exv10w1



 






Exhibit
10.1



AGREEMENT AND PLAN OF MERGER


by and among


STERLING BANCSHARES, INC.,


SBPB, INC.


and


PRESTONWOOD BANCSHARES, INC.


Dated as of July 7, 2005



 









 








TABLE OF CONTENTS




	 	 	 	 	 
	ARTICLE I CERTAIN DEFINITIONS
	 	 	2	 
	Section 1.1 Certain Definitions
	 	 	2	 
	 
	 	 	 	 
	ARTICLE II THE MERGER AND RELATED TRANSACTIONS
	 	 	7	 
	Section 2.1 Merger
	 	 	7	 
	Section 2.2 Time and Place of Closing
	 	 	8	 
	Section 2.3 Effective Time
	 	 	8	 
	Section 2.4 Reservation of Right to Revise Transaction; Further Actions
	 	 	8	 
	 
	 	 	 	 
	ARTICLE III MERGER CONSIDERATION; EXCHANGE PROCEDURES
	 	 	9	 
	Section 3.1 Merger Consideration
	 	 	9	 
	Section 3.2 Determination of Merger Consideration
	 	 	10	 
	Section 3.3 Escrow
	 	 	10	 
	 
	 	 	 	 
	ARTICLE IV EXCHANGE OF SHARES
	 	 	11	 
	Section 4.1 Exchange Agent
	 	 	11	 
	Section 4.2 Exchange Procedures
	 	 	11	 
	Section 4.3 No Further Ownership Rights in Company Common Stock
	 	 	12	 
	Section 4.4 Termination of Exchange Fund
	 	 	12	 
	Section 4.5 Escheat of Exchange Fund
	 	 	12	 
	Section 4.6 Lost Certificates
	 	 	12	 
	 
	 	 	 	 
	ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY
	 	 	13	 
	Section 5.1 Organization, Standing and Authority
	 	 	13	 
	Section 5.2 Company Common Stock
	 	 	13	 
	Section 5.3 Subsidiaries
	 	 	14	 
	Section 5.4 Authorization of Merger and Related Transactions
	 	 	15	 
	Section 5.5 Financial Statements and Regulatory Reports
	 	 	16	 
	Section 5.6 Absence of Undisclosed Liabilities
	 	 	17	 
	Section 5.7 Tax Matters
	 	 	17	 
	Section 5.8 Allowance for Credit Losses
	 	 	18	 
	Section 5.9 Other Regulatory Matters
	 	 	19	 
	Section 5.10 Properties
	 	 	19	 
	Section 5.11 Compliance with Laws
	 	 	19	 
	Section 5.12 Employee Benefit Plans
	 	 	20	 
	Section 5.13 Commitments and Contracts
	 	 	22	 
	Section 5.14 Material Contract Defaults
	 	 	23	 
	Section 5.15 Legal Proceedings
	 	 	23	 
	Section 5.16 Absence of Certain Changes or Events
	 	 	23	 
	Section 5.17 Reports
	 	 	25	 
	Section 5.18 Insurance
	 	 	25	 
	Section 5.19 Labor
	 	 	25	 
	Section 5.20 Material Interests of Certain Persons
	 	 	25	 
	Section 5.21 Registration Obligations
	 	 	26	 






 

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	Section 5.22 Brokers and Finders and Executive Bonus
	 	 	26	 
	Section 5.23 State Takeover Laws
	 	 	26	 
	Section 5.24 Environmental Matters
	 	 	26	 
	Section 5.25 Loans
	 	 	27	 
	Section 5.26 Fiduciary Responsibilities
	 	 	27	 
	Section 5.27 Patents, Trademarks and Copyrights
	 	 	28	 
	Section 5.28 Company Action
	 	 	29	 
	Section 5.29 Dissenting Shareholders
	 	 	29	 
	Section 5.30 Company Indebtedness
	 	 	29	 
	Section 5.31 Statements True and Correct
	 	 	29	 
	Section 5.32 Representations Not Misleading
	 	 	30	 
	 
	 	 	 	 
	ARTICLE VI REPRESENTATIONS AND WARRANTIES OF STERLING
	 	 	30	 
	Section 6.1 Organization, Standing and Authority
	 	 	30	 
	Section 6.2 Authorization of Merger and Related Transactions
	 	 	30	 
	Section 6.3 Financial Statements
	 	 	31	 
	Section 6.4 Regulatory Matters
	 	 	31	 
	Section 6.5 Legal Proceedings
	 	 	31	 
	Section 6.6 Representations Not Misleading
	 	 	32	 
	Section 6.7 Brokers and Finders
	 	 	32	 
	 
	 	 	 	 
	ARTICLE VII CONDUCT OF THE COMPANY’S BUSINESS
	 	 	32	 
	Section 7.1 Conduct of Business Prior to the Effective Time
	 	 	32	 
	Section 7.2 Forbearances
	 	 	33	 
	 
	 	 	 	 
	ARTICLE VIII ADDITIONAL AGREEMENTS
	 	 	36	 
	Section 8.1 Access and Information
	 	 	36	 
	Section 8.2 Proxy Statement
	 	 	37	 
	Section 8.3 Company Shareholder’s Meeting
	 	 	38	 
	Section 8.4 Filing of Regulatory Approvals
	 	 	38	 
	Section 8.5 Press Releases
	 	 	39	 
	Section 8.6 Miscellaneous Agreements and Consents
	 	 	39	 
	Section 8.7 Indemnification
	 	 	39	 
	Section 8.8 Certain Change of Control Matters
	 	 	41	 
	Section 8.9 Employee Benefits
	 	 	41	 
	Section 8.10 Certain Actions
	 	 	41	 
	Section 8.11 No Solicitation
	 	 	42	 
	Section 8.12 Termination Fee
	 	 	43	 
	Section 8.13 Accruals
	 	 	44	 
	Section 8.14 Certain Agreements
	 	 	44	 
	Section 8.15 Release Agreements
	 	 	44	 
	Section 8.16 Banker’s and Finder’s Fees
	 	 	45	 
	Section 8.17 Notification; Updated Disclosure Memorandums
	 	 	45	 
	Section 8.18 Closing Date
	 	 	45	 
	Section 8.19 Transaction Payments
	 	 	45	 
	 
	 	 	 	 
	ARTICLE IX CONDITIONS TO MERGER
	 	 	45	 






 

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	Section 9.1 Conditions to Each Party’s Obligation to Effect the Merger
	 	 	45	 
	Section 9.2 Conditions to Obligations of the Company to Effect the Merger
	 	 	46	 
	Section 9.3 Conditions to Obligations of Sterling and Merger Sub to Effect the Merger
	 	 	47	 
	 
	 	 	 	 
	ARTICLE X TERMINATION
	 	 	48	 
	Section 10.1 Termination
	 	 	48	 
	Section 10.2 Effect of Termination
	 	 	49	 
	Section 10.3 Non-Survival of Representations, Warranties and Covenants
	 	 	50	 
	 
	 	 	 	 
	ARTICLE XI GENERAL PROVISIONS
	 	 	50	 
	Section 11.1 Expenses
	 	 	50	 
	Section 11.2 Entire Agreement; Parties in Interest
	 	 	50	 
	Section 11.3 Amendments
	 	 	50	 
	Section 11.4 Waivers
	 	 	50	 
	Section 11.5 No Assignment
	 	 	51	 
	Section 11.6 Notices
	 	 	51	 
	Section 11.7 Specific Performance
	 	 	52	 
	Section 11.8 Governing Law
	 	 	52	 
	Section 11.9 Counterparts
	 	 	53	 
	Section 11.10 Captions
	 	 	53	 
	Section 11.11 Severability
	 	 	53	 





Attachments:




	 	 	 
	Annex A.

	 	Form of Agreement and Irrevocable Proxy.
	 
	Annex B.

	 	Company Specified Shareholders.
	 
	Annex C(1-4).

	 	Form of Non-Compete Agreement.
	 
	Annex D.

	 	Form of Escrow Agreement.
	 
	Annex E.

	 	Form of Release Agreement.
	 
	Annex F.

	 	Form of Release of Claims.






 




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AGREEMENT AND PLAN OF MERGER




     THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”) dated as of July 7, 2005, is by
and among STERLING BANCSHARES, INC. (“Sterling”), a Texas corporation and a registered bank
holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”), SBPB,
INC., a Texas corporation and a wholly owned subsidiary of Sterling (“Merger Sub”), and
PRESTONWOOD BANCSHARES, INC., a Texas corporation and a registered bank holding company under the
BHCA (the “Company”). Capitalized terms not otherwise defined herein shall have the
meanings set forth in Article I.



w i t n e s s e t h:




     WHEREAS, pursuant to the terms and subject to the conditions of this Agreement, Sterling will
acquire the Company through the merger of Merger Sub with and into the Company, or by such other
means as provided for herein (the “Merger”); and



     WHEREAS, pursuant to the Merger, and upon the terms and subject to the conditions of this
Agreement, each issued and outstanding share of Company Common Stock (other than the Dissenting
Shares) will be converted into the right to receive cash; and



     WHEREAS, (i) the respective Boards of Directors of Sterling, Merger Sub and the Company have
each determined that this Agreement, the Merger and the transactions contemplated hereby are in the
best interests of their respective companies and shareholders and have approved this Agreement, the
Merger and the other transactions contemplated hereby, (ii) the Board of Directors of the Company
has unanimously (a) determined, based upon such factors as it considers material, that the
consideration to be paid for the outstanding shares of Company Common Stock is fair to the
shareholders of the Company and (b) resolved to recommend to the shareholders of the Company that
they vote in favor of adoption of this Agreement, and (iii) Sterling, as the parent of Merger Sub,
has approved and adopted this Agreement, the Merger and the transactions contemplated hereby; and



     WHEREAS, to induce Sterling to enter into this Agreement (i) the Company Specified
Shareholders have agreed, concurrently with the execution of this Agreement, to execute and deliver
to Sterling an Agreement and Irrevocable Proxy in the form set forth as Annex A to this Agreement,
and (ii) the Key Company Officials have agreed, concurrently with the execution of this Agreement,
to execute and deliver their respective Non-Compete Agreements to Sterling;



     WHEREAS, after the Merger, Sterling intends to effect the merger (the “Delaware
Merger”) of the Company and Prestonwood Bancshares Nevada, Inc. a Nevada corporation and wholly
owned subsidiary of the Company (“PB Nevada”), with and into Sterling Bancorporation, Inc., a
Delaware corporation and a direct wholly owned subsidiary of Sterling (“Bancorporation”),
with Bancorporation as the surviving corporation;



     WHEREAS, after the Merger, Sterling intends to effect the merger (the “Bank Merger”)
of The Oaks Bank & Trust Company, an indirect wholly owned subsidiary of the Company (the
“Bank”), with and into Sterling Bank, an indirect wholly owned subsidiary of Sterling
(“Sterling Bank”), with Sterling Bank as the surviving bank; and



 









 







     WHEREAS, Sterling and the Company desire to provide for certain undertakings, conditions,
representations, warranties and covenants in connection with the Merger and the related
transactions contemplated by this Agreement.



     NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties,
covenants and agreements contained herein, the benefits to be derived by each party hereunder and
other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:



ARTICLE I

CERTAIN DEFINITIONS




     Section 1.1
Certain Definitions. As used in this Agreement, the following terms shall
have the meanings set forth below:



     “Acquisition Proposal” shall have the meaning set forth in Section 8.11.



     “Acquisition Transaction” shall have the meaning set forth in Section 8.11.



     “Affiliate” shall mean, with respect to any Person, any Person that, directly or indirectly,
controls or is controlled by or is under common control with such Person.



     “Agreement” shall have the meaning set forth in the introduction hereto.



     “Approvals” shall mean any and all filings, permits, consents, authorizations and approvals of
any governmental or regulatory authority or of any other third person necessary to give effect to
the arrangement contemplated by this Agreement or necessary to consummate the Merger.



     “Authorizations” shall have the meaning set forth in Section 5.1.



     “BHCA” shall have the meaning set forth in the introduction to this Agreement.



     “Merger Sub” shall have the meaning set forth in the introduction to this Agreement.



     “Bancorporation” shall have the meaning set forth in the recitals to this Agreement.



     “Bank” shall have the meaning set forth in the recitals to this Agreement.



     “Bank Merger” shall have the meaning set forth in the recitals to this Agreement.



     “Business Day” shall mean any day that is not a Saturday, Sunday or other day on which
commercial banks in Houston, Texas are authorized or required by law to remain closed.



     “Certificates” shall have the meaning set forth in Section 4.2.



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     “Class A Common Stock” shall mean the Class A Common Stock, par value $1.00 per share of the
Company.



     “Class B Common Stock” shall mean the Class B Common Stock, par value $1.00 per share of the
Company.



     “Class C Common Stock” shall mean the Class C Common Stock, par value $1.00 per share of the
Company.



     “Closing” shall have the meaning set forth in Section 2.2.



     “Closing Date” shall have the meaning set forth in Section 2.2.



     “COBRA” shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.



     “Code” shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder.



     “Commissioner” shall mean the Texas Banking Commissioner.



     “Company” shall have the meaning set forth in the introductory paragraph to this Agreement.



     “Company Benefit Plans” shall have the meaning set forth in Section 5.12.



     “Company Board” shall mean the Board of Directors of the Company.



     “Company Common Stock” shall mean the Class A Common Stock, the Class B Common Stock and the
Class C Common Stock, of the Company.



     “Company Disclosure Memorandum” shall mean that document containing the written detailed
information required to be furnished pursuant to the terms of this Agreement prepared and delivered
by the Company to Sterling prior to the execution of this Agreement.



     “Company Financial Statements” shall have the meaning set forth in Section 5.5.



     “Company Indebtedness” shall mean all liabilities, indebtedness or obligations of the Company,
and its Subsidiaries, on a consolidated basis (i) for borrowed money or loans, (ii) constituting an
obligation to pay the deferred purchase price of property or services, (iii) which (A) under GAAP
should be shown on the Company’s balance sheet as a liability, and (B) are payable more than one
year from the date of creation, or (iv) constituting principal under leases capitalized in
accordance with GAAP; provided that the term shall not include deposits of the Bank.



     “Company Material Adverse Effect” shall have the meaning set forth in Section 5.1.



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     “Company Shareholders’ Meeting” shall have the meaning set forth in Section 5.31.



     “Company Shares Number” shall mean the number of shares of Company Common Stock outstanding
immediately prior to the Effective Time (including all shares of Company Common Stock issuable upon
the exercise of any options, warrants, debentures, or other securities which are in effect or
outstanding prior to the Effective Time entitling the holder thereof to purchase or acquire shares
of the Company Common Stock).



     “Company Specified Shareholders” shall mean those Persons identified on Annex B to this
Agreement, The Oaks Trust Company, as Trustee, Max W. Wells, as Trustee, and the grantors under the
trusts identified on Annex B.



     “Company Stock Plan” shall have the meaning set forth in Section 5.12.



     “Company Termination Fee” shall have the meaning set forth in Section 11.7(b).



     “Condition” shall have the meaning set forth in Section 5.1.



     “Delaware Merger” shall have the meaning set forth in the recitals to the Agreement.



     “Dissenting Share” shall have the meaning set forth in Section 3.1.



     “Effective Time” shall have the meaning set forth in Section 2.3.



     “Employee” shall mean any current or former employee, officer or director, independent
contractor or retiree of the Company, its Subsidiaries and any dependent or spouse thereof.



     “Environmental Law” means any federal, state, local or foreign law, statute, ordinance, rule,
regulation, code, license, permit, authorization, approval, consent, order, judgment, decree,
injunction or agreement with any Regulatory Authority relating to (i) the protection, preservation
or restoration of the environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any
other natural resource), and/or (ii) the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or disposal of any substance
presently listed, defined, designated or classified as a Hazardous Substance, or otherwise
regulated, whether by type or by quantity, including any material containing any such substance as
a component.



     “ERISA” shall have the meaning set forth in Section 5.12.



     “Escrow Agreement” shall have the meaning set forth in Section 3.3.



     “Escrow Fund” shall have the meaning set forth in Section 3.3.



     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.



     “Exchange Agent” shall have the meaning set forth in Section 4.1.



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     “Exchange Fund” shall have the meaning set forth in Section 4.1.



     “FDIC” shall mean the Federal Deposit Insurance Corporation.



     “Federal Reserve Board” shall mean the Board of Governors of the Federal Reserve System and
any Federal Reserve Bank.



     “GAAP” shall mean generally accepted accounting principles in the United States, applied on a
consistent basis.



     “Hazardous Substances” shall mean those substances included within the statutory or regulatory
definitions, listings or descriptions of “pollutant,” “hazardous material,” “contaminant,” “toxic
waste,” “hazardous substance,” “hazardous waste,” “solid waste,” or “regulated substance” pursuant
to applicable Environmental Laws and shall include, without limitation, any material, waste or
substance which is or contains explosives, radioactive materials, oil or any fraction thereof,
asbestos, or formaldehyde.



     “Indemnified Party” shall have the meaning set forth in Section 8.7.



     “Insurance Agency” shall have the meaning set forth in Section 3.3.



     “Key Company Officials” shall mean Max W. Wells, J. Chris Wells, Kyle M. Turner and Dennis Van
Fossen.



     “Law” shall mean any United States (federal, state or local) or foreign law, statute,
ordinance, rule, regulation, order, judgment or decree;



     “Liens” shall have the meaning set forth in Section 5.3.



     “Maximum Amount” shall have the meaning set forth in Section 8.7.



     “Merger” shall have the meaning set forth in the recitals to this Agreement.



     “Merger Consideration” shall have the meaning set forth in Section 3.1(b).



     “Merger Sub” shall have the meaning set forth in the recitals to this Agreement.



     “Nasdaq” shall mean the Nasdaq National Market of the National Association of Securities
Dealers, Inc.



     “Non-Compete Agreements” shall mean the Noncompete Agreements in the form of Annex C -1
through C- 4 attached hereto executed by the Key Company Officials.



     “Order” shall mean any decree, judgment, injunction, ruling, writ or other order (whether
temporary, preliminary or permanent).



     “PB Nevada” shall have the meaning set forth in the recitals to this Agreement.



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     “Permitted Liens” shall mean (i) Liens for current taxes not yet due and payable and incurred
in the ordinary course of business, (ii) with respect to a lease, the interest of the lessor
thereunder, including any Liens on the interest of such lessor, and (iii) such imperfections of
title, Liens, restrictions and easements that do not materially impair the use or value of the
properties or assets or otherwise materially impair the current operations relating to the business
of the Company or its Subsidiaries or the Company’s consolidated financial condition or
consolidated results of operations.



     “Person” or “person” shall mean any individual, corporation, limited liability company,
association, partnership, group (as defined in Section 13(d)(3) of the Exchange Act), joint
venture, trust or unincorporated organization, or a government or any agency or political
subdivision thereof.



     “Proxy Statement” shall have the meaning set forth in Section 5.31.



     “Registration Statement” shall have the meaning set forth in Section 5.31.



     “Regulatory Agreement” shall have the meaning set forth in Section 5.11.



     “Regulatory Authorities” shall have the meaning set forth in Section 5.11.



     “Regulatory Reporting Document” shall have the meaning set forth in Section 5.5.



     “Remedies Exception” shall mean any bankruptcy, reorganization, insolvency, fraudulent
conveyance or transfer, moratorium or similar law affecting creditors’ rights generally and general
principles of equity (regardless of whether enforcement is considered in a proceeding at law or in
equity).



     “Reports” shall have the meaning set forth in Section 5.17.



     “Retained Employees” shall have the meaning set forth in Section 8.9.



     “SEC” shall mean the Securities and Exchange Commission.



     “Securities Act” shall mean the Securities Act of 1933, as amended.



     “Sterling” shall have the meaning set forth in the introduction to this Agreement.



     “Sterling Bank” shall have the meaning set forth in the recitals to this Agreement.



     “Sterling Financial Statements” shall have the meaning set forth in Section 6.3.



     “Sterling Material Adverse Effect” shall have the meaning set forth Section 6.1.



     “Subsidiary” shall mean, in the case of either Sterling or the Company, any corporation,
association, partnership, limited liability company, or other entity in which it owns or controls,
directly or indirectly, 25% or more of the outstanding voting securities or 25% or more of the



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total equity interest; provided, however, that the term shall not include any such entity in
which such voting securities or equity interest is owned or controlled in a fiduciary capacity,
without sole voting power, or was acquired in securing or collecting a debt previously contracted
in good faith. The Oaks Trust Company shall not be deemed a Subsidiary of the Company for purposes
of this Agreement.




     “Superior Proposal” shall have the meaning set forth in Section 10.1.



     “Surviving Corporation” shall have the meaning set forth in Section 2.1.



     “Tax” or “Taxes” shall mean all federal, state, local and foreign taxes, charges, fees,
levies, imposts, duties or other assessments, including, without limitation, income, gross
receipts, excise, employment, sales, use, transfer, license, payroll, franchise, severance, stamp,
occupation, windfall profits, environmental, federal highway use, commercial rent, customs duties,
capital stock, paid up capital, profits, withholding, Social Security, single business and
unemployment, disability, real property, personal property, registration, ad valorem, value added,
alternative or add-on minimum, estimated, or other tax or governmental fee of any kind whatsoever,
imposed or required to be withheld by the United States or any state, local, foreign government or
subdivision or agency thereof, including, without limitation, any interest, penalties or additions
thereto whether disputed or not.



     “Taxable Period” shall mean any period prescribed by any governmental authority, including,
but not limited to, the United States or any state, local, foreign government or subdivision or
agency thereof for which a Tax Return is required to be filed or Tax is required to be paid.



     “Tax Return” shall mean any report, return, information return or other information required
to be supplied to a taxing authority in connection with Taxes, including, without limitation, any
return of an affiliated or combined or unitary group that includes the Company or any of its
Subsidiaries.



     “TBCA” shall mean the Texas Business Corporation Act, as amended.



     “Termination Fee” shall have the meaning set forth in Section 8.12.



ARTICLE II

THE MERGER AND RELATED TRANSACTIONS




     Section 2.1 Merger.



     (a) Upon the terms and subject to the conditions set forth in this Agreement and in accordance
with the TBCA, at the Effective Time, Merger Sub shall be merged with and into the Company. As a
result of the Merger, the separate existence of Merger Sub shall thereupon cease, and the Company
shall continue as the surviving corporation of the Merger (the “Surviving Corporation”) and
as a subsidiary of Sterling.



- 7 -









 





     (b) The articles of incorporation of the Company as in effect immediately prior to the
Effective Time shall be the articles of incorporation of the Surviving Corporation.



     (c) The bylaws of the Company as in effect immediately prior to the Effective Time shall be
the bylaws of the Surviving Corporation.



     (d) The directors of Merger Sub immediately prior to the Effective Time shall become the
directors of the Surviving Corporation and the officers of Merger Sub immediately prior to the
Effective Time shall become the officers of the Surviving Corporation, in each case until their
respective successors are duly elected and qualified.



     (e) The Merger shall have the effects set forth in the TBCA.



     Section 2.2 Time and Place of Closing.



     The closing of the transactions contemplated hereby (the “Closing”) will take place at
the offices of Locke Liddell & Sapp LLP in Houston, Texas on the date (the “Closing Date”)
that the Effective Time occurs, or at such other time, and at such place, as may be agreed to in
writing by the parties hereto.



     Section 2.3 Effective Time.



     On the Business Day mutually agreed to by Sterling and the Company occurring within ten (10)
Business Days following the date on which the expiration of all applicable waiting periods in
connection with approvals of governmental authorities necessary to effectuate the Merger occurs and
all conditions to the consummation of this Agreement are satisfied or waived, unless an earlier or
later date has been agreed by the parties, appropriate articles of merger shall be executed and
filed in accordance with the TBCA, and the Merger provided for herein shall become effective upon
such filing or at such time as may be specified in such articles of merger. The time of such
filing or such later effective time is herein called the “Effective Time.”



     Section 2.4 Reservation of Right to Revise Transaction; Further Actions. 



     (a) Notwithstanding anything to the contrary provided elsewhere in this Agreement, if Sterling
notifies the Company in writing prior to the Closing that Sterling prefers to change the method of
effecting the acquisition of the Company by Sterling (including, without limitation, the provisions
as set forth in Article II) the parties hereto shall forthwith execute an appropriate amendment or
restatement of this Agreement to reflect such changes; provided, however, that no such change shall
(i) alter or change the amount or the kind of the consideration to be received by the holders of
Company Common Stock as provided for in this Agreement, (ii) take the form of an asset purchase,
(iii) adversely affect the tax treatment to the Company shareholders as a result of receiving the
Merger Consideration, (iv) adversely affect the timing of the Closing of the Merger, or (v) place
additional obligations, warranties or conditions on the Company.



     (b) In addition, the parties hereto agree that if Sterling so determines, each of the parties
will execute such additional agreements and documents and take such other actions as



- 8 -









 




Sterling determines necessary or appropriate to facilitate the Merger and the acquisition of
the Company by Sterling, including, without limitation, entering into agreements to facilitate the
Bank Merger; provided, however, that no such agreement shall (i) alter or change the amount or the
kind of the consideration to be received by the holders of Company Common Stock as provided for in
this Agreement, (ii) take the form of an asset purchase, (iii) adversely affect the tax treatment
to the Company shareholders as a result of receiving the Merger Consideration, (iv) adversely
affect the timing of the Closing of the Merger, or (v) place additional obligations, warranties or
conditions on the Company.




ARTICLE III

MERGER CONSIDERATION; EXCHANGE PROCEDURES




     Section 3.1 Merger Consideration.



     (a) Subject to the terms and conditions of this Agreement, each share of Company Common Stock
that is outstanding immediately prior to the Effective Time (excluding any Dissenting Shares and
any shares of Company Common Stock cancelled pursuant to Section 3.1(b)) shall be converted into
and become the right to receive cash as set forth in this Article III.



     (b) Subject to the terms and conditions of this Agreement including, without limitation, the
provisions of Section 3.2 below, each share of Company Common Stock (other than the shares of
Company Common Stock to be cancelled as set forth in Section 3.1(c) or Dissenting Shares) will be
converted into and represent the right to receive consideration consisting of an amount of cash as
is determined in accordance with Section 3.2, which, is referred to herein as the “Merger
Consideration.”



     (c) Each share of Company Common Stock held in the treasury of the Company and each share of
Company Common Stock owned by Sterling, Merger Sub or any direct or indirect wholly owned
Subsidiary of Sterling or the Company immediately prior to the Effective Time shall be canceled
without any conversion and no payment or distribution shall be made with respect thereto.



     (d) The shares of common stock of Merger Sub issued and outstanding immediately before the
Effective Time shall be converted into a number of shares and class of shares of the Surviving
Corporation equal to the number of shares and class of capital stock of the Company issued and
outstanding immediately prior to the Effective Time with the same rights, powers and privileges as
the shares so converted and shall constitute the only outstanding shares of capital stock of the
Surviving Corporation.



     (e) Notwithstanding anything in this Agreement to the contrary, no share of Company Common
Stock, the holder of which shall have complied with the provisions of Article 5.12 of the TBCA as
to appraisal rights (a “Dissenting Share”), shall be deemed converted into and to represent
the right to receive the Merger Consideration hereunder, and the holders of Dissenting Shares, if
any, shall be entitled to payment, solely from the Surviving Corporation, of the appraised value of
such Dissenting Shares to the extent permitted by and in accordance with the provisions of Article
5.12 of the TBCA; provided, however, that (i) if any holder of Dissenting



- 9 -









 




Shares shall, under the circumstances permitted by the TBCA, subsequently deliver a written
withdrawal of his or her demand for appraisal of such Dissenting Shares, (ii) if any holder fails
to establish his or her entitlement to rights to payment as provided in such Article 5.12, or (iii)
if neither any holder of Dissenting Shares nor the Surviving Corporation has filed a petition
demanding a determination of the value of all Dissenting Shares within the time provided in such
Article 5.12, such holder or holders (as the case may be) shall forfeit such right to payment for
such Dissenting Shares pursuant to such Article 5.12 and each such Dissenting Share shall thereupon
be converted into and shall represent the right to receive the Merger Consideration therefore. The
Company shall give Sterling (i) prompt notice of any written objections to the Merger submitted to
the Company in accordance with Article 5.12, attempted withdrawals of such objections, and any
other instruments served pursuant to applicable law received by the Company relating to
shareholders’ rights of appraisal and (ii) the opportunity to direct all negotiations and
proceedings with respect to demands for appraisal under the TBCA. The Company shall not, except
with the prior written consent of Sterling, voluntarily make any payment with respect to any
demands for appraisals of Company Common Stock, offer to settle or settle any such demands or
approve any withdrawal of any such demands.




     Section 3.2 Determination of Merger Consideration.



     Subject to the terms and conditions of this Agreement, including without limitation Section
3.3 of this Agreement, each share of Company Common Stock (other than the shares of Company Common
Stock to be cancelled as set forth in Section 3.1(c) or Dissenting Shares) will be converted into
and represent the right to receive an amount payable in cash equal to (a) $34,375,000, divided by
(b) the Company Shares Number.



     Section 3.3 Escrow.



     Notwithstanding any provisions of this Agreement to the contrary, Sterling, pursuant to an
Escrow Agreement in substantially the form attached hereto as Annex D (the “Escrow
Agreement”), shall deposit into escrow (the “Escrow Fund”) with Sterling Bank, the
amount of $500,000 otherwise payable to the holders of the shares of Company Common Stock in the
Merger. The Escrow Fund shall be used to satisfy:




     (i) the obligations of PB Nevada under that certain Loan Sale Agreement dated December
29, 2003 among AmegyBank National Association., successor to Lone Star Bank, PB Nevada, GBT
Financial and Grand Bank of Texas, that certain Loan Sale Agreement dated March, 2004 among
Comerica Bank-Texas, AmegyBank National Association. (formerly known as Southwest Bank of
Texas, National Association), and PB Nevada, and that certain Loan Sale Agreement dated
March, 2004 among Comerica Bank-Texas, AmegyBank National Association, and PB Nevada with
respect to PB Nevada’s ownership interest in Texas BancPartners Insurance Agency, LLC (the
“Insurance Agency”);




     (ii) any other obligation of the Company or its Subsidiaries arising in connection with
the ownership of the Insurance Agency; and



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     (iii) any payments or other obligations deemed necessary by the Company in order to
divest the Insurance Agency.



ARTICLE IV

EXCHANGE OF SHARES




     Section 4.1 Exchange Agent.



     As of the Effective Time, Sterling shall deposit with a bank or trust company designated by
Sterling and reasonably acceptable to the Company (the “Exchange Agent”), for the benefit
of the holders of shares of Company Common Stock, for exchange in accordance with this Article IV,
cash in an amount sufficient to make all payments of the Merger Consideration pursuant to Article
III. Such cash being hereinafter referred to as the “Exchange Fund”. The Exchange Agent
shall, pursuant to irrevocable instructions from Sterling, deliver the Merger Consideration
contemplated to be issued pursuant hereto out of the Exchange Fund. The Exchange Fund shall not be
used for any other purpose.



     Section 4.2 Exchange Procedures.



     Promptly after the Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which, immediately prior to the Effective Time, represented outstanding
shares of Company Common Stock (the “Certificates”), other than shares canceled in
accordance with Section 3.1(c): (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates theretofore representing shares
of Company Common Stock shall pass, only upon proper delivery of such Certificates to the Exchange
Agent, and shall be in such form and have such other provisions as Sterling shall specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate for cancellation to the Exchange Agent (or to such
other agent or agents as may be appointed by Sterling), together with such letter of transmittal,
duly executed, and any other required documents, the holder of such Certificate(s) shall be
entitled to receive in exchange therefor a check in the amount equal to the portion of the Merger
Consideration that such holder has the right to receive pursuant to Section 3.2, and the
Certificate(s) so surrendered shall forthwith be cancelled. No interest will be paid or will
accrue on any cash payable pursuant to the provisions of Article III or this Section 4.2. In the
event of a transfer of ownership of Company Common Stock that is not registered in the transfer
records of the Company, a check in the proper amount of the portion of the Merger Consideration
pursuant to Section 3.2, may be issued to a transferee if the Certificate(s) representing such
Company Common Stock is presented to the Exchange Agent accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock transfer taxes have
been paid. Until surrendered as contemplated by this Section 4.2, each Certificate shall be deemed
at any time after the Effective Time to represent only the right to receive upon such surrender
Merger Consideration as provided in Article III. The Certificate(s) for Company Common Stock so
surrendered shall be duly endorsed as the Exchange Agent may require. Sterling shall not be
obligated to deliver the consideration to which any former holder of Company Common Stock is
entitled as a result of the Merger until such holder surrenders his



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Certificate(s) formerly representing shares of Company Common Stock for exchange as provided
in this Article IV.




     Section 4.3 No Further Ownership Rights in Company Common Stock.



     All cash paid upon the surrender for exchange of shares of Company Common Stock in accordance
with the terms hereof shall be deemed to have been paid in full satisfaction of all rights
pertaining to such shares of Company Common Stock, and after the Effective Time there shall be no
further registration of transfers on the stock transfer books of the Surviving Corporation of the
shares of Company Common Stock that were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article IV.



     Section 4.4 Termination of Exchange Fund.



     Any portion of the Exchange Fund that remains undistributed to the former shareholders of the
Company for six months after the Effective Time shall be delivered to Sterling upon demand, and any
shareholders of the Company who have not theretofore complied with this Article IV shall thereafter
look only to Sterling for payment of their claim for the Merger Consideration.



     Section 4.5 Escheat of Exchange Fund.



     None of Sterling, Merger Sub, the Company, or the Exchange Agent shall be liable to any person
in respect of any Merger Consideration from the Exchange Fund delivered to a public office pursuant
to any applicable abandoned property, escheat or similar law. If any Certificates representing
shares of Company Common Stock shall not have been surrendered immediately prior to the date on
which any Merger Consideration in respect of such Certificate would otherwise escheat to or become
the property of any government authority, any such Merger Consideration in respect of such
Certificate shall, at such time and to the extent permitted by applicable law, become the property
of the Surviving Corporation, free and clear of all claims or interest of any Person previously
entitled thereto, other than holder of the Certificate originally entitled to Merger Consideration.



     Section 4.6 Lost Certificates.



     If any Certificates shall have been lost, stolen or destroyed, then upon the making of an
affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and,
if required by Sterling or the Exchange Agent, the posting by such Person of a bond in such
reasonable amount not to exceed the Merger Consideration payable to such Person as Sterling or the
Exchange Agent may direct as indemnity against any claim that may be made against the Surviving
Corporation with respect to such Certificate, the Exchange Agent will pay in exchange for such
lost, stolen or destroyed Certificate the Merger Consideration to be paid in respect of the shares
of Company Common Stock represented by such Certificate, as contemplated by this Agreement.



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ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE COMPANY




     The Company represents and warrants to Sterling and Merger Sub as follows:



     Section 5.1
Organization, Standing and Authority.



     The Company is a corporation duly organized, validly existing and in good standing under the
laws of the State of Texas. The Company is duly qualified to do business and in good standing in
all jurisdictions (whether federal, state, local or foreign) where its ownership or leasing of
property or the conduct of its business requires it to be so qualified and in which the failure to
be duly qualified would have a material adverse effect on the financial condition, results of
operations, business, properties (the “Condition”) of the Company and any of its
Subsidiaries or on the ability of the Company or its Subsidiaries to consummate the transactions
contemplated hereby (a “Company Material Adverse Effect”). The Company has all requisite
corporate power and authority (i) to carry on its business as now conducted, (ii) to own, lease and
operate its assets, properties and business and (iii) to execute and deliver this Agreement and
perform the terms of this Agreement. The Company and PB Nevada are duly registered as financial
holding companies under the BHCA. The Company has in effect all federal, state, local and foreign
governmental, regulatory and other authorizations, franchises, permits and licenses (collectively,
“Authorizations”) necessary for it to own or lease its properties and assets and to carry
on its business as now conducted. The Company has heretofore furnished to Sterling a complete and
correct copy of its Articles of Incorporation and bylaws, as amended or restated to the date
hereof. Such Articles of Incorporation and bylaws, as amended, are in full force and effect and
the Company is not in violation of any of the provisions of its Articles of Incorporation or
bylaws.



     Section 5.2 Company Common Stock. 



     (a) The authorized capital stock of the Company consists of 1,000,000 shares of Class A Common
Stock, 31,250 shares of Class B Common Stock, and 58,000 shares of Class C Common Stock. As of the
date hereof, (i) 145,947 shares of Class A Common Stock were issued, and outstanding, (ii) no
shares of Company Common Stock were held by the Company in its treasury, (iii) no shares of Class B
Common Stock were issued or outstanding, (iv) no shares of Class C Common Stock were issued or
outstanding, and (v) no shares of Company Common Stock were reserved for issuance pursuant to stock
options. All of the issued and outstanding shares of Company Common Stock are duly authorized,
validly issued and fully paid and nonassessable. None of the outstanding shares of Company Common
Stock has been issued in violation of any preemptive rights or any provision of the Company’s
Articles of Incorporation or bylaws. As of the date of this Agreement, no shares of Company Common
Stock have been reserved for any purpose except as set forth above or in Section 5.2 of the Company
Disclosure Memorandum.



     (b) Except as set forth in Section 5.2(a) above or Section 5.2 of the Company Disclosure
Memorandum, there are no (i) equity securities of the Company outstanding, (ii) outstanding
options, warrants, rights to subscribe to, calls or commitments of any character



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whatsoever relating to, or securities or rights convertible into or exchangeable for, shares
of the capital stock of the Company or contracts, commitments, understandings or arrangements by
which the Company is or may be bound to issue additional shares of its capital stock or options,
warrants or rights to purchase or acquire any additional shares of its capital stock, (iii)
outstanding notes, bonds, debentures or other indebtedness of the Company having the right to vote
(or convertible into, or exchangeable for, securities having the right to vote) on any matters on
which shareholders of the Company have the right to vote, or (iv) outstanding stock appreciation
rights or other rights to redeem for cash any options, warrants or other securities of the Company.
Except as set forth in Section 5.2 of the Company Disclosure Memorandum, there are no contracts,
commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or
may be bound to transfer any shares of the capital stock of any Subsidiary of the Company, and
there are no agreements, understandings or commitments relating to the right of the Company or any
of its Subsidiaries to vote or to dispose of any such shares.




     (c) Except as set forth in Section 5.2(a) above or in the Company Disclosure Memorandum, there
are no securities required to be issued by the Company under any Company Stock Plan, dividend
reinvestment, or similar plan.



     (d) Except for the proxies evidenced by the Agreements and Irrevocable Proxies executed by the
Company Specified Shareholders and as set forth in Section 5.2 of the Company Disclosure
Memorandum, there are no voting trusts, proxies or other agreements, commitments or understandings
of any character to which the Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound with respect to the voting of any shares of capital stock of
the Company or any of its Subsidiaries. There are no agreements, arrangements or commitments of
any kind or character pursuant to which any Person is or may be entitled to cause the Company or
any of its Subsidiaries to file a registration statement under the Securities Act or which
otherwise relate to the registration of any securities of the Company or any of its Subsidiaries.



     (e) There are no restrictions applicable to the payment of dividends on any shares of the
Company Common Stock except pursuant to the TBCA and applicable banking laws and regulations and
all dividends and distributions declared prior to the date hereof have been fully paid.



     Section 5.3 Subsidiaries.



     Section 5.3 of the Company Disclosure Memorandum contains a complete list of the Company’s
Subsidiaries. Except as set forth in Section 5.3 of the Company Disclosure Memorandum, all of the
outstanding shares of each Subsidiary are owned by the Company and no equity securities are or may
be required to be issued by reason of any options, warrants, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights convertible into or
exchangeable for, shares of any Subsidiary, and there are no contracts, commitments, understandings
or arrangements by which any Subsidiary is bound to issue additional shares of its capital stock or
options, warrants or rights to purchase or acquire any additional shares of its capital stock. All
of the shares of capital stock of each Subsidiary are duly authorized, validly issued, fully paid
and nonassessable and are owned by the Company free and



- 14 -









 




clear of any claim, lien, pledge or encumbrance of whatsoever kind (“Liens”). Each
Subsidiary (i) is duly organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated or organized, (ii) is duly qualified to do business and in
good standing in all jurisdictions (whether federal, state, local or foreign) where its ownership
or leasing of property or the conduct of its business requires it to be so qualified and in which
the failure to be so qualified would have a Company Material Adverse Effect, (iii) has all
requisite corporate power and authority to own or lease its properties and assets and to carry on
its business as now conducted, and (iv) has in effect all Authorizations necessary for it to own or
lease its properties and assets and to carry on its business as now conducted. The Company has
heretofore furnished to Sterling a complete and correct copy of each of its Subsidiaries’
certificates or articles of incorporation and bylaws, or equivalent organizational documents, as
amended or restated to the date hereof. Such certificates or articles or incorporation and
bylaws, as amended, and equivalent organizational documents of Subsidiary are in full force and
effect. None of the Subsidiaries is in violation of any provision of its certificate or articles
of incorporation or association or bylaws or equivalent organizational documents. Except for the
capital stock of its Subsidiaries and as set forth in Section 5.3 of the Company Disclosure
Memorandum, the Company does not own, directly or indirectly, any capital stock or other ownership
interests in any corporation, limited liability company, partnership, joint venture or other
entity.




     Section 5.4 Authorization of Merger and Related Transactions. 



     (a) The execution and delivery of this Agreement and the consummation of the transactions
contemplated hereby (including, without limitation, the consummation of the Merger) have been duly
and validly authorized by all necessary corporate action in respect thereof on the part of the
Company, including unanimous approval of the Merger by the Company Board, subject to the approval
of the Merger by the shareholders of the Company to the extent required by applicable law. The
only shareholder approval required for the approval of the Merger is the approval of two-thirds of
the outstanding shares of Company Common Stock. This Agreement, subject to any requisite
shareholder approval hereof with respect to the Merger, represents a valid and legally binding
obligation of the Company, enforceable against the Company in accordance with its terms, except as
such enforcement may be limited by the Remedies Exception.



     (b) Neither the execution and delivery of this Agreement by the Company, the consummation by
the Company of the transactions contemplated hereby nor compliance by the Company with any of the
provisions hereof will (i) conflict with or result in a breach of any provision of the Articles of
Incorporation or bylaws of the Company or the comparable documents of any of its Subsidiaries, (ii)
constitute or result in a breach or violation of any term, condition or provision of, or constitute
a default (or an event which with notice or lapse of time or both would become a default) under, or
give rise to any right of termination, cancellation or acceleration with respect to, or result in
the creation of any Lien upon, any property or assets of the Company or any of its Subsidiaries
pursuant to any note, bond, mortgage, indenture, license, agreement, lease or other instrument or
obligation to which any of them is a party or by which any of them or any of their properties or
assets may be subject or (iii) subject to receipt of the requisite approvals referred to in Section
9.1 of this Agreement, violate any order, writ,



- 15 -









 




injunction, decree, statute, rule or regulation applicable to the Company or its Subsidiaries
or any of their properties or assets.




     (c) Other than (i) the consents, authorizations, approvals or exemptions required from (A) the
Commissioner, the FDIC, the Federal Reserve Board or other applicable governmental authority, and
(B) the Persons described in Section 5.4 of the Company Disclosure Memorandum, and (ii) the filing
of articles and certificates of merger in accordance with the TBCA, no notice to, filing with,
authorization of, exemption by, or consent or approval of any governmental body, authority or any
other Person is necessary for the consummation by the Company of the Merger, the resulting change
of control of its Subsidiaries, and the other transactions contemplated by this Agreement.



     Section 5.5 Financial Statements and Regulatory Reports. 



     (a) The Company (i) has delivered to Sterling copies of the audited consolidated balance
sheets and the related audited consolidated statements of income, shareholders’ equity and cash
flows (including related notes and schedules) of the Company and its consolidated Subsidiaries as
of and for the periods ended December 31, 2004 and December 31, 2003, together with the report
thereof and of the unaudited balance sheet and the related unaudited statement of income, as of and
for the three (3) months ended March 31, 2005 (the “Company Financial Statements”), and
(ii) has furnished Sterling with a true and complete copy of each material report filed by the
Company with the Federal Reserve Board or by any of its Subsidiaries with any Regulatory
Authorities from and after January 1, 2000 (each a “Regulatory Reporting Document”), which
are all the material documents that the Company or any of its Subsidiaries was required to file
with the Regulatory Authorities since such date and all of which complied when filed in all
material respects with all applicable laws and regulations.



     (b) The Company Financial Statements (as of the dates thereof and for the periods covered
thereby) (i) are in accordance with the books and records of the Company and its Subsidiaries,
which are complete and accurate in all material respects and which have been maintained in
accordance with good business practices, and (ii) present fairly the consolidated financial
position and the consolidated results of operations, changes in shareholders’ equity and cash flows
of the Company and its Subsidiaries as of the dates and for the periods indicated, in accordance
with GAAP, subject in the case of unaudited interim financial statements for the three (3) months
ended March 31, 2005 to normal recurring year-end adjustments and except for the absence of certain
footnote information in such unaudited interim financial statements. Neither Lane, Gorman &
Trubitt independent certified public accountants has prepared or delivered to the Company any
management letters that express any material concerns or issues regarding the Company’s internal
controls, accounting practices or financial conditions since January 1, 2000.



     (c) Neither the Company nor its Subsidiaries have any liabilities or obligations of a type
which should be included in or reflected on the Company Financial Statements if prepared in
accordance with GAAP, whether related to tax or non-tax matters, accrued or contingent, due or not
yet due, liquidated or unliquidated, or otherwise, except as and to the extent disclosed or
reflected in the Company Financial Statements. The Company will provide Sterling with the



- 16 -









 




unaudited consolidated and unconsolidated statements of financial position of the Company and
its Subsidiaries as of the end of each month hereafter, prepared on a basis consistent with prior
periods and promptly following their availability, the Company will provide Sterling with the
Reports of Condition and Statements of Income (“Call Reports”) of its Subsidiaries for all periods
ending after) March 31, 2005. The Company and its Subsidiaries have no off balance sheet
liabilities associated with financial derivative products or potential liabilities associated with
financial derivative products.




     Section 5.6 Absence of Undisclosed Liabilities.



     Except as set forth in Section 5.6 of the Company Disclosure Memorandum, neither the Company
nor any of its Subsidiaries has any obligations or liabilities (contingent or otherwise) in an
amount equal to, or in excess of, $50,000, in the aggregate, except obligations and liabilities (i)
which are fully accrued or reserved against in the consolidated balance sheet of the Company and
its Subsidiaries as of March 31, 2005, included in the Company Financial Statements or reflected in
the notes thereto, or (ii) which were incurred after March 31, 2005, in the ordinary course of
business consistent with past practice and have been fully accrued and reserved for on the books of
the Company as of the date hereof. Since March 31, 2005, neither the Company nor any of its
Subsidiaries has incurred or paid any obligation or liability which would have a Company Material
Adverse Effect.



     Section 5.7 Tax Matters.



     Except as set forth in Section 5.7 of the Company Disclosure Memorandum:



     (a) All Tax Returns required to be filed by or on behalf of the Company or any of its
Subsidiaries have been timely filed, or requests for extensions have been timely filed, granted and
have not expired, all such Tax Returns filed are complete and accurate in all respects and all
Taxes payable by or with respect to the Company and its Subsidiaries for the periods covered by
such Tax Returns (whether or not shown on such Tax Returns) have been timely paid in full or are
adequately reserved for in accordance with GAAP on the March 31, 2005 financial statements included
in the Company Financial Statements. With respect to the periods for which Tax Returns have not
been filed, the Company and its Subsidiaries have established adequate reserves determined in
accordance with GAAP for the payment of all Taxes.



     (b) No deficiencies for any Taxes have been proposed, asserted or assessed against the Company
or any of its Subsidiaries that are not adequately provided for on the Company Financial Statements
and no request for waivers of the time to assess any such Taxes have been granted or are pending.
Neither the Company nor any Subsidiary is involved in any audit examination, deficiency or refund
litigation or matter in controversy with respect to any Taxes. All Taxes due with respect to
completed and settled examinations or concluded litigation have been paid or adequately reserved
for. No claim has ever been made by an authority in a jurisdiction where any of the Company and
its Subsidiaries does not file Tax Returns that it is or may be subject to taxation by that
jurisdiction.



- 17 -









 





     (c) Neither the Company nor any of its Subsidiaries has executed an extension or waiver of any
statute of limitations on the assessment or collection of any Tax due that is currently in effect.



     (d) Adequate provision for any Taxes due or to become due for the Company and any of its
Subsidiaries for any period or periods through and including March 31, 2005, has been made, in
accordance with GAAP, and is reflected on the March 31, 2005 financial statements included in the
Company Financial Statements. Deferred Taxes of the Company and its Subsidiaries have been
provided for in the Company Financial Statements in accordance with GAAP. None of the assets or
properties of the Company or any of its Subsidiaries is subject to any Tax lien, other than such
liens for Taxes which are not due and payable, which may thereafter be paid without penalty or the
validity of which are being contested in good faith by appropriate proceedings and for which
adequate provisions are being maintained in accordance with GAAP.



     (e) The Company and its Subsidiaries have collected and withheld all Taxes which they have
been required to collect or withhold in connection with any amounts paid or owing to any employee,
independent contractor, creditor, shareholder, or other third party and have timely submitted all
such collected and withheld amounts to the appropriate authorities. The Company and its
Subsidiaries are in compliance with the back-up withholding and information reporting requirements
under (i) the Code, and (ii) any state, local or foreign laws, and the rules and regulations,
thereunder.



     (f) Neither the Company nor any of its Subsidiaries has made any payments, is obligated to
make any payments, or is a party to any contract, agreement or other arrangement that could
obligate it to make any payments that would not be deductible (i) under Section 280G of the Code,
or (ii) under Section 162(m) of the Code (or any corresponding provision of state, local or foreign
Tax law).



     (g) No consent has been filed under Section 341(f) of the Code with respect to the Company or
any of its Subsidiaries; neither the Company nor any of its Subsidiaries owns any interest in an
entity or arrangement characterized as a partnership for United States federal income tax purposes;
neither the Company nor any of its Subsidiaries has been a United States real property holding
company within the meaning of Section 897(c)(2) of the Code during the applicable period specified
in Section 897(c)(1)(A)(ii) of the Code; no debt of the Company or any of its Subsidiaries is
“corporate acquisition indebtedness” within the meaning of Section 279(b) of the Code; and neither
the Company nor any of its Subsidiaries has any liability for the Taxes of any Person (other than
any of the Company and its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar
provision of state, local, or foreign law), as a transferee or successor, by contract, or
otherwise.



     Section 5.8 Allowance for Credit Losses



     Except as set forth in Section 5.8 of the Company Disclosure Memorandum, each allowance for
credit losses shown in the consolidated balance sheets of the Company and its Subsidiaries as of
December 31, 2004, and as of March 31, 2005 and included in the Company



- 18 -









 





Financial Statements, complies in all material respects with GAAP. The reserves for possible
loan losses shown on the March 31, 2005 Call Reports filed, and all subsequent Call Reports to be
filed, with a Regulatory Agency for the Bank are or will be adequate to provide for possible
losses, net of recoveries relating to loans previously charged off, on loans outstanding (including
accrued interest receivable) as of the date of such reports.



     Section 5.9 Other Regulatory Matters.



     Neither the Company nor any of its Subsidiaries has taken or agreed to take any action or has
any knowledge of any fact or circumstance that would materially impede or delay receipt of any
approval referred to in Section 9.1(b).



     Section 5.10 Properties.



     Except as set forth in Section 5.10 of the Company’s Disclosure Memorandum, the Company and
its Subsidiaries have good and indefeasible title, free and clear of all Liens except Permitted
Liens, to all their properties and assets whether tangible or intangible, real, personal or mixed,
including, without limitation, all the properties and assets reflected in the Financial Statements
except for those properties and assets disposed of for fair market value in the ordinary course of
business and consistent with prudent banking practices since the date of the Financial Statements.
All buildings, and all fixtures, equipment and other property and assets which are material to its
business on a consolidated basis, held under leases or subleases by any of the Company or its
Subsidiaries are held under valid instruments enforceable in accordance with their respective
terms, subject to the Remedies Exception. All of the Company’s and its Subsidiaries’ equipment in
regular use has been well maintained and is in good, serviceable condition, reasonable wear and
tear excepted, except where a failure to so maintain or to be in such condition would not have a
Company Material Adverse Effect.



     Section 5.11 Compliance with Laws.



     Except as set forth in Section 5.11 of the Company Disclosure Memorandum:



     (a) Each of the Company and its Subsidiaries is in compliance in all material respects with
all laws, rules, regulations, policies, guidelines, reporting and licensing requirements and orders
applicable to its business or to its employees conducting its business, and with its internal
policies and procedures.



     (b) Neither the Company nor any of its Subsidiaries has received any notification or
communication from any agency or department of any federal, state or local government, including
the Federal Reserve Board, the FDIC, the Commissioner, the SEC and the staffs thereof
(collectively, the “Regulatory Authorities”) (i) asserting that since January 1, 2000, the
Company or any of its Subsidiaries is not in material compliance with any of the statutes,
regulations, or ordinances which such agency, department or Regulatory Authority enforces, or the
internal policies and procedures of the Company or its Subsidiaries, (ii) threatening to revoke any
license, franchise, permit or governmental authorization which is material to the Condition of the
Company or any of its Subsidiaries, (iii) requiring or threatening to require the Company



- 19 -









 




or any of its Subsidiaries, or indicating that the Company or any of its Subsidiaries may be
required, to enter into a cease and desist order, agreement or memorandum of understanding or any
other agreement restricting or limiting or purporting to restrict or limit in any manner the
operations of the Company or any of its Subsidiaries, including, without limitation, any
restriction on the payment of dividends, or (iv) directing, restricting or limiting, or purporting
to direct, restrict or limit in any manner the operations of the Company or any of its
Subsidiaries, including, without limitation, any restriction on the payment of dividends (any such
notice, communication, memorandum, agreement or order described in this sentence being herein
referred to as a “Regulatory Agreement”). Neither the Company nor any Subsidiary has
received or been made aware of any complaints or inquiries under the Community Reinvestment Act,
the Fair Housing Act, the Equal Credit Opportunity Act or any other state or federal
anti-discrimination fair lending law and, to the knowledge of the Company and its Subsidiaries,
there is no fact or circumstance that would form the basis of any such complaint or inquiry.




     (c) Since January 1, 2000, neither the Company nor any of its Subsidiaries has been a party to
any effective Regulatory Agreement.



     (d) Neither the Company nor any of its Subsidiaries is required by Section 32 of the Federal
Deposit Insurance Act to give prior notice to a federal banking agency of the proposed addition of
an individual to the Company Board or the employment of an individual as a senior executive
officer.



     Section 5.12 Employee Benefit Plans.



     Except as set forth in Section 5.12 of the Company Disclosure Memorandum:



     (a) The Company has delivered to Sterling prior to the execution of this Agreement true and
complete copies (and, in the case of each material plan, financial data with respect thereto) of
all pension, retirement, profit-sharing, deferred compensation, stock option, employee stock
ownership, severance pay, vacation, bonus or other incentive plans, all other employee programs,
arrangements or agreements, all medical, vision, dental or other health plans, all life insurance
plans and all other employee benefit plans, programs or arrangements, or fringe benefit plans,
including, without limitation, all “employee benefit plans” as that term is defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”),
whether or not terminated, and trust agreements and insurance contracts under or with respect to
which the Company or any of its Subsidiaries has or could have any liability (collectively, the
“Company Benefit Plans”). Any of the Company Benefit Plans pursuant to which the Company
is or may become obligated to, or obligated to cause any of its Subsidiaries or any other Person
to, issue, deliver or sell shares of capital stock of the Company or any of its Subsidiaries, or
grant, extend or enter into any option, warrant, call, right, commitment or agreement to issue,
deliver or sell shares, or any other interest in respect of capital stock of the Company or any of
its Subsidiaries, is referred to herein as a “Company Stock Plan.” No Company Benefit Plan
is or has been a multiemployer plan within the meaning of Section 3(37) of ERISA. The Company has
set forth in Section 5.12 of the Company Disclosure Memorandum (i) a list of all of the Company
Benefit Plans, (ii) a list of the Company Benefit Plans that are Company Stock Plans



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and (iii) a list of the number of shares covered by, exercise prices for, and holders of, all
stock options granted and available for grant under Company Benefit Plans.




     (b) From their inception, all Company Benefit Plans have been and are in compliance in all
material respects with the applicable terms of ERISA and the Code and any other applicable laws,
rules and regulations, including the terms of such plans.



     (c) All liabilities of any sort (contingent or otherwise) under any Company Benefit Plan are
fully accrued or reserved against in the Company Financial Statements in accordance with GAAP. No
Company Benefit Plan is or has ever been subject to Title IV of ERISA or Section 412 of the Code.



     (d) Neither the Company nor any of its Subsidiaries has any obligations for retiree health or
other welfare benefits under any Company Benefit Plan or otherwise other than as required by COBRA.
There are no restrictions on the rights of the Company or its Subsidiaries to unilaterally amend
or terminate any such Company Benefit Plan at any time without incurring any material liability
thereunder.



     (e) Except as disclosed in Section 5.12 of the Company Disclosure Memorandum, neither the
execution and delivery of this Agreement nor the consummation of the transactions contemplated
hereby will (i) result in any payment (including, without limitation, severance, golden parachute
or otherwise) becoming due to any person under any Company Benefit Plan or otherwise, (ii) increase
any benefits otherwise payable under any Company Benefit Plan or (iii) result in any acceleration
of the time of payment or vesting of any such benefits. No amounts payable under any Company
Benefit Plan will be nondeductible pursuant to either Section 280G or 162(m) of the Code.



     (f) Neither the Company, any Subsidiary, nor any plan fiduciary of any Company Benefit Plan
has engaged in any transaction in violation of Section 406 of ERISA (for which transaction no
exemption exists under Section 408 of ERISA) or in any “prohibited transaction” as defined
in Section 4975(c)(1) of the Code (for which no exemption exists under Section 4975(c)(2) or
4975(d) of the Code).



     (g) All Company Benefit Plans, related trust agreements or annuity contracts (or any other
funding instruments), are legally valid and binding and in full force and effect and there are no
written agreements or, to the Company’s knowledge, any oral agreements, regarding increases in
benefits (whether expressed or implied) under any of these plans, nor, to the Company’s knowledge,
any obligations, commitments, or understanding to continue any of these plans (whether expressed or
implied) except as required by Section 4980B of the Code and Sections 601-608 of ERISA.



     (h) There are no violations, defaults, breaches or liabilities under any Company Benefit Plan
which could subject the Company, any of its Subsidiaries, Sterling, the Company Benefit Plan or any
fiduciary thereunder, to Taxes, penalties or liabilities.



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     (i) There are no claims pending with respect to, or under, any Company Benefit Plan other than
routine claims for plan benefits, and there is no litigation pending, or to the knowledge of the
Company or any Subsidiary, any disputes or litigation threatened with respect to any such plans.



     Section 5.13 Commitments and Contracts.



     Except as set forth in Section 5.13 of the Company Disclosure Memorandum, neither the Company
nor any of its Subsidiaries is a party or subject to, or has amended or waived any rights under,
any of the following (whether written or oral, express or implied):



     (a) any employment contract or understanding (including any understandings or obligations with
respect to severance or termination pay liabilities or fringe benefits) with any Employee,
including in any such person’s capacity as a consultant (other than those which either (i) are
terminable at will by the Company or such Subsidiary without requiring any payment by the Company
or (ii) do not involve payments with a present value of more than $10,000 individually or $50,000
in the aggregate by the Company or such Subsidiary during the remaining term thereof (without
giving effect to extensions or renewals of the existing term thereof) which payments may be made at
the election or with the consent or concurrence of the Company;



     (b) any labor contract or agreement with any labor union;



     (c) any contract not made in the usual, regular and ordinary course of business containing
non-competition covenants which limit the ability of the Company or any of its Subsidiaries to
compete in any line of business or which involve any restriction of the geographical area in which
the Company or any of its Subsidiaries may carry on its business (other than as may be required by
law or applicable Regulatory Authorities);



     (d) any other contract or agreement for which the Company or any Subsidiary was or is required
to obtain the approval of any Regulatory Authority prior to becoming bound or to consummating the
transactions contemplated thereby;



     (e) any lease, sublease, license, contract and agreement which obligates or may obligate the
Company or any Subsidiary for an amount in excess of $5,000 annually or which have a current term
of one year or longer; provided, however, that the foregoing shall not include (i) loans made by,
repurchase agreements made by, bankers acceptances of, agreements with Bank customers for trust
services, or deposits by the Company and any of its Subsidiaries, and (ii) any lease, sublease,
license, contract or agreement which may be terminated by the Company, without penalty, upon thirty
(30) day’s or less prior written notice;



     (f) any contract requiring the payment of any penalty, termination or other additional amounts
as “change of control” payments or otherwise as a result of the transactions contemplated
by this Agreement, or providing for the vesting or accrual of benefits or rights upon a “change
of control” or otherwise as a result of the transactions contemplated by this Agreement;



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     (g) any agreement with respect to (i) the acquisition of any bank, bank branch or other assets
or stock of another financial institution or any other Person or (ii) the sale of one or more bank
branches;



     (h) any outstanding interest rate exchange or other derivative contracts; or



     (i) any buy back, recourse or guaranty obligation with respect to participation loans sold by
the Company or any Subsidiary which create contingent or direct liabilities of the Company or any
of its Subsidiaries.



     Section 5.14 Material Contract Defaults.



     Except as set forth in Section 5.14 of the Company Disclosure Memorandum, neither the Company
nor any of its Subsidiaries is, or has received any notice or has any knowledge that any party is,
in any material respect, in breach, violation or default in any respect under any contract,
agreement, commitment, arrangement, lease, insurance policy or other instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or
the assets, business or operations thereof may be bound or affected or under which it or its
respective assets, business or operations receives benefits, and there has not occurred any event
that with the lapse of time or the giving of notice or both would constitute such a default.



     Section 5.15 Legal Proceedings.



     Except as set forth in Section 5.15 of the Company Disclosure Memorandum, there are no claims
or charges filed with, or proceedings or investigations by, Regulatory Authorities or actions or
suits instituted or pending or, to the knowledge of the Company’s management, threatened against
the Company or any of its Subsidiaries, or against any property, asset, interest or right of any of
them, that might reasonably be expected to result in a judgment in excess of $10,000 or that might
reasonably be expected to threaten or impede the consummation of the transactions contemplated by
this Agreement. Neither the Company nor any of its Subsidiaries is a party to any agreement or
instrument or is subject to any charter or other corporate restriction or any Law or Order that,
individually or in the aggregate, might reasonably be expected to have a Company Material Adverse
Effect or might reasonably be expected to threaten or impede the consummation of the transactions
contemplated by this Agreement.



     Section 5.16 Absence of Certain Changes or Events. 



     (a) Since January 1, 2000, except (i) as disclosed in any Regulatory Reporting Document filed
since January 1, 2000 and prior to the date hereof or (ii) as set forth in Section 5.16 of the
Company Disclosure Memorandum, neither the Company nor any of its Subsidiaries has (a) incurred any
liability which has had a Company Material Adverse Effect, (b) suffered any change in its Condition
which would have a Company Material Adverse Effect, other than changes after the date hereof which
affect the banking industry as a whole, (c) failed to operate its business, in all material
respects, in the ordinary course consistent with past practice and prudent banking practices or (d)
changed any accounting practices.



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     (b) Except as set forth in Section 5.16 of the Company Disclosure Memorandum, since March 31,
2005, neither the Company nor any of its Subsidiaries has:




     (i) entered into any agreement, commitment or transaction other than in the ordinary
course of business consistent with prudent banking practices;




     (ii) incurred, assumed or become subject to, whether directly or by way of any guaranty
or otherwise, any obligations or liabilities (absolute, accrued, contingent or otherwise)
other than in the ordinary course of business and consistent with prudent banking practices;




     (iii) permitted or allowed any of its property or assets to become subject to any
mortgage, pledge, lien, security interest, encumbrance, restriction or charge of any kind
(other than Permitted Liens) other than in the ordinary course of business and consistent
with prudent banking practices;




     (iv) except in the ordinary course of business consistent with prudent banking
practices, canceled any debts, waived any claims or rights, or sold, transferred or
otherwise disposed of any its properties or assets;




     (v) except for regular salary increases granted in the ordinary course of business
consistent with prior practice, granted any increase in compensation or paid or agreed to
pay or accrue any bonus, percentage compensation, service award, severance payment or like
benefit to or for the credit of any director, officer, employee or agent, or entered into
any employment or consulting contract or other agreement with any director, officer or
employee or adopted, amended or terminated any Company Benefit Plan;




     (vi) directly or indirectly declared, set aside or paid any dividend or made any
distribution in respect with capital stock, or redeemed, purchased or
otherwise acquired any shares of its capital stock or other of its securities, except for dividends paid to the
Company by its Subsidiaries and quarterly dividends to the shareholders of the Company not
exceeding $1.58 per share consistent with prior practices;




     (vii) organized or acquired any capital stock or any other equity securities or
acquired any equity or ownership interest in any Person (except for settlement of
indebtedness, foreclosure or the exercise of creditors’ remedies or in a fiduciary capacity,
the ownership of which does not expose the Company or its Subsidiaries to any liability from
the business, operations or liabilities of such Person);




     (viii) except for the transactions contemplated by this Agreement or as otherwise
permitted hereunder, entered into any transaction, or entered into, modified or amended any
contract or commitment, other than in the ordinary course of business and consistent with
prudent banking practices; or




     (ix) agreed, whether in writing or otherwise, to take any action the performance of
which would change the representations contained in this Section 5.16(b)



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in the future so that any such representation would not be true in all material
respects as of the Closing.



     Section 5.17 Reports.



     Since January 1, 2000, the Company and each of its Subsidiaries have filed on a timely basis
all reports and statements, together with all amendments required to be made with respect thereto
(collectively “Reports”), that they were required to file with any Regulatory Authority.
No Regulatory Reporting Document with respect to periods beginning on or after January 1, 2000,
contained any information that was false or misleading with respect to any material fact or omitted
to state any material fact necessary in order to make the statements therein not misleading.



     Section 5.18 Insurance.



     The Company and each of its Subsidiaries are presently insured, and during each of the past
four calendar years have been insured, for reasonable amounts against such risks as companies
engaged in a similar business would, in accordance with good business practice, customarily be
insured. To the knowledge of the Company’s management, the policies of fire, theft, liability
(including directors and officers liability insurance) and other insurance set forth in Section
5.18 of the Company Disclosure Memorandum and maintained with respect to the assets or businesses
of the Company and its Subsidiaries provide adequate coverage against all pending or threatened
claims, and the fidelity bonds in effect as to which any of the Company or any of its Subsidiaries
is a named insured are sufficient for their purpose. Except as set forth in Section 5.18 of the
Company Disclosure Memorandum, there have been no claims under such fidelity bonds within the last
four calendar years and neither the Company nor its Subsidiaries have knowledge of any facts which
would form the basis of a claim under such bonds.



     Section 5.19 Labor.



     No material work stoppage involving the Company or its Subsidiaries is pending or, to the
knowledge of the Company’s management, threatened. Neither the Company nor any of its Subsidiaries
is involved in, or, to the knowledge of the Company’s management, threatened with or affected by,
any labor or other employment-related dispute, arbitration, lawsuit or administrative proceeding.
Employees of the Company and its Subsidiaries are not represented by any labor union, and, to the
knowledge of the Company’s management, no labor union is attempting to organize employees of the
Company or any of its Subsidiaries.



     Section 5.20 Material Interests of Certain Persons.



     Except as set forth in Section 5.20 of the Company Disclosure Memorandum, no officer or
director of the Company, or any “associate” (as such term is defined in Rule 14a-1 under
the Exchange Act) of any such officer or director, has any interest in any contract or property
(real or personal), tangible or intangible, used in or pertaining to the business of the Company or
any of its Subsidiaries.



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     Section 5.21 Registration Obligations.



     Neither the Company nor any of its Subsidiaries is under any obligation, contingent or
otherwise, presently in effect or which will survive the Merger by reason of any agreement to
register any of its securities under the Securities Act.



     Section 5.22 Brokers and Finders and Executive Bonus.



     Except as set forth in Section 5.22 of the Company Disclosure Memorandum (which shall identify
the broker, finder or other Person and amount of compensation payable), neither the Company nor any
of its Subsidiaries nor any of their respective officers, directors or employees has employed any
broker or finder or incurred any liability for any financial advisory fees, brokerage fees,
commissions or finder’s fees, no other broker, finder or other Person has acted directly or
indirectly for the Company or any of its Subsidiaries in connection with this Agreement or the
transactions contemplated hereby, and no other amount is payable based upon the consummation of the
transaction contemplated by this Agreement.



     Section 5.23 State Takeover Laws.



     The transactions contemplated by this Agreement are exempt from any applicable charter or
contractual provision containing change of control or anti-takeover provisions and, to the
knowledge of the Company, from any applicable state takeover law.



     Section 5.24 Environmental Matters.



     Except as set forth in Section 5.24 of the Company Disclosure Memorandum, to the knowledge of
the Company or any Subsidiary:



     (a) The Company, its Subsidiaries and any Property (as herein defined) owned or operated by
any of them have been and are in compliance with all applicable Environmental Laws. There is no
present event, condition or circumstance, or any past event, condition or circumstance (i) that
could interfere with the conduct of the business of the Company or its Subsidiaries in any manner
now conducted relating to such entities’ compliance with Environmental Laws, (ii) that could
constitute a violation of, or serve as the basis of liability pursuant to, any Environmental Law,
or (iii) relating to the compliance with any Environmental Law which would have a Company Material
Adverse Effect.



     (b) The Company, its Subsidiaries and its Properties have not been, and are not now subject to
any actual or, to the knowledge of the Company or any Subsidiary, potential or threatened claim or
proceeding pursuant to any Environmental Law and neither the Company nor any Subsidiary have
received any notice from any Person of any actual or alleged violation, or liability pursuant to,
any Environmental Law.



     (c) There is no Controlled Property (as herein defined) for which the Company or any
Subsidiary is or was required to obtain any permit, license or authorization under any
Environmental Law.



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     (d) Neither the Company nor any Subsidiary has generated any Hazardous Substances for which it
was required under any Environmental Law to execute any Hazardous Disposal Manifest and no
Hazardous Substances have been released from any Property that constitutes a violation of
Environmental Laws.



     (e) There are no underground or above ground storage tanks on or under any Property nor any
Hazardous Substances (at, in, on, under or emanating from any Property) in any quantity or
concentration exceeding any standard or limit established pursuant to applicable Environmental Law.



     (f) There is no asbestos containing material (“ACM”) present in any Controlled
Property except non-friable ACM which can be managed in place in compliance with Environmental Law
without air monitoring, removal or encapsulation which is managed under and in compliance with an
operations and maintenance program.



     (g) There are no obligations, undertakings or liabilities arising out of or related to any
Environmental Law which the Company or any Company Subsidiary has agreed to, assumed, or retained,
by contract or otherwise.



     (h) For purposes of this Section 5.24, “Property” includes (i) any property (whether
real or personal) which the Company or any of its Subsidiaries currently or in the past has leased,
operated, owned or managed in any manner including, without limitation, any property acquired by
foreclosure or deed in lieu thereof (a “Controlled Property”) and (ii) property now held as
security for a loan or other indebtedness by the Company or any of its Subsidiaries or property
currently proposed as security for loans or other credit the Company or any of its Subsidiaries is
currently evaluating to extend or has committed to extend (“Collateral Property”).



     Section 5.25 Loans.



     Each loan reflected as an asset in the Financial Statements is the legal, valid and binding
obligation of the obligor of each loan, enforceable in accordance with its terms, subject to the
Remedies Exception; provided, however, that no representation or warranty is made as to the
collectibility of such loans. The Company’s Subsidiaries do not have in their portfolios any loan
exceeding their legal lending limit, and except as disclosed in Section 5.25 of the Company
Disclosure Memorandum, there are no significant delinquent, substandard, doubtful, loss,
nonperforming or problem loans. The Company has provided Sterling with the most recent watch list
of the Bank. Such watch list is true, correct and complete in all material respects.



     Section 5.26 Fiduciary Responsibilities.



     All trusts now or heretofore held by the Bank have been properly administered in all material
respects in conformity with the terms of the applicable governing documents and applicable Law
(including applicable standards of fiduciary conduct), including, without limitation, with respect
to accountings, distributions, allocations, credits and charges between and to income and principal
accounts, investments, investment review procedures, reporting, obtaining necessary approvals,
compliance with instructions, Laws and regulations, maintenance



- 27 -









 




and security of assets, fees charged and Taxes. All material information affecting fiduciary
positions and records demonstrating the correctness of the foregoing representation in this Section
5.26 are maintained by the Bank in its normal files. In connection with the performance of
services related to fiduciary positions, the Bank has not made any guarantee or assurance to any
Person concerning a rate of return, marketability or quality of the assets held in the trusts. The
trust documents under which the Bank is serving in fiduciary positions are in full force and effect
and provide the Bank with the requisite authority to act as a fiduciary. The term “trusts now
or heretofore held” includes (a) any and all common law or other trusts between individual,
corporate or other entities with the Bank as a trustee or co-trustee, including, without
limitation, pension, compensation, testamentary, and charitable trusts and indentures, (b) any and
all decedents’ estates where the Bank is serving as a co- or sole executor, personal representative
or administrator, administrator de bonis non, administrator de bonis non with will annexed, or in
any similar fiduciary capacity, (c) any and all guardianships, conservatorships or similar
positions where the Bank is serving or has served as a co- or sole guardian or conservator, or any
similar fiduciary capacity, (d) any and all agency and/or custodial accounts and/or similar
arrangements under which the Bank is serving or has served as an agent or custodian for the owner
or other party establishing the account with or without investment authority and (e) any and all
escrow arrangements under which the Bank holds or held assets for any party or parties on stated
terms and conditions.




     Section 5.27 Patents, Trademarks and Copyrights. 



     (a) Except as set forth in Section 5.27 of the Company Disclosure Memorandum, neither the
Company nor any of its Subsidiaries require the use of any material patent, patent application,
trademark (whether registered or unregistered), trademark application, trade name, service mark,
copyright, or material trade secret for the business or operations of the Company or its
Subsidiaries. The Company and/or its Subsidiaries own or are licensed or otherwise have the right
to use the items listed in Section 5.27 of the Company Disclosure Memorandum.



     (b) The Company and/or its Subsidiaries own all right, title and interest in and to, or hold
valid licenses or sub-licenses to use, all of the computer software used by the Company and/or its
Subsidiaries in their respective operations, free and clear of any liens, claims or encumbrances of
any kind or nature (excluding the rights of the owner or licensor in the case of software licensed
or sub-licensed by the Company and/or its Subsidiaries from others). Except as specified on in
Section 5.27 of the Company Disclosure Memorandum, all computer software owned by the Company or
its Subsidiaries was developed by the Company or the respective Subsidiary entirely through its own
efforts and for its own account. The use by the Company and/or its Subsidiaries of computer
software licensed to the Company from third parties (including the sublicensing of such licensed
software to customers) does not violate the terms of the respective license agreements with respect
to such licensed software.



     (c) No director, officer or employee of the Company or any Subsidiary owns, directly or
indirectly, in whole or in part, any computer software or other intellectual property right which
the Company is using or which is necessary for the business of the Company or any Subsidiary as now
conducted.



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     Section 5.28 Company Action.



     The Company Board, at a meeting duly called and held on July 6, 2005, unanimously (i)
determined, based upon such factors as the Company Board deemed appropriate, that the Merger is
fair to and in the best interests of the Company and its shareholders, (ii) approved this Agreement
and the Merger in accordance with the TBCA, (iii) resolved to recommend approval and adoption of
this Agreement and the Merger and the other transactions contemplated hereby by the Company’s
shareholders and (iv) directed that this Agreement and the Merger be submitted to the Company’s
shareholders for approval.



     Section 5.29 Dissenting Shareholders.



     The Company and its Subsidiaries have no knowledge of any plan or intention on the part of any
Company shareholder to exercise any appraisal rights under the TBCA or otherwise make written
demand for payment of the fair value of any Company Common Stock in the manner provided in the
TBCA.



     Section 5.30 Company Indebtedness.



     Except as set forth in Section 5.30 of the Company Disclosure Memorandum, the Company has no
Company Indebtedness. The Company has delivered to Sterling true and complete copies of all loan
documents (the “Company Loan Documents”) related to all Company Indebtedness and any
indebtedness of the Bank and the Company’s other Subsidiaries, other than deposits, and made
available to Sterling all material correspondence concerning the status of such indebtedness.



     Section 5.31 Statements True and Correct.



     The proxy statement to be used by the Company to solicit any required approval of its
shareholders as contemplated by this Agreement (the “Proxy Statement”) will not (i) when it
is first mailed to the shareholders of the Company, contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements made therein, in light
of the circumstances under which such statements are made, not misleading, or (ii) at the time of
the meeting of the shareholders of the Company to be held pursuant to Section 8.3 of this
Agreement, including any adjournments thereof (the “Company Shareholders’ Meeting”), be
false or misleading with respect to any material fact or omit to state any material fact necessary
to correct any statement or remedy any omission in any earlier communication with respect to the
solicitation of any proxy for the Company Shareholders’ Meeting. All documents that the Company is
responsible for filing with any Regulatory Authority in connection with the transactions
contemplated hereby will comply as to form in all respects with the provisions of applicable law.
The information which is deemed to be set forth in the Company Disclosure Memorandum by the Company
for the purposes of this Agreement is true and accurate in all material respects.



- 29 -









 





     Section 5.32 Representations Not Misleading.



     No representation or warranty by the Company in this Agreement, nor any statement, summary,
exhibit or schedule furnished to Sterling by the Company or any of its Subsidiaries under and
pursuant to this Agreement contains or will contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements contained herein or therein, in light of
the circumstances in which they are made, not misleading.



ARTICLE VI

REPRESENTATIONS AND WARRANTIES OF STERLING




     Each of Sterling and Merger Sub represent and warrant to the Company as follows:



     Section 6.1
Organization, Standing and Authority.



     (a) Sterling is a corporation duly organized, validly existing and in good standing under the
laws of the State of Texas. Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Texas. Sterling is duly qualified to do business and
in good standing in all jurisdictions where its ownership or leasing of property or the conduct of
its business requires it to be so qualified and in which the failure to be duly qualified would
have a material adverse effect on the Condition of Sterling and its Subsidiaries taken as a whole
or on the ability of Sterling or Merger Sub to consummate the transactions contemplated hereby (a
“Sterling Material Adverse Effect”). Each of Sterling and Merger Sub has all requisite
corporate power and authority to carry on its business as now conducted and to own, lease and
operate its assets, properties and business, and to execute and deliver this Agreement and perform
the terms of this Agreement. Sterling is duly registered as a bank holding company under the BHCA.
Each of Sterling and Merger Sub has in effect all Authorizations necessary for it to own or lease
its properties and assets and to carry on its business as now conducted, except for those
Authorizations the absence of which, either individually or in the aggregate, would not have a
Sterling Material Adverse Effect.



     Section 6.2 Authorization of Merger and Related Transactions. 



     (a) The execution and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by all necessary corporate action in
respect thereof on the part of each of Sterling and Merger Sub, to the extent required by
applicable law. This Agreement represents a valid and legally binding obligation of each of
Sterling and Merger Sub, enforceable against Sterling and Merger Sub in accordance with its terms
except as such enforcement may be limited by the Remedies Exception.



     (b) Neither the execution and delivery of this Agreement by Sterling or Merger Sub, the
consummation by Sterling or Merger Sub of the transactions contemplated hereby nor compliance by
Sterling or Merger Sub with any of the provisions hereof will (i) conflict with or result in a
breach of any provision of Sterling’s Articles of Incorporation or bylaws or the



- 30 -









 




Certificate of Incorporation or bylaws of Merger Sub, (ii) constitute or result in a breach or
violation of any term, condition or provision of, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give rise to any right of
termination, cancellation or acceleration with respect to, or result in the creation of any Lien
upon any property or assets of Sterling or Merger Sub pursuant to any note, bond, mortgage,
indenture, license, agreement, lease or other instrument or obligation to which it is a party or by
which it or any of its properties or assets may be subject, and that would, individually or in the
aggregate, have a Sterling Material Adverse Effect or (iii) subject to receipt of the requisite
approvals referred to in Section 9.1(b) of this Agreement, violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Sterling or Merger Sub or any of its properties
or assets.




     Section 6.3 Financial Statements.



     Sterling has delivered to the Company copies of the audited consolidated balance sheets and
the related audited consolidated statements of income, consolidated statements of shareholders’
equity and consolidated statements of cash flows (including related notes and schedules) of
Sterling and its consolidated Subsidiaries as of and for the periods ended December 31, 2004 and
December 31, 2003, and its unaudited consolidated balance sheet at March 31, 2005, and the related
unaudited consolidated statements of income, shareholders’ equity and cash flows for the three
months then ended and included in its annual report filed on Form 10-K for the year ended December
31, 2004 and its quarterly report filed on Form 10-Q for the quarter ended March 31, 2005,
respectively, filed by Sterling pursuant to the Exchange Act and the rules and regulations of the
SEC promulgated thereunder (collectively, the “Sterling Financial Statements”). The
Sterling Financial Statements (as of the dates thereof and for the periods covered thereby) (a) are
in accordance with the books and records of Sterling and its consolidated Subsidiaries, are
complete and accurate in all material respects and, have been maintained in accordance with good
business practices, and (b) present fairly the consolidated financial position and the consolidated
statements of income, changes in shareholders’ equity and cash flows of Sterling and its
Subsidiaries as of the dates and for the periods indicated, in accordance with GAAP, subject in the
case of unaudited interim financial statements to normal recurring year-end adjustments and except
for the absence of certain footnote information in the unaudited interim financial statements.



     Section 6.4 Regulatory Matters.



     Neither Sterling nor any of its Subsidiaries has taken or agreed to take any action or has any
knowledge of any fact or circumstance that would materially impede or delay receipt of any approval
referred to in Section 9.1(b).



     Section 6.5 Legal Proceedings.



     There are no claims or charges filed with, or proceedings or investigations by, Regulatory
Authorities or actions or suits instituted or pending or, to the knowledge of Sterling’s
management, threatened against Sterling or any of its Subsidiaries, or against any property, asset,
interest or right of any of them, that might reasonably be expected to threaten or impede the



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consummation of the transactions contemplated by this Agreement. Neither Sterling nor any of
its Subsidiaries is a party to any agreement or instrument or is subject to any charter or other
corporate restriction or any Law or Order that, individually or in the aggregate, might reasonably
be expected to threaten or impede the consummation of the transactions contemplated by this
Agreement.




     Section 6.6 Representations Not Misleading.



     No representation or warranty by Sterling in this Agreement, nor any statement, summary,
exhibit or schedule furnished to the Company by Sterling or any of its Subsidiaries under and
pursuant to this Agreement contains or will contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements contained herein or therein, in light of
the circumstances in which they are made, not misleading.



     Section 6.7 Brokers and Finders.



     Neither Sterling nor any of its Subsidiaries nor any of their respective officers, directors
or employees has employed any broker or finder or incurred any liability for any financial advisory
fees, brokerage fees, commissions or finder’s fees and no broker or finder has acted directly or
indirectly for Sterling or any of its Subsidiaries in connection with this Agreement or the
transactions contemplated hereby.



ARTICLE VII

CONDUCT OF THE COMPANY’S BUSINESS




     Section 7.1 Conduct of Business Prior to the Effective Time.



     During the period from the date of this Agreement until the earlier of the Effective Time or
the termination of this Agreement, and except as otherwise contemplated by this Agreement, the
Company shall, and shall cause each of its Subsidiaries to:




     (i) operate and conduct its business in the usual, regular and ordinary course,
consistent with past practice and prudent banking practices;




     (ii) preserve intact the Company’s and each of its Subsidiaries’ corporate existence,
business organization, assets, licenses, permits, authorizations, and business
opportunities;




     (iii) comply with all material contractual obligations applicable to business
operations of the Company and/or its Subsidiaries;




     (iv) maintain all of its properties and assets in good repair, order and condition,
reasonable wear and tear excepted, and maintain the insurance coverages described in Section
5.18 or obtain comparable insurance coverages from reputable insurers, which, in respect to
amounts, types and risks insured, are adequate for the business conducted by the Company and
its Subsidiaries and consistent with the existing insurance coverages;



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     (v) in good faith and in a reasonable manner (a) cooperate with Sterling in satisfying
the conditions in this Agreement, (b) assist Sterling in obtaining as promptly as possible
all consents, approvals, authorizations and rulings, whether regulatory, corporate or
otherwise, as are necessary to carry out and consummate the transactions contemplated by
this Agreement, (c) upon the written request of Sterling, furnish information concerning the
Company and its Subsidiaries not previously provided to Sterling required for inclusion in
any filings or applications that may be necessary in that regard, and (d) perform all acts
and execute and deliver all documents necessary to cause the transactions contemplated by
this Agreement to be consummated at the earliest date that is reasonably possible;




     (vi) timely file all Reports required to be so filed by the Company or any of its
Subsidiaries with any Regulatory Authority and to the extent permitted by applicable law,
promptly thereafter deliver to Sterling copies of all such Reports required to be so filed;




     (vii) comply in all material respects with all applicable laws and regulations,
domestic and foreign;




     (viii) promptly notify Sterling upon obtaining knowledge of any default, event of
default or condition with which the passage of time or giving of notice would constitute a
default or an event of default under the Company Loan Documents and promptly notify and
provide copies to Sterling of any material written communications concerning the Company
Loan Documents;




     (ix) promptly give written notice to Sterling of (a) any material change in its
business, operations or prospects, (b) any complaints, investigations or hearings (or
communications indicating that the same may be contemplated) of any Regulatory Authority,
(c) the institution or the threat of any material litigation against the Company, or (d) any
event or condition that would cause any of the representations or warranties of the Company
contained in this Agreement to be untrue or misleading in any material respect or which
would otherwise cause a Company Material Adverse Effect; and




     (x) use its best efforts to maintain current customer relationships and preserve intact
its business organization, employees, advantageous business relationships and retain the
services of its officers and employees; and




     (xi) promptly notify Sterling of the making, renegotiating, renewal, increase,
extension, or purchase of any loan, lease (credit equivalent), advance, credit enhancement,
or other extension of credit in an amount exceeding $750,000 to any individual borrower.



     Section 7.2 Forbearances.



     During the period from the date of this Agreement to the earlier of the Effective Time or the
termination of this Agreement, and except as set forth in Section 7.2 of the Company Disclosure
Memorandum, the Company shall not, and shall not permit any of its Subsidiaries to,



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without the prior written consent of Sterling (and the Company shall provide Sterling with
prompt notice of any events referred to in this Section 7.2 occurring after the date hereof):




     (a) other than in the ordinary course of business consistent with past practice, incur any
indebtedness for borrowed money (other than short-term indebtedness incurred to refinance
short-term indebtedness and indebtedness of the Company or any of its Subsidiaries to the Company
or any of its Subsidiaries; it being understood and agreed that incurrence of indebtedness in the
ordinary course of business shall include, without limitation, the creation of deposit liabilities,
purchases of federal funds, and sales of certificates of deposit), assume, guarantee, endorse or
otherwise as an accommodation become responsible for the obligations of any other Person, or make
any loan or advance other than in the ordinary course of business consistent with past practice and
prudent banking practices;



     (b) adjust, split, combine or reclassify any capital stock; make, declare or pay any dividend
or make any other distribution on, or directly or indirectly redeem, purchase or otherwise acquire,
any shares of its capital stock or any securities or obligations convertible into or exchangeable
for any shares of its capital stock, other than distributions from PB Nevada and the Bank to the
Company and quarterly dividends to the shareholders of the Company consistent with past practice
not exceeding $1.58 per share for each quarterly dividend payable on July 15, 2005 and October 15,
2005 and quarterly thereafter until consummation of the transactions contemplated by this
Agreement, grant any stock options or stock awards, or grant any Person any right to acquire any
shares of its capital stock; or issue any additional shares of capital stock, or any securities or
obligations convertible into or exchangeable for any shares of its capital stock;



     (c) sell, transfer, mortgage, encumber or otherwise dispose of any of its properties or assets
to any Person, or cancel, release or assign any indebtedness to such Person or any claims held by
any such Person, except in the ordinary course of business consistent with past practice and
prudent banking practices or pursuant to contracts or agreements in force at the date of this
Agreement;



     (d) make any material investment (other than trades in investment securities in the ordinary
course) either by purchase of stock or securities, contributions to capital, property transfers, or
purchase of any property or assets of any other Person;



     (e) enter into, terminate or fail to exercise any material right under, any contract or
agreement involving annual payments in excess of $10,000 and which cannot be terminated without
penalty upon 30 days’ notice, or make any change in, or extension of (other than automatic
extensions) any of its leases or contracts involving annual payments in excess of $10,000 and which
cannot be terminated without penalty upon 30 days’ notice;



     (f) make, renegotiate, renew, increase, extend or purchase any loan, lease (credit
equivalent), advance, credit enhancement or other extension of credit, except in conformity with
existing lending practices of the Company in amounts not to exceed the Bank’s lending limit to any
individual borrower;



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     (g) make, renegotiate, renew, increase, extend or purchase any loan, lease (credit
equivalent), advance, credit enhancement or other extension of credit underwritten based on no
verification of income or loans commonly known or referred to as “no documentation loans,” or
loans, advances or commitments to directors, officers or other affiliated parties of the Company or
any of its subsidiaries;



     (h) except as contemplated by Section 8.19 of this Agreement, modify the terms of any Company
Benefit Plan (including any severance pay plan) or increase or modify in any manner the
compensation or fringe benefits of any of its Employees (including, without limitation, entering
into any commitment to pay any “stay bonuses” or similar benefits) or pay any pension or retirement
allowance not required by any existing plan or agreement to any such Employees, pay any bonuses, or
become a party to, amend or commit itself to any pension, retirement, profit-sharing or welfare
benefit plan or agreement or employment agreement with or for the benefit of any Employee other
than routine adjustments in compensation and fringe benefits in the ordinary course of business
consistent with past practice or accelerate the vesting of any stock options or other stock-based
compensation, provided, that the Company may pay accrued bonuses in an amount not to exceed
$151,000 through June 30, 2005 plus an additional $26,000 per month from July 1, 2005 through the
earlier to occur of (i) December 31, 2005 and (ii) the Closing Date.



     (i) settle any claim, action or proceeding involving the payment of money damages in excess of
$10,000;



     (j) amend its Articles of Incorporation or its bylaws;



     (k) fail to maintain its Regulatory Agreements, material Authorizations or to file in a timely
fashion all federal, state, local and foreign Tax Returns;



     (l) make any capital expenditures of more than $10,000 individually or $50,000 in the
aggregate;



     (m) fail to maintain or administer each Company Benefit Plan in accordance with applicable Law
or timely make all contributions or accruals required thereunder in accordance with GAAP;



     (n) take any action that is intended or may reasonably be expected to result in any of its
representations and warranties set forth in this Agreement being or becoming untrue at any time
prior to the Effective Time, or in any of the conditions to the Merger set forth in Article X not
being satisfied or in a violation of any provision of this Agreement, except, in every case, as may
be required by applicable law;



     (o) change any methods or policies of accounting from those used in the Company Financial
Statements;



     (p) make or change any election, change an annual accounting period, adopt or change any
accounting method, file any amended Tax Return, enter into any closing agreement,



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settle any Tax claim or assessment relating to the Company or any of its Subsidiaries,
surrender any right to claim a refund of Taxes, consent to any extension or waiver of the
limitation period applicable to any Tax claim or assessment relating to the Company or any of its
Subsidiaries, or take any other similar action relating to the filing of any Tax Return or the
payment of any Tax, if such election, adoption, change, amendment, agreement, settlement,
surrender, consent or other action would have the effect of increasing the Tax liability of the
Company or any of its Subsidiaries for any period ending after the Closing Date or decreasing any
Tax attribute of the Company or any of its Subsidiaries existing on the Closing Date; or




     (q) agree, or make any commitment, to take, in writing or otherwise, any of the actions
described in clauses (a) through (o) of this Section 7.2.



ARTICLE VIII

ADDITIONAL AGREEMENTS




     Section 8.1 Access and Information. 



     (a) During the period from the date of this Agreement through the Effective Time:




     (i) the Company shall, and shall cause its Subsidiaries to, afford Sterling and its
accountants, counsel and other representatives full access during normal business hours to
the properties, books, contracts, Tax Returns, Reports, commitments and records of the
Company and its Subsidiaries at any time, and from time to time, for the purpose of
conducting any review or investigation reasonably related to this Agreement or the Merger,
and the Company and its Subsidiaries will cooperate fully with all such reviews and
investigations provided that Sterling provides the Company with reasonable notice of
Sterling’s on-site visits and that Sterling does not unreasonably interfere with the
business operations of the Company during the course of such visits; and




     (ii) Sterling shall upon reasonable notice make copies of the Sterling SEC Reports and
other information reasonably related to Sterling’s operations or financial performance
available to the Company and its advisors for purposes of any review or report to the
Company Board in evaluating the Merger.



     (b) During the period from the date of this Agreement through the Effective Time, the Company
shall furnish to Sterling (i) all Reports which are filed after the date hereof promptly upon the
filing thereof, (ii) a copy of each Tax Return filed by it after the date hereof, and (iii) monthly
and other interim financial statements in the form prepared by the Company for its internal use.
During this period, the Company shall notify Sterling promptly of any material change in the
Condition of the Company or any of its Subsidiaries.



     (c) During the period from the date of this Agreement through the Effective Time, the Company
shall provide Sterling such additional information as Sterling may request from time to time
regarding the loans, credit facilities and/or collateral therefor as may be specified by Sterling.
The Company shall also make available to Sterling its loan files, correspondence and other records
regarding any such specified loans, credit facilities and/or collateral.



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     (d) Notwithstanding the foregoing provisions of this Section 8.1, no investigation by any
party hereto made heretofore or hereafter shall affect the representations and warranties of the
other parties that are contained herein and each such representation and warranty shall survive
such investigation.



     (e) Sterling agrees that it will keep confidential any information furnished to it by the
Company in connection with the transactions contemplated by this Agreement which is reasonably
designated as confidential at the time of delivery, except to the extent that such information (i)
was already known to Sterling and was received from a source other than the Company or any of its
Subsidiaries, directors, officers, employees or agents, (ii) thereafter was lawfully obtained from
another source or was publicly disclosed by the Company or its agent or representative, or (iii) is
required to be disclosed to any Regulatory Authority, or is otherwise required to be disclosed by
law. Sterling agrees not to use such confidential information, and to implement safeguards and
procedures that are reasonably designed to prevent such confidential information from being used,
for any purpose other than in connection with the transactions contemplated by this Agreement.
Upon any termination of this Agreement, Sterling will return to the Company or will destroy all
documents furnished Sterling for its review and all copies of such documents made by Sterling. The
Company agrees to keep confidential, in accordance with the provisions of this Section 8.1(e), any
information furnished to it by Sterling in connection with the transactions contemplated by this
Agreement that is reasonably designated as confidential at the time of delivery. The Company
agrees not to use any such confidential information, and to implement safeguards and procedures
that are reasonably designed to prevent such confidential information from being used, for any
purpose other than in connection with the transactions contemplated by this Agreement. Upon any
termination of this Agreement, the Company will return to Sterling or will destroy all documents
containing any such confidential information furnished to the Company for its review and all copies
of such documents made by the Company.



     Section 8.2 Proxy Statement.



     (a) As promptly as practicable after the execution of this Agreement, the Company shall (i)
prepare and mail to its shareholders and (ii) if required by applicable law file with the
appropriate Regulatory Authorities a proxy or information statement (the “Proxy Statement”)
relating to the Company Shareholders’ Meeting. Sterling shall furnish all information concerning
Sterling and its Subsidiaries as the Company may reasonably request in connection with and the
preparation of the Proxy Statement. The Company shall give Sterling and its counsel the
opportunity to review the Proxy Statement and each document to be incorporated by reference therein
prior to mailing the Proxy Statement to its shareholders.



     (b) Unless otherwise required pursuant to the applicable fiduciary duties of the Company Board
(as determined in good faith by the Company Board based upon the advice of its outside counsel), no
amendment or supplement to the Proxy Statement will be made by the Company without the approval of
Sterling, which approval shall not be unreasonably withheld.



     (c) The information supplied by the Company for inclusion in the Proxy Statement shall not, at
(i) the time the Proxy Statement (or any amendment thereof or supplement thereto)



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is first mailed to the stockholders of the Company and (ii) the time of the Company
Shareholders’ Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the statements therein
not misleading.




     (d) The information supplied or to be supplied by Sterling for inclusion in the Proxy
Statement will not, at the time it is supplied to the Company, contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the statements made
therein not misleading.



     (e) The Company agrees to disclose in the Proxy Statement the total amount of all bonuses and
payments and any individual bonus and/or payment in excess of $100,000 made or intended to be made
to employees of the Bank or the Company in connection with the transactions contemplated by this
Agreement.



     Section 8.3 Company Shareholder’s Meeting.



     The Company, acting through the Company Board, shall, in accordance with applicable law, duly
call, give notice of, convene and hold a special meeting of its shareholders as soon as practicable
for the purpose of approving and adopting this Agreement and approving the Merger. The Company
shall cause the Company Shareholder’s Meeting to occur within 45 days after the Proxy Statement is
completed; provided, however, that the Company Shareholder’s Meeting shall occur no later than
September 30, 2005. Subject to the fiduciary duties of the Company Board under applicable law as
determined by such directors in good faith after consultation with and based upon the advice of
outside counsel, the Company shall include in the Proxy Statement of the Company for use in
connection with the Company Shareholders’ Meeting, the recommendation of the Company Board that the
Company shareholders vote in favor of the approval and adoption of the Merger, this Agreement and
the consummation of the transactions contemplated hereby. The Company agrees to use its best
efforts to obtain the approval and adoption of the Merger and this Agreement by the Company
shareholders. The Company (i) acknowledges that a breach of its covenant contained in this Section
8.3 to convene a meeting of its shareholders and call for a vote thereat with respect to the
approval of this Agreement, the Merger and the transactions contemplated hereby and thereby will
result in irreparable harm to Sterling which will not be compensable in monetary damages and (ii)
agrees that such covenant shall be specifically enforceable and that specific performance and
injunctive relief shall be a remedy properly available to Sterling for a breach of such covenant.



     Section 8.4 Filing of Regulatory Approvals.



     As soon as reasonably practicable, Sterling shall prepare and file all notices and
applications to the applicable Regulatory Authorities, at Sterling’s expense, which Sterling deems
necessary or appropriate to complete the transaction contemplated herein, including the Bank
Merger. The Company shall join in any filing that requires the Company to be a party thereto.
Sterling and the Company each agree to deliver to the other copies of all non-confidential portions
of any such applications. The Company shall cooperate, and shall cause its Subsidiaries,
accountants, counsel and other representatives to cooperate, with Sterling and its



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accountants, counsel and other representatives, in connection with the preparation by Sterling
of any applications and documents required to obtain the Approvals which cooperation shall include
providing all information, documents and appropriate representations as may be necessary in
connection therewith and, when requested by Sterling, preparing and filing regulatory applications.




     Section 8.5 Press Releases.



     Prior to the public dissemination of any press release or other public disclosure of
information about this Agreement, the Merger or any other transaction contemplated hereby, the
parties to this Agreement shall mutually agree as to the form and substance of such release or
disclosure, except as otherwise provided by applicable law or by rules of the Nasdaq.



     Section 8.6 Miscellaneous Agreements and Consents.



     Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to
use its respective commercially reasonable efforts to satisfy, or cause to be satisfied, all
conditions to their respective obligations under this Agreement and to take, or cause to be taken,
all action, and to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the transactions contemplated by
this Agreement as expeditiously as reasonably practicable, including, without limitation, using
their respective commercially reasonable efforts to lift or rescind any injunction or restraining
order or other order adversely affecting the ability of the parties to consummate the transactions
contemplated hereby. Sterling and the Company shall, and shall cause each of their respective
Subsidiaries to, use their commercially reasonable efforts to obtain consents of all third parties
and Regulatory Authorities necessary or, in the reasonable opinion of Sterling or the Company,
desirable for the consummation of the transactions contemplated by this Agreement including the
Merger, the Delaware Merger, and the Bank Merger. While this Agreement is in effect, neither
Sterling nor the Company shall take any actions, or omit to take any actions, which would cause
this Agreement to become unenforceable in accordance with its terms. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and directors of Sterling shall be deemed to have been granted
authority in the name of the Company to take all such necessary or desirable action.



     Section 8.7 Indemnification.



     (a) Sterling shall indemnify, defend and hold harmless the directors, officers, employees, and
agents of the Company and its Subsidiaries (each, an “Indemnified Party”) against all
losses, expenses (including reasonable attorneys’ fees), claims, damages or liabilities and amounts
paid in settlement arising out of actions or omissions or alleged acts or omissions occurring at or
prior to the Effective Time (including the transactions contemplated by this Agreement) to the full
extent permitted under the TBCA, applicable federal law or regulatory authorities, and by the
Company’s and its Subsidiaries’ Articles of Incorporation or Association or other organizational
documents and bylaws as in effect on the date hereof, including provisions relating to advances of
expenses incurred in the defense of any proceeding to the full



- 39 -









 




extent permitted by the TBCA, applicable federal law or regulatory authorities, upon receipt
of any undertaking required by the TBCA, except that the right to indemnification shall not arise
in those instances in which the party seeking indemnification has participated in the breach of any
covenant or agreement contained herein or knowingly caused any representation or warranty of the
Company contained herein to be false or inaccurate in any respect and the claim arises principally
from such breach or the falsity or inaccuracy of such representation or warranty. Without limiting
the foregoing, in any case in which a determination by Sterling is required to effectuate any
indemnification, Sterling shall direct, at the election of the Indemnified Party, that the
determination shall be made by independent counsel mutually agreed upon between Sterling and the
Indemnified Party.




     (b) Sterling shall use its commercially reasonable efforts (and the Company shall cooperate
prior to the Effective Time in these efforts) to maintain in effect for a period of three years
after the Effective Time the Company’s existing directors’ and officers’ liability insurance policy
(provided that Sterling may substitute therefor (i) policies of at least the same coverage and
amounts containing terms and conditions which are substantially no less advantageous in the
aggregate or (ii) with the consent of the Company given prior to the Effective Time, any other
policy) with respect to claims arising from facts or events which occurred prior to the Effective
Time and covering persons who are currently covered by such insurance; provided, however, that
Sterling shall not be obligated to make premium payments for such three-year period in respect of
such policy (or coverage replacing such policy) which exceed, for the portion related to the
Company’s directors and officers, 200% of the annual premium payments on the Company’s current
policy in effect as of the date of this Agreement (the “Maximum Amount”). If the amount of
the premiums necessary to maintain or procure such insurance coverage exceeds the Maximum Amount,
Sterling shall use its commercially reasonable efforts to maintain the most advantageous policies
of directors’ and officers’ liability insurance obtainable for a premium equal to the Maximum
Amount; provided, that in the event coverage would exceed the Maximum Amount, Sterling agrees to
provide the Company with prior notice and to provide the shareholders of the Company with the
opportunity to pay the excess of the premium amount over the Maximum Amount.



     (c) If Sterling shall consolidate with or merge into any other person and shall not be the
continuing or surviving person of such consolidation or merger or shall transfer all or
substantially all of its assets to any person, then and in each case, proper provision shall be
made so that the successors and assigns of Sterling shall assume the obligations set forth in this
Section 8.7.



     (d) The provisions of this Section 8.7 are intended to be for the benefit of, and shall be
enforceable by, each Indemnified Party, and his or her heirs and representatives.



     (e) Sterling shall pay all expenses, including reasonable attorneys’ fees, that may be
incurred by any Indemnified Party in successfully enforcing the indemnity and other obligations
provided for in this Section 8.7 if Sterling has been finally determined to have acted in bad faith
in refusing such indemnity. The Indemnified Party shall pay all expenses, including reasonable
attorneys’ fees, incurred by Sterling if the indemnification or other obligations provided in this
Section 8.7 are denied by a court of competent jurisdiction by final and nonappealable order.



- 40 -









 





     Section 8.8 Certain Change of Control Matters.



     From and after the date hereof, the Company shall take all action necessary so that none of
the execution and delivery of this Agreement, the consummation of the Merger or the consummation of
the other transactions contemplated hereby will either increase, or accelerate the payment of, any
benefits otherwise payable under any Company Benefit Plan.



     Section 8.9 Employee Benefits.



     As soon as practicable following the Effective Time, Sterling shall provide generally to
officers and employees of the Company and its Subsidiaries who are employed with Sterling or its
Subsidiaries following the Effective Time (“Retained Employees”) employee benefits, including
without limitation health and welfare benefits, life insurance and vacation arrangements, on terms
and conditions which when taken as a whole are substantially similar, in the good faith opinion of
Sterling, to those provided from time to time by Sterling and its Subsidiaries to their similarly
situated Retained Employees. In that regard, such Retained Employees of the Company shall be
credited under the employee benefit plans of Sterling for their years of “eligibility service” and
“vesting service” earned under the Company Benefit Plans to the extent such Company Benefit Plans
were comparable to the applicable Sterling plans as if such service had been earned with Sterling.
Such Retained Employees of the Company shall be credited with “benefit service” under the employee
benefit plans of Sterling only with respect to their period of employment with Sterling and its
Subsidiaries after the Effective Time in accordance with the terms and conditions of such employee
benefit plans. As of the Effective Time, the Retained Employees and their dependents, if any,
previously covered as of the Effective Time under the Company’s health insurance plan shall be
covered under Sterling’s health insurance plan and, to the extent possible under the terms of
Sterling’s then current health insurance plan, will not be subject to any pre-existing condition
limitations or exclusions, except those excluded under Sterling’s health insurance plan. The
Retained Employees shall not be required to satisfy the deductible and employee payments required
by Sterling’s comprehensive medical and/or dental plans for the calendar year of the Effective Time
to the extent of amounts previously credited during such calendar year under comparable plans
maintained by the Company. Nothing in this Agreement shall operate or be construed as requiring
Sterling or any of its Subsidiaries to continue to maintain or to terminate any Company Benefit
Plan or any employee benefit plan of Sterling or to limit in any way Sterling’s ability to amend
any such plan.



     Section 8.10 Certain Actions.



     No party shall take any action that would adversely affect or delay the ability of either
Sterling or the Company to obtain any necessary approvals of any Regulatory Authority or other
governmental authority required for the transactions contemplated hereby or to perform its
covenants and agreements under this Agreement.



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     Section 8.11 No Solicitation.



     (a) Neither the Company nor any of its Subsidiaries shall, nor shall it authorize or permit
any of its officers, directors or employees or any investment banker, financial advisor, attorney,
accountant or other representative retained by it or any of its Subsidiaries to initiate, solicit,
encourage (including by way of furnishing information), or take any other action to facilitate, any
inquiries or the making of any proposal which constitutes, or may reasonably be expected to lead
to, any Acquisition Proposal (as defined herein), or enter into or maintain or continue discussions
or negotiate with any person in furtherance of such inquiries or to obtain an Acquisition Proposal,
or agree to or endorse any Acquisition Proposal, and the Company shall notify Sterling orally
(within one business day) and in writing (as promptly as practicable), in reasonable detail, as to
any inquiries and proposals which it or any of its Subsidiaries or any of their respective
representatives or agents may receive; provided, however, that (i) the Company may furnish or cause
to be furnished confidential and non-public information concerning the Company and its businesses,
properties or assets to a third party (subject to execution by such third party of a
confidentiality agreement containing confidentiality provisions substantially similar to those of
the letter agreement entered into between the Company and Sterling dated March 23, 2005), (ii)
following the execution of such a confidentiality agreement, the Company may engage in discussions
or negotiations with a third party executing such an agreement, (iii) following receipt of an
Acquisition Proposal, the Company may take and disclose to its shareholders a position with respect
to such Acquisition Proposal, including, if such Acquisition Proposal is a tender offer, the
Company Board may take and disclose to the Company’s shareholders a position contemplated by Rule
14e-2 under the Exchange Act, and/or (iv) following receipt of an Acquisition Proposal, the Company
Board may withdraw or modify its recommendation referred to in Section 5.28, but in each case
referred to in the foregoing clauses (i) through (iv) only to the extent that the Company Board
shall conclude in good faith (on the basis of advice from outside counsel) that such action is
required in order for the Company Board to satisfy its fiduciary obligations under applicable law;
provided, further, that the Company Board shall not take any of the foregoing actions referred to
in clauses (i) through (iv) until after reasonable notice to and consultation with Sterling with
respect to such action and that the Company Board shall continue to consult with Sterling after
taking such action and, in addition, if the Company Board receives an Acquisition Proposal or any
request for confidential and non-public information or for access to the properties, books or
records of the Company or any Subsidiary for the purpose of making, or in connection with, an
Acquisition Proposal, then the Company shall promptly inform Sterling as provided above of the
terms and conditions of such proposal or request and the identity of the person making it. As used
herein, the term “Acquisition Proposal” means: (x) any proposal, inquiry or offer from any
person relating to, or any agreement to engage in, any acquisition or purchase of a significant
amount of the assets of the Company and its Subsidiaries on a consolidated basis, or any equity
interest in the Company or any of its Subsidiaries or any take-over bid or tender offer (including
an issuer bid or self-tender offer) or exchange offer, merger, plan of arrangement, reorganization,
consolidation, business combination, sale of substantially all of the assets, sale of securities,
recapitalization, liquidation, dissolution or similar transaction involving the Company or any of
its Subsidiaries (other than the transactions contemplated by this Agreement) or any other
transaction the consummation of which would or could reasonably be expected to impede, interfere
with,



- 42 -









 




prevent or materially delay the consummation of the Merger or which would or could reasonably
be expected to materially dilute the benefits to Sterling of the transactions contemplated hereby
or (y) any public announcement of, or written communication to the Company of, any proposal, plan
or intention to do any of the foregoing. The Company will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing. “Acquisition Transaction” means the
transaction(s) by which an Acquisition Proposal is consummated. Nothing in this Section 8.11 shall
(a) permit the Company to terminate this Agreement or (b) permit the Company or any of its
Subsidiaries to enter into any written agreement with respect to an Acquisition Proposal during the
term of this Agreement (it being agreed that during the term of this Agreement neither the Company
nor any of its Subsidiaries shall enter into any written agreement with any person that provides
for, or in any way facilitates, an Acquisition Proposal, other than a confidentiality agreement in
the form referred to above), it being understood that Section 10.1 sets forth the rights of the
Company to terminate this Agreement.




     (b) Without limiting the foregoing, it is understood that any violation of the restrictions
set forth in the first sentence of Section 8.11(a) by any employee, officer or director or
authorized employee, agent or representative of the Company or any of its Subsidiaries (including,
without limitation, any investment banker, financial advisor, attorney or accountant or other
representative retained by the Company or any of its Subsidiaries) or otherwise shall be deemed to
be a breach of Section 8.11(a) by the Company.



     Section 8.12 Termination Fee.



     To compensate Sterling for entering into this Agreement, taking actions to consummate the
transactions contemplated hereunder and incurring the costs and expenses related thereto and other
losses and expenses, including foregoing the pursuit of other opportunities by Sterling, the
Company and Sterling agree as follows:



     (a) Provided that neither Sterling nor Merger Sub shall be in material breach of its
obligations under this Agreement (which breach has not been cured promptly following receipt of
written notice thereof by the Company specifying in reasonable detail the basis of such alleged
breach), the Company shall pay to Sterling the sum of $300,000 if this Agreement is terminated (i)
by the Company under the provisions of Section 10.1(e), (ii) by either Sterling or the Company
under the provisions of Section 10.1(f) due to the failure of the Company’s shareholders to approve
and adopt this Agreement and the Merger, if at the time of such failure to so approve and adopt
this Agreement and the Merger there shall exist an Acquisition Proposal with respect to the Company
and, within nine months of the termination of this Agreement, the Company enters into a definitive
agreement with any third party with respect to any Acquisition Proposal with respect to the Company
or (iii) by Sterling under the provisions of Section 10.1(g). Sterling shall provide the Company
with an itemization of Expenses.



     (b) Any payment required by clauses (i) and (iii) of paragraph (a) of this Section 8.12 shall
become payable within two Business Days after termination of this Agreement or, in the case of
reimbursement to Sterling of the Expenses, promptly after (but in no event later than three
Business Days following) delivery to the Company of the itemization of Expenses. Any



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payment of the Termination Fee required by clause (ii) of paragraph (a) of this Section 8.12
shall become payable within two (2) Business Days of the Company’s entry into the definitive
agreement referred to in clause (ii) provided, however, that any payment of Expenses required by
such clause (ii) shall be payable upon the termination of this Agreement.



     (c) The Company acknowledges that the agreements contained in this Section 8.12 are an
integral part of the transactions contemplated in this Agreement, and that, without these
agreements, Sterling would not enter into this Agreement; accordingly, if the Company fails to
promptly pay the Termination Fee or Expenses when due, the Company shall in addition thereto pay to
Sterling all costs and expenses (including fees and disbursements of counsel) incurred in
collecting such Termination Fee or Expenses, as the case may be, together with interest on the
amount of the Termination Fee or Expenses (or any unpaid portion thereof) from the date such
payment was required to be made until the date such payment is received by Sterling at the prime
rate as reported in The Wall Street Journal as in effect from time to time during such period.



     Section 8.13 Accruals.



     At the request of Sterling, the Company shall, consistent with GAAP, immediately prior to the
Closing establish and take such reserves and accruals as Sterling shall reasonably request to
conform the Bank’s loan, accrual and reserve policies and practices to the policies of Sterling
Bank, provided, however, that no such adjustment shall constitute or be deemed to be a breach,
violation or failure to satisfy any representation, warranty, covenant, condition or other
provision or constitute grounds for termination of this Agreement. No adjustment shall require any
prior filing with or approval from any governmental agency or regulatory authority or violate any
law, rule or regulation applicable to the Company or any Subsidiary.



     Section 8.14 Certain Agreements.



     Neither the Company nor any Subsidiary (nor any of their agents or representatives) will waive
any provision of any confidentiality or standstill or similar agreement to which it is a party
without the prior written consent of Sterling, unless the Company Board or the board of directors
of such Subsidiary concludes in good faith (based upon advice from outside counsel) that waiving
such provision is necessary or appropriate in order for such board of directors to act in a manner
which is consistent with its fiduciary obligations under applicable law. The Company will
immediately advise Sterling of the termination or waiver of any confidentiality or standstill or
similar agreement to which it is a party by the other party or parties to such agreement.



     Section 8.15 Release Agreements.



     The Company shall use its best efforts, on behalf of Sterling and pursuant to the request of
Sterling, to cause each Key Company Official, each director of the Company and its Subsidiaries,
and each officer of the Company and its Subsidiaries with the title of vice president and above to
execute and deliver to Sterling a written release and waiver satisfactory in form and substance to
Sterling in its sole discretion and in substantially the form attached hereto as Annex E (the
“Release Agreements”) prior to the Effective Time, providing for, among other things, the
release of the Company, Bank, Sterling and the Surviving Corporation and their respective



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affiliates from any and all claims, known and unknown, that such Person has or may have
against any of the foregoing through the Effective Time.




     Section 8.16 Banker’s and Finder’s Fees.



     The Company shall pay all broker’s and finder’s fees to the parties identified on Section 5.22
of the Company Disclosure Memorandum, such payments to be paid prior to the Closing Date and in
such a manner so as not to constitute an expense or liability of Sterling which Sterling would be
required to include in any of its consolidated statements of income.



     Section 8.17 Notification; Updated Disclosure Memorandums.



     The Company shall give prompt notice to Sterling, and Sterling shall give prompt notice to the
Company, of (i) any representation or warranty made by it in this Agreement becoming untrue or
inaccurate in any respect, including, without limitation, as a result of any change in the Company
Disclosure Memorandum, or (ii) the failure by it to comply with or satisfy in any material respect
any covenant, condition or agreement to be complied with or satisfied by it under this Agreement;
provided, however, that no such notification shall affect the representations, warranties,
covenants or agreements of the parties or the conditions to the obligations of the parties under
this Agreement.



     Section 8.18 Closing Date.



     The Company, Sterling and Merger Sub shall each use commercially reasonable efforts to
consummate the Merger on or before December 31, 2005.



     Section 8.19 Transaction Payments.



     Sterling and the Company agree that the Company may make payments to employees of the Company
and its Subsidiaries in connection with the transactions contemplated by this Agreement in an
aggregate amount not exceeding $1,125,000. Such payments are set forth in Section 8.19 of the
Company Disclosure Memorandum. The payments contemplated by this Section 8.19 are in addition to
the ordinary course bonuses of the Company and its Subsidiaries described in Section 7.2(h).



ARTICLE IX

CONDITIONS TO MERGER




     Section 9.1 Conditions to Each Party’s Obligation to Effect the Merger.



     The respective obligations of each party to effect the Merger and the other transactions
contemplated hereby shall be subject to the fulfillment or waiver at or prior to the Effective Time
of the following conditions:



     (a) The Company shareholders shall have approved and adopted all matters relating to this
Agreement, the Merger and the transactions contemplated hereby and as required under the TBCA and
the Company’s Articles of Incorporation at the Company Shareholders’ Meeting.



- 45 -









 





     (b) This Agreement, the Merger, the Bank Merger and the other transactions contemplated hereby
shall have been approved by the Federal Reserve Board, the Commissioner, the FDIC and any other
Regulatory Authorities whose approval is required for consummation of the transactions contemplated
hereby (other than the Bank Merger) and all applicable waiting periods shall have expired. No such
approval or consent shall be conditioned or restricted in any manner (including requirements
relating to the disposition of assets) which in the good faith judgment of Sterling would so
adversely impact the economic or business benefits of the transactions contemplated by this
Agreement that, had such condition or restriction been known, it would not have entered into this
Agreement.



     (c) Neither Sterling, Merger Sub nor the Company shall be subject to any litigation which
seeks any order, decree or injunction of a court or agency of competent jurisdiction to enjoin or
prohibit the consummation of the Merger or the other transactions contemplated by this Agreement.



     Section 9.2 Conditions to Obligations of the Company to Effect the Merger.



     The obligations of the Company to effect the Merger shall be subject to the fulfillment or
waiver at or prior to the Effective Time of the following additional conditions:



     (a) Representations and Warranties. The representations and warranties of Sterling and Merger
Sub set forth in Article VI hereof shall be true and correct in all material respects as of the
date of this Agreement and as of the Effective Time (as though made on and as of the Effective Time
except to the extent such representations and warranties are by their express provisions made as of
a specified date) and the Company shall have received a certificate signed by the chairman,
president or other duly authorized officer of each of Sterling and Merger Sub to that effect.



     (b) Performance of Obligations. Each of Sterling and Merger Sub shall have performed in all
material respects all obligations required to be performed by it under this Agreement prior to the
Effective Time, and the Company shall have received a certificate signed by the chairman, president
or other duly authorized officer of each of Sterling and Merger Sub to that effect and as to the
absence of litigation as described in Section 9.1(c).



     (c) Opinion of Counsel. The Company shall have received an opinion of Locke Liddell & Sapp
LLP, counsel for Sterling, addressed to the Company and in form mutually acceptable to Locke
Liddell & Sapp LLP and counsel to the Company as to the validity of the approvals of the Merger by
the board of directors of Sterling and by the board of directors and shareholder of Merger Sub.



     (d) Release Agreements. The Company shall have received Releases of Claims substantially in
the form of Annex F executed and delivered in favor of the persons who have executed releases
pursuant to Sections 8.15 and 9.3(f) of this Agreement.



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     Section 9.3 Conditions to Obligations of Sterling and Merger Sub to Effect the Merger.



     The obligations of Sterling and Merger Sub to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following additional conditions:



     (a) Representations and Warranties. The representations and warranties of the Company set
forth in Article V hereof shall be true and correct in all material respects as of the date of this
Agreement and as of the Effective Time (as though made on and as of the Effective Time except to
the extent such representations and warranties are by their express provisions made as of a
specified date) and Sterling and Merger Sub shall have received a certificate signed by the
chairman, chief executive officer, president or other duly authorized officer of the Company to
that effect.



     (b) Performance of Obligations. The Company shall have performed in all material respects all
obligations required to be performed by it under this Agreement prior to the Effective Time, and
Sterling and Merger Sub shall have received a certificate signed by the chairman and chief
executive officer, president or other duly authorized officer of the Company to that effect and as
to the absence of litigation as described in Section 9.1(c).



     (c) Material Adverse Change. Prior to the Closing, there shall not have occurred any material
adverse change in the Condition of the Company and any of its Subsidiaries, taken as a whole, nor
shall any event have occurred which, with the lapse of time, may cause or create any material
adverse change in the Condition of the Company and any of its Subsidiaries, taken as a whole, in
the reasonable and good faith judgment of the Board of Directors of Sterling, and Sterling and
Merger Sub shall have received a certificate signed by the chairman, chief executive officer,
president or other duly authorized officer of the Company to that effect.



     (d) Opinion of Counsel. Sterling and Merger Sub shall have received an opinion of Larry
Temple, counsel for the Company, addressed to Sterling and Merger Sub and in form mutually
acceptable to Temple and counsel to Sterling as to the validity of the approvals of the Merger by
the Company Board and the shareholders of the Company.



     (e) Dissenting Shares. The number of Dissenting Shares shall not exceed fifteen percent (15%)
of the total issued and outstanding shares (as of the Effective Time) of Company Common Stock.



     (f) Release Agreements. Sterling shall have received Release Agreements, substantially in the
form of Annex E, executed and delivered by each of the Key Company Officials, each director of the
Company and its Subsidiaries, and each officer of the Company and its Subsidiaries with the title
of vice president and above; provided, however, that the Company shall only be required to use its
best efforts to obtain Releases of Claims from J. B. Belvin III, Sr, Renee Clarkson and Sharron
Kruse.



     (g) Company Options. All of the Company Options shall have been fully and completely
exercised or terminated and all Company Stock Plans shall have been terminated.



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     (h) Non-Compete Agreements. Sterling shall have received Non-Compete Agreements executed and
delivered by each of the Key Company Officials.



     (i) Broker’s and Finder’s Fees and Expenses. The Company shall have fully paid all of the
broker’s, finder’s and other fees and expenses in accordance with Section 8.16 and shall provide to
Sterling satisfactory evidence of the payment, in full, of all such fees and expenses.



     (j) Consents Obtained. All consents, authorizations and approvals required to be received
from, or given to, any Person (other than the matters described in Section 9.1(b)) by the Company
for the authorization, execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, including, without limitation, those identified in Section 5.4 of
the Company Disclosure Memorandum, shall have been obtained or made by the Company.



     (k) Mortage Company and Insurance Agency. The Company and PB Nevada shall have divested their
respective indirect and direct interests in the Insurance Agency and Parkvest BancGroup, LLC in a
manner reasonably acceptable to Sterling.



     (l) Escrow Agreement. Sterling shall have received the Escrow Agreement executed by the
parties thereto.



ARTICLE X

TERMINATION




     Section 10.1 Termination.



     Notwithstanding any other provision of this Agreement, and notwithstanding the approval of
this Agreement, the Merger and the transactions contemplated hereby by the shareholders of the
Company, this Agreement may be terminated and the Merger may be abandoned at any time prior to the
Effective Time:



     (a) by mutual consent of the Board of Directors of Sterling and the Company; or



     (b) by the Company Board or the Board of Directors of Sterling if (i) the Federal Reserve, the
FDIC or the Commissioner has denied approval of the Merger or the Bank Merger and such denial has
become final and nonappealable or has approved the Merger subject to conditions that in the
judgment of Sterling would restrict it or its Subsidiaries or Affiliates in their respective
spheres of operations and business activities after the Effective Time or (ii) the Effective Time
does not occur by December 31, 2005, provided, however, that the right to terminate this Agreement
under clause (ii) of this Section 10.1(b) shall not be available to any party whose failure to
fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the
Effective Time to occur prior to such date; or



     (c) by Sterling (if it is not in breach of any of its obligations hereunder) pursuant to
notice in the event of a breach or failure by the Company that would cause a failure of the



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conditions in Section 9.3, which breach or failure has not been, or cannot be, cured within 30
days after written notice of such breach is given to the Company; or




     (d) by the Company (if it is not in breach of any of its obligations hereunder) pursuant to
notice in the event of a breach or failure by Sterling that would cause a failure of the conditions
in Section 9.2, which breach or failure has not been, or cannot be, cured within 30 days after
written notice of such breach is given to Sterling; or



     (e) by the Company if (i) there shall not have been a breach of any covenant or agreement on
the part of the Company under this Agreement and (ii) prior to the Effective Time, the Company
shall have received a bona fide Acquisition Proposal and the Company Board determines in its good
faith judgment and in the exercise of its fiduciary duties, based as to legal matters on the
written opinion of independent legal counsel and as to financial matters on the written opinion of
an investment banking firm of national reputation, that such alternative Acquisition Proposal (if
consummated pursuant to its terms) would result in an alternative Acquisition Transaction that is
more favorable to the Company shareholders than the Merger (“Superior Proposal”) and that
the failure to terminate this Agreement and accept such alternative Acquisition Proposal would be
inconsistent with the proper exercise of such fiduciary duties; provided, however, that termination
under this clause (ii) shall not be deemed effective until payment of the Termination Fee and
Expenses required by Section 8.12; or



     (f) by either Sterling or the Company, if the Merger and this Agreement shall fail to receive
the requisite vote for approval and adoption at the Company Shareholders’ Meeting; or



     (g) by Sterling if the Company Board shall have (i) resolved to accept a Superior Proposal, or
(ii) recommended to the shareholders of the Company that they tender their shares in a tender or
exchange offer commenced by a third party or (iii) withdrawn or modified, in any manner that is
adverse to Sterling or Merger Sub, its recommendation or approval of this Agreement or the Merger
or recommended to the Company shareholders acceptance or approval of any alternative Acquisition
Proposal, or shall have resolved to do the foregoing;



     (h) by Sterling if the number of Dissenting Shares exceeds fifteen percent (15%) of the total
issued and outstanding shares (as of the Effective Time) of Company Common Stock; or



     (i) by Sterling if the factual substance of any warranties set forth in Section 5.24 is not
true and accurate irrespective of the knowledge or lack of knowledge of the Company and losses,
damages, environmental response costs, liabilities, fines, penalties, costs and expenses which
might arise there from could reasonably exceed $100,000.



     Section 10.2 Effect of Termination.



     In the event of the termination and abandonment of this Agreement pursuant to Section 10.1,
this Agreement shall become void and have no effect, except that (i) the provisions of this Section
10.2 and Section 8.1(e), Section 8.12 and Section 11.1 shall survive any such termination



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and abandonment; and (ii) no party shall be relieved or released from any liability arising
out of an intentional breach of any provision of this Agreement.




     Section 10.3 Non-Survival of Representations, Warranties and Covenants.



     Except for Article III and Article IV and Section 8.7, none of the respective representations,
warranties, obligations, covenants and agreements of the parties shall survive the Effective Time.



ARTICLE XI

GENERAL PROVISIONS




     Section 11.1 Expenses.



     Except as provided in Section 8.12, each party hereto shall bear its own expenses incident to
preparing, entering into and carrying out this Agreement and consummating the Merger.



     Section 11.2 Entire Agreement; Parties in Interest.



     Except as otherwise expressly provided herein, this Agreement contains the entire agreement
between the parties hereto with respect to the transactions contemplated hereunder and supersedes
all prior arrangements or understandings with respect thereto, written or oral. The terms and
conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective successors. Other than Section 8.7, nothing in this Agreement, expressed or
implied, is intended to confer upon any individual, corporation or other entity (including, without
limitation, any employee or shareholder of the Company), other than Sterling, Merger Sub and the
Company or their respective successors, any rights, remedies, obligations or liabilities under or
by reason of this Agreement.



     Section 11.3 Amendments.



     To the extent permitted by law, this Agreement may be amended by a subsequent writing signed
by each Sterling, Merger Sub and the Company; provided however, that the provisions hereof relating
to the amount of the Merger Consideration shall not be amended after the Company Shareholders’
Meeting without any requisite approval of the holders of the issued and outstanding shares of
Company Common Stock entitled to vote thereon.



     Section 11.4 Waivers.



     Prior to or at the Effective Time, each of Sterling, Merger Sub and the Company shall have the
right to waive any default in the performance of any term of this Agreement by the other, to waive
or extend the time for the compliance or fulfillment by any other party of any and all of such
other party’s obligations under this Agreement and to waive any or all of the conditions precedent
to its obligations under this Agreement, except any condition which, if not satisfied, would result
in the violation of any law or applicable governmental regulation.



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     Section 11.5 No Assignment.



     None of the parties hereto may assign any of its rights or delegate any of its obligations
under this Agreement to any other person or entity without the prior written consent of the other
parties to this Agreement; provided, however, that Sterling may assign its rights and obligations
or those of Merger Sub to any direct or indirect, wholly-owned subsidiary of Sterling, but no such
assignment shall relieve Sterling of its obligations hereunder if such assignee does not perform
such obligations.



     Section 11.6 Notices.



     All notices or other communications which are required or permitted hereunder shall be in
writing and sufficient if delivered by courier, by facsimile transmission, or by registered or
certified mail, postage prepaid to the persons at the addressees set forth below (or at such other
address as may be provided hereunder), and shall be deemed to have been delivered as of the date so
delivered:



	 	 	 
	Company:

	 	Prestonwood Bancshares, Inc.
	 

	 	4849 Greenville Ave.
	 

	 	Dallas, Texas 75206
	 

	 	Attention: Max W. Wells
	 

	 	Facsimile: (214) 363-7806
	 
	 	 
	With a copy to:

	 	Larry Temple
	 

	 	400 West 15th Street, Suite 1510
	 

	 	Austin, Texas 78701
	 

	 	Facsimile: (512) 477-4478
	 
	 	 
	Sterling:

	 	Sterling Bancshares, Inc.
	 

	 	2550 North Loop West, Suite 600
	 

	 	Houston, Texas 77092
	 

	 	Attention: J. Downey Bridgwater, President and Chief
	 

	 	                 Executive Officer
	 

	 	James W. Goolsby, Jr., General Counsel
	 

	 	Facsimile: (713) 849-5498
	 
	 	 
	With a copy to:

	 	Locke Liddell & Sapp LLP
	 

	 	3400 JPMorgan Chase Tower
	 

	 	600 Travis Street
	 

	 	Houston, Texas 77002
	 

	 	Attention: Annette L. Tripp
	 

	 	Facsimile: (713) 223-3717






- 51 -









 






     Section 11.7 Specific Performance.



     (a) The parties hereby acknowledge and agree that the failure of either party to fulfill any
of its covenants and agreements hereunder, including the failure to take all such actions as are
necessary on its part to cause the consummation of the Merger, will cause irreparable injury for
which damages, even if available, will not be an adequate remedy. Accordingly, each party hereby
consents to the issuance of injunctive relief by any court of competent jurisdiction to compel
performance of the other party’s obligations and to the granting by any such court of the remedy of
specific performance hereunder.



     (b) Notwithstanding clause (a) of this Section 11.7, if Sterling fails to consummate the
Merger due to its failure to obtain all regulatory approvals required for Sterling to acquire the
Company and such failure relates solely to facts or circumstances relating to Sterling and not
relating to the Company and its Subsidiaries, then the Company shall not be entitled to the remedy
of specific performance provided in clause (a) above (and hereby waives such remedy under the
circumstances specified in this Section 11.7(b)) and, in lieu thereof, (x) Sterling shall pay the
Company the sum of $300,000 (the “Company Termination Fee”) in complete release and
satisfaction of any claims (for specific performance or otherwise) which the Company may have as a
result of Sterling’s failure to consummate the Merger, and (y) Sterling shall terminate this
Agreement pursuant to Section 10.1(k). The parties agree that the agreement contained in this
Section 11.7(b) is an integral part of the transactions contemplated by this Agreement and that the
Company Termination Fee constitutes liquidated damages and not a penalty.



     (c) Any payment required by clause (b) of this Section 11.7 shall become payable within two
Business Days after termination of this Agreement by Sterling pursuant to Section 10.1(j). If
Sterling fails to promptly pay the Company Termination Fee when due, Sterling shall in addition
thereto pay to the Company all costs and expenses (including fees and disbursements of counsel)
incurred in collecting such Company Termination Fee, together with interest on the amount of the
Company Termination Fee (or any unpaid portion thereof) from the date such payment was required to
be made until the date such payment is received by the Company at the prime rate as reported in The
Wall Street Journal as in effect from time to time during such period.



     Section 11.8 Governing Law.



     This Agreement shall in all respects be governed by and construed in accordance with the laws
of the state of Texas applicable to contracts executed and to be performed in that state. All
actions and proceedings arising out of or relating to this Agreement shall be heard and determined
in any state or federal court sitting in Houston, Harris County, Texas.



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     Section 11.9 Counterparts.



     This Agreement may be executed in one or more counterparts, each of which shall be deemed to
constitute an original but all of which together shall constitute one and the same instrument.



     Section 11.10 Captions.



     The captions contained in this Agreement are for reference purposes only and are not part of
this Agreement.



     Section 11.11 Severability.



     If any term or other provision of this Agreement is invalid, illegal or incapable of being
enforced by any rule of Law, or public policy, all other conditions and provisions of this
Agreement shall nevertheless remain in full force and effect so long as the economic or legal
substance of the Merger is not affected in any manner materially adverse to any party. Upon such
determination that any term or other provision is invalid, illegal or incapable of being enforced,
the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in a mutually acceptable manner in order that
the Merger be consummated as originally contemplated to the fullest extent possible.



[Remainder of Page Intentionally Left Blank]




 

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     IN WITNESS WHEREOF, Sterling, Merger Sub and the Company have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the date first written
above.



	 	 	 	 	 	 	 
	 	 	STERLING BANCSHARES, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ J. Downey Bridgwater	 	 
	 

	 	 	 	 

J. Downey Bridgwater, President and Chief
	 	 
	 

	 	 	 	Executive Officer	 	 
	 
	 	 	 	 	 	 
	 	 	SBPB, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ James W. Goolsby
 

James W. Goolsby. President and Secretary
	 	 
	 
	 	 	 	 	 	 
	 	 	PRESTONWOOD BANCSHARES, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Max W. Wells
 

Name: Max W. Wells
	 	 
	 

	 	 	 	Title: President