recoveries                                               |  |                            | 629    |   |                          |   | 616    |      |  |   | 1,461  |   |  |   | 1,206  |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net charge-offs                                                |  |                            | 15,128 |   |                          |   | 2,197  |      |  |   | 17,154 |   |  |   | 5,112  |  
|Provision for loan losses                                      |  |                            | 11,500 |   |                          |   | 8,167  |      |  |   | 21,052 |   |  |   | 12,317 |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Allowance for loan losses at end of period                     |  |                            | 53,075 |   |                          |   | 41,651 |      |  |   | 53,075 |   |  |   | 41,651 |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                               |  |                            |        |  
|Allowance for unfunded loan commitments at beginning of period |  |                            | 1,102  |   |                          |   | 927    |      |  |   | 1,654  |   |  |   | 927    |  
|Provision (credit) for losses on unfunded loan commitments     |  |                            |       |   |                          |   |       |      |  |   | (552   | ) |  |   |       |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Allowance for unfunded loan commitments at end of period       |  |                            | 1,102  |   |                          |   | 927    |      |  |   | 1,102  |   |  |   | 927    |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total allowance for credit losses                              |  | $                          | 54,177 |   |                          | $ | 42,578 |      |  | $ | 54,177 |   |  | $ | 42,578 |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                               |  |                            |        |  
|Period-end allowance for credit losses to period-end loans     |  |                            | 1.53   | % |                          |   | 1.16   | %    |  |   | 1.53   | % |  |   | 1.16   | %
|Period-end allowance for loan losses to period-end loans       |  |                            | 1.50   | % |                          |   | 1.14   | %    |  |   | 1.50   | % |  |   | 1.14   | %
|Period-end allowance for loan losses to nonperforming loans    |  |                            | 45.40  | % |                          |   | 85.14  | %    |  |   | 45.40  | % |  |   | 85.14  | %
|Net charge-offs to average loans (annualized)                  |  |                            | 1.67   | % |                          |   | 0.24   | %    |  |   | 0.93   | % |  |   | 0.29   | %

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.



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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, 2009 and December 31, 2008:



|                                         |  |                                         |  
|---------------------------------------- |  | --------------------------------------- | -
|Changes in Interest Rates (Basis Points) |  | Increase(Decrease) inNet InterestIncome |  
|June 30, 2009                            |  |                                         |  
|+200                                     |  | 7.27                                    | %
|+100                                     |  | 3.15                                    | %
|Base                                     |  | 0.00                                    | %
|-100                                     |  | -6.80                                   | %
|                                         | 
|December 31, 2008                        |  |                                         |  
|+200                                     |  | 4.13                                    | %
|+100                                     |  | 2.86                                    | %
|Base                                     |  | 0.00                                    | %
|-100                                     |  | -4.92                                   | %

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,
2009, shareholders equity totaled $570 million or 11.6% of total assets, as compared to $643 million or 12.7% of total assets at December 31, 2008. Our risk-based capital ratios together with the minimum capital amounts and ratios at
June 30, 2009 were as follows (dollars in thousands):



|                                         |  |        |         |       |                                      |   |        |   |         |  |     |  
|---------------------------------------- |  | ------ | ------- | ----- | ------------------------------------ | - | ------ | - | ------- |  | --- | -
|                                         |  | Actual |         |       | For Minimum CapitalAdequacy Purposes |  
|                                         |  | Amount |         | Ratio |                                      |   | Amount |   | Ratio   | 
|Total capital (to risk weighted assets)  |  | $      | 556,820 |       | 13.7                                 | % |        | $ | 325,237 |  | 8.0 | %
|Tier 1 capital (to risk weighted assets) |  |        | 449,744 |       | 11.1                                 | % |        |   | 162,618 |  | 4.0 | %
|Tier 1 capital (to average assets)       |  |        | 449,744 |       | 9.4                                  | % |        |   | 191,796 |  | 4.0 | %

During 2008, we received $125 million in capital from the U.S. Treasury as the result of our participation in the
U.S. Treasurys Capital Purchase Program. During the second quarter of 2009, the Company fully redeemed the $125 million preferred stock that it sold to the U.S. Treasury in December of 2008. See Note 15 to our Consolidated Financial Statements
for further discussion of regulatory capital requirements.

Additionally, during the second quarter of 2009, the Company issued 8.3 million shares of
its common stock through a public stock offering, which resulted in net proceeds of approximately $54.6 million, after deducting underwriting fees and estimated offering expenses.

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



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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 2008 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, 2009, the aggregate amount of dividends, which legally could be paid without prior approval of various regulatory agencies, totaled $62.6
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, 2008. 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.



|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.

We enhanced review and evaluation control procedures to restrict modification of terms for loans, specifically extension of maturity dates. We review
these control procedures on an ongoing basis and management anticipates that such control procedures will operate effectively for the remainder of 2009. Additional control procedures will be implemented as determined necessary.

There were no other 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, 2008. 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, 2009.



44



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##### Table of Contents

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

None.



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

On
April 27, 2009, we held our 2009 Annual Meeting of Shareholders, at which meeting our Shareholders approved the following:



| | (a) | Election of the following directors:
| | --- | ------------------------------------



|                   |  |            |  |           
|------------------ |  | ---------- |  | ----------
|Class II Directors |  | FOR        |  | WITHHELD  
|David L. Hatcher   |  | 47,683,739 |  | 19,473,252
|Raimundo Riojas E. |  | 57,886,917 |  | 9,270,074 
|Dan C. Tutcher     |  | 57,914,272 |  | 9,242,719 
|Sheldon I. Oster   |  | 57,853,532 |  | 9,303,459 

The terms of directors Edward R. Bardgett, J. Downey Bridgwater, George Beatty, Jr, Anat Bird,
Bruce J. Harper, Bernard A. Harris, Jr., MD, Glenn H. Johnson, R. Bruce LaBoon, Roland Rodriguez and Elizabeth C. Williams continued beyond the 2009 Annual Meeting of Shareholders.



| | (b) | Ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------



|           |  |         |  |        
|---------- |  | ------- |  | -------
|FOR        |  | AGAINST |  | ABSTAIN
|66,430,439 |  | 667,217 |  | 59,334 



| | (c) | Approve a non-binding advisory vote on our executive compensation.
| | --- | ------------------------------------------------------------------



|           |  |            |  |        
|---------- |  | ---------- |  | -------
|FOR        |  | AGAINST    |  | ABSTAIN
|56,598,056 |  | 10,239,667 |  | 317,952



| | (d) | Recommend that the Board of Directors take action to declassify the Board such that all directors stand for election annually.
| | --- | ------------------------------------------------------------------------------------------------------------------------------



|           |  |           |  |        
|---------- |  | --------- |  | -------
|FOR        |  | AGAINST   |  | ABSTAIN
|51,086,210 |  | 9,108,897 |  | 310,452



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

On August 5, 2009, our Board of Directors
unanimously approved an amendment to Section 5.2 of the Companys Amended and Restated Bylaws, which increased the ownership percentage required to call a special meeting of the shareholders from 10% to 25%. The amendment is effective August 5,
2009.

This summary is qualified in its entirety by reference to the First Amendment to the Amended and Restated Bylaws of Sterling Bancshares, Inc. filed
as Exhibit 3.1 to this Quarterly Report on Form 10-Q and incorporated by reference herein.



45



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##### Table of Contents

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



|       |  |                                                                                                                                                                                                                                                                           
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*3.1   |  | First Amendment to the Amended and Restated Bylaws of Sterling Bancshares, Inc.                                                                                                                                                                                           
|       | 
|10.1   |  | Redemption Letter Agreement, dated May 5, 2009, by and between Sterling Bancshares, Inc. and the United States Department of the Treasury [Incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K filed on May 5, 2009 (File No. 0-20750).]
|       | 
|11     |  | Statement Regarding Computation of Earnings Per Share (included as Note 12) to Consolidated Financial Statements on page 21 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.
|-- | ----------------------



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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 6, 2009 |  | By:                       |  | /s/ J. Downey Bridgwater                            
|                     |  |                           |  | J. Downey Bridgwater                                
|                     |  |                           |  | Chairman, President and Chief Executive Officer     
|                     |  |                           |  | (Principal Executive Officer)                       
|                     |  |                          
|Date: August 6, 2009 |  | By:                       |  | /s/ Zach L. Wasson                                  
|                     |  |                           |  | Zach L. Wasson                                      
|                     |  |                           |  | Executive Vice President and Chief Financial Officer
|                     |  |                           |  | (Principal Financial and Accounting Officer)        



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EXHIBIT INDEX



|        |  |                                                                                                                                                                                                                                                                           
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                               
|        | 
|*3.1    |  | First Amendment to the Amended and Restated Bylaws of Sterling Bancshares, Inc.                                                                                                                                                                                           
|        | 
|10.1    |  | Redemption Letter Agreement, dated May 5, 2009, by and between Sterling Bancshares, Inc. and the United States Department of the Treasury [Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on May 5, 2009 (File No. 0-20750).]
|        | 
|11      |  | Statement Regarding Computation of Earnings Per Share (included as Note 12) to Consolidated Financial Statements on page 21 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.
|-- | ----------------------



48