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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K







|  |  |                                                                    
|- |  | -------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES    
|  |  | EXCHANGE ACT OF 1934                                               
|  |  | For the fiscal year ended: December 31, 2008                       
|  |  | OR                                                                 
| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|  |  | EXCHANGE ACT OF 1934                                               

For the transition period from
                     to

Commission file number: 0-20750





STERLING BANCSHARES, INC.

(Exact name of registrant as specified in its charter)







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

(713) 466-8300

(Registrants telephone number, including area code)

Securities registered pursuant to
Section 12(b) of the Act:



|                           |  |                                            
|-------------------------- |  | -------------------------------------------
|Common Stock, $1 par value |  | NASDAQ Global Select Market                
|(Title of each class)      |  | (Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes   ̈    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈

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

Large accelerated filer   ̈          Accelerated filer  x          Non-accelerated filer   ̈          Smaller reporting company   ̈

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

As of June 30, 2008, the last business day of the registrants most recently completed second
quarter fiscal quarter, aggregate market value of the registrants common stock held by non-affiliates of the registrant was $647,644,065 based on the closing sale price of $9.09 on such date as reported on the National Association of
Securities Dealers Automated Quotation System Global Select Market. For purposes of this calculation, affiliates are defined as all directors and executive officers.

As of February 25, 2009, there were 73,268,605 shares of the registrants common stock, $1.00 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE



|                                                                                  |  |                                      
|--------------------------------------------------------------------------------- |  | -------------------------------------
|Document                                                                          |  | Parts Into Which Incorporated        
|Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 2009. |  | Part III, Items 10, 11, 12, 13 and 14









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STERLING BANCSHARES, INC.

2008 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



|           |  |                                                                                                              |  |   
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|PART I.    |  |                                                                                                             
|           |  |                                                                                                             
|ITEM 1.    |  | Business                                                                                                     |  | 2 
|ITEM 1A.   |  | Risk Factors                                                                                                 |  | 13
|ITEM 1B.   |  | Unresolved Staff Comments                                                                                    |  | 16
|ITEM 2.    |  | Properties                                                                                                   |  | 16
|ITEM 3.    |  | Legal Proceedings                                                                                            |  | 17
|ITEM 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 17
|           | 
|PART II.   |  |                                                                                                             
|           |  |                                                                                                             
|ITEM 5.    |  | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |  | 18
|ITEM 6.    |  | Selected Financial Data                                                                                      |  | 19
|ITEM 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 20
|ITEM 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 45
|ITEM 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 45
|ITEM 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 45
|ITEM 9A.   |  | Controls and Procedures                                                                                      |  | 45
|ITEM 9B    |  | Other Information                                                                                            |  | 48
|           | 
|PART III.  |  |                                                                                                             
|           |  |                                                                                                             
|ITEM 10.   |  | Directors, Executive Officers and Corporate Governance                                                       |  | 48
|ITEM 11.   |  | Executive Compensation                                                                                       |  | 48
|ITEM 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 48
|ITEM 13.   |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 48
|ITEM 14.   |  | Principal Accounting Fees and Services                                                                       |  | 48
|           | 
|PART IV.   |  |                                                                                                             
|           |  |                                                                                                             
|ITEM 15.   |  | Exhibits, Financial Statement Schedules                                                                      |  | 49
|SIGNATURES |  | 55                                                                                                          



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PART I

ITEM 1. Business

The disclosures in this item are qualified by the section entitled Forward-Looking
Statements in Managements Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this report.

In this filing, we may refer to Sterling Bancshares, Inc., on a parent-only basis, as Sterling Bancshares and to Sterling Bank as the Bank. Sterling Bancshares, the Bank and other subsidiaries of both may be
collectively referred to as the Company, we, our, and us.

Overview

For more than 34 years, Sterling Bancshares, Inc. and Sterling Bank have served the banking needs of small to medium-sized businesses. We provide a broad array of
financial services to Texas businesses and consumers through 59 banking centers in the greater metropolitan areas of Houston, San Antonio, Dallas and Fort Worth, Texas.

Sterling Bancshares was incorporated under the laws of the State of Texas in 1980 and became the parent bank holding company of Sterling Bank in 1981. Sterling Bank was chartered in 1974 under the laws of the State of
Texas. Our principal executive offices are located at 2550 North Loop West, Suite 600, Houston, Texas, 77092 and our telephone number is (713) 466-8300.

At December 31, 2008, we had consolidated total assets of $5.1 billion, total loans of $3.8 billion, total deposits of $3.8 billion, and shareholders equity of $643 million. On February 8, 2008, the Company completed its
acquisition of ten branches located in the Dallas and Fort Worth, Texas areas from First Horizon National Corp. (First Horizon). The results of operations for this acquisition have been included in our financial results since
February 8, 2008.

Business Banking Strategy.We provide a broad range of financial products and services to all our constituencies
within the small to medium-sized business segments and consumers through our full service banking centers. Each banking center is managed by experienced banking professionals. These professionals exercise substantial authority over credit and
pricing decisions, subject to a concurrence process and loan committee approval for larger credits. This approach, coupled with continuity of service by the same staff members, enables us to create lasting relationships by meeting all of the banking
needs of our owner-operated business customers including the business owners, their employees and their families. This emphasis on relationship banking, together with a conservative approach to lending, are important factors in our
success and growth.

We provide a wide array of consumer and commercial banking services, including demand, savings and time deposits; commercial, real
estate and consumer loans; merchant credit card services; letters of credit; and cash and asset management services. In addition, we facilitate sales of brokerage, mutual fund, alternative financing and insurance products through third-party
vendors. Bank deposits are insured up to applicable limits by the Bank Insurance Fund (BIF) of the Federal Deposit Insurance Corporation (FDIC).

We offer an extensive scope of services which include our Treasury Management, specialized lending (including energy lending) and Private Client Services groups. We offer services to other financial institutions
through our correspondent banking group. The Banks Capital Markets group is involved in purchases of government guaranteed loans and wholesale real estate lending activities. These additional services enable the Bank to be a more comprehensive
financial resource dedicated to helping owner-operated businesses meet their financial services needs.

Our primary lending focus is commercial loans and
owner-occupied real estate loans to businesses with annual revenues of $100 million or less. Typically, our customers have financing requirements between $50 thousand and $5 million. At December 31, 2008, over 85% of our loans are commercial in
nature and 93% of our



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approximately 16,200 funded loans are less than $5 million in size. The Banks lending focus allows for greater diversity and granularity in the loan
portfolio, less competition from larger banks, and better pricing opportunities.

We maintain a strong community orientation by, among other things,
supporting the active participation of our officers and employees in local charitable, civic, school, religious and community development activities. Each banking center may also appoint selected customers to a business development board that
assists in introducing prospective customers to us and in developing or improving products and services to meet customer needs. Our lending and investing activities are funded primarily by core deposits. This stable source of funding comes to us by
developing strong banking relationships with customers through our broad product offering, competitive pricing, convenience and service. Approximately 30% of our total deposits are noninterest-bearing demand deposits.

Certain operational and support functions that are transparent to customers have been centralized. This has allowed us to improve consistency and cost efficiencies in
the delivery of products and services by each banking center. Centralized functions include services such as data processing, bookkeeping, accounting and finance, loan administration, loan review, compliance, treasury, risk management and internal
auditing. Credit policy and administration, strategic planning, marketing and other administrative services also are provided centrally. Our banking centers work closely with our operational and support functions to develop new products and services
and to introduce enhancements to existing products and services.

Company Growth Strategy

Our growth strategy has been concentrated on increasing our banking presence in major metropolitan areas in Texas. We have grown through a combination of internal growth,
acquisitions and the opening of new banking centers. Sterling was founded as a Houston bank, with a loan portfolio that was primarily secured by Houston real estate, but over the years we have been able to diversify our loan portfolio geographically
and expand our product offering. Over the years we have expanded into new markets such as Dallas, Fort Worth, San Antonio and the Texas Hill Country. We regularly evaluate opportunities to acquire banks and other financial services companies that
complement our existing business, expand our market coverage and enhance our product offerings.

Acquisitions have been important to our growth. As of
December 31, 2008, we have completed five acquisitions since 2004. We have accomplished these acquisitions without substantially altering our balance sheet in a way that would impact the long-term value of our franchise. We continue to seek
acquisitions as they become available and prove to be aligned with our business banking philosophy.

On February 8, 2008, we completed the acquisition
of ten banking centers located in the Dallas and Fort Worth, Texas areas from First Horizon National Corp. (First Horizon). In addition to these ten banking centers, we also acquired three pieces of land for possible future banking
center expansion. This transaction allowed us to achieve a critical presence in Dallas, Texas and gain entry into the growing Fort Worth, Texas market.

On
June 28, 2007, we completed the acquisition of MBM Advisors, an independent investment advisory and pension administration/consulting firm with approximately $700 million in assets under management. MBM Advisors specializes in providing
full-services in the design, administration, investment management, and communication of retirement plans with an office in Houston, Texas. The acquisition of MBM Advisors provides for increased opportunities to serve the owners of small and
medium-sized businesses and their employees while enhancing noninterest income.

On March 30, 2007, we completed the acquisition of Partners Bank.
Partners Bank was a privately held bank with approximately $191 million in assets and four banking centers in the Houston area. The Partners Bank acquisition enabled us to fill out our footprint in the Northeast Houston area.



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On September 29, 2006, we completed the acquisition of Kerrville, Texas-based BOTH, Inc. and its subsidiary bank,
Bank of the Hills (BOTH). BOTH had assets of approximately $328 million and five banking centers in the San Antonio/Kerrville area, which further enhanced our geographic position in this area of Texas.

On September 30, 2005, we completed the acquisition of Dallas, Texas-based Prestonwood Bancshares, Inc. (Prestonwood), and its subsidiary bank, The Oaks
Bank & Trust Company (The Oaks Bank). The Oaks Bank had assets of approximately $128 million and operated five banking centers in Dallas. This acquisition doubled our size in both assets and locations in the Dallas area.

For further information on these acquisitions, refer to Note 2, Acquisitions and Divestitures, in the Notes to Consolidated Financial Statements for more
information regarding recent acquisitions.

Competition

The financial services industry is highly competitive. There are a number of new banking competitors who have entered, or greatly expanded their presence in Texasparticularly in the Houston, San Antonio, Dallas and Fort Worth, Texas
markets in which we operate. We experience significant competition in attracting and retaining deposits and making loans, as well as in providing other financial services in each of our markets. Product pricing, customer convenience and service
capabilities, and breadth of product lines are significant competitive factors. We also experience significant competition in attracting and retaining qualified banking professionals.

Our most direct competition for loans comes from other banks. Our most direct competition for deposits comes from other banks, savings institutions and credit unions doing business in our markets. We also experience
competition from nonbanking sources, including mutual funds, corporate and governmental debt securities and other investment alternatives offered within and outside of our primary markets. Many of our competitors are much larger in total assets and
capitalization, have greater access to capital markets and offer a broader range of financial products and services.

Supervision and Regulation

Bank holding companies and banks are extensively regulated under federal and state laws. This regulation is intended primarily for the protection of
depositors and the deposit insurance fund and not for the benefit of shareholders. A summary description of the material laws and regulations that relate to our operations is included below. These descriptions are not intended to be complete and are
qualified in their entirety by reference to such statutes and regulations.

Regulatory Oversight.Sterling Bancshares and its second tier
holding company, Sterling Bancorporation, LLC, are bank holding companies registered under the Bank Holding Company Act of 1956, as amended (BHCA), and are subject to supervision and regulation by the Federal Reserve Board. Federal laws
subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and policies.
In addition, Texas law authorizes the Texas Department of Banking to supervise and regulate a holding company controlling a state bank. Further, our securities are registered with the Securities and Exchange Commission (SEC) under the
Securities Act of 1933, as amended (the Securities Act) and are subject to the reporting obligations pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act). As such, we are subject to the information,
proxy solicitation, insider trading and other requirements and restrictions of the Exchange Act. We are also subject to the provisions of the Sarbanes-Oxley Act of 2002, which primarily addresses corporate governance, internal controls and
disclosure matters.

Bank Holding Company Activities. Sterling Bank is a Texas-chartered banking association and
its deposits are insured, up to applicable limits, by the BIF of the FDIC. The Bank is subject to supervision and regulation by both the Texas Department of Banking and the FDIC, and may be subject to special restrictions, supervisory



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requirements and potential enforcement actions. The Bank is not a member of the Federal Reserve System; however, the Federal Reserve Board also has
supervisory authority that indirectly affects the Bank. The Bank is a member of the Federal Home Loan Bank and, therefore, is subject to compliance with its requirements.

Under the BHCA, Sterling Bancshares activities, as well as the activities of entities which it controls or owns 5% or more of the voting securities, are limited to banking, management and control of banks,
furnishing or performing services for its subsidiaries, or any other activity which the Federal Reserve Board determines to be incidental or closely related to banking or managing or controlling banks. The BHCA provides for certain limited
exceptions to this general prohibition. The Gramm-Leach-Bliley Act amended the BHCA and granted certain expanded powers to bank holding companies as discussed below.

The Gramm-Leach-Bliley Act authorizes affiliations between banking, securities and insurance firms and authorizes bank holding companies and state banks, if permitted by state law, to engage in a variety of new
financial activities. Bank holding companies may also elect to become financial holding companies if they meet certain requirements relating to capitalization and management and have filed a declaration with the Federal Reserve Board. Among the
permitted activities by bank holding companies are securities and insurance brokerage, securities underwriting, insurance underwriting and merchant banking. The Federal Reserve Board, in consultation with the Department of Treasury, may approve
additional financial activities. We have not filed an election to be a financial holding company.

Anti-Money Laundering; USA PATRIOT Act.
Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an
independent audit function. Financial institutions are prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and knowing your customer in their
dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions.
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 is intended to strengthen U.S. law enforcements and the intelligence communities ability to work cohesively to
combat terrorism on a variety of fronts. Its impact is significant and wide-ranging and has substantially increased the Companys anti-money laundering obligations. Failure of a financial institution to maintain and implement adequate programs
to combat these matters, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Safety and Soundness Standards.The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) expanded the Federal Reserve Boards authority to prohibit activities of bank holding companies
and their non-banking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations. Notably, FIRREA increased the amount of civil monetary penalties that the Federal Reserve Board can assess
for certain activities conducted on a knowing and reckless basis, if those activities cause a substantial loss to a depository institution. The penalties can be as high as $1 million per day. FIRREA also expanded the scope of individuals and
entities against which such penalties may be assessed.

The federal agencies that regulate banks and savings associations jointly issued guidelines for
safe and sound banking operations as required by Section 132 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The guidelines identify the fundamental standards that the four agencies follow when evaluating the
operational and managerial controls at insured institutions. An institutions performance will be evaluated against these standards during the regulators periodic on-site examinations.

Temporary Liquidity Guarantee Program.On November 21, 2008, the FDIC adopted the final rule for the implementation of the Temporary Liquidity
Guarantee Program (TLGP). The TLGP has two primary components: the Debt Guarantee Program, by which the FDIC will guarantee the payment of certain newly issued senior unsecured debt, and the Transaction Account Guarantee Program, by
which the FDIC will guarantee in full certain noninterest-bearing transaction accounts. The Debt Guarantee Program temporarily



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guarantees all newly issued senior unsecured debt up to prescribed limits issued by participating entities on or after October 14, 2008, through and
including June 30, 2009. The guarantee would not extend beyond June 30, 2012. Senior unsecured debt includes, without limitation, federal funds purchased, promissory notes, commercial paper, unsubordinated unsecured notes, certificates of
deposit standing to the credit of a bank, bank deposits in an international banking facility (IBF) of an insured depository institution, and Eurodollar deposits standing to the credit of a bank. The Transaction Account Guarantee Program
provides full FDIC deposit insurance coverage for noninterest-bearing transaction deposit accounts, Negotiable Order of Withdrawal (NOW) accounts paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts held at
participating FDIC-insured institutions through December 31, 2009. Coverage under the TLGP was available for the first 30 days without charge. The fee assessment for coverage of senior unsecured debt ranges from 50 basis points to
100 basis points per annum, depending on the initial maturity of the debt. The fee assessment for deposit insurance coverage is 10 basis points per quarter on amounts in covered accounts exceeding $250,000. The Company has elected to
participate in both guarantee programs.

Dividend Restrictions. It is the policy of the Federal Reserve Board
that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organizations expected future needs and financial
condition. This policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding companys ability to serve as a source of strength to its banking subsidiaries. Under Federal Reserve
Board policy, a bank holding company is expected to act as a source of financial strength to each of its banking subsidiaries and commit resources to their support. Such support may be required at times when, absent this Federal Reserve Board
policy, a bank holding company may not be inclined to provide it.

On December 12, 2008, as part of the Troubled Asset Relief Program
(TARP) Capital Purchase Program, the Company entered into a Securities Purchase Agreement (the Purchase Agreement) with the United States Department of the Treasury (the U.S. Treasury). Under the Purchase
Agreement, the Company is not permitted to increase common stock dividends above the amount of the last quarterly cash dividend per share declared prior to October 14, 2008 without the initial approval of the U.S. Treasury until the third
anniversary of the investment unless all of the Series J Preferred Stock purchased by the U.S. Treasury has been redeemed or transferred.

Capital
Adequacy Requirements.The Federal Reserve Board monitors the capital adequacy of bank holding companies using risk-based capital adequacy guidelines to evaluate their capital adequacy. The Bank is subject to similar requirements promulgated
by the FDIC and the Texas Department of Banking. Under the guidelines, specific categories of assets and certain off-balance sheet assets such as letters of credit are assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding asset balances to determine a risk-weighted asset base. In addition, the guidelines define each of the capital components. Total capital is defined as the sum of core
capital elements (Tier 1) and supplemental capital elements (Tier 2), with Tier 2 being limited to 100% of Tier 1. For bank holding companies, Tier 1 capital includes,
with certain restrictions, common shareholders equity, noncumulative perpetual preferred stock and related surplus, a limited amount of cumulative perpetual preferred stock, and a limited amount of cumulative perpetual stock and minority
interest in equity accounts of consolidated subsidiaries, less goodwill and other intangible assets. Tier 2 capital includes, with certain limitations, perpetual preferred stock not meeting the Tier 1 definition, mandatory
convertible securities, subordinated debt, and allowances for credit losses, less certain required deductions. The guidelines require a minimum ratio of total capital-to-risk-weighted assets of 8.0% (of which at least 4.0% is required to be
comprised of Tier 1 capital elements).

A minimum Tier 1 leverage ratio is used as an additional tool to evaluate the capital
adequacy of banks and bank holding companies. Tier 1 leverage ratio is defined to be Tier 1 capital divided by its average total consolidated assets. Certain highly rated institutions may maintain a minimum leverage ratio of
3.0% Tier 1 capital to total average assets while others are required to maintain a leverage ratio of 4.0% to 5.0%. The Texas Department of Bankings policy requires state chartered banks to maintain a leverage ratio of at least 6%.



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Corrective Measures for Capital Deficiencies. The federal banking regulators
are required to take prompt corrective action with respect to capital-deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A well capitalized bank has a total risk-based capital ratio of 10.0% or higher; a Tier 1 risk-based
capital ratio of 6.0% or higher; a leverage ratio of 5.0% or higher; and is not subject to any written agreement, order or directive requiring it to maintain a specific capital ratio for any capital measure. An adequately capitalized
bank has a total risk-based capital ratio of 8.0% or higher; a Tier 1 risk-based capital ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a composite 1 in its most recent examination report and is not
experiencing significant growth). A bank is undercapitalized if it fails to meet any one of the ratios required to be adequately capitalized. The Company believes that as of December 31, 2008, the Bank was well
capitalized based on the guidelines and ratios for purposes of the FDICs prompt corrective action regulations.

In addition to requiring
undercapitalized institutions to submit a capital restoration plan, agency regulations contain broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisition, branch establishment and expansion into new
lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be
undercapitalized after any such distribution or payment.

As an institutions capital decreases, the FDICs enforcement powers become more
severe. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions. The FDIC has only very
limited discretion in dealing with a critically undercapitalized institution and is virtually required to appoint a receiver or conservator.

Banks with
risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a
hearing in the event the institution has no tangible capital.

Imposition of Liability for Undercapitalized Subsidiaries.A bank holding
company that fails to meet the applicable risk-based capital standards will be at a disadvantage. For example, Federal Reserve Board policy discourages the payment of dividends by a bank holding company from borrowed funds as well as payments that
would adversely affect capital adequacy. Failure to meet the capital guidelines may result in the issuance of supervisory or enforcement actions by the Federal Reserve Board. FDICIA requires bank regulators to take prompt corrective
action to resolve problems associated with insured depository institutions whose capital declines below certain levels.

Acquisitions by Bank
Holding Companies.The BHCA requires a bank holding company to obtain the prior approval of the Federal Reserve Board before it acquires all or substantially all of the assets of any bank, or ownership or control of more than 5% of any class
of voting shares of any bank.

Community Reinvestment Act.The Community Reinvestment Act of 1977 (CRA) and the regulations
promulgated by the FDIC to implement the CRA are intended to ensure that banks meet the credit needs of their service area, including low and moderate income communities and individuals, consistent with safe and sound banking practices. The CRA
regulations also require the banking regulatory authorities to evaluate a banks record in meeting the needs of its service area when considering applications to establish new offices or consummate any merger or acquisition transaction. Under
FIRREA, the federal banking agencies are required to rate each insured institutions performance under CRA and to make such information publicly available. In the case of an acquisition by a bank holding company, the CRA performance records of
the banks involved in the transaction are reviewed as part of the processing of the acquisition application. A CRA rating other than outstanding or satisfactory can substantially delay or block a transaction. Based upon our
most recent CRA examination, the Bank has an outstanding CRA rating.



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Permissible Activities for State-Chartered Institutions.The Texas Constitution provides that a
Texas-chartered bank has the same rights and privileges that are granted to national banks domiciled in Texas. The Texas Finance Code also contains provisions that expand the powers of Texas-chartered banks. Under these provisions, a Texas-chartered
bank may, with limited exceptions, perform any act, own any property, and offer any product or service that is permissible for any depository institution organized under federal law or the laws of any state, unless (i) prohibited by the FDICIA,
or (ii) the Commissioner of the Texas Banking Department finds that the activity would adversely affect the safety and soundness of the bank. However, FDICIA provides that no state bank or subsidiary thereof may engage as principal in any
activity not permitted for national banks, unless the institution complies with applicable capital requirements and the FDIC determines that the activity poses no significant risk to the Bank Insurance Fund.

Branching.Texas law provides that a Texas-chartered bank can establish a branch anywhere in Texas provided that the branch is approved in advance by the
Commissioner of the Texas Department of Banking. The branch must also be approved by the FDIC, which considers a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community,
and consistency with corporate powers.

Restrictions on Transactions with Affiliates and Insiders. Transactions between the Bank and its
nonbanking affiliates, including Sterling Bancshares, are subject to Section 23A of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by, or is under common control with the bank. In general,
Section 23A imposes a limit on the amount of such transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties which are collateralized by the securities or
obligations of the Bank or its nonbanking affiliates.

Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which
generally requires that certain other transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at that time for comparable transactions with or involving other
non-affiliated persons.

The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively, the
insiders) contained in the Federal Reserve Act and Regulation O apply to all insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met
before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institutions total unimpaired capital and surplus, and the FDIC may determine that a
lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions.

Brokered Deposit Restrictions. FIRREA and FDICIA generally limit institutions that are not well capitalized from accepting brokered deposits. In general, undercapitalized institutions may not solicit, accept or renew brokered
deposits. Adequately capitalized institutions may not solicit, accept or renew brokered deposits unless they obtain a waiver from the FDIC. Even in that event, the institution must comply with rate limitations imposed by the Federal Deposit
Insurance Act.

Restrictions on Subsidiary Banks.Dividends paid by the Bank provided substantially all of Sterling Bancshares cash
flow during 2008 and will continue to do so in the foreseeable future. Under federal law, a bank may not pay a dividend that results in an undercapitalized situation. At December 31, 2008, the aggregate amount of dividends, which
legally could be paid without prior approval of various regulatory agencies, totaled approximately $189 million.

Other requirements under Texas law
affecting the operation of subsidiary banks include requirements relating to maintenance of reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon and limitations
relating to investments and other activities.



8



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##### Index to Financial Statements

Examinations.The FDIC periodically examines and evaluates insured banks. FDIC examinations are conducted
annually. The Texas Banking Commissioner also conducts examinations annually, unless additional examinations are deemed necessary to safeguard the interests of shareholders, depositors and creditors.

Audit Reports.The Company must submit annual audit reports prepared by an independent registered public accounting firm to federal and state regulators.
In some instances, the audit report of the institutions holding company can be used to satisfy this requirement. In addition, financial statements prepared in accordance with generally accepted accounting principles in the United States of
America, managements certifications concerning responsibility for the financial statements, internal controls and compliance with legal requirements designated by the FDIC, and an attestation by the independent registered public accounting
firm relating to the internal controls must be submitted. For institutions with total assets of more than $3 billion, an independent registered public accounting firm may be required to review quarterly financial statements. FDICIA requires that
independent audit committees be formed, consisting solely of outside directors. Committees must include members with experience in banking or financial management, must have access to outside counsel, and must not include representatives of large
customers.

Deposit Insurance Assessments.The Bank must pay assessments to the FDIC for federal deposit insurance protection. The FDIC has
adopted a risk-based assessment system as required by FDICIA. Under this system, insured depository institutions pay insurance premiums at rates based on their risk classification. Institutions assigned to higher-risk classifications pay assessments
at higher rates than institutions that pose a lower risk. An institutions risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators. In addition, the FDIC can
impose special assessments in certain instances. The FDIC may adjust the assessment rate schedule twice a year without seeking prior public comment, but only within a range of five cents per $100 above or below the premium schedule adopted. The FDIC
can make changes in the rate schedule outside the five-cent range above or below the current schedule only after a full rulemaking with opportunity for public comment.

Expanded Enforcement Authority.Federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal
penalties, and appoint a conservator or receiver. Failure to comply with applicable laws, regulations, and supervisory agreements could subject the Bank and its affiliates, as well as officers and directors, to administrative sanctions and
potentially substantial civil penalties.

Effect on Economic Environment.The policies of regulatory authorities, including the monetary
policy of the Federal Reserve Board, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve Board to affect the money supply are open market operations in
U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank
loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits. Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected
to continue to do so in the future.

Consumer Laws and Regulations. Banks are also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. Among the more prominent of such laws and regulations are the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Housing Act and consumer privacy protection provisions of the Gramm-Leach-Bliley Act. These laws and regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with consumers. With respect to consumer privacy, the Gramm-Leach-Bliley Act generally prohibits disclosure of customer information to non-affiliated third parties unless the customer has been given the
opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually.



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##### Index to Financial Statements

TARP Capital Purchase Program.On December 12, 2008, as part of the TARP Capital Purchase Program, the
Company issued the U.S. Treasury preferred shares and a ten-year warrant (the Warrant) to purchase up to 2.6 million shares of the Companys common stock for an aggregate purchase price of $125 million.

Cumulative dividends on the Preferred Shares will accrue on the liquidation preference at a rate of 5% per year for the first five years, and at a
rate of 9% per year thereafter, but will be paid only if declared by the Companys Board of Directors. The Preferred Shares have no maturity date and rank senior to the Common Stock with respect to the payment of dividends and distributions and
amounts payable upon liquidation, dissolution and winding up of the Company. The Preferred Shares are redeemable at the option of the Company at 100% of their liquidation preference, provided that the Preferred Shares may be redeemed prior to the
first dividend payment date falling after December 12, 2011 only if (i) the Company has raised aggregate gross proceeds in one or more Qualified Equity Offerings in excess of 25% of the aggregate purchase price and (ii) the aggregate redemption
price does not exceed the aggregate net proceeds from such Qualified Equity Offerings. Qualified Equity Offering is defined as the sale for cash by the Company after the Closing Date of shares of Preferred Stock or Common Stock that
qualify as Tier I capital of the Company under the capital guidelines of the Companys appropriate federal banking agency. Notwithstanding any provision in the Purchase Agreement, the recently enacted American Recovery and Reinvestment Act of
2009 (the ARRA) permits the Company, with the approval of the Secretary of the U.S. Treasury, to redeem the Preferred Shares without regard to whether the Company has raised gross proceeds from a Qualified Equity Offering or any other
source and without regard to any waiting period. In the event the Company would redeem the Preferred Shares, the U.S. Treasury must liquidate the Warrant at the current market price. Unless both the holder and the Company agree otherwise, the
exercise of the Warrant will be a net exercise.

The U.S. Treasury may only transfer or exercise an aggregate of one-half of the Warrant prior to the
earlier of (i) the date on which the Company has received aggregate gross proceeds of not less than $125 million from one or more Qualified Equity Offerings and (ii) December 31, 2009.

The Purchase Agreement, contains limitations on the payment of dividends on the Common Stock and on the Companys ability to repurchase Common Stock and repurchase
or redeem trust preferred securities, and subjects the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (the EESA). As a condition to the closing of the
transaction, each of the Companys senior executive officers (the Senior Executive Officers), (i) executed a waiver (the Waiver) voluntarily waiving any claim against the U.S. Treasury or the Company for any changes to
such Senior Executive Officers compensation or benefits that are required to comply with the regulation issued by the U.S. Treasury under the TARP Capital Purchase Program and acknowledging that the regulation may require modification of the
compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements (including so-called golden parachute agreements) (collectively, Benefit Plans) as they relate to the period the U.S. Treasury
holds any equity or debt securities of the Company acquired through the TARP Capital Purchase Program; and (ii) entered into a senior executive officer agreement (Senior Executive Officer Agreement) with the Company amending the Benefit
Plans with respect to such Senior Executive Officer as may be necessary, during the period that the U.S. Treasury owns any debt or equity securities of the Company acquired pursuant to the Purchase Agreement or the Warrant, to comply with
Section 111(b) of the EESA.

The Purchase Agreement and all related documents may be amended unilaterally by the U.S. Treasury to the extent required
to comply with any changes in applicable federal statutes after the execution thereof.

On October 20, 2008, the U.S. Treasury issued an interim final rule
(the Initial Rule) which requires that the compensation committee of every TARP Capital Purchase Program participant must promptly after, and in no event more than 90 days after, completion of the TARP Capital Purchase Program
investment, and annually thereafter, review with senior risk officers the compensation arrangements of Senior Executive Officers to ensure that such arrangements do not encourage Senior Executive Officers to take unnecessary and excessive risks and
to discuss and review the relationship between risk management policies and Senior Executive Officer incentive



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##### Index to Financial Statements

compensation. The compensation committee must certify that it has completed the reviews of the compensation set forth above and provide such certification in
the proxy statement of the company. In addition, a TARP Capital Purchase Program participant must: require that Senior Executive Officer bonus and incentive compensation paid during the period that the U.S. Treasury holds an equity or debt position
acquired under the TARP Capital Purchase Program be subject to recovery or clawback by the financial institution if the payments were based on materially inaccurate financial statements or any other materially inaccurate performance
metric criteria; prohibit any golden parachute payments within the meaning of section 111(b) of EESA; and forgo income tax deductions for compensation deductions for payments to Senior Executive Officers that would be prohibited by
section 162(m)(5) of the Internal Revenue Code if that section applied to the TARP Capital Purchase Program participant. Code section 162(m)(5) generally limits to $500 thousand the deduction for compensation paid to certain executives.

On January 16, 2009, the U.S. Treasury released an interim final rule (the Proposed Rule) to provide additional requirements and guidance for all
institutions receiving TARP funds under the TARP Capital Purchase Program. The Proposed Rule amends and supplements the Initial Rule, which remains in effect. The Proposed Rule requires new CEO certifications as to compliance with the executive
compensation limitations and provides a few clarifications to the Initial Rule. The Proposed Rule will be effective upon publication in the Federal Register. However, it is not known at this point when the Proposed Rule will be effective. The final
form of the Proposed Rule will probably be revised to reflect the legislation described in the following paragraph.

On February 17, 2009, the ARRA,
amended the executive compensation provisions found in section 111 of EESA. Under the ARRA, each TARP Capital Purchase Program recipient will be subject to standards established by the Secretary of the U.S. Treasury and the provisions of section
162(m)(5) of the Internal Revenue code, which generally limit deductions for Senior Executive Officer compensations to $500 thousand. The standards established by the Secretary of the U.S. Treasury must include the following restrictions that apply
during the period in which any obligation arising from financial assistance provided under the TARP Capital Purchase Program remains outstanding: (i) limits on compensation that exclude incentives for Senior Executive Officers of TARP Capital
Purchase Program recipients to take unnecessary and excessive risks that threaten the value of such recipient; (ii) a provision for recovery of any bonus, retention award or incentive compensation paid to a Senior Executive Officer and any of the
next 20 most highly-compensated employees of the TARP Capital Purchase Program recipient based on statements of earnings, revenues, gains or other criteria later found to be materially inaccurate; (iii) a prohibition on such TARP Capital Purchase
Program recipient from paying any golden parachute payment to a Senior Executive Officer and any of the next five most highly-compensated employees of the TARP Capital Purchase Program recipient; (iv) a prohibition on such TARP Capital
Purchase Program recipient paying or accruing any bonus, retention award or incentive compensation, except for the payment of long-term restricted stock that does not fully vest during the period in which any financial assistance provided to the
TARP recipient remains outstanding, has a value that is not greater than 1/3 the total annual compensation of the employee receiving the stock, and is subject to such other terms as determined by the Secretary of the U.S. Treasury; (v) a prohibition
on any compensation that would encourage the manipulation of the reported earnings of the TARP Capital Purchase Program recipient to enhance compensation of any employee and (vi) a requirement for the establishment of a board compensation committee
that meets the requirements set forth below. The restrictions in (iv) above apply to such numbers of officers and employees of the TARP Capital Purchase Program recipient depending on the amount of financial assistance received. In the case of
the Company, the restriction would apply to the Senior Executive Officers. This restriction does not apply to any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009.

Under the ARRA, the Company must establish a board compensation committee comprised entirely of independent directors. The Companys Human Resources Programs
Committee, which acts as a compensation committee, complies with this requirement. Such committee must meet at least semi-annually to discuss and evaluate employee compensation plans in light of any proposed risk to the TARP Capital Purchase Program
recipient from such plans. The Board must develop a company-wide policy regarding excessive or luxury



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##### Index to Financial Statements

expenditures, including expenditures on entertainment or events, office and facility renovations, aviation and other transportation services or other defined
activities or events.

Any proxy statement distributed during the period in which any obligations arising from financial assistance provided to the TARP
Capital Purchase Program recipient remains outstanding shall permit a separate shareholder vote to approve the compensation of executives, as disclosed pursuant to the rules of the SEC. The shareholder vote shall not be binding on the Board and may
not be construed as overruling a decision by the Board, nor create or imply any additional fiduciary duty on the Board, nor shall such vote be construed to restrict or limit the ability of shareholders to make proposals for inclusion in the proxy
materials related to executive compensation.

The Secretary of the U.S. Treasury shall review the bonus, retention awards and other compensation paid to
the Senior Executive Officers and the next 20 most highly compensated employees of each entity receiving TARP Capital Purchase Program assistance before the date of the ARRA to determine if such payments were inconsistent with the purposes of the
TARP Capital Purchase Program or otherwise contrary to the public interest. If the Secretary of the U.S. Treasury determines that payments are inconsistent with the purposes of the TARP Capital Purchase Program or are contrary to the public
interest, the Secretary of the U.S. Treasury shall negotiate with the TARP Capital Purchase Program recipient and the employee for reimbursement to the Federal Government with respect to compensation and bonuses.

Employees

The Company had 1,116 full time equivalent employees as
of December 31, 2008. None of our employees are represented by collective bargaining agreements and the Company considers its employee relations to be good.

Available Information

Under the Exchange Act, Sterling Bancshares is required to file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read a copy of any document we file with the SEC at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information about the Public Reference Room. The SEC maintains a web site at http://www.sec.gov that contains reports, proxy and information statements, and other information we file electronically with the SEC.

We make available, free of charge through our web site, our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable after
such reports are filed with the SEC. Additionally, we have adopted and posted on our web site a Code of Ethics for Senior Financial Officers that applies to our principal executive officer, principal financial and accounting officer. Our web site
also includes the charters for our Audit Committee and Corporate Governance and Nominating Committee. The address for our web site is http://www.banksterling.com. The information contained on or accessible from our website does not constitute a part
of this report and is not incorporated by reference herein. We will also provide a printed copy of any of these aforementioned documents free of charge upon request.



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##### Index to Financial Statements

ITEM 1A. Risk Factors

Risks, Uncertainties and Other Factors That May Affect Our Future Results

Our profitability depends
significantly on geographic economic conditions.

Our success depends primarily on the general economic conditions of the nation, the Houston
metropolitan area and, to a lesser extent, that of the San Antonio, Dallas and Fort Worth, Texas metropolitan areas. Unlike larger banks that are more geographically diversified, we provide banking and financial services to customers primarily in
the market areas in which we operate. The local economic conditions of these areas have a significant impact on our commercial, real estate and construction loans, the ability of the borrowers to repay these loans and the value of the collateral
securing these loans. A significant decline in general economic conditions, such as inflation, recession, acts of terrorism, an outbreak of hostilities, unemployment and other factors beyond our control will impact these local economic conditions
and will negatively affect the financial results of our banking operations. In addition, Houston remains largely dependent on the energy industry. A downturn in the energy industry and energy-related business could adversely affect our results of
operations and financial condition.

We rely on an owner-operated business market.

Our business development and marketing strategy primarily targets the banking and financial needs of owner-operated businesses with credit needs of under $5 million.
These owner-operated businesses represent a major sector of the Houston and national economies. If general economic conditions negatively impact this economic sector in the metropolitan areas in which we operate, our results of operations and
financial condition will be significantly affected. This lending focuses on providing commercial and owner-occupied real estate loans to businesses. Because our loan portfolio contains a significant number of commercial and industrial, construction
and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings
from these loans, an increase in the provision for possible loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.

If our allowance for credit losses is not sufficient to cover actual loan losses, our earnings could decrease.

Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure
repayment. We may experience significant credit losses that could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of
our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the size of the allowance, we rely on our experience and our evaluation of economic conditions. If our
assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Significant
additions to our allowance would materially decrease our net income.

In addition, federal and state regulators periodically review our allowance for
credit losses and may require us to increase our provision for credit losses or recognize further loan charge-offs, based on judgments different than those we make. Any increase in our allowance or charge-offs as required by these regulatory
agencies could have a negative affect on us.

Fluctuations in interest rates could reduce our profitability.

We realize income primarily from the difference between interest earned on loans and securities and the interest paid on deposits and borrowings. We expect that we will
periodically experience gaps in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning
assets, or vice versa. In either event, if market interest rates should move contrary to our position, this gap will work against us, and our earnings may be negatively affected.



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##### Index to Financial Statements

We are unable to predict fluctuations of market interest rates, which are affected by the following factors:



| |  |  | general economic conditions including inflation, recession, or a rise in unemployment;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | policies of various governmental and regulatory agencies;
| | - |  | ---------------------------------------------------------



| |  |  | tightening money supply;
| | - |  | ------------------------



| |  |  | international disorder; and
| | - |  | ---------------------------



| |  |  | instability in domestic and foreign financial markets.
| | - |  | ------------------------------------------------------

Our asset/liability management strategy, which is designed to address the risk from changes in market interest rates and the shape of the yield curve, may not prevent changes in interest rates from having a material adverse effect on our
results of operations and financial condition.

Our investment securities portfolio is subject to credit risk, market risk, and illiquidity.

Our investment securities portfolio has risks beyond our control that can significantly influence the fair value of the securities it contains. These
factors include, but are not limited to, rating agency downgrades of the securities, defaults of the issuers of the securities, lack of market pricing of the securities, and continued instability in the credit markets. The current lack of market
activity and the illiquidity of the securities have, in certain circumstances, required us to base our fair market valuation on unobservable inputs. Any change in current accounting principles or interpretations of these principles could impact our
assessment of fair value and thus our determination of other than temporary impairment. If these securities are determined to be other than temporarily impaired, we would be required to write down the securities, which could adversely affect our
earnings and regulatory capital ratios.

We are subject to liquidity risks.

Market conditions could negatively affect the level or cost of liquidity available to us, which would affect our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual
obligations, and fund asset growth and new business transactions at a reasonable cost, in a timely manner, and without adverse consequences. Core deposits are Sterling Banks primary source of funding. A significant decrease in Sterling
Banks core deposits, an inability to obtain alternative funding to the core deposits, or a substantial, unexpected, or prolonged change in the level or cost of liquidity could have a negative effect on our business and financial condition.

Competition with other financial institutions could adversely affect our profitability.

We face vigorous competition from banks and other financial institutions, including savings institutions, finance companies and credit unions. A number of these banks and
other financial institutions have substantially greater resources and lending limits, larger branch systems and a wider array of banking services. To a limited extent, we also compete with other providers of financial services, such as money market
mutual funds, brokerage firms, consumer finance companies and insurance companies. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our results of operations and financial condition.
Additionally, we face competition primarily from other banks in attracting, developing and retaining qualified banking professionals.

We may not be
able to maintain our historical growth rate which may adversely impact our results of operations and financial condition.

We have initiated
internal growth programs, completed various acquisitions and opened additional banking centers in the past few years. We may not be able to sustain our historical rate of growth or may not even be able to grow at all. We may not be able to obtain
the financing necessary to fund additional growth and may not be able to find suitable candidates for acquisition. Various factors, such as economic conditions and competition,



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##### Index to Financial Statements

may impede or prohibit the opening of new banking centers. Further, our inability to attract and retain experienced bankers may adversely affect our internal
growth. A significant decrease in our historical rate of growth may adversely impact our results of operations and financial condition.

We may be
unable to complete acquisitions, and once complete, may not be able to integrate our acquisitions successfully.

Our growth strategy includes our
desire to acquire other financial institutions. We may not be able to complete any future acquisitions and, if completed, we may not be able to successfully integrate the operations, management, products and services of the entities we acquire. We
may not realize expected cost savings or make revenue enhancements. Following each acquisition, we must expend substantial managerial, operating, financial and other resources to integrate these entities. In particular, we may be required to install
and standardize adequate operational and control systems, deploy or modify equipment, implement marketing efforts in new as well as existing locations and employ and maintain qualified personnel. Our failure to successfully integrate the entities we
acquire into our existing operations may adversely affect our financial condition and results of operations.

We operate in a highly regulated
environment and may be adversely affected by changes in federal and local laws and regulations.

We are subject to extensive regulation, supervision
and examination by federal and state banking authorities. Any change in applicable regulations or federal or state legislation could have a substantial impact on us and our operations. Additional legislation and regulations may be enacted or adopted
in the future that could significantly affect our powers, authority and operations, which could have a material adverse effect on our financial condition and results of operations. Further, regulators have significant discretion and power to prevent
or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of this regulatory discretion and power may have a negative impact on us.

Because of our participation in new programs sponsored by the U.S. Government, we are subject to certain restrictions on our business and these
programs are subject to change beyond the control of the Company.

We have chosen to participate in a number of new programs sponsored by the U.S.
Government during the current financial and economic crisis, and in the future may elect to or be required to participate in these or other, as not yet enacted, programs. We are therefore subject to the risk that these programs may not be available
in the future, or that we will be forced to participate in programs that we do not believe to be in the Companys best interest or that of our shareholders. These programs, including the TARP Capital Purchase Program and the TLGP, contain
important limitations on the conduct of our business, including limitations on dividends, repurchases of common stock, acquisitions, and executive compensation. These limitations may adversely impact the Companys ability to attract
nongovernmental capital and to recruit and retain executive management and other personnel and its ability to compete with other financial institutions. One of these programs, the TARP Capital Purchase Program, contains provisions that allow the
U.S. Government to unilaterally modify any term or provision of contracts executed under the program.

Because of our participation in the TARP
Capital Purchase Program, we are subject to executive compensation restrictions that could materially affect our ability to retain and/or recruit.

The ARRA includes an amendment and restatement of Section 111 of the EESA that significantly expands and strengthens executive compensation restrictions applicable to entities, including the Company, that participate in the TARP Capital
Purchase Program. The ARRA also includes a number of other requirements, including but not limited to implementing a say-on-pay policy that allows for an annual non-binding shareholder vote on executive compensation and a policy related to the
approval of excessive or luxury expenditures, as identified by the U.S.



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##### Index to Financial Statements

Treasury, including corporate aircraft, office and facility renovations, entertainment and holiday parties and other activities or events that are not
reasonable expenditures for staff development, performance incentives or similar measures in the normal course of business. The ARRAs executive compensation restrictions generally will continue for so long as any obligation arising from the
TARP Capital Purchase Program remains outstanding, other than government-held warrants. The provisions of the ARRA, and importantly the U.S. Treasury regulations that will implement the ARRA could have a material effect on our ability to recruit and
retain individuals with the experience and skill necessary to manage successfully our business out of its current difficulties and during the long-term.

The impact of recently enacted legislation and government programs to stabilize the financial markets cannot be predicted at this time, and such legislation is subject to change.

Under the EESA, the U.S. Treasury has the authority to, among other things, invest in financial institutions for the purpose of stabilizing and providing liquidity to the
U.S. financial markets. Pursuant to this authority, the U.S. Treasury announced the TARP Capital Purchase Program to increase the flow of credit to businesses and consumers and to support the economy.

We expect that future rulemaking under the EESA and the ARRA will be forthcoming from the U.S. Treasury which could impact our operations. Congress has held hearings on
implementation of the TARP Capital Purchase Program and the use of funds and may adopt further legislation impacting the Company and other financial institutions that have obtained funding under the TARP Capital Purchase Program or changing lending
practices that legislators believe led to the current economic situation. Furthermore, the U.S. Treasury is required to issue rules interpreting and implementing the executive compensation provisions of the ARRA. Although it is unclear what, if any,
additional legislation will be enacted into law or rules will be issued, certain laws or rules may be enacted or imposed administratively by the U.S. Treasury that could restrict the Companys operations or increase governmental oversight of
its businesses and its corporate governance practices. The Special Inspector General for TARP has requested information from the TARP Capital Purchase Program participants, including a description of past and anticipated uses of the TARP Capital
Purchase Program funds and plans for addressing executive compensation requirements under the TARP Capital Purchase Program. It is unclear at this point what the ramifications of such disclosure are or may be in the future.

In addition, there can be no assurance as to the actual impact that the TARP Capital Purchase Program, the EESA, the ARRA and their implementing regulations, or any
other governmental program, will have on the financial markets generally, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of the financial markets to stabilize and a continuation or
worsening of current financial market conditions could materially and adversely affect the Companys business, results of operations, financial condition, access to funding and the trading price of the Companys common stock.



|ITEM 1B. | Unresolved Staff Comments
|-------- | -------------------------

None.



|ITEM 2. | Properties
|------- | ----------

Our principal executive offices are located at 2550
North Loop West, Suite 600, Houston, Texas, 77092, in space leased by the Company. We operate the following locations:



|                                                 |  |       |  |        |  |      
|------------------------------------------------ |  | ----- |  | ------ |  | -----
|                                                 |  | Owned |  | Leased |  | Total
|Banking centers in the Houston metropolitan area |  | 3     |  | 26     |  | 29   
|Banking centers in the San Antonio area          |  | 4     |  | 9      |  | 13   
|Banking centers in the North Texas area          |  | 2     |  | 15     |  | 17   
|Central department offices                       |  |      |  | 5      |  | 5    
|                                                 |  |       |  |        |  |      
|Total                                            |  | 9     |  | 55     |  | 64   
|                                                 |  |       |  |        |  |      



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##### Index to Financial Statements

The Company has options to renew leases at most locations.

In 2007, we entered into a lease agreement to consolidate our central and corporate offices at one central location in Houston, Texas. This move will be completed over
the next two years and the timing of the move is aligned with the renewals and expirations of our existing leases.

ITEM 
3. Legal Proceedings

From time to time, the Company is a party to various legal proceedings incident to its business. Currently,
neither Sterling Bancshares nor any of its subsidiaries are involved in any material legal proceedings.

ITEM 4. Submission
of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of 2008.



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##### Index to Financial Statements

PART II

ITEM 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Common Stock Market Prices and Dividends

Our stock trades through the NASDAQ Global Select Market System under the
symbol SBIB. In 2006, Sterling was named to the NASDAQ Global Select Market Composite Index which is a market capitalization weighted index that measures all NASDAQ domestic and international based common type stocks listed on the Global
Select tier of The NASDAQ Stock Market. The following table sets forth the high and low sales prices per share of Sterling Bancshares common stock and the dividends paid thereon for each quarter of the last two years. This information has been
restated to reflect all stock splits occurring prior to the issuance of this report.



|               |  |                       |       |     |   |          |  |   |       
|-------------- |  | --------------------- | ----- | --- | - | -------- |  | - | ------
|               |  | Sales Price Per Share |       |    
|               |  | High                  |       | Low |   | Dividend
|               |  |                       |      
|2008           |  |                       |       |     |   |          |  |   |       
|First quarter  |  | $                     | 11.46 |     | $ | 8.50     |  | $ | 0.0550
|Second quarter |  |                       | 11.19 |     |   | 8.51     |  |   | 0.0550
|Third quarter  |  |                       | 14.01 |     |   | 6.80     |  |   | 0.0550
|Fourth quarter |  |                       | 11.91 |     |   | 5.18     |  |   | 0.0550
|               |  |                       |      
|               |  | High                  |       | Low |   | Dividend
|               |  |                       |      
|2007           |  |                       |       |     |   |          |  |   |       
|First quarter  |  | $                     | 13.25 |     | $ | 10.92    |  | $ | 0.0525
|Second quarter |  |                       | 12.60 |     |   | 10.66    |  |   | 0.0525
|Third quarter  |  |                       | 12.38 |     |   | 9.56     |  |   | 0.0525
|Fourth quarter |  |                       | 12.70 |     |   | 10.39    |  |   | 0.0525

On January 27, 2009, the Board of Directors declared a quarterly cash dividend of $0.055 per share payable on
February 20, 2009, to shareholders of record on February 6, 2009. We intend to continue to pay a dividend at a minimum rate of $0.055 per share quarterly throughout 2009. However, there can be no assurance that we will continue to pay cash
dividends on our common stock in the future or the amount or frequency of any such dividend. The payment of future dividends is dependent on our future earnings, capital requirements and financial condition.

For information on the ability of the Bank to pay dividends and make loans to Sterling Bancshares, see Managements Discussion and Analysis of Financial
Condition and Results of OperationsFinancial ConditionInterest Rate Sensitivity and Liquidity and Note 20 to the Consolidated Financial Statements.

As of February 25, 2009, there were 73,268,605 shares of the Companys common stock outstanding held by 943 shareholders of record. The closing price per share of common stock on December 31, 2008, the
last trading day of the Companys fiscal year, was $6.08. The number of beneficial shareholders is unknown.

Recent Sales of Unregistered
Securities

The Company did not issue any shares which were exempt from the registration under the Securities Act of 1933 pursuant to
Section 3(a)(9) thereunder during 2008.

Issuer Repurchases of Equity Securities

On July 30, 2007, the Companys Board of Directors amended its existing common stock repurchase program (the Program) originally adopted by the Board of Directors on April 26, 2005. The
aggregate number of shares



18



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##### Index to Financial Statements

originally approved by the Board of Directors for repurchase under the Program remains unchanged at 3.8 million shares. The Company may repurchase
shares of common stock from time to time in the open market or through privately negotiated transactions from available cash or other borrowings. During the fourth quarter of 2008, there were no purchases of the Companys equity securities
registered pursuant to Section 12 of the Exchange Act.

ITEM 6. Selected Financial Data



|                                                    |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|--------------------------------------------------- |  | --------------------------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                    |  | Year Ended December 31,                                         |          
|                                                    |  | 2008                                                            |           |   | 2007 |   |           | 2006 |  |   | 2005      |   |  | 2004 |          
|                                                    |  | (Dollars and shares in thousands, except for per share amounts) |          
|Income Statement Data:                              |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net interest income                                 |  | $                                                               | 198,084   |   |      | $ | 185,624   |      |  | $ | 171,806   |   |  | $    | 150,230   |   |  | $ | 128,972   |  
|Provision for credit losses                         |  |                                                                 | 29,917    |   |      |   | 3,820     |      |  |   | 4,058     |   |  |      | 14,371    |   |  |   | 12,250    |  
|Noninterest income                                  |  |                                                                 | 41,027    |   |      |   | 36,220    |      |  |   | 31,217    |   |  |      | 26,959    |   |  |   | 31,025    |  
|Noninterest expense                                 |  |                                                                 | 153,210   |   |      |   | 139,354   |      |  |   | 131,186   |   |  |      | 110,646   |   |  |   | 113,300   |  
|Income before income taxes                          |  |                                                                 | 55,984    |   |      |   | 78,670    |      |  |   | 67,779    |   |  |      | 52,172    |   |  |   | 34,447    |  
|Net income                                          |  |                                                                 | 38,619    |   |      |   | 52,962    |      |  |   | 45,840    |   |  |      | 36,222    |   |  |   | 24,963    |  
|Net income available to common shareholders         |  |                                                                 | 38,221    |   |      |   | 52,962    |      |  |   | 45,840    |   |  |      | 36,222    |   |  |   | 24,963    |  
|                                                    |  |                                                                 |           |   |     
|Balance Sheet Data (at period-end):                 |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total assets                                        |  | $                                                               | 5,079,979 |   |      | $ | 4,535,909 |      |  | $ | 4,117,559 |   |  | $    | 3,726,859 |   |  | $ | 3,336,896 |  
|Total loans                                         |  |                                                                 | 3,793,814 |   |      |   | 3,418,284 |      |  |   | 3,132,567 |   |  |      | 2,699,362 |   |  |   | 2,344,977 |  
|Allowance for loan losses                           |  |                                                                 | 49,177    |   |      |   | 34,446    |      |  |   | 32,027    |   |  |      | 31,230    |   |  |   | 29,406    |  
|Total securities                                    |  |                                                                 | 805,396   |   |      |   | 656,776   |      |  |   | 573,614   |   |  |      | 618,998   |   |  |   | 658,118   |  
|Trading assets                                      |  |                                                                 |          |   |      |   |          |      |  |   |          |   |  |      | 28,515    |   |  |   | 36,720    |  
|Total deposits                                      |  |                                                                 | 3,819,137 |   |      |   | 3,673,711 |      |  |   | 3,334,611 |   |  |      | 2,838,143 |   |  |   | 2,443,967 |  
|Other borrowed funds                                |  |                                                                 | 408,586   |   |      |   | 197,147   |      |  |   | 220,675   |   |  |      | 392,850   |   |  |   | 420,575   |  
|Subordinated debt                                   |  |                                                                 | 78,335    |   |      |   | 48,694    |      |  |   | 46,135    |   |  |      | 46,238    |   |  |   | 47,162    |  
|Junior subordinated debt                            |  |                                                                 | 82,734    |   |      |   | 82,734    |      |  |   | 56,959    |   |  |      | 82,475    |   |  |   | 82,475    |  
|Shareholders equity                                |  |                                                                 | 643,139   |   |      |   | 480,259   |      |  |   | 409,285   |   |  |      | 334,472   |   |  |   | 313,172   |  
|                                                    |  |                                                                 |           |   |     
|Common Share Data:                                  |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Earnings per common share (1):                      |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic shares                                        |  | $                                                               | 0.52      |   |      | $ | 0.73      |      |  | $ | 0.67      |   |  | $    | 0.53      |   |  | $ | 0.37      |  
|Diluted shares                                      |  |                                                                 | 0.52      |   |      |   | 0.72      |      |  |   | 0.66      |   |  |      | 0.53      |   |  |   | 0.37      |  
|Shares used in computing earnings per common share: |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic shares                                        |  |                                                                 | 73,177    |   |      |   | 72,659    |      |  |   | 68,834    |   |  |      | 67,932    |   |  |   | 67,259    |  
|Diluted shares                                      |  |                                                                 | 73,488    |   |      |   | 73,126    |      |  |   | 69,533    |   |  |      | 68,642    |   |  |   | 67,918    |  
|End of period common shares outstanding             |  |                                                                 | 73,260    |   |      |   | 73,159    |      |  |   | 71,001    |   |  |      | 68,001    |   |  |   | 67,602    |  
|Book value per common share at period-end           |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total                                               |  | $                                                               | 7.17      |   |      | $ | 6.56      |      |  | $ | 5.76      |   |  | $    | 4.92      |   |  | $ | 4.63      |  
|Tangible                                            |  | $                                                               | 4.61      |   |      | $ | 4.04      |      |  | $ | 3.78      |   |  | $    | 3.62      |   |  | $ | 3.68      |  
|Cash dividends paid per common share                |  | $                                                               | 0.220     |   |      | $ | 0.210     |      |  | $ | 0.186     |   |  | $    | 0.160     |   |  | $ | 0.133     |  
|Common stock dividend payout ratio                  |  |                                                                 | 41.72     | % |      |   | 28.77     | %    |  |   | 27.99     | % |  |      | 30.00     | % |  |   | 35.91     | %



19



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##### Index to Financial Statements

|                                                            |  |                         |   |  |        |   |  |        |   |  |        |   |  |        |  
|----------------------------------------------------------- |  | ----------------------- | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | -
|                                                            |  | Year Ended December 31, |  
|                                                            |  | 2008                    |   |  | 2007   |   |  | 2006   |   |  | 2005   |   |  | 2004   |  
|Selected Performance Ratios and Other Data:                 |  |                         |   |  |        |   |  |        |   |  |        |   |  |        |  
|Return on average common equity                             |  | 7.60                    | % |  | 11.77  | % |  | 12.66  | % |  | 11.07  | % |  | 8.23   | %
|Return on average tangible common equity                    |  | 12.58                   | % |  | 19.44  | % |  | 17.86  | % |  | 14.24  | % |  | 10.58  | %
|Return on average assets                                    |  | 0.80                    | % |  | 1.22   | % |  | 1.18   | % |  | 1.02   | % |  | 0.78   | %
|Return on average tangible assets                           |  | 0.86                    | % |  | 1.31   | % |  | 1.23   | % |  | 1.05   | % |  | 0.81   | %
|Tax equivalent net interest margin (2)                      |  | 4.55                    | % |  | 4.77   | % |  | 4.90   | % |  | 4.66   | % |  | 4.47   | %
|Efficiency ratio (3)                                        |  | 63.04                   | % |  | 61.84  | % |  | 63.79  | % |  | 61.61  | % |  | 69.72  | %
|Full-time equivalent employees                              |  | 1,116                   |   |  | 1,042  |   |  | 1,074  |   |  | 1,014  |   |  | 961    |  
|Number of banking centers                                   |  | 59                      |   |  | 49     |   |  | 45     |   |  | 40     |   |  | 36     |  
|                                                            |  |                         |   |  |       
|Liquidity and Capital Ratios:                               |  |                         |   |  |        |   |  |        |   |  |        |   |  |        |  
|Average loans to average deposits                           |  | 101.31                  | % |  | 91.93  | % |  | 95.85  | % |  | 97.67  | % |  | 89.32  | %
|Period-end shareholders equity to total assets             |  | 12.66                   | % |  | 10.59  | % |  | 9.94   | % |  | 8.97   | % |  | 9.39   | %
|Average shareholders equity to average assets              |  | 10.50                   | % |  | 10.38  | % |  | 9.33   | % |  | 9.19   | % |  | 9.52   | %
|Period-end tangible capital to total tangible assets        |  | 9.32                    | % |  | 6.79   | % |  | 6.74   | % |  | 6.76   | % |  | 7.61   | %
|Period-end tangible common capital to total tangible assets |  | 6.91                    | % |  | 6.79   | % |  | 6.74   | % |  | 6.76   | % |  | 7.61   | %
|Tier 1 capital to risk weighted assets                      |  | 12.14                   | % |  | 9.05   | % |  | 8.64   | % |  | 9.99   | % |  | 11.78  | %
|Total capital to risk weighted assets                       |  | 14.94                   | % |  | 11.10  | % |  | 10.72  | % |  | 12.36  | % |  | 14.55  | %
|Tier 1 leverage ratio (Tier 1 capital to average assets)    |  | 10.57                   | % |  | 8.59   | % |  | 8.14   | % |  | 9.11   | % |  | 10.15  | %
|                                                            |  |                         |   |  |       
|Asset Quality Ratios:                                       |  |                         |   |  |        |   |  |        |   |  |        |   |  |        |  
|Period-end allowance for credit losses to period-end loans  |  | 1.34                    | % |  | 1.03   | % |  | 1.05   | % |  | 1.20   | % |  | 1.29   | %
|Period-end allowance for loan losses to period-end loans    |  | 1.30                    | % |  | 1.01   | % |  | 1.02   | % |  | 1.16   | % |  | 1.25   | %
|Period-end allowance for loan losses to nonperforming loans |  | 56.21                   | % |  | 170.41 | % |  | 281.27 | % |  | 142.99 | % |  | 142.71 | %
|Nonperforming loans to period-end loans                     |  | 2.31                    | % |  | 0.59   | % |  | 0.36   | % |  | 0.81   | % |  | 0.88   | %
|Nonperforming assets to period-end assets                   |  | 1.84                    | % |  | 0.53   | % |  | 0.32   | % |  | 0.60   | % |  | 0.67   | %
|Net charge-offs to average loans                            |  | 0.40                    | % |  | 0.09   | % |  | 0.20   | % |  | 0.51   | % |  | 0.58   | %



|(1) | The calculation of diluted earnings per share excludes 837,381, 550,505, 139,025, 167,663 and 328,343 shares for year 2008, 2007, 2006, 2005 and 2004 respectively, which were
antidilutive.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Taxable-equivalent basis assuming a 35% tax rate.
|--- | -------------------------------------------------

|(3) | The efficiency ratio is calculated by dividing noninterest expense less acquisition costs, hurricane related costs, an employee severance payment, and Trust Preferred Securities
debt issuance costs by tax equivalent basis net interest income plus noninterest income less net gain (loss) on investment securities.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Annual Report on Form 10-K, other periodic reports filed by us under the Exchange Act, and other written or
oral statements made by or on behalf of the Company contain certain statements relating to future events and our future results which constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are typically identified by words such as expects, anticipates, intends, plans, believes, seeks, estimates, or words of
similar meaning, or future or conditional verbs such as should, could, or may.

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



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



20



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##### Index to Financial Statements

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



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



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



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



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



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



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

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

RECENT MARKET
DEVELOPMENTS

Recent Market Developments

The United
States government, particularly the U.S. Treasury, the Board of Governors of the Federal Reserve System (the Federal Reserve) and the FDIC, working in cooperation with foreign governments and other central banks have taken a variety of
extraordinary measures designed to restore confidence in the financial markets and to strengthen financial institutions. In particular, the EESA gives the U.S. Treasury the authority to, among other things, purchase up to $700 billion of
mortgages, mortgage-backed securities and certain other financial instruments from financial institutions through TARP and the direct purchase by the U.S. Treasury of equity of financial institutions through the TARP Capital Purchase Program.

TARP Capital Purchase Program

Under the TARP
Capital Purchase Program, the U.S. Treasury will make $250 billion of capital available to U.S. financial institutions in the form of preferred stock and warrants to acquire common stock. Pursuant to the Capital Purchase Program, on
December 12, 2008, we entered into a Securities Purchase Agreement, with the U.S. Treasury in which we issued for aggregate consideration of $125 million, the preferred stock and related warrants. Please see the discussion above under
Supervision and RegulationTARP Capital Purchase Program for a more thorough explanation of the TARP Capital Purchase Program.

Overview

Managements Discussion and Analysis of Financial Condition and Results of Operations analyzes major elements of
our Consolidated Financial Statements and provides insight into important areas of managements focus. This introduction highlights selected information in this report and may not contain all of the information that is important to you. For a
more complete understanding of trends, events, commitments, liquidity, capital resources and critical accounting estimates, you should carefully read this entire report.

Highlights for 2008 include very strong period-end deposit growth and good loan growth. We are in a strong capital position. As of the end of the year, our total capital to risk-weighted assets ratio was 15% and
our tangible common capital to tangible assets ratio was nearly 7%.



21



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##### Index to Financial Statements

In 2009, we will continue to expand the Sterling franchise and increase shareholder value through our strategy of
focusing on all the constituencies within the small to medium-sized business segment, more specifically companies with annual revenues of $100 million or less. This includes business owners, their employees, their family members, and people who live
and work around our locations. We pride ourselves on building long-term relationships with our customers, knowing their business, and helping them achieve their goals.

On February 8, 2008, we completed the acquisition of ten branches located in the Dallas and Fort Worth, Texas areas from First Horizon National Corp. (First Horizon). In addition to these ten bank
branches, we also acquired land for possible future Sterling banking centers in Lewisville, Arlington and Fort Worth, Texas. This transaction allows us to achieve a critical presence in Dallas, Texas and an entry into the growing Fort Worth, Texas
market.

Critical Accounting Policies

An understanding
of our accounting policies is important to an understanding of our reported results. Accounting policies are described in detail in Note 1 to the Consolidated Financial Statements in this Annual Report of Form 10-K. Certain of our accounting
policies are considered to be critical because they involve subjective judgment, estimation by management or are particularly complex in their nature.

Fair value of Financial Instruments. Effective January 1, 2008, we determined the fair market values of our financial instruments based on the fair value hierarchy established in Statement of
Financial Accounting Standards (SFAS) No. 157 (SFAS 157) Fair Value Measurements which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In
accordance with Financial Accounting Standards Board Staff Position (FSP) No. SFAS 157-2, Effective Date of FASB Statement No.157, the Company delayed the application of SFAS 157 for non-financial assets and non-financial
liabilities, until January 1, 2009.

SFAS 157 describes three levels of inputs that may be used to measure fair value. Level 1 inputs include quoted
market prices, where available. If such quoted market prices are not available Level 2 inputs are used. These inputs are based upon internally developed models that primarily use observable market-based parameters. Level 3 inputs are
unobservable inputs which are typically based on an entitys own assumptions, as there is little, if any, related market activity. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires
judgment, and considers factors specific to the asset or liability.

Allowance for Credit Losses. The allowance for credit losses is a
valuation allowance for probable losses incurred on loans and binding commitments. Losses are charged to the allowance when the loss actually occurs or when a determination is made that a probable loss has occurred. Recoveries are credited to the
allowance at the time of recovery. Throughout the year, management estimates the probable level of losses to determine whether the allowance for credit losses is adequate to absorb losses inherent in the existing portfolio. Based on these estimates,
an amount is charged to the provision for credit losses and credited to the allowance for credit losses in order to adjust the allowance to a level determined to be adequate to absorb losses. Managements judgment as to the level of probable
losses on existing loans involves the consideration of current economic conditions and their estimated effects on specific borrowers; an evaluation of the existing relationships among loans, potential credit losses and the present level of the
allowance; results of examinations of the loan portfolio by regulatory agencies; and managements internal review of the loan portfolio. In determining the collectibility of certain loans, management also considers the fair value of any
underlying collateral. The amount ultimately realized may differ from the carrying value of these assets because of economic, operating or other conditions beyond our control. Please refer to the subsequent discussion of Allowance for Credit
Losses below as well as in Note 1 to the Consolidated Financial Statements for additional insight into managements approach and methodology in estimating the allowance for credit losses.

Goodwill and Other Intangibles.Goodwill and intangible assets that have indefinite useful lives are subject to an annual evaluation of whether any
impairment has occurred. If any such impairment is determined to have



22



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##### Index to Financial Statements

occurred, a write-down would be recorded. Intangible assets consist primarily of core deposits and customer relationships. Intangible assets with definite
useful lives are amortized on an accelerated basis over the years expected to be benefited, which we believe is approximately 10 years. Based on our annual goodwill impairment test, management does not believe any of our goodwill is impaired as of
December 31, 2008. While we believe no impairment existed at December 31, 2008 under accounting standards applicable at that date, different conditions or assumptions, or changes in cash flows or profitability, if significantly
negative or unfavorable, could have a material adverse effect on the outcome of our impairment evaluation and financial condition or future results of operations.

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

Stock-based Compensation.The Companys stock-based compensation policy applies to all forms of stock-based compensation including stock options,
restricted stock units, shares acquired under the Employee Stock Purchase Plan and performance based phantom units. All stock-based compensation is accounted for under the fair-value method as required by generally accepted accounting principles in
the United States. The expense associated with stock based compensation is recognized over the vesting period of each individual arrangement. The fair value of each stock option award is estimated on the date of grant using a Black-Scholes-Merton
option valuation model. The fair value of restricted stock and phantom stock units is based on the fair value at the date of grant using the current market price on the grant date. The fair value of each performance based share unit is estimated
based on expected performance goals being attained. Compensation expense associated with the Employee Stock Purchase Plan is determined using a Black-Scholes-Merton option pricing formula. Please refer to Note 1 to the Consolidated Financial
Statements for further information. Disclosures of stock-based compensation are also included in Note 15 to the Consolidated Financial Statements.

Results of Operations

Performance Summary.Net income for the year ended December 31, 2008 was $38.6 million, or $0.52
per diluted common share, compared with $53.0 million, or $0.72 per diluted common share, earned for 2007 and $45.8 million, or $0.66 per diluted common share, earned for 2006.

Net income for 2008 decreased $14.3 million or 27.1% compared to 2007 due primarily to an increase in the provision for credit losses of $26.1 million. Net income for 2007 increased $7.1 million or 15.5% compared to
2006. This increase was due primarily to an increase in net interest income of $13.8 million, an increase in noninterest income of $5.0 million partially offset by an increase in noninterest expense of $8.2 million.

A banking institutions return on average assets and return on average common equity are two commonly used industry measures of performance. Return on average
assets (ROA) measures net income in relation to average total assets and is an indicator of a companys ability to employ its resources profitably. For 2008, our ROA was 0.80%, as compared to 1.22% and 1.18% for 2007 and 2006,
respectively.

Return on average common equity (ROE) measures net income after preferred dividends in relation to average common equity and is
an indicator of a companys return to its common shareholders. For 2008, our ROE was 7.60%, as compared to 11.77% and 12.66% for 2007 and 2006, respectively.



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##### Index to Financial Statements

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

The Federal Reserve Board significantly influences market interest
rates, including rates offered for loans and deposits by many financial institutions. Generally, when the Federal Open Market Committee (FOMC) of the Federal Reserve Board changes the target overnight interest rate charged by banks, the
market responds with a similar change in the prime lending rate. Our loan portfolio is impacted significantly by changes in short-term interest rates. From June 2006 until September of 2007, overnight interest rates remained consistent at 5.25%.
Beginning in September 2007, the FOMC decreased overnight interest rates by 500 basis points to 0.25% at December 31, 2008. This significant decline in interest rates has negatively impacted our net interest income and margin during 2008.



24



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##### Index to Financial Statements

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



|                                                      |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|----------------------------------------------------- |  | ----------------------- | --------- | - | -------- | - | ----------------- | ---- | ---- | -------------- |  | - | --------- | - | ----------------- | - | ------- | -------------- | ---- | - | -------- | - | ----------------- | - |  | - | ------- |  | ---- | -
|                                                      |  | Year Ended December 31, |          
|                                                      |  | 2008                    |           |   | 2007     |   |                   | 2006 |     
|                                                      |  | AverageBalance          |           |   | Interest |   | AverageYield/Rate |      |      | AverageBalance |  |   | Interest  |   | AverageYield/Rate |   |         | AverageBalance |      |   | Interest |   | AverageYield/Rate |  
|Interest-earning assets:                              |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Loans held for sale (1)                               |  | $                       | 71,050    |   |          | $ | 4,696             |      | 6.61 | %              |  | $ | 62,232    |   |                   | $ | 4,982   |                | 8.01 | % |          | $ | 30,400            |   |  | $ | 2,427   |  | 7.98 | %
|Loans held for investment (1):                        |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Taxable                                               |  |                         | 3,583,762 |   |          |   | 236,259           |      | 6.59 | %              |  |   | 3,221,523 |   |                   |   | 254,931 |                | 7.91 | % |          |   | 2,867,308         |   |  |   | 224,490 |  | 7.83 | %
|Non-taxable (2)                                       |  |                         | 3,637     |   |          |   | 294               |      | 8.09 | %              |  |   | 3,344     |   |                   |   | 265     |                | 7.92 | % |          |   | 2,734             |   |  |   | 237     |  | 8.66 | %
|Securities:                                           |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Taxable                                               |  |                         | 620,506   |   |          |   | 29,660            |      | 4.78 | %              |  |   | 523,589   |   |                   |   | 23,849  |                | 4.55 | % |          |   | 535,589           |   |  |   | 23,886  |  | 4.46 | %
|Non-taxable (2)                                       |  |                         | 97,328    |   |          |   | 5,116             |      | 5.26 | %              |  |   | 92,928    |   |                   |   | 4,699   |                | 5.06 | % |          |   | 69,175            |   |  |   | 3,574   |  | 5.17 | %
|Trading assets                                        |  |                         | 3,727     |   |          |   | 64                |      | 1.70 | %              |  |   | 4,396     |   |                   |   | 173     |                | 3.93 | % |          |   | 11,881            |   |  |   | 696     |  | 5.85 | %
|Federal funds sold                                    |  |                         | 4,915     |   |          |   | 101               |      | 2.06 | %              |  |   | 13,061    |   |                   |   | 597     |                | 4.58 | % |          |   | 5,371             |   |  |   | 261     |  | 4.87 | %
|Deposits in financial institutions                    |  |                         | 510       |   |          |   | 10                |      | 1.92 | %              |  |   | 734       |   |                   |   | 35      |                | 4.78 | % |          |   | 3,970             |   |  |   | 183     |  | 4.61 | %
|                                                      |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Total interest-earning assets                         |  |                         | 4,385,435 |   |          |   | 276,200           |      | 6.30 | %              |  |   | 3,921,807 |   |                   |   | 289,531 |                | 7.38 | % |          |   | 3,526,428         |   |  |   | 255,754 |  | 7.25 | %
|                                                      |  |                         |           |   |          |   |                   |      |     
|Noninterest-earning assets:                           |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Cash and due from banks                               |  |                         | 101,711   |   |          |   |                   |      |      |                |  |   | 108,603   |   |                   |   |         |                |      |   |          |   | 105,681           |   |  |   |         |  |      |  
|Premises and equipment, net                           |  |                         | 40,297    |   |          |   |                   |      |      |                |  |   | 25,768    |   |                   |   |         |                |      |   |          |   | 39,276            |   |  |   |         |  |      |  
|Other assets                                          |  |                         | 364,306   |   |          |   |                   |      |      |                |  |   | 311,413   |   |                   |   |         |                |      |   |          |   | 240,678           |   |  |   |         |  |      |  
|Allowance for loan losses                             |  |                         | (38,377   | ) |          |   |                   |      |      |                |  |   | (33,306   | ) |                   |   |         |                |      |   |          |   | (32,314           | ) |  |   |         |  |      |  
|                                                      |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Total noninterest-earning assets                      |  |                         | 467,937   |   |          |   |                   |      |      |                |  |   | 412,478   |   |                   |   |         |                |      |   |          |   | 353,321           |   |  |   |         |  |      |  
|                                                      |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Total assets                                          |  | $                       | 4,853,372 |   |          |   |                   |      |      |                |  | $ | 4,334,285 |   |                   |   |         |                |      |   |          | $ | 3,879,749         |   |  |   |         |  |      |  
|                                                      |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|                                                      |  |                         |           |   |          |   |                   |      |     
|Interest-bearing liabilities:                         |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Deposits:                                             |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Demand and savings                                    |  | $                       | 1,416,594 |   |          | $ | 17,285            |      | 1.22 | %              |  | $ | 1,304,168 |   |                   | $ | 29,217  |                | 2.24 | % |          | $ | 1,093,652         |   |  | $ | 17,934  |  | 1.64 | %
|Certificates and other time                           |  |                         | 1,107,735 |   |          |   | 37,443            |      | 3.38 | %              |  |   | 1,191,393 |   |                   |   | 55,691  |                | 4.67 | % |          |   | 918,432           |   |  |   | 37,671  |  | 4.10 | %
|Other borrowed funds                                  |  |                         | 542,413   |   |          |   | 11,607            |      | 2.14 | %              |  |   | 134,349   |   |                   |   | 6,829   |                | 5.08 | % |          |   | 345,138           |   |  |   | 17,273  |  | 5.00 | %
|Subordinated debt                                     |  |                         | 62,128    |   |          |   | 4,474             |      | 7.20 | %              |  |   | 46,521    |   |                   |   | 4,649   |                | 9.99 | % |          |   | 45,522            |   |  |   | 4,476   |  | 9.83 | %
|Junior subordinated debt                              |  |                         | 82,734    |   |          |   | 5,731             |      | 6.93 | %              |  |   | 76,802    |   |                   |   | 6,239   |                | 8.12 | % |          |   | 64,210            |   |  |   | 5,571   |  | 8.68 | %
|                                                      |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Total interest-bearing liabilities                    |  |                         | 3,211,604 |   |          |   | 76,540            |      | 2.38 | %              |  |   | 2,753,233 |   |                   |   | 102,625 |                | 3.73 | % |          |   | 2,466,954         |   |  |   | 82,925  |  | 3.36 | %
|                                                      |  |                         |           |   |          |   |                   |      |     
|Noninterest-bearing sources:                          |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Demand deposits                                       |  |                         | 1,086,727 |   |          |   |                   |      |      |                |  |   | 1,080,099 |   |                   |   |         |                |      |   |          |   | 1,013,788         |   |  |   |         |  |      |  
|Other liabilities                                     |  |                         | 45,396    |   |          |   |                   |      |      |                |  |   | 50,975    |   |                   |   |         |                |      |   |          |   | 36,974            |   |  |   |         |  |      |  
|                                                      |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Total noninterest-bearing liabilities                 |  |                         | 1,132,123 |   |          |   |                   |      |      |                |  |   | 1,131,074 |   |                   |   |         |                |      |   |          |   | 1,050,762         |   |  |   |         |  |      |  
|Shareholders equity                                  |  |                         | 509,645   |   |          |   |                   |      |      |                |  |   | 449,978   |   |                   |   |         |                |      |   |          |   | 362,033           |   |  |   |         |  |      |  
|                                                      |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Total liabilities and shareholders equity            |  | $                       | 4,853,372 |   |          |   |                   |      |      |                |  | $ | 4,334,285 |   |                   |   |         |                |      |   |          | $ | 3,879,749         |   |  |   |         |  |      |  
|                                                      |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Tax equivalent net interest income and margin (2) (3) |  |                         |           |   |          |   | 199,660           |      | 4.55 | %              |  |   |           |   |                   |   | 186,906 |                | 4.77 | % |          |   |                   |   |  |   | 172,829 |  | 4.90 | %
|                                                      |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|                                                      |  |                         |           |   |          |   |                   |      |     
|Tax equivalent adjustment:                            |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Loans                                                 |  |                         |           |   |          |   | 92                |      |      |                |  |   |           |   |                   |   | 77      |                |      |   |          |   |                   |   |  |   | 71      |  |      |  
|Securities                                            |  |                         |           |   |          |   | 1,484             |      |      |                |  |   |           |   |                   |   | 1,205   |                |      |   |          |   |                   |   |  |   | 952     |  |      |  
|                                                      |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Total tax equivalent adjustment                       |  |                         |           |   |          |   | 1,576             |      |      |                |  |   |           |   |                   |   | 1,282   |                |      |   |          |   |                   |   |  |   | 1,023   |  |      |  
|                                                      |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  
|Net interest income                                   |  |                         |           |   |          | $ | 198,084           |      |      |                |  |   |           |   |                   | $ | 185,624 |                |      |   |          |   |                   |   |  | $ | 171,806 |  |      |  
|                                                      |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |      |  



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

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

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



25



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##### Table of Contents

##### Index to Financial Statements

The following table shows the portions of the net change in tax equivalent interest income and expense due to changes in
volume or rate. The changes in tax equivalent interest income due to both rate and volume in the analysis have been allocated proportionately to the volume or rate changes (in thousands):



|                                       |  |                                                    |        |   |                                                    |   |         |       |  |   |         |   |  |      |         |   |       |   |         |   |  |   |         |  
|-------------------------------------- |  | -------------------------------------------------- | ------ | - | -------------------------------------------------- | - | ------- | ----- |  | - | ------- | - |  | ---- | ------- | - | ----- | - | ------- | - |  | - | ------- | -
|                                       |  | 2008 vs. 2007Increase (Decrease)Due to Changes
in: |        |   | 2007 vs. 2006Increase (Decrease)Due to Changes in: |  
|                                       |  | Volume                                             |        |   | Rate                                               |   |         | Total |  |   | Volume  |   |  | Rate |         |   | Total |  
|Interest-earning assets:               |  |                                                    |        |   |                                                    |   |         |       |  |   |         |   |  |      |         |   |       |   |         |   |  |   |         |  
|Loans held for sale                    |  | $                                                  | 656    |   |                                                    | $ | (942    | )     |  | $ | (286    | ) |  | $    | 2,548   |   |       | $ | 7       |   |  | $ | 2,555   |  
|Loans held for investment:             |  |                                                    |        |   |                                                    |   |         |       |  |   |         |   |  |      |         |   |       |   |         |   |  |   |         |  
|Taxable                                |  |                                                    | 26,366 |   |                                                    |   | (45,038 | )     |  |   | (18,672 | ) |  |      | 28,007  |   |       |   | 2,434   |   |  |   | 30,441  |  
|Non-taxable (1)                        |  |                                                    | 33     |   |                                                    |   | (4      | )     |  |   | 29      |   |  |      | 44      |   |       |   | (16     | ) |  |   | 28      |  
|Securities:                            |  |                                                    |        |   |                                                    |   |         |       |  |   |         |   |  |      |         |   |       |   |         |   |  |   |         |  
|Taxable                                |  |                                                    | 4,601  |   |                                                    |   | 1,210   |       |  |   | 5,811   |   |  |      | (540    | ) |       |   | 503     |   |  |   | (37     | )
|Non-taxable (1)                        |  |                                                    | 496    |   |                                                    |   | (79     | )     |  |   | 417     |   |  |      | 1,152   |   |       |   | (27     | ) |  |   | 1,125   |  
|Trading assets                         |  |                                                    | (25    | ) |                                                    |   | (84     | )     |  |   | (109    | ) |  |      | (344    | ) |       |   | (179    | ) |  |   | (523    | )
|Federal funds sold                     |  |                                                    | (263   | ) |                                                    |   | (233    | )     |  |   | (496    | ) |  |      | 353     |   |       |   | (17     | ) |  |   | 336     |  
|Deposits in financial institutions     |  |                                                    | (9     | ) |                                                    |   | (16     | )     |  |   | (25     | ) |  |      | (154    | ) |       |   | 6       |   |  |   | (148    | )
|                                       |  |                                                    |        |   |                                                    |   |         |       |  |   |         |   |  |      |         |   |       |   |         |   |  |   |         |  
|Total tax equivalent interest income   |  |                                                    | 31,855 |   |                                                    |   | (45,186 | )     |  |   | (13,331 | ) |  |      | 31,066  |   |       |   | 2,711   |   |  |   | 33,777  |  
|                                       |  |                                                    |        |   |                                                    |   |         |       |  |   |         |   |  |      |         |   |       |   |         |   |  |   |         |  
|                                       |  |                                                    |        |   |                                                    |  
|Interest-bearing liabilities:          |  |                                                    |        |   |                                                    |   |         |       |  |   |         |   |  |      |         |   |       |   |         |   |  |   |         |  
|Deposits:                              |  |                                                    |        |   |                                                    |   |         |       |  |   |         |   |  |      |         |   |       |   |         |   |  |   |         |  
|Demand and savings                     |  |                                                    | 2,312  |   |                                                    |   | (14,244 | )     |  |   | (11,932 | ) |  |      | 3,888   |   |       |   | 7,395   |   |  |   | 11,283  |  
|Certificates and other time            |  |                                                    | (3,740 | ) |                                                    |   | (14,508 | )     |  |   | (18,248 | ) |  |      | 12,316  |   |       |   | 5,704   |   |  |   | 18,020  |  
|Other borrowed funds                   |  |                                                    | 10,639 |   |                                                    |   | (5,861  | )     |  |   | 4,778   |   |  |      | (10,713 | ) |       |   | 269     |   |  |   | (10,444 | )
|Subordinated debt                      |  |                                                    | 1,311  |   |                                                    |   | (1,486  | )     |  |   | (175    | ) |  |      | 99      |   |       |   | 74      |   |  |   | 173     |  
|Junior subordinated debt               |  |                                                    | 451    |   |                                                    |   | (959    | )     |  |   | (508    | ) |  |      | 1,041   |   |       |   | (373    | ) |  |   | 668     |  
|                                       |  |                                                    |        |   |                                                    |   |         |       |  |   |         |   |  |      |         |   |       |   |         |   |  |   |         |  
|Total interest expense                 |  |                                                    | 10,973 |   |                                                    |   | (37,058 | )     |  |   | (26,085 | ) |  |      | 6,631   |   |       |   | 13,069  |   |  |   | 19,700  |  
|                                       |  |                                                    |        |   |                                                    |   |         |       |  |   |         |   |  |      |         |   |       |   |         |   |  |   |         |  
|Tax equivalent net interest income (1) |  | $                                                  | 20,882 |   |                                                    | $ | (8,128  | )     |  | $ | 12,754  |   |  | $    | 24,435  |   |       | $ | (10,358 | ) |  | $ | 14,077  |  
|                                       |  |                                                    |        |   |                                                    |   |         |       |  |   |         |   |  |      |         |   |       |   |         |   |  |   |         |  



|(1) | Taxable-equivalent basis assuming a 35% tax rate.
|--- | -------------------------------------------------

Tax equivalent net
interest income increased $12.8 million or 6.8% for 2008 compared to 2007. This increase in net interest income was primarily due to a decline in interest expense resulting from a decrease in average cost of funds on deposits and the utilization of
lower cost borrowings. The rate paid on interest-bearing liabilities decreased 135 basis points for 2008 compared to 2007. Our tax equivalent net interest margin was 4.55% for 2008 compared to 4.77% for 2007. This decline in net interest margin was
due, in part, to increased competition for deposits, an increase in nonperforming assets and the significant decline in short-term interest rates that began in late 2007. Due to the increased competition for demand deposits during 2008, we utilized
short-term borrowings to fund asset growth. The negative impact of the decline in short-term interest rates was partially mitigated by the work we have done in the past two years to position our balance sheet to be more neutral to movements in
short-term interest rates including the interest rate hedge that was established in 2006 and the strategic decision to allow certain higher-cost certificates of deposit to be replaced with lower cost borrowings.

Tax equivalent net interest income increased $14.1 million or 8.1% for 2007 compared to 2006. Our tax equivalent net interest margin was 4.77% for 2007 compared to 4.90%
for 2006.

Total tax equivalent interest income decreased $13.3 million or 4.6% for 2008 compared to 2007 due to a decrease in interest income on loans.
Interest income on loans decreased $18.9 million for 2008 compared to 2007 due to a decrease in yield earned of 133 basis points for 2008. This decrease in yield was due to the decline in interest rates that began in late 2007 and an increase in
nonperforming loans during 2008. For the purpose of



26



---

##### Table of Contents

##### Index to Financial Statements

calculating loan yields, average loan balances include nonaccrual loans with no related interest income. The decrease in yield was partially offset by
additional interest income from the interest rate hedge that we purchased in 2006 which provided additional interest income of $10.3 million for 2008. The hedge effectively converts a portion of our loan portfolio from variable rate loans to fixed
rate loans. In addition, the decline in interest income resulting from decreases in interest rates was partially offset by an increase in average total loans of $371 million or 11.3% for 2008.

Total tax equivalent interest income increased $33.8 million or 13.2% for 2007 compared to 2006. Interest income on loans increased $33.0 million for 2007 compared to
2006 due to an increase in both the growth and yield earned on the loan portfolio. Average total loans for 2007 increased $387 million or 13.3% compared to 2006. The tax equivalent yield earned on average total loans increased eight basis points for
2007.

Tax equivalent interest income on securities increased $6.1 million for 2008 compared to 2007, and $565 thousand for 2007 compared to 2006 due to an
increase in the average securities portfolio (including trading assets) and yield earned. Average securities increased $101 million for 2008 compared to 2007, and $4.3 million for 2007 compared to 2006. Tax equivalent yield earned on securities
increased 20 basis points for 2008 compared to 2007, and seven basis points for 2007 compared to 2006.

Total interest expense decreased $26.1 million for
2008 compared to 2007 due to a decline in interest rates and the utilization of lower cost borrowings. The decline in interest rates was offset by an increase in average interest-bearing liabilities for 2008 of $458 million or 16.6% compared to
2007. This decrease in interest expense for 2008 was primarily due to a decrease in interest expense on deposits of $30.2 million compared to 2007. The reduction in short-term interest rates that began in late 2007 contributed to a decrease in the
average rate paid on all interest-bearing deposits of 123 basis points for 2008 compared to 2007.

Total interest expense increased $19.7 million for 2007
compared to 2006. Average interest-bearing liabilities for 2007 increased $286 million or 11.6% compared to 2006. The average rate paid on interest-bearing liabilities increased 37 basis points during 2007 compared to 2006. The increase in interest
expense for 2007 compared to 2006 was primarily due to an increase in average interest-bearing deposits of $483 million. In addition, the average rate paid on all interest-bearing deposits increased 64 basis points for 2007 as compared to 2006. The
increase in average deposit balances and interest rates paid resulted in additional interest expense of $29.3 million for 2007 compared to 2006.

Beginning
in the fourth quarter of 2007, we made the strategic decision to allow some of our higher cost time deposits to mature and be replaced by lower cost borrowings. Average other borrowings increased $408 million for 2008 compared to 2007. These
borrowings provided additional funding at a rate of 2.14% for 2008, a decrease in funding costs of 294 basis points over 2007. Overall, interest expense on other borrowings increased $4.8 million for 2008 compared to 2007.

Average other borrowings decreased $211 million for 2007 compared to 2006. This decrease contributed to a decrease in interest expense on other borrowings of $10.4
million for 2007 as compared to 2006. The benefit of this decrease in other borrowings was partially offset by an increase in rate paid of eight basis points.



27



---

##### Table of Contents

##### Index to Financial Statements

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



|                                       |  |      |        |   |      |   |        |  |   |        |  
|-------------------------------------- |  | ---- | ------ | - | ---- | - | ------ |  | - | ------ | -
|                                       |  | 2008 |        |   | 2007 |   | 2006   | 
|Customer service fees                  |  | $    | 15,771 |   |      | $ | 14,327 |  | $ | 12,850 |  
|Net gain (loss) on trading assets      |  |      | (1     | ) |      |   | 2      |  |   | (302   | )
|Net gain (loss) on securities          |  |      | (244   | ) |      |   | 3      |  |   | (358   | )
|Wealth management fees                 |  |      | 8,984  |   |      |   | 5,662  |  |   | 2,899  |  
|Net gain on loans                      |  |      | 200    |   |      |   | 1,991  |  |   | 1,326  |  
|Bank-owned life insurance              |  |      | 3,664  |   |      |   | 3,738  |  |   | 2,938  |  
|Debit card income                      |  |      | 2,479  |   |      |   | 2,330  |  |   | 1,988  |  
|Federal Home Loan Bank stock dividends |  |      | 480    |   |      |   | 604    |  |   | 941    |  
|Other                                  |  |      | 9,694  |   |      |   | 7,563  |  |   | 8,935  |  
|                                       |  |      |        |   |      |   |        |  |   |        |  
|                                       |  | $    | 41,027 |   |      | $ | 36,220 |  | $ | 31,217 |  
|                                       |  |      |        |   |      |   |        |  |   |        |  

Total noninterest income increased $4.8 million or 13.3% for 2008 compared to 2007 and $5.0 million or 16.0% for
2007 compared to 2006. Details of the changes in the various components of noninterest income are discussed below:

Customer service fees increased $1.4
million for 2008 compared to 2007. This increase is partly attributable to the lower earnings credit rate on our commercial accounts on analysis, which is a direct result of lower short-term interest rates. Customer service fees increased $1.5
million for 2007 compared to 2006 due primarily to the completion of three acquisitions beginning in the third quarter of 2006 through June of 2007.

The
Company recorded realized losses of $722 thousand and $562 thousand for 2008 and 2006, respectively, on certain interest-only securities. There were no realized losses recorded in 2007. These securities are tied to underlying government guaranteed
loans and are subject to prepayment and interest rate fluctuations. Given the length of time these securities had been in an unrealized loss position, current prepayment factors for the underlying loan and managements inability to determine
when a full recovery of the value may occur, management considered these securities to be other than temporarily impaired. These losses were partially offset by realized gains of $478 thousand, $3 thousand and $204 thousand for 2008, 2007 and 2006,
respectively, on investments which were sold as part of our routine portfolio management and subsequent to the acquisition of BOTH in 2006.

Wealth
management fees increased $3.3 million for 2008 compared to 2007 and $2.8 million for 2007 compared to 2006. These increases were due primarily to the addition of MBM Advisors in June 2007. MBM Advisors is an investment advisory and pension
administration/consulting firm providing full-services in the design, administration, investment management, and communication of retirement plans with offices in Houston, Texas. Our wealth management group provides customized solutions for high net
worth customers by integrating financial services with traditional banking products and services such as private banking, money management, full-service brokerage, financial planning, personal and institutional trust and retirement services, as well
as insurance and risk management services.

Net losses on trading assets in 2006 were attributable to the market conditions for these types of assets.
Trading assets consisted primarily of the government guaranteed portion of SBA loans. At December 31, 2008 and 2007, we no longer carried these types of investments on our balance sheet. We may potentially reinvest in these assets depending on
future market conditions. Trading assets are carried at fair market value in our consolidated balance sheets.

Net gain on loans decreased $1.8 million for
2008 compared to 2007. This decrease was primarily due to a decline in loan sale activity. During 2008, the Company sold approximately $10.3 million of performing commercial real estate loans that were originally acquired as held for investment
compared to $45.5 million for



28



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##### Table of Contents

##### Index to Financial Statements

2007. These sales resulted in net gains of $203 thousand for 2008 compared to $1.4 million for 2007. These loans were sold as part of our ongoing management
of the size, concentrations and risk profile of the loan portfolio. Loans held for sale at December 31, 2007 included certain commercial real estate loans and SBA guaranteed loans originated by the Bank. Due to current market conditions in
2008, $112 million of these loans were no longer classified as held for sale and are now considered as held for investment. We recorded a lower of cost or market adjustment of $266 thousand during 2008. There were no lower of cost or market
adjustments recorded for the same period in 2007. Net gain on loans increased $665 thousand for 2007 compared to 2006. This increase for 2007 as compared to 2006 was due primarily to an increased volume of loan sales.

Other noninterest income increased $2.1 million for 2008 compared to 2007. This increase was due primarily to an increase in other lending fees of $2.0 million. In
addition, we received $323 thousand from the mandatory redemption of some of our shares of VISA Inc., related to Visa Incs Initial Public Offering during 2008. Other noninterest income decreased $1.4 million for 2007 compared to 2006. This
decrease was primarily due to the completion of three sale/leaseback transactions in 2006 resulting in total net pre-tax gains of $1.8 million.

Noninterest Expense.The following table shows the detail of noninterest expense (in thousands):



|                                                                          |  |      |         |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                          |  | 2008 |         | 2007 |   |         | 2006 | 
|Salaries and employee benefits                                            |  | $    | 85,253  |      | $ | 81,039  |      |  | $ | 76,046  |  
|Occupancy                                                                 |  |      | 21,782  |      |   | 18,366  |      |  |   | 16,075  |  
|Technology                                                                |  |      | 9,794   |      |   | 8,843   |      |  |   | 6,882   |  
|Professional fees                                                         |  |      | 4,707   |      |   | 4,159   |      |  |   | 6,147   |  
|Postage, delivery and supplies                                            |  |      | 3,672   |      |   | 3,611   |      |  |   | 3,355   |  
|Marketing                                                                 |  |      | 2,545   |      |   | 1,809   |      |  |   | 2,412   |  
|Core deposits and other intangibles amortization                          |  |      | 2,328   |      |   | 2,137   |      |  |   | 1,012   |  
|Acquisition costs                                                         |  |      | 562     |      |   | 920     |      |  |   | 638     |  
|Net gains and carrying costs of other real estate and foreclosed property |  |      | 40      |      |   | (92     | )    |  |   | (109    | )
|Other                                                                     |  |      | 22,527  |      |   | 18,562  |      |  |   | 18,728  |  
|                                                                          |  |      |         |      |   |         |      |  |   |         |  
|Total                                                                     |  | $    | 153,210 |      | $ | 139,354 |      |  | $ | 131,186 |  
|                                                                          |  |      |         |      |   |         |      |  |   |         |  

Total noninterest expense for 2008 increased $13.9 million compared to 2007 and $8.2 million for 2007 compared to
2006. These increases were due primarily to four acquisitions completed since the third quarter of 2006, resulting in additional noninterest expense of $8.1 million and $10.6 million for 2008 and 2007, respectively. Details of the changes in
various components of noninterest expense are discussed below:

Salaries and employee benefits for 2008 increased $4.2 million compared to 2007. This
increase was primarily due to three acquisitions completed since March of 2007. These acquisitions have resulted in additional salaries and benefits expense of approximately $4.5 million for 2008. Additionally, in 2008, we incurred $485 thousand of
severance and salary costs related to the restructuring of our SBA unit and exiting the small ticket leasing business. These decisions were based on decreased opportunities in these areas due to market conditions. Salaries and employee benefits for
2007 increased $5.0 million compared to 2006. This increase was primarily due to three acquisitions completed from the third quarter of 2006 through the second quarter of 2007. Combined, these acquisitions resulted in additional salaries and
benefits expense of approximately $6.6 million. In addition, we paid $450 thousand related to an employee severance payment during the second quarter of 2007. Excluding acquisitions and the employee severance payments, we were able to reduce overall
salaries and benefits through our customer focused process improvement program with particular progress in achieving planned attrition in certain back office departments, continued right-sizing of our front office banking staff, as well as the
continued implementation of our disciplined expense management.

Occupancy expense increased $3.4 million for 2008 compared to 2007 and $2.3 million for
2007 compared to 2006. Since the third quarter of 2006, we have added 19 banking centers in conjunction with the BOTH, Partners



29



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##### Index to Financial Statements

Bank and First Horizon branch acquisitions. During 2006, we completed three separate sale/leaseback transactions of 18 banking centers resulting in
additional rental expense which was partially offset by a reduction in depreciation.

Technology expense increased $951 thousand for 2008 compared to 2007
and $2.0 million for 2007 compared to 2006. These increases were due, in part, to four acquisitions completed since September 2006 which contributed approximately $238 thousand and $962 thousand for the years ended 2008 and 2007, respectively, of
additional expense. Additionally, in 2008 and 2007, depreciation increased due to hardware and customer products added including an upgrade in the Banks deposit system.

Professional fees increased $548 thousand for 2008 compared to 2007. Professional fees decreased $2.0 million for 2007 compared to 2006 primarily due to a decrease in consulting fees. During the first quarter of 2007,
we reevaluated our need for the use of consultants and other professionals and determined that in certain areas we have the internal resources and skills necessary to handle these specialized tasks.

We recorded $562 thousand, $920 thousand and $638 thousand in acquisition-related expenses for 2008, 2007 and 2006, respectively. Acquisition expenses include retention
bonuses and data processing costs related to the conversion of computer systems.

Other noninterest expense was $22.5 million for 2008, up $4.0 million
compared to 2007. This increase was due, in part, to three acquisitions completed since March of 2007. In addition, FDIC assessment rates which were enacted in 2007, increased $2.1 million and we incurred approximately $800 thousand in Hurricane Ike
related expenses during 2008.

Other noninterest expense decreased $166 thousand for 2007 compared to 2006. Since the third quarter of 2006, we have
completed three acquisitions which contributed approximately $1.5 million in noninterest expense. This increase was partially offset by the write-off of $1.3 million of remaining unamortized debt issuance costs related to the prepayment of $29.6
million of junior subordinated debt in 2006.

Income Taxes. We provided $17.4 million, $25.7 million and $21.9 million for
federal and state income taxes for 2008, 2007 and 2006, respectively. The effective tax rates for 2008, 2007 and 2006 were approximately 31%, 33% and 32%, respectively. During 2008, 2007 and 2006, we revised our estimate to remove contingent
liabilities totaling $619 thousand, $98 thousand and $473 thousand, respectively, related to the expiration of previous tax contingencies. These reductions resulted in lower effective tax rates during these periods.

We expect our effective tax rate to continue to run at the 32% level dependent largely upon the size of our tax-exempt securities portfolio and bank-owned life insurance
income.

Financial Condition

Loans Held for
Investment. The following table summarizes our loan portfolio by type, excluding loans held for sale as of December 31 (dollars in thousands):



|                          |  |        |           |   |       |   |        |      |           |  |       |        |  |      |           |  |        |   |   |   |           |        |       |   |  |   |           |  |       |  
|------------------------- |  | ------ | --------- | - | ----- | - | ------ | ---- | --------- |  | ----- | ------ |  | ---- | --------- |  | ------ | - | - | - | --------- | ------ | ----- | - |  | - | --------- |  | ----- | -
|                          |  | 2008   |           |   | 2007  |   |        | 2006 |           |  | 2005  |        |  | 2004 |          
|                          |  | Amount |           | % |       |   | Amount |      | %         |  |       | Amount |  | %    |           |  | Amount |   | % |   |           | Amount |       | % | 
|Commercial and industrial |  | $      | 1,093,942 |   | 28.8  | % |        | $    | 912,604   |  | 27.3  | %      |  | $    | 824,494   |  | 26.8   | % |   | $ | 738,061   |        | 27.4  | % |  | $ | 682,209   |  | 29.2  | %
|Real estate:              |  |        |           |   |       |   |        |      |           |  |       |        |  |      |           |  |        |   |   |   |           |        |       |   |  |   |           |  |       |  
|Commercial                |  |        | 1,763,712 |   | 46.5  | % |        |      | 1,387,014 |  | 41.5  | %      |  |      | 1,336,465 |  | 43.4   | % |   |   | 1,221,610 |        | 45.4  | % |  |   | 1,043,960 |  | 44.6  | %
|Construction              |  |        | 545,303   |   | 14.4  | % |        |      | 714,600   |  | 21.4  | %      |  |      | 597,985   |  | 19.4   | % |   |   | 438,454   |        | 16.3  | % |  |   | 329,982   |  | 14.1  | %
|Residential               |  |        | 309,622   |   | 8.2   | % |        |      | 226,033   |  | 6.8   | %      |  |      | 209,163   |  | 6.8    | % |   |   | 190,701   |        | 7.1   | % |  |   | 183,839   |  | 7.9   | %
|Consumer/other            |  |        | 63,883    |   | 1.7   | % |        |      | 75,626    |  | 2.3   | %      |  |      | 79,642    |  | 2.6    | % |   |   | 72,937    |        | 2.7   | % |  |   | 72,997    |  | 3.1   | %
|Foreign loans             |  |        | 15,828    |   | 0.4   | % |        |      | 23,960    |  | 0.7   | %      |  |      | 30,096    |  | 1.0    | % |   |   | 29,245    |        | 1.1   | % |  |   | 25,109    |  | 1.1   | %
|                          |  |        |           |   |       |   |        |      |           |  |       |        |  |      |           |  |        |   |   |   |           |        |       |   |  |   |           |  |       |  
|Total                     |  | $      | 3,792,290 |   | 100.0 | % |        | $    | 3,339,837 |  | 100.0 | %      |  | $    | 3,077,845 |  | 100.0  | % |   | $ | 2,691,008 |        | 100.0 | % |  | $ | 2,338,096 |  | 100.0 | %
|                          |  |        |           |   |       |   |        |      |           |  |       |        |  |      |           |  |        |   |   |   |           |        |       |   |  |   |           |  |       |  



30



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##### Table of Contents

##### Index to Financial Statements

At December 31, 2008, loans held for investment were $3.8 billion, an increase of $452 million or 13.5% over loans
held for investment at December 31, 2007. Loans held for investment acquired as a result of the First Horizon branch acquisition on February 8, 2008 totaled $54.6 million. In addition, due to current market conditions, $112 million of
loans classified as held for sale were transferred into the held for investment classification. The remaining increase in loans was due to internal loan growth.

During the fourth quarter of 2008, we reclassified certain construction and development loans in order to more precisely reflect our loan classifications based on their most current status. Based on our review, we reclassified approximately
$200 million from construction and development loans into the commercial real estate and residential real estate loan categories of approximately $180 million and $20 million, respectively. These loans were classified as construction and development
loans before the construction was completed and had not been adjusted to reflect the change in status on the loan.

Our primary lending focus is commercial
loans and owner-occupied real estate loans to businesses with annual revenues of $100 million or less. Typically, our customers have financing requirements between $50 thousand and $5 million. The Banks legal lending limit was $127 million at
December 31, 2008 and was not exceeded by any single loan relationship. At December 31, 2008, commercial real estate loans and commercial and industrial loans were 46.5% and 28.8%, respectively, of loans held for investment.

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

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

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

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



31



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##### Table of Contents

##### Index to Financial Statements

The following tables summarize the Companys commercial and construction real estate loan portfolios by the type of
property securing the credit. Property type concentrations are stated as a percentage of year-end total commercial and construction real estate loans as of December 31, 2008 (dollars in thousands):



|                                 |  |   |           |  |       |  
|-------------------------------- |  | - | --------- |  | ----- | -
|Property type:                   |  |   |           |  |       |  
|Office and office warehouse      |  | $ | 457,037   |  | 19.8  | %
|Retail                           |  |   | 395,547   |  | 17.1  | %
|Acquisition and land development |  |   | 299,267   |  | 12.9  | %
|Hospitality                      |  |   | 283,804   |  | 12.3  | %
|1-4 family                       |  |   | 156,041   |  | 6.8   | %
|Industrial warehouse             |  |   | 90,589    |  | 3.9   | %
|Multifamily                      |  |   | 28,720    |  | 1.2   | %
|Other                            |  |   | 598,010   |  | 26.0  | %
|                                 |  |   |           |  |       |  
|                                 |  | $ | 2,309,015 |  | 100.0 | %
|                                 |  |   |           |  |       |  

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

The following table presents loan maturities of the total loan portfolio excluding residential
mortgage and consumer loans at December 31, 2008 (in thousands). The table also presents the portion of loans that have fixed interest rates or variable interest rates that reprice at various intervals over the life of the loan.



|                                    |  |                       |           |                                    |   |                     |  |       |         |  |   |          
|----------------------------------- |  | --------------------- | --------- | ---------------------------------- | - | ------------------- |  | ----- | ------- |  | - | ---------
|                                    |  | Due inOne Yearor Less |           | Due AfterOne YearThroughFive Years |   | Due AfterFive Years |  | Total
|Commercial and industrial           |  | $                     | 788,106   |                                    | $ | 242,505             |  | $     | 63,331  |  | $ | 1,093,942
|Real estatecommercial              |  |                       | 216,649   |                                    |   | 785,754             |  |       | 761,309 |  |   | 1,763,712
|Real estateconstruction            |  |                       | 265,645   |                                    |   | 178,253             |  |       | 101,405 |  |   | 545,303  
|Foreign loans                       |  |                       | 9,041     |                                    |   | 6,787               |  |       |        |  |   | 15,828   
|                                    |  |                       |           |                                    |   |                     |  |       |         |  |   |          
|Total loans                         |  | $                     | 1,279,441 |                                    | $ | 1,213,299           |  | $     | 926,045 |  | $ | 3,418,785
|                                    |  |                       |           |                                    |   |                     |  |       |         |  |   |          
|Loans with a fixed interest rate    |  | $                     | 188,245   |                                    | $ | 782,254             |  | $     | 273,024 |  | $ | 1,243,523
|Loans with a floating interest rate |  |                       | 1,091,196 |                                    |   | 431,045             |  |       | 653,021 |  |   | 2,175,262
|                                    |  |                       |           |                                    |   |                     |  |       |         |  |   |          
|Total loans                         |  | $                     | 1,279,441 |                                    | $ | 1,213,299           |  | $     | 926,045 |  | $ | 3,418,785
|                                    |  |                       |           |                                    |   |                     |  |       |         |  |   |          

Our largest concentration in any single industry is in our energy portfolio. At December 31, 2008, our
energy portfolio totaled $442 million which represents approximately 12% of total loans held for investment. The petroleum industry is usually divided into three major components: upstream, midstream and downstream. The composition of the
collateral of our upstream energy portfolio, at December 31, 2008, consists of 63% gas reserves and 37% oil reserves. The upstream oil sector is a term commonly used to refer to the searching for and the recovery and production of crude
oil and natural gas. The upstream oil sector is also known as the exploration and production sector. These reserve-based loans represent approximately 80% of our energy portfolio. Our remaining energy portfolio consists of well-secured loans to
companies that would be classified as midstream energy companies. A midstream energy company is a company that processes and transports crude oil and natural gas. The energy lending group participates in shared national credits which are
defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. The energy lending group is the only group that consistently participates in shared national credits. As of
December 31, 2008, excluding the energy portfolio, there was no concentration of loans to any one type of industry exceeding 10% of total loans nor were there any loans classified as highly leveraged transactions.

At December 31, 2008, loans held for investment were 99.3% of deposits and 74.7% of total assets. Loans held for investment were 90.9% of deposits and 73.6% of
total assets at December 31, 2007.



32



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##### Index to Financial Statements

Loans Held for Sale.Loans held for sale totaled $1.5 million at December 31, 2008, as compared with
$78.4 million at December 31, 2007. Loans held for sale at December 31, 2007 included certain commercial real estate loans and SBA guaranteed loans originated by the Bank. Due to current market conditions in 2008, $112 million of these
loans were no longer classified as held for sale and are now considered as held for investment. We recorded a lower of cost or market adjustment of $266 thousand for the year ended 2008. There were no lower of cost or market adjustments recorded for
the year ended 2007.

Loans are classified as held for sale when management has positively determined that the loans will be sold in the foreseeable future
and we have the ability to do so. The classification may be made upon origination or subsequent to the origination or purchase. Once a decision has been made to sell loans not previously classified as held for sale, such loans are transferred into
the held for sale classification and carried at the lower of cost or fair value. During the year ended December 31, 2008 and 2007, the Company sold approximately $10.3 million and $45.5 million, respectively, of performing commercial real
estate loans that were originally acquired as held for investment. These sales resulted in net gains of $203 thousand and $1.4 million during 2008 and 2007, respectively. These loans were sold as part of the Companys ongoing management of the
size, concentrations and risk profile of the loan portfolio.

Securities. The carrying amount of securities
we held at December 31 is shown below (dollars in thousands):



|                                                                    |  |        |         |   |       |   |        |      |         |  |       |        |  |   |         |  |       |  
|------------------------------------------------------------------- |  | ------ | ------- | - | ----- | - | ------ | ---- | ------- |  | ----- | ------ |  | - | ------- |  | ----- | -
|                                                                    |  | 2008   |         |   | 2007  |   |        | 2006 |        
|                                                                    |  | Amount |         | % |       |   | Amount |      | %       |  |       | Amount |  | % |        
|Available-for-Sale                                                  |  |        |         |   |       |   |        |      |         |  |       |        |  |   |         |  |       |  
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $      | 1,774   |   | 0.3   | % |        | $    | 11,601  |  | 2.4   | %      |  | $ | 6,425   |  | 1.6   | %
|Obligations of states of the U.S. and political subdivisions        |  |        | 1,358   |   | 0.2   | % |        |      | 1,714   |  | 0.4   | %      |  |   | 2,321   |  | 0.6   | %
|Mortgage-backed securities and collateralized mortgage obligations  |  |        | 616,028 |   | 97.3  | % |        |      | 448,779 |  | 94.1  | %      |  |   | 385,815 |  | 94.3  | %
|Other securities                                                    |  |        | 14,197  |   | 2.2   | % |        |      | 14,596  |  | 3.1   | %      |  |   | 14,790  |  | 3.5   | %
|                                                                    |  |        |         |   |       |   |        |      |         |  |       |        |  |   |         |  |       |  
|Total                                                               |  | $      | 633,357 |   | 100.0 | % |        | $    | 476,690 |  | 100.0 | %      |  | $ | 409,351 |  | 100.0 | %
|                                                                    |  |        |         |   |       |   |        |      |         |  |       |        |  |   |         |  |       |  
|Held-to-Maturity                                                    |  |        |         |   |       |   |        |      |         |  |       |        |  |   |         |  |       |  
|Obligations of states of the U.S. and political subdivisions        |  | $      | 95,910  |   | 55.7  | % |        | $    | 96,593  |  | 53.6  | %      |  | $ | 91,946  |  | 56.0  | %
|Mortgage-backed securities and collateralized mortgage obligations  |  |        | 76,129  |   | 44.3  | % |        |      | 83,493  |  | 46.4  | %      |  |   | 72,317  |  | 44.0  | %
|                                                                    |  |        |         |   |       |   |        |      |         |  |       |        |  |   |         |  |       |  
|Total                                                               |  | $      | 172,039 |   | 100.0 | % |        | $    | 180,086 |  | 100.0 | %      |  | $ | 164,263 |  | 100.0 | %
|                                                                    |  |        |         |   |       |   |        |      |         |  |       |        |  |   |         |  |       |  

At December 31, 2008, securities totaled $805 million, an increase of $149 million, or 22.6%, from $657
million at December 31, 2007. These securities represented 15.9% and 14.5% of total assets as of December 31, 2008 and 2007, respectively.

Net
unrealized gains on the available-for-sale securities were $6.2 million at December 31, 2008 as compared to net unrealized losses of $2.7 million at December 31, 2007.

The Company recorded realized losses of $722 thousand and $562 thousand for 2008 and 2006, respectively on certain interest-only securities. There were no realized losses recorded in 2007. These securities are tied to
underlying government guaranteed loans and are subject to prepayment and interest rate fluctuations. Given the length of time these securities had been in an unrealized loss position, current prepayment factors for the underlying loan and
managements inability to determine when a full recovery of the value may occur, management considered these securities to be other than temporarily impaired.



33



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##### Table of Contents

##### Index to Financial Statements

The carrying amount of securities at December 31, 2008, by contractual maturity is shown below (dollars in
thousands):



|                                                                    |  |                        |        |                      |                                     |   |        |                                      |                      |  |                    |        |  |                      |         |  |        |   |                      |   |        |       |      |   |  |   |        
|------------------------------------------------------------------- |  | ---------------------- | ------ | -------------------- | ----------------------------------- | - | ------ | ------------------------------------ | -------------------- |  | ------------------ | ------ |  | -------------------- | ------- |  | ------ | - | -------------------- | - | ------ | ----- | ---- | - |  | - | -------
|                                                                    |  | Due in One Yearor Less |        |                      | Due after One YearthroughFive Years |   |        | Due After FiveYears throughTen Years |                      |  | Due AfterTen Years |        |  |                     
|                                                                    |  | Amount                 |        | WeightedAverageYield |                                     |   | Amount |                                      | WeightedAverageYield |  |                    | Amount |  | WeightedAverageYield |         |  | Amount |   | WeightedAverageYield |   |        | Total
|Available-for-Sale                                                  |  |                        |        |                      |                                     |   |        |                                      |                      |  |                    |        |  |                      |         |  |        |   |                      |   |        |       |      |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                      | 1,774  |                      | 4.89                                | % |        | $                                    |                     |  |                   |        |  | $                    |        |  |       |   |                      | $ |       |       |     |   |  | $ | 1,774  
|Obligations of states of the U.S. and political subdivisions        |  |                        | 361    |                      | 4.94                                | % |        |                                      | 997                  |  | 3.99               | %      |  |                      |        |  |       |   |                      |   |       |       |     |   |  |   | 1,358  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                        | 20,961 |                      | 4.51                                | % |        |                                      | 346,887              |  | 4.67               | %      |  |                      | 171,451 |  | 5.26   | % |                      |   | 76,729 |       | 5.10 | % |  |   | 616,028
|Other securities                                                    |  |                        | 14,197 |                      | 1.85                                | % |        |                                      |                     |  |                   |        |  |                      |        |  |       |   |                      |   |       |       |     |   |  |   | 14,197 
|                                                                    |  |                        |        |                      |                                     |   |        |                                      |                      |  |                    |        |  |                      |         |  |        |   |                      |   |        |       |      |   |  |   |        
|Total                                                               |  | $                      | 37,293 |                      | 3.52                                | % |        | $                                    | 347,884              |  | 4.67               | %      |  | $                    | 171,451 |  | 5.26   | % |                      | $ | 76,729 |       | 5.10 | % |  | $ | 633,357
|                                                                    |  |                        |        |                      |                                     |   |        |                                      |                      |  |                    |        |  |                      |         |  |        |   |                      |   |        |       |      |   |  |   |        
|Held-to-Maturity                                                    |  |                        |        |                      |                                     |   |        |                                      |                      |  |                    |        |  |                      |         |  |        |   |                      |   |        |       |      |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                      | 10,919 |                      | 4.28                                | % |        | $                                    | 51,129               |  | 3.53               | %      |  | $                    | 30,581  |  | 3.80   | % |                      | $ | 3,281  |       | 3.91 | % |  | $ | 95,910 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                        | 9,240  |                      | 4.36                                | % |        |                                      | 32,759               |  | 4.88               | %      |  |                      | 15,690  |  | 5.21   | % |                      |   | 18,440 |       | 5.02 | % |  |   | 76,129 
|                                                                    |  |                        |        |                      |                                     |   |        |                                      |                      |  |                    |        |  |                      |         |  |        |   |                      |   |        |       |      |   |  |   |        
|Total                                                               |  | $                      | 20,159 |                      | 4.31                                | % |        | $                                    | 83,888               |  | 4.06               | %      |  | $                    | 46,271  |  | 4.28   | % |                      | $ | 21,721 |       | 4.85 | % |  | $ | 172,039
|                                                                    |  |                        |        |                      |                                     |   |        |                                      |                      |  |                    |        |  |                      |         |  |        |   |                      |   |        |       |      |   |  |   |        

The tax equivalent book yield on our securities portfolio for 2008 was 4.9%. The weighted-average life of the
portfolio was approximately 3.6 years, and the modified duration was approximately 3.0 years at December 31, 2008. The tax equivalent book yield on our securities portfolio for 2007 was 4.6%. The weighted-average life of the portfolio was
approximately 4.1 years, and the modified duration was approximately 3.5 years at December 31, 2007.

We did not own the securities of any one issuer
(other than the U.S. government and its agencies) of which the aggregate adjusted cost exceeded 10% of consolidated shareholders equity at December 31, 2008.

Deposits.Our lending and investing activities are funded primarily by deposits, approximately 74% of which were core deposits at December 31, 2008. Core deposits exclude brokered deposits and time
deposits over $100,000. These jumbo deposits are characteristically more sensitive to changes in interest rates and, thus we do not consider these a part of our core funding.

Total deposits as of December 31, 2008 increased $145 million to $3.8 billion, up 4.0% compared to $3.7 billion at December 31, 2007. Deposits acquired in the First Horizon branch acquisition on
February 8, 2008 totaled $85.3 million. The remaining increase was due to internal deposit growth. Approximately 70.6% of deposits at December 31, 2008 were interest-bearing. The percentage of interest-bearing demand and
noninterest-bearing demand deposits to total deposits as of December 31, 2008 was 39.9% and 29.4%, respectively, and our loan to deposit ratio at December 31, 2008 was 99.3%.

Sterling has chosen to participate in the FDICs Temporary Liquidity Guarantee Program which allows funds in noninterest-bearing transaction deposit accounts to be fully FDIC-insured until December 31, 2009.
The Company will incur a 10 basis point surcharge to these noninterest-bearing transaction deposit accounts not otherwise covered by the existing deposit insurance limit of $250 thousand.



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##### Index to Financial Statements

The average balances and weighted average rates paid on deposits for each of the past three years ended December 31
are presented below (dollars in thousands):



|                                             |  |                |           |             |      |   |                |      |             |  |      |                |  |             |           |  |      |  
|-------------------------------------------- |  | -------------- | --------- | ----------- | ---- | - | -------------- | ---- | ----------- |  | ---- | -------------- |  | ----------- | --------- |  | ---- | -
|                                             |  | 2008           |           |             | 2007 |   |                | 2006 |            
|                                             |  | AverageBalance |           | AverageRate |      |   | AverageBalance |      | AverageRate |  |      | AverageBalance |  | AverageRate |          
|Noninterest-bearing demand deposits          |  | $              | 1,086,727 |             |      |   |                | $    | 1,080,099   |  |      |                |  | $           | 1,013,788 |  |      |  
|Interest-bearing demand and savings deposits |  |                | 1,416,594 |             | 1.22 | % |                |      | 1,304,168   |  | 2.24 | %              |  |             | 1,093,652 |  | 1.64 | %
|Time deposits                                |  |                | 978,579   |             | 3.46 | % |                |      | 1,065,147   |  | 4.72 | %              |  |             | 803,698   |  | 4.10 | %
|Brokered certificates of deposit             |  |                | 129,156   |             | 2.79 | % |                |      | 126,246     |  | 4.31 | %              |  |             | 114,734   |  | 4.08 | %
|                                             |  |                |           |             |      |   |                |      |             |  |      |                |  |             |           |  |      |  
|Total deposits                               |  | $              | 3,611,057 |             | 2.17 | % |                | $    | 3,575,660   |  | 3.40 | %              |  | $           | 3,025,872 |  | 2.76 | %
|                                             |  |                |           |             |      |   |                |      |             |  |      |                |  |             |           |  |      |  

Average total deposits increased $35.4 million in 2008 compared to 2007. The increase during 2008 was primarily
attributable to the deposits acquired in the First Horizon branch acquisition on February 8, 2008. The changes in deposit mix and interest rates decreased the average cost of funds for deposits by 123 basis points in 2008.

Average total deposits increased $550 million in 2007 compared to 2006. The increase during 2007 was primarily attributable to internal deposit growth and the
acquisition of Partners Bank completed in March 2007. The changes in deposit mix and interest rates increased the average cost of funds for deposits by 64 basis points in 2007.

Average brokered certificates of deposit totaled $129 million in 2008, $126 million in 2007 and $115 million in 2006. We utilize brokered deposits together with other borrowed funds as a source of funding for our
lending and investment activities.

The maturities of time deposits of $100 thousand or more at December 31, 2008 are shown below (in thousands):



|                               |  |   |        
|------------------------------ |  | - | -------
|Three months or less           |  | $ | 317,138
|Over three through six months  |  |   | 158,940
|Over six through twelve months |  |   | 194,105
|Thereafter                     |  |   | 56,982 
|                               |  |   |        
|                               |  | $ | 727,165
|                               |  |   |        



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##### Index to Financial Statements

Other Borrowed Funds. Deposits are the primary source of funds for our lending, investment and
general business activities. Details of other borrowed funds are as follows (dollars in thousands):



|                                              |  |                                 |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                              |  | For the Year Ended December 31, |        
|                                              |  | 2008                            |         |   | 2007 |   |         | 2006 | 
|Federal Home Loan Bank advances               |  |                                 |         |   |      |   |         |      |  |   |         |  
|Balance outstanding at period-end             |  | $                               | 212,500 |   |      | $ | 187,500 |      |  | $ | 193,500 |  
|Weighted average interest rate at period-end  |  |                                 | 0.79    | % |      |   | 2.91    | %    |  |   | 5.36    | %
|Maximum outstanding at any month-end          |  | $                               | 638,000 |   |      | $ | 190,000 |      |  | $ | 381,000 |  
|Daily average balance                         |  |                                 | 435,804 |   |      |   | 104,338 |      |  |   | 312,746 |  
|Weighted average interest rate for the period |  |                                 | 2.21    | % |      |   | 5.05    | %    |  |   | 4.98    | %
|Repurchase agreements                         |  |                                 |         |   |      |   |         |      |  |   |         |  
|Balance outstanding at period-end             |  | $                               | 59,936  |   |      | $ | 422     |      |  | $ |        |  
|Weighted average interest rate at period-end  |  |                                 | 1.04    | % |      |   | 2.50    | %    |  |   |        |  
|Maximum outstanding at any month-end          |  | $                               | 67,288  |   |      | $ | 5,055   |      |  | $ |        |  
|Daily average balance                         |  |                                 | 51,129  |   |      |   | 1,383   |      |  |   |        |  
|Weighted average interest rate for the period |  |                                 | 1.79    | % |      |   | 1.99    | %    |  |   |        |  
|Federal funds purchased                       |  |                                 |         |   |      |   |         |      |  |   |         |  
|Balance outstanding at period-end             |  | $                               | 36,150  |   |      | $ | 9,225   |      |  | $ | 27,175  |  
|Weighted average interest rate at period-end  |  |                                 | 0.50    | % |      |   | 4.40    | %    |  |   | 5.43    | %
|Maximum outstanding at any month-end          |  | $                               | 80,200  |   |      | $ | 36,225  |      |  | $ | 35,050  |  
|Daily average balance                         |  |                                 | 47,828  |   |      |   | 28,627  |      |  |   | 32,354  |  
|Weighted average interest rate for the period |  |                                 | 2.11    | % |      |   | 5.35    | %    |  |   | 5.23    | %
|Treasury Auction Facility                     |  |                                 |         |   |      |   |         |      |  |   |         |  
|Balance outstanding at period-end             |  | $                               | 100,000 |   |      | $ |        |      |  | $ |        |  
|Weighted average interest rate at period-end  |  |                                 | 0.42    | % |      |   |        |      |  |   |        |  
|Maximum outstanding at any month-end          |  | $                               | 100,000 |   |      | $ |        |      |  | $ |        |  
|Daily average balance                         |  |                                 | 7,650   |   |      |   |        |      |  |   |        |  
|Weighted average interest rate for the period |  |                                 | 0.42    | % |      |   |        |      |  |   |        |  

As of December 31, 2008, we had $409 million in other borrowings compared to $197 million at
December 31, 2007, an increase of $211 million or 107%. Our primary source of other borrowings is the Federal Home Loan Bank (FHLB). These borrowings are collateralized by single family residential mortgage loans, certain pledged
securities, FHLB stock and any funds on deposit with the FHLB. FHLB advances are available to us under a security and pledge agreement. At December 31, 2008, we had total funds of $1.1 billion available under this agreement of which $213
million was outstanding with an average interest rate of 0.79%. At December 31, 2008, we had $40.0 million of FHLB advances that mature in nine years and $500 thousand of FHLB advances that mature in two years. The remaining $172 million
advances had maturities of fewer than three days. We utilize these borrowings to meet liquidity needs. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits.

Securities sold under agreements to repurchase represent the purchase of interests in securities by banking customers and structured repurchase agreements with other
financial institutions. At December 31, 2008 and 2007, we had securities sold under agreements to repurchase with banking customers of $9.9 million and $422 thousand, respectively. Structured repurchase agreements totaled $50.0 million at
December 31, 2008 and consisted of agreements with two separate financial institutions totaling $25.0 million, each that will mature in 2015. The rate on these repurchase agreements was 1.22% and 0.87%, respectively, at December 31, 2008.
There were no structured repurchase agreements outstanding on December 31, 2007.

We have federal funds purchased at correspondent banks that
typically mature within one to ninety days. As of December 31, 2008 and 2007, federal funds outstanding with correspondent banks were $36.2 million and $9.2 million, respectively, and payable upon demand.



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##### Index to Financial Statements

Treasury Auction Facilities (TAF) are term funds auctioned to depository institutions by the Federal Reserve
Board. Each TAF auction is for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate). All advances must be fully collateralized. At December 31, 2008, we had $100 million of TAF borrowings outstanding.
There were no TAF borrowings at December 31, 2007.

Junior Subordinated Debt/Company Obligated Mandatorily Redeemable Trust Preferred
Securities.As of December 31, 2008, we had the following issues of trust preferred securities outstanding and junior subordinated debt owed to trusts (dollars in thousands):



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

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

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

On March 1, 2005,
the Federal Reserve adopted final rules for the capital treatment of trust preferred securities. The rules, as applicable to us, when fully transitioned and applicable on March 31, 2009, will limit the aggregate amount of trust preferred
securities and certain other capital elements to 25% of Tier 1 capital, net of goodwill. At December 31, 2008, the entire amount of the $80.3 million would count as Tier 1 capital. Any excess amount not qualifying for Tier 1 capital may be
included in Tier 2 capital. This amount is limited to 50% of Tier 1 capital. There is a five-year transition period for banks to become compliant with the new rules. Additionally, the rules provide that trust preferred securities no longer qualify
for Tier 1 capital within 5 years of their maturity. Refer to Note 20 to the Consolidated Financial Statements for a discussion of the impact of the final rule on our regulatory capital ratios.



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##### Index to Financial Statements

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

Subordinated Debt.In April 2003, we raised approximately $50.0 million through a private offering of subordinated unsecured notes. These subordinated
notes bear interest at a fixed rate of 7.375% and mature on April 15, 2013. Interest payments are due semi-annually. The subordinated notes may not be redeemed or called prior to their maturity. Debt issuance costs of approximately $1.0 million
are being amortized over the ten-year term of the notes on a straight-line basis. In June 2003, we entered into an interest rate swap agreement in which the Bank swapped the fixed rate to a floating rate. Under the terms of the swap agreement, we
receive a fixed coupon rate of 7.375% and pay a variable interest rate equal to the three-month LIBOR that is reset on a quarterly basis, plus 3.62%. This swap is designated as a fair-value hedge that qualifies for the shortcut method of
accounting. If the swap were to become ineffective the change in the fair value would be reflected in our statement of income.

On June 30, 2008, the
Bank entered into a subordinated note in the aggregate principal amount of $25.0 million. The subordinated note bears interest at a rate equal to LIBOR plus 2.50% and will be reset quarterly. The unpaid principal balance plus all accrued and unpaid
interest on the subordinated debt shall be due and payable on September 15, 2018. The Bank may prepay the subordinated debt without penalty on any interest payment date on or after September 15, 2013.

Asset Quality

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

A loan is impaired when, based on current
information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Potential problem loans are those loans that are not classified as nonperforming or impaired
but where information known by management indicates that the borrower may be unable to comply with the present terms. Management identifies these loans through its ongoing loan review process. As of December 31, 2008, potential problem loans
increased $51.0 million to $83.3 million at December 31, 2008 from $32.3 million at December 31, 2007.



38



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##### Table of Contents

##### Index to Financial Statements

Nonperforming assets and potential problem loans consisted of the following (in
thousands):



|                                          |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|----------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                          |  | 2008 |        |   | 2007 |   |        | 2006 |  |   | 2005   |   |  | 2004 |       
|Nonperforming loans:                      |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Nonaccrual                                |  | $    | 87,491 |   |      | $ | 19,445 |      |  | $ | 10,611 |   |  | $    | 21,841 |   |  | $ | 20,605 |  
|Restructured                              |  |      |       |   |      |   | 769    |      |  |   | 776    |   |  |      |       |   |  |   |       |  
|                                          |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming loans                 |  |      | 87,491 |   |      |   | 20,214 |      |  |   | 11,387 |   |  |      | 21,841 |   |  |   | 20,605 |  
|Foreclosed assets:                        |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Real estate acquired by foreclosure       |  |      | 5,625  |   |      |   | 3,683  |      |  |   | 1,465  |   |  |      | 460    |   |  |   | 1,536  |  
|Other repossessed assets                  |  |      | 154    |   |      |   | 152    |      |  |   | 404    |   |  |      | 137    |   |  |   | 216    |  
|                                          |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total foreclosed assets                   |  |      | 5,779  |   |      |   | 3,835  |      |  |   | 1,869  |   |  |      | 597    |   |  |   | 1,752  |  
|                                          |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming assets                |  | $    | 93,270 |   |      | $ | 24,049 |      |  | $ | 13,256 |   |  | $    | 22,438 |   |  | $ | 22,357 |  
|                                          |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                          |  |      |        |   |     
|Potential problem loans                   |  | $    | 83,309 |   |      | $ | 32,253 |      |  | $ | 32,201 |   |  | $    | 58,011 |   |  | $ | 54,293 |  
|                                          |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                          |  |      |        |   |     
|Accruing loans past due 90 days or more   |  | $    | 8,448  |   |      | $ | 1,304  |      |  | $ | 2,731  |   |  | $    | 162    |   |  | $ | 2,395  |  
|                                          |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                          |  |      |        |   |     
|Nonperforming loans to period-end loans   |  |      | 2.31   | % |      |   | 0.59   | %    |  |   | 0.36   | % |  |      | 0.81   | % |  |   | 0.88   | %
|Nonperforming assets to period-end assets |  |      | 1.84   | % |      |   | 0.53   | %    |  |   | 0.32   | % |  |      | 0.60   | % |  |   | 0.67   | %

Nonperforming assets were $93.2 million at December 31, 2008, a $69.2 million increase from $24.0 million at
December 31, 2007 due in part to nonperforming loans related to SemGroup, an energy customer that is currently in Chapter 11 bankruptcy. Total exposure to SemGroup at December 31, 2008 totaled $29.2 million, representing approximately 35%
of our total nonperforming loans. In addition, a limited number of loans secured by owner-occupied commercial real estate moved to a nonperforming status during 2008. These loans are expected to have minimal losses due to the low loan to value of
each of these real estate secured credits.

Accruing loans 90 days past due or more were $8.4 million and $1.3 million at December 31, 2008 and 2007,
respectively. The balance at December 31, 2008 consists primarily of two loans where the loans are well secured and in the process of collection.

Interest foregone on nonaccrual loans was approximately $3.6 million, $1.9 million and $1.3 million, respectively, during 2008, 2007 and 2006.

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

The provision for credit losses for 2008 was $29.9 million as compared to
$3.8 million for 2007. This increase in provision was due, in part, to the SemGroup borrowing relationship totaling $29.2 million which resulted in additional provision of approximately $4.3 million in 2008. Additionally, we recorded approximately
$2.7 million in provision for credit losses related to Hurricane Ike. Approximately $220 million of outstanding loans have been identified that have collateral located in the identified Hurricane Evacuation Zones near the coast which were the most
severely affected areas. This provision represents our best estimate at this time of possible losses that may occur in these areas.

Net charge-offs were
$14.5 million or 0.40% of average loans for 2008 compared to $2.9 million or 0.09% of average loans during 2007. The increase in net charge-offs during 2008 was due in part to certain auto dealer loans that were identified and several other older
nonperforming loans which we sold as part of a clean-up effort.



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##### Index to Financial Statements

The allowance for credit losses is a valuation allowance consisting of the allowance for loan losses and the allowance
for unfunded lending commitments. It is established through charges to earnings in the form of a provision for credit losses. Based on an evaluation of the loan portfolio, management presents a quarterly review of the allowance for credit losses to
the Banks Board of Directors, indicating any changes in the allowance since the last review and any recommendations as to adjustments in the allowance. In making our evaluation, we consider the industry diversification of the commercial loan
portfolio and the effect of changes in the local real estate market on collateral values. We also consider the results of recent regulatory examinations, our history of credit experience and our ongoing internal credit reviews.

The allowance for loan losses at December 31, 2008 was $49.2 million and represented 1.30% of total loans. The allowance for loan losses at December 31, 2008
was 56.21% of nonperforming loans, down from 170.41% at December 31, 2007. The allowance for unfunded lending commitments was $1.7 million at December 31, 2008 and $927 thousand at December 31, 2007.

We continually monitor economic conditions in our local market areas and the probable impact on borrowers, past due amounts, related collateral values, the number and
size of nonperforming loans and on the resulting amount of charge-offs for the period.

We have several systems and procedures in place to assist in
managing the overall quality of the loan portfolio. In addition to established underwriting guidelines and approval processes, we monitor delinquency levels for any negative or adverse trends. We also perform reviews of the loan portfolios on a
regular basis to identify troubled loans and to assess their overall probability of collection.

Ongoing portfolio reviews are conducted by our internal
loan review department under an established loan review program. We are targeting a loan review penetration of at least 60-70% annually of the total commercial and real estate loan portfolios.

Through the loan review process, we maintain an internally classified loan list, which, along with the delinquency list of loans, helps us assess the overall quality of
the loan portfolios and the adequacy of the allowance for credit losses. Loans on this listing are classified as substandard, doubtful or loss based on probability of repayment, collateral valuation and related collectibility.

All doubtful and loss loans are considered impaired. Substandard loans are defined as impaired when based on current information and events, it is probable that we will
be unable to collect all amounts due, both interest and principal, according to the contractual terms of the loan agreement. The allowance for loan losses related to impaired loans is determined based on the difference between the carrying value of
the impaired loan and its fair value. The fair value is determined based on the present value of expected cash flows discounted at the loans effective interest rate or, as a practical expedient, the loans observable market price or the
fair value of the collateral if the loan is collateral dependent.

Loans classified as substandard have clear and defined weaknesses such as
highly leveraged positions, unfavorable financial ratios, uncertain repayment sources or poor financial condition, which may jeopardize the loans recoverability. Loans classified as doubtful have characteristics similar to
substandard loans but with an increased risk that a loss may occur or that at least a portion of the loan may require a charge-off if liquidated at present. Although loans classified as substandard do not duplicate loans classified as doubtful, both
substandard and doubtful loans include some loans that are delinquent at least 30 days or on nonaccrual status. Loans classified as loss are those loans that are in the process of being charged off.

At December 31, 2008, substandard loans totaled $156 million, of which $81.5 million were loans designated as nonaccrual; and doubtful and loss loans totaled $5.0
million and $533 thousand, respectively, all of which were designated as nonaccrual.



40



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##### Table of Contents

##### Index to Financial Statements

In addition to the internally classified loan list and delinquency list of loans, we maintain a separate watch
list which further aids in monitoring the loan portfolios. Watch list loans show warning elements, deficiencies that require attention in the short run, or where pertinent ratios of the loan account have weakened to a point where more frequent
monitoring is warranted. These loans do not have all the characteristics of a classified loan (substandard or doubtful) but do show weakened elements as compared with those of a satisfactory credit. We review these loans in assessing the adequacy of
the allowance for credit losses. As of December 31, 2008 and 2007, watch list loans totaled $118 million and $94.9 million, respectively.

Management
assigns loan grades by individual loan and allocations are made within each loan grade. Loans are assigned a grade according to payment history, collateral values, and financial condition of the borrower.

The Bank maintains an adequate allowance for credit losses through its watch list classifications, allocating an increasing amount as the severity of a problem loan
increases. The Bank maintains an unallocated allowance for satisfactory non-classified credits based, in part, on the average of the last three years actual net charge-offs.

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



|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|----------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                  |  | Year Ended December 31, |       
|                                                                  |  | 2008                    |        |   | 2007 |   |        | 2006 |  |   | 2005   |   |  | 2004 |       
|Allowance for loan losses at January 1                            |  | $                       | 34,446 |   |      | $ | 32,027 |      |  | $ | 31,230 |   |  | $    | 29,406 |   |  | $ | 30,722 |  
|                                                                  |  |                         |        |   |     
|Charge-offs:                                                      |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial and industrial                                         |  |                         | 9,408  |   |      |   | 3,267  |      |  |   | 4,372  |   |  |      | 12,410 |   |  |   | 10,365 |  
|Real estate, mortgage and construction                            |  |                         | 5,241  |   |      |   | 1,066  |      |  |   | 3,879  |   |  |      | 1,768  |   |  |   | 3,405  |  
|Consumer/other                                                    |  |                         | 1,959  |   |      |   | 1,629  |      |  |   | 1,199  |   |  |      | 1,535  |   |  |   | 1,446  |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total charge-offs                                                 |  |                         | 16,608 |   |      |   | 5,962  |      |  |   | 9,450  |   |  |      | 15,713 |   |  |   | 15,216 |  
|Recoveries:                                                       |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial and industrial                                         |  |                         | 1,392  |   |      |   | 1,829  |      |  |   | 3,205  |   |  |      | 1,773  |   |  |   | 2,094  |  
|Real estate, mortgage and construction                            |  |                         | 117    |   |      |   | 47     |      |  |   | 79     |   |  |      | 711    |   |  |   | 159    |  
|Consumer/other                                                    |  |                         | 640    |   |      |   | 1,189  |      |  |   | 507    |   |  |      | 268    |   |  |   | 223    |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total recoveries                                                  |  |                         | 2,149  |   |      |   | 3,065  |      |  |   | 3,791  |   |  |      | 2,752  |   |  |   | 2,476  |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net charge-offs                                                   |  |                         | 14,459 |   |      |   | 2,897  |      |  |   | 5,659  |   |  |      | 12,961 |   |  |   | 12,740 |  
|                                                                  |  |                         |        |   |     
|Allowance for credit losses associated with acquired institutions |  |                         |       |   |      |   | 1,496  |      |  |   | 2,152  |   |  |      | 761    |   |  |   |       |  
|Provision for loan losses                                         |  |                         | 29,190 |   |      |   | 3,820  |      |  |   | 4,304  |   |  |      | 14,024 |   |  |   | 11,424 |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for loan losses at December 31                          |  | $                       | 49,177 |   |      | $ | 34,446 |      |  | $ | 32,027 |   |  | $    | 31,230 |   |  | $ | 29,406 |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for unfunded loan commitments at January 1              |  |                         | 927    |   |      |   | 927    |      |  |   | 1,173  |   |  |      | 826    |   |  |   |       |  
|Provision for losses on unfunded loan commitments                 |  |                         | 727    |   |      |   |       |      |  |   | (246   | ) |  |      | 347    |   |  |   | 826    |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for unfunded loan commitments at December 31            |  |                         | 1,654  |   |      |   | 927    |      |  |   | 927    |   |  |      | 1,173  |   |  |   | 826    |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total allowance for credit losses at December 31                  |  | $                       | 50,831 |   |      | $ | 35,373 |      |  | $ | 32,954 |   |  | $    | 32,403 |   |  | $ | 30,232 |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                                  |  |                         |        |   |     
|Ratios:                                                           |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for loan losses to period end loans                     |  |                         | 1.30   | % |      |   | 1.01   | %    |  |   | 1.02   | % |  |      | 1.16   | % |  |   | 1.25   | %
|Net charge-offs to average loans                                  |  |                         | 0.40   | % |      |   | 0.09   | %    |  |   | 0.20   | % |  |      | 0.51   | % |  |   | 0.58   | %
|Allowance for loan losses to period-end nonperforming loans       |  |                         | 56.21  | % |      |   | 170.41 | %    |  |   | 281.27 | % |  |      | 142.99 | % |  |   | 142.71 | %



41



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##### Table of Contents

##### Index to Financial Statements

The following table shows the allocation of the allowance for loan losses among various categories of loans. The
allocation is made for analytical purposes and is not necessarily indicative of the categories in which future loan losses may occur. The total allowance is available to absorb losses from any category of loans. In 2006, we changed our allowance
methodology to allow more specific allocation of our reserves.



|                                                                     |  |                        |        |                                                           |      |   |        |      |                                                           |  |      |        |  |                                                           |        |  |        |   |                                                           |   |        |        |     |                                                           |  |   |        |  |     |  
|-------------------------------------------------------------------- |  | ---------------------- | ------ | --------------------------------------------------------- | ---- | - | ------ | ---- | --------------------------------------------------------- |  | ---- | ------ |  | --------------------------------------------------------- | ------ |  | ------ | - | --------------------------------------------------------- | - | ------ | ------ | --- | --------------------------------------------------------- |  | - | ------ |  | --- | -
|                                                                     |  | December 31,           |       
|                                                                     |  | 2008                   |        |                                                           | 2007 |   |        | 2006 |                                                           |  | 2005 |        |  | 2004                                                      |       
|                                                                     |  | Amount                 |        | % of loansin eachCategory toTotal LoansHeld forInvestment |      |   | Amount |      | % of loansin eachCategory toTotal LoansHeld forInvestment |  |      | Amount |  | % of loansin eachCategory toTotal LoansHeld forInvestment |        |  | Amount |   | % of loansin eachCategory toTotal LoansHeld forInvestment |   |        | Amount |     | % of loansin eachCategory toTotal LoansHeld forInvestment | 
|                                                                     |  | (dollars in thousands) |       
|Balance of allowance for loan losses at end of period applicable to: |  |                        |        |                                                           |      |   |        |      |                                                           |  |      |        |  |                                                           |        |  |        |   |                                                           |   |        |        |     |                                                           |  |   |        |  |     |  
|Commercial and industrial                                            |  | $                      | 15,173 |                                                           | 29   | % |        | $    | 12,887                                                    |  | 28   | %      |  | $                                                         | 12,101 |  | 28     | % |                                                           | $ | 6,429  |        | 28  | %                                                         |  | $ | 8,925  |  | 30  | %
|Real estate, mortgage and construction                               |  |                        | 26,212 |                                                           | 69   | % |        |      | 17,645                                                    |  | 70   | %      |  |                                                           | 16,769 |  | 70     | % |                                                           |   | 8,738  |        | 69  | %                                                         |  |   | 10,647 |  | 67  | %
|Consumer/other                                                       |  |                        | 4,988  |                                                           | 2    | % |        |      | 2,851                                                     |  | 2    | %      |  |                                                           | 2,262  |  | 2      | % |                                                           |   | 730    |        | 3   | %                                                         |  |   | 764    |  | 3   | %
|Unallocated                                                          |  |                        | 2,804  |                                                           | N/A  |   |        |      | 1,063                                                     |  | N/A  |        |  |                                                           | 895    |  | N/A    |   |                                                           |   | 15,333 |        | N/A |                                                           |  |   | 9,070  |  | N/A |  
|                                                                     |  |                        |        |                                                           |      |   |        |      |                                                           |  |      |        |  |                                                           |        |  |        |   |                                                           |   |        |        |     |                                                           |  |   |        |  |     |  
|Total                                                                |  | $                      | 49,177 |                                                           | 100  | % |        | $    | 34,446                                                    |  | 100  | %      |  | $                                                         | 32,027 |  | 100    | % |                                                           | $ | 31,230 |        | 100 | %                                                         |  | $ | 29,406 |  | 100 | %
|                                                                     |  |                        |        |                                                           |      |   |        |      |                                                           |  |      |        |  |                                                           |        |  |        |   |                                                           |   |        |        |     |                                                           |  |   |        |  |     |  

Interest Rate Sensitivity

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

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



42



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##### Table of Contents

##### Index to Financial Statements

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



|                                       |  |                                          |  
|-------------------------------------- |  | ---------------------------------------- | -
|Changes inInterest Rates(Basis Points) |  | Increase (Decrease)in Net InterestIncome |  
|December 31, 2008                      |  |                                          |  
|+200                                   |  | 4.13                                     | %
|+100                                   |  | 2.86                                     | %
|Base                                   |  | 0.00                                     | %
|-100                                   |  | -4.92                                    | %
|December 31, 2007                      |  |                                          |  
|+200                                   |  | -0.26                                    | %
|+100                                   |  | -0.08                                    | %
|Base                                   |  | 0.00                                     | %
|-100                                   |  | -0.56                                    | %

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

Off-Balance Sheet Arrangements, Commitments, Guarantees and Contractual Obligations

Our potential obligations associated with commitments to extend credit and outstanding letters of credit as of December 31, 2008 are summarized below (in thousands):



|                             |  |                   |         |           |   |           |  |             |         |       |   |         |  |   |        
|---------------------------- |  | ----------------- | ------- | --------- | - | --------- |  | ----------- | ------- | ----- | - | ------- |  | - | -------
|                             |  | Less thanOne Year |         | 1-3 Years |   | 3-5 Years |  | Over5 Years |         | Total
|Commitments to extend credit |  | $                 | 436,739 |           | $ | 199,296   |  | $           | 121,365 |       | $ | 112,688 |  | $ | 870,088
|Letters of credit            |  |                   | 92,798  |           |   | 11,220    |  |             | 61      |       |   |        |  |   | 104,079
|Bankers acceptances          |  |                   | 2,769   |           |   |          |  |             |        |       |   |        |  |   | 2,769  
|                             |  |                   |         |           |   |           |  |             |         |       |   |         |  |   |        
|Total                        |  | $                 | 532,306 |           | $ | 210,516   |  | $           | 121,426 |       | $ | 112,688 |  | $ | 976,936
|                             |  |                   |         |           |   |           |  |             |         |       |   |         |  |   |        

Since commitments associated with letters of credit and lending and financing arrangements may expire unused, the
amounts shown do not necessarily reflect the actual future cash funding requirements. See Note 19 to the Consolidated Financial Statements for additional discussion of financial instruments with off-balance sheet risk, including a discussion of the
nature, business purpose and importance of off-balance sheet arrangements.

Off-balance sheet arrangements also include an interest rate swap, an interest
rate floor and an interest rate collar which can be found in Note 13 and our Trust Preferred Securities. Further information regarding the Trust Preferred Securities can be found in Note 11 to the Consolidated Financial Statements.



43



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##### Index to Financial Statements

Our future contractual cash payments are as follows (in thousands):



|                                           |  |                   |           |          |   |          |  |             |        |       |   |         |  |   |          
|------------------------------------------ |  | ----------------- | --------- | -------- | - | -------- |  | ----------- | ------ | ----- | - | ------- |  | - | ---------
|                                           |  | Less thanOne Year |           | 1-3Years |   | 3-5Years |  | Over5 Years |        | Total
|Junior subordinated debt                   |  | $                 |          |          | $ |         |  | $           |       |       | $ | 82,734  |  | $ | 82,734   
|Subordinated debt                          |  |                   |          |          |   |         |  |             |       |       |   | 75,000  |  |   | 75,000   
|Interest expense related to long-term debt |  |                   | 10,209    |          |   | 20,461   |  |             | 23,651 |       |   | 116,812 |  |   | 171,133  
|Operating leases                           |  |                   | 9,676     |          |   | 18,939   |  |             | 16,567 |       |   | 75,263  |  |   | 120,445  
|Certificates and other time deposits       |  |                   | 1,064,305 |          |   | 95,165   |  |             | 11,901 |       |   | 51      |  |   | 1,171,422
|                                           |  |                   |           |          |   |          |  |             |        |       |   |         |  |   |          
|Total                                      |  | $                 | 1,084,190 |          | $ | 134,565  |  | $           | 52,119 |       | $ | 349,860 |  | $ | 1,620,734
|                                           |  |                   |           |          |   |          |  |             |        |       |   |         |  |   |          

The amount shown above for subordinated debt represents our contractual obligation. The subordinated debt is
reflected in the consolidated balance sheet at its fair value. As discussed earlier, the Bank entered into an interest rate swap designated as a fair-value hedge of the subordinated debt. Refer to Note 13 in the Consolidated Financial Statements for
further information.

Interest expense obligations on junior subordinated debt and on subordinated debt are calculated based on the stated contractual
interest rates. Interest expense on variable rate junior subordinated debt and on subordinated debt is calculated based on the current 3-month LIBOR rate. Refer to Notes 11 and 12 in the Consolidated Financial Statements for further information.

Capital and Liquidity

CapitalAt
December 31, 2008, shareholders equity totaled $643 million or 12.7% of total assets, as compared to $480 million or 10.6% of total assets at December 31, 2007. Our risk-based capital ratios together with the minimum capital amounts
and ratios as of December 31, 2008 were as follows (dollars in thousands):



|                                         |  |        |         |       |                              |   |        |   |         |  |     |  
|---------------------------------------- |  | ------ | ------- | ----- | ---------------------------- | - | ------ | - | ------- |  | --- | -
|                                         |  | Actual |         |       | For CapitalAdequacy Purposes |  
|                                         |  | Amount |         | Ratio |                              |   | Amount |   | Ratio   | 
|Total Capital (to Risk Weighted Assets)  |  | $      | 632,015 |       | 14.9                         | % |        | $ | 338,491 |  | 8.0 | %
|Tier 1 Capital (to Risk Weighted Assets) |  |        | 513,518 |       | 12.1                         | % |        |   | 169,245 |  | 4.0 | %
|Tier 1 Capital (to Average Assets)       |  |        | 513,518 |       | 10.6                         | % |        |   | 194,316 |  | 4.0 | %

During the fourth quarter of 2008, we received $125 million in capital from the U.S. Treasury department as the
result of our participation in the U.S. Treasurys Capital Purchase Program. See Note 20 to our Consolidated Financial Statements for further discussion of regulatory capital requirements.

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

Sterling Bancshares must provide for
its own liquidity and fund its own obligations. The primary source of Sterling Bancshares revenues is from dividends declared by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends
to Sterling Bancshares. At December 31, 2008, the aggregate amount of dividends, which legally could be paid without prior approval of various regulatory agencies, totaled approximately $189 million. It is not anticipated that such restrictions
will have an impact on the ability of Sterling Bancshares to meet its ongoing cash obligations.



44



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##### Index to Financial Statements

On July 30, 2007, our Board of Directors amended its existing common stock repurchase program originally adopted by
the Board on April 26, 2005. The aggregate number of shares originally approved by the Board for repurchase under the Program remains unchanged at 3,750,000 shares.



|ITEM 7A. | Quantitative and Qualitative Disclosures about Market Risk
|-------- | ----------------------------------------------------------

For
information regarding the market risk of our financial instruments, see Managements Discussion and Analysis of Financial Condition and Results of Operations  Interest Rate Sensitivity. Our principal market risk exposure is to
interest rates.



|ITEM 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

Refer to the index included on page F-1 and the Consolidated Financial Statements that begin on page F-3 of this Annual Report on Form 10-K.



|ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

None.



|ITEM 9A. | Controls and Procedures
|-------- | -----------------------

The Companys Chief Executive Officer
(the CEO) and Chief Financial Officer (the CFO), after evaluating the effectiveness of the Companys disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act have concluded that, as of
the end of the fiscal year covered by this Annual Report on Form 10-K, the Companys disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports filed or
submitted under such Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and such information is accumulated and communicated to management, including the CEO and the CFO, as
appropriate, to allow timely decisions regarding required disclosures.

There were no changes in the Companys internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial
reporting.



45



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##### Table of Contents

##### Index to Financial Statements

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND COMPLIANCE WITH DESIGNATED
LAWS AND REGULATIONS

Managements Report on Internal Control over Financial Reporting

Management of Sterling Bancshares, Inc. and subsidiaries (the Company) is responsible for preparing the Companys annual financial statements. Management
is also responsible for establishing and maintaining adequate internal control over financial reporting. The Companys internal control over financial reporting is a process designed under the supervision of the Companys CEO and CFO to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Companys financial statements for external purposes in accordance with generally accepted accounting principles. All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

As of December 31, 2008, management assessed the effectiveness of the Companys internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal ControlIntegrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. This assessment included controls over the preparation of the
schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FRY-9C) to meet the reporting requirements of Section 112 of the Federal
Deposit Insurance Corporation Improvement Act. Based on the assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2008, based on those criteria.

Deloitte & Touche LLP, the independent registered public accounting firm that audited the Companys consolidated financial statements included in this
Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Companys internal control over financial reporting as of December 31, 2008. The report is included in this Item under the heading Report
of Independent Registered Public Accounting Firm.

Compliance with Designated Laws and Regulations

Management is also responsible for ensuring compliance with the federal laws and regulations concerning loans to insiders and the federal and state laws and regulations
concerning dividend restrictions, both of which are designated by the Federal Deposit Insurance Corporation (FDIC) as safety and soundness laws and regulations.

Management assessed its compliance with the designated safety and soundness laws and regulations and has maintained records of its determinations and assessments as required by the FDIC. Based on this assessment, management believes that
the Company has complied, in all material respects, with the designated safety and soundness laws and regulations for the year ended December 31, 2008.



|                                                                    
|--------------------------------------------------------------------
|LOGO                                                                
|J. Downey Bridgwater Chairman, President and Chief Executive Officer



|                                                                   
|-------------------------------------------------------------------
|LOGO                                                               
|Zach L. Wasson Executive Vice President and Chief Financial Officer



46



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##### Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Sterling Bancshares, Inc.

Houston, Texas

We have audited the internal control over financial reporting of Sterling Bancshares, Inc. and subsidiaries
(the Bank) as of December 31, 2008, based on criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Banks management
is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Banks internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.

A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys
principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override
of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States), the financial statements as of and for the year ended December 31, 2008 of the Bank and our report dated March 13, 2009 expressed an unqualified opinion on those financial
statements.

LOGO

Houston, Texas

March 13, 2009



47



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##### Index to Financial Statements

|ITEM 9B. | Other Information
|-------- | -----------------

None.

PART III



|ITEM 10. | Directors, Executive Officers and Corporate Governance
|-------- | ------------------------------------------------------

The
information required by this Item as to the directors and executive officers is hereby incorporated by reference from the information appearing under the captions Election of Directors, Information about the Board of Directors,
Committees of the Board, and Committees of the Bank, Executive Officers and Other Significant Employees, Section 16 Beneficial Ownership Reporting Compliance and Corporate Governance and Nominating Committee
in the Companys definitive proxy statement to be filed with the SEC pursuant to the Exchange Act within 120 days of year end. The information required by this Item as to the Code of Ethics for Senior Financial Officers is hereby incorporated
by reference from Item 1BusinessAvailable Information of this report.



|ITEM 11. | Executive Compensation
|-------- | ----------------------

The information
required by this Item as to the management of the Company is hereby incorporated by reference from the information appearing under the caption Compensation Discussion and Analysis, Human Resources Programs Committee
Decisions, Compensation Committee Interlocks and Insider Participation, Summary Compensation Table, Equity Compensation Plan Information, and Grants of Plan-Based Awards in the Companys
definitive proxy statement to be filed with the SEC pursuant to the Exchange Act within 120 days of year end. Notwithstanding the foregoing, in accordance with the instructions to Item 407 of Regulation S-K, the information contained in the
Companys definitive proxy statement under the subheading Human Resources Programs Committee Decisions shall be deemed Furnished, and not Filed, in this Form 10-K, and shall not be incorporated by reference into any Filing under the
Securities Act or the Exchange Act as a result of Furnishing, except to the extent the Company specifically incorporates it by reference.



|ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

The information required by this Item as to the ownership by management and others of securities of the Company is hereby incorporated by reference from the information
appearing under the captions Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information in the Companys definitive proxy statement to be filed with the SEC pursuant to the
Securities Exchange Act of 1934 within 120 days of year end.



|ITEM 13. | Certain Relationships and Related Transactions, and Director Independence
|-------- | -------------------------------------------------------------------------

The information required by this Item as to certain business relationships and transactions with management and other related parties of the Company is hereby incorporated by reference to such information appearing
under the captions Certain Transactions with Related Persons, and Director Independence in the Companys definitive proxy to be filed with the SEC pursuant to the Exchange Act within 120 days of year end.



|ITEM 14. | Principal Accounting Fees and Services
|-------- | --------------------------------------

The information required by this Item as to disclosures regarding accounting fees and services is hereby incorporated by reference to such information appearing under the caption Independent Registered Public Accounting Firms
Fees in the Companys definitive proxy to be filed with the SEC pursuant to the Exchange Act within 120 days of year end.



48



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##### Index to Financial Statements

PART IV



|ITEM 15. | Exhibits, Financial Statement Schedules
|-------- | ---------------------------------------

(a) List of documents
filed as part of this report



| | 1. | Consolidated Financial Statements. The following Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm are included in this
Annual Report on Form 10-K.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                        |  |    
|------------------------------------------------------- |  | ---
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |  | F-2
|                                                        | 
|CONSOLIDATED FINANCIAL STATEMENTS:                      |  |    
|Consolidated Balance Sheets                             |  | F-3
|Consolidated Statements of Income                       |  | F-4
|Consolidated Statements of Shareholders Equity         |  | F-5
|Consolidated Statements of Cash Flows                   |  | F-6
|Notes to Consolidated Financial Statements              |  | F-7



| | 2. | Consolidated Financial Statement Schedules. These schedules are omitted as the required information is inapplicable or the information is presented in the consolidated
financial statements or related notes.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Exhibits.
| | -- | ---------



|            |  |                                                                                                                                                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                
|2.1         |  | Agreement and Plan of Merger Dated July 7, 2005 by and among Sterling Bancshares, Inc., SBPB, Inc., and Prestonwood Bancshares, Inc. [Incorporated by reference to Exhibit 10.1 of the
Companys Quarterly Report on Form 10-Q filed on November 8, 2005 (File No. 000-20750).]
|            | 
|2.2         |  | Agreement and Plan of Merger dated July 25, 2006 between Sterling Bancshares, Inc. and BOTH, Inc. [Incorporated by reference to Exhibit 2.1 of the Companys Current Report on Form
8-K filed on July 26, 2006.]                                                               
|            | 
|2.3         |  | Agreement and Plan of Merger dated January 24, 2007 between Sterling Bancshares, Inc., Sterling Bank and Partners Bank of Texas. [Incorporated by reference to Exhibit 2.1 of the
Companys Current Report on Form 8-K filed on January 25, 2007.]                             
|            | 
|2.4         |  | Share Exchange Agreement dated May 3, 2007, among the Company, MBM Advisors and the shareholders of MBM Advisors. [Incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on May 4, 2007 (File No. 000-20750).]                            
|            | 
|3.1         |  | Restated and Amended Articles of Incorporation of the Company effective August 13, 2007. [Incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed
on August 19, 2007 (File No. 000-20750).]                                                 
|            | 
|3.2         |  | Amended and Restated Bylaws of Sterling Bancshares, Inc. (as of October 29, 2007). [Incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed on October
30, 2007 (File No. 000-20750).]                                                      
|            | 
|3.3         |  | Certificate of Designations of Fixed Rate Cumulative Preferred Stock, Series J, of Sterling Bancshares, Inc. [Incorporated by reference to Exhibit 3.1 to the Companys Current Report on
Form 8-K filed on December 15, 2008 (File No. 0-20750).]                             
|            | 
|4.1         |  | Preferred Securities Guarantee Agreement dated March 21, 2001. [Incorporated by reference to Exhibit 4.2 of the Companys Current Report on Form 8-K filed on March 21, 2001 (File
No. 000-20750).]                                                                            
|            | 
|4.2         |  | Indenture dated March 21, 2001. [Incorporated by reference to Exhibit 4.4 of the Companys Current Report on Form 8-K filed on March 21, 2001 (File No. 000-20750).]                                                                                                           



49



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                                                                              
|4.3         |  | First Supplemental Indenture dated March 21, 2001. [Incorporated by reference to Exhibit 4.5 of the Companys Current Report on Form 8-K filed on March 21, 2001 (File No. 000-20750).]                                                                                                                                                                                      
|            | 
|4.4         |  | Indenture dated August 30, 2002. [Incorporated by reference to Exhibit 4.4 of the Companys Current Report on Form 8-K filed on September 12, 2002(File No.
000-20750).]                                                                                                                                                                                                     
|            | 
|4.5         |  | Junior Subordinated Deferrable Interest Debenture due August 30, 2032. [Incorporated by reference to Exhibit 4.6 of the Companys Current Report on Form 8-K filed on September 12, 2002
(File No. 000-20750).]                                                                                                                                                              
|            | 
|4.6         |  | Guarantee Agreement dated August 30, 2002. [Incorporated by reference to Exhibit 4.6 of the Companys Current Report on Form 8-K filed on September 12, 2002(File No. 000-20750).]                                                                                                                                                                                           
|            | 
|4.7         |  | Preferred Securities Guarantee Agreement dated September 26, 2002. [Incorporated by reference to Exhibit 4.2 of the Companys Current Report on Form 8-K dated September 26, 2002
(File No. 000-20750).]                                                                                                                                                                     
|            | 
|4.8         |  | Second Supplemental Indenture dated September 26, 2002. [Incorporated by reference to Exhibit 4.9 of the Companys Current Report on Form 8-K dated September 26, 2002 (File No.
000-20750).]                                                                                                                                                                                
|            | 
|4.9         |  | 8.30% Junior Subordinated Deferrable Interest Debenture due September 26, 2032. [Incorporated by reference to Exhibit 4.8 of the Companys Current Report on Form 8-K dated September 26,
2002 (File No. 000-20750).]                                                                                                                                                        
|            | 
|4.10        |  | Fiscal and Paying Agency Agreement dated April 10, 2003 between Sterling Bank and Deutsche Bank Trust Company Americas. [Incorporated by reference to Exhibit 4.1 of the Companys Current
Report on Form 8-K filed April 15, 2003 (File No. 000-20750).]                                                                                                                    
|            | 
|4.11        |  | Form of Global Certificate representing Sterling Banks 7.375% Subordinated Notes due 2013. [Incorporated by reference to Exhibit 4.2 of the Companys Current Report on Form 8-K
filed April 15, 2003 (File No. 000-20750).]                                                                                                                                                
|            | 
|4.12        |  | Amended and Restated Declaration of Trust by and among Sterling Bancshares, Inc., as sponsor, Wilmington Trust Company, as institutional trustee and Delaware trustee, and the administrators
named therein, dated as of March 26, 2007. [Incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed on March 30, 2007 (File No. 000-20750).]
|            | 
|4.13        |  | Indenture by and between Sterling Bancshares, Inc., as issuer, and Wilmington Trust Company, as trustee, dated as of March 26, 2007. [Incorporated by reference to Exhibit 4.2 to the
Companys Current Report on Form 8-K filed on March 30, 2007(File No. 000-20750).]                                                                                                     
|            | 
|4.14        |  | Guarantee Agreement by and between Sterling Bancshares, Inc., as guarantor, and Wilmington Trust Company, as guarantee trustee, dated as of March 26, 2007. [Incorporated by reference to
Exhibit 4.3 to the Companys Current Report on Form 8-K filed on March 30, 2007 (File No. 000-20750).]                                                                             
|            | 
|4.15        |  | Form of Capital Securities Certificate of Sterling Bancshares Capital Trust IV, dated March 26, 2007. [Incorporated by reference to Exhibit 4.4 to the Companys Current Report on Form
8-K filed on March 30, 2007 (File No. 000-20750).]                                                                                                                                   



50



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                                 |  |                  
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                 |  |                  
|4.16        |  | Sterling Bancshares, Inc. Deferred Compensation Plan (as Amended and Restated) [Incorporated by reference to Exhibit 4.6 to the Companys Registration Statement on
Form S-8 filed August 29, 2007 (File No. 333-145774 ).]                                                                                    
|            | 
|4.17        |  | Form of Stock Certificate for the Series J Preferred Stock [Incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed on December 15,
2008 (File No. 0-20750).]                                                                                                               
|            | 
|4.18        |  | Warrant to Purchase 2,615,557 Shares of Common Stock of Sterling Bancshares, Inc. [Incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K
filed on December 15, 2008 (File No. 0-20750).]                                                                                        
|            | 
|10.1***     |  | 1994 Incentive Stock Option Plan of the Company. [Incorporated by reference to Exhibit 10.1 of the Companys Annual Report on Form 10-K for the year ended
December 31, 1994.]                                                                                                                                 
|            | 
|10.2        |  | 1994 Employee Stock Purchase Plan of the Company. [Incorporated by reference to Exhibit 10.2 of the Companys Annual Report on Form 10-K for the year ended
December 31, 1994.]                                                                                                                                
|            | 
|10.3***     |  | 1984 Incentive Stock Option Plan of the Company. [Incorporated by reference to Exhibit 10.1 of the Companys Registration Statement on Form S-1, effective
October 22, 1992 (Registration No. 33-51476).]                                                                                                      
|            | 
|10.4***     |  | 1995 Non-Employee Director Stock Compensation Plan. [Incorporated by reference to Exhibit 4.3 of the Companys Registration Statement on Form S-8 (File No. 333-16719).]                                                                                                                                       
|            | 
|10.5***     |  | Employment Agreement between Sterling Bancshares, Inc. and J. Downey Bridgwater executed on December 20, 2007, and effective as of January 1, 2007. [Incorporated by reference
to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on December 26, 2007 (File No. 000-207500).]                  
|            | 
|10.6***     |  | Amended and Restated Employment Agreement between Sterling Bancshares, Inc. and J. Downey Bridgwater executed on December 29, 2008, and effective as of January 1, 2007.
[Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on December 29, 2008 (File No. 0-20750).]
|            | 
|10.7***     |  | Amended and restated Sterling Bancshares, Inc. 2003 Stock Incentive and Compensation Plan effective April 30, 2007. [Incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K filed on August 14, 2007.(File No. 000-207500).]                                                    
|            | 
|10.8***     |  | Form of Severance and Non-Competition Agreements between Sterling Bancshares, Inc., Sterling Bank and the following named executive officers:                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                
|            |  | Wanda S. Dalton                                                                                                                                                                                                                                                                                                 |  | Travis Jaggers   
|            |  | James W. Goolsby, Jr.                                                                                                                                                                                                                                                                                           |  | Graham B. Painter
|            | 
|            |  | [Incorporated by reference to Exhibit 10.2 of the Companys Quarterly Report on Form 10-Q filed on August 5, 2004 (File No. 000-207501).]                                                                                                                                                                      
|            | 
|10.9***     |  | Form of Restricted Stock Agreement. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on February 4, 2005(File No.
000-207500).]                                                                                                                                    
|            | 
|10.10***    |  | Form of Incentive Stock Agreement. [Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed on February 4, 2005(File No. 000-207500).]                                                                                                                                     



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|            |  |                                                                                                                                                                                                                                                                                                 
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                 
|10.11***    |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., Sterling Bank and Allen Brown executed and effective as of December 1, 2004. [Incorporated by reference to Exhibit
10.1 of the Companys Current Report on Form 8-K filed on December 7, 2004 (File No. 000-207500).]
|            | 
|10.12***    |  | Short Term Incentive Program for Shared Services. [Incorporated by reference to Exhibit 10.14 of the Companys Annual Report on Form 10-K for the year ended December 31,
2004.]                                                                                                                
|            | 
|10.13***    |  | Short Term Incentive Program for Bank Offices. [Incorporated by reference to Exhibit 10.15 of the Companys Annual Report on Form 10-K for the year ended December 31, 2004.]                                                                                                                   
|            | 
|10.14***    |  | Severance and Non-Competition Agreement dated effective May 2, 2005, by and among Sterling Bancshares, Inc., Sterling Bank and Sonny B. Lyles. [Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on May 5, 2005 (File No. 000-207500).]              
|            | 
|10.15***    |  | Severance and Non-Competition Agreement dated effective January 1, 2005, by and among Sterling Bancshares, Inc., Sterling Bank and Robert S. Smith. [Incorporated by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K filed on January 13, 2005 (File No. 000-207500).]    
|            | 
|10.16***    |  | Non-Compete Agreement between Sterling Bancshares, Inc. and Max W. Wells dated July 7, 2005. [Incorporated by reference to Exhibit 10.2 of the Companys Quarterly Report on Form
10-Q filed on November 8, 2005 (File No. 000-207500).]                                                        
|            | 
|10.17***    |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc. and John A. Rossitto dated January 23, 2006. [Incorporated by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K filed on January 26, 2006(File No. 000-207500).]                                  
|            | 
|10.18***    |  | Summary Description of Non-Employee Director compensation. [Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed on April 29, 2005 (File No.
000-207500).]                                                                                               
|            | 
|10.19***    |  | Summary of Named Executive Officer Compensation. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on April 29, 2005 (File No. 000-207500).]                                                                                                         
|            | 
|10.20***    |  | Summary Description of Compensation - Sonny B. Lyles. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on May 2, 2005(File No.
000-207500).]                                                                                                        
|            | 
|10.21       |  | Purchase and Sale Agreement, dated November 13, 2006, between Sterling Bank and First States Group, L.P. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K filed on November 17, 2006.]                                                                    
|            | 
|10.22***    |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Sonny B. Lyles. [Incorporated by reference to Exhibit 10.3 of the Companys Current Report on Form 8-K
filed on August 15, 2006].                                                                            
|            | 
|10.23***    |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Allen D. Brown. [Incorporated by reference to Exhibit 10.4 of the Companys Current Report on Form
8-K filed on August 15, 2006].                                                                            



52



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                                                                                        
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.24***    |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Allen D. Brown. [Incorporated by reference to Exhibit 10.5 of the Companys Current Report on Form 8-K
filed on August 15, 2006.]                                                                                                                                                   
|            | 
|10.25***    |  | Form of Phantom Share Agreement. [Incorporated by reference to Exhibit 10.6 of the Companys Current Report on Form 8-K filed on August 15, 2006.]                                                                                                                                                                                                                     
|            | 
|10.26***    |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, and Deborah Dinsmore, dated February 24, 2006. [Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on February 28, 2006.]                                                                                                     
|            | 
|10.27***    |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, and C. Wallis McMath, Jr., dated March 1, 2006. [Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on March 6, 2006.]                                                                                                        
|            | 
|10.28***    |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, and Zach L. Wasson dated December 4, 2006. [Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on December 6, 2006.]                                                                                                          
|            | 
|10.29       |  | Placement Agreement by and among Sterling Bancshares, Inc., Sterling Bancshares Capital Trust IV, FTN Financial Capital Markets and Keefe, Bruyette & Woods, Inc., dated March 14, 2007.
[Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on March 30, 2007 (File No. 000-20750).]                                         
|            | 
|10.30       |  | Amendment to Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, Sterling Bank, a banking association chartered by the State of Texas, and Stephen
C. Raffaele effective June 29, 2007. [Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on July 2, 2007 (File No. 000-20750).]
|            | 
|10.31       |  | Long-Term Incentive (LTI) Stock Performance Program [Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on September 5. 2007 (File No.
000-20750).]                                                                                                                                                                           
|            | 
|10.32       |  | Letter Agreement, dated December 12, 2008, including Securities Purchase AgreementStandard Terms incorporated by reference therein, by and between Sterling Bancshares, Inc. and the
United States Department of Treasury [Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on December 15, 2008 (File No. 0-20750).]      
|            | 
|10.33       |  | Form of Letter Agreement executed by Senior Executive Officers [Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on December 15, 2008 (File No.
0-20750).]                                                                                                                                                                  
|            | 
|10.34       |  | Form of Waiver executed by Senior Executive Officers [Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on December 15, 2008 (File No.
0-20750).]                                                                                                                                                                            
|            | 
|21.1*       |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                           
|            | 
|23.1*       |  | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                       
|            | 
|31.1*       |  | Certification of J. Downey Bridgwater, Chairman, President and Chief Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                         



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|            |  |                                                                                                                                                              
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                              
|            | 
|31.2*       |  | Certification of Zach L. Wasson, Executive Vice President and Chief Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.1**      |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                      
|            | 
|32.2**      |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                      



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

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

|*** | Management Compensation Agreement.
|--- | ----------------------------------



54



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##### Index to Financial Statements

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                     |  |  |  |                           |  |                             |  |                                                                     
|-------------------- |  |  |  | ------------------------- |  | --------------------------- |  | --------------------------------------------------------------------
|                     |  |  |  | STERLING BANCSHARES, INC.
|                     |  |  | 
|DATE: March 13, 2009 |  |  |  | by                        |  | /S/    J. DOWNEY
BRIDGWATER
|                     |  |  |  |                           |  |                             |  | J. Downey Bridgwater Chairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacity indicated on this the 13th day of March, 2009.



|                                                             |  |                                                                                                   |  |                                                    |  |         
|------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- |  | --------
|SIGNATURE                                                    |  | TITLE                                                                                             |  | SIGNATURE                                          |  | TITLE   
|                                                             |  |                                                                                                   | 
|/S/    J. DOWNEY
BRIDGWATER J. Downey Bridgwater             |  | Chairman, President, and Chief Executive Officer (Principal Executive Officer)                    |  | /S/    GLENN H.
JOHNSON Glenn H. Johnson           |  | Director
|                                                             |  |                                                                                                   | 
|/S/    ZACH L.
WASSON Zach L. Wasson                         |  | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | /S/    R. BRUCE
LABOON R. Bruce LaBoon             |  | Director
|                                                             |  |                                                                                                   | 
|/S/    DAVID L.
HATCHER David L. Hatcher                     |  | Lead Director                                                                                     |  | /S/    G. EDWARD
POWELL G. Edward Powell           |  | Director
|                                                             |  |                                                                                                   | 
|/S/    EDWARD R.
BARDGETT Edward R. Bardgett                 |  | Director                                                                                          |  | /S/    RAIMUNDO RIOJAS
E. Raimundo Riojas E.       |  | Director
|                                                             |  |                                                                                                   | 
|/S/    GEORGE BEATTY,
JR. George Beatty, Jr.                 |  | Director                                                                                          |  | /S/    ROLAND
RODRIGUEZ Roland Rodriguez           |  | Director
|                                                             |  |                                                                                                   | 
|/S/    ANAT
BIRD Anat Bird                                   |  | Director                                                                                          |  | /S/    DAN C.
TUTCHER Dan C. Tutcher               |  | Director
|                                                             |  |                                                                                                   | 
|/S/    BRUCE J.
HARPER Bruce J. Harper                       |  | Director                                                                                          |  | /S/    MAX W.
WELLS Max W. Wells                   |  | Director
|                                                             |  |                                                                                                   | 
|/S/    BERNARD A. HARRIS,
JR., MD Bernard A. Harris, Jr., MD |  | Director                                                                                          |  | /S/    ELIZABETH C.
WILLIAMS Elizabeth C. Williams |  | Director



55



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##### Index to Financial Statements

EXHIBIT TABLE



|            |  |                                                                                                                                                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                
|2.1         |  | Agreement and Plan of Merger Dated July 7, 2005 by and among Sterling Bancshares, Inc., SBPB, Inc., and Prestonwood Bancshares, Inc. [Incorporated by reference to Exhibit 10.1 of the
Companys Quarterly Report on Form 10-Q filed on November 8, 2005 (File No. 000-20750).]
|            | 
|2.2         |  | Agreement and Plan of Merger dated July 25, 2006 between Sterling Bancshares, Inc. and BOTH, Inc. [Incorporated by reference to Exhibit 2.1 of the Companys Current Report on Form 8-K
filed on July 26, 2006.]                                                               
|            | 
|2.3         |  | Agreement and Plan of Merger dated January 24, 2007 between Sterling Bancshares, Inc., Sterling Bank and Partners Bank of Texas. [Incorporated by reference to Exhibit 2.1 of the
Companys Current Report on Form 8-K filed on January 25, 2007.]                             
|            | 
|2.4         |  | Share Exchange Agreement dated May 3, 2007, among the Company, MBM Advisors and the shareholders of MBM Advisors. [Incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on May 4, 2007 (File No. 000-20750).]                            
|            | 
|3.1         |  | Restated and Amended Articles of Incorporation of the Company effective August 13, 2007. [Incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed on
August 19, 2007 (File No. 000-20750).]                                                 
|            | 
|3.2         |  | Amended and Restated Bylaws of Sterling Bancshares, Inc. (as of October 29, 2007). [Incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed on October
30, 2007 (File No. 000-20750).]                                                      
|            | 
|3.3         |  | Certificate of Designations of Fixed Rate Cumulative Preferred Stock, Series J, of Sterling Bancshares, Inc. [Incorporated by reference to Exhibit 3.1 to the Companys Current Report on
Form 8-K filed on December 15, 2008 (File No. 0-20750).]                             
|            | 
|4.1         |  | Preferred Securities Guarantee Agreement dated March 21, 2001. [Incorporated by reference to Exhibit 4.2 of the Companys Current Report on Form 8-K filed on March 21, 2001(File No.
000-20750).]                                                                             
|            | 
|4.2         |  | Indenture dated March 21, 2001. [Incorporated by reference to Exhibit 4.4 of the Companys Current Report on Form 8-K filed on March 21, 2001 (File No. 000-20750).]                                                                                                           
|            | 
|4.3         |  | First Supplemental Indenture dated March 21, 2001. [Incorporated by reference to Exhibit 4.5 of the Companys Current Report on Form 8-K filed on March 21, 2001 (File No. 000-20750).]                                                                                        
|            | 
|4.4         |  | Indenture dated August 30, 2002. [Incorporated by reference to Exhibit 4.4 of the Companys Current Report on Form 8-K filed on September 12, 2002 (File No. 000-20750).]                                                                                                      
|            | 
|4.5         |  | Junior Subordinated Deferrable Interest Debenture due August 30, 2032. [Incorporated by reference to Exhibit 4.6 of the Companys Current Report on Form 8-K filed on September 12, 2002
(File No. 000-20750).]                                                                
|            | 
|4.6         |  | Guarantee Agreement dated August 30, 2002. [Incorporated by reference to Exhibit 4.6 of the Companys Current Report on Form 8-K filed on September 12, 2002 (File No.
000-20750).]                                                                                            
|            | 
|4.7         |  | Preferred Securities Guarantee Agreement dated September 26, 2002. [Incorporated by reference to Exhibit 4.2 of the Companys Current Report on Form 8-K dated September 26, 2002(File
No. 000-20750).]                                                                        
|            | 
|4.8         |  | Second Supplemental Indenture dated September 26, 2002. [Incorporated by reference to Exhibit 4.9 of the Companys Current Report on Form 8-K dated September 26, 2002(File No.
000-20750).]                                                                                   



56



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                                                                              
|4.9         |  | 8.30% Junior Subordinated Deferrable Interest Debenture due September 26, 2032. [Incorporated by reference to Exhibit 4.8 of the Companys Current Report on Form 8-K dated
September 26, 2002 (File No. 000-20750).]                                                                                                                                                        
|            | 
|4.10        |  | Fiscal and Paying Agency Agreement dated April 10, 2003 between Sterling Bank and Deutsche Bank Trust Company Americas. [Incorporated by reference to Exhibit 4.1 of the Companys Current
Report on Form 8-K filed April 15, 2003 (File No. 000-20750).]                                                                                                                    
|            | 
|4.11        |  | Form of Global Certificate representing Sterling Banks 7.375% Subordinated Notes due 2013. [Incorporated by reference to Exhibit 4.2 of the Companys Current Report on Form 8-K
filed April 15, 2003 (File No. 000-20750).]                                                                                                                                                
|            | 
|4.12        |  | Amended and Restated Declaration of Trust by and among Sterling Bancshares, Inc., as sponsor, Wilmington Trust Company, as institutional trustee and Delaware trustee, and the administrators
named therein, dated as of March 26, 2007. [Incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed on March 30, 2007 (File No. 000-20750).]
|            | 
|4.13        |  | Indenture by and between Sterling Bancshares, Inc., as issuer, and Wilmington Trust Company, as trustee, dated as of March 26, 2007. [Incorporated by reference to Exhibit 4.2 to the
Companys Current Report on Form 8-K filed on March 30, 2007 (File No. 000-20750).]                                                                                                    
|            | 
|4.14        |  | Guarantee Agreement by and between Sterling Bancshares, Inc., as guarantor, and Wilmington Trust Company, as guarantee trustee, dated as of March 26, 2007. [Incorporated by reference to
Exhibit 4.3 to the Companys Current Report on Form 8-K filed on March 30, 2007(File No. 000-20750).]                                                                              
|            | 
|4.15        |  | Form of Capital Securities Certificate of Sterling Bancshares Capital Trust IV, dated March 26, 2007. [Incorporated by reference to Exhibit 4.4 to the Companys Current Report on Form
8-K filed on March 30, 2007 (File No. 000-20750).]                                                                                                                                   
|            | 
|4.16        |  | Sterling Bancshares, Inc. Deferred Compensation Plan (as Amended and Restated) [Incorporated by reference to Exhibit 4.6 to the Companys Registration Statement on Form S-8
filed August 29, 2007 (File No. 333-145774 ).]                                                                                                                                                  
|            | 
|4.17        |  | Form of Stock Certificate for the Series J Preferred Stock [Incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed on December 15, 2008 (File No.
0-20750).]                                                                                                                                                                             
|            | 
|4.18        |  | Warrant to Purchase 2,615,557 Shares of Common Stock of Sterling Bancshares, Inc. [Incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K filed on December
15, 2008 (File No. 0-20750).]                                                                                                                                                      
|            | 
|10.1***     |  | 1994 Incentive Stock Option Plan of the Company. [Incorporated by reference to Exhibit 10.1 of the Companys Annual Report on Form 10-K for the year ended December 31,
1994.]                                                                                                                                                                                               
|            | 
|10.2        |  | 1994 Employee Stock Purchase Plan of the Company. [Incorporated by reference to Exhibit 10.2 of the Companys Annual Report on Form 10-K for the year ended December 31,
1994.]                                                                                                                                                                                              
|            | 
|10.3***     |  | 1984 Incentive Stock Option Plan of the Company. [Incorporated by reference to Exhibit 10.1 of the Companys Registration Statement on Form S-1, effective October 22,
1992(Registration No. 33-51476).]                                                                                                                                                                     
|            | 
|10.4***     |  | 1995 Non-Employee Director Stock Compensation Plan. [Incorporated by reference to Exhibit 4.3 of the Companys Registration Statement on Form S-8 (File No. 333-16719).]                                                                                                                                                                                                     
|            | 
|10.5***     |  | Employment Agreement between Sterling Bancshares, Inc. and J. Downey Bridgwater executed on December 20, 2007, and effective as of January 1, 2007. [Incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed on December 26, 2007(File No. 000-207500).]                                                                                 



57



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                                 |  |                  
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                 |  |                  
|10.6***     |  | Amended and Restated Employment Agreement between Sterling Bancshares, Inc. and J. Downey Bridgwater executed on December 29, 2008, and effective as of January 1, 2007.
[Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on December 29, 2008 (File No. 0-20750).]
|            | 
|10.7***     |  | Amended and restated Sterling Bancshares, Inc. 2003 Stock Incentive and Compensation Plan effective April 30, 2007. [Incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K filed on August 14, 2007. (File No. 000-207500).]                                                   
|            | 
|10.8***     |  | Form of Severance and Non-Competition Agreements between Sterling Bancshares, Inc., Sterling Bank and the following named executive officers:                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                
|            |  | Wanda S. Dalton                                                                                                                                                                                                                                                                                                 |  | Travis Jaggers   
|            |  | James W. Goolsby, Jr.                                                                                                                                                                                                                                                                                           |  | Graham B. Painter
|            | 
|            |  | [Incorporated by reference to Exhibit 10.2 of the Companys Quarterly Report on Form 10-Q filed on August 5, 2004 (File No. 000-207501).]                                                                                                                                                                      
|            | 
|10.9***     |  | Form of Restricted Stock Agreement. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on February 4, 2005 (File No. 000-207500).]                                                                                                                                   
|            | 
|10.10***    |  | Form of Incentive Stock Agreement. [Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed on February 4, 2005 (File No.
000-207500).]                                                                                                                                    
|            | 
|10.11***    |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., Sterling Bank and Allen Brown executed and effective as of December 1, 2004. [Incorporated by reference
to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on December 7, 2004(File No. 000-207500).]                
|            | 
|10.12***    |  | Short Term Incentive Program for Shared Services. [Incorporated by reference to Exhibit 10.14 of the Companys Annual Report on Form 10-K for the year ended December 31,
2004.]                                                                                                                               
|            | 
|10.13***    |  | Short Term Incentive Program for Bank Offices. [Incorporated by reference to Exhibit 10.15 of the Companys Annual Report on Form 10-K for the year ended December 31, 2004.]                                                                                                                                  
|            | 
|10.14***    |  | Severance and Non-Competition Agreement dated effective May 2, 2005, by and among Sterling Bancshares, Inc., Sterling Bank and Sonny B. Lyles. [Incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed on May 5, 2005 (File No. 000-207500).]                             
|            | 
|10.15***    |  | Severance and Non-Competition Agreement dated effective January 1, 2005, by and among Sterling Bancshares, Inc., Sterling Bank and Robert S. Smith. [Incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed on January 13, 2005(File No. 000-207500).]                    
|            | 
|10.16***    |  | Non-Compete Agreement between Sterling Bancshares, Inc. and Max W. Wells dated July 7, 2005. [Incorporated by reference to Exhibit 10.2 of the Companys Quarterly Report on
Form 10-Q filed on November 8, 2005 (File No. 000-207500).]                                                                       
|            | 
|10.17***    |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc. and John A. Rossitto dated January 23, 2006. [Incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K filed on January 26, 2006 (File No. 000-207500).]                                                
|            | 
|10.18***    |  | Summary Description of Non-Employee Director compensation. [Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed on April 29,
2005(File No. 000-207500).]                                                                                                               
|            | 
|10.19***    |  | Summary of Named Executive Officer Compensation. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on April 29, 2005 (File No.
000-207500).]                                                                                                                        



58



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                                                                                        
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.20***    |  | Summary Description of Compensation - Sonny B. Lyles. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on May 2, 2005(File No.
000-207500).]                                                                                                                                                                               
|            | 
|10.21       |  | Purchase and Sale Agreement, dated November 13, 2006, between Sterling Bank and First States Group, L.P. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K filed on November 17, 2006.]                                                                                                                                           
|            | 
|10.22***    |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Sonny B. Lyles. [Incorporated by reference to Exhibit 10.3 of the Companys Current Report on
Form 8-K filed on August 15, 2006].                                                                                                                                                   
|            | 
|10.23***    |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Allen D. Brown. [Incorporated by reference to Exhibit 10.4 of the Companys Current Report on
Form 8-K filed on August 15, 2006].                                                                                                                                                   
|            | 
|10.24***    |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Allen D. Brown. [Incorporated by reference to Exhibit 10.5 of the Companys Current Report on
Form 8-K filed on August 15, 2006.]                                                                                                                                                   
|            | 
|10.25***    |  | Form of Phantom Share Agreement. [Incorporated by reference to Exhibit 10.6 of the Companys Current Report on Form 8-K filed on August 15, 2006.]                                                                                                                                                                                                                     
|            | 
|10.26***    |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, and Deborah Dinsmore, dated February 24, 2006. [Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on February 28, 2006.]                                                                                                     
|            | 
|10.27***    |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, and C. Wallis McMath, Jr., dated March 1, 2006. [Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on March 6, 2006.]                                                                                                        
|            | 
|10.28***    |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, and Zach L. Wasson dated December 4, 2006. [Incorporated by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K filed on December 6, 2006.]                                                                                                          
|            | 
|10.29       |  | Placement Agreement by and among Sterling Bancshares, Inc., Sterling Bancshares Capital Trust IV, FTN Financial Capital Markets and Keefe, Bruyette & Woods, Inc., dated March 14,
2007. [Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on March 30, 2007 (File No. 000-20750).]                                         
|            | 
|10.30       |  | Amendment to Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, Sterling Bank, a banking association chartered by the State of Texas, and Stephen
C. Raffaele effective June 29, 2007. [Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on July 2, 2007 (File No. 000-20750).]
|            | 
|10.31       |  | Long-Term Incentive (LTI) Stock Performance Program [Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on September 5. 2007(File No.
000-20750).]                                                                                                                                                                            
|            | 
|10.32       |  | Letter Agreement, dated December 12, 2008, including Securities Purchase AgreementStandard Terms incorporated by reference therein, by and between Sterling Bancshares, Inc. and the
United States Department of Treasury [Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on December 15, 2008 (File No. 0-20750).]      
|            | 
|10.33       |  | Form of Letter Agreement executed by Senior Executive Officers [Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on December 15, 2008(File
No. 0-20750).]                                                                                                                                                                   



59



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                            
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                            
|10.34       |  | Form of Waiver executed by Senior Executive Officers [Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on December 15, 2008 (File No.
0-20750).]
|            | 
|21.1*       |  | Subsidiaries of the Company.                                                                                                                                                               
|            | 
|23.1*       |  | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.                                                                                                           
|            | 
|31.1*       |  | Certification of J. Downey Bridgwater, Chairman, President and Chief Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                             
|            | 
|31.2*       |  | Certification of Zach L. Wasson, Executive Vice President and Chief Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                              
|            | 
|32.1**      |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                    
|            | 
|32.2**      |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                    



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

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

|*** | Management Compensation Agreement.
|--- | ----------------------------------



60



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##### Index to Financial Statements

STERLING BANCSHARES, INC.

TABLE OF CONTENTS



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|                                                        | 
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |  | F-2 
|                                                        | 
|CONSOLIDATED FINANCIAL STATEMENTS:                      |  |     
|                                                        | 
|Consolidated Balance Sheets                             |  | F-3 
|                                                        | 
|Consolidated Statements of Income                       |  | F-4 
|                                                        | 
|Consolidated Statements of Shareholders Equity         |  | F-5 
|                                                        | 
|Consolidated Statements of Cash Flows                   |  | F-6 
|                                                        | 
|Notes to Consolidated Financial Statements              |  | F-7 



F-1



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##### Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Sterling Bancshares, Inc.

Houston, Texas

We have audited the accompanying consolidated balance sheets of Sterling Bancshares, Inc. and subsidiaries
(the Bank) as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2008. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sterling Bancshares, Inc. and subsidiaries as
of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of
America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys
internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 13, 2009 expressed an unqualified opinion on the Banks internal control over financial reporting.

LOGO

Houston, Texas

March 13, 2009



F-2



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER
31, 2008 AND 2007

(In thousands, except share amounts)



|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                  |  | 2008 |           |   | 2007 |  
|ASSETS                                                                                                                                                                            |  |      |           |   |      |   |           |  
|Cash and cash equivalents                                                                                                                                                         |  | $    | 113,163   |   |      | $ | 133,670   |  
|Available-for-sale securities, at fair value                                                                                                                                      |  |      | 633,357   |   |      |   | 476,690   |  
|Held-to-maturity securities, at amortized cost                                                                                                                                    |  |      | 172,039   |   |      |   | 180,086   |  
|Loans held for sale                                                                                                                                                               |  |      | 1,524     |   |      |   | 78,447    |  
|Loans held for investment                                                                                                                                                         |  |      | 3,792,290 |   |      |   | 3,339,837 |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|Total loans                                                                                                                                                                       |  |      | 3,793,814 |   |      |   | 3,418,284 |  
|Allowance for loan losses                                                                                                                                                         |  |      | (49,177   | ) |      |   | (34,446   | )
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|Loans, net                                                                                                                                                                        |  |      | 3,744,637 |   |      |   | 3,383,838 |  
|Premises and equipment, net                                                                                                                                                       |  |      | 46,875    |   |      |   | 27,905    |  
|Real estate acquired by foreclosure                                                                                                                                               |  |      | 5,625     |   |      |   | 3,683     |  
|Goodwill                                                                                                                                                                          |  |      | 173,210   |   |      |   | 168,815   |  
|Core deposits and other intangibles, net                                                                                                                                          |  |      | 13,874    |   |      |   | 15,971    |  
|Accrued interest receivable                                                                                                                                                       |  |      | 19,428    |   |      |   | 19,701    |  
|Other assets                                                                                                                                                                      |  |      | 157,771   |   |      |   | 125,550   |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|TOTAL ASSETS                                                                                                                                                                      |  | $    | 5,079,979 |   |      | $ | 4,535,909 |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                              |  |      |           |   |      |   |           |  
|LIABILITIES:                                                                                                                                                                      |  |      |           |   |      |   |           |  
|Deposits:                                                                                                                                                                         |  |      |           |   |      |   |           |  
|Noninterest-bearing demand                                                                                                                                                        |  | $    | 1,123,746 |   |      | $ | 1,092,210 |  
|Interest-bearing demand                                                                                                                                                           |  |      | 1,523,969 |   |      |   | 1,403,227 |  
|Certificates and other time                                                                                                                                                       |  |      | 1,171,422 |   |      |   | 1,178,274 |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|Total deposits                                                                                                                                                                    |  |      | 3,819,137 |   |      |   | 3,673,711 |  
|Other borrowed funds                                                                                                                                                              |  |      | 408,586   |   |      |   | 197,147   |  
|Subordinated debt                                                                                                                                                                 |  |      | 78,335    |   |      |   | 48,694    |  
|Junior subordinated debt                                                                                                                                                          |  |      | 82,734    |   |      |   | 82,734    |  
|Accrued interest payable and other liabilities                                                                                                                                    |  |      | 48,048    |   |      |   | 53,364    |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|Total liabilities                                                                                                                                                                 |  |      | 4,436,840 |   |      |   | 4,055,650 |  
|                                                                                                                                                                                  |  |     
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                     |  |      |          |   |      |   |          |  
|                                                                                                                                                                                  |  |     
|SHAREHOLDERS EQUITY:                                                                                                                                                             |  |      |           |   |      |   |           |  
|Preferred stock, $1 par value, 1,000,000 shares authorized, 125,198 issued and outstanding at December 31, 2008. No shares issued or
outstanding at December 31, 2007             |  |      | 118,012   |   |      |   |          |  
|Common stock, $1 par value, 100,000,000 shares authorized, 75,127,636 and 74,926,449 issued and 73,260,136 and 73,158,949 outstanding at
December 31, 2008 and 2007, respectively |  |      | 75,128    |   |      |   | 74,926    |  
|Capital surplus                                                                                                                                                                   |  |      | 121,918   |   |      |   | 110,367   |  
|Retained earnings                                                                                                                                                                 |  |      | 332,009   |   |      |   | 309,903   |  
|Treasury stock, at cost, 1,867,500 and 1,767,500 shares held at December 31, 2008 and 2007, respectively                                                                          |  |      | (21,399   | ) |      |   | (20,493   | )
|Accumulated other comprehensive income, net of tax                                                                                                                                |  |      | 17,471    |   |      |   | 5,556     |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|Total shareholders equity                                                                                                                                                        |  |      | 643,139   |   |      |   | 480,259   |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                        |  | $    | 5,079,979 |   |      | $ | 4,535,909 |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  

See notes to consolidated financial statements.



F-3



---

##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

(In thousands, except per share amounts)



|                                                      |  |      |         |   |      |   |         |  |   |         |  
|----------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- |  | - | ------- | -
|                                                      |  | 2008 |         |   | 2007 |   | 2006    | 
|Interest income:                                      |  |      |         |   |      |   |         |  |   |         |  
|Loans, including fees                                 |  | $    | 241,157 |   |      | $ | 260,101 |  | $ | 227,083 |  
|Securities:                                           |  |      |         |   |      |   |         |  |   |         |  
|Taxable                                               |  |      | 29,660  |   |      |   | 23,849  |  |   | 23,886  |  
|Non-taxable                                           |  |      | 3,632   |   |      |   | 3,494   |  |   | 2,622   |  
|Trading assets                                        |  |      | 64      |   |      |   | 173     |  |   | 696     |  
|Federal funds sold                                    |  |      | 101     |   |      |   | 597     |  |   | 261     |  
|Deposits in financial institutions                    |  |      | 10      |   |      |   | 35      |  |   | 183     |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Total interest income                                 |  |      | 274,624 |   |      |   | 288,249 |  |   | 254,731 |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Interest expense:                                     |  |      |         |   |      |   |         |  |   |         |  
|Demand and savings deposits                           |  |      | 17,285  |   |      |   | 29,217  |  |   | 17,934  |  
|Certificates and other time deposits                  |  |      | 37,443  |   |      |   | 55,691  |  |   | 37,671  |  
|Other borrowed funds                                  |  |      | 11,607  |   |      |   | 6,829   |  |   | 17,273  |  
|Subordinated debt                                     |  |      | 4,474   |   |      |   | 4,649   |  |   | 4,476   |  
|Junior subordinated debt                              |  |      | 5,731   |   |      |   | 6,239   |  |   | 5,571   |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Total interest expense                                |  |      | 76,540  |   |      |   | 102,625 |  |   | 82,925  |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Net interest income                                   |  |      | 198,084 |   |      |   | 185,624 |  |   | 171,806 |  
|Provision for credit losses                           |  |      | 29,917  |   |      |   | 3,820   |  |   | 4,058   |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Net interest income after provision for credit losses |  |      | 168,167 |   |      |   | 181,804 |  |   | 167,748 |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Noninterest income:                                   |  |      |         |   |      |   |         |  |   |         |  
|Customer service fees                                 |  |      | 15,771  |   |      |   | 14,327  |  |   | 12,850  |  
|Net gain (loss) on trading assets                     |  |      | (1      | ) |      |   | 2       |  |   | (302    | )
|Net gain (loss) on securities                         |  |      | (244    | ) |      |   | 3       |  |   | (358    | )
|Wealth management fees                                |  |      | 8,984   |   |      |   | 5,662   |  |   | 2,899   |  
|Other                                                 |  |      | 16,517  |   |      |   | 16,226  |  |   | 16,128  |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Total noninterest income                              |  |      | 41,027  |   |      |   | 36,220  |  |   | 31,217  |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Noninterest expense:                                  |  |      |         |   |      |   |         |  |   |         |  
|Salaries and employee benefits                        |  |      | 85,253  |   |      |   | 81,039  |  |   | 76,046  |  
|Occupancy                                             |  |      | 21,782  |   |      |   | 18,366  |  |   | 16,075  |  
|Technology                                            |  |      | 9,794   |   |      |   | 8,843   |  |   | 6,882   |  
|Professional fees                                     |  |      | 4,707   |   |      |   | 4,159   |  |   | 6,147   |  
|Postage, delivery and supplies                        |  |      | 3,672   |   |      |   | 3,611   |  |   | 3,355   |  
|Marketing                                             |  |      | 2,545   |   |      |   | 1,809   |  |   | 2,412   |  
|Core deposits and other intangibles amortization      |  |      | 2,328   |   |      |   | 2,137   |  |   | 1,012   |  
|Acquisition costs                                     |  |      | 562     |   |      |   | 920     |  |   | 638     |  
|Other                                                 |  |      | 22,567  |   |      |   | 18,470  |  |   | 18,619  |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Total noninterest expense                             |  |      | 153,210 |   |      |   | 139,354 |  |   | 131,186 |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Income before income taxes                            |  |      | 55,984  |   |      |   | 78,670  |  |   | 67,779  |  
|Provision for income taxes                            |  |      | 17,365  |   |      |   | 25,708  |  |   | 21,939  |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Net income                                            |  | $    | 38,619  |   |      | $ | 52,962  |  | $ | 45,840  |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Preferred stock dividends                             |  |      | 398     |   |      |   |        |  |   |        |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Net income available to common shareholders           |  | $    | 38,221  |   |      | $ | 52,962  |  | $ | 45,840  |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Earnings per common share:                            |  |      |         |   |      |   |         |  |   |         |  
|Basic                                                 |  | $    | 0.52    |   |      | $ | 0.73    |  | $ | 0.67    |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  
|Diluted                                               |  | $    | 0.52    |   |      | $ | 0.72    |  | $ | 0.66    |  
|                                                      |  |      |         |   |      |   |         |  |   |         |  

See notes to consolidated financial statements.



F-4



---

##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

(In thousands)



|                                                                                                             |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | --------------- |  | ------------ | ------- | ------ | -------------- | - | ------ | ---------------- | ------ | - | -------------- | - | ------- | ------------------------------------------ |  | ------ | ------- | - | ------ | ------ | - |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                             |  | Preferred Stock |  | Common Stock |         |        | CapitalSurplus |   |        | RetainedEarnings |        |   | Treasury Stock |   |         | AccumulatedOtherComprehensiveincome/(loss) |  |        | Total   |  
|                                                                                                             |  | Shares          |  | Amount       |         | Shares |                |   | Amount |                  |        |   |                |   |         |                                            |  | Shares |         |   | Amount |        |   |  |   |         |   | 
|BALANCE AT DECEMBER 31, 2005                                                                                 |  |                |  | $            |        |        | 68,187         |   |        | $                | 68,187 |   |                | $ | 36,028  |                                            |  | $      | 239,171 |   |        | (188   | ) |  | $ | (1,984  | ) |  | $ | (6,930 | ) |  | $ | 334,472 |  
|Comprehensive income:                                                                                        |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                                   |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        | 45,840  |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 45,840  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $24              |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | 44     |   |  |   | 44      |  
|Net change in unrealized gains and losses on effective cash flow hedging derivatives, net of taxes of $967   |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | 1,796  |   |  |   | 1,796   |  
|Less: Reclassification adjustment for losses included in net income, net of taxes of $125                    |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | 233    |   |  |   | 233     |  
|                                                                                                             |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                   |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 47,913  |  
|                                                                                                             |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                                     |  |                 |  |              |         |        | 728            |   |        |                  | 728    |   |                |   | 6,951   |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 7,679   |  
|Issuance of common stock in connection with the purchase of BOTH, Inc.                                       |  |                 |  |              |         |        | 3,023          |   |        |                  | 3,023  |   |                |   | 37,948  |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 40,971  |  
|Repurchase of common stock                                                                                   |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        | (750   | ) |  |   | (8,918  | ) |  |   |        |   |  |   | (8,918  | )
|Common stock dividends paid                                                                                  |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        | (12,832 | ) |        |        |   |  |   |         |   |  |   |        |   |  |   | (12,832 | )
|                                                                                                             |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2006                                                                                 |  |                |  |              |        |        | 71,938         |   |        |                  | 71,938 |   |                |   | 80,927  |                                            |  |        | 272,179 |   |        | (938   | ) |  |   | (10,902 | ) |  |   | (4,857 | ) |  |   | 409,285 |  
|Comprehensive income:                                                                                        |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                                   |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        | 52,962  |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 52,962  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $2,641           |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | 4,903  |   |  |   | 4,903   |  
|Net change in unrealized gains and losses on effective cash flow hedging derivatives, net of taxes of $2,967 |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | 5,510  |   |  |   | 5,510   |  
|                                                                                                             |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                   |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 63,375  |  
|                                                                                                             |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                                     |  |                 |  |              |         |        | 705            |   |        |                  | 705    |   |                |   | 5,898   |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 6,603   |  
|Issuance of common stock in connection with the purchase of Partners Bank of Texas                           |  |                 |  |              |         |        | 2,345          |   |        |                  | 2,345  |   |                |   | 24,176  |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 26,521  |  
|Shares held in Rabbi Trust                                                                                   |  |                 |  |              |         |        | (62            | ) |        |                  | (62    | ) |                |   | (634    | )                                          |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | (696    | )
|Repurchase of common stock                                                                                   |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        | (830   | ) |  |   | (9,591  | ) |  |   |        |   |  |   | (9,591  | )
|Common stock dividends paid                                                                                  |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        | (15,238 | ) |        |        |   |  |   |         |   |  |   |        |   |  |   | (15,238 | )
|                                                                                                             |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2007                                                                                 |  |                |  |              |        |        | 74,926         |   |        |                  | 74,926 |   |                |   | 110,367 |                                            |  |        | 309,903 |   |        | (1,768 | ) |  |   | (20,493 | ) |  |   | 5,556  |   |  |   | 480,259 |  
|Comprehensive income:                                                                                        |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                                   |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        | 38,619  |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 38,619  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $3,032           |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | 5,631  |   |  |   | 5,631   |  
|Net change in unrealized gains and losses on effective cash flow hedging derivatives, net of taxes of $3,299 |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | 6,126  |   |  |   | 6,126   |  
|Less: Reclassification adjustment for losses included in net income, net of taxes of $85                     |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | 158    |   |  |   | 158     |  
|                                                                                                             |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                   |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 50,534  |  
|                                                                                                             |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Issuance of preferred stock:                                                                                 |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Preferred stock, at fair value                                                                               |  | 125,198         |  |              | 117,945 |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 117,945 |  
|Detachable warrants, at fair value                                                                           |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   | 7,253   |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 7,253   |  
|Issuance of common stock                                                                                     |  |                 |  |              |         |        | 221            |   |        |                  | 221    |   |                |   | 4,464   |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 4,685   |  
|Shares held in Rabbi Trust                                                                                   |  |                 |  |              |         |        | (19            | ) |        |                  | (19    | ) |                |   | (166    | )                                          |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | (185    | )
|Repurchase of common stock                                                                                   |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        | (100   | ) |  |   | (906    | ) |  |   |        |   |  |   | (906    | )
|Preferred stock dividend and amortization of preferred stock discount                                        |  |                 |  |              | 67      |        |                |   |        |                  |        |   |                |   |         |                                            |  |        | (398    | ) |        |        |   |  |   |         |   |  |   |        |   |  |   | (331    | )
|Common stock dividends paid                                                                                  |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        | (16,115 | ) |        |        |   |  |   |         |   |  |   |        |   |  |   | (16,115 | )
|                                                                                                             |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2008                                                                                 |  | 125,198         |  | $            | 118,012 |        | 75,128         |   |        | $                | 75,128 |   |                | $ | 121,918 |                                            |  | $      | 332,009 |   |        | (1,868 | ) |  | $ | (21,399 | ) |  | $ | 17,471 |   |  | $ | 643,139 |  
|                                                                                                             |  |                 |  |              |         |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  

See notes to consolidated financial statements.



F-5



---

##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

(In thousands)



|                                                                                        |  |            |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------------- |  | ---------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                        |  | Year Ended |         
|                                                                                        |  | 2008       |          |   | 2007 |   |          | 2006 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |  |            |          |   |      |   |          |      |  |   |          |  
|Net income                                                                              |  | $          | 38,619   |   |      | $ | 52,962   |      |  |   | 45,840   |  
|Adjustments to reconcile net income to net cash provided by operating activities:       |  |            |          |   |      |   |          |      |  |   |          |  
|Amortization and accretion of premiums and discounts on securities, net                 |  |            | 1,578    |   |      |   | 2,194    |      |  |   | 2,447    |  
|Net (gain) loss on securities                                                           |  |            | 244      |   |      |   | (3       | )    |  |   | 358      |  
|Net (gain) loss on trading assets                                                       |  |            |         |   |      |   | (2       | )    |  |   | 302      |  
|Net gain on loans                                                                       |  |            | (200     | ) |      |   | (1,991   | )    |  |   | (1,326   | )
|Provision for credit losses                                                             |  |            | 29,917   |   |      |   | 3,820    |      |  |   | 4,058    |  
|Writedowns, less gains on sale, of real estate acquired by foreclosure                  |  |            | (40      | ) |      |   | (254     | )    |  |   | (232     | )
|Depreciation and amortization                                                           |  |            | 10,646   |   |      |   | 9,056    |      |  |   | 8,530    |  
|Proceeds from principal paydowns of trading securities                                  |  |            |         |   |      |   | 1        |      |  |   | 31,790   |  
|Proceeds from the sale of trading securities                                            |  |            |         |   |      |   | 13,137   |      |  |   |         |  
|Purchases of trading assets                                                             |  |            |         |   |      |   | (13,136  | )    |  |   | (3,811   | )
|Deferred income tax expense                                                             |  |            | (8,367   | ) |      |   | (1,659   | )    |  |   | 259      |  
|Stock-based compensation expense (net of tax benefit recognized)                        |  |            | 2,647    |   |      |   | 1,244    |      |  |   | 1,589    |  
|Excess tax benefits from share-based payment arrangements                               |  |            | (24      | ) |      |   | (372     | )    |  |   | (620     | )
|Net decrease in loans held for sale                                                     |  |            | 9,366    |   |      |   | 977      |      |  |   | 1,621    |  
|Net gain on sale of bank assets                                                         |  |            | (146     | ) |      |   | (717     | )    |  |   | (1,915   | )
|Net (increase) decrease in accrued interest receivable and other assets                 |  |            | (2,321   | ) |      |   | 4,701    |      |  |   | (8,759   | )
|Net increase (decrease) in accrued interest payable and other liabilities               |  |            | (2,967   | ) |      |   | 158      |      |  |   | 15,722   |  
|                                                                                        |  |            |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                               |  |            | 78,952   |   |      |   | 70,116   |      |  |   | 95,853   |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |  |            |          |   |      |   |          |      |  |   |          |  
|Proceeds from the maturities or calls and paydowns of held-to-maturity securities       |  |            | 16,219   |   |      |   | 14,775   |      |  |   | 15,907   |  
|Proceeds from the sale of available-for-sale securities                                 |  |            | 28,398   |   |      |   | 2,600    |      |  |   | 98,498   |  
|Proceeds from the maturities or calls and paydowns of available-for-sale securities     |  |            | 105,644  |   |      |   | 86,189   |      |  |   | 103,299  |  
|Purchases of available-for-sale securities                                              |  |            | (283,580 | ) |      |   | (139,681 | )    |  |   | (45,136  | )
|Purchases of held-to-maturity securities                                                |  |            | (8,218   | ) |      |   | (30,689  | )    |  |   | (18,007  | )
|Net increase in loans held for investment                                               |  |            | (364,984 | ) |      |   | (198,802 | )    |  |   | (371,352 | )
|Purchase of bank-owned life insurance                                                   |  |            | (13,875  | ) |      |   |         |      |  |   |         |  
|Proceeds from sale of real estate acquired by foreclosure                               |  |            | 5,839    |   |      |   | 1,080    |      |  |   | 2,792    |  
|Proceeds from sale of land held for sale                                                |  |            |         |   |      |   |         |      |  |   | 1,570    |  
|Purchase of Bank of the Hills, Inc. (including transaction costs)                       |  |            |         |   |      |   |         |      |  |   | (31,730  | )
|Cash and cash equivalents acquired with Bank of the Hills, Inc.                         |  |            |         |   |      |   |         |      |  |   | 27,860   |  
|Purchase of Partners Bank of Texas (including transaction costs)                        |  |            |         |   |      |   | (25,319  | )    |  |   |         |  
|Cash and cash equivalents acquired with Partners Bank of Texas                          |  |            |         |   |      |   | 33,324   |      |  |   |         |  
|Purchase of MBM Advisors, Inc. (including transaction costs)                            |  |            |         |   |      |   | (6,900   | )    |  |   |         |  
|Cash and cash equivalents acquired with MBM Advisors, Inc.                              |  |            |         |   |      |   | 104      |      |  |   |         |  
|Payment of earnout obligations related to the acquisition of MBM Advisors, Inc.         |  |            | (2,222   | ) |      |   |         |      |  |   |         |  
|Cash and cash equivalents acquired with First Horizon National Corp. branch acquisition |  |            | 15,301   |   |      |   |         |      |  |   |         |  
|Net change in interest-bearing deposits in financial institutions                       |  |            |         |   |      |   | 198      |      |  |   | 21,469   |  
|Proceeds from sale of loans originated as held for investment                           |  |            | 12,712   |   |      |   | 49,909   |      |  |   | 79,902   |  
|Proceeds from sale of premises and equipment                                            |  |            | 168      |   |      |   | 428      |      |  |   | 31,975   |  
|Purchase of premises and equipment                                                      |  |            | (16,464  | ) |      |   | (8,730   | )    |  |   | (5,394   | )
|                                                                                        |  |            |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                                   |  |            | (505,062 | ) |      |   | (221,514 | )    |  |   | (88,347  | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                   |  |            |          |   |      |   |          |      |  |   |          |  
|Net increase in deposit accounts                                                        |  |            | 60,132   |   |      |   | 173,334  |      |  |   | 198,244  |  
|Net increase (decrease) in short-term other borrowed funds                              |  |            | 161,439  |   |      |   | (68,242  | )    |  |   | (172,175 | )
|Proceeds from issuance of long-term borrowings                                          |  |            | 50,000   |   |      |   | 40,000   |      |  |   |         |  
|Issuance of trust preferred securities                                                  |  |            |         |   |      |   | 25,774   |      |  |   |         |  
|Redemption of junior subordinated debt                                                  |  |            |         |   |      |   |         |      |  |   | (29,640  | )
|Proceeds from issuance of subordinated debt                                             |  |            | 25,000   |   |      |   |         |      |  |   |         |  
|Proceeds from issuance of common stock                                                  |  |            | 1,016    |   |      |   | 4,580    |      |  |   | 4,816    |  
|Repurchase of common stock                                                              |  |            | (1,091   | ) |      |   | (10,287  | )    |  |   | (8,918   | )
|Proceeds from issuance of preferred stock                                               |  |            | 125,198  |   |      |   |         |      |  |   |         |  
|Excess tax benefits from share-based payment arrangements                               |  |            | 24       |   |      |   | 372      |      |  |   | 620      |  
|Dividends paid                                                                          |  |            | (16,115  | ) |      |   | (15,238  | )    |  |   | (12,832  | )
|                                                                                        |  |            |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                                     |  |            | 405,603  |   |      |   | 150,293  |      |  |   | (19,885  | )
|                                                                                        |  |            |          |   |      |   |          |      |  |   |          |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                               |  |            | (20,507  | ) |      |   | (1,105   | )    |  |   | (12,379  | )
|CASH AND CASH EQUIVALENTS:                                                              |  |            |          |   |      |   |          |      |  |   |          |  
|Beginning of period                                                                     |  |            | 133,670  |   |      |   | 134,775  |      |  |   | 147,154  |  
|                                                                                        |  |            |          |   |      |   |          |      |  |   |          |  
|End of period                                                                           |  | $          | 113,163  |   |      | $ | 133,670  |      |  | $ | 134,775  |  
|                                                                                        |  |            |          |   |      |   |          |      |  |   |          |  
|Supplemental information:                                                               |  |            |          |   |      |   |          |      |  |   |          |  
|Income taxes paid                                                                       |  | $          | 26,625   |   |      | $ | 23,250   |      |  | $ | 27,098   |  
|Interest paid                                                                           |  |            | 79,304   |   |      |   | 104,973  |      |  |   | 75,913   |  
|Noncash investing and financing activities                                             |  |            |          |   |      |   |          |      |  |   |          |  
|Acquisition of real estate through foreclosure of collateral                            |  |            | 7,741    |   |      |   | 3,044    |      |  |   | 3,565    |  
|Transfer of loans from held for sale to held for investment                             |  |            | 112,129  |   |      |   | 36,094   |      |  |   | 6,527    |  
|Loans to finance the sale of premises and equipment                                     |  |            |         |   |      |   |         |      |  |   | 1,400    |  
|Acquisition of Bank of the Hills, Inc.                                                  |  |            |          |   |      |   |          |      |  |   |          |  
|Common Stock issued                                                                     |  |            |         |   |      |   |         |      |  |   | 40,971   |  
|Payable to BOTH, Inc. shareholders                                                      |  |            |         |   |      |   |         |      |  |   | 336      |  
|Acquisition of Partners Bank of Texas                                                   |  |            |          |   |      |   |          |      |  |   |          |  
|Common stock issued                                                                     |  |            |         |   |      |   | 26,521   |      |  |   |         |  
|Acquisition of MBM Advisors, Inc.                                                       |  |            |          |   |      |   |          |      |  |   |          |  
|Payable to MBM Advisors, Inc. shareholders                                              |  |            |         |   |      |   | 4,442    |      |  |   |         |  

See notes to consolidated financial statements.



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



|1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
|-- | -------------------------------------------------------------------------

OrganizationSterling Bancshares, Inc. (Sterling Bancshares and together with its subsidiaries, the Company), headquartered in Houston, Texas, is a bank holding company that
has served the banking needs of small to medium-sized businesses for over 34 years. The Company provides commercial and consumer banking services in the greater metropolitan areas of Houston, San Antonio, Dallas and Fort Worth, Texas through
the 59 banking centers of Sterling Bank (the Bank), a banking association chartered under the laws of the state of Texas.

Summary of Significant Accounting and Reporting PoliciesThe accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and the prevailing
practices within the financial services industry. A summary of significant accounting policies follows:

Basis of
PresentationThe consolidated financial statements include the accounts of Sterling Bancshares and its subsidiaries except for those subsidiaries where it has been determined that the Company is not the primary beneficiary. Intercompany
transactions have been eliminated in consolidation. The Company operates its business as one segment providing banking services to a variety of customers.

Use of EstimatesThe preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could
differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, the valuation of foreclosed real estate, deferred tax assets,
goodwill and other intangibles, trading activities and stock-based compensation.

Trading AssetsSecurities classified
as trading assets are bought with the anticipation of sale in the near term and are carried at fair market value. Generally, these assets are held up to 120 days. These securities consist primarily of the government-guaranteed portion of SBA loans.

SecuritiesSecurities classified as held-to-maturity are carried at cost, adjusted for the amortization of premiums and
the accretion of discounts. Management has the positive intent and the Company has the ability to hold these assets until their maturities. Under certain circumstances (including the deterioration of the issuers creditworthiness or a change in
tax law or statutory or regulatory requirements), these securities may be sold or transferred to another portfolio.

Securities classified
as available-for-sale are carried at fair value. Unrealized gains and losses are excluded from earnings and reported, net of tax, as accumulated comprehensive income or loss until realized. Declines in the fair value of individual securities below
their cost that are determined to be other-than-temporary would result in writedowns, as a realized loss, of the individual securities to their fair value. In evaluating other-than-temporary impairment losses, management considers several
factors including the severity and the duration of time that the fair value has been less than cost, the credit quality of the issuer, and the intent and ability of the Company to hold the security until recovery of the fair value. Securities
within the available-for-sale portfolio may be used as part of the Companys asset and liability management strategy and may be sold in response to changes in interest rate risk, prepayment risk or other factors.

Premiums and discounts are amortized and accreted to operations using the level-yield method of accounting, adjusted for prepayments as applicable. The
specific identification method of accounting is used to compute gains or losses on the sales of securities. Interest earned on these assets is included in interest income.



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



Loans Held for SaleLoans held for sale are carried at the lower of aggregate cost
or market value. Premiums, discounts and loan fees (net of certain direct loan origination costs) on loans held for sale are deferred until the related loans are sold or repaid. Gains or losses on loan sales are recognized at the time of sale and
determined using the specific identification method.

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

Loans Held for InvestmentLoans held for investment are stated at the principal amount outstanding, net of the unearned discount and net deferred loan fees or costs. Unearned discount relates principally to consumer
installment loans. Interest income for loans is recognized principally by the simple interest method.

The Company provides equipment
financing to its customers through a variety of lease arrangements. Direct financing leases are included in loans held for investment and carried at the aggregate of lease payments receivable plus estimated residual value of the leased property,
less unearned income.

A loan is defined as impaired when based on current information and events, it is probable that the Company will be
unable to collect all amounts due, both interest and principal, according to the contractual terms of the loan agreement. The allowance for loan losses related to impaired loans is determined based on the difference between the carrying value of the
impaired loan and its fair value. The fair value is determined based on the present value of expected cash flows discounted at the loans effective interest rate or, as a practical expedient, the loans observable market price or the fair
value of the collateral if the loan is collateral dependent. Interest payments on impaired loans are typically applied to principal unless collectibility of the principal amount is reasonably assured, in which case interest is recognized.

Nonperforming Loans and Past Due LoansNonperforming loans are loans which have been categorized by management as
nonaccrual because collection of interest is doubtful and loans which have been restructured due to the borrowers financial difficulty and which result in a concessionary modification.

When the payment of principal or interest on a loan is delinquent for 90 days, or earlier in some cases, the loan is placed on nonaccrual status and
classified as impaired unless the loan is in the process of collection and the underlying collateral fully supports the carrying value of the loan. If the decision is made to continue accruing interest on the loan, periodic reviews are made to
evaluate the appropriateness of its accruing status. When a loan is placed on nonaccrual status, all accrued but unpaid interest is charged to operations. Generally, any payments received on nonaccrual loans are applied first to outstanding loan
amounts and next to the recovery of charged-off loan amounts. Any excess is treated as a recovery of lost interest.

Loans are classified
as a restructured (accruing) loan in cases where a borrower experiences financial difficulty and the Company makes certain concessionary modifications to contractual terms. Restructured loans typically involve a modification of terms such as a
reduction of the stated interest rate or face amount of the loan, a reduction of accrued interest, or an extension of the maturity date(s) at a stated interest rate lower than the current market rate for a new loan with similar risk.

Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of six months to demonstrate that the borrower can meet the
restructured terms. However, performance prior to the



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may
result in the loan being returned to accrual at the time of restructuring or after a shorter performance period. If the borrowers ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan.

Restructured loans are included considered impaired until the calendar years subsequent to the restructuring if they are not impaired
based on the modified terms. Impairment loss of restructured loans is based on the difference between the original loans carrying amount and the present value of expected future cash flows discounted at the original, contractual rate of the
loan.

Allowance for Credit LossesThe allowance for credit losses is a valuation allowance for losses incurred on loans
and binding loan commitments. The allowance for losses on unfunded loan commitments is included in other liabilities. All losses are charged to the allowance when the loss actually occurs or when a determination is made that a loss is probable.
Recoveries are credited to the allowance at the time of recovery.

Throughout the year, management estimates the probable level of losses
to determine whether the allowance for credit losses is adequate to absorb inherent losses in the existing portfolio. Based on these estimates, an amount is charged to the provision for credit losses and credited to the allowance for credit losses
in order to adjust the allowance to a level determined to be adequate to absorb inherent losses.

Managements judgment as to the
level of probable inherent losses on existing loans involves the consideration of current and anticipated economic conditions and their potential effects on specific borrowers; an evaluation of the existing relationships among loans, potential
credit losses and the present level of the allowance; results of examinations of the loan portfolio by regulatory agencies; and managements internal review of the loan portfolio. In determining the collectibility of certain loans, management
also considers the fair value of any underlying collateral. The amount ultimately realized may differ from the carrying value of these assets because of economic, operating or other conditions beyond the Companys control.

Estimates of credit losses involve an exercise of judgment. While it is reasonably possible that in the near term the Company may sustain losses which
are substantial relative to the allowance for credit losses, it is the judgment of management that the allowance for credit losses reflected in the consolidated balance sheets is adequate to absorb probable losses that exist in the current loan
portfolio.

Premises and EquipmentLand is carried at cost. Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation expense is computed primarily using the straight-line method over the estimated useful lives (ranging from three to forty years) of the assets. Leasehold improvements are amortized using the straight-line
method over the periods of the leases or the estimated useful lives, whichever is shorter.

The Company evaluates for impairment its
long-lived assets to be held and used, and long-lived assets to be disposed of, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is determined using the undiscounted
operating cash flows estimated over the remaining useful life of the related long-lived asset and the eventual disposal. In the event of impairment, the asset is written down to its fair market value. Assets to be disposed of are recorded at the
lower of net book value or fair market value less cost to sell and are classified as assets held for sale on the consolidated balance sheet at the date management commits to a plan of disposal.



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



Goodwill and Other IntangiblesIntangible assets consist primarily of core
deposits and customer relationships. Intangible assets with definite useful lives are amortized on an accelerated basis over their estimated life. Goodwill and intangible assets that have indefinite useful lives are subject to at least an annual
impairment test and more frequently if a triggering event occurs. The goodwill impairment test involves a two-step process. Under the first step, the estimation of fair value of the reporting unit is compared with its carrying value including
goodwill. If step one indicates a potential impairment, the second step is performed to measure the amount of impairment, if any. Goodwill impairment exists when the implied fair value of goodwill is less than its carrying value. The implied fair
value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. As part of its impairment analysis, the Company uses a variety of methodologies in determining the fair value of
the reporting unit, including cash flow analyses that are consistent with the assumptions management believes hypothetical marketplace participants would use.

Real Estate Acquired by ForeclosureThe Company records real estate acquired by foreclosure at fair value less estimated costs to sell. Adjustments are made to reflect declines in value subsequent
to acquisition, if any, below the recorded amounts. Required developmental costs associated with foreclosed property under construction are capitalized and considered in determining the fair value of the property. Operating expenses of such
properties, net of related income, and gains and losses on their disposition are included in noninterest expense.

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

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

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

Fair Value MeasurementsOn January 1, 2008, the Company adopted SFAS 157 Fair Value
Measurements for financial assets and financial liabilities. SFAS 157 applies to reported balances that are required or permitted to be measured at fair value under an existing accounting pronouncement. SFAS 157 emphasizes that fair value
is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



in pricing the asset or liability and establishes a fair value hierarchy. The fair value hierarchy consists of three levels of inputs that may be used to
measure fair value.

Income TaxesSterling Bancshares files a consolidated federal income tax return with its
subsidiaries. Each computes income taxes as if it filed a separate return and remits to, or is reimbursed by Sterling Bancshares based on the portion of taxes currently due or refundable.

Deferred income taxes are accounted for by applying statutory tax rates in effect at the balance sheet date to differences between the book basis and the
tax basis of assets and liabilities. The resulting deferred tax assets and liabilities are adjusted to reflect changes in enacted tax laws or rates. The Company has established, and periodically reviews and re-evaluates, an estimated contingent tax
liability on its consolidated balance sheet to provide for the possibility of adverse outcomes in tax matters.

Realization of net deferred
tax assets is dependent on generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that all of the net deferred tax assets will be realized.

Stock-based CompensationThe Companys stock-based compensation policy applies to all forms of stock-based compensation including
stock options, restricted stock units, shares acquired under the Employee Stock Purchase Plan and performance based phantom units. All stock-based compensation is accounted for under the fair-value method as required by generally accepted accounting
principles in the United States. The expense associated with stock-based compensation is recognized over the vesting period of each individual arrangement.

The fair value of each stock option award is estimated on the date of grant using a Black-Scholes-Merton option valuation model. The fair value of restricted stock and phantom stock units is based on the current
market price on the date of grant. The fair value of each performance based share unit is estimated based on expected performance goals being attained. Compensation expense associated with the Employee Stock Purchase Plan is determined using a
Black-Scholes-Merton option pricing formula.

Profit Sharing PlanThe Company has a profit sharing plan that covers
substantially all employees. Contributions to the plan are accrued and paid only when the bank records predetermined earnings per share performance and achieves a minimum return on average assets consistent with the approved plan year budget.

Statements of Cash FlowsCash and cash equivalents include cash, due from banks and federal funds sold. Generally,
federal funds are invested for one-day periods.

Earnings Per Common ShareEarnings per common share (EPS)
are presented under two formats: basic EPS and diluted EPS. Basic EPS is computed by dividing net income available to common shareholders (after deducting dividends on preferred stock) by the weighted average number of shares outstanding during the
year excluding non-vested stock. Diluted EPS is computed by dividing net income available to common shareholders (after deducting dividends on preferred stock) by the weighted average number of shares outstanding and non-vested stock adjusted for
the incremental shares issuable upon exercise of outstanding stock options and warrants.

Comprehensive
IncomeComprehensive income includes all changes in equity during the period presented that result from transactions and other economic events other than transactions with shareholders. The Company reports comprehensive income in the
consolidated statements of shareholders equity.



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



ReclassificationsCertain reclassifications have been made to prior year amounts
to conform to current year presentation. All reclassifications have been applied consistently for the periods presented.

In 2008, $40.0
million of long-term borrowings were reclassified from short-term other borrowed funds to long-term borrowings on the Statement of Cash Flows for the year ended December 31, 2007. This reclassification did not result in any change to net cash
provided by financing activities or in the total net change in cash and cash equivalents.

Recent Accounting
StandardsIn June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN
48 clarified the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109 (SFAS 109) Accounting for Income Taxes. FIN 48 clarified the
application of SFAS 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprises financial statements. Additionally, FIN 48 provided guidance on
measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted FIN 48 on January 1, 2007. The adoption of this accounting standard did not have a material
impact on the Companys financial statements.

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

On October 10, 2008, the FASB issued FASB Staff Position 157- 3 (FSP 157-3) Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active. FSP 157-3 applied to financial assets within the scope of SFAS 157. FSP 157-3 clarified the application of SFAS 157 in a market that is not active and provided an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that financial asset is not active. In situations in which there is little, if any, market activity for an asset at the measurement date, the fair value measurement objective
remains the same, that is, the price that would be received by the holder of the financial asset in an orderly transaction (an exit price notion) that is not a forced liquidation or distressed sale at the measurement date. Additionally, in
determining fair value for a financial asset, the use of a reporting entitys own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. Broker (or
pricing service) quotes may be an appropriate input when measuring fair value, but they are not necessarily determinative if an active market does not exist for the financial asset. SFAS 157-3 became effective for the interim financial
statements as of September 30, 2008 and did not significantly impact the methods by which the Company determines the fair values of its financial assets.

In September 2006, the FASB issued SFAS No. 158 (SFAS 158) Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87,
88, 106, and 132(R). SFAS 158 requires an employer to recognize the funded status of a benefit plan in its statement of financial position. The funded status is measured as the difference between plan assets at fair value and the benefit
obligation. An employer is also required to recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period. SFAS 158 also requires certain disclosures in
the financial statements of additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



gains or losses, prior service costs or credits, and transition asset or obligation. This Statement was effective for financial statements issued for fiscal
years ending after December 15, 2006. The adoption of this accounting standard on January 1, 2007 did not have a material impact on the Companys financial statements.

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

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

In December 2007, the FASB issued SFAS No. 141(R) (SFAS 141R) Business Combinations (Revised 2007). SFAS 141R requires the acquiring entity in a business combination to recognize the assets
acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of
the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141R was effective on January 1, 2009. SFAS 141R is expected to have a significant impact on the Companys
accounting for business combinations closing on or after January 1, 2009.

In December 2007, the FASB issued SFAS No. 160
(SFAS 160) Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51. SFAS 160 eliminates the diversity that currently exists in accounting for transactions between an entity and
noncontrolling interests by requiring they be treated as equity transactions. The Company adopted SFAS 160 on January 1, 2009. The adoption of this accounting standard did not have a material impact on the Companys financial statements.

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



|2. | ACQUISITIONS AND DIVESTITURES
|-- | -----------------------------

Acquisitions. On February 8, 2008, the Company acquired ten branches located in the Dallas and Fort Worth, Texas areas from First Horizon National Corp. (First Horizon). This transaction was accounted for
using the purchase method of accounting in which the excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. In addition to these ten bank branches, the Company also agreed to acquire land from
First Horizon for possible future Sterling banking centers in



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



Lewisville, Arlington and Fort Worth, Texas. This transaction allows the Company to achieve a critical presence in Dallas, Texas and an entry into the
growing Fort Worth, Texas market. The Company acquired approximately $85.9 million in total assets and assumed deposit accounts of approximately $85.3 million for a premium of $1.7 million. Assets consisted of approximately $54.0 million in loans,
$10.9 million in premises and equipment and $15.9 million in cash and other assets. The assets and liabilities have been recorded at fair value based on market conditions and risk characteristics at the acquisition date. Excess cost over tangible
net assets acquired totaled $5.3 million, of which $231 thousand and $5.1 million have been allocated to core deposits and goodwill, respectively, all of which is expected to be deductible for tax purposes. The results of operations for this
acquisition have been included in the Companys financial results since February 8, 2008.

On June 28, 2007, the Company
acquired MBM Advisors, Inc. (MBM Advisors). MBM Advisors was an independent investment advisory and pension administration/consulting firm with approximately $700 million in assets under management providing full-services in the
design, administration, investment management, and communication of retirement plans with offices in both Houston and Dallas, Texas. The acquisition of MBM Advisors provides for increased opportunities to serve the owners of small and medium-sized
businesses and their employees while enhancing noninterest income. The Company entered into a share exchange agreement with MBM Advisors and the shareholders of MBM Advisors in which the Company paid the shareholders an aggregate amount in cash
equal to $6.0 million on the date of merger. An unconditional guaranteed cash payment of $3.0 million, payable over a three year earn-out period was recorded as part of the purchase price at the estimated net present value. The agreement includes an
earn-out which is contingent upon maintaining or achieving specified earnings levels in future periods. When the contingency is resolved and additional consideration is distributable, the Company records the fair value of the consideration issued as
an additional cost of the acquisition. The Company paid out $2.6 million for 2007 as part of the earn-out as an additional cost of the acquisition. There was no earn-out recorded for 2008. At December 31, 2008, the remaining maximum amount of
future payments the Company could be required to make under contingent payment provisions was approximately $4.4 million in the form of cash. This acquisition was accounted for using the purchase method of accounting in which the excess of the
purchase price over the estimated fair value of the net assets acquired was recorded as goodwill, all of which is expected to be deductible for tax purposes. The results of operations for this acquisition have been included in the Companys
financial results since the third quarter of 2007.

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

On September 29, 2006, the Company acquired Kerrville, Texas-based BOTH, Inc., and its subsidiary bank, Bank of the Hills
(BOTH). BOTH operated five banking centers in the San Antonio/Kerrville area. The purchase price of $73.0 million consisted of $41.0 million of the Companys common stock (3.0 million



F-14



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



shares), $31.5 million in cash and $536 thousand in acquisition-related costs. The shares of the Companys common stock issued in the transaction were
valued at the average of the closing price of the Companys common stock for the ten business days ending on August 22, 2006. This acquisition was accounted for using the purchase method of accounting in which the excess of the purchase
price over the estimated fair value of the net assets was recorded as goodwill, none of which is expected to be deductible for tax purposes.



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

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



|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                                    |  | December 31, 2008
|                                                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                 | 1,749   |                      | $ | 25                    |  | $ |           |   |  | $ | 1,774  
|Obligations of states of the U.S. and political subdivisions        |  |                   | 1,331   |                      |   | 27                    |  |   |           |   |  |   | 1,358  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 608,811 |                      |   | 8,487                 |  |   | (1,270     | ) |  |   | 616,028
|Other securities                                                    |  |                   | 15,252  |                      |   |                      |  |   | (1,055     | ) |  |   | 14,197 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 627,143 |                      | $ | 8,539                 |  | $ | (2,325     | ) |  | $ | 633,357
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                 | 95,910  |                      | $ | 1,930                 |  | $ | (228       | ) |  | $ | 97,612 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 76,129  |                      |   | 86                    |  |   | (9,967     | ) |  |   | 66,248 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 172,039 |                      | $ | 2,016                 |  | $ | (10,195    | ) |  | $ | 163,860
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|                                                                    | 
|                                                                    |  | December 31, 2007
|                                                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                 | 11,563  |                      | $ | 40                    |  | $ | (2         | ) |  | $ | 11,601 
|Obligations of states of the U.S. and political subdivisions        |  |                   | 1,693   |                      |   | 22                    |  |   | (1         | ) |  |   | 1,714  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 450,132 |                      |   | 2,023                 |  |   | (3,376     | ) |  |   | 448,779
|Other securities                                                    |  |                   | 15,993  |                      |   |                      |  |   | (1,397     | ) |  |   | 14,596 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 479,381 |                      | $ | 2,085                 |  | $ | (4,776     | ) |  | $ | 476,690
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                 | 96,593  |                      | $ | 905                   |  | $ | (111       | ) |  | $ | 97,387 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 83,493  |                      |   | 8                     |  |   | (1,225     | ) |  |   | 82,276 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 180,086 |                      | $ | 913                   |  | $ | (1,336     | ) |  | $ | 179,663
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        



F-15



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



Expected maturities of securities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment penalties. The contractual maturities of securities at December 31, 2008 are shown below (in thousands):



|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|------------------------------------------------------------------ |  | ------------------ | ------- | ---------------- | - | ------------- |  | ---------- | ------- |  | - | -------
|                                                                   |  | Available-for-Sale |         | Held-to-Maturity
|                                                                   |  | AmortizedCost      |         | Fair Value       |   | AmortizedCost |  | Fair Value
|Due in one year or less                                            |  | $                  | 2,110   |                  | $ | 2,137         |  | $          | 10,919  |  | $ | 11,066 
|Due after one year through five years                              |  |                    | 970     |                  |   | 995           |  |            | 51,129  |  |   | 52,140 
|Due after five years through ten years                             |  |                    |        |                  |   |              |  |            | 30,581  |  |   | 31,162 
|Due after ten years                                                |  |                    |        |                  |   |              |  |            | 3,281   |  |   | 3,244  
|Mortgage-backed securities and collateralized mortgage obligations |  |                    | 608,811 |                  |   | 616,028       |  |            | 76,129  |  |   | 66,248 
|Other securities                                                   |  |                    | 15,252  |                  |   | 14,197        |  |            |        |  |   |       
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|Total                                                              |  | $                  | 627,143 |                  | $ | 633,357       |  | $          | 172,039 |  | $ | 163,860
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        

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



|                              |  |              |        |      |   |       |  |   |       
|----------------------------- |  | ------------ | ------ | ---- | - | ----- |  | - | ------
|                              |  | December 31,
|                              |  | 2008         |        | 2007 |   | 2006 
|Proceeds from sales and calls |  | $            | 28,398 |      | $ | 2,600 |  | $ | 98,498
|Gross realized gains          |  |              | 478    |      |   | 3     |  |   | 204   
|Gross realized losses         |  |              | 722    |      |   |      |  |   | 562   

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

The
Company realized losses of $722 thousand and $562 thousand for 2008 and 2006, respectively. There were no realized losses recorded in 2007. These securities are tied to underlying government guaranteed loans and are subject to prepayment and
interest rate fluctuations. Given the length of time these securities had been in an unrealized loss position, current prepayment factors for the underlying loans and managements inability to determine when a full recovery of the value may
occur, management considered these securities to be other than temporarily impaired.



F-16



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



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



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

The average loss on securities in an unrealized loss position was 6% of the amortized cost basis
at December 31, 2008. Securities in a loss position of less than 12 months have an average loss of less than 5% of the amortized cost basis at December 31, 2008.



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



Securities with unrealized losses segregated by length of impairment at December 31, 2007 were
as follows (in thousands):



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

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



F-18



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



The Company does not own securities of any one issuer (other than the U.S. government and its
agencies) for which the aggregate adjusted cost exceeds 10% of the consolidated shareholders equity at December 31, 2008.

Securities with carrying values totaling $305 million and fair values totaling $301 million were pledged to secure public deposits at December 31, 2008.



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

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



|                                |  |              |           |      |   |          
|------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                |  | December 31,
|                                |  | 2008         |           | 2007
|Loans held for sale             |  | $            | 1,524     |      | $ | 78,447   
|Loans held for investment       |  |              |           |      |   |          
|Domestic                        |  |              |           |      |   |          
|Commercial and industrial       |  |              | 1,093,942 |      |   | 912,604  
|Real estate:                    |  |              |           |      |   |          
|Commercial                      |  |              | 1,763,712 |      |   | 1,387,014
|Construction                    |  |              | 545,303   |      |   | 714,600  
|Residential                     |  |              | 309,622   |      |   | 226,033  
|Consumer/other                  |  |              | 63,883    |      |   | 75,626   
|Foreign loans                   |  |              |           |      |   |          
|Commercial and industrial       |  |              | 13,577    |      |   | 21,571   
|Other loans                     |  |              | 2,251     |      |   | 2,389    
|                                |  |              |           |      |   |          
|Total loans held for investment |  |              | 3,792,290 |      |   | 3,339,837
|                                |  |              |           |      |   |          
|Total loans                     |  | $            | 3,793,814 |      | $ | 3,418,284
|                                |  |              |           |      |   |          

Loan maturities and rate sensitivity of the loans held for investment, excluding residential
mortgage and consumer loans, at December 31, 2008 were as follows (in thousands):



|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|----------------------------------- |  | ---------------------- | --------- | ---------------------------------- | - | ------------------- |  | ----- | ------- |  | - | ---------
|                                    |  | Due in OneYear or Less |           | Due AfterOne YearThroughFive Years |   | Due AfterFive Years |  | Total
|Commercial and industrial           |  | $                      | 788,106   |                                    | $ | 242,505             |  | $     | 63,331  |  | $ | 1,093,942
|Real estatecommercial              |  |                        | 216,649   |                                    |   | 785,754             |  |       | 761,309 |  |   | 1,763,712
|Real estateconstruction            |  |                        | 265,645   |                                    |   | 178,253             |  |       | 101,405 |  |   | 545,303  
|Foreign loans                       |  |                        | 9,041     |                                    |   | 6,787               |  |       |        |  |   | 15,828   
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Total loans                         |  | $                      | 1,279,441 |                                    | $ | 1,213,299           |  | $     | 926,045 |  | $ | 3,418,785
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Loans with a fixed interest rate    |  | $                      | 188,245   |                                    | $ | 782,254             |  | $     | 273,024 |  | $ | 1,243,523
|Loans with a floating interest rate |  |                        | 1,091,196 |                                    |   | 431,045             |  |       | 653,021 |  |   | 2,175,262
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Total loans                         |  | $                      | 1,279,441 |                                    | $ | 1,213,299           |  | $     | 926,045 |  | $ | 3,418,785
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          

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



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



Our largest concentration in any single industry is in our energy portfolio. At
December 31, 2008, our energy portfolio totaled $442 million which represents approximately 12% of total loans held for investment. The petroleum industry is usually divided into three major components: upstream, midstream and downstream.
The composition of the collateral of our upstream energy portfolio, at December 31, 2008, consists of 63% gas reserves and 37% oil reserves. The upstream oil sector is a term commonly used to refer to the searching for and the recovery and
production of crude oil and natural gas. The upstream oil sector is also known as the exploration and production sector. These reserve-based loans represent approximately 80% of our energy portfolio. Our remaining energy portfolio consists of
well-secured loans to companies that would be classified as midstream energy companies. A midstream energy company is a company that processes and transports crude oil and natural gas. The energy lending group participates in shared
national credits which are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. The energy lending group is the only group that consistently participates in shared
national credits. As of December 31, 2008, excluding the energy portfolio, there was no concentration of loans to any one type of industry exceeding 10% of total loans nor were there any loans classified as highly leveraged transactions.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported in the balance sheet as
loans held for investment stated at the principal amount outstanding adjusted for charge-offs, the allowance for loan losses, deferred fees or costs and unamortized premiums or discounts. Loans are classified as held for sale when management has
positively determined that the loans will be sold in the foreseeable future and the Company has the ability to do so. The classification may be made upon origination or subsequent to the origination or purchase. Once a decision has been made to sell
loans not previously classified as held for sale, such loans are transferred into the held for sale classification and carried at the lower of cost or fair value. During the years ended December 31, 2008 and 2007, the Company sold approximately
$10.3 million and $45.5 million, respectively, of performing commercial real estate loans that were originally acquired as held for investment. These sales resulted in net gains of $203 thousand and $1.4 million during the years ended
December 31, 2008 and 2007, respectively. These loans were sold as part of the Companys ongoing management of the size, concentrations and risk profile of the loan portfolio. Loans held for sale previously included certain commercial real
estate loans and SBA guaranteed loans originated by the Bank. Due to current market conditions, in September of 2008, $112 million of these loans were no longer classified as held for sale and are now considered as held for investment. The
Company recorded a lower of cost or market adjustment of $266 thousand for 2008. There were no lower of cost or market adjustments recorded for 2007.

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

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



|                  |  |                        |       |   |      |   |       |  
|----------------- |  | ---------------------- | ----- | - | ---- | - | ----- | -
|                  |  | Year EndedDecember 31, |      
|                  |  | 2008                   |       |   | 2007 |  
|Beginning balance |  | $                      | 2,189 |   |      | $ | 2,293 |  
|New loans         |  |                        |      |   |      |   | 747   |  
|Repayments        |  |                        | (89   | ) |      |   | (851  | )
|                  |  |                        |       |   |      |   |       |  
|Ending balance    |  | $                      | 2,100 |   |      | $ | 2,189 |  
|                  |  |                        |       |   |      |   |       |  



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



A loan is impaired when, based on current information and events, it is probable that a creditor will
be unable to collect all amounts due according to the contractual terms of the loan agreement. The recorded investment in impaired loans was $87.5 million and $23.4 million, at December 31, 2008 and 2007, respectively. Such impaired loans
required an allowance for loan losses of $16.1 million and $3.9 million, respectively. The average recorded investment in impaired loans for the year ended December 31, 2008, 2007 and 2006 was $50.9 million, $14.5 million and $17.2
million, respectively. No interest on impaired loans was received for the years ended December 31, 2008 and 2007.

Potential problem
loans are those loans that are not classified as nonperforming or impaired but where information known by management indicates that the borrower may be unable to comply with the present terms. Management identifies these loans through its ongoing
loan review process. Potential problem loans were $83.3 million and $32.3 million at December 31, 2008 and 2007, respectively.

Nonperforming loans of $87.5 million and $20.2 million at December 31, 2008 and 2007, respectively, have been categorized by management as nonaccrual loans. Interest foregone on nonaccrual loans for 2008, 2007 and 2006 was
approximately $3.6 million, $1.9 million and $1.3 million, respectively. There were no restructured loans as of December 31, 2008. The Company had one restructured loan totaling $769 thousand as of December 31, 2007.

When management doubts a borrowers ability to meet payment obligations, which typically occurs when principal or interest payments are more than 90
days past due, the loans are placed on nonaccrual status. Accruing loans 90 days past due or more were $8.4 million and $1.3 million at December 31, 2008 and 2007, respectively. The balance at December 31, 2008 consists primarily of two
loans where the loans are well secured and in the process of collection.



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

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



|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                |  | Year Ended December 31, |       
|                                                                |  | 2008                    |        |   | 2007 |   |        | 2006 | 
|Allowance for Credit Losses                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Allowance for loan losses at beginning of period                |  | $                       | 34,446 |   |      | $ | 32,027 |      |  | $ | 31,230 |  
|Loans charged off                                               |  |                         | 16,608 |   |      |   | 5,962  |      |  |   | 9,450  |  
|Loan recoveries                                                 |  |                         | (2,149 | ) |      |   | (3,065 | )    |  |   | (3,791 | )
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Net loans charged-off                                           |  |                         | 14,459 |   |      |   | 2,897  |      |  |   | 5,659  |  
|Allowance for loan losses associated with acquired institutions |  |                         |       |   |      |   | 1,496  |      |  |   | 2,152  |  
|Provision for loan losses                                       |  |                         | 29,190 |   |      |   | 3,820  |      |  |   | 4,304  |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Allowance for loan losses at end of period                      |  |                         | 49,177 |   |      |   | 34,446 |      |  |   | 32,027 |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Allowance for unfunded loan commitments at beginning of period  |  |                         | 927    |   |      |   | 927    |      |  |   | 1,173  |  
|Provision for losses on unfunded loan commitments               |  |                         | 727    |   |      |   |       |      |  |   | (246   | )
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Allowance for unfunded loan commitments at end of period        |  |                         | 1,654  |   |      |   | 927    |      |  |   | 927    |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Total allowance for credit losses                               |  | $                       | 50,831 |   |      | $ | 35,373 |      |  | $ | 32,954 |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  



F-21



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



|6. | PREMISES AND EQUIPMENT
|-- | ----------------------

Premises and equipment are
summarized as follows (in thousands):



|                                               |  |              |         |   |      |   |         |  
|---------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                               |  | December 31, |        
|                                               |  | 2008         |         |   | 2007 |  
|Land                                           |  | $            | 9,688   |   |      | $ | 4,230   |  
|Buildings and improvements                     |  |              | 36,540  |   |      |   | 21,004  |  
|Furniture, fixtures and equipment              |  |              | 58,304  |   |      |   | 53,293  |  
|                                               |  |              |         |   |      |   |         |  
|                                               |  |              | 104,532 |   |      |   | 78,527  |  
|Less accumulated depreciation and amortization |  |              | (57,657 | ) |      |   | (50,622 | )
|                                               |  |              |         |   |      |   |         |  
|Total                                          |  | $            | 46,875  |   |      | $ | 27,905  |  
|                                               |  |              |         |   |      |   |         |  

Depreciation and amortization of premises and equipment totaled $8.3 million in 2008, $6.9 million
in 2007 and $7.5 million in 2006.

The Company completed three separate sale/leaseback transactions during 2006 resulting in total net
pre-tax gains of $1.8 million. A total of 18 properties were sold resulting in premises and equipment with a net book value of $21.9 million being removed from the Companys assets. These properties are being leased over various terms and are
accounted for as operating leases subsequent to the completion of each transaction. These transactions included the sale of a multi-tenant office building which resulted in a gain of $1.1 million and the sale of a banking center location in San
Antonio which resulted in a gain of $1.0 million. The third sale/leaseback transaction included the sale of 16 bank-owned locations for a total sales price of $28.3 million resulting in a deferred gain of $9.3 million. This gain will be recognized
into income over the lease term of approximately 19 years. The Company has no future commitments, obligations, provisions or circumstances that would require or result in its continuing involvement. As part of this transaction, the Company recorded
a net loss of $281 thousand.



|7. | GOODWILL AND OTHER INTANGIBLES
|-- | ------------------------------

The changes in the
carrying amount of goodwill by reporting unit for the years ended December 31, 2008 and 2007 were as follows (in thousands):



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

The Company reviews its goodwill for impairment annually, as of the first day of the fourth
quarter or more frequently if indicators of impairment exist. Goodwill is assigned to reporting units for purposes of impairment testing. Reporting units used for the goodwill impairment testing include our banking operations



F-22



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



and MBM Advisors. At the end of the fourth quarter of 2008, due to the present uncertainty surrounding the global economy and volatility in the
Companys stock price, management concluded a triggering event had occurred. As part of our process for performing step one of the impairment test of goodwill, the Company estimated the fair value of both reporting units and reconciled to the
Companys overall estimated market capitalization. The estimated market capitalization considers recent trends in our market capitalization and an expected control premium, based on comparable transactional history. Based on the results of the
step one impairment test, no impairment of goodwill was indicated.

The changes in the carrying amounts of the core deposit and other
intangibles for the years ended December 31, 2008 and 2007 were as follows (in thousands):



|                                   |  |                         |        |   |                                 |   |       |       |  |   |        |  
|---------------------------------- |  | ----------------------- | ------ | - | ------------------------------- | - | ----- | ----- |  | - | ------ | -
|                                   |  | Core DepositIntangibles |        |   | CustomerRelationshipIntangibles |   |       | Total | 
|Balance, January 1, 2007           |  | $                       | 10,299 |   |                                 | $ |      |       |  | $ | 10,299 |  
|Amortization expense               |  |                         | (1,951 | ) |                                 |   | (186  | )     |  |   | (2,137 | )
|Partners Bank of Texas acquisition |  |                         | 4,087  |   |                                 |   |      |       |  |   | 4,087  |  
|MBM Advisors, Inc. acquisition     |  |                         |       |   |                                 |   | 3,722 |       |  |   | 3,722  |  
|                                   |  |                         |        |   |                                 |   |       |       |  |   |        |  
|Balance, December 31, 2007         |  |                         | 12,435 |   |                                 |   | 3,536 |       |  |   | 15,971 |  
|Amortization expense               |  |                         | (1,956 | ) |                                 |   | (372  | )     |  |   | (2,328 | )
|First Horizon branch acquisition   |  |                         |       |   |                                 |   | 231   |       |  |   | 231    |  
|                                   |  |                         |        |   |                                 |   |       |       |  |   |        |  
|Balance, December 31, 2008         |  | $                       | 10,479 |   |                                 | $ | 3,395 |       |  | $ | 13,874 |  
|                                   |  |                         |        |   |                                 |   |       |       |  |   |        |  

Core deposit and other intangibles are amortized on an accelerated basis over their estimated
lives of 10 years. The projected amortization for core deposit intangibles as of December 31, 2008 is as follows (in thousands):



|           |  |   |       
|---------- |  | - | ------
|2009       |  | $ | 2,247 
|2010       |  |   | 2,149 
|2011       |  |   | 2,011 
|2012       |  |   | 1,801 
|2013       |  |   | 1,695 
|Thereafter |  |   | 3,971 
|           |  |   |       
|Total      |  | $ | 13,874
|           |  |   |       



|8. | BANK OWNED LIFE INSURANCE
|-- | -------------------------

The Company purchases
bank owned life insurance (BOLI) policies on the lives of certain officers and is the owner and beneficiary of the policies. These policies provide funding for long-term retirement and other employee benefits costs. The recorded balance
of BOLI was $95.5 million and $78.1 million at December 31, 2008 and 2007, respectively. At December 31, 2008, approximately $25 million of BOLI funds were held in separate accounts with investments in U.S. government, mortgage-backed and
corporate debt securities. The cash surrender value of the life insurance policies contained in separate accounts is further supported by a stable value wrap agreement, which protects against changes in the fair value of the investments. BOLI
policies are recorded within other assets in the Consolidated Balance Sheets at each policys respective cash surrender value, including the value of the stable value wrapper, with changes recorded in noninterest income in the Consolidated
Statements of Income.



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



|9. | DEPOSITS
|-- | --------

Included in certificates and other time
deposits are individual amounts of $100,000 or more including brokered certificate of deposits. The remaining maturities of these deposits as of December 31, 2008, are as follows (in thousands):



|                               |  |   |        
|------------------------------ |  | - | -------
|Three months or less           |  | $ | 317,138
|Over three through six months  |  |   | 158,940
|Over six through twelve months |  |   | 194,105
|Thereafter                     |  |   | 56,982 
|                               |  |   |        
|                               |  | $ | 727,165
|                               |  |   |        

Interest expense for certificates of deposit in excess of $100,000 was approximately $26.7
million, $41.3 million, and $28.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.

At December 31,
2008, the Bank had $65.9 million in brokered certificates of deposits that were in excess of $100,000, of which $59.4 million will mature in 2009. The remaining balance of these deposits was $6.5 million and will mature in 2010.

There are no major concentrations of deposits.



|10. | OTHER BORROWED FUNDS
|--- | --------------------

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



|                                |  |              |         |      |   |        
|------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                |  | December 31,
|                                |  | 2008         |         | 2007
|Federal Home Loan Bank advances |  | $            | 212,500 |      | $ | 187,500
|Repurchase agreements           |  |              | 59,936  |      |   | 422    
|Federal funds purchased         |  |              | 36,150  |      |   | 9,225  
|Treasury auction facility       |  |              | 100,000 |      |   |       
|                                |  |              |         |      |   |        
|Total                           |  | $            | 408,586 |      | $ | 197,147
|                                |  |              |         |      |   |        

Federal Home Loan Bank AdvancesThe Company has an available line of
credit with the Federal Home Loan Bank (FHLB) of Dallas, which allows the Company to borrow on a collateralized basis. At December 31, 2008, we had total funds of $1.1 billion available under this agreement of which $213 million was outstanding
with an average interest rate of 0.79%. At December 31, 2008, the Company had $40.0 million of FHLB advances that mature in nine years and $500 thousand of FHLB advances that mature in two years. The remaining $172 million of advances had
maturities of fewer than three days. These borrowings are collateralized by single family residential mortgage loans, certain pledged securities, FHLB stock owned by the Company and any funds on deposit with the FHLB. The Company utilizes these
borrowings to meet liquidity needs. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits.

Securities Sold Under Agreements to RepurchaseSecurities sold under agreements to repurchase represent the purchase of interests in securities by banking customers and structured repurchase
agreements with other financial institutions. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. Repurchase agreements with banking customers are settled



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



on the following business day, while structured repurchase agreements with other financial institutions will have varying terms. All securities sold under
agreements to repurchase are collateralized by certain pledged securities. The securities underlying the structured repurchase agreements are held in safekeeping by the purchasing financial institution. At December 31, 2008 and 2007, the
Company had securities sold under agreements to repurchase with banking customers of $9.9 million and $422 thousand, respectively. Structured repurchase agreements totaled $50.0 million at December 31, 2008 and consisted of agreements with two
separate financial institutions totaling $25.0 million, each that will mature in 2015. The rate on these repurchase agreements was 1.22% and 0.87%, respectively, at December 31, 2008. The Company may be required to provide additional collateral
based on the fair value of the underlying securities. There were no structured repurchase agreements outstanding on December 31, 2007.

Treasury Auction FacilityTreasury Auction Facilities (TAF) are term funds auctioned to depository institutions by the Federal Reserve Board. Each TAF auction is for a fixed amount, with the rate determined by
the auction process (subject to a minimum bid rate). All advances must be fully collateralized. At December 31, 2008, we had $100 million of TAF borrowings outstanding. There were no TAF borrowings at December 31, 2007.

Federal Funds PurchasedThe Company has federal funds purchased at correspondent banks. As of December 31, 2008, federal funds
outstanding with correspondent banks were $36.2 million and payable upon demand. These funds typically mature within one to ninety days.



|11. | JUNIOR SUBORDINATED DEBT/COMPANY MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
|--- | ----------------------------------------------------------------------------------

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



|                     |  |                    |  |                                     |        |              |                        |                                      |   |                     |  |                   
|-------------------- |  | ------------------ |  | ----------------------------------- | ------ | ------------ | ---------------------- | ------------------------------------ | - | ------------------- |  | ------------------
|Description          |  | Issuance Date      |  | TrustPreferredSecuritiesOutstanding |        | InterestRate |                        | JuniorSubordinatedDebt OwedTo Trusts |   | Final Maturity Date
|Statutory Trust One  |  | August 30, 2002    |  | $                                   | 20,000 |              | 3-monthLIBOR plus3.45% |                                      | $ | 20,619              |  | August 30, 2032   
|                     |  |                    |  |                                     |       
|Capital Trust III    |  | September 26, 2002 |  |                                     | 31,250 |              | 8.30% Fixed            |                                      |   | 32,217              |  | September 26, 2032
|                     |  |                    |  |                                     |       
|BOTH Capital Trust I |  | June 30, 2003      |  |                                     | 4,000  |              | 3-monthLIBOR plus3.10% |                                      |   | 4,124               |  | July 7, 2033      
|                     |  |                    |  |                                     |       
|Capital Trust IV     |  | March 26, 2007     |  |                                     | 25,000 |              | 3-monthLIBOR plus1.60% |                                      |   | 25,774              |  | June 15, 2037     
|                     |  |                    |  |                                     |        |              |                        |                                      |   |                     |  |                   
|Total                |  |                    |  | $                                   | 80,250 |              |                        |                                      | $ | 82,734              |  |                   
|                     |  |                    |  |                                     |        |              |                        |                                      |   |                     |  |                   

Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust
securities and investing the proceeds thereof in junior subordinated debentures of Sterling Bancshares. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to
mandatory redemption upon payments of the junior subordinated debentures held by the trust. The common securities of each trust are wholly-owned by Sterling Bancshares. Each trusts ability to pay



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



amounts due on the trust preferred securities is solely dependent upon Sterling Bancshares making payment on the related junior subordinated debentures.
Sterling Bancshares obligations under the junior subordinated debentures and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by Sterling Bancshares of each respective trusts obligations under
the trust securities issued by each respective trust.

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

The trust preferred securities issued under Statutory Trust One were privately placed.
The interest on these securities is a floating rate that resets quarterly. As of December 31, 2008, the floating rate was 4.91% on these securities compared to 8.28% at December 31, 2007.

The BOTH Capital Trust I preferred securities bear interest at a floating rate equal to the three-month LIBOR plus 3.10%. As of December 31, 2008,
the floating rate on these securities was 7.92% compared to 5.96% at December 31, 2007.

On March 26, 2007, the Company completed
the issuance and sale in a private placement of $25.0 million in aggregate principal amount of trust preferred securities issued by the Companys newly formed subsidiary, Sterling Bancshares Capital Trust IV, a Delaware statutory trust
(Trust IV). The trust preferred securities may be called at par by the Company at any time after June 15, 2012 and require quarterly distributions of interest by Trust IV to the holder of the trust preferred securities.
Distributions will be payable quarterly at a floating interest rate equal to the 3-month LIBOR plus 1.60% per annum. Trust IV simultaneously issued 774 shares of its common securities to the Company for the purchase price of $774 thousand,
which constitutes all of the issued and outstanding common securities of Trust IV. As of December 31, 2008, the floating rate was on these securities was 3.60% compared to 6.59% at December 31, 2007.



|12. | SUBORDINATED DEBT
|--- | -----------------

During April 2003, the Bank
raised approximately $50.0 million through a private offering of subordinated unsecured notes. These subordinated notes bear interest at a fixed rate of 7.375% and mature on April 15, 2013. Interest payments are due semi-annually. The
subordinated notes may not be redeemed or called prior to their maturity. Debt issuance costs of approximately $1.0 million are being amortized over the ten-year term of the notes on a straight-line basis. In June 2003, the Bank entered into an
interest rate swap agreement with a notional amount of $50.0 million in which the bank swapped the fixed rate to a floating rate (discussed in Note 13).

On June 30, 2008, the Bank entered into a subordinated note in the aggregate principal amount of $25.0 million. The subordinated note bears interest at a rate equal to LIBOR plus 2.50% and resets quarterly.
The unpaid principal balance plus all accrued and unpaid interest on the subordinated debt shall be due and payable on September 15, 2018. The Bank may prepay the subordinated debt without penalty on any interest payment date on or after
September 15, 2013. As of December 31, 2008, the floating rate was 4.50% on the subordinated note.



F-26



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



|13. | DERIVATIVE FINANCIAL INSTRUMENTS
|--- | --------------------------------

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

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

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

In June 2003, the Bank entered into an interest rate swap agreement with a notional amount of $50.0 million in which the Bank swapped the
fixed rate to a floating rate. Under the terms of the swap agreement, the Bank receives a fixed coupon rate of 7.375% and pays a variable interest rate equal to the three-month LIBOR that is reset on a quarterly basis, plus 3.62%. This swap is
designated as a fair value hedge of the Companys $50.0 million subordinated debentures and qualifies for the short-cut method of accounting (discussed in Note 12). At December 31, 2008, the swaps fair value of $3.4
million is included in other assets with a floating rate of 8.38%. At December 31, 2007, the swaps fair value was $1.3 million and had a floating rate of 8.87%. The Companys credit exposure on the interest rate swap is limited to
its net favorable fair value, if any, and the interest payment receivable from the counterparty.

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

For cash flow hedges, the effective portion of the gain or loss on the
derivative hedging instrument is reported in other comprehensive income, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change
in expected future cash flows on the hedge transaction) is recorded in current earnings as other income or other expense. The accumulated net after-tax gain on the floor and collar contracts included in accumulated other comprehensive income totaled
$13.4 million and $7.3 million at December 31, 2008 and 2007, respectively. The total fair value of the interest-rate collar and floor was $21.0 million and $12.2 million at December 31, 2008 and 2007, respectively, and is included in
other assets.



F-27



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



|14. | INCOME TAXES
|--- | ------------

The components of the provision for
income taxes are as follows (in thousands):



|                                      |  |                         |        |   |      |   |        |      |  |   |       
|------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------
|                                      |  | Year Ended December 31,
|                                      |  | 2008                    |        |   | 2007 |   |        | 2006
|Current income tax expense            |  | $                       | 25,732 |   |      | $ | 27,367 |      |  | $ | 21,680
|Deferred income tax expense (benefit) |  |                         | (8,367 | ) |      |   | (1,659 | )    |  |   | 259   
|                                      |  |                         |        |   |      |   |        |      |  |   |       
|Total income tax expense              |  | $                       | 17,365 |   |      | $ | 25,708 |      |  | $ | 21,939
|                                      |  |                         |        |   |      |   |        |      |  |   |       

The provision for income taxes differs from the amount computed by applying the federal income tax
statutory rate of 35% to income from continuing operations as follows (in thousands):



|                                                 |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                 |  | Year Ended December 31, |       
|                                                 |  | 2008                    |        |   | 2007 |   |        | 2006 | 
|Taxes calculated at statutory rate               |  | $                       | 19,594 |   |      | $ | 27,535 |      |  | $ | 23,723 |  
|Increase (decrease) resulting from:              |  |                         |        |   |      |   |        |      |  |   |        |  
|Release of reserves                              |  |                         | (689   | ) |      |   | (98    | )    |  |   | (473   | )
|Tax-exempt interest income                       |  |                         | (1,229 | ) |      |   | (1,126 | )    |  |   | (868   | )
|Tax-exempt income from bank-owned life insurance |  |                         | (1,162 | ) |      |   | (1,185 | )    |  |   | (989   | )
|Other, net                                       |  |                         | 851    |   |      |   | 582    |      |  |   | 546    |  
|                                                 |  |                         |        |   |      |   |        |      |  |   |        |  
|Income tax expense, as reported                  |  | $                       | 17,365 |   |      | $ | 25,708 |      |  | $ | 21,939 |  
|                                                 |  |                         |        |   |      |   |        |      |  |   |        |  

Significant deferred tax assets and liabilities at December 31 were as follows (in
thousands):



|                                                 |  |      |        |      |   |       
|------------------------------------------------ |  | ---- | ------ | ---- | - | ------
|                                                 |  | 2008 |        | 2007
|Deferred tax assets:                             |  |      |        |      |   |       
|Depreciable assets                               |  | $    | 4,388  |      | $ | 3,446 
|Allowance for credit losses                      |  |      | 17,516 |      |   | 12,106
|Net operating loss carryforward                  |  |      |       |      |   | 1,083 
|Deferred compensation                            |  |      | 1,726  |      |   | 1,559 
|Unrealized loss on available-for-sale securities |  |      |       |      |   | 925   
|Federal Home Loan Bank stock dividends           |  |      | 203    |      |   |      
|Real estate acquired by foreclosure              |  |      | 24     |      |   |      
|Other                                            |  |      | 2,580  |      |   | 1,677 
|                                                 |  |      |        |      |   |       
|Total deferred tax assets                        |  |      | 26,437 |      |   | 20,796
|Deferred tax liabilities:                        |  |      |        |      |   |       
|Federal Home Loan Bank stock dividends           |  |      |       |      |   | 723   
|Core deposit intangibles                         |  |      | 3,672  |      |   | 4,352 
|Unrealized gain on available-for-sale securities |  |      | 2,175  |      |   |      
|Loan origination fees                            |  |      | 1,742  |      |   | 1,912 
|Unrealized gain on cash flow hedge               |  |      | 7,232  |      |   | 3,934 
|Real estate acquired by foreclosure              |  |      |       |      |   | 23    
|Prepaid expenses                                 |  |      | 1,194  |      |   | 680   
|Other                                            |  |      | 390    |      |   | 139   
|                                                 |  |      |        |      |   |       
|Total deferred tax liabilities                   |  |      | 16,405 |      |   | 11,763
|                                                 |  |      |        |      |   |       
|Net deferred tax assets                          |  | $    | 10,032 |      | $ | 9,033 
|                                                 |  |      |        |      |   |       



F-28



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



The Company adopted the provisions of FIN 48 on January 1, 2007. There was no effect on the
Companys consolidated balance sheet or income statement as a result of implementing FIN 48. As of December 31, 2008 and 2007, the Company had unrecognized tax benefits of $265 thousand and $619 thousand, respectively. The unrecognized tax
benefit of $265 thousand has no impact on the effective tax rate. The reduction in unrecognized tax benefits result from open state tax examination periods which expired in November 2008.

A reconciliation of the beginning and ending amounts of the unrecognized tax benefit is listed below (in thousands):



|                                                           |  |      |      |   |      |   |     |  
|---------------------------------------------------------- |  | ---- | ---- | - | ---- | - | --- | -
|                                                           |  | 2008 |      |   | 2007 |  
|Beginning balance at January 1                             |  | $    | 619  |   |      | $ | 717 |  
|Increases due to new contingencies                         |  |      | 265  |   |      |   |    |  
|Decreases due to lapse of applicable statue of limitations |  |      | (619 | ) |      |   | (98 | )
|                                                           |  |      |      |   |      |   |     |  
|Ending balance at December 31                              |  | $    | 265  |   |      | $ | 619 |  
|                                                           |  |      |      |   |      |   |     |  

The Companys policy is that it recognizes interest and penalties as a component of income
tax expense. As of December 31, 2008, the Company had accrued interest and penalties of $25 thousand.

The Company files income tax
returns in the U.S. federal jurisdiction and various state jurisdictions. During 2005, the Internal Revenue Service commenced an examination of the Companys federal income tax return for the 2003 tax year. This examination was completed during
the third quarter of 2006, resulting in an additional federal income tax obligation of $1.2 million. This obligation was previously accrued as part of the Companys overall tax contingency reserve. During the years ended December 31, 2008,
2007, and 2006, the Company revised its estimate to remove contingent liabilities totaling $619 thousand, $98 thousand and $473 thousand, respectively, related to the expiration of previous tax contingencies and refunds received, including the
filing of various state tax returns related to the Companys mortgage banking segment which was sold in 2003.



|15. | EMPLOYEE BENEFITS
|--- | -----------------

Profit sharing
planThrough December 31, 2008, the Companys profit sharing plan included substantially all employees. The profit sharing contribution is made at the discretion of the Board of Directors. Total contributions to the profit sharing
plan were limited to 5% of the Companys pre-tax net income, subject to Internal Revenue Service limitations. During 2008, there was no profit sharing contribution as the Company did not achieve the minimum performance metrics required for
earnings per share and return on average assets. Earnings per share and return on average assets are the profit sharing plan metrics that were adopted in 2007. In 2006 and prior years, profit sharing was paid out only when the Bank achieved a
minimum 12% ROE. The profit sharing plan was terminated in 2009 upon approval of the Board of Directors. Through December 31, 2008, the Company also matched employee 401(k) contributions at 50% of the first 6% of eligible compensation that an
employee may elect to defer . The Company match fully vests after four years of service. In 2009, the 401(k) plan was revised to provide a Company match of 100% of the first 5% of eligible compensation. Employee contributions to the 401(k) plan
accounts are optional. Contributions to the 401(k) are accrued and funded currently. In 2008 and 2007, the matching expense for the 401(k) was $1.5 million and $1.3 million, respectively. Total profit sharing and 401(k) matching contribution
expenses were approximately $1.5 million for 2008, approximately $4.0 million for 2007, and approximately $3.4 million for 2006.



F-29



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



Stock-based compensationThe 2003 Stock Incentive and Compensation Plan (the
2003 Stock Plan), which has been approved by the shareholders, permits the grant of unrestricted stock units, restricted stock units phantom stock awards, stock appreciation rights or stock options. On August 31, 2007, the Board of
Directors of the Company approved and adopted the Long-Term Incentive Stock Performance Program (the Program) pursuant to which the Human Resources Programs Committee of the Board of Directors (the Committee) may award equity-based
awards to employees who are actively employed by the Company. All awards will be made under the 2003 Stock Plan and vest over a three year period. Certain share awards granted under previous shareholder-approved plans are still outstanding and
unvested at December 31, 2008. Options are granted to officers and employees at exercise prices determined by the Human Resources Programs Committee (Committee) of the Board of Directors. These options have exercise prices equal to
the fair market value of the common stock at the date of grant, vest ratably over a three or four-year period and must be exercised within ten years from the date of grant. Certain awards provide for accelerated vesting if there is a change in
control (as defined in the 2003 Stock Plan).

Total stock-based compensation expense that was charged against income was $3.6 million, $1.7
million and $2.2 million for 2008, 2007 and 2006, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $751 thousand, $407 thousand and $654 thousand for 2008, 2007 and 2006,
respectively.

Cash received for exercises under all share-based payment arrangements during 2008, 2007 and 2006 was $1.0 million, $4.2
million and $4.9 million, respectively. The actual tax benefit realized for the tax deductions under all share-based payment arrangements totaled $24 thousand, $372 thousand and $620 thousand, respectively, for 2008, 2007 and 2006.

The Company issues new shares upon the exercise of all share-based payment arrangements.

Stock optionsOptions are granted to officers and employees as determined by the Committee. These options have exercise prices equal
to the fair market value of the Companys common stock at the date of grant, vest ratably over a three or four year period and must be exercised within ten years from the date of grant. Certain awards provide for accelerated vesting if there is
a change in control (as defined in the 2003 Stock Plan). The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option valuation model. The Black-Scholes-Merton formula assumes that option exercises
occur at the end of an options contractual term, and that expected volatility, expected dividends, and risk-free interest rates are constant over the options term. The Black-Scholes-Merton formula is adjusted to take into account
certain characteristics of employee share options and similar instruments that are not consistent with the models assumptions. Because of the nature of the formula, those adjustments take the form of weighted-average assumptions about
those characteristics. The expected term represents the period of time that options granted are expected to be outstanding. The risk-free interest rate of the option is based on the U.S. Treasury zero-coupon with a remaining term equal to the
expected term used in the assumption model. The historical volatility is a measure of fluctuations in the Companys share price. The fair value of options was estimated using the following weighted-average assumptions:



|                        |  |       |   |  |       |   |  |       |  
|----------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                        |  | 2008  |   |  | 2007  |   |  | 2006  |  
|Expected term (years)   |  | 5.00  |   |  | 3.80  |   |  | 4.78  |  
|Risk-free interest rate |  | 3.03  | % |  | 3.65  | % |  | 4.74  | %
|Historical volatility   |  | 29.70 | % |  | 21.69 | % |  | 30.18 | %
|Dividend yield          |  | 2.11  | % |  | 1.46  | % |  | 1.56  | %



F-30



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



A summary of changes in outstanding stock options as of December 31, 2008 is as follows:



|                                         |  |                      |   |  |                              |      |                                                   |      |                                       |   |    
|---------------------------------------- |  | -------------------- | - |  | ---------------------------- | ---- | ------------------------------------------------- | ---- | ------------------------------------- | - | ---
|                                         |  | Shares(In thousands) |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualTerm(In years) |      | AggregateIntrinsicValue(In thousands)
|Shares under option, beginning of period |  | 1,284                |   |  | $                            | 8.99 |                                                   |      |                                       |   |    
|Shares granted                           |  | 333                  |   |  |                              | 9.93 |                                                   |      |                                       |   |    
|Shares forfeited or expired              |  | (262                 | ) |  |                              | 9.68 |                                                   |      |                                       |   |    
|Shares exercised                         |  | (73                  | ) |  |                              | 7.11 |                                                   |      |                                       |   |    
|                                         |  |                      |   |  |                              |      |                                                   |      |                                       |   |    
|Shares under option, end of period       |  | 1,282                |   |  | $                            | 9.42 |                                                   | 6.24 |                                       | $ | 106
|                                         |  |                      |   |  |                              |      |                                                   |      |                                       |   |    
|Shares exercisable, end of period        |  | 718                  |   |  | $                            | 8.47 |                                                   | 4.23 |                                       | $ | 106
|                                         |  |                      |   |  |                              |      |                                                   |      |                                       |   |    

The weighted average grant-date fair value of the options granted during the years ended
December 31, 2008, 2007 and 2006 was $2.83, $3.31 and $3.55, respectively. The total intrinsic value of options exercised during the years ended December 31, 2008, 2007 and 2006 was $164 thousand, $1.2 million and $2.7 million,
respectively.

Share awardsA summary of the status of the Companys nonvested share awards as of December 31,
2008 is presented below (shares in thousands):



|                                          |  |                      |   |  |                                     |      
|----------------------------------------- |  | -------------------- | - |  | ----------------------------------- | -----
|                                          |  | Shares(in thousands) |   |  | WeightedAverageGrant-DateFair Value
|Nonvested share awards, beginning of year |  | 376                  |   |  | $                                   | 11.58
|Shares granted                            |  | 230                  |   |  |                                     | 9.96 
|Shares forfeited                          |  | (39                  | ) |  |                                     | 10.99
|Shares vested                             |  | (87                  | ) |  |                                     | 11.05
|                                          |  |                      |   |  |                                     |      
|Nonvested share awards, end of year       |  | 480                  |   |  | $                                   | 10.89
|                                          |  |                      |   |  |                                     |      

As of December 31, 2008, there was $3.4 million of total unrecognized compensation expense
related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 1.73 years. The total fair value of shares vested during the year ended December 31, 2008 was $966
thousand.

On December 20, 2007, the Company entered into a new employment agreement with its chief executive officer
(CEO). This agreement replaced the existing agreement, in which the CEO was awarded 187,500 Performance Restricted Share Units (PRSUs), to be earned based on specified performance metrics. The total value of this stock grant
was based on the current market price on the date of grant. Under the revised agreement, the new performance metrics include an earnings per share growth versus the Companys peer banks and a return on assets performance versus the
Companys peer banks. In addition, the vesting period changed from four years to three years. Based on these performance metrics, the CEO will earn a specific number of the eligible share units on December 31, 2009. The Company had
recorded total compensation expense of $665 thousand for 2006 under the previous agreement. Additional compensation expense of



F-31



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



$36 thousand was recorded in 2007 as a result of the new agreement. The Company recorded compensation expense of $701 thousand in 2008 related to the
PRSUs granted under the new agreement. As of December 31, 2008, there was $701 thousand of total unrecognized compensation expense related to the PRSUs. If the performance measures are not met, no future compensation expense will be recognized
and any previously recognized compensation expense will be reversed.

Stock purchase planThe Company offers the 2004
Employee Stock Purchase Plan (the Purchase Plan) effective July 1, 2004, which superceded the 1994 Employee Stock Purchase Plan (the old ESPP) to eligible employees. An aggregate of 2.3 million shares of Company
common stock may be issued under the Purchase Plan subject to adjustment upon changes in capitalization. The Purchase Plan is a compensatory benefit plan to all employees who are employed for more than 20 hours per week and meet minimum
length-of-service requirements of three months. The Purchase Plan is subscribed through payroll deductions which may not exceed 10% of the eligible employees compensation. The purchase price for shares available under the Purchase Plan is 90%
of the lower of the fair market value on either the first or last day of each quarter. Compensation expense associated with the Purchase Plan was determined using a Black-Scholes-Merton option pricing formula. Assumptions used in this formula were
the same as disclosed above for incentive stock options except that an expected term of three months was used. During 2008, 69,998 shares were subscribed for through payroll deductions under the Purchase Plan compared to 46,672 shares for 2007.

Deferred compensation plansIn 1996, the Company adopted the Sterling Bancshares, Inc. Deferred Compensation Plan (the
Deferred Compensation Plan). The Deferred Compensation Plan enabled eligible participants, including certain executives, to make and receive contributions on a tax deferred basis. Additionally, the Deferred Compensation Plan, which
was amended and restated effective January 1, 2001, allowed officers to make an election to defer up to 90% of their base salary, annual bonus, and/or special bonus awards, if any, prior to the beginning of each calendar year. Any deferred
amounts became unfunded liabilities of the Company. The Company had an unfunded deferred compensation liability of $2.8 million at December 31, 2006, which was included in other liabilities. The Company paid a specified rate of return
to the participants of the Deferred Compensation Plan as determined by the Human Resources Programs Committee. The Committee used the year-to-date, 10-year average Treasury rate as a guide in determining the effective interest rate for each
year. For 2007 and 2006, the interest rate paid was 5.30% and 5.26%, respectively. The Company recorded compensation expense of $118 thousand and $225 thousand related to this plan for 2007 and 2006, respectively.

On August 1, 2007, the Board of Directors approved an Amended and Restated Deferred Compensation Plan (Amended Deferred Compensation
Plan) for Sterling Bancshares, Inc. which was effective for compensation periods beginning in September 2007. In connection with the Amended Deferred Compensation plan, the Company established a Rabbi Trust which was funded by the Company in
order to satisfy the Companys contractual liability to pay benefits under the terms of the Amended Deferred Compensation Plan. Plan assets are invested generally in the same investments available to the participants of the 401(k) plan,
including Sterling Bancshares, Inc. stock. The Rabbi Trust is subject to the claims of the Companys creditors.

At December 31,
2008 and 2007, investments held in the Rabbi Trust of $2.7 million and $2.3 million, respectively, were included in available-for-sale investments on the Companys consolidated balance sheet. Changes in the fair value of the plan assets are
excluded from earnings and reported, net of tax, as accumulated comprehensive income or loss until realized. The Company had realized losses of $57 thousand on plan assets which were deducted from the plan assets. Plan assets that are invested in
the Companys common stock are included as a reduction of the Companys shareholder equity. The funded Amended Deferred Compensation Plan liabilities totaling $3.2 million and $3.0 million are included in other



F-32



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



liabilities at December 31, 2008 and 2007, respectively. A reduction to compensation expense of $765 thousand was recorded during 2008 as a result of
changes in the plan assets.

The Company also has an unfunded defined benefit deferred compensation agreements for certain former
management as the result of prior acquisitions. At December 31, 2008 and 2007, these deferred compensation agreements have an estimated benefit obligation of $1.8 million and $1.7 million, respectively which were included in other liabilities.
These retirement agreements provide for varying monthly benefits ranging from ten years to the life of the participant.

Executive
compensation restrictionsAs part of the TARP Capital Purchase Program, the Company entered into a Securities Purchase Agreement (collectively, the Purchase Agreement) with the U.S. Treasury. The Company adopted the
initial selling securityholders standards for executive compensation and corporate governance for the period during which the initial selling securityholder holds the equity issued pursuant to the Purchase Agreement, including the common stock
which may be issued pursuant to the Warrant. These standards generally apply to the Chief Executive Officer, Chief Financial Officer and the three next most highly compensated Senior Executive Officers. The standards include (1) ensuring
that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive
based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on making golden parachute payments to senior executives; and (4) agreement not to deduct for tax
purposes executive compensation in excess of $500 thousand for each senior executive. In particular, the change to the deductibility limit on executive compensation will likely increase the overall cost of our compensation programs in future
periods. Since the Warrant has a ten year term, we could potentially be subject to the executive compensation and corporate governance restrictions for a ten year time period.

The ARRA imposes additional compensation restrictions and corporate governance standards on TARP recipients. The ARRA amends, among other things, TARP by
directing the U.S. Treasury Department to issue regulations implementing strict limitations on compensation paid or accrued by TARP recipients. Limitations are to include:



| |  |  | A prohibition on paying or accruing bonus, incentive or retention compensation for at least the five most highly compensated employees, other than certain awards of
long-term restricted stock or bonuses payable under existing employment agreements;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A prohibition on making any golden parachute payments to the five highest paid executive officers and the next five most highly compensated employees
for departure from the Company other than compensation earned for services rendered or accrued benefits;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Subjecting bonus, incentive and retention payments made to the five highest paid executive officers and the next 20 most highly compensated employees to a
clawback if based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A prohibition on any compensation plan that would encourage manipulation of reported earnings;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Adoption by the Companys Board of Directors of a company-wide policy regarding excessive or luxury expenditures including office and facility renovations,
aviation or other transportation services and other activities or events that are not reasonable expenditures for staff development, reasonable performance incentives or similar measures in the ordinary course of business;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



| |  |  | Submitting a say-on-pay proposal to a non-biding vote of shareholders at future annual meetings, whereby shareholders vote to approve the compensation
of executives as disclosed pursuant to the executive compensation disclosures included in the proxy statement; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A review by the U.S. Department of Treasury of any bonus, retention awards or other compensation paid to the five highest paid executive officers and the next 20
most highly compensated employees prior to February 17, 2009 to determine if such payments were excessive and negotiate for the reimbursement of such excess payments.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|16. | SHAREHOLDERS EQUITY
|--- | --------------------

Treasury
stockOn April 25, 2005, the Companys Board of Directors authorized the repurchase of up to 2.5 million shares of common stock, not to exceed 500 thousand shares in any calendar year. On January 29, 2007, the
Companys Board of Directors authorized an increase in the number of shares to be repurchased to adjust for the three-for-two stock split approved by the Board of Directors on October 30, 2006. On July 30, 2007, the Companys
Board of Directors amended its existing common stock repurchase program (the Program). The amendment increased by 750 thousand shares the total number of shares that may be repurchased by the Company under the Program in the fiscal year
2007. The aggregate number of shares originally approved by the Board of Directors for repurchase under the Program remains unchanged at 3.8 million shares. The Company may repurchase shares of common stock from time to time in the open market
or through privately negotiated transactions from available cash or other borrowings. In 2008, the Company repurchased 100 thousand shares at an average cost per share of $9.06, for a total purchase price of $906 thousand.

Preferred stockOn December 12, 2008, as part of the TARP Capital Purchase Program, the Company entered into a Securities
Purchase Agreement with the U.S. Treasury, pursuant to which the Company for a purchase price of $125 million in cash (i) sold 125,198 shares of the Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series J and
(ii) issued a Warrant to purchase 2.6 million shares of the Companys common stock, for a price of $7.18 per share. The total proceeds were recorded in equity, based on the relative fair value of the preferred stock and related
warrants of $118 million and $7.2 million, respectively. The resulting discount from the liquidation (par) amount of the Preferred Stock will be amortized over the first five years using a constant effective yield. The amortization of this
discount will result in the carrying amount of the Preferred Stock equaling its par amount at the end of year five.

The Series J Preferred
Stock qualifies as Tier 1 capital and is entitled to cumulative dividends. The Preferred Stock dividend reduces earnings available to common shareholders and is computed at an annual rate of 5% per year for the first five years, and 9% per
year thereafter. The Series J Preferred Stock may be redeemed by the Company after three years, with regulatory approval.

The Warrant has
a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $7.18 per share of the Common Stock. The U.S. Treasury has agreed not to exercise voting power with respect
to any shares of Common Stock issued upon exercise of the Warrant that it holds.

Under the Securities Purchase Agreement, the Company is
not permitted to increase common stock dividends above the amount of the last quarterly cash dividend per share declared prior to October 14, 2008 without the initial approval of the U.S. Treasury until the third anniversary of the
investment unless all of the Series J Preferred Stock has been redeemed or transferred. In addition, the Companys ability to



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##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



repurchase its shares is restricted. Consent of the U.S. Treasury generally is required for the Company to make any stock repurchase until the
third anniversary of the investment by U.S. Treasury unless all of the Series J Preferred Stock has been redeemed or transferred. Further, common, junior preferred or pari passu preferred shares may not be repurchased if the Company is in
arrears on the Series J Preferred Stock dividends.



|17. | EARNINGS PER COMMON SHARE
|--- | -------------------------

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



|                                                                   |  |                         |        |      |   |        |  |   |       
|------------------------------------------------------------------ |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                                                                   |  | Year Ended December 31,
|                                                                   |  | 2008                    |        | 2007 |   | 2006  
|Net income available for common shareholders                       |  | $                       | 38,221 |      | $ | 52,962 |  | $ | 45,840
|Basic:                                                             |  |                         |        |      |   |        |  |   |       
|Weighted average shares outstanding                                |  |                         | 73,177 |      |   | 72,659 |  |   | 68,834
|Diluted:                                                           |  |                         |        |      |   |        |  |   |       
|Add incremental shares for:                                        |  |                         |        |      |   |        |  |   |       
|Assumed exercise of outstanding options and nonvested share awards |  |                         | 311    |      |   | 467    |  |   | 699   
|                                                                   |  |                         |        |      |   |        |  |   |       
|Total                                                              |  |                         | 73,488 |      |   | 73,126 |  |   | 69,533
|                                                                   |  |                         |        |      |   |        |  |   |       
|Earnings per share                                                 |  |                         |        |      |   |        |  |   |       
|Basic                                                              |  | $                       | 0.52   |      | $ | 0.73   |  | $ | 0.67  
|                                                                   |  |                         |        |      |   |        |  |   |       
|Diluted                                                            |  | $                       | 0.52   |      | $ | 0.72   |  | $ | 0.66  
|                                                                   |  |                         |        |      |   |        |  |   |       

The incremental shares for the assumed exercise of the outstanding options were determined by
application of the treasury stock method. The calculation of diluted earnings per common share excludes 837,381, 550,505, and 139,025 shares outstanding during 2008, 2007, and 2006, respectively, which were antidilutive. In addition, the
calculation excludes the 2.6 million detachable warrants outstanding during 2008, which were antidilutive.



|18. | COMMITMENTS AND CONTINGENCIES
|--- | -----------------------------

LeasesA summary as of December 31, 2008, of noncancelable future operating lease commitments is as follows (in thousands):



|           |  |   |        
|---------- |  | - | -------
|2009       |  | $ | 9,676  
|2010       |  |   | 9,863  
|2011       |  |   | 9,076  
|2012       |  |   | 7,564  
|2013       |  |   | 9,003  
|Thereafter |  |   | 75,263 
|           |  |   |        
|Total      |  | $ | 120,445
|           |  |   |        

In 2007, the Company entered into a lease agreement to consolidate its central and corporate
offices at one central location in Houston, Texas. This move will be completed over the next two years and the timing of the move is aligned with the remaining renewals and expirations of our existing leases.



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



The Company leases certain office facilities and equipment under operating leases. Rent expense under
all noncancelable operating lease obligations, net of income from noncancelable subleases aggregated, was approximately $10.5 million, $9.0 million and $5.2 million for 2008, 2007 and 2006, respectively.

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

Severance and non-competition agreements The Company has entered into severance and non-competition agreements with its chief executive
officer (discussed in Note 15) and certain other executive officers. Under these agreements, upon a termination of employment under the circumstances described in the agreements, each would receive: (i) two years base pay; (ii) an
annual bonus for two years in an amount equal to the highest annual bonus paid to the respective executive officer during the three years preceding termination or change in control (as defined in the agreement); (iii) continued eligibility for
Company perquisites, welfare and life insurance benefit plans, to the extent permitted, and in the event participation is not permitted, payment of the cost of such welfare benefits for a period of two years following termination of employment;
(iv) payment of up to $20 thousand in job placement fees; and (v) to the extent permitted by law or the applicable plan, accelerated vesting and termination of all forfeiture provisions under all benefit plans, options, restricted
stock grants or other similar awards.



|19. | FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
|--- | -------------------------------------------------

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

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



|                                         |  |              |         |      |   |        
|---------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                         |  | December 31,
|                                         |  | 2008         |         | 2007
|Commitments to extend credit             |  | $            | 870,088 |      | $ | 929,227
|Standby and commercial letters of credit |  |              | 104,079 |      |   | 135,345

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

Standby and commercial letters of
credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event of nonperformance by the customers, the



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



Company has rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and
marketable securities. The credit risk to the Company in issuing letters of credit is essentially the same as that involved in extending loan facilities to its customers.

Off-balance sheet arrangements also include an interest rate swap, an interest rate floor, an interest rate collar (discussed in Note 13) and the Companys Trust Preferred Securities (discussed in Note 11).



|20. | REGULATORY MATTERS
|--- | ------------------

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

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

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

During the fourth quarter of 2008, we received $125 million in capital from the U.S. Treasury as the result of our participation in the TARP Capital Purchase Program (discussed in Note 16).



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



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



|                                         |  |                                           |         |       |                              |   |        |                                                                             |         |  |     |        |  |       |         |  |      |  
|---------------------------------------- |  | ----------------------------------------- | ------- | ----- | ---------------------------- | - | ------ | --------------------------------------------------------------------------- | ------- |  | --- | ------ |  | ----- | ------- |  | ---- | -
|                                         |  | Actual                                    |         |       | For CapitalAdequacy Purposes |   |        | To Be Categorizedas Well CapitalizedUnder PromptCorrective ActionProvisions |        
|                                         |  | Amount                                    |         | Ratio |                              |   | Amount |                                                                             | Ratio   |  |     | Amount |  | Ratio |        
|                                         |  | (In thousands, except percentage amounts) |        
|Consolidated:                            |  |                                           |         |       |                              |   |        |                                                                             |         |  |     |        |  |       |         |  |      |  
|As of December 31, 2008:                 |  |                                           |         |       |                              |   |        |                                                                             |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 632,015 |       | 14.9                         | % |        | $                                                                           | 338,491 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 513,518 |       | 12.1                         | % |        |                                                                             | 169,245 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 513,518 |       | 10.6                         | % |        |                                                                             | 194,316 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                              |  
|As of December 31, 2007:                 |  |                                           |         |       |                              |   |        |                                                                             |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 454,030 |       | 11.1                         | % |        | $                                                                           | 327,180 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 369,965 |       | 9.1                          | % |        |                                                                             | 163,590 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 369,965 |       | 8.6                          | % |        |                                                                             | 172,366 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                              |  
|Sterling Bank:                           |  |                                           |         |       |                              |   |        |                                                                             |         |  |     |        |  |       |         |  |      |  
|As of December 31, 2008:                 |  |                                           |         |       |                              |   |        |                                                                             |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 627,695 |       | 14.9                         | % |        | $                                                                           | 338,224 |  | 8.0 | %      |  | $     | 422,780 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 509,198 |       | 12.0                         | % |        |                                                                             | 169,112 |  | 4.0 | %      |  |       | 253,668 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 509,198 |       | 10.5                         | % |        |                                                                             | 194,180 |  | 4.0 | %      |  |       | 242,725 |  | 5.0  | %
|                                         |  |                                           |         |       |                              |  
|As of December 31, 2007:                 |  |                                           |         |       |                              |   |        |                                                                             |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 401,511 |       | 10.6                         | % |        | $                                                                           | 303,449 |  | 8.0 | %      |  | $     | 379,312 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 322,423 |       | 8.5                          | % |        |                                                                             | 151,725 |  | 4.0 | %      |  |       | 227,587 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 322,423 |       | 8.0                          | % |        |                                                                             | 160,879 |  | 4.0 | %      |  |       | 201,099 |  | 5.0  | %

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

Dividend restrictionsDividends paid by the Bank are subject to certain restrictions imposed
by regulatory agencies. At December 31, 2008, the aggregate amount of dividends, which legally could be paid without prior approval of various regulatory agencies, totaled approximately $189 million by the Bank.



|21. | DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
|--- | -----------------------------------------------------

On January 1, 2008, the Company adopted SFAS 157. As discussed in Note 1, SFAS 157 applies to reported balances that are required or permitted to be measured at fair value under an existing accounting pronouncement. SFAS 157
emphasizes that fair value is a market-based measurement, not an entity-specific



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or
liability and establishes a fair value hierarchy. The fair value hierarchy consists of three levels of inputs that may be used to measure fair value as follows:

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

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

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

The table below presents the Companys assets and liabilities measured at fair value on a recurring basis as of December 31, 2008, aggregated by the level in the fair value hierarchy within which those
measurements fall (in thousands).



|                              |  |                             |         |                                                                  |   |                                            |  |                                        |         |  |   |      
|----------------------------- |  | --------------------------- | ------- | ---------------------------------------------------------------- | - | ------------------------------------------ |  | -------------------------------------- | ------- |  | - | -----
|                              |  | Balance atDecember 31, 2008 |         | Quoted Prices inActive Markets forIdentical Instruments(Level 1) |   | Significant OtherObservableInputs(Level
2) |  | SignificantUnobservableInputs(Level
3)
|Financial assets:             |  |                             |         |                                                                  |   |                                            |  |                                        |         |  |   |      
|Available-for-sale securities |  | $                           | 633,357 |                                                                  | $ |                                           |  | $                                      | 630,841 |  | $ | 2,516
|Cash flow hedges              |  |                             | 20,967  |                                                                  |   |                                           |  |                                        | 20,967  |  |   |     
|Loans held for sale           |  |                             | 1,524   |                                                                  |   |                                           |  |                                        |        |  |   | 1,524
|Interest rate swap            |  |                             | 3,361   |                                                                  |   |                                           |  |                                        | 3,361   |  |   |     



F-39



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



Certain financial assets and financial liabilities are measured at fair value on a nonrecurring
basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets measured on a nonrecurring basis
include impaired loans that are collateral dependent, other real estate owned and other repossessed assets which are measured using appraisals and third party estimates and are considered Level 2 inputs within the fair value hierarchy. For
2008, the Company had additions to impaired loans, other real estate owned and other repossessed assets of $81.5 million, $4.9 million and $154 thousand, respectively, which were outstanding at December 31, 2008 and measured using the fair
value hierarchy. In addition, as part of the TARP Capital Purchase Program, we sold 125,198 Preferred Shares for a purchase price of $125 million and issued a Warrant to purchase 2.6 million shares of the Companys common stock. The proceeds
from the TARP Capital Purchase Program were allocated between the Preferred Shares and the Warrant based on relative fair values. The Preferred Shares were determined using Level 3 inputs based on similar types of securities. The fair value of the
Warrant was determined based on Level 2 inputs using the Black-Scholes-Merton option pricing model.

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



|                                                                                                         |  |                                                                                  |       |   |                     |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------- | ----- | - | ------------------- | - | ------- | -
|                                                                                                         |  | Level 3 InstrumentsFair Value Measurements Using Significant Unobservable Inputs |      
|                                                                                                         |  | Year Ended December 31, 2008                                                     |      
|                                                                                                         |  | Available-for-Sale Securities                                                    |       |   | Loans held for sale |  
|Balance, January 1, 2008                                                                                 |  | $                                                                                | 3,586 |   |                     | $ | 78,447  |  
|Total gains or losses for the period included in:                                                        |  |                                                                                  |       |   |                     |   |         |  
|Noninterest income                                                                                       |  |                                                                                  | (722  | ) |                     |   | (266    | )
|Other comprehensive income                                                                               |  |                                                                                  | 78    |   |                     |   |        |  
|Purchases, issuances, settlements and amortization                                                       |  |                                                                                  | (426  | ) |                     |   | 1,846   |  
|Transfers in and/or out of Level 3                                                                       |  |                                                                                  |      |   |                     |   | (78,503 | )
|                                                                                                         |  |                                                                                  |       |   |                     |   |         |  
|Balance, December 31, 2008                                                                               |  | $                                                                                | 2,516 |   |                     | $ | 1,524   |  
|                                                                                                         |  |                                                                                  |       |   |                     |   |         |  
|Net unrealized losses included in net income for the period relating to assets held at December 31, 2008 |  | $                                                                                | (722  | ) |                     | $ | (266    | )



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



The Company realized losses on related Level 3 assets of $988 thousand during the third quarter of
2008. There were no realized gains or losses related to Level 3 assets recorded during 2007.

The estimated fair values of financial
instruments were determined by management as of December 31, 2008 and 2007, and required considerable judgment. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values presented.

The following methods and assumptions were used to estimate the fair value of cash and of financial instruments for which it is practicable to estimate that value:

Cash and Short-term investmentsThe carrying amount is a reasonable estimate of fair value.

SecuritiesSecurities are valued based on quoted prices in an active market when available. These securities are classified in Level 1
of the valuation hierarchy. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows or Level 2 of
the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. These securities are valued based on certain
observable inputs such as interest rates and credit spreads, as well as unobservable inputs such as estimated net charge-off and prepayment rates.

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

Loans Held for InvestmentThe fair value of loans is
estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposit LiabilitiesThe fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on
demand at the reporting date. The fair value of certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Subordinated DebtThe subordinated debt is carried at fair value because this borrowing is fully hedged by an interest rate swap that reprices at market rates on a quarterly basis.

Junior Subordinated DebtFair value equals quoted market prices, if available. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar subordinated debentures.

Other Borrowed FundsThe carrying amount
is a reasonable estimate of fair value because these borrowings reprice at market rates generally within ninety days.

DerivativesDerivatives are reported at fair value utilizing Level 2 inputs. The fair value is determined using market quotes and models that are widely accepted in the financial services industry to value its interest
rate swaps, caps and floors.



F-41



---

##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



Off-Balance Sheet Financial InstrumentsThe fair value of commitments is estimated
using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle
the obligations with the counterparties at the reporting date. These amounts were not significant at the reporting dates.

The estimated
fair values of the Companys financial instruments are as follows (in thousands):



|                                |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|------------------------------- |  | -------------- | --------- | - | ------------------- | - | --------- | -------------- |  | - | ------------------- | - |  | - | --------- | -
|                                |  | December 31,   |          
|                                |  | 2008           |           |   | 2007                |  
|                                |  | CarryingAmount |           |   | EstimatedFair Value |   |           | CarryingAmount |  |   | EstimatedFair Value |  
|Financial assets:               |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|Cash and short-term investments |  | $              | 113,163   |   |                     | $ | 113,163   |                |  | $ | 133,670             |   |  | $ | 133,670   |  
|Available-for-sale securities   |  |                | 633,357   |   |                     |   | 633,357   |                |  |   | 476,690             |   |  |   | 476,690   |  
|Held-to-maturity securities     |  |                | 172,039   |   |                     |   | 163,860   |                |  |   | 180,086             |   |  |   | 179,663   |  
|Loans held for sale             |  |                | 1,524     |   |                     |   | 1,524     |                |  |   | 78,447              |   |  |   | 78,447    |  
|Loans held for investment       |  |                | 3,792,290 |   |                     |   | 3,885,142 |                |  |   | 3,339,837           |   |  |   | 3,414,162 |  
|Less: allowance for loan losses |  |                | (49,177   | ) |                     |   | (49,177   | )              |  |   | (34,446             | ) |  |   | (34,446   | )
|Loan hedge                      |  |                | 20,967    |   |                     |   | 20,967    |                |  |   | 11,971              |   |  |   | 11,971    |  
|Interest rate swap              |  |                | 3,361     |   |                     |   | 3,361     |                |  |   |                    |   |  |   |          |  
|                                |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|Total                           |  | $              | 4,687,524 |   |                     | $ | 4,772,197 |                |  | $ | 4,186,255           |   |  | $ | 4,260,157 |  
|                                |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|Financial liabilities:          |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|Deposits                        |  | $              | 3,819,137 |   |                     | $ | 3,823,104 |                |  | $ | 3,673,711           |   |  | $ | 3,656,002 |  
|Junior subordinated debt        |  |                | 82,734    |   |                     |   | 82,734    |                |  |   | 82,734              |   |  |   | 82,734    |  
|Subordinated debt               |  |                | 78,335    |   |                     |   | 78,335    |                |  |   | 48,694              |   |  |   | 48,694    |  
|Interest rate swap              |  |                |          |   |                     |   |          |                |  |   | 1,274               |   |  |   | 1,274     |  
|Other borrowed funds            |  |                | 408,586   |   |                     |   | 399,879   |                |  |   | 197,147             |   |  |   | 196,915   |  
|                                |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|Total                           |  | $              | 4,388,792 |   |                     | $ | 4,384,052 |                |  | $ | 4,003,560           |   |  | $ | 3,985,619 |  
|                                |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  



F-42



---

##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



|22. | SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|--- | ---------------------------------------------

The
table below sets forth unaudited financial information for each quarter of the last two years (in thousands, except per share amounts):



|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|----------------------------------------------------- |  | ------------- | ------ | ------------ | - | ------------- |  | ------------ | ------ | ------------- | - | ------------ |  | ------------- | ------ | ------------ | - | ------ |  | - | ------ |  | - | ------
|                                                      |  | 2008          |        | 2007        
|                                                      |  | FourthQuarter |        | ThirdQuarter |   | SecondQuarter |  | FirstQuarter |        | FourthQuarter |   | ThirdQuarter |  | SecondQuarter |        | FirstQuarter
|Interest income                                       |  | $             | 67,286 |              | $ | 68,314        |  | $            | 68,452 |               | $ | 70,572       |  | $             | 73,854 |              | $ | 74,159 |  | $ | 72,382 |  | $ | 67,854
|Interest expense                                      |  |               | 16,910 |              |   | 18,846        |  |              | 18,208 |               |   | 22,576       |  |               | 26,692 |              |   | 27,064 |  |   | 25,604 |  |   | 23,265
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Net interest income                                   |  |               | 50,376 |              |   | 49,468        |  |              | 50,244 |               |   | 47,996       |  |               | 47,162 |              |   | 47,095 |  |   | 46,778 |  |   | 44,589
|Provision for credit losses                           |  |               | 7,500  |              |   | 10,100        |  |              | 8,167  |               |   | 4,150        |  |               | 1,600  |              |   | 850    |  |   | 1,000  |  |   | 370   
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Net interest income after provision for credit losses |  |               | 42,876 |              |   | 39,368        |  |              | 42,077 |               |   | 43,846       |  |               | 45,562 |              |   | 46,245 |  |   | 45,778 |  |   | 44,219
|Noninterest income                                    |  |               | 9,641  |              |   | 9,801         |  |              | 10,870 |               |   | 10,715       |  |               | 10,135 |              |   | 10,633 |  |   | 7,518  |  |   | 7,934 
|Noninterest expense                                   |  |               | 39,117 |              |   | 38,997        |  |              | 37,708 |               |   | 37,388       |  |               | 36,134 |              |   | 35,044 |  |   | 34,342 |  |   | 33,834
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Income before income taxes                            |  |               | 13,400 |              |   | 10,172        |  |              | 15,239 |               |   | 17,173       |  |               | 19,563 |              |   | 21,834 |  |   | 18,954 |  |   | 18,319
|Provision for income taxes                            |  |               | 3,787  |              |   | 3,082         |  |              | 4,932  |               |   | 5,564        |  |               | 6,201  |              |   | 7,255  |  |   | 5,856  |  |   | 6,396 
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Net income                                            |  | $             | 9,613  |              | $ | 7,090         |  | $            | 10,307 |               | $ | 11,609       |  | $             | 13,362 |              | $ | 14,579 |  | $ | 13,098 |  | $ | 11,923
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Preferred stock dividends                             |  |               | 398    |              |   |              |  |              |       |               |   |             |  |               |       |              |   |       |  |   |       |  |   |      
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Net income available to common shareholders           |  | $             | 9,215  |              | $ | 7,090         |  | $            | 10,307 |               | $ | 11,609       |  | $             | 13,362 |              | $ | 14,579 |  | $ | 13,098 |  | $ | 11,923
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Earnings per share:                                   |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Basic                                                 |  | $             | 0.13   |              | $ | 0.10          |  | $            | 0.14   |               | $ | 0.16         |  | $             | 0.18   |              | $ | 0.20   |  | $ | 0.18   |  | $ | 0.17  
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Diluted                                               |  | $             | 0.13   |              | $ | 0.10          |  | $            | 0.14   |               | $ | 0.16         |  | $             | 0.18   |              | $ | 0.20   |  | $ | 0.18   |  | $ | 0.17  
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       



F-43



---

##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



|23. | PARENT-ONLY FINANCIAL STATEMENTS
|--- | --------------------------------

STERLING
BANCSHARES, INC.

(Parent Company Only)

CONDENSED BALANCE SHEETS

DECEMBER 31, 2008 AND 2007

(In thousands)



|                                                 |  |      |         |   |      |   |         |  
|------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                                 |  | 2008 |         |   | 2007 |  
|ASSETS                                           |  |      |         |   |      |   |         |  
|Cash and cash equivalents                        |  | $    | 3,825   |   |      | $ | 4,461   |  
|Accrued interest receivable and other assets     |  |      | 2,304   |   |      |   | 2,660   |  
|Investment in subsidiaries                       |  |      | 719,074 |   |      |   | 554,798 |  
|Investment in Sterling Bancshares Capital Trusts |  |      | 2,484   |   |      |   | 2,484   |  
|                                                 |  |      |         |   |      |   |         |  
|TOTAL ASSETS                                     |  | $    | 727,687 |   |      | $ | 564,403 |  
|                                                 |  |      |         |   |      |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY             |  |      |         |   |      |   |         |  
|LIABILITIES:                                     |  |      |         |   |      |   |         |  
|Accrued interest payable and other liabilities   |  | $    | 1,814   |   |      | $ | 1,410   |  
|Junior subordinated debt                         |  |      | 82,734  |   |      |   | 82,734  |  
|                                                 |  |      |         |   |      |   |         |  
|Total liabilities                                |  |      | 84,548  |   |      |   | 84,144  |  
|                                                 |  |     
|COMMITMENTS AND CONTINGENCIES                    |  |      |         |   |      |   |         |  
|                                                 |  |     
|SHAREHOLDERS EQUITY:                            |  |      |         |   |      |   |         |  
|Preferred stock                                  |  |      | 118,012 |   |      |   |        |  
|Common stock                                     |  |      | 75,128  |   |      |   | 74,926  |  
|Capital surplus                                  |  |      | 121,918 |   |      |   | 110,367 |  
|Retained earnings                                |  |      | 332,009 |   |      |   | 309,903 |  
|Treasury stock                                   |  |      | (21,399 | ) |      |   | (20,493 | )
|Accumulated other comprehensive gain, net of tax |  |      | 17,471  |   |      |   | 5,556   |  
|                                                 |  |      |         |   |      |   |         |  
|Total shareholders equity                       |  |      | 643,139 |   |      |   | 480,259 |  
|                                                 |  |      |         |   |      |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY       |  | $    | 727,687 |   |      | $ | 564,403 |  
|                                                 |  |      |         |   |      |   |         |  



F-44



---

##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



STERLING BANCSHARES, INC.

(Parent Company Only)

CONDENSED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(In thousands)



|                                                                                |  |      |        |      |   |        |  |   |         |  
|------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------- | -
|                                                                                |  | 2008 |        | 2007 |   | 2006   | 
|REVENUES:                                                                       |  |      |        |      |   |        |  |   |         |  
|Dividends received from bank subsidiaries                                       |  | $    | 15,995 |      | $ | 25,495 |  | $ | 78,969  |  
|Other income                                                                    |  |      | 173    |      |   | 191    |  |   | 173     |  
|                                                                                |  |      |        |      |   |        |  |   |         |  
|Total revenues                                                                  |  |      | 16,168 |      |   | 25,686 |  |   | 79,142  |  
|EXPENSES:                                                                       |  |      |        |      |   |        |  |   |         |  
|Interest expense:                                                               |  |      |        |      |   |        |  |   |         |  
|Junior subordinated debt                                                        |  |      | 5,731  |      |   | 6,239  |  |   | 5,571   |  
|General and administrative                                                      |  |      | 1,429  |      |   | 2,509  |  |   | 3,350   |  
|                                                                                |  |      |        |      |   |        |  |   |         |  
|Total expenses                                                                  |  |      | 7,160  |      |   | 8,748  |  |   | 8,921   |  
|Income before equity in undistributed earnings of subsidiaries and income taxes |  |      | 9,008  |      |   | 16,938 |  |   | 70,221  |  
|Equity in undistributed earnings of subsidiaries                                |  |      | 27,163 |      |   | 33,026 |  |   | (27,410 | )
|                                                                                |  |      |        |      |   |        |  |   |         |  
|Income before income tax benefit                                                |  |      | 36,171 |      |   | 49,964 |  |   | 42,811  |  
|Income tax benefit                                                              |  |      | 2,448  |      |   | 2,998  |  |   | 3,029   |  
|                                                                                |  |      |        |      |   |        |  |   |         |  
|Net income                                                                      |  | $    | 38,619 |      | $ | 52,962 |  | $ | 45,840  |  
|                                                                                |  |      |        |      |   |        |  |   |         |  



F-45



---

##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



STERLING BANCSHARES, INC.

(Parent Company Only)

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(In thousands)



|                                                                                  |  |      |          |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                  |  | 2008 |          |   | 2007 |   |         | 2006 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |      |          |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $    | 38,619   |   |      | $ | 52,962  |      |  | $ | 45,840  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |          |   |      |   |         |      |  |   |         |  
|Equity in undistributed earnings of subsidiary                                    |  |      | (27,163  | ) |      |   | (33,026 | )    |  |   | 27,410  |  
|Change in operating assets and liabilities:                                       |  |      |          |   |      |   |         |      |  |   |         |  
|Accrued interest receivable and other assets                                      |  |      | 356      |   |      |   | 3,153   |      |  |   | 2,941   |  
|Accrued interest payable and other liabilities                                    |  |      | 73       |   |      |   | 8       |      |  |   | 948     |  
|                                                                                  |  |      |          |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                         |  |      | 11,885   |   |      |   | 23,097  |      |  |   | 77,139  |  
|                                                                                  |  |      |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |      |          |   |      |   |         |      |  |   |         |  
|Investments in subsidiaries                                                       |  |      | (125,198 | ) |      |   |        |      |  |   |        |  
|Purchase of Partners Bank of Texas                                                |  |      |         |   |      |   | (25,319 | )    |  |   |        |  
|Purchase of BOTH, Inc.                                                            |  |      |         |   |      |   |        |      |  |   | (31,730 | )
|Redemption of investment in Sterling Bancshares CapitalTrust II                   |  |      |         |   |      |   |        |      |  |   | 889     |  
|                                                                                  |  |      |          |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                             |  |      | (125,198 | ) |      |   | (25,319 | )    |  |   | (30,841 | )
|                                                                                  |  |      |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |      |          |   |      |   |         |      |  |   |         |  
|Repurchase of common stock                                                        |  |      | (1,091   | ) |      |   | (10,387 | )    |  |   | (8,918  | )
|Proceeds from issuance of common stock                                            |  |      | 4,685    |   |      |   | 4,952   |      |  |   | 5,436   |  
|Proceeds from issuance of preferred stock                                         |  |      | 125,198  |   |      |   |        |      |  |   |        |  
|Payments of cash dividends                                                        |  |      | (16,115  | ) |      |   | (15,238 | )    |  |   | (12,832 | )
|Proceeds from the issuance of Statutory Trust IV                                  |  |      |         |   |      |   | 25,774  |      |  |   |        |  
|Redemption of junior subordinated debentures                                      |  |      |         |   |      |   |        |      |  |   | (29,639 | )
|                                                                                  |  |      |          |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) financing activities                               |  |      | 112,677  |   |      |   | 5,101   |      |  |   | (45,953 | )
|                                                                                  |  |      |          |   |      |   |         |      |  |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              |  |      | (636     | ) |      |   | 2,879   |      |  |   | 345     |  
|                                                                                  |  |      |         
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                    |  |      | 4,461    |   |      |   | 1,582   |      |  |   | 1,237   |  
|                                                                                  |  |      |          |   |      |   |         |      |  |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                          |  | $    | 3,825    |   |      | $ | 4,461   |      |  | $ | 1,582   |  
|                                                                                  |  |      |          |   |      |   |         |      |  |   |         |  



F-46