##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended March 31, 2009

OR



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

For the transition period from  to

Commission
file number: 0-20750

STERLING BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Texas                                                          |  | 74-2175590                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   ̈     No   ̈

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

Large accelerated filer   ̈            Accelerated filer  þ            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 April 24, 2009
|[Common Stock, $1.00 par value per share] |  | 73,298,320 shares            









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##### Table of Contents

STERLING BANCSHARES, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2009

TABLE OF CONTENTS



|           |  |                                                                                       |  |   
|---------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I.    |  | FINANCIAL INFORMATION                                                                 |  |   
|           |  |                                                                                      
|Item 1.    |  | Financial Statements (Unaudited)                                                      |  |   
|           |  |                                                                                      
|           |  | Consolidated Balance Sheets                                                           |  | 2 
|           |  |                                                                                      
|           |  | Consolidated Statements of Income                                                     |  | 3 
|           |  |                                                                                      
|           |  | Consolidated Statements of Shareholders Equity                                       |  | 4 
|           |  |                                                                                      
|           |  | Consolidated Statements of Cash Flows                                                 |  | 5 
|           |  |                                                                                      
|           |  | Notes to Consolidated Financial Statements                                            |  | 6 
|           |  |                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 21
|           |  |                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 36
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 36
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  |   
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 36
|           |  |                                                                                      
|Item 1A.   |  | Risk Factors                                                                          |  | 36
|           |  |                                                                                      
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 36
|           |  |                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 36
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 36
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 37
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 37
|           | 
|SIGNATURES |  | 38                                                                                   



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)



|                                                                                                                                                                                            |  |               |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                            |  | March 31,2009 |           |   | December 31,2008 |  
|ASSETS                                                                                                                                                                                      |  |               |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                   |  | $             | 142,769   |   |                  | $ | 113,163   |  
|Available-for-sale securities, at fair value                                                                                                                                                |  |               | 673,960   |   |                  |   | 633,357   |  
|Held-to-maturity securities, at amortized cost                                                                                                                                              |  |               | 169,973   |   |                  |   | 172,039   |  
|Loans held for sale                                                                                                                                                                         |  |               | 1,395     |   |                  |   | 1,524     |  
|Loans held for investment                                                                                                                                                                   |  |               | 3,727,368 |   |                  |   | 3,792,290 |  
|                                                                                                                                                                                            |  |               |           |   |                  |   |           |  
|Total loans                                                                                                                                                                                 |  |               | 3,728,763 |   |                  |   | 3,793,814 |  
|Allowance for loan losses                                                                                                                                                                   |  |               | (56,703   | ) |                  |   | (49,177   | )
|                                                                                                                                                                                            |  |               |           |   |                  |   |           |  
|Loans, net                                                                                                                                                                                  |  |               | 3,672,060 |   |                  |   | 3,744,637 |  
|Premises and equipment, net                                                                                                                                                                 |  |               | 50,738    |   |                  |   | 46,875    |  
|Real estate acquired by foreclosure                                                                                                                                                         |  |               | 8,144     |   |                  |   | 5,625     |  
|Goodwill                                                                                                                                                                                    |  |               | 173,210   |   |                  |   | 173,210   |  
|Core deposit and other intangibles, net                                                                                                                                                     |  |               | 13,309    |   |                  |   | 13,874    |  
|Accrued interest receivable                                                                                                                                                                 |  |               | 18,285    |   |                  |   | 19,428    |  
|Other assets                                                                                                                                                                                |  |               | 152,383   |   |                  |   | 157,771   |  
|                                                                                                                                                                                            |  |               |           |   |                  |   |           |  
|TOTAL ASSETS                                                                                                                                                                                |  | $             | 5,074,831 |   |                  | $ | 5,079,979 |  
|                                                                                                                                                                                            |  |               |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                        |  |               |           |   |                  |   |           |  
|LIABILITIES:                                                                                                                                                                                |  |               |           |   |                  |   |           |  
|Deposits:                                                                                                                                                                                   |  |               |           |   |                  |   |           |  
|Noninterest-bearing demand                                                                                                                                                                  |  | $             | 1,173,745 |   |                  | $ | 1,123,746 |  
|Interest-bearing demand                                                                                                                                                                     |  |               | 1,586,754 |   |                  |   | 1,523,969 |  
|Certificates and other time                                                                                                                                                                 |  |               | 1,173,958 |   |                  |   | 1,171,422 |  
|                                                                                                                                                                                            |  |               |           |   |                  |   |           |  
|Total deposits                                                                                                                                                                              |  |               | 3,934,457 |   |                  |   | 3,819,137 |  
|Other borrowed funds                                                                                                                                                                        |  |               | 278,274   |   |                  |   | 408,586   |  
|Subordinated debt                                                                                                                                                                           |  |               | 78,310    |   |                  |   | 78,335    |  
|Junior subordinated debt                                                                                                                                                                    |  |               | 82,734    |   |                  |   | 82,734    |  
|Accrued interest payable and other liabilities                                                                                                                                              |  |               | 53,942    |   |                  |   | 48,048    |  
|                                                                                                                                                                                            |  |               |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                           |  |               | 4,427,717 |   |                  |   | 4,436,840 |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                               |  |               |          |   |                  |   |          |  
|SHAREHOLDERS EQUITY:                                                                                                                                                                       |  |               |           |   |                  |   |           |  
|Preferred stock, $1 par value, 1,000,000 shares authorized, 125,198 issued and outstanding at March 31, 2009 and December 31, 2008                                                          |  |               | 118,332   |   |                  |   | 118,012   |  
|Common stock, $1 par value, 150,000,000 shares authorized, 75,167,953 and 75,127,636 issued and 73,300,453 and 73,260,136 outstanding at
March 31, 2009 and December 31, 2008, respectively |  |               | 75,168    |   |                  |   | 75,128    |  
|Capital surplus                                                                                                                                                                             |  |               | 122,877   |   |                  |   | 121,918   |  
|Retained earnings                                                                                                                                                                           |  |               | 333,498   |   |                  |   | 332,009   |  
|Treasury stock, at cost, 1,867,500 shares held at March 31, 2009 and December 31, 2008                                                                                                      |  |               | (21,399   | ) |                  |   | (21,399   | )
|Accumulated other comprehensive income, net of tax                                                                                                                                          |  |               | 18,638    |   |                  |   | 17,471    |  
|                                                                                                                                                                                            |  |               |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                                  |  |               | 647,114   |   |                  |   | 643,139   |  
|                                                                                                                                                                                            |  |               |           |   |                  |   |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                  |  | $             | 5,074,831 |   |                  | $ | 5,079,979 |  
|                                                                                                                                                                                            |  |               |           |   |                  |   |           |  

See Notes to Consolidated Financial Statements.



2



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##### Table of Contents

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share amounts)



|                                                      |  |                             |        |      |   |       
|----------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                                      |  | Three Months EndedMarch 31,
|                                                      |  | 2009                        |        | 2008
|Interest income:                                      |  |                             |        |      |   |       
|Loans, including fees                                 |  | $                           | 53,000 |      | $ | 63,052
|Securities:                                           |  |                             |        |      |   |       
|Taxable                                               |  |                             | 8,558  |      |   | 6,549 
|Non-taxable                                           |  |                             | 900    |      |   | 908   
|Trading assets                                        |  |                             |       |      |   | 21    
|Federal funds sold                                    |  |                             | 6      |      |   | 39    
|Deposits in financial institutions                    |  |                             |       |      |   | 3     
|                                                      |  |                             |        |      |   |       
|Total interest income                                 |  |                             | 62,464 |      |   | 70,572
|                                                      |  |                             |        |      |   |       
|Interest expense:                                     |  |                             |        |      |   |       
|Demand and savings deposits                           |  |                             | 3,492  |      |   | 5,615 
|Certificates and other time deposits                  |  |                             | 7,467  |      |   | 11,977
|Other borrowed funds                                  |  |                             | 812    |      |   | 2,352 
|Subordinated debt                                     |  |                             | 979    |      |   | 1,032 
|Junior subordinated debt                              |  |                             | 1,204  |      |   | 1,600 
|                                                      |  |                             |        |      |   |       
|Total interest expense                                |  |                             | 13,954 |      |   | 22,576
|                                                      |  |                             |        |      |   |       
|Net interest income                                   |  |                             | 48,510 |      |   | 47,996
|Provision for credit losses                           |  |                             | 9,000  |      |   | 4,150 
|                                                      |  |                             |        |      |   |       
|Net interest income after provision for credit losses |  |                             | 39,510 |      |   | 43,846
|                                                      |  |                             |        |      |   |       
|Noninterest income:                                   |  |                             |        |      |   |       
|Customer service fees                                 |  |                             | 4,112  |      |   | 3,876 
|Net gain on securities                                |  |                             | 15     |      |   |      
|Wealth management fees                                |  |                             | 2,202  |      |   | 2,338 
|Other                                                 |  |                             | 4,469  |      |   | 4,501 
|                                                      |  |                             |        |      |   |       
|Total noninterest income                              |  |                             | 10,798 |      |   | 10,715
|                                                      |  |                             |        |      |   |       
|Noninterest expense:                                  |  |                             |        |      |   |       
|Salaries and employee benefits                        |  |                             | 22,277 |      |   | 20,759
|Occupancy                                             |  |                             | 5,869  |      |   | 5,265 
|Technology                                            |  |                             | 2,505  |      |   | 2,330 
|Professional fees                                     |  |                             | 1,197  |      |   | 1,009 
|Postage, delivery and supplies                        |  |                             | 721    |      |   | 1,073 
|Marketing                                             |  |                             | 431    |      |   | 413   
|Core deposit and other intangibles amortization       |  |                             | 565    |      |   | 585   
|Acquisition costs                                     |  |                             |       |      |   | 562   
|FDIC insurance assessments                            |  |                             | 1,232  |      |   | 606   
|Other                                                 |  |                             | 4,801  |      |   | 4,786 
|                                                      |  |                             |        |      |   |       
|Total noninterest expense                             |  |                             | 39,598 |      |   | 37,388
|                                                      |  |                             |        |      |   |       
|Income before income taxes                            |  |                             | 10,710 |      |   | 17,173
|Provision for income taxes                            |  |                             | 3,303  |      |   | 5,564 
|                                                      |  |                             |        |      |   |       
|Net income                                            |  | $                           | 7,407  |      | $ | 11,609
|                                                      |  |                             |        |      |   |       
|Preferred stock dividends                             |  |                             | 1,884  |      |   |      
|                                                      |  |                             |        |      |   |       
|Net income available to common shareholders           |  | $                           | 5,523  |      | $ | 11,609
|                                                      |  |                             |        |      |   |       
|Earnings per common share:                            |  |                             |        |      |   |       
|Basic                                                 |  | $                           | 0.08   |      | $ | 0.16  
|                                                      |  |                             |        |      |   |       
|Diluted                                               |  | $                           | 0.08   |      | $ | 0.16  
|                                                      |  |                             |        |      |   |       

See Notes to Consolidated Financial Statements.



3



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##### Table of Contents

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(UNAUDITED)

(In thousands)



|                                                                                                               |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------- |  | --------------- |  | ------------ | ------- | ------ | -------------- | - | ------ | ---------------- | ------ | - | -------------- | ------ | ------- | ------------------------------------------ | ------ | - | ------- | - |  | ------ | - |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                               |  | Preferred Stock |  | Common Stock |         |        | CapitalSurplus |   |        | RetainedEarnings |        |   | Treasury Stock |        |         | AccumulatedOtherComprehensiveIncome
(Loss) |        |   | Total   |  
|                                                                                                               |  | Shares          |  | Amount       |         | Shares |                |   | Amount |                  |        |   |                | Shares |         |                                            | Amount |   |         |  
|BALANCE AT JANUARY 1, 2008                                                                                     |  |                |  | $            |        |        | 74,926         |   |        | $                | 74,926 |   |                | $      | 110,367 |                                            |        | $ | 309,903 |   |  | (1,768 | ) |  | $ | (20,493 | ) |  | $ | 5,556  |   |  | $ | 480,259 |  
|Comprehensive income:                                                                                          |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                                     |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   | 11,609  |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 11,609  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $1,499             |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   | 2,784  |   |  |   | 2,784   |  
|Net change in unrealized gains on effective cash flow hedging derivatives, net of taxes of $3,066              |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   | 5,694  |   |  |   | 5,694   |  
|                                                                                                               |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                     |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 20,087  |  
|                                                                                                               |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                                       |  |                 |  |              |         |        | 44             |   |        |                  | 44     |   |                |        | 269     |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 313     |  
|Shares issued in stock awards                                                                                  |  |                 |  |              |         |        | 20             |   |        |                  | 20     |   |                |        | (20     | )                                          |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |        |  
|Shares held in Rabbi Trust                                                                                     |  |                 |  |              |         |        | (7             | ) |        |                  | (7     | ) |                |        | (64     | )                                          |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | (71     | )
|Repurchase of common stock                                                                                     |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  | (100   | ) |  |   | (906    | ) |  |   |        |   |  |   | (906    | )
|Stock-based compensation expense                                                                               |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        | 715     |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 715     |  
|Cash dividends paid                                                                                            |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   | (4,027  | ) |  |        |   |  |   |         |   |  |   |        |   |  |   | (4,027  | )
|                                                                                                               |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT MARCH 31, 2008                                                                                      |  |                |  | $            |        |        | 74,983         |   |        | $                | 74,983 |   |                | $      | 111,267 |                                            |        | $ | 317,485 |   |  | (1,868 | ) |  | $ | (21,399 | ) |  | $ | 14,034 |   |  | $ | 496,370 |  
|                                                                                                               |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT JANUARY 1, 2009                                                                                     |  | 125,198         |  | $            | 118,012 |        | 75,128         |   |        | $                | 75,128 |   |                | $      | 121,918 |                                            |        | $ | 332,009 |   |  | (1,868 | ) |  | $ | (21,399 | ) |  | $ | 17,471 |   |  | $ | 643,139 |  
|Comprehensive income:                                                                                          |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                                     |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   | 7,407   |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 7,407   |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $2,181             |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   | 4,051  |   |  |   | 4,051   |  
|Net change in unrealized gains and losses on effective cash flow hedging derivatives, net of taxes of ($1,553) |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   | (2,884 | ) |  |   | (2,884  | )
|                                                                                                               |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                     |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 8,574   |  
|                                                                                                               |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                                       |  |                 |  |              |         |        | 26             |   |        |                  | 26     |   |                |        | 41      |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 67      |  
|Shares issued in stock awards                                                                                  |  |                 |  |              |         |        | 19             |   |        |                  | 19     |   |                |        | (19     | )                                          |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |        |  
|Shares held in Rabbi Trust                                                                                     |  |                 |  |              |         |        | (5             | ) |        |                  | (5     | ) |                |        | (21     | )                                          |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | (26     | )
|Preferred stock dividend and amortization of preferred stock discount                                          |  |                 |  |              | 320     |        |                |   |        |                  |        |   |                |        |         |                                            |        |   | (1,884  | ) |  |        |   |  |   |         |   |  |   |        |   |  |   | (1,564  | )
|Stock-based compensation expense                                                                               |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        | 958     |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   | 958     |  
|Cash dividends paid                                                                                            |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   | (4,034  | ) |  |        |   |  |   |         |   |  |   |        |   |  |   | (4,034  | )
|                                                                                                               |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT MARCH 31, 2009                                                                                      |  | 125,198         |  | $            | 118,332 |        | 75,168         |   |        | $                | 75,168 |   |                | $      | 122,877 |                                            |        | $ | 333,498 |   |  | (1,868 | ) |  | $ | (21,399 | ) |  | $ | 18,638 |   |  | $ | 647,114 |  
|                                                                                                               |  |                 |  |              |         |        |                |   |        |                  |        |   |                |        |         |                                            |        |   |         |   |  |        |   |  |   |         |   |  |   |        |   |  |   |         |  

See Notes to Consolidated Financial Statements.



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STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



|                                                                                                          |  |                             |          |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                          |  | Three Months EndedMarch 31, |         
|                                                                                                          |  | 2009                        |          |   | 2008 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                     |  |                             |          |   |      |   |          |  
|Net income                                                                                                |  | $                           | 7,407    |   |      | $ | 11,609   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                         |  |                             |          |   |      |   |          |  
|Amortization and accretion of premiums and discounts on securities, net                                   |  |                             | 334      |   |      |   | 227      |  
|Net gain on securities                                                                                    |  |                             | (15      | ) |      |   |         |  
|Net gain on loans                                                                                         |  |                             | (113     | ) |      |   | (306     | )
|Provision for credit losses                                                                               |  |                             | 9,000    |   |      |   | 4,150    |  
|Writedowns, less gains on sale, of real estate acquired by foreclosure                                    |  |                             | 24       |   |      |   | (134     | )
|Depreciation and amortization                                                                             |  |                             | 2,613    |   |      |   | 2,589    |  
|Stock-based compensation expense (net of tax benefit recognized)                                          |  |                             | 701      |   |      |   | 515      |  
|Excess tax benefits from share-based payment arrangements                                                 |  |                             |         |   |      |   | (5       | )
|Net decrease in loans held for sale                                                                       |  |                             | 124      |   |      |   | 9,421    |  
|Net gain on sale of bank assets                                                                           |  |                             | (13      | ) |      |   | (185     | )
|Net decrease (increase) in accrued interest receivable and other assets                                   |  |                             | 1,441    |   |      |   | (5,590   | )
|Net increase (decrease) in accrued interest payable and other liabilities                                 |  |                             | 6,233    |   |      |   | (4,565   | )
|                                                                                                          |  |                             |          |   |      |   |          |  
|Net cash provided by operating activities                                                                 |  |                             | 27,736   |   |      |   | 17,726   |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                     |  |                             |          |   |      |   |          |  
|Proceeds from the maturities or calls and paydowns of held-to-maturity securities                         |  |                             | 4,207    |   |      |   | 5,060    |  
|Proceeds from the sale of available-for-sale securities                                                   |  |                             | 375      |   |      |   |         |  
|Proceeds from the maturities or calls and paydowns of available-for-sale securities                       |  |                             | 38,377   |   |      |   | 30,060   |  
|Purchases of available-for-sale securities                                                                |  |                             | (73,433  | ) |      |   | (80,784  | )
|Purchases of held-to-maturity securities                                                                  |  |                             | (2,149   | ) |      |   | (1,895   | )
|Net decrease (increase) in loans held for investment                                                      |  |                             | 60,188   |   |      |   | (93,645  | )
|Proceeds from sale of real estate acquired by foreclosure                                                 |  |                             | 283      |   |      |   | 1,330    |  
|Payment of earnout obligations related to the acquisition of MBM Advisors, Inc.                           |  |                             |         |   |      |   | (2,222   | )
|Cash and cash equivalents acquired with First Horizon National Corp. branch acquisition                   |  |                             |         |   |      |   | 15,301   |  
|Proceeds from sale of loans originated as held for investment                                             |  |                             |         |   |      |   | 4,218    |  
|Proceeds from sale of premises and equipment                                                              |  |                             | 160      |   |      |   | 124      |  
|Purchase of premises and equipment                                                                        |  |                             | (6,058   | ) |      |   | (3,323   | )
|                                                                                                          |  |                             |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                                                       |  |                             | 21,950   |   |      |   | (125,776 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                     |  |                             |          |   |      |   |          |  
|Net increase (decrease) in deposit accounts                                                               |  |                             | 115,320  |   |      |   | (114,088 | )
|Net (decrease) increase in short-term other borrowed funds                                                |  |                             | (130,312 | ) |      |   | 228,782  |  
|Proceeds from issuance of common stock                                                                    |  |                             | 67       |   |      |   | 309      |  
|Repurchase of common stock                                                                                |  |                             | (26      | ) |      |   | (977     | )
|Excess tax benefits from share-based payment arrangements                                                 |  |                             |         |   |      |   | 5        |  
|Dividends paid                                                                                            |  |                             | (5,129   | ) |      |   | (4,027   | )
|                                                                                                          |  |                             |          |   |      |   |          |  
|Net cash (used in) provided by financing activities                                                       |  |                             | (20,080  | ) |      |   | 110,004  |  
|                                                                                                          |  |                             |          |   |      |   |          |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                                 |  |                             | 29,606   |   |      |   | 1,954    |  
|CASH AND CASH EQUIVALENTS:                                                                                |  |                             |          |   |      |   |          |  
|Beginning of period                                                                                       |  |                             | 113,163  |   |      |   | 133,670  |  
|                                                                                                          |  |                             |          |   |      |   |          |  
|End of period                                                                                             |  | $                           | 142,769  |   |      | $ | 135,624  |  
|                                                                                                          |  |                             |          |   |      |   |          |  
|Supplemental information:                                                                                 |  |                             |          |   |      |   |          |  
|Income taxes paid                                                                                         |  | $                           |         |   |      | $ | 625      |  
|Interest paid                                                                                             |  |                             | 15,717   |   |      |   | 24,539   |  
|Noncash investing and financing activities - Acquisition of real estate through foreclosure of collateral |  |                             | 2,960    |   |      |   | 1,555    |  

See Notes to Consolidated Financial Statements.



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STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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

Basis of Presentation

The consolidated financial statements are unaudited and include the accounts of Sterling Bancshares, Inc. and its subsidiaries (the
Company) except for those subsidiaries where it has been determined that the Company is not the primary beneficiary. The Companys accounting and financial reporting policies are in accordance with accounting principles generally
accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. The information furnished in these interim statements reflects all adjustments that are, in the opinion of management,
necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the
results that may be expected for the full year. The interim financial information should be read in conjunction with the Companys 2008 Annual Report on Form 10-K.

Recent Accounting Standards

In April 2009, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position 157-4 (FSP 157-4) Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides
additional guidance for estimating fair value in accordance with FASB Statement No. 157 (SFAS 157), Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased and
includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and will be applied prospectively. Management has not
completed its evaluation of this issue; however, the Company does not expect it to be material to its financial statements.

In April 2009, the FASB issued
FASB Staff Position No. FAS 115-2 and FAS 124-2 Recognition and Presentation of Other-Than-Temporary Impairments, which amends the other-than-temporary impairment guidance in United States Generally Accepted Accounting Principles for debt
securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. These FSPs do not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity securities. For debt securities where the fair value of the security is less than its amortized cost basis at the measurement date, an entity should recognize an
other-than-temporary impairment if the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In instances in which a determination is made that a credit
loss exists but the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (that is, the
amortized cost basis less any current period credit loss), this FSP changes the presentation and amount of the other-than-temporary impairment recognized in the statement of earnings. In those instances, the impairment is separated into (a) the
amount of the total impairment related to the credit loss and (b) the amount of the total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The
amount of the total impairment related to all other factors is recognized in other comprehensive income. The total other-than-temporary impairment is presented in the statement of earnings with an offset for the amount of the total
other-than-temporary impairment that is recognized in other comprehensive income. This new presentation provides additional information about the amounts that an entity does not expect to collect related to a debt security. These FSPs shall be
effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted. Management has not completed its evaluation of these issues; however, the Company does not expect them to be material to its financial
statements.

In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1 Interim Disclosures about Fair Value of Financial
Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This interim disclosure will be included in the Companys interim financial statements beginning in the second quarter of 2009.

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



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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 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 became effective as of December 15, 2008 and will have a significant impact on the Companys accounting for business combinations closing 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. The adoption of this standard did not have a
significant impact on the Companys 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 $231 thousand and $5.1 million have been allocated to core deposits and
goodwill, respectively, all of which is expected to be deductible for tax purposes. The results of operations for this acquisition have been included in the Companys financial results since February 8, 2008.



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

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



|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                                    |  | March 31, 2009   
|                                                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                 | 12,001  |                      | $ | 9                     |  | $ |           |   |  | $ | 12,010 
|Obligations of states of the U.S. and political subdivisions        |  |                   | 1,236   |                      |   | 31                    |  |   |           |   |  |   | 1,267  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 630,952 |                      |   | 14,108                |  |   | (945       | ) |  |   | 644,115
|Other securities                                                    |  |                   | 17,325  |                      |   | 76                    |  |   | (833       | ) |  |   | 16,568 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 661,514 |                      | $ | 14,224                |  | $ | (1,778     | ) |  | $ | 673,960
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                 | 95,711  |                      | $ | 1,648                 |  | $ | (518       | ) |  | $ | 96,841 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 74,262  |                      |   | 180                   |  |   | (12,082    | ) |  |   | 62,360 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 169,973 |                      | $ | 1,828                 |  | $ | (12,600    | ) |  | $ | 159,201
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|                                                                    | 
|                                                                    |  | December 31, 2008
|                                                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                 | 1,749   |                      | $ | 25                    |  | $ |           |   |  | $ | 1,774  
|Obligations of states of the U.S. and political subdivisions        |  |                   | 1,331   |                      |   | 27                    |  |   |           |   |  |   | 1,358  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 608,811 |                      |   | 8,487                 |  |   | (1,270     | ) |  |   | 616,028
|Other securities                                                    |  |                   | 15,252  |                      |   |                      |  |   | (1,055     | ) |  |   | 14,197 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 627,143 |                      | $ | 8,539                 |  | $ | (2,325     | ) |  | $ | 633,357
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                 | 95,910  |                      | $ | 1,930                 |  | $ | (228       | ) |  | $ | 97,612 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 76,129  |                      |   | 86                    |  |   | (9,967     | ) |  |   | 66,248 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 172,039 |                      | $ | 2,016                 |  | $ | (10,195    | ) |  | $ | 163,860
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        



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Expected maturities of securities will differ from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties. The contractual maturities of securities at March 31, 2009 are shown below (in thousands):



|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|------------------------------------------------------------------ |  | ------------------ | ------- | ---------------- | - | ------------- |  | ---------- | ------- |  | - | -------
|                                                                   |  | Available-for-Sale |         | Held-to-Maturity
|                                                                   |  | AmortizedCost      |         | Fair Value       |   | AmortizedCost |  | Fair Value
|Due in one year or less                                            |  | $                  | 12,362  |                  | $ | 12,373        |  | $          | 14,297  |  | $ | 14,442 
|Due after one year through five years                              |  |                    | 875     |                  |   | 904           |  |            | 52,228  |  |   | 53,262 
|Due after five years through ten years                             |  |                    |        |                  |   |              |  |            | 25,970  |  |   | 25,970 
|Due after ten years                                                |  |                    |        |                  |   |              |  |            | 3,216   |  |   | 3,167  
|Mortgage-backed securities and collateralized mortgage obligations |  |                    | 630,952 |                  |   | 644,115       |  |            | 74,262  |  |   | 62,360 
|Other securities                                                   |  |                    | 17,325  |                  |   | 16,568        |  |            |        |  |   |       
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|Total                                                              |  | $                  | 661,514 |                  | $ | 673,960       |  | $          | 169,973 |  | $ | 159,201
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        

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



|                              |  |                              |     |      |   |  
|----------------------------- |  | ---------------------------- | --- | ---- | - | -
|                              |  | Three months ended March 31,
|                              |  | 2009                         |     | 2008
|Proceeds from sales and calls |  | $                            | 375 |      | $ | 
|Gross realized gains          |  |                              | 15  |      |   | 

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.

Securities with unrealized losses
segregated by length of impairment at March 31, 2009 were as follows (in thousands):



|                                                                    |  |                     |        |                       |   |      |            |  |               |        |                       |   |        |            |   |         |   |  |   |       
|------------------------------------------------------------------- |  | ------------------- | ------ | --------------------- | - | ---- | ---------- |  | ------------- | ------ | --------------------- | - | ------ | ---------- | - | ------- | - |  | - | ------
|                                                                    |  | March 31, 2009     
|                                                                    |  | 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 |  | $                   | 11,000 |                       | $ |     |            |  | $             | 11,000 |                       | $ |       |            | $ |        |   |  | $ |      
|Obligations of states of the U.S. and political subdivisions        |  |                     |       |                       |   |     |            |  |               |       |                       |   |       |            |   |        |   |  |   |      
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 4,454  |                       |   | (12  | )          |  |               | 4,442  |                       |   | 14,705 |            |   | (933    | ) |  |   | 13,772
|Other securities                                                    |  |                     | 3,293  |                       |   | (527 | )          |  |               | 2,766  |                       |   | 11,641 |            |   | (306    | ) |  |   | 11,335
|                                                                    |  |                     |        |                       |   |      |            |  |               |        |                       |   |        |            |   |         |   |  |   |       
|Total                                                               |  | $                   | 18,747 |                       | $ | (539 | )          |  | $             | 18,208 |                       | $ | 26,346 |            | $ | (1,239  | ) |  | $ | 25,107
|                                                                    |  |                     |        |                       |   |      |            |  |               |        |                       |   |        |            |   |         |   |  |   |       
|Held-to-Maturity                                                    |  |                     |        |                       |   |      |            |  |               |        |                       |   |        |            |   |         |   |  |   |       
|Obligations of states of the U.S. and political subdivisions        |  | $                   | 25,099 |                       | $ | (518 | )          |  | $             | 24,581 |                       | $ |       |            | $ |        |   |  | $ |      
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 5,079  |                       |   | (355 | )          |  |               | 4,724  |                       |   | 62,696 |            |   | (11,727 | ) |  |   | 50,969
|                                                                    |  |                     |        |                       |   |      |            |  |               |        |                       |   |        |            |   |         |   |  |   |       
|Total                                                               |  | $                   | 30,178 |                       | $ | (873 | )          |  | $             | 29,305 |                       | $ | 62,696 |            | $ | (11,727 | ) |  | $ | 50,969
|                                                                    |  |                     |        |                       |   |      |            |  |               |        |                       |   |        |            |   |         |   |  |   |       



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The average loss on securities in an unrealized loss position was approximately 10% of the amortized cost basis at
March 31, 2009. Securities in a loss position of less than 12 months have an average loss of less than 3% of the amortized cost basis at March 31, 2009.

Securities with unrealized losses segregated by length of impairment at December 31, 2008 were as follows (in thousands):



|                                                                    |  |                     |        |                       |   |        |            |  |               |        |                       |   |        |            |   |        |   |  |   |       
|------------------------------------------------------------------- |  | ------------------- | ------ | --------------------- | - | ------ | ---------- |  | ------------- | ------ | --------------------- | - | ------ | ---------- | - | ------ | - |  | - | ------
|                                                                    |  | Less than 12 Months |        | More than 12 Months  
|                                                                    |  | AmortizedCost       |        | GrossUnrealizedLosses |   |        | Fair Value |  | AmortizedCost |        | GrossUnrealizedLosses |   |        | Fair Value
|Available-for-Sale                                                  |  |                     |        |                       |   |        |            |  |               |        |                       |   |        |            |   |        |   |  |   |       
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                   |       |                       | $ |       |            |  | $             |       |                       | $ |       |            | $ |       |   |  | $ |      
|Obligations of states of the U.S. and political subdivisions        |  |                     |       |                       |   |       |            |  |               |       |                       |   |       |            |   |       |   |  |   |      
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 83,184 |                       |   | (603   | )          |  |               | 82,581 |                       |   | 33,961 |            |   | (667   | ) |  |   | 33,294
|Other securities                                                    |  |                     | 3,152  |                       |   | (483   | )          |  |               | 2,669  |                       |   | 12,100 |            |   | (572   | ) |  |   | 11,528
|                                                                    |  |                     |        |                       |   |        |            |  |               |        |                       |   |        |            |   |        |   |  |   |       
|Total                                                               |  | $                   | 86,336 |                       | $ | (1,086 | )          |  | $             | 85,250 |                       | $ | 46,061 |            | $ | (1,239 | ) |  | $ | 44,822
|                                                                    |  |                     |        |                       |   |        |            |  |               |        |                       |   |        |            |   |        |   |  |   |       
|Held-to-Maturity                                                    |  |                     |        |                       |   |        |            |  |               |        |                       |   |        |            |   |        |   |  |   |       
|Obligations of states of the U.S. and political subdivisions        |  | $                   | 13,392 |                       | $ | (228   | )          |  | $             | 13,164 |                       | $ |       |            | $ |       |   |  | $ |      
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 39,557 |                       |   | (5,506 | )          |  |               | 34,051 |                       |   | 30,499 |            |   | (4,461 | ) |  |   | 26,038
|                                                                    |  |                     |        |                       |   |        |            |  |               |        |                       |   |        |            |   |        |   |  |   |       
|Total                                                               |  | $                   | 52,949 |                       | $ | (5,734 | )          |  | $             | 47,215 |                       | $ | 30,499 |            | $ | (4,461 | ) |  | $ | 26,038
|                                                                    |  |                     |        |                       |   |        |            |  |               |        |                       |   |        |            |   |        |   |  |   |       

The average loss on securities in an unrealized loss position was approximately 6% of the amortized cost basis at
December 31, 2008. During the fourth 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. Given the length of time these securities had been in an unrealized loss position, 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.

Securities in a loss position of less than 12 months have an average
loss of less than 5% of the amortized cost basis at December 31, 2008.

The Company does not own securities of any one issuer (other than the U.S.
government and its agencies) for which the aggregate adjusted cost exceeds 10% of the consolidated shareholders equity at March 31, 2009.

Securities with carrying values totaling $289 million and fair values totaling $286 million were pledged to secure public deposits at March 31, 2009.



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

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



|                                |  |                |           |   |                   |   |        |   |           |  |       |  
|------------------------------- |  | -------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                |  | March 31, 2009 |           |   | December 31, 2008 |  
|                                |  | Amount         |           | % |                   |   | Amount |   | %         | 
|Loans held for sale             |  | $              | 1,395     |   | 0.0               | % |        | $ | 1,524     |  | 0.0   | %
|Loans held for investment       |  |                |           |   |                   |   |        |   |           |  |       |  
|Domestic:                       |  |                |           |   |                   |   |        |   |           |  |       |  
|Commercial and industrial       |  |                | 1,050,363 |   | 28.2              | % |        |   | 1,093,942 |  | 28.8  | %
|Real estate:                    |  |                |           |   |                   |   |        |   |           |  |       |  
|Commercial                      |  |                | 1,786,367 |   | 47.9              | % |        |   | 1,763,712 |  | 46.5  | %
|Construction                    |  |                | 499,262   |   | 13.4              | % |        |   | 545,303   |  | 14.4  | %
|Residential mortgage            |  |                | 319,981   |   | 8.6               | % |        |   | 309,622   |  | 8.2   | %
|Consumer/other                  |  |                | 58,907    |   | 1.6               | % |        |   | 63,883    |  | 1.7   | %
|Foreign                         |  |                |           |   |                   |   |        |   |           |  |       |  
|Commercial and industrial       |  |                | 10,209    |   | 0.3               | % |        |   | 13,577    |  | 0.4   | %
|Other loans                     |  |                | 2,279     |   | 0.0               | % |        |   | 2,251     |  | 0.0   | %
|                                |  |                |           |   |                   |   |        |   |           |  |       |  
|Total loans held for investment |  |                | 3,727,368 |   | 100.0             | % |        |   | 3,792,290 |  | 100.0 | %
|                                |  |                |           |   |                   |   |        |   |           |  |       |  
|Total loans                     |  | $              | 3,728,763 |   | 100.0             | % |        | $ | 3,793,814 |  | 100.0 | %
|                                |  |                |           |   |                   |   |        |   |           |  |       |  

Loan maturities and rate sensitivity of the loans held for investment, excluding residential mortgage and consumer
loans, at March 31, 2009 were as follows (in thousands):



|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|----------------------------------- |  | ---------------------- | --------- | ----------------------------------- | - | ------------------- |  | ----- | ------- |  | - | ---------
|                                    |  | Due in OneYear or Less |           | Due After OneYear ThroughFive Years |   | Due AfterFive Years |  | Total
|Commercial and industrial           |  | $                      | 729,240   |                                     | $ | 265,834             |  | $     | 55,289  |  | $ | 1,050,363
|Real estate - commercial            |  |                        | 253,336   |                                     |   | 780,557             |  |       | 752,474 |  |   | 1,786,367
|Real estate - construction          |  |                        | 244,316   |                                     |   | 166,896             |  |       | 88,050  |  |   | 499,262  
|Foreign loans                       |  |                        | 7,789     |                                     |   | 4,542               |  |       |        |  |   | 12,331   
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,234,681 |                                     | $ | 1,217,829           |  | $     | 895,813 |  | $ | 3,348,323
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|Loans with a fixed interest rate    |  | $                      | 209,886   |                                     | $ | 750,534             |  | $     | 260,978 |  | $ | 1,221,398
|Loans with a floating interest rate |  |                        | 1,024,795 |                                     |   | 467,295             |  |       | 634,835 |  |   | 2,126,925
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,234,681 |                                     | $ | 1,217,829           |  | $     | 895,813 |  | $ | 3,348,323
|                                    |  |                        |           |                                     |   |                     |  |       |         |  |   |          

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

Our largest concentration in any single industry is in our energy portfolio. At
March 31, 2009, our energy portfolio totaled $433 million which represents approximately 12% of total loans held for investment. The petroleum industry is usually divided into three major components: upstream, midstream and downstream. The
composition of the collateral of our upstream energy portfolio, at March 31, 2009, consists of 59% gas reserves and 41% oil reserves. The upstream oil sector is a term commonly used to refer to the exploration for and the recovery and
production of crude oil and natural gas. The upstream oil sector is also known as the exploration and production sector. These reserve-based loans represent approximately 70% of our energy portfolio. Our



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remaining energy portfolio consists of well-secured loans to companies that would be classified as midstream energy companies. A midstream energy
company is a company that processes and transports crude oil and natural gas. The energy lending group participates in shared national credits which are defined by banking regulators as credits of more than $20 million and with three or more
non-affiliated banks as participants. The energy lending group is the only group that consistently participates in shared national credits. As of March 31, 2009, 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 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 first quarter of 2008, the Company sold $2.2 million of performing commercial real estate loans that were originally acquired as held for investment. This sale resulted in a net gain of $82 thousand for the three
months ended March 31, 2008. These loans were sold as part of the Companys ongoing management of the size, concentrations and risk profile of the loan portfolio.

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

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



|                  |  |               |       |   |                  |   |       |  
|----------------- |  | ------------- | ----- | - | ---------------- | - | ----- | -
|                  |  | March 31,2009 |       |   | December 31,2008 |  
|Beginning balance |  | $             | 2,100 |   |                  | $ | 2,189 |  
|New loans         |  |               | 26    |   |                  |   |      |  
|Repayments        |  |               | (174  | ) |                  |   | (89   | )
|                  |  |               |       |   |                  |   |       |  
|Ending balance    |  | $             | 1,952 |   |                  | $ | 2,100 |  
|                  |  |               |       |   |                  |   |       |  

A loan is impaired when, based on current information, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. The recorded investment in impaired loans was $103 million and $87.5 million at March 31, 2009 and December 31, 2008, respectively. Such impaired loans required an
allowance for loan losses of $23.4 million and $16.1 million, respectively. The average recorded investment in impaired loans for the three months ended March 31, 2009 and 2008 was $94.7 million and $24.2 million, respectively. No interest on
impaired loans was received during the three months ended March 31, 2009 and 2008, respectively.

Nonperforming loans of $103 million and $87.5
million at March 31, 2009 and December 31, 2008, respectively, have been categorized by management as nonaccrual loans. Interest foregone on nonaccrual loans was $1.6 million and $1.1 million for the three months ended March 31, 2009
and 2008, respectively. There were no restructured loans as of March 31, 2009 and December 31, 2008.

When management doubts a borrowers
ability to meet payment obligations, which typically occurs when principal or interest payments are more than 90 days past due, the loans are placed on nonaccrual status. Accruing loans 90 days past due or more were $7.5 million and $8.4 million at
March 31, 2009 and December 31, 2008, respectively. The balance at March 31, 2009 consists primarily of one loan that is well-secured and in the process of collection.



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

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



|                                                               |  |                             |        |   |      |   |        |  
|-------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                               |  | Three Months EndedMarch 31, |       
|                                                               |  | 2009                        |        |   | 2008 |  
|Allowance for Credit Losses                                    |  |                             |        |   |      |   |        |  
|Allowance for loan losses at beginning of period               |  | $                           | 49,177 |   |      | $ | 34,446 |  
|Loans charged-off                                              |  |                             | 2,858  |   |      |   | 3,505  |  
|Loan recoveries                                                |  |                             | (832   | ) |      |   | (590   | )
|                                                               |  |                             |        |   |      |   |        |  
|Net loans charged-off                                          |  |                             | 2,026  |   |      |   | 2,915  |  
|Provision for loan losses                                      |  |                             | 9,552  |   |      |   | 4,150  |  
|                                                               |  |                             |        |   |      |   |        |  
|Allowance for loan losses at end of period                     |  |                             | 56,703 |   |      |   | 35,681 |  
|                                                               |  |                             |        |   |      |   |        |  
|Allowance for unfunded loan commitments at beginning of period |  |                             | 1,654  |   |      |   | 927    |  
|Provision (credit) for losses on unfunded loan commitments     |  |                             | (552   | ) |      |   |       |  
|                                                               |  |                             |        |   |      |   |        |  
|Allowance for unfunded loan commitments at end of period       |  |                             | 1,102  |   |      |   | 927    |  
|                                                               |  |                             |        |   |      |   |        |  
|Total allowance for credit losses                              |  | $                           | 57,805 |   |      | $ | 36,608 |  
|                                                               |  |                             |        |   |      |   |        |  



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

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

The Company reviews its goodwill for impairment annually or more frequently if indicators of impairment exist. Goodwill is assigned to
reporting units for purposes of impairment testing. Reporting units used for the goodwill impairment testing include our banking operations and MBM Advisors. At March 31, 2009, due to the present uncertainty surrounding the global economy and
volatility in the Companys stock price, management concluded a triggering event had occurred. As part of our process for performing step one of the impairment test of goodwill, the Company estimated the fair value of both reporting units and
reconciled to the Companys overall estimated market capitalization. The estimated market capitalization considers recent trends in our market capitalization and an expected control premium, based on comparable transactional history. Based on
the results of the step one impairment test, no impairment of goodwill was indicated at March 31, 2009.

Other intangible assets totaled
$13.3 million at March 31, 2009 including $10.2 million related to core deposits and $3.1 million related to customer relationships. Other intangible assets totaled $13.9 million at December 31, 2008 including
$10.7 million related to core deposits and $3.2 million related to customer relationships. The changes in intangibles related to core deposits and customer relationships during 2008 were related to the First Horizon branch acquisition, net
of amortization. Amortization of intangible assets was $565 thousand and $585 thousand for the three months period ended March 31, 2009 and 2008, respectively.



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

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



|                                |  |               |         |                  |   |        
|------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|                                |  | March 31,2009 |         | December 31,2008
|Federal Home Loan Bank advances |  | $             | 40,500  |                  | $ | 212,500
|Repurchase agreements           |  |               | 61,244  |                  |   | 59,936 
|Federal funds purchased         |  |               | 26,530  |                  |   | 36,150 
|Treasury auction facility       |  |               | 150,000 |                  |   | 100,000
|                                |  |               |         |                  |   |        
|Total                           |  | $             | 278,274 |                  | $ | 408,586
|                                |  |               |         |                  |   |        

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 March 31, 2009, the Company had total funds of $1.1 billion available under this agreement of which $40.5 million was
outstanding with an average interest rate of 2.95%. At March 31, 2009, the Company had $40.0 million of FHLB advances with a maturity of nine years and $500 thousand of FHLB advances with a remaining maturity of one year. These borrowings are
collateralized by mortgage loans, certain pledged securities, FHLB stock owned by the Company and any funds on deposit with the FHLB. The Company utilizes these borrowings to meet liquidity needs. Maturing advances are replaced by drawing on
available cash, making additional borrowings or through increased customer deposits.

Securities Sold Under Agreements to RepurchaseSecurities sold under agreements to repurchase represent the purchase of interests in securities by banking customers and structured repurchase agreements with other financial institutions. Securities sold under agreements to repurchase
are stated at the amount of cash received in connection with the transaction. Repurchase agreements with banking customers are settled on the following business day, while structured repurchase agreements with other financial institutions will have
varying terms. All securities sold under agreements to repurchase are collateralized by certain pledged securities. The securities underlying the structured repurchase agreements are held in safekeeping by the purchasing financial institution. At
March 31, 2009 and December 31, 2008, the Company had securities sold under agreements to repurchase with banking customers of $11.2 million and $9.9 million, respectively. Structured repurchase agreements totaled $50.0 million at
March 31, 2009 and December 31, 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 0.25% and 0.32%, at March 31,
2009. The Company may be required to provide additional collateral based on the fair value of the underlying securities.

Treasury Auction Facility
Treasury Auction Facilities (TAF) are term funds auctioned to depository institutions by the Federal Reserve Board. Each TAF auction is for a fixed amount, with the rate determined by the auction process (subject to a
minimum bid rate). All advances must be fully collateralized. At March 31, 2009, we had $150 million of TAF borrowings outstanding at a rate of 0.25%. At December 31, 2008, we had $100 million of TAF borrowings outstanding at a rate of 0.42%.

Federal Funds Purchased  The Company has federal funds purchased at correspondent banks. As of March 31, 2009, federal
funds outstanding with correspondent banks were $26.5 million and payable upon demand. These funds typically mature within one to ninety days.



|8. | SUBORDINATED DEBT
|-- | -----------------

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

On June 30, 2008, the Bank
entered into a subordinated note in the aggregate principal amount of $25.0 million. The subordinated note bears interest at a rate equal to LIBOR plus 2.50% and will be reset quarterly. The unpaid principal balance plus all accrued



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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 March 31, 2009, the floating rate was 3.82% on the subordinated note compared to 4.50% at December 31, 2008.



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

As of March 31, 2009 and December 31, 2008, the Company had the following issues of trust preferred securities outstanding and junior subordinated debt owed to trusts (dollars in thousands):



|                     |  |                    |  |                                     |        |               |                          |                                      |   |                     |  |                   
|-------------------- |  | ------------------ |  | ----------------------------------- | ------ | ------------- | ------------------------ | ------------------------------------ | - | ------------------- |  | ------------------
|Description          |  | Issuance Date      |  | TrustPreferredSecuritiesOutstanding |        | Interest Rate |                          | JuniorSubordinatedDebt Owed ToTrusts |   | Final Maturity Date
|Statutory Trust One  |  | August 30, 2002    |  | $                                   | 20,000 |               | 3-month LIBOR plus 3.45% |                                      | $ | 20,619              |  | August 30, 2032   
|Capital Trust III    |  | September 26, 2002 |  |                                     | 31,250 |               | 8.30% Fixed              |                                      |   | 32,217              |  | September 26, 2032
|BOTH Capital Trust I |  | June 30, 2003      |  |                                     | 4,000  |               | 3-month LIBOR plus 3.10% |                                      |   | 4,124               |  | July 7, 2033      
|Capital Trust IV     |  | March 26, 2007     |  |                                     | 25,000 |               | 3-month LIBOR plus 1.60% |                                      |   | 25,774              |  | June 15, 2037     
|                     |  |                    |  |                                     |        |               |                          |                                      |   |                     |  |                   
|Total                |  |                    |  | $                                   | 80,250 |               |                          |                                      | $ | 82,734              |  |                   
|                     |  |                    |  |                                     |        |               |                          |                                      |   |                     |  |                   

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

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

The trust preferred
securities issued under Statutory Trust One, BOTH Capital Trust I, and Capital Trust IV bear interest on a floating rate that resets quarterly. As of March 31, 2009, the floating rate on these securities was 4.67%, 4.19% and 2.92%, respectively
compared to 4.91%, 7.92% and 3.60%, respectively, at December 31, 2008.



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

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



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

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

In June 2003, the Bank entered into an interest rate swap agreement with a notional amount of $50.0 million in which the Bank swapped the fixed rate to a
floating rate. Under the terms of the swap agreement, the Bank receives a fixed coupon rate of 7.375% and pays a variable interest rate equal to the three-month LIBOR that is reset on a quarterly basis, plus 3.62%. This swap is designated as a fair
value hedge of the Companys $50.0 million subordinated debentures and qualifies for the short-cut method of accounting (discussed in Note 8). The swaps fair value is included in other assets and was $3.3 million and $3.4
million with a floating rate of 4.72% and 8.38% on March 31, 2009 and December 31, 2008, 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 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. For the three months ended March 31, 2009, the Company recorded a gain of $763 thousand due to cash flow hedge ineffectiveness. There were no hedge ineffectiveness gains or losses related to the cash flow hedges
for the three months ended March 31, 2008. The accumulated net after-tax gain on the floor and collar contracts included in accumulated other comprehensive income totaled $10.5 million and $13.4 million at March 31, 2009 and
December 31, 2008, respectively. The total fair value of the interest-rate collar and floor was $17.2 million and $21.0 million at March 31, 2009 and December 31, 2008, respectively, and is included in other assets.



|11. | STOCK-BASED COMPENSATION
|--- | ------------------------

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

Total stock-based compensation expense that was charged against income was $958 thousand and $715 thousand for the three month periods ended March 31, 2009 and 2008, respectively. The total income tax benefit
recognized in the income statement for share-based compensation arrangements was $258 thousand and $199 thousand for the three months ended March 31, 2009 and 2008, respectively.

On December 20, 2007, the Company entered into a new employment agreement with its chief executive officer (CEO). This agreement replaced the existing agreement, in which the CEO was awarded 187,500
Performance Restricted Share Units (PRSUs), to be earned based on specified performance metrics. The total value of this stock grant was based on the current market price on the date of grant. Under the revised agreement, the new
performance metrics include earnings per share growth versus the Companys peer banks and return on assets performance versus the Companys peer banks. In addition, the vesting period changed from four years to three years. Based on these
performance metrics, the CEO will earn a specific number of the eligible share units on December 31, 2009. As of March 31, 2009, there was $526 thousand of total unrecognized compensation



16



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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 months ended
March 31, 2009, 23,265 shares were subscribed for through payroll deductions under the Purchase Plan compared to 14,345 shares for the same period in 2008.



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

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



|                                                                   |  |                              |        |      |   |       
|------------------------------------------------------------------ |  | ---------------------------- | ------ | ---- | - | ------
|                                                                   |  | Three months ended March 31,
|                                                                   |  | 2009                         |        | 2008
|Net income available to common shareholders                        |  | $                            | 5,523  |      | $ | 11,609
|                                                                   |  |                              |        |      |   |       
|Basic:                                                             |  |                              |        |      |   |       
|Weighted average shares outstanding                                |  |                              | 73,285 |      |   | 73,152
|Diluted:                                                           |  |                              |        |      |   |       
|Add incremental shares for:                                        |  |                              |        |      |   |       
|Assumed exercise of outstanding options and nonvested share awards |  |                              | 186    |      |   | 253   
|                                                                   |  |                              |        |      |   |       
|Total                                                              |  |                              | 73,471 |      |   | 73,405
|                                                                   |  |                              |        |      |   |       
|Earnings per common share:                                         |  |                              |        |      |   |       
|Basic                                                              |  | $                            | 0.08   |      | $ | 0.16  
|                                                                   |  |                              |        |      |   |       
|Diluted                                                            |  | $                            | 0.08   |      | $ | 0.16  
|                                                                   |  |                              |        |      |   |       

The incremental shares for the assumed exercise of the outstanding options and nonvested share awards were
determined by application of the treasury stock method. The calculation of diluted earnings per share excludes 1,461,115 and 498,707 options and nonvested share awards outstanding for the three months ended March 31, 2009 and 2008,
respectively, which were antidilutive. In addition, the calculation excludes the Warrant to purchase 2.6 million shares of common stock outstanding for the three month period ending March 31, 2009, which were antidilutive.



|13. | COMMITMENTS AND CONTINGENCIES
|--- | -----------------------------

Leases  The
Company leases certain office facilities and equipment under operating leases. Rent expense under all noncancelable operating lease obligations, net of income from noncancelable subleases aggregated, was approximately $3.1 million and $2.6 million
for the three months ended March 31, 2009 and 2008, respectively. Refer to the 2008 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 years base pay; (ii) an annual bonus for two years in an amount equal to the highest annual bonus paid to the respective executive officer during the three years preceding termination
or change in control (as defined in the agreement); (iii) continued eligibility for Company perquisites, welfare and life insurance benefit plans, to the extent permitted, and in the event participation is not permitted, payment of the cost of
such welfare benefits for a period of two years following termination of employment; (iv) payment of up to $20 thousand in job placement fees; and (v) to the extent permitted by law or the applicable plan, accelerated vesting and
termination of all forfeiture provisions under all benefit plans, options, restricted stock grants or other similar awards.



|14. | FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
|--- | -------------------------------------------------

The Company is a
party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby and commercial letters of
credit.



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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):



|                                         |  |               |         |                  |   |        
|---------------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|                                         |  | March 31,2009 |         | December 31,2008
|Commitments to extend credit             |  | $             | 778,116 |                  | $ | 870,088
|Standby and commercial letters of credit |  |               | 79,590  |                  |   | 104,079

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

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



|15. | REGULATORY MATTERS
|--- | ------------------

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

To meet the capital adequacy requirements, Sterling Bancshares and the Bank must maintain minimum capital amounts and ratios as defined in the
regulations. Management believes, as of March 31, 2009 and December 31, 2008, 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.

On
December 12, 2008, as part of the TARP Capital Purchase Program, the Company entered into a Securities Purchase Agreement with the U.S. Treasury, pursuant to which the Company for a purchase price of $125 million in cash (i) sold 125,198
shares of the Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series J and (ii) issued a Warrant to purchase 2.6 million shares of the Companys common stock, for a price of $7.18 per share. The Series J Preferred
Stock is nonvoting and qualifies as Tier 1 Capital. The Preferred Stock dividend reduces earnings available to common shareholders and is computed at an annual rate of 5% per year for the first five years, and 9% per year thereafter.



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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 March 31, 2009:                    |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 636,584 |       | 15.4                         | % |        | $                                                                            | 331,311 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 517,094 |       | 12.5                         | % |        |                                                                              | 165,656 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 517,094 |       | 10.6                         | % |        |                                                                              | 195,234 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|As of December 31, 2008:                 |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 632,015 |       | 14.9                         | % |        | $                                                                            | 338,491 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 513,518 |       | 12.1                         | % |        |                                                                              | 169,245 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 513,518 |       | 10.6                         | % |        |                                                                              | 194,316 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|STERLING BANK:                           |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|As of March 31, 2009:                    |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 630,387 |       | 15.2                         | % |        | $                                                                            | 331,314 |  | 8.0 | %      |  | $     | 414,142 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 510,897 |       | 12.3                         | % |        |                                                                              | 165,657 |  | 4.0 | %      |  |       | 248,485 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 510,897 |       | 10.5                         | % |        |                                                                              | 195,098 |  | 4.0 | %      |  |       | 243,873 |  | 5.0  | %
|As of December 31, 2008:                 |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 627,695 |       | 14.9                         | % |        | $                                                                            | 338,224 |  | 8.0 | %      |  | $     | 422,780 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 509,198 |       | 12.0                         | % |        |                                                                              | 169,112 |  | 4.0 | %      |  |       | 253,668 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 509,198 |       | 10.5                         | % |        |                                                                              | 194,180 |  | 4.0 | %      |  |       | 242,725 |  | 5.0  | %

On January 1, 2004, the Company deconsolidated the outstanding trust preferred securities from its
Consolidated Financial Statements. However, trust preferred securities are still considered in calculating the Companys Tier 1 capital ratios as permitted by the Federal Reserve rules. These rules when fully transitioned and applicable on
March 31, 2011, will limit the aggregate amount of cumulative perpetual preferred stock, trust preferred securities and certain other capital elements; require bank holding companies to deduct goodwill, less any associated deferred tax
liability, from the sum of core capital elements in calculating the amount of restricted core capital elements that may be included in Tier 1 capital. At March 31, 2009, the entire amount of the $80.2 million of trust preferred securities
outstanding counted as Tier 1 capital. The excess amount of trust preferred securities not qualifying for Tier 1 capital may be included in Tier 2 capital. This amount is limited to 50% of Tier 1 capital. Additionally, the final rules provide that
trust preferred securities no longer qualify for Tier 1 capital within five years of their maturity. Under the transitioned rules, there is not a material impact on the Companys consolidated capital ratios at March 31, 2009.

Dividend restrictions Dividends paid by the Bank are subject to certain restrictions imposed by regulatory agencies. At March 31, 2009, the
aggregate amount of dividends, which legally could be paid without prior approval of various regulatory agencies, totaled approximately $190 million by the Bank.



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

On
January 1, 2008, the Company adopted SFAS 157. 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.

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



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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 March 31, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).



|                              |  |                          |         |                                                                  |   |                                            |  |                                        |         |  |   |      
|----------------------------- |  | ------------------------ | ------- | ---------------------------------------------------------------- | - | ------------------------------------------ |  | -------------------------------------- | ------- |  | - | -----
|                              |  | Balance atMarch 31, 2009 |         | Quoted Prices inActive Markets forIdentical Instruments(Level 1) |   | Significant OtherObservableInputs(Level
2) |  | SignificantUnobservableInputs(Level 3)
|Financial assets:             |  |                          |         |                                                                  |   |                                            |  |                                        |         |  |   |      
|Available-for-sale securities |  | $                        | 673,960 |                                                                  | $ |                                           |  | $                                      | 671,493 |  | $ | 2,467
|Cash flow hedges              |  |                          | 17,170  |                                                                  |   |                                           |  |                                        | 17,170  |  |   |     
|Loans held for sale           |  |                          | 1,395   |                                                                  |   |                                           |  |                                        |        |  |   | 1,395
|Interest rate swap            |  |                          | 3,335   |                                                                  |   |                                           |  |                                        | 3,335   |  |   |     

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 or Level 3 inputs within the fair value hierarchy. For the three months
ended March 31, 2009, the Company had additions to impaired loans, other real estate owned and other repossessed assets of $22.7 million, $2.6 million and $44 thousand, respectively, which were outstanding at March 31, 2009 and measured
using the fair value hierarchy. In 2008, as part of the TARP Capital Purchase Program, we sold 125,198 preferred shares for a purchase price of $125 million and issued a Warrant to purchase 2.6 million shares of the Companys common stock.
The proceeds from the TARP Capital Purchase Program were allocated between the Preferred Shares and the Warrant based on relative fair values. The Preferred Shares were determined using Level 3 inputs based on similar types of securities. The fair
value of the Warrant was determined based on Level 2 inputs using the Black-Scholes-Merton option pricing model.

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 2009 and summarizes gains and losses due to changes in fair value. Level 3 available-for-sale securities include certain
interest-only strips which are valued based on certain observable inputs such as interest rates and credit spreads, as well as unobservable inputs such as estimated net charge-off and prepayment rates.



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|                                                                                                      |  |                                                                                 |       |   |                     |   |       |  
|----------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ----- | - | ------------------- | - | ----- | -
|                                                                                                      |  | Level 3 InstrumentsFair Value Measurements Using
SignificantUnobservable Inputs |      
|                                                                                                      |  | Three Months Ended March 31, 2009                                               |      
|                                                                                                      |  | Available-for-Sale Securities                                                   |       |   | Loans held for sale |  
|Balance, January 1, 2009                                                                              |  | $                                                                               | 2,516 |   |                     | $ | 1,524 |  
|Total gains or losses for the period included in:                                                     |  |                                                                                 |       |   |                     |   |       |  
|Noninterest income                                                                                    |  |                                                                                 |      |   |                     |   |      |  
|Other comprehensive income                                                                            |  |                                                                                 | 153   |   |                     |   |      |  
|Purchases, issuances, settlements and amortization                                                    |  |                                                                                 | (202  | ) |                     |   | (129  | )
|Transfers in and/or out of Level 3                                                                    |  |                                                                                 |      |   |                     |   |      |  
|                                                                                                      |  |                                                                                 |       |   |                     |   |       |  
|Balance, March 31, 2009                                                                               |  | $                                                                               | 2,467 |   |                     | $ | 1,395 |  
|                                                                                                      |  |                                                                                 |       |   |                     |   |       |  
|Net unrealized losses included in net income for the period relating to assets held at March 31, 2009 |  | $                                                                               |      |   |                     | $ |      |  
|                                                                                                      |  |                                                                                 |       |   |                     |   |       |  

There were no realized gains or losses related to Level 3 assets recorded during the three months ended
March 31, 2009 and 2008.



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

FORWARD-LOOKING STATEMENTS

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

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



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



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



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



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



| |  |  | the effect of legislative or regulatory developments including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial
securities industry;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking
professionals;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of changes in accounting policies and practices, as may be adopted by the FASB, the Securities and Exchange Commission, the Public Company Accounting
Oversight Board and other regulatory agencies;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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

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

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

OVERVIEW

For more than 34 years, Sterling Bancshares, Inc. and
Sterling Bank have served the banking needs of small to medium-sized businesses. We provide a broad array of financial services to Texas businesses and consumers through 60 banking centers in the greater metropolitan areas of Houston, San Antonio,
Dallas and Fort Worth, Texas.

At March 31, 2009, we had consolidated total assets of $5.1 billion, total loans of $3.7 billion, total deposits of
$3.9 billion and shareholders equity of $647 million.

We reported net income available to common shareholders of $5.5 million, or $0.08 per diluted
common share for the quarter ended March 31, 2009, compared to $11.6 million or $0.16 per diluted common share earned for the first quarter of 2008.

Our earnings this quarter were impacted by an increased loan loss provision related to one previously announced nonperforming energy loan relationship, as well as an increased loan loss provision related to a slowing economy. Our
nonperforming assets increased this quarter as we continued to feel the effects of a weakening economy. We do not anticipate seeing significant losses from these nonperforming loans due to the underlying collateral values.

Despite a challenging economy, we had very strong deposit growth in the first quarter of 2009. We continue to remain a valuable core funded franchise with almost 30% of
our deposits being noninterest-bearing. While, historically low interest rates continue to be a challenge for us as it is for all banks, our current net interest margin remains healthy at 4.32%.

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
March 31, 2009.

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

These policies and the
judgments, estimates and assumptions are described in greater detail in our 2008 Annual Report on Form 10-K in the Critical Accounting Policies section of Managements Discussion and Analysis and in Note 1 to the Consolidated
Financial Statements  Organization and Summary of Significant Accounting and Reporting Policies.

RECENT ACCOUNTING
STANDARDS

In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position 157-4 (FSP 157-4)
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for estimating fair value in
accordance with FASB Statement No. 157 (SFAS 157), Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased and includes guidance on identifying circumstances that
indicate a transaction is not orderly. FSP 157-4 is



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effective for interim and annual reporting periods ending after June 15, 2009, and will be applied prospectively. Management has not completed its
evaluation of this issue; however, the Company does not expect it to be material to its financial statements.

In April 2009, the FASB issued FASB Staff
Position No. FAS 115-2 and FAS 124-2 Recognition and Presentation of Other-Than-Temporary Impairments, which amends the other-than-temporary impairment guidance in United States Generally Accepted Accounting Principles for debt securities to
make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. These FSPs do not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities. For debt securities where the fair value of the security is less than its amortized cost basis at the measurement date, an entity should recognize an other-than-temporary
impairment if the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In instances in which a determination is made that a credit loss exists but the
entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (that is, the amortized cost basis
less any current period credit loss), this FSP changes the presentation and amount of the other-than-temporary impairment recognized in the statement of earnings. In those instances, the impairment is separated into (a) the amount of the total
impairment related to the credit loss and (b) the amount of the total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total
impairment related to all other factors is recognized in other comprehensive income. The total other-than-temporary impairment is presented in the statement of earnings with an offset for the amount of the total other-than-temporary impairment that
is recognized in other comprehensive income. This new presentation provides additional information about the amounts that an entity does not expect to collect related to a debt security. These FSPs shall be effective for interim and annual
reporting periods ending after June 15, 2009, with early adoption permitted. Management has not completed its evaluation of these issues; however, the Company does not expect them to be material to its financial statements.

In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1 Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FASB
Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial
statements. This interim disclosure will be included in the Companys interim financial statements beginning in the second quarter of 2009.



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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 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 became effective as of December 15, 2008 and will have a significant impact on the Companys accounting for
business combinations closing 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. The adoption of this standard did not have a significant impact on the Companys 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 EndedMarch 31,                        |           |   | Year EndedDecember 31, |  
|                                                            |  | 2009                                               |           |   | 2008                   |   |           | 2008 | 
|                                                            |  | (Dollars and shares in thousands, except per share |          
|INCOME STATEMENT DATA:                                      |  |                                                    |           |   |                        |   |           |      |  |   |           |  
|Net interest income                                         |  | $                                                  | 48,510    |   |                        | $ | 47,996    |      |  | $ | 198,084   |  
|Provision for credit losses                                 |  |                                                    | 9,000     |   |                        |   | 4,150     |      |  |   | 29,917    |  
|Noninterest income                                          |  |                                                    | 10,798    |   |                        |   | 10,715    |      |  |   | 41,027    |  
|Noninterest expense                                         |  |                                                    | 39,598    |   |                        |   | 37,388    |      |  |   | 153,210   |  
|Income before income taxes                                  |  |                                                    | 10,710    |   |                        |   | 17,173    |      |  |   | 55,984    |  
|Net income                                                  |  |                                                    | 7,407     |   |                        |   | 11,609    |      |  |   | 38,619    |  
|Net income available to common shareholders                 |  |                                                    | 5,523     |   |                        |   | 11,609    |      |  |   | 38,221    |  
|BALANCE SHEET DATA(at period-end):                          |  |                                                    |           |   |                        |   |           |      |  |   |           |  
|Total assets                                                |  | $                                                  | 5,074,831 |   |                        | $ | 4,745,461 |      |  | $ | 5,079,979 |  
|Total loans                                                 |  |                                                    | 3,728,763 |   |                        |   | 3,548,750 |      |  |   | 3,793,814 |  
|Allowance for loan losses                                   |  |                                                    | 56,703    |   |                        |   | 35,681    |      |  |   | 49,177    |  
|Total securities                                            |  |                                                    | 843,933   |   |                        |   | 708,474   |      |  |   | 805,396   |  
|Total deposits                                              |  |                                                    | 3,934,457 |   |                        |   | 3,644,917 |      |  |   | 3,819,137 |  
|Other borrowed funds                                        |  |                                                    | 278,274   |   |                        |   | 425,929   |      |  |   | 408,586   |  
|Subordinated debt                                           |  |                                                    | 78,310    |   |                        |   | 49,142    |      |  |   | 78,335    |  
|Junior subordinated debt                                    |  |                                                    | 82,734    |   |                        |   | 82,734    |      |  |   | 82,734    |  
|Common equity                                               |  |                                                    | 528,782   |   |                        |   | 496,370   |      |  |   | 525,127   |  
|Preferred equity                                            |  |                                                    | 118,332   |   |                        |   |          |      |  |   | 118,012   |  
|COMMON SHARE DATA:                                          |  |                                                    |           |   |                        |   |           |      |  |   |           |  
|Earnings per common share (1):                              |  |                                                    |           |   |                        |   |           |      |  |   |           |  
|Basic shares                                                |  | $                                                  | 0.08      |   |                        | $ | 0.16      |      |  | $ | 0.52      |  
|Diluted shares                                              |  | $                                                  | 0.08      |   |                        | $ | 0.16      |      |  | $ | 0.52      |  
|Shares used in computing earnings per common share:         |  |                                                    |           |   |                        |   |           |      |  |   |           |  
|Basic shares                                                |  |                                                    | 73,285    |   |                        |   | 73,152    |      |  |   | 73,177    |  
|Diluted shares                                              |  |                                                    | 73,471    |   |                        |   | 73,405    |      |  |   | 73,488    |  
|End of period common shares outstanding                     |  |                                                    | 73,300    |   |                        |   | 73,115    |      |  |   | 73,260    |  
|Book value per common share at period-end:                  |  |                                                    |           |   |                        |   |           |      |  |   |           |  
|Total                                                       |  | $                                                  | 7.21      |   |                        | $ | 6.79      |      |  | $ | 7.17      |  
|Tangible                                                    |  | $                                                  | 4.67      |   |                        | $ | 4.21      |      |  | $ | 4.61      |  
|Cash dividends paid per common share                        |  | $                                                  | 0.055     |   |                        | $ | 0.055     |      |  | $ | 0.220     |  
|Common stock dividend payout ratio                          |  |                                                    | 54.47     | % |                        |   | 34.69     | %    |  |   | 41.72     | %
|SELECTED PERFORMANCE RATIOS AND OTHER DATA:                 |  |                                                    |           |   |                        |   |           |      |  |   |           |  
|Return on average common equity (2)                         |  |                                                    | 4.21      | % |                        |   | 9.43      | %    |  |   | 7.60      | %
|Return on average tangible common equity (2)                |  |                                                    | 6.93      | % |                        |   | 15.56     | %    |  |   | 12.58     | %
|Return on average assets (2)                                |  |                                                    | 0.59      | % |                        |   | 1.01      | %    |  |   | 0.80      | %
|Return on average tangible assets (2)                       |  |                                                    | 0.65      | % |                        |   | 1.09      | %    |  |   | 0.86      | %
|Tax equivalent net interest margin (3)                      |  |                                                    | 4.32      | % |                        |   | 4.67      | %    |  |   | 4.55      | %
|Efficiency ratio (4)                                        |  |                                                    | 66.12     | % |                        |   | 62.34     | %    |  |   | 63.04     | %
|Full-time equivalent employees                              |  |                                                    | 1,124     |   |                        |   | 1,103     |      |  |   | 1,116     |  
|Number of banking centers                                   |  |                                                    | 60        |   |                        |   | 59        |      |  |   | 59        |  
|LIQUIDITY AND CAPITAL RATIOS:                               |  |                                                    |           |   |                        |   |           |      |  |   |           |  
|Average loans to average deposits                           |  |                                                    | 98.22     | % |                        |   | 96.75     | %    |  |   | 101.31    | %
|Period-end shareholders equity to total assets             |  |                                                    | 12.75     | % |                        |   | 10.46     | %    |  |   | 12.66     | %
|Average shareholders equity to average assets              |  |                                                    | 12.81     | % |                        |   | 10.75     | %    |  |   | 10.50     | %
|Period-end tangible capital to total tangible assets        |  |                                                    | 9.42      | % |                        |   | 6.76      | %    |  |   | 9.32      | %
|Period-end tangible common capital to total tangible assets |  |                                                    | 7.00      | % |                        |   | 6.76      | %    |  |   | 6.91      | %
|Tier 1 capital to risk-weighted assets                      |  |                                                    | 12.49     | % |                        |   | 8.72      | %    |  |   | 12.14     | %
|Total capital to risk-weighted assets                       |  |                                                    | 15.37     | % |                        |   | 10.72     | %    |  |   | 14.94     | %
|Tier 1 leverage ratio (Tier 1 capital to average assets)    |  |                                                    | 10.59     | % |                        |   | 8.46      | %    |  |   | 10.57     | %
|ASSET QUALITY RATIOS:                                       |  |                                                    |           |   |                        |   |           |      |  |   |           |  
|Period-end allowance for credit losses to period-end loans  |  |                                                    | 1.55      | % |                        |   | 1.03      | %    |  |   | 1.34      | %
|Period-end allowance for loan losses to period-end loans    |  |                                                    | 1.52      | % |                        |   | 1.01      | %    |  |   | 1.30      | %
|Period-end allowance for loan losses to nonperforming loans |  |                                                    | 55.35     | % |                        |   | 162.46    | %    |  |   | 56.21     | %
|Nonperforming loans to period-end loans                     |  |                                                    | 2.75      | % |                        |   | 0.62      | %    |  |   | 2.31      | %
|Nonperforming assets to period-end assets                   |  |                                                    | 2.18      | % |                        |   | 0.55      | %    |  |   | 1.84      | %
|Net charge-offs to average loans (2)                        |  |                                                    | 0.22      | % |                        |   | 0.34      | %    |  |   | 0.40      | %



|(1) | The calculation of diluted earnings per share excludes 1,461,115 and 498,707 options and nonvested share awards outstanding for the three months ended March 31, 2009 and 2008,
respectively, and 837,381 options and nonvested share awards outstanding for the year 2008, which were antidilutive. In addition, the calculation excludes the Warrant to purchase 2.6 million shares of common stock outstanding for the three month
period ending March 31, 2009, 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 costs and hurricane related costs by tax equivalent basis net interest income plus noninterest
income less net gain (loss) on investment securities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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RESULTS OF OPERATIONS

Net Income Net income available to common shareholders was $5.5 million, or $0.08 per diluted common share, for the first quarter ended March 31, 2009, compared to $11.6 million, or $0.16 per diluted common share,
earned for the first quarter of 2008.

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

The Federal Reserve Board significantly
influences market interest rates, including rates offered for loans and deposits by many financial institutions. Generally, when the Federal Open Market Committee (FOMC) of the Federal Reserve Board changes the target overnight interest
rate charged by banks, the market responds with a similar change in the prime lending rate. Our loan portfolio is impacted significantly by changes in short-term interest rates. During 2008, the FOMC significantly reduced overnight interest rates by
200 basis points to 2.25% at March 31, 2008 and an additional 200 basis points to 0.25% at December 31, 2008. Rates remained at this historically low level throughout the first quarter of 2009. This decline in interest rates negatively
impacted our net interest income and margin during 2008 and 2009.



26



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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 March 31, |          
|                                                      |  | (Dollars in thousands)       |          
|                                                      |  | 2009                         |           |   | 2008     |  
|                                                      |  | AverageBalance               |           |   | Interest |   | AverageYield/Rate |  |      | AverageBalance |  |   | Interest  |   | AverageYield/Rate |  
|Interest-Earning Assets:                              |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Loans held for sale (1)                               |  | $                            | 1,876     |   |          | $ | 26                |  | 5.66 | %              |  | $ | 78,331    |   |                   | $ | 1,384  |  | 7.11 | %
|Loans held for investment (1):                        |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Taxable                                               |  |                              | 3,775,098 |   |          |   | 52,914            |  | 5.68 | %              |  |   | 3,404,998 |   |                   |   | 61,626 |  | 7.28 | %
|Non-taxable (2)                                       |  |                              | 5,049     |   |          |   | 88                |  | 7.04 | %              |  |   | 2,974     |   |                   |   | 61     |  | 8.27 | %
|Securities:                                           |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Taxable                                               |  |                              | 709,776   |   |          |   | 8,558             |  | 4.89 | %              |  |   | 567,343   |   |                   |   | 6,549  |  | 4.64 | %
|Non-taxable (2)                                       |  |                              | 96,892    |   |          |   | 1,302             |  | 5.45 | %              |  |   | 97,411    |   |                   |   | 1,251  |  | 5.17 | %
|Trading assets                                        |  |                              |          |   |          |   |                  |  |     |                |  |   | 4,395     |   |                   |   | 21     |  | 1.91 | %
|Federal funds sold                                    |  |                              | 9,740     |   |          |   | 6                 |  | 0.27 | %              |  |   | 4,990     |   |                   |   | 39     |  | 3.13 | %
|Deposits in financial institutions                    |  |                              | 257       |   |          |   |                  |  | 0.07 | %              |  |   | 437       |   |                   |   | 3      |  | 3.01 | %
|                                                      |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total interest-earning assets                         |  |                              | 4,598,688 |   |          |   | 62,894            |  | 5.55 | %              |  |   | 4,160,879 |   |                   |   | 70,934 |  | 6.86 | %
|Noninterest-earning assets:                           |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Cash and due from banks                               |  |                              | 103,035   |   |          |   |                   |  |      |                |  |   | 98,377    |   |                   |   |        |  |      |  
|Premises and equipment, net                           |  |                              | 48,729    |   |          |   |                   |  |      |                |  |   | 36,400    |   |                   |   |        |  |      |  
|Other assets                                          |  |                              | 370,230   |   |          |   |                   |  |      |                |  |   | 341,837   |   |                   |   |        |  |      |  
|Allowance for loan losses                             |  |                              | (48,743   | ) |          |   |                   |  |      |                |  |   | (34,076   | ) |                   |   |        |  |      |  
|                                                      |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total noninterest-earning assets                      |  |                              | 473,251   |   |          |   |                   |  |      |                |  |   | 442,538   |   |                   |   |        |  |      |  
|                                                      |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total Assets                                          |  | $                            | 5,071,939 |   |          |   |                   |  |      |                |  | $ | 4,603,417 |   |                   |   |        |  |      |  
|                                                      |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Interest-Bearing Liabilities:                         |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Deposits:                                             |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Demand and savings                                    |  | $                            | 1,565,770 |   |          | $ | 3,492             |  | 0.90 | %              |  | $ | 1,430,887 |   |                   | $ | 5,615  |  | 1.58 | %
|Certificates and other time                           |  |                              | 1,154,420 |   |          |   | 7,467             |  | 2.62 | %              |  |   | 1,125,983 |   |                   |   | 11,977 |  | 4.28 | %
|Other borrowed funds                                  |  |                              | 365,408   |   |          |   | 812               |  | 0.90 | %              |  |   | 323,622   |   |                   |   | 2,352  |  | 2.92 | %
|Subordinated debt                                     |  |                              | 77,820    |   |          |   | 979               |  | 5.10 | %              |  |   | 49,272    |   |                   |   | 1,032  |  | 8.42 | %
|Junior subordinated debt                              |  |                              | 82,734    |   |          |   | 1,204             |  | 5.90 | %              |  |   | 82,734    |   |                   |   | 1,600  |  | 7.78 | %
|                                                      |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total interest-bearing liabilities                    |  |                              | 3,246,152 |   |          |   | 13,954            |  | 1.74 | %              |  |   | 3,012,498 |   |                   |   | 22,576 |  | 3.01 | %
|Noninterest-bearing sources:                          |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Demand deposits                                       |  |                              | 1,130,230 |   |          |   |                   |  |      |                |  |   | 1,046,412 |   |                   |   |        |  |      |  
|Other liabilities                                     |  |                              | 45,698    |   |          |   |                   |  |      |                |  |   | 49,554    |   |                   |   |        |  |      |  
|                                                      |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total noninterest-bearing liabilities                 |  |                              | 1,175,928 |   |          |   |                   |  |      |                |  |   | 1,095,966 |   |                   |   |        |  |      |  
|Shareholders equity                                  |  |                              | 649,859   |   |          |   |                   |  |      |                |  |   | 494,953   |   |                   |   |        |  |      |  
|                                                      |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total liabilities and shareholders equity            |  | $                            | 5,071,939 |   |          |   |                   |  |      |                |  | $ | 4,603,417 |   |                   |   |        |  |      |  
|                                                      |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|                                                      |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Tax equivalent net interest income and margin (2) (3) |  |                              |           |   |          |   | 48,940            |  | 4.32 | %              |  |   |           |   |                   |   | 48,358 |  | 4.67 | %
|                                                      |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Tax equivalent adjustment:                            |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Loans                                                 |  |                              |           |   |          |   | 28                |  |      |                |  |   |           |   |                   |   | 19     |  |      |  
|Securities                                            |  |                              |           |   |          |   | 402               |  |      |                |  |   |           |   |                   |   | 343    |  |      |  
|                                                      |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total tax equivalent adjustment                       |  |                              |           |   |          |   | 430               |  |      |                |  |   |           |   |                   |   | 362    |  |      |  
|                                                      |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Net interest income                                   |  |                              |           |   |          | $ | 48,510            |  |      |                |  |   |           |   |                   | $ | 47,996 |  |      |  
|                                                      |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  



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



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



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



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Tax equivalent net interest income increased $582 thousand or 1.2% to $48.9 million for the three month period ended
March 31, 2009, compared to the same time period in 2008. Our tax equivalent net interest margin was 4.32% for the three month period ended March 31, 2009 compared to 4.67% for the three month period ended March 31, 2008. This decline
in net interest margin was due, in part, to the significant decline in short-term interest rates and an increase in nonperforming assets. The negative impact of the decline in short-term interest rates was partially mitigated by the work we
have done in recent years to position our balance sheet to be more neutral to movements in short-term interest rates including the interest rate hedge that was established in 2006.

Interest income on loans decreased $10.0 million for the three month period ended March 31, 2009 compared to the same period in 2008, due to a decrease in yield earned of 159 basis points. This decrease in yield
was due to the decline in interest rates in 2008 and an increase in nonperforming loans during 2008 and 2009. For the purpose of calculating loan yields, average loan balances include nonaccrual loans with no related interest income. The decrease in
yield was partially offset by an increase in average total loans of $296 million or 8.5% for the three months ended March 31, 2009 over the comparable period in 2008 and additional interest income from the interest rate hedge that we purchased
in 2006 which provided additional interest income of $2.5 million or 22 basis points to net interest margin for the three month period ended March 31, 2009. The hedge effectively converts a portion of our loan portfolio from variable rate loans
to fixed rate loans.

Tax equivalent interest income on securities increased $2.0 million for the three month period ended March 31, 2009 compared to
the same period in 2008 due to an increase in the average securities portfolio (including trading assets) and yield earned. Average securities increased $138 million or 20.6% for the three month period ended March 31, 2009 compared to the same
period in 2008. Tax equivalent yield earned on securities increased 26 basis points for the three month period ended March 31, 2009 compared to the same period in 2008.

Total interest expense decreased $8.6 million for the three month period ended March 31, 2009 over the comparable period in 2008 due to a decline in interest rates. The decline in interest rates was offset by an
increase in average interest-bearing liabilities for the three month period ended March 31, 2009 of $234 million or 7.8% compared to the same period in 2008. This decrease in interest expense was primarily due to a decrease in interest expense
on deposits of $6.6 million for the three month period ended March 31, 2009 compared to the same period in 2008 resulting from a decrease in the average rate paid on all interest-bearing deposits of 114 basis points.

Average other borrowings for the three month period ended March 31, 2009 increased $41.8 million compared to the same period in 2008. These borrowings provided
additional funding at a rate of 0.90% for the three month period ended March 31, 2009, for a decrease in funding costs of 202 basis points over the same period in 2008. The decrease in interest rates contributed to a decrease in interest
expense on other borrowings of $1.5 million for the three month period ended March 31, 2009 compared to the same period in 2008.

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



|                                       |  |                                      |        |      |   |       
|-------------------------------------- |  | ------------------------------------ | ------ | ---- | - | ------
|                                       |  | For the Three Months Ended March 31,
|                                       |  | 2009                                 |        | 2008
|Customer service fees                  |  | $                                    | 4,112  |      | $ | 3,876 
|Net gain on securities                 |  |                                      | 15     |      |   |      
|Wealth management fees                 |  |                                      | 2,202  |      |   | 2,338 
|Net gain on loans                      |  |                                      | 113    |      |   | 306   
|Bank-owned life insurance              |  |                                      | 905    |      |   | 824   
|Debit card income                      |  |                                      | 575    |      |   | 589   
|Federal Home Loan Bank stock dividends |  |                                      | 36     |      |   | 115   
|Other                                  |  |                                      | 2,840  |      |   | 2,667 
|                                       |  |                                      |        |      |   |       
|Total                                  |  | $                                    | 10,798 |      | $ | 10,715
|                                       |  |                                      |        |      |   |       

Total noninterest income for the three month period ended March 31, 2009 increased $83 thousand compared to
the same period in 2008. Details of the changes in the various components of noninterest income are discussed below:



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Customer service fees for the three months ended March 31, 2009 increased $236 thousand compared to the same period
in 2008. This increase was partly attributable to the lower earnings credit rate on our commercial accounts on analysis, which is a direct result of lower short-term interest rates.

Wealth management fees decreased $136 thousand for the three months ended March 31, 2009 compared to the same period in 2008. The decrease in wealth management fees was due primarily to a decline in investment
management fees which are assessed based on the market value of managed assets. Our wealth management group provides customized solutions for high net worth customers by integrating financial services with traditional banking products and services
such as private banking, money management, full-service brokerage, financial planning, personal and institutional trust and retirement services, as well as insurance and risk management services.

Other noninterest income increased $173 thousand for the three months ended March 31, 2009 compared to the same period in 2008. This increase was due primarily to
$763 thousand in gains recorded as a result of the cash flow hedge ineffectiveness for the first quarter of 2009. This increase was partially offset by $323 thousand we received during the first quarter of 2008 from the mandatory redemption of some
of our shares of Visa, Inc. related to Visa Inc.s Initial Public Offering during 2008.

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



|                                                                          |  |                                      |        |      |   |        |  
|------------------------------------------------------------------------- |  | ------------------------------------ | ------ | ---- | - | ------ | -
|                                                                          |  | For the Three Months Ended March 31, |       
|                                                                          |  | 2009                                 |        | 2008 |  
|Salaries and employee benefits                                            |  | $                                    | 22,277 |      | $ | 20,759 |  
|Occupancy                                                                 |  |                                      | 5,869  |      |   | 5,265  |  
|Technology                                                                |  |                                      | 2,505  |      |   | 2,330  |  
|Professional fees                                                         |  |                                      | 1,197  |      |   | 1,009  |  
|Postage, delivery and supplies                                            |  |                                      | 721    |      |   | 1,073  |  
|Marketing                                                                 |  |                                      | 431    |      |   | 413    |  
|Core deposit and other intangibles amortization                           |  |                                      | 565    |      |   | 585    |  
|Acquisition costs                                                         |  |                                      |       |      |   | 562    |  
|FDIC insurance assessments                                                |  |                                      | 1,232  |      |   | 606    |  
|Net gains and carrying costs of other real estate and foreclosed property |  |                                      | 158    |      |   | (69    | )
|Other                                                                     |  |                                      | 4,643  |      |   | 4,855  |  
|                                                                          |  |                                      |        |      |   |        |  
|Total                                                                     |  | $                                    | 39,598 |      | $ | 37,388 |  
|                                                                          |  |                                      |        |      |   |        |  

Total noninterest expense for the three month period ended March 31, 2009 increased $2.2 million compared to
the same period in 2008. We completed one acquisition in 2008 which resulted in an increase in noninterest expense of approximately $527 thousand for the first quarter of 2009 compared to the first quarter of 2008. Details of the changes in the
various components of noninterest expense are discussed below:

Salaries and employee benefits for the three month period ended March 31, 2009
increased $1.5 million compared to the same period in 2008. This increase was due, in part, to increased employee benefits costs including additional employer matches related to changes in the Companys 401(k) benefit plan and higher medical
costs.

Occupancy expense for the three month period ended March 31, 2009 increased $604 thousand compared to the same period in 2008. During the
first quarter of 2008, we added ten banking centers in conjunction with the First Horizon branch acquisitions which resulted in additional occupancy expense of $201 thousand for the first quarter of 2009.

Technology expense increased $175 thousand for the three month period ended March 31, 2009 compared to the same period in 2008, primarily due to additional software
licensing costs.

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

We have chosen
to participate in the FDICs Temporary Liquidity Guarantee Program which allows funds in noninterest-bearing transaction deposit accounts to be fully FDIC-insured. FDIC insurance premiums increased $626 thousand to $1.2 million for the first
quarter of 2009 compared to the first quarter of 2008 due to increased FDIC assessment rates and higher average deposits.



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Other noninterest expense decreased $212 thousand for the three month period ended March 31, 2009 compared to the
same period in 2008. No single component of other noninterest expense made up a significant portion of the change from the first quarter of 2008.

Income Taxes  We provided $3.3 million for federal and state income taxes during the three month period ended March 31, 2009 and $5.6 million for the same period in 2008. The effective tax rate was approximately 31%
for the three month period ended March 31, 2009 as compared to 32% for the same period in 2008.

FINANCIAL CONDITION

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



|                                |  |                |           |   |                   |   |        |   |           |  |       |  
|------------------------------- |  | -------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                |  | March 31, 2009 |           |   | December 31, 2008 |  
|                                |  | Amount         |           | % |                   |   | Amount |   | %         | 
|Commercial and industrial       |  | $              | 1,050,363 |   | 28.2              | % |        | $ | 1,093,942 |  | 28.8  | %
|Real estate:                    |  |                |           |   |                   |   |        |   |           |  |       |  
|Commercial                      |  |                | 1,786,367 |   | 47.9              | % |        |   | 1,763,712 |  | 46.5  | %
|Construction                    |  |                | 499,262   |   | 13.4              | % |        |   | 545,303   |  | 14.4  | %
|Residential mortgage            |  |                | 319,981   |   | 8.6               | % |        |   | 309,622   |  | 8.2   | %
|Consumer/other                  |  |                | 58,907    |   | 1.6               | % |        |   | 63,883    |  | 1.7   | %
|Foreign loans                   |  |                | 12,488    |   | 0.3               | % |        |   | 15,828    |  | 0.4   | %
|                                |  |                |           |   |                   |   |        |   |           |  |       |  
|Total loans held for investment |  | $              | 3,727,368 |   | 100.0             | % |        | $ | 3,792,290 |  | 100.0 | %
|                                |  |                |           |   |                   |   |        |   |           |  |       |  

At March 31, 2009, loans held for investment were $3.7 billion, a decrease of $64.9 million or 1.7% over
loans held for investment at December 31, 2008. The decline in loan growth during the first quarter of 2009, was due in part to principal reductions in energy loans and a slowing demand resulting from customer decisions to defer new projects,
reduce inventory positions, and pay down lines of credit.

Our primary lending focus is commercial loans and owner-occupied real estate loans to businesses
with annual revenues of $100 million or less. Typically, our customers have financing requirements between $50 thousand and $5 million. At March 31, 2009, commercial real estate loans and commercial and industrial loans were 47.9% and 28.2%,
respectively, of loans held for investment.

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

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

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.



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We also make loans to finance the construction of residential and nonresidential properties, such as retail shopping
centers and commercial office buildings. Generally, construction loans are secured by first liens on real estate and have floating interest rates. We conduct periodic inspections, either directly or through an architect or other agent, prior to
approval of periodic draws on these loans. Underwriting guidelines similar to those described above are also used in our construction lending activities.

The following table summarizes our commercial and construction real estate loan portfolios by the type of property securing the credit. Property type concentrations are stated as a percentage of year end total commercial and construction
real estate loans as of March 31, 2009 (dollars in thousands):



|                                 |  |        |           |   |       |  
|-------------------------------- |  | ------ | --------- | - | ----- | -
|                                 |  | Amount |           | % |      
|Property type:                   |  |        |           |   |       |  
|Office and office warehouse      |  | $      | 462,157   |   | 20.2  | %
|Retail                           |  |        | 391,859   |   | 17.1  | %
|Acquisition and land development |  |        | 281,347   |   | 12.3  | %
|Hospitality                      |  |        | 292,764   |   | 12.8  | %
|1-4 family                       |  |        | 147,450   |   | 6.5   | %
|Industrial warehouse             |  |        | 88,115    |   | 3.9   | %
|Multfamily                       |  |        | 60,314    |   | 2.6   | %
|Other                            |  |        | 561,624   |   | 24.6  | %
|                                 |  |        |           |   |       |  
|                                 |  | $      | 2,285,630 |   | 100.0 | %
|                                 |  |        |           |   |       |  

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

Our largest concentration in any single industry is in our energy portfolio. At
March 31, 2009, our energy portfolio totaled $433 million which represents approximately 12% of total loans held for investment. The petroleum industry is usually divided into three major components: upstream, midstream and downstream. The
composition of the collateral of our upstream energy portfolio, at March 31, 2009, consists of 59% gas reserves and 41% oil reserves. The upstream oil sector is a term commonly used to refer to the exploration for and the recovery and
production of crude oil and natural gas. The upstream oil sector is also known as the exploration and production sector. These reserve-based loans represent approximately 70% of our energy portfolio. Our remaining energy portfolio consists of
well-secured loans to companies that would be classified as midstream energy companies. A midstream energy company is a company that processes and transports crude oil and natural gas. The energy lending group participates in shared
national credits which are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. The energy lending group is the only group that consistently participates in shared
national credits. As of March 31, 2009, 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 March 31, 2009, loans held for investment were 94.7% of deposits and 73.4% of total assets. Loans held for investment were 99.3% of deposits and
74.7% of total assets at December 31, 2008.



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Loans Held for Sale  Loans held for sale totaled $1.4 million at March 31, 2009, as compared
with $1.5 million at December 31, 2008.

Securities Our securities portfolio at March 31, 2009 totaled $844 million as
compared to $805 million at December 31, 2008, an increase of $38.5 million or 4.8%.

Net unrealized gains on the available-for-sale securities were
$12.4 million at March 31, 2009 as compared to $6.2 million at December 31, 2008.

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



|                                      |  |                |           |   |                   |   |        |   |           |  |       |  
|------------------------------------- |  | -------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                      |  | March 31, 2009 |           |   | December 31, 2008 |  
|                                      |  | Amount         |           | % |                   |   | Amount |   | %         | 
|Noninterest-bearing demand            |  | $              | 1,173,745 |   | 29.8              | % |        | $ | 1,123,746 |  | 29.4  | %
|Interest-bearing demand               |  |                | 1,586,754 |   | 40.3              | % |        |   | 1,523,969 |  | 39.9  | %
|Certificates and other time deposits: |  |                |           |   |                   |   |        |   |           |  |       |  
|Jumbo                                 |  |                | 666,722   |   | 17.0              | % |        |   | 660,427   |  | 17.3  | %
|Regular                               |  |                | 301,047   |   | 7.7               | % |        |   | 317,719   |  | 8.3   | %
|Brokered                              |  |                | 206,189   |   | 5.2               | % |        |   | 193,276   |  | 5.1   | %
|                                      |  |                |           |   |                   |   |        |   |           |  |       |  
|Total deposits                        |  | $              | 3,934,457 |   | 100.0             | % |        | $ | 3,819,137 |  | 100.0 | %
|                                      |  |                |           |   |                   |   |        |   |           |  |       |  

Total deposits as of March 31, 2009 increased $115 million to $3.9 billion, up 3.0% compared to $3.8 billion
at December 31, 2008. This increase was due to internal deposit growth. The percentage of interest-bearing and noninterest-bearing demand deposits to total deposits as of March 31, 2009 was 40.3% and 29.8%, respectively, and our loan to
deposit ratio was 94.8%.

We chose to participate in the FDICs Temporary Liquidity Guarantee Program which allows funds in noninterest-bearing
transaction deposit accounts to be fully FDIC-insured. We incurred a 10 basis point surcharge to noninterest-bearing transaction deposit accounts not otherwise covered by the existing deposit insurance limit of $250 thousand.

Other Borrowed Funds  As of March 31, 2009, we had $278 million in other borrowings compared to $409 million at December 31, 2008, a
decrease of $130 million. This decline in borrowings was a result of an increase in total deposits. Our primary source of other borrowings is the Federal Home Loan Bank (FHLB). These borrowings are collateralized by mortgage loans,
certain pledged securities, FHLB stock and any funds on deposit with the FHLB. FHLB advances are available to us under a security and pledge agreement. At March 31, 2009, we had total funds of $1.1 billion available under this agreement of
which $40.5 million was outstanding with an average interest rate of 2.95%. At March 31, 2009, we had $40.0 million of FHLB advances that mature in nine years and $500 thousand of FHLB advances with a remaining maturity of one year. We utilize
these borrowings to meet liquidity needs. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits.

Securities sold under agreements to repurchase represent the purchase of interests in securities by banking customers and structured repurchase agreements with other financial institutions. At March 31, 2009 and
December 31, 2008, we had securities sold under agreements to repurchase with banking customers of $11.2 million and $9.9 million, respectively. Structured repurchase agreements totaled $50.0 million at March 31, 2009 and December 31,
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 0.25% and 0.32%, respectively, at March 31, 2009.

Treasury Auction Facilities (TAF) are term funds auctioned to depository institutions by the Federal Reserve Board. Each TAF auction is for a fixed amount,
with the rate determined by the auction process (subject to a minimum bid rate). All advances must be fully collateralized. At March 31, 2009, we had $150 million of TAF borrowings outstanding at a rate of 0.25%. At December 31, 2008, we had
$100 million of TAF borrowings outstanding at a rate of 0.42%.



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We have federal funds purchased at correspondent banks that typically mature within one to ninety days. As of
March 31, 2009, federal funds outstanding with correspondent banks were $26.5 million and payable upon demand.

ASSET QUALITY

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

Nonperforming assets consisted of the following (in thousands):



|                                          |  |               |         |   |                  |   |        |  
|----------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------ | -
|                                          |  | March 31,2009 |         |   | December 31,2008 |  
|Nonaccrual loans                          |  | $             | 102,450 |   |                  | $ | 87,491 |  
|Real estate acquired by foreclosure       |  |               | 8,144   |   |                  |   | 5,625  |  
|Other repossessed assets                  |  |               | 144     |   |                  |   | 154    |  
|                                          |  |               |         |   |                  |   |        |  
|Total nonperforming assets                |  | $             | 110,738 |   |                  | $ | 93,270 |  
|                                          |  |               |         |   |                  |   |        |  
|Accruing loans past due 90 days or more   |  | $             | 7,464   |   |                  | $ | 8,448  |  
|                                          |  |               |         |   |                  |   |        |  
|Nonperforming loans to period-end loans   |  |               | 2.75    | % |                  |   | 2.31   | %
|Nonperforming assets to period-end assets |  |               | 2.18    | % |                  |   | 1.84   | %

Nonperforming assets were $111 million at March 31, 2009, a $17.5 million increase from December 31,
2008. Included in the nonperforming loans balance are nonperforming loans related to an energy customer that is currently in Chapter 11 bankruptcy. Total exposure to this customer at both March 31, 2009 and December 31, 2008 totaled $29.2
million. In addition, a limited number of loans secured by owner-occupied commercial real estate moved to a nonperforming status during 2009. 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 March 31, 2009 totaled $7.5 million, down $984 thousand compared to $8.4 million at
December 31, 2008.

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

The provision for credit losses for the three months ended March 31, 2009 was $9.0 million as compared to $4.2 million for the same period in 2008. The provision
for credit losses for the first quarter of 2009 included $5.3 million of additional provision related to a previously disclosed nonperforming energy loan relationship totaling $29.2 million. This additional provision brings the total amount reserved
for this relationship to $10.4 million (which includes an $800 thousand discount for purchased loans).

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

Net charge-offs were $2.0 million or 0.22% (annualized) of average total loans for the three months ended March 31, 2009 compared to $2.9 million or 0.34%
(annualized) of average total loans for the same period in 2008.



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The allowance for loan losses at March 31, 2009 was $56.7 million and represented 1.52% of total loans. The
allowance for loan losses at March 31, 2009 was 55.35% of nonperforming loans, down from 56.21% at December 31, 2008. The allowance for unfunded lending commitments was $1.1 million as of March 31, 2009 compared to $1.7 million as of
December 31, 2008.

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



|                                                               |  |                             |        |   |      |   |        |  
|-------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                               |  | Three Months EndedMarch 31, |       
|                                                               |  | 2009                        |        |   | 2008 |  
|Allowance for loan losses at beginning of period               |  | $                           | 49,177 |   |      | $ | 34,446 |  
|Charge-offs:                                                   |  |                             |        |   |      |   |        |  
|Commercial, financial, and industrial                          |  |                             | 1,960  |   |      |   | 1,721  |  
|Real estate, mortgage and construction                         |  |                             | 438    |   |      |   | 1,481  |  
|Consumer                                                       |  |                             | 460    |   |      |   | 303    |  
|                                                               |  |                             |        |   |      |   |        |  
|Total charge-offs                                              |  |                             | 2,858  |   |      |   | 3,505  |  
|                                                               |  |                             |        |   |      |   |        |  
|Recoveries                                                     |  |                             |        |   |      |   |        |  
|Commercial, financial, and industrial                          |  |                             | 640    |   |      |   | 352    |  
|Real estate, mortgage and construction                         |  |                             | 98     |   |      |   | 61     |  
|Consumer                                                       |  |                             | 94     |   |      |   | 177    |  
|                                                               |  |                             |        |   |      |   |        |  
|Total recoveries                                               |  |                             | 832    |   |      |   | 590    |  
|                                                               |  |                             |        |   |      |   |        |  
|Net charge-offs                                                |  |                             | 2,026  |   |      |   | 2,915  |  
|Provision for loan losses                                      |  |                             | 9,552  |   |      |   | 4,150  |  
|                                                               |  |                             |        |   |      |   |        |  
|Allowance for loan losses at end of period                     |  |                             | 56,703 |   |      |   | 35,681 |  
|                                                               |  |                             |        |   |      |   |        |  
|                                                               |  |                            
|Allowance for unfunded loan commitments at beginning of period |  |                             | 1,654  |   |      |   | 927    |  
|Provision (credit) for losses on unfunded loan commitments     |  |                             | (552   | ) |      |   |       |  
|                                                               |  |                             |        |   |      |   |        |  
|Allowance for unfunded loan commitments at end of period       |  |                             | 1,102  |   |      |   | 927    |  
|                                                               |  |                             |        |   |      |   |        |  
|Total allowance for credit losses                              |  | $                           | 57,805 |   |      | $ | 36,608 |  
|                                                               |  |                             |        |   |      |   |        |  
|                                                               |  |                            
|Period-end allowance for credit losses to period-end loans     |  |                             | 1.55   | % |      |   | 1.03   | %
|Period-end allowance for loan losses to period-end loans       |  |                             | 1.52   | % |      |   | 1.01   | %
|Period-end allowance for loan losses to nonperforming loans    |  |                             | 55.35  | % |      |   | 162.46 | %
|Net charge-offs to average loans (annualized)                  |  |                             | 0.22   | % |      |   | 0.34   | %

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 March 31, 2009 and December 31, 2008:



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|                                       |  |                                         |  
|-------------------------------------- |  | --------------------------------------- | -
|Changes inInterest Rates(Basis Points) |  | Increase(Decrease) inNet InterestIncome |  
|March 31, 2009                         |  |                                         |  
|+200                                   |  | 6.48                                    | %
|+100                                   |  | 3.87                                    | %
|Base                                   |  | 0.00                                    | %
|-100                                   |  | -5.17                                   | %
|December 31, 2008                      |  |                                         |  
|+200                                   |  | 4.13                                    | %
|+100                                   |  | 2.86                                    | %
|Base                                   |  | 0.00                                    | %
|-100                                   |  | -4.92                                   | %

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

CAPITAL AND LIQUIDITY

Capital  At March 31,
2009, shareholders equity totaled $647 million or 12.8% of total assets, as compared to $643 million or 12.7% of total assets at December 31, 2008. Our risk-based capital ratios together with the minimum capital amounts and ratios at
March 31, 2009 were as follows (dollars in thousands):



|                                         |  |        |         |       |                                      |   |        |   |         |  |     |  
|---------------------------------------- |  | ------ | ------- | ----- | ------------------------------------ | - | ------ | - | ------- |  | --- | -
|                                         |  | Actual |         |       | For Minimum CapitalAdequacy Purposes |  
|                                         |  | Amount |         | Ratio |                                      |   | Amount |   | Ratio   | 
|Total capital (to risk weighted assets)  |  | $      | 636,584 |       | 15.4                                 | % |        | $ | 331,311 |  | 8.0 | %
|Tier 1 capital (to risk weighted assets) |  |        | 517,094 |       | 12.5                                 | % |        |   | 165,656 |  | 4.0 | %
|Tier 1 capital (to average assets)       |  |        | 517,094 |       | 10.6                                 | % |        |   | 195,234 |  | 4.0 | %

During 2008, we received $125 million in capital from capital from the U.S. Treasury department as the result of
our participation in the U.S. Treasurys Capital Purchase Program. See Note 15 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 2008 Annual Report on Form 10-K.

Sterling Bancshares must provide for its own liquidity and fund its own obligations. The primary source of Sterling Bancshares revenues is from dividends declared by the Bank. There are statutory and regulatory
provisions that could limit the ability of the Bank to pay dividends to Sterling Bancshares. At March 31, 2009, the aggregate amount of dividends, which legally could be paid without prior approval of various regulatory agencies, totaled $190
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, 2008. For information regarding the market risk of our financial instruments, see Managements Discussion and Analysis of Financial Condition and Results of
Operations  Interest Rate Sensitivity. Our principal market risk exposure is to interest rates.



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

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

During the quarter ended March 31, 2009, we improved procedures to review delinquent loans and assess collectability. These procedures include the
review of loans, assignment of grading, establishment of loss provisions and evaluation for impairment and/or restructure. Additionally, we implemented review and evaluation procedures to restrict modification of terms for loans, specifically
extension of maturity dates. We reviewed the new internal controls during the quarter and have successfully tested these internal control changes.

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

PART II. OTHER INFORMATION



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

None.



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

Information regarding risk factors appears in
Managements Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements, in Part I - Item 2 of this Form 10-Q and in Part I - Item 1A of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2008. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.



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

On
July 30, 2007, the Companys Board of Directors amended its existing common stock repurchase program (the Program) originally adopted by the Board on April 26, 2005. The aggregate number of shares originally approved by
the Board for repurchase under the Program remains unchanged at 3,750,000 shares. The Company may repurchase shares of common stock from time to time in the open market or through privately negotiated transactions from available cash or other
borrowings. No shares were repurchased by the Company during the three months ended March 31, 2009.



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

None.



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

None.



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##### Table of Contents

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

None.



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



|       |  |                                                                                                                                                                   
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|11     |  | Statement Regarding Computation of Earnings Per Share (included as Note 12) 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: May 1, 2009 |  |  |  | By:                       |  | /s/ J. Downey Bridgwater
|                  |  |  |  |                           |  |                          |  | J. Downey Bridgwater                        
|                  |  |  |  |                           |  |                          |  | Chairman, President and                     
|                  |  |  |  |                           |  |                          |  | Chief Executive Officer                     
|                  |  |  |  |                           |  |                          |  | (Principal Executive Officer)               
|                  |  |  | 
|Date: May 1, 2009 |  |  |  | By:                       |  | /s/ Zach L. Wasson      
|                  |  |  |  |                           |  |                          |  | Zach L. Wasson                              
|                  |  |  |  |                           |  |                          |  | Executive Vice President                    
|                  |  |  |  |                           |  |                          |  | and Chief Financial Officer                 
|                  |  |  |  |                           |  |                          |  | (Principal Financial and Accounting Officer)



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EXHIBIT INDEX





|        |  |                                                                                                                                                                   
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                       
|        | 
|11      |  | Statement Regarding Computation of Earnings Per Share (included as Note 12) 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.
|-- | ----------------------



39