FORWARD-LOOKING STATEMENTS

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

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

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

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

• our liquidity requirements could be adversely affected by changes in our assets and liabilities;

• our investment securities portfolio is subject to credit risk, market risk, and illiquidity;

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

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

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

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

• federal and state governments could pass legislation responsive to current credit conditions; and

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

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

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

OVERVIEW

For more than 34 years, Sterling Bancshares, Inc. and Sterling Bank have served the banking needs of small to medium-sized businesses. We provide a broad array of financial services to Texas businesses and consumers through 61 banking centers in the greater metropolitan areas of Houston, San Antonio, Dallas and Fort Worth, Texas.

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

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

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

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

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our Consolidated Financial Statements and accompanying notes. We believe that the judgments, estimates and assumptions used in the preparation of our Consolidated Financial Statements are appropriate given the factual circumstances as of June 30, 2009.

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

assumptions inherent in those policies, and the sensitivity of our Consolidated Financial Statements to those judgments, estimates and assumptions, are critical to an understanding of our Consolidated Financial Statements. These policies relate to the methodology that determines our valuation of financial instruments, allowance for credit losses, accounting for goodwill and other intangibles, accounting for derivatives and the assumptions used in determining stock-based compensation.

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

RECENT ACCOUNTING STANDARDS

In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141(R) ("SFAS 141R") Business Combinations (Revised 2007). SFAS 141R requires the acquiring entity in a business combination to recognize the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This Statement will apply to future acquisitions by the Company subsequent to January 1, 2009.

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

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

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

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

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

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

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

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

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

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

SELECTED FINANCIAL DATA




                                       Three Months Ended                  Six Months Ended              Year Ended
                                            June 30,                           June 30,                 December 31,
                                     2009              2008             2009             2008               2008
                                              (Dollars and shares in thousands, except per share amounts)
INCOME STATEMENT DATA:
Net interest income               $    48,568       $    50,244      $    97,078      $    98,240      $      198,084
Provision for credit losses            11,500             8,167           20,500           12,317              29,917
Noninterest income                     10,493            10,870           21,291           21,585              41,027
Noninterest expense                    44,021            37,708           83,619           75,096             153,210
Income before income taxes              3,540            15,239           14,250           32,412              55,984
Net income                              2,607            10,307           10,014           21,916              38,619
Net income (loss) applicable to
common shareholders                    (4,851 )          10,307              672           21,916              38,221

BALANCE SHEET DATA (at
period-end):
Total assets                      $ 4,912,367       $ 4,909,454      $ 4,912,367      $ 4,909,454      $    5,079,979
Total loans                         3,538,863         3,655,608        3,538,863        3,655,608           3,793,814
Allowance for loan losses              53,075            41,651           53,075           41,651              49,177
Total securities                      930,147           743,964          930,147          743,964             805,396
Total deposits                      3,958,235         3,694,335        3,958,235        3,694,335           3,819,137
Other borrowed funds                  176,631           521,395          176,631          521,395             408,586
Subordinated debt                      77,028            73,816           77,028           73,816              78,335
Junior subordinated debt               82,734            82,734           82,734           82,734              82,734
Common equity                         570,108           494,534          570,108          494,534             525,127
Preferred equity                           -                 -                -                -              118,012

COMMON SHARE DATA:
Earnings (loss) per common
share (1):
Basic shares                      $     (0.06 )     $      0.14      $      0.01      $      0.30      $         0.52
Diluted shares                    $     (0.06 )     $      0.14      $      0.01      $      0.30      $         0.52
Shares used in computing
earnings per common share:
Basic shares                           77,894            73,137           75,602           73,144              73,177
Diluted shares                         77,894            73,419           75,862           73,412              73,488
End of period common shares
outstanding                            81,685            73,160           81,685           73,160              73,260
Book value per common share at
period-end                        $      6.98       $      6.79      $      6.98      $      6.79      $         7.17
Cash dividends paid per common
share                             $     0.055       $     0.055      $     0.110      $     0.110      $        0.220
Common stock dividend payout
ratio                                  154.89 %           39.06 %          80.61 %          36.74 %             41.72 %

SELECTED PERFORMANCE RATIOS AND
OTHER DATA:
Return on average common equity
(2)                                     (3.46 )%           8.26 %           0.25 %           8.84 %              7.60 %
Return on average assets (2)             0.21 %            0.86 %           0.40 %           0.93 %              0.80 %
Tax equivalent net interest
margin (3)                               4.33 %            4.66 %           4.32 %           4.67 %              4.55 %
Efficiency ratio (4)                    70.54 %           61.31 %          68.33 %          61.81 %             63.04 %
Full-time equivalent employees          1,038             1,126            1,038            1,126               1,116
Number of banking centers                  61                59               61               59                  59

LIQUIDITY AND CAPITAL RATIOS:
Average loans to average
deposits                                91.81 %          102.02 %          94.95 %          99.37 %            101.31 %
Period-end shareholders' equity
to total assets                         11.61 %           10.07 %          11.61 %          10.07 %             12.66 %
Average shareholders' equity to
average assets                          12.14 %           10.38 %          12.48 %          10.56 %             10.50 %
Tier 1 capital to risk-weighted
assets                                  11.08 %            9.14 %          11.08 %           9.14 %             12.14 %
Total capital to risk-weighted
assets                                  13.72 %           11.70 %          13.72 %          11.70 %             14.94 %
Tier 1 leverage ratio (Tier 1
capital to average assets)               9.38 %            8.20 %           9.38 %           8.20 %             10.57 %

ASSET QUALITY RATIOS:
Period-end allowance for credit
losses to period-end loans               1.53 %            1.16 %           1.53 %           1.16 %              1.34 %
Period-end allowance for loan
losses to period-end loans               1.50 %            1.14 %           1.50 %           1.14 %              1.30 %
Period-end allowance for loan
losses to nonperforming loans           45.40 %           85.14 %          45.40 %          85.14 %             56.21 %
Nonperforming loans to
period-end loans                         3.30 %            1.34 %           3.30 %           1.34 %              2.31 %
Nonperforming assets to
period-end assets                        2.55 %            1.09 %           2.55 %           1.09 %              1.84 %
Net charge-offs to average
loans (2)                                1.67 %            0.24 %           0.93 %           0.29 %              0.40 %

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

(2) Interim periods annualized.

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

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

RESULTS OF OPERATIONS

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

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