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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2008

OR



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

For the transition period from  to

Commission
file number: 0-20750

STERLING BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Texas                                                         |  | 74-2175590                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|2550 North Loop West, Suite 600 Houston, Texas                |  | 77092                              
|(Address of principal executive offices)                      |  | (Zip Code)                         

713-466-8300

(Registrants telephone number, including area code)

[None]

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ            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  þ        Accelerated filer   ̈        Non-accelerated
filer   ̈        Smaller Reporting Company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ̈            No  þ

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 November 1, 2008
|[Common Stock, $1.00 par value per share] |  | 73,221,705 shares              









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##### Table of Contents

STERLING BANCSHARES, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2008

TABLE OF CONTENTS



|           |  |                                                                                       |  |   
|---------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I.    |  | FINANCIAL INFORMATION                                                                 |  |   
|           |  |                                                                                      
|Item 1.    |  | Financial Statements (Unaudited)                                                      |  |   
|           |  |                                                                                      
|           |  | Consolidated Balance Sheets                                                           |  | 2 
|           |  |                                                                                      
|           |  | Consolidated Statements of Income                                                     |  | 3 
|           |  |                                                                                      
|           |  | Consolidated Statements of Shareholders Equity                                       |  | 4 
|           |  |                                                                                      
|           |  | Consolidated Statements of Cash Flows                                                 |  | 5 
|           |  |                                                                                      
|           |  | Notes to Consolidated Financial Statements                                            |  | 6 
|           |  |                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 21
|           |  |                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 37
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 37
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  |   
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 37
|           |  |                                                                                      
|Item 1A.   |  | Risk Factors                                                                          |  | 37
|           |  |                                                                                      
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 37
|           |  |                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 37
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 37
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 37
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 38
|           | 
|SIGNATURES |  | 39                                                                                   



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)



|                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                |  | September 30,2008 |           |   | December 31,2007 |  
|ASSETS                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                       |  | $                 | 113,070   |   |                  | $ | 133,670   |  
|Available-for-sale securities, at fair value                                                                                                                                                    |  |                   | 543,545   |   |                  |   | 476,690   |  
|Held-to-maturity securities, at amortized cost                                                                                                                                                  |  |                   | 174,434   |   |                  |   | 180,086   |  
|Loans held for sale                                                                                                                                                                             |  |                   | 322       |   |                  |   | 78,447    |  
|Loans held for investment                                                                                                                                                                       |  |                   | 3,744,772 |   |                  |   | 3,339,837 |  
|                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total loans                                                                                                                                                                                     |  |                   | 3,745,094 |   |                  |   | 3,418,284 |  
|Allowance for loan losses                                                                                                                                                                       |  |                   | (45,222   | ) |                  |   | (34,446   | )
|                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Loans, net                                                                                                                                                                                      |  |                   | 3,699,872 |   |                  |   | 3,383,838 |  
|Premises and equipment, net                                                                                                                                                                     |  |                   | 41,195    |   |                  |   | 27,905    |  
|Real estate acquired by foreclosure                                                                                                                                                             |  |                   | 4,562     |   |                  |   | 3,683     |  
|Goodwill                                                                                                                                                                                        |  |                   | 173,210   |   |                  |   | 168,815   |  
|Core deposit and other intangibles, net                                                                                                                                                         |  |                   | 14,444    |   |                  |   | 15,971    |  
|Accrued interest receivable                                                                                                                                                                     |  |                   | 17,968    |   |                  |   | 19,701    |  
|Other assets                                                                                                                                                                                    |  |                   | 164,929   |   |                  |   | 125,550   |  
|                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|TOTAL ASSETS                                                                                                                                                                                    |  | $                 | 4,947,229 |   |                  | $ | 4,535,909 |  
|                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                            |  |                   |           |   |                  |   |           |  
|LIABILITIES:                                                                                                                                                                                    |  |                   |           |   |                  |   |           |  
|Deposits:                                                                                                                                                                                       |  |                   |           |   |                  |   |           |  
|Noninterest-bearing demand                                                                                                                                                                      |  | $                 | 1,085,882 |   |                  | $ | 1,092,210 |  
|Interest-bearing demand                                                                                                                                                                         |  |                   | 1,397,614 |   |                  |   | 1,403,227 |  
|Certificates and other time                                                                                                                                                                     |  |                   | 1,090,624 |   |                  |   | 1,178,274 |  
|                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total deposits                                                                                                                                                                                  |  |                   | 3,574,120 |   |                  |   | 3,673,711 |  
|Other borrowed funds                                                                                                                                                                            |  |                   | 668,069   |   |                  |   | 197,147   |  
|Subordinated debt                                                                                                                                                                               |  |                   | 74,266    |   |                  |   | 48,694    |  
|Junior subordinated debt                                                                                                                                                                        |  |                   | 82,734    |   |                  |   | 82,734    |  
|Accrued interest payable and other liabilities                                                                                                                                                  |  |                   | 46,145    |   |                  |   | 53,364    |  
|                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                               |  |                   | 4,445,334 |   |                  |   | 4,055,650 |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                   |  |                   |          |   |                  |   |          |  
|SHAREHOLDERS EQUITY:                                                                                                                                                                           |  |                   |           |   |                  |   |           |  
|Preferred stock, $1 par value, 1,000,000 shares authorized, no shares issued and outstanding at September 30, 2008 and December 31,
2007                                                        |  |                   |          |   |                  |   |          |  
|Common stock, $1 par value, 150,000,000 shares authorized, 75,086,145 and 74,926,449 issued and 73,218,645 and 73,158,949 outstanding at
September 30, 2008 and December 31, 2007, respectively |  |                   | 75,086    |   |                  |   | 74,926    |  
|Capital surplus                                                                                                                                                                                 |  |                   | 113,611   |   |                  |   | 110,367   |  
|Retained earnings                                                                                                                                                                               |  |                   | 326,826   |   |                  |   | 309,903   |  
|Treasury stock, at cost, 1,867,500 and 1,767,500 shares held at September 30, 2008 and December 31, 2007,
respectively                                                                          |  |                   | (21,399   | ) |                  |   | (20,493   | )
|Accumulated other comprehensive income, net of tax                                                                                                                                              |  |                   | 7,771     |   |                  |   | 5,556     |  
|                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                                      |  |                   | 501,895   |   |                  |   | 480,259   |  
|                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                      |  | $                 | 4,947,229 |   |                  | $ | 4,535,909 |  
|                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  

See Notes to Consolidated Financial Statements.



2



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STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share amounts)



|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|----------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ------ |  | - | ------- | - |  | - | -------
|                                                      |  | Three MonthsEnded September 30, |        | Nine MonthsEnded September 30,
|                                                      |  | 2008                            |        |                                | 2007 |   | 2008   |  |   | 2007   
|Interest income:                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Loans, including fees                                 |  | $                               | 59,636 |                                |      | $ | 67,033 |  | $ | 182,770 |   |  | $ | 193,872
|Securities:                                           |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Taxable                                               |  |                                 | 7,714  |                                |      |   | 6,111  |  |   | 21,671  |   |  |   | 17,327 
|Non-taxable                                           |  |                                 | 909    |                                |      |   | 867    |  |   | 2,725   |   |  |   | 2,597  
|Trading assets                                        |  |                                 | 21     |                                |      |   | 81     |  |   | 64      |   |  |   | 86     
|Federal funds sold                                    |  |                                 | 32     |                                |      |   | 58     |  |   | 98      |   |  |   | 480    
|Deposits in financial institutions                    |  |                                 | 2      |                                |      |   | 9      |  |   | 10      |   |  |   | 33     
|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Total interest income                                 |  |                                 | 68,314 |                                |      |   | 74,159 |  |   | 207,338 |   |  |   | 214,395
|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Interest expense:                                     |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Demand and savings deposits                           |  |                                 | 4,136  |                                |      |   | 8,038  |  |   | 13,640  |   |  |   | 21,682 
|Certificates and other time deposits                  |  |                                 | 8,763  |                                |      |   | 14,809 |  |   | 29,402  |   |  |   | 41,081 
|Other borrowed funds                                  |  |                                 | 3,432  |                                |      |   | 1,369  |  |   | 9,193   |   |  |   | 5,121  
|Subordinated debt                                     |  |                                 | 1,198  |                                |      |   | 1,175  |  |   | 3,094   |   |  |   | 3,487  
|Junior subordinated debt                              |  |                                 | 1,317  |                                |      |   | 1,673  |  |   | 4,301   |   |  |   | 4,562  
|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Total interest expense                                |  |                                 | 18,846 |                                |      |   | 27,064 |  |   | 59,630  |   |  |   | 75,933 
|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Net interest income                                   |  |                                 | 49,468 |                                |      |   | 47,095 |  |   | 147,708 |   |  |   | 138,462
|Provision for credit losses                           |  |                                 | 10,100 |                                |      |   | 850    |  |   | 22,417  |   |  |   | 2,220  
|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Net interest income after provision for credit losses |  |                                 | 39,368 |                                |      |   | 46,245 |  |   | 125,291 |   |  |   | 136,242
|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Noninterest income:                                   |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Customer service fees                                 |  |                                 | 3,882  |                                |      |   | 3,629  |  |   | 11,906  |   |  |   | 10,532 
|Net loss on securities                                |  |                                 | (187   | )                              |      |   |       |  |   | (187    | ) |  |   |       
|Wealth management fees                                |  |                                 | 2,255  |                                |      |   | 2,186  |  |   | 6,956   |   |  |   | 3,470  
|Other                                                 |  |                                 | 3,851  |                                |      |   | 4,818  |  |   | 12,711  |   |  |   | 12,083 
|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Total noninterest income                              |  |                                 | 9,801  |                                |      |   | 10,633 |  |   | 31,386  |   |  |   | 26,085 
|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Noninterest expense:                                  |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Salaries and employee benefits                        |  |                                 | 21,692 |                                |      |   | 20,634 |  |   | 63,316  |   |  |   | 60,090 
|Occupancy                                             |  |                                 | 5,367  |                                |      |   | 4,706  |  |   | 15,992  |   |  |   | 13,674 
|Technology                                            |  |                                 | 2,600  |                                |      |   | 2,260  |  |   | 7,235   |   |  |   | 6,404  
|Professional fees                                     |  |                                 | 1,257  |                                |      |   | 1,068  |  |   | 3,481   |   |  |   | 3,091  
|Postage, delivery and supplies                        |  |                                 | 871    |                                |      |   | 903    |  |   | 2,907   |   |  |   | 2,657  
|Marketing                                             |  |                                 | 627    |                                |      |   | 432    |  |   | 1,764   |   |  |   | 1,368  
|Core deposit and other intangibles amortization       |  |                                 | 586    |                                |      |   | 610    |  |   | 1,757   |   |  |   | 1,547  
|Acquisition costs                                     |  |                                 |       |                                |      |   |       |  |   | 562     |   |  |   | 920    
|Other                                                 |  |                                 | 5,997  |                                |      |   | 4,431  |  |   | 17,079  |   |  |   | 13,469 
|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Total noninterest expense                             |  |                                 | 38,997 |                                |      |   | 35,044 |  |   | 114,093 |   |  |   | 103,220
|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Income before income taxes                            |  |                                 | 10,172 |                                |      |   | 21,834 |  |   | 42,584  |   |  |   | 59,107 
|Provision for income taxes                            |  |                                 | 3,082  |                                |      |   | 7,255  |  |   | 13,578  |   |  |   | 19,507 
|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Net Income                                            |  | $                               | 7,090  |                                |      | $ | 14,579 |  | $ | 29,006  |   |  | $ | 39,600 
|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Earnings per share:                                   |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Basic                                                 |  | $                               | 0.10   |                                |      | $ | 0.20   |  | $ | 0.40    |   |  | $ | 0.55   
|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Diluted                                               |  | $                               | 0.10   |                                |      | $ | 0.20   |  | $ | 0.39    |   |  | $ | 0.54   
|                                                      |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        

See Notes to Consolidated Financial Statements.



3



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STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(UNAUDITED)

(In thousands)



|                                                                                                   |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | -------------- |  | ------------ | - | ------ | ------- | - | ------ | -------- | ------ | ------- | -------------- | - | -------- | ----------------------------- |  | ------ | ------- | - | ------ | ------ | - | ------------- | - | ------- | ----- |  | - | ------ | - |  | - | ------- | -
|                                                                                                   |  | PreferredStock |  | Common Stock |   |        | Capital |   |        | Retained |        |         | Treasury Stock |   |          | AccumulatedOtherComprehensive |  |        |         |  
|                                                                                                   |  | Shares         |  | Amount       |   | Shares |         |   | Amount |          |        | Surplus |                |   | Earnings |                               |  | Shares |         |   | Amount |        |   | Income (Loss) |   |         | Total | 
|BALANCE AT JANUARY 1, 2007                                                                         |  |               |  | $            |  |        | 71,938  |   |        | $        | 71,938 |         |                | $ | 80,927   |                               |  | $      | 272,179 |   |        | (938   | ) |               | $ | (10,902 | )     |  | $ | (4,857 | ) |  | $ | 409,285 |  
|Comprehensive income:                                                                              |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   |         |  
|Net income                                                                                         |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        | 39,600  |   |        |        |   |               |   |         |       |  |   |        |   |  |   | 39,600  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $1,219 |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   | 2,264  |   |  |   | 2,264   |  
|Net change in unrealized gains on effective cash flow hedging derivatives, net of taxes of $1,069  |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   | 1,988  |   |  |   | 1,988   |  
|                                                                                                   |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                         |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   | 43,852  |  
|                                                                                                   |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                           |  |                |  |              |   |        | 511     |   |        |          | 511    |         |                |   | 3,861    |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   | 4,372   |  
|Issuance of common stock in connection with the purchase of Partners Bank of Texas                 |  |                |  |              |   |        | 2,345   |   |        |          | 2,345  |         |                |   | 24,176   |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   | 26,521  |  
|Repurchase of common stock                                                                         |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        | (830   | ) |               |   | (9,591  | )     |  |   |        |   |  |   | (9,591  | )
|Cash dividends paid                                                                                |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        | (11,404 | ) |        |        |   |               |   |         |       |  |   |        |   |  |   | (11,404 | )
|                                                                                                   |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   |         |  
|BALANCE AT SEPTEMBER 30, 2007                                                                      |  |               |  | $            |  |        | 74,794  |   |        | $        | 74,794 |         |                | $ | 108,964  |                               |  | $      | 300,375 |   |        | (1,768 | ) |               | $ | (20,493 | )     |  | $ | (605   | ) |  | $ | 463,035 |  
|                                                                                                   |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   |         |  
|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                                                                                         |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        | 29,006  |   |        |        |   |               |   |         |       |  |   |        |   |  |   | 29,006  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $125   |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   | 232    |   |  |   | 232     |  
|Net change in unrealized gains on effective cash flow hedging derivatives, net of taxes of $1,068  |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   | 1,983  |   |  |   | 1,983   |  
|                                                                                                   |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                         |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   | 31,221  |  
|                                                                                                   |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                           |  |                |  |              |   |        | 176     |   |        |          | 176    |         |                |   | 3,384    |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   | 3,560   |  
|Shares held in Rabbi Trust                                                                         |  |                |  |              |   |        | (16     | ) |        |          | (16    | )       |                |   | (140     | )                             |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   | (156    | )
|Repurchase of common stock                                                                         |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        | (100   | ) |               |   | (906    | )     |  |   |        |   |  |   | (906    | )
|Cash dividends paid                                                                                |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        | (12,083 | ) |        |        |   |               |   |         |       |  |   |        |   |  |   | (12,083 | )
|                                                                                                   |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   |         |  
|BALANCE AT SEPTEMBER 30, 2008                                                                      |  |               |  | $            |  |        | 75,086  |   |        | $        | 75,086 |         |                | $ | 113,611  |                               |  | $      | 326,826 |   |        | (1,868 | ) |               | $ | (21,399 | )     |  | $ | 7,771  |   |  | $ | 501,895 |  
|                                                                                                   |  |                |  |              |   |        |         |   |        |          |        |         |                |   |          |                               |  |        |         |   |        |        |   |               |   |         |       |  |   |        |   |  |   |         |  

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)



|                                                                                        |  |                                 |          |   |      |   |          |  
|--------------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                        |  | Nine Months ended September 30, |         
|                                                                                        |  | 2008                            |          |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |  |                                 |          |   |      |   |          |  
|Net income                                                                              |  | $                               | 29,006   |   |      | $ | 39,600   |  
|Adjustments to reconcile net income to net cash provided by operating activities:       |  |                                 |          |   |      |   |          |  
|Amortization and accretion of premiums and discounts on securities, net                 |  |                                 | 1,239    |   |      |   | 1,705    |  
|Net loss on securities                                                                  |  |                                 | 187      |   |      |   |         |  
|Net gain on trading assets                                                              |  |                                 |         |   |      |   | (2       | )
|Net gain on loans                                                                       |  |                                 | (127     | ) |      |   | (1,785   | )
|Provision for credit losses                                                             |  |                                 | 22,417   |   |      |   | 2,220    |  
|Writedowns, less gains on sale, of real estate acquired by foreclosure                  |  |                                 | (188     | ) |      |   | (169     | )
|Depreciation and amortization                                                           |  |                                 | 7,931    |   |      |   | 6,603    |  
|Proceeds from principal paydowns of trading securities                                  |  |                                 |         |   |      |   | 1        |  
|Proceeds from the sale of trading securities                                            |  |                                 |         |   |      |   | 13,137   |  
|Purchases of trading assets                                                             |  |                                 |         |   |      |   | (13,136  | )
|Stock-based compensation expense (net of tax benefit recognized)                        |  |                                 | 1,933    |   |      |   | 637      |  
|Excess tax benefits from share-based payment arrangements                               |  |                                 | (24      | ) |      |   | (387     | )
|Net decrease (increase) in loans held for sale                                          |  |                                 | 9,874    |   |      |   | (11,739  | )
|Net gain on sale of bank assets                                                         |  |                                 | (125     | ) |      |   | (555     | )
|Net (increase) decrease in accrued interest receivable and other assets                 |  |                                 | (20,878  | ) |      |   | 10,796   |  
|Net decrease in accrued interest payable and other liabilities                          |  |                                 | (5,505   | ) |      |   | (4,456   | )
|                                                                                        |  |                                 |          |   |      |   |          |  
|Net cash provided by operating activities                                               |  |                                 | 45,740   |   |      |   | 42,470   |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |  |                                 |          |   |      |   |          |  
|Proceeds from the maturities or calls and paydowns of held-to-maturity securities       |  |                                 | 13,829   |   |      |   | 12,925   |  
|Proceeds from the sale of available-for-sale securities                                 |  |                                 | 28,236   |   |      |   |         |  
|Proceeds from the maturities or calls and paydowns of available-for-sale securities     |  |                                 | 81,828   |   |      |   | 65,225   |  
|Purchases of available-for-sale securities                                              |  |                                 | (177,996 | ) |      |   | (107,856 | )
|Purchases of held-to-maturity securities                                                |  |                                 | (8,218   | ) |      |   | (25,582  | )
|Net increase in loans held for investment                                               |  |                                 | (307,877 | ) |      |   | (140,195 | )
|Purchase of bank-owned life insurance                                                   |  |                                 | (13,875  | ) |      |   |         |  
|Proceeds from sale of real estate acquired by foreclosure                               |  |                                 | 2,849    |   |      |   | 1,178    |  
|Purchase of Partners Bank of Texas (including transaction costs)                        |  |                                 |         |   |      |   | (25,319  | )
|Cash and cash equivalents acquired with Partners Bank of Texas                          |  |                                 |         |   |      |   | 33,324   |  
|Purchase of MBM Advisors, Inc. (including transaction costs)                            |  |                                 |         |   |      |   | (6,000   | )
|Cash and cash equivalents acquired with MBM Advisors, Inc.                              |  |                                 |         |   |      |   | 104      |  
|Payment of earnout obligations related to the acquisition of MBM Advisors, Inc.         |  |                                 | (2,222   | ) |      |   |         |  
|Cash and cash equivalents acquired with First Horizon National Corp. branch acquisition |  |                                 | 15,302   |   |      |   |         |  
|Net change in interest-bearing deposits in financial institutions                       |  |                                 |         |   |      |   | 198      |  
|Proceeds from sale of loans originated as held for investment                           |  |                                 | 11,490   |   |      |   | 49,909   |  
|Proceeds from sale of premises and equipment                                            |  |                                 | 169      |   |      |   | 111      |  
|Purchase of premises and equipment                                                      |  |                                 | (8,641   | ) |      |   | (5,273   | )
|                                                                                        |  |                                 |          |   |      |   |          |  
|Net cash used in investing activities                                                   |  |                                 | (365,126 | ) |      |   | (147,251 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                   |  |                                 |          |   |      |   |          |  
|Net (decrease) increase in deposit accounts                                             |  |                                 | (184,885 | ) |      |   | 161,386  |  
|Net increase (decrease) in other borrowed funds                                         |  |                                 | 420,922  |   |      |   | (88,834  | )
|Proceeds from issuance of long-term borrowings                                          |  |                                 | 50,000   |   |      |   |         |  
|Issuance of trust preferred securities                                                  |  |                                 |         |   |      |   | 25,775   |  
|Proceeds from issuance of subordinated debt                                             |  |                                 | 25,000   |   |      |   |         |  
|Proceeds from issuance of common stock                                                  |  |                                 | 870      |   |      |   | 3,163    |  
|Repurchase of common stock                                                              |  |                                 | (1,062   | ) |      |   | (9,591   | )
|Excess tax benefits from share-based payment arrangements                               |  |                                 | 24       |   |      |   | 387      |  
|Dividends paid                                                                          |  |                                 | (12,083  | ) |      |   | (11,404  | )
|                                                                                        |  |                                 |          |   |      |   |          |  
|Net cash provided by financing activities                                               |  |                                 | 298,786  |   |      |   | 80,882   |  
|                                                                                        |  |                                 |          |   |      |   |          |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                               |  |                                 | (20,600  | ) |      |   | (23,899  | )
|CASH AND CASH EQUIVALENTS:                                                              |  |                                 |          |   |      |   |          |  
|Beginning of period                                                                     |  |                                 | 133,670  |   |      |   | 134,775  |  
|                                                                                        |  |                                 |          |   |      |   |          |  
|End of period                                                                           |  | $                               | 113,070  |   |      | $ | 110,876  |  
|                                                                                        |  |                                 |          |   |      |   |          |  
|Supplemental information:                                                               |  |                                 |          |   |      |   |          |  
|Income taxes paid                                                                       |  | $                               | 21,125   |   |      | $ | 12,750   |  
|Interest paid                                                                           |  |                                 | 63,029   |   |      |   | 76,111   |  
|Noncash investing and financing activities -                                            |  |                                 |          |   |      |   |          |  
|Acquisition of real estate through foreclosure of collateral                            |  |                                 | 3,540    |   |      |   | 2,257    |  
|Transfer of loans from held for sale to held for investment                             |  |                                 | 112,129  |   |      |   | 14,368   |  
|Acquisition of Partners Bank of Texas                                                   |  |                                 |          |   |      |   |          |  
|Common stock issued                                                                     |  |                                 |         |   |      |   | 26,521   |  
|Acquisition of MBM Advisors, Inc.                                                       |  |                                 |          |   |      |   |          |  
|Payable to MBM Advisors, Inc. shareholders                                              |  |                                 | 1,955    |   |      |   | 2,774    |  

See Notes to Consolidated Financial Statements.



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##### Table of Contents

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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

Basis of Presentation

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

Recent Accounting Standards

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

On October 10, 2008, the FASB
issued FASB Staff Position 157- 3 (FSP 157-3) Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP 157-3 applies to financial assets within the scope of SFAS 157. FSP 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.

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

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

In December 2007, the FASB issued SFAS
No. 141(R) (SFAS 141R) Business Combinations (Revised 2007). SFAS 141R requires the acquiring entity in a business combination to recognize the assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and
financial effect of the business combination. This Statement is effective for fiscal years beginning after December 15, 2008.



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##### Table of Contents

Management has not completed its evaluation of the impact of this standard; however, the Company does expect SFAS 141R to have a significant impact on the
Companys accounting for business combinations closing on or after January 1, 2009.

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

In May 2008, the FASB issued SFAS No. 162 (SFAS 162) The Hierarchy of
Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The adoption of this standard did not have a significant impact on the Companys financial statements.



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

On February 8, 2008, the Company acquired ten
branches located in the Dallas and Fort Worth, Texas areas from First Horizon National Corp. (First Horizon). This transaction was accounted for using the purchase method of accounting in which the 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 $230 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 allocation of the purchase price is preliminary and subject to final valuation determinations. The results of operations for this acquisition have been included
in the Companys financial results since February 8, 2008.

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

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



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

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



|                                                                    |  |                    |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------------------------- |  | ------------------ | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                                    |  | September 30, 2008
|                                                                    |  | AmortizedCost      |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                    |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                  | 1,749   |                      | $ | 16                    |  | $ |           |   |  | $ | 1,765  
|Obligations of states of the U.S. and political subdivisions        |  |                    | 1,331   |                      |   | 27                    |  |   |           |   |  |   | 1,358  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                    | 527,468 |                      |   | 2,520                 |  |   | (4,039     | ) |  |   | 525,949
|Other securities                                                    |  |                    | 15,283  |                      |   |                      |  |   | (810       | ) |  |   | 14,473 
|                                                                    |  |                    |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                  | 545,831 |                      | $ | 2,563                 |  | $ | (4,849     | ) |  | $ | 543,545
|                                                                    |  |                    |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                    |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                  | 96,210  |                      | $ | 1,168                 |  | $ | (599       | ) |  | $ | 96,779 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                    | 78,224  |                      |   | 17                    |  |   | (7,835     | ) |  |   | 70,406 
|                                                                    |  |                    |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                  | 174,434 |                      | $ | 1,185                 |  | $ | (8,434     | ) |  | $ | 167,185
|                                                                    |  |                    |         |                      |   |                       |  |   |            |   |  |   |        
|                                                                    | 
|                                                                    |  | December 31, 2007 
|                                                                    |  | AmortizedCost      |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                    |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                  | 11,563  |                      | $ | 40                    |  | $ | (2         | ) |  | $ | 11,601 
|Obligations of states of the U.S. and political subdivisions        |  |                    | 1,693   |                      |   | 22                    |  |   | (1         | ) |  |   | 1,714  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                    | 450,132 |                      |   | 2,023                 |  |   | (3,376     | ) |  |   | 448,779
|Other securities                                                    |  |                    | 15,993  |                      |   |                      |  |   | (1,397     | ) |  |   | 14,596 
|                                                                    |  |                    |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                  | 479,381 |                      | $ | 2,085                 |  | $ | (4,776     | ) |  | $ | 476,690
|                                                                    |  |                    |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                    |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                  | 96,593  |                      | $ | 905                   |  | $ | (111       | ) |  | $ | 97,387 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                    | 83,493  |                      |   | 8                     |  |   | (1,225     | ) |  |   | 82,276 
|                                                                    |  |                    |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                  | 180,086 |                      | $ | 913                   |  | $ | (1,336     | ) |  | $ | 179,663
|                                                                    |  |                    |         |                      |   |                       |  |   |            |   |  |   |        



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



|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|------------------------------------------------------------------ |  | ------------------ | ------- | ---------------- | - | ------------- |  | ---------- | ------- |  | - | -------
|                                                                   |  | Available-for-Sale |         | Held-to-Maturity
|                                                                   |  | AmortizedCost      |         | Fair Value       |   | AmortizedCost |  | Fair Value
|Due in one year or less                                            |  | $                  | 2,109   |                  | $ | 2,126         |  | $          | 9,230   |  | $ | 9,348  
|Due after one year through five years                              |  |                    | 971     |                  |   | 997           |  |            | 50,883  |  |   | 51,512 
|Due after five years through ten years                             |  |                    |        |                  |   |              |  |            | 32,816  |  |   | 32,782 
|Due after ten years                                                |  |                    |        |                  |   |              |  |            | 3,281   |  |   | 3,137  
|Mortgage-backed securities and collateralized mortgage obligations |  |                    | 527,468 |                  |   | 525,949       |  |            | 78,224  |  |   | 70,406 
|Other securities                                                   |  |                    | 15,283  |                  |   | 14,473        |  |            |        |  |   |       
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|Total                                                              |  | $                  | 545,831 |                  | $ | 543,545       |  | $          | 174,434 |  | $ | 167,185
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        

The following table summarizes the proceeds received and gross realized gains and losses on investment securities
(in thousands):



|                              |  |                                  |        |                                 |   |      |  |      |        |  |   |  
|----------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ---- |  | ---- | ------ |  | - | -
|                              |  | Three months ended September 30, |        | Nine months ended September 30,
|                              |  | 2008                             |        | 2007                            |   | 2008 |  | 2007
|Proceeds from sales and calls |  | $                                | 28,236 |                                 | $ |     |  | $    | 28,236 |  | $ | 
|Gross realized gains          |  |                                  | 535    |                                 |   |     |  |      | 535    |  |   | 
|Gross realized losses         |  |                                  | 722    |                                 |   |     |  |      | 722    |  |   | 

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



|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |            |   |        |   |  |   |       
|------------------------------------------------------------------- |  | ------------------- | ------- | --------------------- | - | ------ | ---------- |  | ------------- | ------- | --------------------- | - | ------ | ---------- | - | ------ | - |  | - | ------
|                                                                    |  | September 30, 2008 
|                                                                    |  | Less than 12 Months |         | More than 12 Months  
|                                                                    |  | AmortizedCost       |         | GrossUnrealizedLosses |   |        | Fair Value |  | AmortizedCost |         | GrossUnrealizedLosses |   |        | Fair Value
|Available-for-Sale                                                  |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |            |   |        |   |  |   |       
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                   |        |                       | $ |       |            |  | $             |        |                       | $ |       |            | $ |       |   |  | $ |      
|Obligations of states of the U.S. and political subdivisions        |  |                     |        |                       |   |       |            |  |               |        |                       |   |       |            |   |       |   |  |   |      
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 228,202 |                       |   | (2,467 | )          |  |               | 225,735 |                       |   | 62,422 |            |   | (1,572 | ) |  |   | 60,850
|Other securities                                                    |  |                     | 3,062   |                       |   | (324   | )          |  |               | 2,738   |                       |   | 12,221 |            |   | (486   | ) |  |   | 11,735
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |            |   |        |   |  |   |       
|Total                                                               |  | $                   | 231,264 |                       | $ | (2,791 | )          |  | $             | 228,473 |                       | $ | 74,643 |            | $ | (2,058 | ) |  | $ | 72,585
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |            |   |        |   |  |   |       
|Held-to-Maturity                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |            |   |        |   |  |   |       
|Obligations of states of the U.S. and political subdivisions        |  | $                   | 21,066  |                       | $ | (599   | )          |  | $             | 20,467  |                       | $ |       |            | $ |       |   |  | $ |      
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 42,780  |                       |   | (5,257 | )          |  |               | 37,523  |                       |   | 33,083 |            |   | (2,578 | ) |  |   | 30,505
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |            |   |        |   |  |   |       
|Total                                                               |  | $                   | 63,846  |                       | $ | (5,856 | )          |  | $             | 57,990  |                       | $ | 33,083 |            | $ | (2,578 | ) |  | $ | 30,505
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |        |            |   |        |   |  |   |       



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

The average loss on securities in
an unrealized loss position was 3% of the amortized cost basis at September 30, 2008. During the third quarter of 2008, realized losses of $722 thousand were recorded on certain interest-only securities. These securities are tied to an
underlying government guaranteed loan and are subject to prepayment and interest rate fluctuations. These securities had been in an unrealized loss position since the fourth quarter of 2006. Given the current prepayment factors for the underlying
loan and managements inability to determine when a full recovery of the value may occur, management considered these securities to be other than temporarily impaired.



|                                                                    |  |                     |        |                       |   |      |            |  |               |        |                       |   |         |            |   |        |   |  |   |        
|------------------------------------------------------------------- |  | ------------------- | ------ | --------------------- | - | ---- | ---------- |  | ------------- | ------ | --------------------- | - | ------- | ---------- | - | ------ | - |  | - | -------
|                                                                    |  | December 31, 2007  
|                                                                    |  | Less than 12 Months |        | More than 12 Months  
|                                                                    |  | AmortizedCost       |        | GrossUnrealizedLosses |   |      | Fair Value |  | AmortizedCost |        | GrossUnrealizedLosses |   |         | Fair Value
|Available-for-Sale                                                  |  |                     |        |                       |   |      |            |  |               |        |                       |   |         |            |   |        |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                   |       |                       | $ |     |            |  | $             |       |                       | $ | 4,998   |            | $ | (2     | ) |  | $ | 4,996  
|Obligations of states of the U.S. and political subdivisions        |  |                     |       |                       |   |     |            |  |               |       |                       |   | 267     |            |   | (1     | ) |  |   | 266    
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 26,032 |                       |   | (124 | )          |  |               | 25,908 |                       |   | 221,995 |            |   | (3,252 | ) |  |   | 218,743
|Other securities                                                    |  |                     | 2,351  |                       |   | (48  | )          |  |               | 2,303  |                       |   | 13,642  |            |   | (1,349 | ) |  |   | 12,293 
|                                                                    |  |                     |        |                       |   |      |            |  |               |        |                       |   |         |            |   |        |   |  |   |        
|Total                                                               |  | $                   | 28,383 |                       | $ | (172 | )          |  | $             | 28,211 |                       | $ | 240,902 |            | $ | (4,604 | ) |  | $ | 236,298
|                                                                    |  |                     |        |                       |   |      |            |  |               |        |                       |   |         |            |   |        |   |  |   |        
|Held-to-Maturity                                                    |  |                     |        |                       |   |      |            |  |               |        |                       |   |         |            |   |        |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                   | 1,744  |                       | $ | (21  | )          |  | $             | 1,723  |                       | $ | 13,998  |            | $ | (90    | ) |  | $ | 13,908 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 44,562 |                       |   | (451 | )          |  |               | 44,111 |                       |   | 37,970  |            |   | (774   | ) |  |   | 37,196 
|                                                                    |  |                     |        |                       |   |      |            |  |               |        |                       |   |         |            |   |        |   |  |   |        
|Total                                                               |  | $                   | 46,306 |                       | $ | (472 | )          |  | $             | 45,834 |                       | $ | 51,968  |            | $ | (864   | ) |  | $ | 51,104 
|                                                                    |  |                     |        |                       |   |      |            |  |               |        |                       |   |         |            |   |        |   |  |   |        

Securities in an unrealized loss position for more than 12 months at December 31, 2007 included an other
securities category that was in a loss position of approximately 10% of amortized cost basis. Management believed that the unrealized losses on these securities were caused primarily by interest rate increases and prepayments. Because the decline in
market value was attributable to changes in interest rates, not credit quality, and because the Company had the ability and intent to hold these investments until a recovery of fair value, which may be at maturity, the Company did not consider these
investments to be other-than-temporarily impaired at December 31, 2007. There are no remaining securities in the Companys securities portfolio in a loss position greater than 10% of the Companys amortized cost basis at
December 31, 2007.

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

Securities with carrying values totaling
$481 million and fair values totaling $475 million were pledged to secure public deposits at September 30, 2008.



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

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



|                                |  |                    |           |   |                   |   |        |   |           |  |       |  
|------------------------------- |  | ------------------ | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                |  | September 30, 2008 |           |   | December 31, 2007 |  
|                                |  | Amount             |           | % |                   |   | Amount |   | %         | 
|Loans held for sale             |  | $                  | 322       |   | 0.0               | % |        | $ | 78,447    |  | 2.3   | %
|Loans held for investment       |  |                    |           |   |                   |   |        |   |           |  |       |  
|Domestic:                       |  |                    |           |   |                   |   |        |   |           |  |       |  
|Commercial and industrial       |  |                    | 1,076,274 |   | 28.7              | % |        |   | 912,604   |  | 26.7  | %
|Real estate:                    |  |                    |           |   |                   |   |        |   |           |  |       |  
|Commercial                      |  |                    | 1,562,835 |   | 41.7              | % |        |   | 1,387,014 |  | 40.6  | %
|Construction                    |  |                    | 732,174   |   | 19.6              | % |        |   | 714,600   |  | 20.9  | %
|Residential mortgage            |  |                    | 283,991   |   | 7.6               | % |        |   | 226,033   |  | 6.6   | %
|Consumer/other                  |  |                    | 68,719    |   | 1.8               | % |        |   | 75,626    |  | 2.2   | %
|Foreign                         |  |                    |           |   |                   |   |        |   |           |  |       |  
|Commercial and industrial       |  |                    | 18,493    |   | 0.5               | % |        |   | 21,571    |  | 0.6   | %
|Other loans                     |  |                    | 2,286     |   | 0.1               | % |        |   | 2,389     |  | 0.1   | %
|                                |  |                    |           |   |                   |   |        |   |           |  |       |  
|Total loans held for investment |  |                    | 3,744,772 |   | 100.0             | % |        |   | 3,339,837 |  | 97.7  | %
|                                |  |                    |           |   |                   |   |        |   |           |  |       |  
|Total loans                     |  | $                  | 3,745,094 |   | 100.0             | % |        | $ | 3,418,284 |  | 100.0 | %
|                                |  |                    |           |   |                   |   |        |   |           |  |       |  

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



|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|----------------------------------- |  | ---------------------- | --------- | ----------------------------------- | - | ------------------- |  | ----- | ------- |  | - | ---------
|                                    |  | Due in OneYear or Less |           | Due After OneYear ThroughFive Years |   | Due After FiveYears |  | Total
|Commercial and industrial           |  | $                      | 764,739   |                                     | $ | 249,462             |  | $     | 62,073  |  | $ | 1,076,274
|Real estate - commercial            |  |                        | 180,803   |                                     |   | 660,324             |  |       | 721,708 |  |   | 1,562,835
|Real estate - construction          |  |                        | 332,052   |                                     |   | 266,903             |  |       | 133,219 |  |   | 732,174  
|Foreign loans                       |  |                        | 11,980    |                                     |   | 8,799               |  |       |        |  |   | 20,779   
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,289,574 |                                     | $ | 1,185,488           |  | $     | 917,000 |  | $ | 3,392,062
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|                                    |  |                        |           |                                    
|Loans with a fixed interest rate    |  | $                      | 195,411   |                                     | $ | 760,325             |  | $     | 269,230 |  | $ | 1,224,966
|Loans with a floating interest rate |  |                        | 1,094,163 |                                     |   | 425,163             |  |       | 647,770 |  |   | 2,167,096
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,289,574 |                                     | $ | 1,185,488           |  | $     | 917,000 |  | $ | 3,392,062
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          

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

The largest concentration in any single industry is in the energy portfolio. At September 30,
2008, the energy portfolio totaled $439 million which represents approximately 11.7% of total loans held for investment. The energy portfolio consists primarily of upstream companies. The energy lending group participates in shared national credits
which are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. The energy lending group is the only group that consistently participates in shared national credits. As of
September 30, 2008, excluding the energy portfolio, there was no concentration of loans to any one type of industry exceeding 10% of total loans nor were there any loans classified as highly leveraged transactions.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported in the balance sheet as loans held for investment
stated at the principal amount outstanding adjusted for charge-offs, the allowance for loan losses, deferred fees or costs and unamortized premiums or discounts. Loans are classified as held for sale when management has positively determined that
the loans will be sold in the foreseeable future and the Company has the ability to do so. The classification may be made upon origination or subsequent to the origination or purchase. Once a decision has been made to sell



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loans not previously classified as held for sale, such loans are transferred into the held for sale classification and carried at the lower of cost or fair
value. During the nine months ended September 30, 2008 and 2007, the Company sold approximately $9 million and $21 million, respectively, of performing commercial real estate loans that were originally acquired as held for investment. These
sales resulted in net gains of $175 thousand and $350 thousand during the nine month periods ended September 30, 2008 and 2007, respectively. These loans were sold as part of the Companys ongoing management of the size, concentrations and
risk profile of the loan portfolio. Loans held for sale previously included certain commercial real estate loans and SBA guaranteed loans originated by the Bank. Due to current market conditions, in September of 2008, $112 million of these loans
were no longer classified as held for sale and are now considered as held for investment. The Company recorded a lower of cost or market adjustment of $266 thousand for the three and nine month periods ended September 30, 2008. There were no
lower of cost or market adjustments recorded for the same periods in 2007.

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):



|                  |  |                   |       |   |                  |   |       |  
|----------------- |  | ----------------- | ----- | - | ---------------- | - | ----- | -
|                  |  | September 30,2008 |       |   | December 31,2007 |  
|Beginning balance |  | $                 | 2,189 |   |                  | $ | 2,293 |  
|New loans         |  |                   | 112   |   |                  |   | 747   |  
|Repayments        |  |                   | (11   | ) |                  |   | (851  | )
|                  |  |                   |       |   |                  |   |       |  
|Ending balance    |  | $                 | 2,290 |   |                  | $ | 2,189 |  
|                  |  |                   |       |   |                  |   |       |  

The recorded investment in impaired loans was $70.5 million and $23.4 million at September 30, 2008 and
December 31, 2007, respectively. Such impaired loans required an allowance for loan losses of $10.8 million and $3.9 million, respectively. The average recorded investment in impaired loans for the three and nine months ended September 30,
2008 was $62.4 million and $39.9 million, respectively, and for the three and nine months ended September 30, 2007 was $11.7 million and $12.5 million, respectively. No interest on impaired loans was received during the three and nine months
ended September 30, 2008 and 2007.

Interest foregone on nonaccrual loans was $1.4 million and $2.6 million for the three and nine months ended
September 30, 2008, respectively, and $362 thousand and $1.0 million for the same time periods in 2007. There were no restructured loans as of September 30, 2008. The Company had one restructured loan totaling $769 thousand as of
December 31, 2007.

When management doubts a borrower's ability to meet payment obligations, which typically occurs when principal or interest
payments are more than 90 days past due, the loans are placed on nonaccrual status. Loans 90 days or more past due, not on nonaccrual were $3.1 million and $1.3 million at September 30, 2008 and December 31, 2007, respectively.



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

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



|                                                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                |  | 2008                            |        |   | 2007                           |   |        | 2008 |  |   | 2007   |  
|Allowance for Credit Losses                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Allowance for loan losses at beginning of period                |  | $                               | 41,651 |   |                                | $ | 33,450 |      |  | $ | 34,446 |   |  | $ | 32,027 |  
|Loans charged-off                                               |  |                                 | 6,249  |   |                                |   | 1,070  |      |  |   | 12,567 |   |  |   | 3,811  |  
|Loan recoveries                                                 |  |                                 | (447   | ) |                                |   | (995   | )    |  |   | (1,653 | ) |  |   | (2,293 | )
|                                                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net loans charged-off                                           |  |                                 | 5,802  |   |                                |   | 75     |      |  |   | 10,914 |   |  |   | 1,518  |  
|Allowance for loan losses associated with acquired institutions |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   | 1,496  |  
|Provision for loan losses                                       |  |                                 | 9,373  |   |                                |   | 850    |      |  |   | 21,690 |   |  |   | 2,220  |  
|                                                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Allowance for loan losses at end of period                      |  |                                 | 45,222 |   |                                |   | 34,225 |      |  |   | 45,222 |   |  |   | 34,225 |  
|                                                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Reserve for unfunded loan commitments at beginning of period    |  |                                 | 927    |   |                                |   | 927    |      |  |   | 927    |   |  |   | 927    |  
|Provision for losses on unfunded loan commitments               |  |                                 | 727    |   |                                |   |       |      |  |   | 727    |   |  |   |       |  
|                                                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Reserve for unfunded loan commitments at end of period          |  |                                 | 1,654  |   |                                |   | 927    |      |  |   | 1,654  |   |  |   | 927    |  
|                                                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total allowance for credit losses                               |  | $                               | 46,876 |   |                                | $ | 35,152 |      |  | $ | 46,876 |   |  | $ | 35,152 |  
|                                                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  



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

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



|                                 |  |         |        |             |   |        |             |  |       |        |  |   |         |  
|-------------------------------- |  | ------- | ------ | ----------- | - | ------ | ----------- |  | ----- | ------ |  | - | ------- | -
|                                 |  | Houston |        | San Antonio |   |        | North Texas |  | Total |       
|Balance, January 1, 2007         |  | $       | 29,613 |             | $ | 73,037 |             |  | $     | 28,208 |  | $ | 130,858 |  
|BOTH, Inc. goodwill adjustment   |  |         |       |             |   | 6      |             |  |       |       |  |   | 6       |  
|Partners Bank acquisition        |  |         | 30,050 |             |   |       |             |  |       |       |  |   | 30,050  |  
|MBM Advisors acquisition         |  |         | 7,901  |             |   |       |             |  |       |       |  |   | 7,901   |  
|                                 |  |         |        |             |   |        |             |  |       |        |  |   |         |  
|Balance, December 31, 2007       |  |         | 67,564 |             |   | 73,043 |             |  |       | 28,208 |  |   | 168,815 |  
|First Horizon branch acquisition |  |         |       |             |   |       |             |  |       | 5,080  |  |   | 5,080   |  
|Purchase accounting adjustments  |  |         | 167    |             |   | (852   | )           |  |       |       |  |   | (685    | )
|                                 |  |         |        |             |   |        |             |  |       |        |  |   |         |  
|Balance, September 30, 2008      |  | $       | 67,731 |             | $ | 72,191 |             |  | $     | 33,288 |  | $ | 173,210 |  
|                                 |  |         |        |             |   |        |             |  |       |        |  |   |         |  

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



|                                 |  |                         |        |   |                                 |   |       |       |  |   |        |  
|-------------------------------- |  | ----------------------- | ------ | - | ------------------------------- | - | ----- | ----- |  | - | ------ | -
|                                 |  | Core DepositIntangibles |        |   | CustomerRelationshipIntangibles |   |       | Total | 
|Balance, January 1, 2007         |  | $                       | 10,299 |   |                                 | $ |      |       |  | $ | 10,299 |  
|Amortization expense             |  |                         | (1,951 | ) |                                 |   | (186  | )     |  |   | (2,137 | )
|Partners Bank acquisition        |  |                         | 4,087  |   |                                 |   |      |       |  |   | 4,087  |  
|MBM Advisors acquisition         |  |                         |       |   |                                 |   | 3,722 |       |  |   | 3,722  |  
|                                 |  |                         |        |   |                                 |   |       |       |  |   |        |  
|Balance, December 31, 2007       |  |                         | 12,435 |   |                                 |   | 3,536 |       |  |   | 15,971 |  
|Amortization expense             |  |                         | (1,478 | ) |                                 |   | (279  | )     |  |   | (1,757 | )
|First Horizon branch acquisition |  |                         | 230    |   |                                 |   |      |       |  |   | 230    |  
|                                 |  |                         |        |   |                                 |   |       |       |  |   |        |  
|Balance, September 30, 2008      |  | $                       | 11,187 |   |                                 | $ | 3,257 |       |  | $ | 14,444 |  
|                                 |  |                         |        |   |                                 |   |       |       |  |   |        |  



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

The Company purchases bank owned life
insurance (BOLI) policies on the lives of certain officers and is the owner and beneficiary of the policies. These policies provide funding for long-term retirement and other employee benefits costs. The recorded balance of BOLI was
$94.6 million and $78.1 million at September 30, 2008 and December 31, 2007, respectively. At September 30, 2008, approximately $25 million of BOLI funds were held in separate accounts with investments in U.S. government,
mortgage-backed and corporate debt securities. The cash surrender value of the life insurance policies contained in separate accounts is further supported by a stable value wrap agreement, which protects against changes in the fair value of the
investments. BOLI policies are recorded within other assets in the Consolidated Balance Sheets at each policys respective cash surrender value, including the value of the stable value wrapper, with changes recorded in noninterest income in the
Consolidated Statements of Income.



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

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



|                     |  |                    |  |                                     |        |               |                        |                                      |   |                     |  |                   
|-------------------- |  | ------------------ |  | ----------------------------------- | ------ | ------------- | ---------------------- | ------------------------------------ | - | ------------------- |  | ------------------
|Description          |  | Issuance Date      |  | TrustPreferredSecuritiesOutstanding |        | Interest Rate |                        | JuniorSubordinatedDebt Owed ToTrusts |   | Final Maturity Date
|Statutory Trust One  |  | August 30, 2002    |  | $                                   | 20,000 |               | 3-monthLIBOR plus3.45% |                                      | $ | 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 plus3.10% |                                      |   | 4,124               |  | July 7, 2033      
|Capital Trust IV     |  | March 26, 2007     |  |                                     | 25,000 |               | 3-monthLIBOR plus1.60% |                                      |   | 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 were privately placed. The interest on these securities is a floating rate that resets quarterly. As of September 30, 2008, the floating rate was 7.21% on these securities compared to 8.28% at
December 31, 2007.



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The BOTH Capital Trust I preferred securities bear interest at a floating rate equal to the three-month LIBOR, plus
3.10%. As of September 30, 2008, the floating rate on these securities was 5.89% compared to 5.96% at December 31, 2007.

On March 26, 2007,
the Company completed the issuance and sale in a private placement of $25.0 million in aggregate principal amount of trust preferred securities issued by the Companys newly formed subsidiary, Sterling Bancshares Capital Trust IV, a Delaware
statutory trust (Trust IV). The trust preferred securities may be called at par by the Company at any time after June 15, 2012 and require quarterly distributions of interest by Trust IV to the holder of the trust preferred
securities. Distributions will be payable quarterly at a floating interest rate equal to the 3-month LIBOR plus 1.60% per annum. Trust IV simultaneously issued 774 shares of its common securities to the Company for the purchase price of $774
thousand, which constitutes all of the issued and outstanding common securities of Trust IV. As of September 30, 2008, the floating rate on these securities was 4.42% compared to 6.59% at December 31, 2007.



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

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

On June 30, 2008, the Bank
entered into a subordinated note in the aggregate principal amount of $25.0 million. The subordinated note bears interest at a rate equal to LIBOR plus 2.50% 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 September 30, 2008, the
floating rate was 5.32% on the subordinated note.



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

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

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

In June 2003, the Bank entered into an interest rate swap agreement with a notional amount of $50.0 million in which the Bank swapped the fixed rate to a floating rate.
Under the terms of the swap agreement, the Bank receives a fixed coupon rate of 7.375% and pays a variable interest rate equal to the three-month LIBOR that is reset on a quarterly basis, plus 3.62%. This swap is designated as a fair value hedge of
the Companys $50.0 million subordinated debentures and qualifies for the short-cut method of accounting (discussed in Note 9). The swaps fair value is included in other liabilities and was $706 thousand and $1.3 million with
a floating rate of 6.41% and 8.87% on September 30, 2008 and December 31, 2007, respectively. The Companys credit exposure on the interest rate swap is limited to its net favorable fair value, if any, and the interest payment
receivable from the counterparty.

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

For cash flow hedges, the gain or loss on the effective portion of the derivative hedging instrument is reported in other comprehensive income, while the ineffective
portion (indicated by the excess of the cumulative change in the fair value of the



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derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is recorded in current
earnings as other income or other expense. The accumulated net after-tax gain on the floor and collar contracts included in accumulated other comprehensive income totaled $9.3 million and $7.3 million at September 30, 2008 and December 31,
2007, respectively. The total fair value of the interest-rate collar and floor was $14.7 million and $12.2 million at September 30, 2008 and December 31, 2007, respectively, and is included in other assets.



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

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



|                                               |  |                   |         |                  |   |        
|---------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                               |  | September 30,2008 |         | December 31,2007
|Federal Home Loan Bank advances                |  | $                 | 532,500 |                  | $ | 187,500
|Federal funds purchased                        |  |                   | 72,440  |                  |   | 9,225  
|Securities sold under agreements to repurchase |  |                   | 63,129  |                  |   | 422    
|                                               |  |                   |         |                  |   |        
|Total                                          |  | $                 | 668,069 |                  | $ | 197,147
|                                               |  |                   |         |                  |   |        

Federal Home Loan Bank Advances - The Company has an available line of credit with the Federal
Home Loan Bank (FHLB) of Dallas, which allows the Company to borrow on a collateralized basis. At September 30, 2008, we had total funds of $1.1 billion available under this agreement of which $533 million was outstanding. At September 30,
2008, 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 two years. The remaining advances totaling $492 million had maturities of fewer than eight days. The
weighted-average interest rate on these borrowings was 2.45% at September 30, 2008. These borrowings are collateralized by a blanket lien against all eligible real estate loans, certain pledged securities, FHLB stock owned by the Company and
any funds on deposit with the FHLB. The Company utilizes these borrowings to meet liquidity needs. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits.

Federal Funds Purchased - The Company has federal funds purchased at correspondent banks. As of September 30, 2008, federal funds outstanding
with correspondent banks were $72.4 million and payable upon demand. These funds typically mature within one to ninety days.

Securities Sold Under
Agreements to Repurchase - Securities sold under agreements to repurchase represent the purchase of interests in securities by banking customers and structured repurchase agreements with other financial institutions. Securities sold under
agreements to repurchase are stated at the amount of cash received in connection with the transaction. Repurchase agreements with banking customers are settled on the following business day, while structured repurchase agreements with other
financial institutions will have varying terms. All securities sold under agreements to repurchase are collateralized by certain pledged securities. The securities underlying the structured repurchase agreements are held in safekeeping by the
purchasing financial institution. At September 30, 2008 and December 31, 2007, the Company had securities sold under agreements to repurchase with banking customers of $13.1 million and $422 thousand, respectively. Structured repurchase
agreements totaled $50.0 million at September 30, 2008 and consisted of agreements with two separate financial institutions. These agreements mature in 2015. The rate on these repurchase agreements was 1.81% and 1.82%, at September 30,
2008. The Company may be required to provide additional collateral based on the fair value of the underlying securities. There were no structured repurchase agreements outstanding on December 31, 2007.



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

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

Total stock-based compensation expense that was charged against income was $2.7 million and $822 thousand for the nine month periods ended September 30, 2008 and
2007, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $733 thousand and $185 thousand for the nine months ended September 30, 2008 and 2007, respectively.



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On December 20, 2007, the Company entered into an employment agreement with its chief executive officer
(CEO). This agreement replaces the existing agreement, in which the CEO was awarded 187,500 Performance Restricted Share Units (PRSUs), to be earned based on specified performance metrics. Under the revised agreement, the new
performance metrics include EPS Growth versus the Companys peers measure and a return on assets versus peers performance measure. In addition, the vesting period changed from four years to three years. Based on these performance
metrics, the CEO will earn a specific number of the eligible share units on December 31, 2009. As of September 30, 2008, there was $877 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 nine months ended September 30, 2008, 15,914 and 46,506 shares were subscribed for through payroll deductions under the Purchase Plan compared to 12,428 and 34,338 shares for
the same periods in 2007.



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

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



|                                        |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|--------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                        |  | Three months ended September 30, |        | Nine months ended September 30,
|                                        |  | 2008                             |        | 2007                            |   | 2008   |  | 2007
|Net income                              |  | $                                | 7,090  |                                 | $ | 14,579 |  | $    | 29,006 |  | $ | 39,600
|Basic:                                  |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Weighted average shares outstanding     |  |                                  | 73,186 |                                 |   | 73,029 |  |      | 73,158 |  |   | 72,476
|Diluted:                                |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Add incremental shares for:             |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Assumed exercise of outstanding options |  |                                  | 339    |                                 |   | 424    |  |      | 317    |  |   | 494   
|                                        |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total                                   |  |                                  | 73,525 |                                 |   | 73,453 |  |      | 73,475 |  |   | 72,970
|                                        |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Earnings per share:                     |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Basic                                   |  | $                                | 0.10   |                                 | $ | 0.20   |  | $    | 0.40   |  | $ | 0.55  
|                                        |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Diluted                                 |  | $                                | 0.10   |                                 | $ | 0.20   |  | $    | 0.39   |  | $ | 0.54  
|                                        |  |                                  |        |                                 |   |        |  |      |        |  |   |       

The incremental shares for the assumed exercise of the outstanding options were determined by application of the
treasury stock method. The calculation of diluted earnings per share excludes 736,371 and 756,871 options outstanding for the three and nine months ended September 30, 2008, respectively, and 373,849 and 339,362 options outstanding for the
three and nine month periods ended September 30, 2007, respectively, which were antidilutive.



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

Leases  The
Company leases certain office facilities and equipment under operating leases. Rent expense under all noncancelable operating lease obligations, net of income from noncancelable subleases aggregated, was approximately $2.5 million and $7.7 million
for the three and nine months ended September 30, 2008, respectively, and $2.4 million and $6.8 million for the three and nine months ended September 30, 2007, respectively. Refer to the 2007 Form 10-K for information regarding these
commitments.

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

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



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by law or the applicable plan, accelerated vesting and termination of all forfeiture provisions under all benefit plans, options, restricted stock grants or
other similar awards.



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

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

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



|                             |  |                   |         |                  |   |        
|---------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                             |  | September 30,2008 |         | December 31,2007
|Commitments to extend credit |  | $                 | 951,152 |                  | $ | 929,227
|Letters of credit            |  |                   | 157,049 |                  |   | 135,345

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

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

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



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

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

To meet the capital adequacy requirements, Sterling Bancshares and the Bank must maintain minimum capital amounts and ratios as defined in the
regulations. Management believes, as of September 30, 2008 and December 31, 2007, that Sterling Bancshares 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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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 September 30, 2008:                |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 497,689 |       | 11.8                         | % |        | $                                                                            | 336,748 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 386,402 |       | 9.2                          | % |        |                                                                              | 168,374 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 386,402 |       | 8.1                          | % |        |                                                                              | 190,242 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                              |  
|As of December 31, 2007:                 |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 454,030 |       | 11.1                         | % |        | $                                                                            | 327,180 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 369,965 |       | 9.1                          | % |        |                                                                              | 163,590 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 369,965 |       | 8.6                          | % |        |                                                                              | 172,366 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                              |  
|STERLING BANK:                           |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|As of September 30, 2008:                |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 492,931 |       | 11.7                         | % |        | $                                                                            | 336,476 |  | 8.0 | %      |  | $     | 420,595 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 381,644 |       | 9.1                          | % |        |                                                                              | 168,238 |  | 4.0 | %      |  |       | 252,357 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 381,644 |       | 8.0                          | % |        |                                                                              | 190,101 |  | 4.0 | %      |  |       | 237,627 |  | 5.0  | %
|                                         |  |                                           |         |       |                              |  
|As of December 31, 2007:                 |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 448,314 |       | 11.0                         | % |        | $                                                                            | 326,896 |  | 8.0 | %      |  | $     | 408,620 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 364,248 |       | 8.9                          | % |        |                                                                              | 163,448 |  | 4.0 | %      |  |       | 245,172 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 364,248 |       | 8.5                          | % |        |                                                                              | 172,193 |  | 4.0 | %      |  |       | 215,241 |  | 5.0  | %

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

Dividend restrictions -Dividends paid by the Bank are subject to certain restrictions imposed by regulatory
agencies. At September 30, 2008, the aggregate amount of dividends, which legally could be paid without prior approval of various regulatory agencies, totaled approximately $72.3 million by the Bank.



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

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

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



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Level 2 - Inputs other than those quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. These inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as
interest rates and yield curves that are observable at commonly quoted intervals. Level 2 assets and liabilities include available-for-sale securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative
contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Available-for-sale securities are valued using 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.

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



|                              |  |                              |         |                                                                  |   |                                            |  |                                        |         |  |   |      
|----------------------------- |  | ---------------------------- | ------- | ---------------------------------------------------------------- | - | ------------------------------------------ |  | -------------------------------------- | ------- |  | - | -----
|                              |  | Balance atSeptember 30, 2008 |         | Quoted Prices inActive Markets forIdentical Instruments(Level 1) |   | Significant OtherObservableInputs(Level
2) |  | SignificantUnobservableInputs(Level
3)
|Financial assets:             |  |                              |         |                                                                  |   |                                            |  |                                        |         |  |   |      
|Available-for-sale securities |  | $                            | 543,545 |                                                                  | $ |                                           |  | $                                      | 540,716 |  | $ | 2,829
|Cash flow hedges              |  |                              | 14,712  |                                                                  |   |                                           |  |                                        | 14,712  |  |   |     
|Loans held for sale           |  |                              | 322     |                                                                  |   |                                           |  |                                        |        |  |   | 322  
|Financial liabilities:        |  |                              |         |                                                                  |   |                                            |  |                                        |         |  |   |      
|Interest rate swap            |  |                              | 707     |                                                                  |   |                                           |  |                                        | 707     |  |   |     

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is,
the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets measured on a nonrecurring basis include impaired loans
that are collateral dependent, other real estate owned and other repossessed assets which are measured using appraisals and third party estimates and are considered Level 2 inputs within the fair value hierarchy. For the nine months ended
September 30, 2008, the Company had additions to impaired loans, other real estate owned and other repossessed assets of $64.2 million, $1.8 million and $234 thousand, respectively, which were outstanding at September 30, 2008 and measured
using the fair value hierarchy.

The table below presents a reconciliation for assets and liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) during 2008 and summarizes gains and losses due to changes in fair value. Level 3 available-for-sale securities include certain interest-only strips which are valued based on certain observable inputs such
as interest rates and credit spreads, as well as unobservable inputs such as estimated net charge-off and pre-payment rates. Level 3 loans held for sale at December 31, 2007 included certain commercial real estate loans and the guaranteed
portion of SBA loans originated by the Bank. Beginning in the third quarter of 2008, these loans were no longer considered as held for sale and were transferred to the Companys held for investment portfolio. These loans were valued based on
current investor market pricing from investors in these types of loans.



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|                                                                                                          |  |                                                                                 |        |   |                    |   |          |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ------ | - | ------------------ | - | -------- | -
|                                                                                                          |  | Level 3 InstrumentsFair Value Measurements UsingSignificant Unobservable Inputs |       
|                                                                                                          |  | Three Months EndedSeptember 30, 2008                                            |       
|                                                                                                          |  | Available-for-SaleSecurities                                                    |        |   | Loans heldfor sale |  
|Balance, June 30, 2008                                                                                    |  | $                                                                               | 2,822  |   |                    | $ | 112,614  |  
|Total gains or losses for the period included in:                                                         |  |                                                                                 |        |   |                    |   |          |  
|Noninterest income                                                                                        |  |                                                                                 | (722   | ) |                    |   | (266     | )
|Other comprehensive income                                                                                |  |                                                                                 | 1,065  |   |                    |   |         |  
|Purchases, issuances, settlements and amortization                                                        |  |                                                                                 | (336   | ) |                    |   |         |  
|Transfers in and/or out of Level 3                                                                        |  |                                                                                 |       |   |                    |   | (112,026 | )
|                                                                                                          |  |                                                                                 |        |   |                    |   |          |  
|Balance, September 30, 2008                                                                               |  | $                                                                               | 2,829  |   |                    | $ | 322      |  
|                                                                                                          |  |                                                                                 |        |   |                    |   |          |  
|Net unrealized losses included in net income for the period relating to assets held at September 30, 2008 |  | $                                                                               | (722   | ) |                    | $ | (266     | )
|                                                                                                          | 
|                                                                                                          |  | Level 3 InstrumentsFair Value
Measurements UsingSignificant Unobservable Inputs |       
|                                                                                                          |  | Nine Months EndedSeptember 30, 2008                                             |       
|                                                                                                          |  | Available-for-SaleSecurities                                                    |        |   | Loans heldfor sale |  
|Balance, January 1, 2008                                                                                  |  | $                                                                               | 3,586  |   |                    | $ | 78,447   |  
|Total gains or losses for the period included in:                                                         |  |                                                                                 |        |   |                    |   |          |  
|Noninterest income                                                                                        |  |                                                                                 | (722   | ) |                    |   | (266     | )
|Other comprehensive income                                                                                |  |                                                                                 | 1,039  |   |                    |   |         |  
|Purchases, issuances, settlements and amortization                                                        |  |                                                                                 | (1,074 | ) |                    |   |         |  
|Transfers in and/or out of Level 3                                                                        |  |                                                                                 |       |   |                    |   | (78,503  | )
|                                                                                                          |  |                                                                                 |        |   |                    |   |          |  
|Balance, September 30, 2008                                                                               |  | $                                                                               | 2,829  |   |                    | $ | 322      |  
|                                                                                                          |  |                                                                                 |        |   |                    |   |          |  
|Net unrealized losses included in net income for the period relating to assets held at September 30, 2008 |  | $                                                                               | (722   | ) |                    | $ | (266     | )

The Company realized losses on related level 3 assets of $988 thousand during the third quarter of 2008. There
were no realized gains or losses related to Level 3 assets recorded during the three and nine month periods ended September 30, 2007.



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

FORWARD-LOOKING STATEMENTS

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

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



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



| |  |  | changes in market rates and prices may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity
of our balance sheet;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our liquidity requirements could be adversely affected by changes in our assets and liabilities;
| | - |  | ------------------------------------------------------------------------------------------------



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



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

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

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

OVERVIEW

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

At September 30, 2008, we had consolidated total assets of $4.9 billion, total loans of $3.7 billion, total deposits of $3.6 billion and shareholders equity
of $502 million.

We reported net income of $7.1 million, or $0.10 per diluted share for the quarter ended September 30, 2008, compared to $14.6
million or $0.20 per diluted share earned for the third quarter of 2007. Net income for the nine months ended September 30, 2008 was $29.0 million, or $0.39 per diluted share, compared with $39.6 million, or $0.54 per diluted share earned for
the same period in 2007.

During September 2008, Hurricane Ike significantly impacted the Texas Gulf coast, including Houston and the surrounding areas.
Certain coastal counties received significant storm damage and the majority of the greater Houston area was without power for up to two weeks, which negatively impacted productivity of businesses and individuals in these areas. The first business
day after the storm, our central departments were fully operational to ensure all of our customers needs were met. Currently, 28 of our 29 Houston banking centers are fully operational with only a few having suffered minimal cosmetic damage.
The one banking center that is currently not open for business is located in our leased space at 2550 North Loop West, which also operates as our corporate headquarters. Our corporate offices were damaged during the storm resulting in over 200
employees being relocated to other offices throughout Houston. There was significant roof and water damage to the building and therefore is currently uninhabitable. It is expected that the building will be available for occupation towards the end of
the year. Our third quarter results include approximately $640 thousand in casualty and disaster recovery costs and an additional $2.7 million of loan loss provision related to Hurricane Ike.

While the current economic conditions and our regions recovery from Hurricane Ike certainly create significant challenges, they also provide considerable
opportunities. There has been historic consolidation in the financial services industry during the last several months. In order to bolster our already strong capital levels and enable us to take advantage of opportunities that may result from these
and other consolidations, we are currently considering participating in the Treasury Department's Capital Purchase Program which will allow us to sell senior preferred equity interests to the U.S. Treasury Department. Given the increased uncertainty
in the economy and potential loan losses related to Hurricane Ike, we have increased our allowance for credit losses as a percentage of loans from 1.16% in the second quarter to 1.25% at the end of the third quarter.

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
September 30, 2008.



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

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

RECENT ACCOUNTING
STANDARDS

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

On October 10, 2008, the FASB issued FASB Staff Position 157- 3 (FSP 157-3)
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP 157-3 applies to financial assets within the scope of SFAS 157. FSP 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.



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

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

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

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

In May 2008, the FASB issued SFAS No. 162 (SFAS 162)
The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The adoption of this standard did not have a significant impact on the Companys financial statements.



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SELECTED FINANCIAL DATA



|                                                            |  |                                                             |           |   |                                |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|----------------------------------------------------------- |  | ----------------------------------------------------------- | --------- | - | ------------------------------ | - | --------- | ---------------------- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                            |  | Three Months EndedSeptember 30,                             |           |   | Nine Months EndedSeptember 30, |   |           | Year EndedDecember 31, | 
|                                                            |  | 2008                                                        |           |   | 2007                           |   |           | 2008                   |  |   | 2007      |   |  | 2007 |          
|                                                            |  | (Dollars and shares in thousands, except per share amounts) |          
|INCOME STATEMENT DATA:                                      |  |                                                             |           |   |                                |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Net interest income                                         |  | $                                                           | 49,468    |   |                                | $ | 47,095    |                        |  | $ | 147,708   |   |  | $    | 138,462   |   |  | $ | 185,624   |  
|Provision for credit losses                                 |  |                                                             | 10,100    |   |                                |   | 850       |                        |  |   | 22,417    |   |  |      | 2,220     |   |  |   | 3,820     |  
|Noninterest income                                          |  |                                                             | 9,801     |   |                                |   | 10,633    |                        |  |   | 31,386    |   |  |      | 26,085    |   |  |   | 36,220    |  
|Noninterest expense                                         |  |                                                             | 38,997    |   |                                |   | 35,044    |                        |  |   | 114,093   |   |  |      | 103,220   |   |  |   | 139,354   |  
|Income before income taxes                                  |  |                                                             | 10,172    |   |                                |   | 21,834    |                        |  |   | 42,584    |   |  |      | 59,107    |   |  |   | 78,670    |  
|Net income                                                  |  |                                                             | 7,090     |   |                                |   | 14,579    |                        |  |   | 29,006    |   |  |      | 39,600    |   |  |   | 52,962    |  
|BALANCE SHEET DATA (at period-end):                         |  |                                                             |           |   |                                |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Total assets                                                |  | $                                                           | 4,947,229 |   |                                | $ | 4,440,177 |                        |  | $ | 4,947,229 |   |  | $    | 4,440,177 |   |  | $ | 4,535,909 |  
|Total loans                                                 |  |                                                             | 3,745,094 |   |                                |   | 3,374,351 |                        |  |   | 3,745,094 |   |  |      | 3,374,351 |   |  |   | 3,418,284 |  
|Allowance for loan losses                                   |  |                                                             | 45,222    |   |                                |   | 34,225    |                        |  |   | 45,222    |   |  |      | 34,225    |   |  |   | 34,446    |  
|Total securities                                            |  |                                                             | 717,979   |   |                                |   | 641,636   |                        |  |   | 717,979   |   |  |      | 641,636   |   |  |   | 656,776   |  
|Total deposits                                              |  |                                                             | 3,574,120 |   |                                |   | 3,661,763 |                        |  |   | 3,574,120 |   |  |      | 3,661,763 |   |  |   | 3,673,711 |  
|Other borrowed funds                                        |  |                                                             | 668,069   |   |                                |   | 136,555   |                        |  |   | 668,069   |   |  |      | 136,555   |   |  |   | 197,147   |  
|Subordinated debt                                           |  |                                                             | 74,266    |   |                                |   | 46,986    |                        |  |   | 74,266    |   |  |      | 46,986    |   |  |   | 48,694    |  
|Junior subordinated debt                                    |  |                                                             | 82,734    |   |                                |   | 82,734    |                        |  |   | 82,734    |   |  |      | 82,734    |   |  |   | 82,734    |  
|Shareholders equity                                        |  |                                                             | 501,895   |   |                                |   | 463,035   |                        |  |   | 501,895   |   |  |      | 463,035   |   |  |   | 480,259   |  
|COMMON SHARE DATA:                                          |  |                                                             |           |   |                                |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Earnings per share (1)                                      |  |                                                             |           |   |                                |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Basic shares                                                |  | $                                                           | 0.10      |   |                                | $ | 0.20      |                        |  | $ | 0.40      |   |  | $    | 0.55      |   |  | $ | 0.73      |  
|Diluted shares                                              |  | $                                                           | 0.10      |   |                                | $ | 0.20      |                        |  | $ | 0.39      |   |  | $    | 0.54      |   |  | $ | 0.72      |  
|Shares used in computing earnings per common share          |  |                                                             |           |   |                                |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Basic shares                                                |  |                                                             | 73,186    |   |                                |   | 73,029    |                        |  |   | 73,158    |   |  |      | 72,476    |   |  |   | 72,659    |  
|Diluted shares                                              |  |                                                             | 73,525    |   |                                |   | 73,453    |                        |  |   | 73,475    |   |  |      | 72,970    |   |  |   | 73,126    |  
|End of period common shares outstanding                     |  |                                                             | 73,219    |   |                                |   | 73,026    |                        |  |   | 73,219    |   |  |      | 73,026    |   |  |   | 73,159    |  
|Book value per common share at period-end                   |  |                                                             |           |   |                                |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Total                                                       |  | $                                                           | 6.85      |   |                                | $ | 6.34      |                        |  | $ | 6.85      |   |  | $    | 6.34      |   |  | $ | 6.56      |  
|Tangible                                                    |  | $                                                           | 4.29      |   |                                | $ | 3.84      |                        |  | $ | 4.29      |   |  | $    | 3.84      |   |  | $ | 4.04      |  
|Cash dividends paid per common share                        |  | $                                                           | 0.055     |   |                                | $ | 0.0525    |                        |  | $ | 0.165     |   |  | $    | 0.158     |   |  | $ | 0.210     |  
|Common stock dividend payout ratio                          |  |                                                             | 56.83     | % |                                |   | 26.29     | %                      |  |   | 41.65     | % |  |      | 28.80     | % |  |   | 28.77     | %
|SELECTED PERFORMANCE RATIOS AND OTHER DATA:                 |  |                                                             |           |   |                                |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Return on average common equity (2)                         |  |                                                             | 5.61      | % |                                |   | 12.67     | %                      |  |   | 7.75      | % |  |      | 11.99     | % |  |   | 11.77     | %
|Return on average tangible common equity (2)                |  |                                                             | 9.43      | % |                                |   | 21.72     | %                      |  |   | 12.86     | % |  |      | 19.73     | % |  |   | 18.39     | %
|Return on average assets (2)                                |  |                                                             | 0.57      | % |                                |   | 1.32      | %                      |  |   | 0.81      | % |  |      | 1.24      | % |  |   | 1.22      | %
|Return on average tangible assets (2)                       |  |                                                             | 0.63      | % |                                |   | 1.41      | %                      |  |   | 0.87      | % |  |      | 1.32      | % |  |   | 1.25      | %
|Tax equivalent net interest margin (3)                      |  |                                                             | 4.44      | % |                                |   | 4.74      | %                      |  |   | 4.59      | % |  |      | 4.82      | % |  |   | 4.77      | %
|Efficiency ratio (4)                                        |  |                                                             | 64.08     | % |                                |   | 60.38     | %                      |  |   | 62.57     | % |  |      | 61.54     | % |  |   | 61.84     | %
|Full-time equivalent employees                              |  |                                                             | 1,119     |   |                                |   | 1,039     |                        |  |   | 1,119     |   |  |      | 1,039     |   |  |   | 1,042     |  
|Number of banking centers                                   |  |                                                             | 59        |   |                                |   | 49        |                        |  |   | 59        |   |  |      | 49        |   |  |   | 49        |  
|LIQUIDITY AND CAPITAL RATIOS:                               |  |                                                             |           |   |                                |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Average loans to average deposits                           |  |                                                             | 101.77    | % |                                |   | 90.98     | %                      |  |   | 100.19    | % |  |      | 91.70     | % |  |   | 91.93     | %
|Period-end shareholders equity to total assets             |  |                                                             | 10.14     | % |                                |   | 10.43     | %                      |  |   | 10.14     | % |  |      | 10.43     | % |  |   | 10.59     | %
|Average shareholders equity to average assets              |  |                                                             | 10.20     | % |                                |   | 10.38     | %                      |  |   | 10.44     | % |  |      | 10.31     | % |  |   | 10.38     | %
|Period-end tangible capital to total tangible assets        |  |                                                             | 6.60      | % |                                |   | 6.58      | %                      |  |   | 6.60      | % |  |      | 6.58      | % |  |   | 6.79      | %
|Tier 1 capital to risk-weighted assets                      |  |                                                             | 9.18      | % |                                |   | 8.89      | %                      |  |   | 9.18      | % |  |      | 8.89      | % |  |   | 9.05      | %
|Total capital to risk-weighted assets                       |  |                                                             | 11.82     | % |                                |   | 10.91     | %                      |  |   | 11.82     | % |  |      | 10.91     | % |  |   | 11.10     | %
|Tier 1 leverage ratio (Tier 1 capital to average assets)    |  |                                                             | 8.15      | % |                                |   | 8.54      | %                      |  |   | 8.15      | % |  |      | 8.54      | % |  |   | 8.59      | %
|ASSET QUALITY RATIOS:                                       |  |                                                             |           |   |                                |   |           |                        |  |   |           |   |  |      |           |   |  |   |           |  
|Period-end allowance for credit losses to period-end loans  |  |                                                             | 1.25      | % |                                |   | 1.04      | %                      |  |   | 1.25      | % |  |      | 1.04      | % |  |   | 1.03      | %
|Period-end allowance for loan losses to period-end loans    |  |                                                             | 1.21      | % |                                |   | 1.01      | %                      |  |   | 1.21      | % |  |      | 1.01      | % |  |   | 1.01      | %
|Period-end allowance for loan losses to nonperforming loans |  |                                                             | 64.11     | % |                                |   | 292.74    | %                      |  |   | 64.11     | % |  |      | 292.74    | % |  |   | 170.41    | %
|Nonperforming loans to period-end loans                     |  |                                                             | 1.88      | % |                                |   | 0.35      | %                      |  |   | 1.88      | % |  |      | 0.35      | % |  |   | 0.59      | %
|Nonperforming assets to period-end assets                   |  |                                                             | 1.52      | % |                                |   | 0.33      | %                      |  |   | 1.52      | % |  |      | 0.33      | % |  |   | 0.53      | %
|Net charge-offs to average loans (2)                        |  |                                                             | 0.62      | % |                                |   |          |                        |  |   | 0.40      | % |  |      | 0.06      | % |  |   | 0.09      | %



|(1) | The calculation of diluted EPS excludes 736,371 and 756,871 options outstanding for the three and nine months ended September 30, 2008, respectively, 550,505 options for the
year ended 2007, and 373,849 and 339,362 options for the three and nine month periods ended September 30, 2007, respectively, which were 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 and hurricane related costs, an employee severance payment, and Trust Preferred Securities debt
issuance costs by tax equivalent basis net interest income plus noninterest income less net gain (loss) on sales of investment securities and less net gain on sale/leaseback transactions. Prior period amounts have been restated to reflect the
current methodology.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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RESULTS OF OPERATIONS

Net Income -Net income was $7.1 million, or $0.10 per diluted share, for the third quarter ended September 30, 2008, compared to $14.6 million, or $0.20 per diluted share, earned for the third quarter of 2007. Net income
for the nine months ended September 30, 2008 was $29.0 million, or $0.39 per diluted share, compared with $39.6 million, or $0.54 per diluted share earned for the same period in 2007.

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

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

The Federal Reserve Board significantly influences market interest rates, including rates offered for loans and deposits by many financial institutions. Generally, when
the Federal Open Market Committee (FOMC) of the Federal Reserve Board changes the target overnight interest rate charged by banks, the market responds with a similar change in the prime lending rate. Our loan portfolio is impacted
significantly by changes in short-term interest rates. From June 2006 until September of 2007, overnight interest rates remained consistent at 5.25%. Beginning in September 2007, the FOMC gradually decreased overnight interest rates by 375 basis
points to 1.50% at September 30, 2008. This gradual decline in interest rates has negatively impacted our net interest income and margin during 2008.

Tax equivalent net interest income increased $2.5 million or 5.2% to $49.9 million and $9.4 million or 6.8% to $149 million for the three and nine month periods ended September 30, 2008, respectively, compared to the same time periods
in 2007. This increase in net interest income was primarily due to a decline in interest expense resulting from a decrease in average cost of funds on deposits and the utilization of lower cost borrowings. The rate paid on interest-bearing
liabilities decreased 156 basis points and 123 basis points for the three and nine month periods ended September 30, 2008, respectively, compared to the same periods in 2007. Our tax equivalent net interest margin was 4.44% and 4.59% for the
three and nine month periods ended September 30, 2008, respectively, compared to 4.74% and 4.82% for the three and nine month periods ended September 30, 2007, respectively. These declines in net interest margin were due, in part, to
increased competition for deposits, an increase in nonperforming assets and the significant decline in short-term interest rates that began in late 2007. Due to the increased competition for demand deposits during 2008, we utilized
short-term borrowings to fund asset growth. The negative impact of the decline in short-term interest rates was partially mitigated by the work we have done in the past two years to position our balance sheet to be more neutral to movements in
short-term interest rates including the interest rate hedge that was established in 2006 and the strategic decision to allow certain higher cost certificates of deposit to be replaced with lower cost borrowings.

Total tax equivalent interest income decreased $5.8 million and $6.9 million for the three and nine month periods ended September 30, 2008, respectively, over the
comparable periods in 2007. Interest income on loans decreased $7.4 million and $11.1 million for the three and nine month periods ended September 30, 2008, respectively, compared to the same periods in 2007, due to a decrease in yield earned
of 160 basis points and 123 basis points for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. This decrease in yield was due to the decline in interest rates that began in late 2007 and an
increase in nonperforming loans during 2008. For the purpose of calculating loan yields, average loan balances include nonaccrual loans with no related interest income. The decrease in yield was partially offset by additional interest income from
the interest rate hedge that we purchased in 2006 which provided additional interest income of $2.7 million or 23 basis points to net interest margin and $6.8 million or 21 basis points to net interest margin for the three and nine month periods
ended September 30, 2008, respectively. The hedge effectively converts a portion of our loan portfolio from variable rate loans to fixed rate loans. In addition, the decline in interest income resulting from decreases in interest rates was
partially offset by an increase in average total loans of $386 million or 11.6% and $366 million or 11.3% for the three and nine months ended September 30, 2008, respectively, over the comparable periods in 2007.

Tax equivalent interest income on securities increased $1.7 million and $4.7 million for the three and nine month periods ended September 30, 2008, respectively,
compared to the same periods in 2007 due to an increase in the average securities portfolio (including trading assets) and yield earned. Average securities increased $112 million or 17.7% and $105 million or 17.2% for the three and nine month
periods ended September 30, 2008, respectively, compared to the same periods in 2007. Tax equivalent yield earned on securities increased 21 basis points and 19 basis points for the three and nine month periods ended September 30, 2008,
respectively, compared to the same periods in 2007.

Total interest expense decreased $8.2 million and $16.3 million for the three and nine month periods
ended September 30, 2008, respectively, over the comparable periods in 2007. Average interest-bearing liabilities increased $497 million and $457 million for the three and nine month periods ended September 30, 2008, respectively, compared
to the same periods in 2007. The average rate paid on interest-bearing liabilities decreased 156 basis points and 123 basis points, respectively, for the same time frames.



26



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##### Table of Contents

This decrease in interest expense was primarily due to a decrease in interest expense on deposits of $9.9 million and
$19.7 million for the three and nine month periods ended September 30, 2008, respectively, compared to the same periods in 2007. The reduction in short-term interest rates that began in late 2007 reduced the average rate paid on all
interest-bearing deposits 153 basis points and 113 basis points for the three and nine month periods ended September 30, 2008, respectively, compared to the same periods in 2007.

Beginning in the fourth quarter of 2007, we made the strategic decision to allow some of our higher cost time deposits to mature and be replaced by lower cost borrowings. Average other borrowings for the three and
nine month periods ended September 30, 2008 increased $477 million and $371 million, respectively, compared to the same periods in 2007. These borrowings provided additional funding at a rate of 2.35% and 2.45% for the three and nine month
periods ended September 30, 2008, respectively, a decrease in funding costs of 284 basis points over the same periods in 2007. Overall, interest expense on other borrowings increased $2.1 million and $4.1 million for the three and nine month
periods ended September 30, 2008, respectively, compared to the same periods in 2007.



27



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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 September 30, |          
|                                                      |  | (Dollars in thousands)           |          
|                                                      |  | 2008                             |           |   | 2007     |  
|                                                      |  | AverageBalance                   |           |   | Interest |   | AverageYield/Rate |  |      | AverageBalance |  |   | Interest  |   | AverageYield/Rate |  
|Interest-Earning Assets:                              |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Loans held for sale (1)                               |  | $                                | 110,721   |   |          | $ | 1,756             |  | 6.31 | %              |  | $ | 73,295    |   |                   | $ | 1,539  |  | 8.33  | %
|Loans held for investment (1):                        |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Taxable                                               |  |                                  | 3,598,381 |   |          |   | 57,815            |  | 6.39 | %              |  |   | 3,251,368 |   |                   |   | 65,449 |  | 7.99  | %
|Non-taxable (2)                                       |  |                                  | 4,472     |   |          |   | 95                |  | 8.46 | %              |  |   | 3,145     |   |                   |   | 63     |  | 7.93  | %
|Securities:                                           |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Taxable                                               |  |                                  | 642,152   |   |          |   | 7,714             |  | 4.78 | %              |  |   | 531,609   |   |                   |   | 6,111  |  | 4.56  | %
|Non-taxable (2)                                       |  |                                  | 97,607    |   |          |   | 1,284             |  | 5.23 | %              |  |   | 92,297    |   |                   |   | 1,159  |  | 4.98  | %
|Trading assets                                        |  |                                  | 4,348     |   |          |   | 21                |  | 1.92 | %              |  |   | 8,470     |   |                   |   | 81     |  | 3.77  | %
|Federal funds sold                                    |  |                                  | 6,774     |   |          |   | 32                |  | 1.88 | %              |  |   | 4,915     |   |                   |   | 58     |  | 4.69  | %
|Deposits in financial institutions                    |  |                                  | 326       |   |          |   | 2                 |  | 1.88 | %              |  |   | 690       |   |                   |   | 9      |  | 5.38  | %
|                                                      |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Total interest-earning assets                         |  |                                  | 4,464,781 |   |          |   | 68,719            |  | 6.12 | %              |  |   | 3,965,789 |   |                   |   | 74,469 |  | 7.45  | %
|Noninterest-earning assets:                           |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Cash and due from banks                               |  |                                  | 98,532    |   |          |   |                   |  |      |                |  |   | 115,923   |   |                   |   |        |  |       |  
|Premises and equipment, net                           |  |                                  | 40,926    |   |          |   |                   |  |      |                |  |   | 26,810    |   |                   |   |        |  |       |  
|Other assets                                          |  |                                  | 369,692   |   |          |   |                   |  |      |                |  |   | 323,438   |   |                   |   |        |  |       |  
|Allowance for loan losses                             |  |                                  | (40,148   | ) |          |   |                   |  |      |                |  |   | (33,702   | ) |                   |   |        |  |       |  
|                                                      |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Total noninterest-earning assets                      |  |                                  | 469,002   |   |          |   |                   |  |      |                |  |   | 432,469   |   |                   |   |        |  |       |  
|                                                      |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Total Assets                                          |  | $                                | 4,933,783 |   |          |   |                   |  |      |                |  | $ | 4,398,258 |   |                   |   |        |  |       |  
|                                                      |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Interest-Bearing Liabilities:                         |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Deposits:                                             |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Demand and savings                                    |  | $                                | 1,410,719 |   |          | $ | 4,136             |  | 1.17 | %              |  | $ | 1,320,136 |   |                   | $ | 8,038  |  | 2.47  | %
|Certificates and other time                           |  |                                  | 1,145,196 |   |          |   | 8,763             |  | 3.04 | %              |  |   | 1,243,924 |   |                   |   | 14,809 |  | 4.72  | %
|Other borrowed funds                                  |  |                                  | 581,212   |   |          |   | 3,432             |  | 2.35 | %              |  |   | 104,579   |   |                   |   | 1,369  |  | 5.19  | %
|Subordinated debt                                     |  |                                  | 74,098    |   |          |   | 1,198             |  | 6.43 | %              |  |   | 46,078    |   |                   |   | 1,175  |  | 10.12 | %
|Junior subordinated debt                              |  |                                  | 82,734    |   |          |   | 1,317             |  | 6.33 | %              |  |   | 82,734    |   |                   |   | 1,673  |  | 8.02  | %
|                                                      |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Total interest-bearing liabilities                    |  |                                  | 3,293,959 |   |          |   | 18,846            |  | 2.28 | %              |  |   | 2,797,451 |   |                   |   | 27,064 |  | 3.84  | %
|Noninterest-bearing sources:                          |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Demand deposits                                       |  |                                  | 1,093,053 |   |          |   |                   |  |      |                |  |   | 1,093,485 |   |                   |   |        |  |       |  
|Other liabilities                                     |  |                                  | 43,608    |   |          |   |                   |  |      |                |  |   | 50,962    |   |                   |   |        |  |       |  
|                                                      |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Total noninterest-bearing liabilities                 |  |                                  | 1,136,661 |   |          |   |                   |  |      |                |  |   | 1,144,447 |   |                   |   |        |  |       |  
|Shareholders equity                                  |  |                                  | 503,163   |   |          |   |                   |  |      |                |  |   | 456,360   |   |                   |   |        |  |       |  
|                                                      |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Total Liabilities and Shareholders Equity            |  | $                                | 4,933,783 |   |          |   |                   |  |      |                |  | $ | 4,398,258 |   |                   |   |        |  |       |  
|                                                      |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|                                                      |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Tax Equivalent Net Interest Income and Margin (2) (3) |  |                                  |           |   |          |   | 49,873            |  | 4.44 | %              |  |   |           |   |                   |   | 47,405 |  | 4.74  | %
|                                                      |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Tax equivalent adjustment:                            |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Loans                                                 |  |                                  |           |   |          |   | 30                |  |      |                |  |   |           |   |                   |   | 18     |  |       |  
|Securities                                            |  |                                  |           |   |          |   | 375               |  |      |                |  |   |           |   |                   |   | 292    |  |       |  
|                                                      |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Total tax equivalent adjustment                       |  |                                  |           |   |          |   | 405               |  |      |                |  |   |           |   |                   |   | 310    |  |       |  
|                                                      |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  
|Net Interest Income                                   |  |                                  |           |   |          | $ | 49,468            |  |      |                |  |   |           |   |                   | $ | 47,095 |  |       |  
|                                                      |  |                                  |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |       |  



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



28



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##### Table of Contents



|                                                      |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|----------------------------------------------------- |  | ------------------------------- | --------- | - | -------- | - | ----------------- |  | ---- | -------------- |  | - | --------- | - | ----------------- | - | ------- |  | ----- | -
|                                                      |  | Nine Months Ended September 30, |          
|                                                      |  | (Dollars in thousands)          |          
|                                                      |  | 2008                            |           |   | 2007     |  
|                                                      |  | AverageBalance                  |           |   | Interest |   | AverageYield/Rate |  |      | AverageBalance |  |   | Interest  |   | AverageYield/Rate |  
|Interest-Earning Assets:                              |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Loans held for sale (1)                               |  | $                               | 94,677    |   |          | $ | 4,681             |  | 6.60 | %              |  | $ | 60,660    |   |                   | $ | 3,646   |  | 8.04  | %
|Loans held for investment (1):                        |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Taxable                                               |  |                                 | 3,514,320 |   |          |   | 177,950           |  | 6.76 | %              |  |   | 3,182,270 |   |                   |   | 190,081 |  | 7.99  | %
|Non-taxable (2)                                       |  |                                 | 3,260     |   |          |   | 202               |  | 8.27 | %              |  |   | 3,456     |   |                   |   | 204     |  | 7.89  | %
|Securities:                                           |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Taxable                                               |  |                                 | 610,877   |   |          |   | 21,671            |  | 4.74 | %              |  |   | 512,936   |   |                   |   | 17,327  |  | 4.52  | %
|Non-taxable (2)                                       |  |                                 | 97,278    |   |          |   | 3,820             |  | 5.25 | %              |  |   | 92,113    |   |                   |   | 3,493   |  | 5.07  | %
|Trading assets                                        |  |                                 | 4,379     |   |          |   | 64                |  | 1.94 | %              |  |   | 2,950     |   |                   |   | 86      |  | 3.88  | %
|Federal funds sold                                    |  |                                 | 5,789     |   |          |   | 98                |  | 2.27 | %              |  |   | 13,903    |   |                   |   | 480     |  | 4.62  | %
|Deposits in financial institutions                    |  |                                 | 590       |   |          |   | 10                |  | 2.19 | %              |  |   | 919       |   |                   |   | 33      |  | 4.80  | %
|                                                      |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Total interest-earning assets                         |  |                                 | 4,331,170 |   |          |   | 208,496           |  | 6.43 | %              |  |   | 3,869,207 |   |                   |   | 215,350 |  | 7.44  | %
|Noninterest-earning assets:                           |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Cash and due from banks                               |  |                                 | 98,219    |   |          |   |                   |  |      |                |  |   | 114,736   |   |                   |   |         |  |       |  
|Premises and equipment, net                           |  |                                 | 39,441    |   |          |   |                   |  |      |                |  |   | 25,372    |   |                   |   |         |  |       |  
|Other assets                                          |  |                                 | 359,630   |   |          |   |                   |  |      |                |  |   | 306,656   |   |                   |   |         |  |       |  
|Allowance for loan losses                             |  |                                 | (36,386   | ) |          |   |                   |  |      |                |  |   | (33,051   | ) |                   |   |         |  |       |  
|                                                      |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Total noninterest-earning assets                      |  |                                 | 460,904   |   |          |   |                   |  |      |                |  |   | 413,713   |   |                   |   |         |  |       |  
|                                                      |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Total Assets                                          |  | $                               | 4,792,074 |   |          |   |                   |  |      |                |  | $ | 4,282,920 |   |                   |   |         |  |       |  
|                                                      |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Interest-Bearing Liabilities:                         |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Deposits:                                             |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Demand and savings                                    |  | $                               | 1,419,654 |   |          | $ | 13,640            |  | 1.28 | %              |  | $ | 1,289,139 |   |                   | $ | 21,682  |  | 2.25  | %
|Certificates and other time                           |  |                                 | 1,109,199 |   |          |   | 29,402            |  | 3.54 | %              |  |   | 1,172,951 |   |                   |   | 41,081  |  | 4.68  | %
|Other borrowed funds                                  |  |                                 | 500,268   |   |          |   | 9,193             |  | 2.45 | %              |  |   | 129,417   |   |                   |   | 5,121   |  | 5.29  | %
|Subordinated debt                                     |  |                                 | 57,687    |   |          |   | 3,094             |  | 7.16 | %              |  |   | 46,145    |   |                   |   | 3,487   |  | 10.10 | %
|Junior subordinated debt                              |  |                                 | 82,734    |   |          |   | 4,301             |  | 6.94 | %              |  |   | 74,803    |   |                   |   | 4,562   |  | 8.15  | %
|                                                      |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Total interest-bearing liabilities                    |  |                                 | 3,169,542 |   |          |   | 59,630            |  | 2.51 | %              |  |   | 2,712,455 |   |                   |   | 75,933  |  | 3.74  | %
|Noninterest-bearing sources:                          |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Demand deposits                                       |  |                                 | 1,076,695 |   |          |   |                   |  |      |                |  |   | 1,078,037 |   |                   |   |         |  |       |  
|Other liabilities                                     |  |                                 | 45,748    |   |          |   |                   |  |      |                |  |   | 50,951    |   |                   |   |         |  |       |  
|                                                      |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Total noninterest-bearing liabilities                 |  |                                 | 1,122,443 |   |          |   |                   |  |      |                |  |   | 1,128,988 |   |                   |   |         |  |       |  
|Shareholders equity                                  |  |                                 | 500,089   |   |          |   |                   |  |      |                |  |   | 441,477   |   |                   |   |         |  |       |  
|                                                      |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Total Liabilities and Shareholders Equity            |  | $                               | 4,792,074 |   |          |   |                   |  |      |                |  | $ | 4,282,920 |   |                   |   |         |  |       |  
|                                                      |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|                                                      |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Tax Equivalent Net Interest Income and Margin (2) (3) |  |                                 |           |   |          |   | 148,866           |  | 4.59 | %              |  |   |           |   |                   |   | 139,417 |  | 4.82  | %
|                                                      |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Tax equivalent adjustment:                            |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Loans                                                 |  |                                 |           |   |          |   | 63                |  |      |                |  |   |           |   |                   |   | 59      |  |       |  
|Securities                                            |  |                                 |           |   |          |   | 1,095             |  |      |                |  |   |           |   |                   |   | 896     |  |       |  
|                                                      |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Total tax equivalent adjustment                       |  |                                 |           |   |          |   | 1,158             |  |      |                |  |   |           |   |                   |   | 955     |  |       |  
|                                                      |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  
|Net Interest Income                                   |  |                                 |           |   |          | $ | 147,708           |  |      |                |  |   |           |   |                   | $ | 138,462 |  |       |  
|                                                      |  |                                 |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |         |  |       |  



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



|                          |  |                                          |       |                                         |      |   |        |  |   |        |   |  |   |       
|------------------------- |  | ---------------------------------------- | ----- | --------------------------------------- | ---- | - | ------ |  | - | ------ | - |  | - | ------
|                          |  | For the Three Months Ended September 30, |       | For the Nine Months Ended September 30,
|                          |  | 2008                                     |       |                                         | 2007 |   | 2008   |  |   | 2007  
|Customer service fees     |  | $                                        | 3,882 |                                         |      | $ | 3,629  |  | $ | 11,906 |   |  | $ | 10,532
|Net loss on securities    |  |                                          | (187  | )                                       |      |   |       |  |   | (187   | ) |  |   |      
|Wealth management fees    |  |                                          | 2,255 |                                         |      |   | 2,186  |  |   | 6,956  |   |  |   | 3,470 
|Net gain (loss) on loans  |  |                                          | (229  | )                                       |      |   | 1,208  |  |   | 127    |   |  |   | 1,785 
|Bank owned life insurance |  |                                          | 964   |                                         |      |   | 796    |  |   | 2,726  |   |  |   | 2,413 
|Debit card income         |  |                                          | 614   |                                         |      |   | 596    |  |   | 1,882  |   |  |   | 1,710 
|FHLB stock dividends      |  |                                          | 129   |                                         |      |   | 92     |  |   | 360    |   |  |   | 509   
|Other                     |  |                                          | 2,373 |                                         |      |   | 2,126  |  |   | 7,616  |   |  |   | 5,666 
|                          |  |                                          |       |                                         |      |   |        |  |   |        |   |  |   |       
|Total                     |  | $                                        | 9,801 |                                         |      | $ | 10,633 |  | $ | 31,386 |   |  | $ | 26,085
|                          |  |                                          |       |                                         |      |   |        |  |   |        |   |  |   |       

Total noninterest income for the three month period ended September 30, 2008 decreased $832 thousand compared
to the same period in 2007. This decrease was primarily due to a decline in loan sale activity during 2008. Total noninterest income increased $5.3 million for the nine month period ended September 30, 2008 as compared to the same period in
2007. Details of the changes in the various components of noninterest income are discussed below.

Customer service fees for the three and nine months
ended September 30, 2008 increased $253 thousand and $1.4 million, respectively, compared to the same periods in 2007. These increases are partly attributable to the lower earnings credit rate on our commercial deposit accounts on analysis,
which is a direct result of lower short-term interest rates.

Net losses on securities during the third quarter of 2008 were due, in part, to realized
losses of $722 thousand recorded on certain interest-only securities. These securities are tied to an underlying government guaranteed loan and are subject to prepayment and interest rate fluctuations. These securities had been in an unrealized loss
position since the fourth quarter of 2006. Given the current prepayment factors for the underlying loan and managements inability to determine when a full recovery of the value may occur, management considered these securities to be other than
temporarily impaired. This loss was partially offset by a $535 thousand gain on investments which were sold as part of our routine portfolio management.

Net gain on loans decreased $1.4 million and $1.7 million for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. These decreases were primarily due to a decline in loan sale
activity. During the nine months ended September 30, 2008 and 2007, the Company sold approximately $9 million and $21 million, respectively, of performing commercial real estate loans that were originally acquired as held for investment. These
sales resulted in net gains of $175 thousand and $350 thousand during the nine month periods ended September 30, 2008 and 2007, respectively. These loans were sold as part of the Companys ongoing management of the size, concentrations and
risk profile of the loan portfolio. Loans held for sale previously included certain commercial real estate loans and SBA guaranteed loans originated by the Bank. Due to current market conditions, in September of 2008, $112 million of these loans
were no longer classified as held for sale and are now considered as held for investment. The Company recorded a lower of cost or market adjustment of $266 thousand for the three and nine month periods ended September 30, 2008. There were no
lower of cost or market adjustments recorded for the same periods in 2007.

Wealth management fees increased $69 thousand and $3.5 million for the three
and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. These increases were due primarily to the addition of MBM Advisors in June of 2007.

Other noninterest income increased $247 thousand and $2.0 million for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. These increases were due primarily to
an increase in other lending fees of $647 thousand and $1.6 million for the three and nine months ended September 30, 2008, respectively. In addition, we received $323 thousand from the mandatory redemption of some of our shares of Visa, Inc.
related to Visa Inc.s Initial Public Offering during the first quarter of 2008.



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



|                                                                          |  |                                          |        |                                         |   |        |  |      |         |  |   |         |  
|------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | --------------------------------------- | - | ------ |  | ---- | ------- |  | - | ------- | -
|                                                                          |  | For the Three Months Ended September 30, |        | For the Nine Months Ended September 30, |  
|                                                                          |  | 2008                                     |        | 2007                                    |   | 2008   |  | 2007 |        
|Salaries and employee benefits                                            |  | $                                        | 21,692 |                                         | $ | 20,634 |  | $    | 63,316  |  | $ | 60,090  |  
|Occupancy                                                                 |  |                                          | 5,367  |                                         |   | 4,706  |  |      | 15,992  |  |   | 13,674  |  
|Technology                                                                |  |                                          | 2,600  |                                         |   | 2,260  |  |      | 7,235   |  |   | 6,404   |  
|Professional fees                                                         |  |                                          | 1,257  |                                         |   | 1,068  |  |      | 3,481   |  |   | 3,091   |  
|Postage, delivery and supplies                                            |  |                                          | 871    |                                         |   | 903    |  |      | 2,907   |  |   | 2,657   |  
|Marketing                                                                 |  |                                          | 627    |                                         |   | 432    |  |      | 1,764   |  |   | 1,368   |  
|Core deposit and other intangibles amortization                           |  |                                          | 586    |                                         |   | 610    |  |      | 1,757   |  |   | 1,547   |  
|Acquisition costs                                                         |  |                                          |       |                                         |   |       |  |      | 562     |  |   | 920     |  
|Net gains and carrying costs of other real estate and foreclosed property |  |                                          | 193    |                                         |   | 33     |  |      | 188     |  |   | (40     | )
|Other                                                                     |  |                                          | 5,804  |                                         |   | 4,398  |  |      | 16,891  |  |   | 13,509  |  
|                                                                          |  |                                          |        |                                         |   |        |  |      |         |  |   |         |  
|Total                                                                     |  | $                                        | 38,997 |                                         | $ | 35,044 |  | $    | 114,093 |  | $ | 103,220 |  
|                                                                          |  |                                          |        |                                         |   |        |  |      |         |  |   |         |  

Total noninterest expense for the three month period ended September 30, 2008 increased $4.0 million compared
to the same period in 2007. The Company completed one acquisition in February 2008, which resulted in additional noninterest expense of $1.5 million for the third quarter of 2008 compared to the same quarter in 2007. Total noninterest expense for
the nine month period ended September 30, 2008 increased $10.8 million compared to the same time period in 2007. This increase was primarily due to three acquisitions completed since March 2007, resulting in additional noninterest expense of
$6.6 million. Details of the changes in the various components of noninterest expense are discussed below.

Salaries and employee benefits for the three
and nine month periods ended September 30, 2008 increased $1.1 million and $3.2 million, respectively, compared to the same periods in 2007. Acquisitions completed during these time periods have resulted in additional salaries and employee
benefits expenses of $762 thousand and $3.7 million for the three and nine month periods ended September 30, 2008, respectively.

Occupancy expense
for the three and nine month periods ended September 30, 2008 increased $661 thousand and $2.3 million, respectively, compared to the same periods in 2007. Since the first quarter of 2007, we have added fourteen banking centers in conjunction
with the Partners Bank and First Horizon branch acquisitions.

Technology expense increased $340 thousand for the three month period ended
September 30, 2008 compared to the same period in 2007, primarily due to one-time software licensing fees of $150 thousand incurred in the third quarter of 2008. Technology expense increased $831 thousand for the nine month period ended
September 30, 2008 compared to the same period in 2007. This increase was due, in part, to three acquisitions completed since March of 2007 which contributed approximately $235 thousand for the nine months ended September 30, 2008. In
addition, depreciation increased associated with additional hardware, software and customer products including an upgrade in the Banks deposit system in 2006 and 2007.

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

Other noninterest expense increased $1.4 million and $3.4 million for the three and nine month periods ended September 30, 2008, respectively, compared to the same
periods in 2007. These increases were due, in part, to an increase in FDIC assessment rates which were enacted in 2007 resulting in additional expense of $456 thousand and $1.5 million for the three and nine month periods ended September 30,
2008, respectively. In addition, we incurred approximately $640 thousand in Hurricane Ike related expenses during the third quarter of 2008.

Income
Taxes  We provided $3.1 million and $13.6 million for federal and state income taxes during the three and nine month periods ended September 30, 2008, respectively, and $7.3 million and $19.5 million and for the same periods in
2007. The effective tax rate was approximately 30% and 32% for the three and nine month periods ended September 30, 2008, respectively, as compared to 33% for the same periods in 2007.



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FINANCIAL CONDITION

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



|                                |  |                    |           |   |                   |   |        |   |           |  |       |  
|------------------------------- |  | ------------------ | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                |  | September 30, 2008 |           |   | December 31, 2007 |  
|                                |  | Amount             |           | % |                   |   | Amount |   | %         | 
|Commercial and industrial       |  | $                  | 1,076,274 |   | 28.7              | % |        | $ | 912,604   |  | 27.3  | %
|Real estate:                    |  |                    |           |   |                   |   |        |   |           |  |       |  
|Commercial                      |  |                    | 1,562,835 |   | 41.7              | % |        |   | 1,387,014 |  | 41.5  | %
|Construction                    |  |                    | 732,174   |   | 19.6              | % |        |   | 714,600   |  | 21.4  | %
|Residential mortgage            |  |                    | 283,991   |   | 7.6               | % |        |   | 226,033   |  | 6.8   | %
|Consumer/other                  |  |                    | 68,719    |   | 1.8               | % |        |   | 75,626    |  | 2.3   | %
|Foreign loans                   |  |                    | 20,779    |   | 0.6               | % |        |   | 23,960    |  | 0.7   | %
|                                |  |                    |           |   |                   |   |        |   |           |  |       |  
|Total loans held for investment |  | $                  | 3,744,772 |   | 100.0             | % |        | $ | 3,339,837 |  | 100.0 | %
|                                |  |                    |           |   |                   |   |        |   |           |  |       |  

At September 30, 2008, loans held for investment were $3.7 billion, an increase of $405 million or 12.1% over
loans held for investment at December 31, 2007. Loans acquired as a result of the First Horizon branch acquisition on February 8, 2008 totaled $54.6 million. In addition, due to current market conditions, $112 million of loans classified
as held for sale were transferred into the held for investment classification. The remaining increase in loans was due to internal loan growth.

Our
primary lending focus is commercial loans and owner-occupied real estate loans to businesses with annual sales ranging up to $100 million. Typically, our customers have financing requirements between $50 thousand and $5 million. At
September 30, 2008, commercial real estate loans and commercial and industrial loans were 41.7% and 28.7%, respectively, of loans held for investment.

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

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

Our largest concentration in any single
industry is in our energy portfolio. At September 30, 2008, our energy portfolio totaled $439 million which represents approximately 11.7% of total loans held for investment. Our energy portfolio consists primarily of upstream companies. The
energy lending group participates in shared national credits which are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. The energy lending group is the only group that
consistently participates in shared national credits. As of September 30, 2008, excluding the energy portfolio, 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.

At September 30, 2008, loans held for investment were 105% of deposits and 75.7% of total assets. Loans held for
investment were 90.9% of deposits and 73.6% of total assets at December 31, 2007.

Loans Held for Sale  Loans held for sale
totaled $322 thousand at September 30, 2008, as compared with $78.4 million at December 31, 2007. Loans held for sale at December 31, 2007 included certain commercial real estate loans and SBA guaranteed loans originated by the Bank.
Due to current market conditions, these loans are no longer classified as held for sale and are now considered as held for investment.



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Securities Our securities portfolio at September 30, 2008 totaled $718 million as compared to
$657 million at December 31, 2007, an increase of $61.2 million or 9.3%.

Net unrealized losses on the available-for-sale securities were $2.3 million
at September 30, 2008 as compared to $2.7 million at December 31, 2007. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because we have the ability and intent to hold those
investments until a recovery of fair value, which may be at maturity, we do not consider those investments to be other-than-temporarily impaired at September 30, 2008. We recorded a realized loss of $722 thousand on certain interest-only
securities during the third quarter of 2008. These securities are tied to an underlying government guaranteed loan and are subject to prepayment and interest rate fluctuations. These securities had been in an unrealized loss position since the
fourth quarter of 2006. Given the current prepayment factors for the underlying loan and managements inability to determine when a full recovery of the value may occur, management considered these securities to be other than temporarily
impaired at September 30, 2008.

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



|                                     |  |                    |           |   |                   |   |        |   |           |  |       |  
|------------------------------------ |  | ------------------ | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                     |  | September 30, 2008 |           |   | December 31, 2007 |  
|                                     |  | Amount             |           | % |                   |   | Amount |   | %         | 
|Noninterest-bearing demand           |  | $                  | 1,085,882 |   | 30.4              | % |        | $ | 1,092,210 |  | 29.7  | %
|Interest-bearing demand              |  |                    | 1,397,614 |   | 39.1              | % |        |   | 1,403,227 |  | 38.3  | %
|Certificates and other time deposits |  |                    |           |   |                   |   |        |   |           |  |       |  
|Jumbo                                |  |                    | 636,447   |   | 17.8              | % |        |   | 756,980   |  | 20.6  | %
|Regular                              |  |                    | 304,050   |   | 8.5               | % |        |   | 332,206   |  | 9.0   | %
|Brokered                             |  |                    | 150,127   |   | 4.2               | % |        |   | 89,088    |  | 2.4   | %
|                                     |  |                    |           |   |                   |   |        |   |           |  |       |  
|Total deposits                       |  | $                  | 3,574,120 |   | 100.0             | % |        | $ | 3,673,711 |  | 100.0 | %
|                                     |  |                    |           |   |                   |   |        |   |           |  |       |  

Total deposits as of September 30, 2008 decreased $99.6 million to $3.6 billion, down 2.7% compared to $3.7
billion at December 31, 2007. At September 30, 2008, certificate and other time deposits decreased $87.7 million since December 31, 2007, due to managements decision to allow certain higher priced certificates of deposit to
mature and be replaced by lower cost borrowings. This decrease was partially offset by deposits acquired in the First Horizon branch acquisition on February 8, 2008 of $85.3 million. The percentage of interest-bearing and noninterest-bearing
demand deposits to total deposits as of September 30, 2008 was 39.1% and 30.4%, respectively, and our loan to deposit ratio increased to 105%.

Other Borrowed Funds  As of September 30, 2008, we had $668 million in other borrowings compared to $197 million at December 31, 2007, an increase of $471 million. Our primary source of other borrowings is the
Federal Home Loan Bank (FHLB). At September 30, 2008, borrowings under FHLB advances totaled $533 million with an average interest rate of 2.45%. At September 30, 2008, we had $40.0 million of FHLB advances that mature in nine
years and $500 thousand of FHLB advances that mature in two years. The remaining $492 million advances had maturities of fewer than eight days. We utilize these borrowings to meet liquidity needs. Maturing advances are replaced by drawing on
available cash, making additional borrowings or through increased customer deposits.

We have federal funds purchased at correspondent banks that typically
mature within one to ninety days. As of September 30, 2008, federal funds outstanding with correspondent banks were $72.4 million and payable upon demand.

Securities sold under agreements to repurchase represent the purchase of interests in securities by banking customers and structured repurchase agreements with other financial institutions. At September 30, 2008 and December 31,
2007, we had securities sold under agreements to repurchase with banking customers of $13.1 million and $422 thousand, respectively. Structured repurchase agreements totaled $50.0 million at September 30, 2008 and consisted of agreements with
two separate financial institutions totaling $25.0 million, each that will mature in 2015. The rate on these repurchase agreements was 1.81% and 1.82%, respectively, at September 30, 2008. There were no structured repurchase agreements
outstanding on December 31, 2007.

ASSET QUALITY

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



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Nonperforming assets consisted of the following (in thousands):



|                                          |  |                   |        |   |                  |   |        |  
|----------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                          |  | September 30,2008 |        |   | December 31,2007 |  
|Nonperforming loans:                      |  |                   |        |   |                  |   |        |  
|Nonaccrual                                |  | $                 | 70,538 |   |                  | $ | 19,445 |  
|Restructured                              |  |                   |       |   |                  |   | 769    |  
|Real estate acquired by foreclosure       |  |                   | 4,562  |   |                  |   | 3,683  |  
|Other repossessed assets                  |  |                   | 234    |   |                  |   | 152    |  
|                                          |  |                   |        |   |                  |   |        |  
|Total nonperforming assets                |  | $                 | 75,334 |   |                  | $ | 24,049 |  
|                                          |  |                   |        |   |                  |   |        |  
|                                          |  |                  
|Accruing loans past due 90 days or more   |  | $                 | 3,142  |   |                  | $ | 1,304  |  
|                                          |  |                   |        |   |                  |   |        |  
|                                          |  |                  
|Nonperforming loans to period-end loans   |  |                   | 1.88   | % |                  |   | 0.59   | %
|Nonperforming assets to period-end assets |  |                   | 1.52   | % |                  |   | 0.53   | %

Nonperforming assets were $75.3 million at September 30, 2008, a $51.3 million increase from
December 31, 2007 primarily due to nonperforming loans related to SemGroup, an energy customer that is currently in Chapter 11 bankruptcy. Total exposure to SemGroup at the end of the third quarter of 2008 totaled $29.2 million, representing
approximately 40% of our total nonperforming loans. The SemGroup bankruptcy has proceeded as anticipated and is expected to be resolved during the second quarter of 2009. In addition, a limited number of loans secured by owner-occupied commercial
real estate moved to a nonperforming status during 2008. These loans are expected to have minimal losses due to the low loan to value of each of these real estate secured credits.

Accruing loans past due 90 days or more at September 30, 2008 totaled $3.1 million, up $1.8 million compared to $1.3 million at December 31, 2007.

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

The provision for credit losses for the three and nine months ended September 30, 2008 was $10.1 million and $22.4 million, respectively, as compared to $850 thousand and $2.2 million for the same periods in 2007. This increase in
provision was due, in part, to the Semgroup borrowing relationship totaling $29.2 million which resulted in additional provision of approximately $4.3 million for the nine months ended September 30, 2008. Additionally, we recorded approximately $2.7
million in provision for credit losses related to Hurricane Ike. Approximately $220 million of outstanding loans have been identified that have collateral located in the identified Hurricane Evacuation Zones near the coast which were the most
severely affected areas. This provision represents our best estimate at this time of possible losses that may occur in these areas.

Net charge-offs were
$5.8 million or 0.62% (annualized) and $10.9 million or 0.40% (annualized) of average loans for the three and nine months ended September 30, 2008, respectively, compared to $75 thousand and $1.5 million or 0.06% (annualized) of average loans
for the same periods in 2007. Net charge-offs increased $5.7 million and $9.4 million for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. The increase in net charge-offs during 2008 was
primarily related to certain auto dealer loans that were identified in the second quarter of 2008 and several older nonperforming loans which we sold as part of a clean-up effort.

The allowance for loan losses at September 30, 2008 was $45.2 million and represented 1.21% of total loans. The allowance for loan losses at September 30, 2008 was 64.11% of nonperforming loans, down from
170.41% at December 31, 2007. The reserve for unfunded lending commitments was $1.7 million as of September 30, 2008 compared to $927 thousand as of December 31, 2007.



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



|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                  |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                  |  | 2008                            |        |   | 2007                           |   |        | 2008 |  |   | 2007   |  
|Allowance for loan losses at beginning of period                  |  | $                               | 41,651 |   |                                | $ | 33,450 |      |  | $ | 34,446 |   |  | $ | 32,027 |  
|Charge-offs:                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Commercial, financial, and industrial                             |  |                                 | 3,713  |   |                                |   | 540    |      |  |   | 7,644  |   |  |   | 2,391  |  
|Real estate, mortgage and construction                            |  |                                 | 1,879  |   |                                |   | 52     |      |  |   | 3,612  |   |  |   | 338    |  
|Consumer                                                          |  |                                 | 657    |   |                                |   | 478    |      |  |   | 1,311  |   |  |   | 1,082  |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total charge-offs                                                 |  |                                 | 6,249  |   |                                |   | 1,070  |      |  |   | 12,567 |   |  |   | 3,811  |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Recoveries                                                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Commercial, financial, and industrial                             |  |                                 | 277    |   |                                |   | 612    |      |  |   | 1,106  |   |  |   | 1,559  |  
|Real estate, mortgage and construction                            |  |                                 | 28     |   |                                |   | 3      |      |  |   | 112    |   |  |   | 39     |  
|Consumer                                                          |  |                                 | 142    |   |                                |   | 380    |      |  |   | 435    |   |  |   | 695    |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total recoveries                                                  |  |                                 | 447    |   |                                |   | 995    |      |  |   | 1,653  |   |  |   | 2,293  |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net charge-offs                                                   |  |                                 | 5,802  |   |                                |   | 75     |      |  |   | 10,914 |   |  |   | 1,518  |  
|Allowance for credit losses associated with acquired institutions |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   | 1,496  |  
|Provision for loan losses                                         |  |                                 | 9,373  |   |                                |   | 850    |      |  |   | 21,690 |   |  |   | 2,220  |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Allowance for loan losses at end of period                        |  |                                 | 45,222 |   |                                |   | 34,225 |      |  |   | 45,222 |   |  |   | 34,225 |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Reserve for unfunded loan commitments at beginning of period      |  |                                 | 927    |   |                                |   | 927    |      |  |   | 927    |   |  |   | 927    |  
|Provision for losses on unfunded loan commitments                 |  |                                 | 727    |   |                                |   |       |      |  |   | 727    |   |  |   |       |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Reserve for unfunded loan commitments at end of period            |  |                                 | 1,654  |   |                                |   | 927    |      |  |   | 1,654  |   |  |   | 927    |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total allowance for credit losses                                 |  | $                               | 46,876 |   |                                | $ | 35,152 |      |  | $ | 46,876 |   |  | $ | 35,152 |  
|                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|                                                                  |  |                                 |        |  
|Period-end allowance for credit losses to period-end loans        |  |                                 | 1.25   | % |                                |   | 1.04   | %    |  |   | 1.25   | % |  |   | 1.04   | %
|Period-end allowance for loan losses to period-end loans          |  |                                 | 1.21   | % |                                |   | 1.01   | %    |  |   | 1.21   | % |  |   | 1.01   | %
|Period-end allowance for loan losses to nonperforming loans       |  |                                 | 64.11  | % |                                |   | 292.74 | %    |  |   | 64.11  | % |  |   | 292.74 | %
|Nonperforming loans to period-end loans                           |  |                                 | 1.88   | % |                                |   | 0.35   | %    |  |   | 1.88   | % |  |   | 0.35   | %
|Nonperforming assets to period-end assets                         |  |                                 | 1.52   | % |                                |   | 0.33   | %    |  |   | 1.52   | % |  |   | 0.33   | %
|Net charge-offs to average loans (annualized)                     |  |                                 | 0.62   | % |                                |   |       |      |  |   | 0.40   | % |  |   | 0.06   | %

INTEREST RATE SENSITIVITY

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

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

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



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|                                         |  |                                         |  
|---------------------------------------- |  | --------------------------------------- | -
|Changes in Interest Rates (Basis Points) |  | Increase(Decrease) inNet InterestIncome |  
|September 30, 2008                       |  |                                         |  
|+200                                     |  | -1.20                                   | %
|+100                                     |  | -0.40                                   | %
|Base                                     |  | 0.00                                    | %
|-100                                     |  | -0.28                                   | %
|                                         | 
|December 31, 2007                        |  |                                         |  
|+200                                     |  | -0.26                                   | %
|+100                                     |  | -0.08                                   | %
|Base                                     |  | 0.00                                    | %
|-100                                     |  | -0.56                                   | %

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

CAPITAL AND LIQUIDITY

Capital - At September 30,
2008, shareholders equity totaled $502 million or 10.1% of total assets, as compared to $480 million or 10.6% of total assets at December 31, 2007. Our risk-based capital ratios together with the minimum capital amounts and ratios at
September 30, 2008 were as follows (dollars in thousands):



|                                         |  |        |         |       |                                      |   |        |   |         |  |     |  
|---------------------------------------- |  | ------ | ------- | ----- | ------------------------------------ | - | ------ | - | ------- |  | --- | -
|                                         |  | Actual |         |       | For Minimum CapitalAdequacy Purposes |  
|                                         |  | Amount |         | Ratio |                                      |   | Amount |   | Ratio   | 
|Total capital (to risk weighted assets)  |  | $      | 497,689 |       | 11.8                                 | % |        | $ | 336,748 |  | 8.0 | %
|Tier 1 capital (to risk weighted assets) |  |        | 386,402 |       | 9.2                                  | % |        |   | 168,374 |  | 4.0 | %
|Tier 1 capital (to average assets)       |  |        | 386,402 |       | 8.1                                  | % |        |   | 190,242 |  | 4.0 | %

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

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

Sterling Bancshares must provide for its own liquidity and fund its own obligations. The primary source of Sterling Bancshares revenues is from
dividends declared by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to Sterling Bancshares. At September 30, 2008, the aggregate amount of dividends, which legally could be
paid without prior approval of various regulatory agencies, totaled $72.3 million. It is not anticipated that such restrictions will have an impact on our ability to meet our ongoing cash obligations.



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

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



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

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

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

PART II. OTHER INFORMATION



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

None.



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

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



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

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



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

None.



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

None.



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

None.



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



|       |  |                                                                                                                                                                   
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|11     |  | Statement Regarding Computation of Earnings Per Share (included as Note 13) to Consolidated Financial Statements on page 17 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: November 7, 2008 |  |  |  | By:                       |  | /s/ J. Downey Bridgwater
|                       |  |  |  |                           |  |                          |  | J. Downey Bridgwater                                
|                       |  |  |  |                           |  |                          |  | Chairman, President and Chief Executive Officer     
|                       |  |  |  |                           |  |                          |  | (Principal Executive Officer)                       
|                       |  |  | 
|Date: November 7, 2008 |  |  |  | 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                                                                                                                                                       
|        | 
|11      |  | Statement Regarding Computation of Earnings Per Share (included as Note 13) to Consolidated Financial Statements on page 17 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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