AGREEMENT AND PLAN OF MERGER

Exhibit 2.1

AGREEMENT AND PLAN OF MERGER

by and between

STERLING BANCSHARES, INC.,

STERLING BANK

and

PARTNERS BANK OF TEXAS

Dated as of January 24, 2007

TABLE OF CONTENTS

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AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (this " Agreement ") dated as of January 24, 2007, is by and between STERLING BANCSHARES, INC. (" Sterling "), a Texas corporation and a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the " BHCA "), STERLING BANK, a Texas-chartered banking association and wholly-owned subsidiary of Sterling (" Merger Sub "), and PARTNERS BANK OF TEXAS, a Texas state banking association chartered under the banking laws of the State of Texas (the " Bank "). Initially capitalized terms not otherwise defined herein shall have the meanings set forth in Article I .

W I T N E S S E T H:

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

WHEREAS, pursuant to the Merger, and upon the terms and subject to the conditions of this Agreement, each issued and outstanding share of Bank Common Stock (other than the Dissenting Shares and any shares of Bank Common Stock cancelled pursuant to Section 3.1(b) ) will be converted into the right to receive cash and shares of Sterling Common Stock;

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

WHEREAS, to induce Sterling and Merger Sub to enter into this Agreement (i) each of the Bank Specified Shareholders has agreed, concurrently with the execution of this Agreement, to execute and deliver to Sterling an Agreement and Irrevocable Proxy in the form set forth as Annex A to this Agreement, and (ii) each of the Key Bank Officials has agreed, concurrently with the execution of this Agreement, to execute and deliver to Sterling a Noncompete Agreement in one of the forms set forth as Annex B to this Agreement;

WHEREAS, for federal income tax purposes, the Merger is intended to qualify as a tax-free reorganization, pursuant to Section 368 of the Code; and

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

A G R E E M E N T:

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

ARTICLE I

CERTAIN DEFINITIONS

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

" ACM " shall have the meaning set forth in Section 5.24 .

" Acquisition Proposal " shall have the meaning set forth in Section 8.13 .

" Acquisition Transaction " shall have the meaning set forth in Section 8.13 .

" Action " means any action, appeal, petition, plea, charge, complaint, claim, suit, demand, litigation, arbitration, mediation, hearing, inquiry, investigation or similar event, occurrence, or proceeding.

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

" Affiliate Letter " shall have the meaning set forth in Section 8.8 .

" Agreement " shall have the meaning set forth in the introduction hereto.

" Aggregate Merger Consideration " shall have the meaning set forth in Section 3.2(a) .

" Approvals " shall mean any and all filings, permits, consents, authorizations and approvals of any Regulatory Authority or of any other third Person necessary to give effect to the arrangement contemplated by this Agreement or necessary to consummate the Merger.

" Authorizations " shall have the meaning set forth in Section 5.1 .

" Average Closing Price " shall mean the average closing price per share of the Sterling Common Stock (rounded to the nearest cent) on the NASDAQ Global Select Market (as reported in The Wall Street Journal or, if not reported thereby, another authoritative source as chosen by Sterling) for the ten consecutive trading days in which such shares are quoted on the NASDAQ ending on the trading day immediately prior to the Determination Date; provided , however , in no event shall the Average Closing Price be less than $10.57 or more than $12.91, subject to Sections 10.1(j) and (k) .

" Bank " shall have the meaning set forth in the introductory paragraph to this Agreement.

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" Bank Benefit Plans " shall have the meaning set forth in Section 5.12 .

" Bank Board " shall mean the Board of Directors of the Bank.

" Bank Common Stock " shall mean the common stock, par value $5.00 per share, of the Bank.

" Bank Controlled Group " means Bank and any other organization which is a member of a controlled group of organizations within the meaning of Sections 414(b), (c), (m) or (o), of the Code of which the Bank is a member.

" Bank Disclosure Schedule " shall mean that document containing the written detailed information required to be furnished pursuant to the terms of this Agreement prepared and delivered by the Bank to Sterling prior to the execution of this Agreement.

" Bank Financial Statements " shall have the meaning set forth in Section 5.5 .

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

" Bank Loan Documents " shall have the meaning set forth in Section 5.30 .

" Bank Material Adverse Effect " shall have the meaning set forth in Section 5.1 .

" Bank Options " shall have the meaning set forth in Section 3.3(a) .

" Bank Shareholders’ Meeting " shall have the meaning set forth in Section 5.31 .

" Bank Shares Number " shall mean the number of shares of Bank Common Stock outstanding immediately prior to the Effective Time (including all shares of Bank Common Stock issuable upon the exercise of any options, warrants, debentures, or other securities which are in effect or outstanding prior to the Effective Time entitling the holder thereof to purchase or acquire shares of the Bank Common Stock), less any shares of Bank Common Stock cancelled pursuant to Section 3.1(b) .

" Bank Specified Shareholders " shall mean John N. Bedford, Harry J. Brooks and Milan B. Saunders.

" Bank Stock Plan " shall have the meaning set forth in Section 5.12 , and shall include without limitation the Partners Bank of Texas 2003 Stock Option Plan.

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

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

" Call Reports " shall have the meaning set forth in Section 5.5(c) .

" Certificates " shall have the meaning set forth in Section 4.2 .

" Closing " shall have the meaning set forth in Section 2.2 .

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

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

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

" Collateral Property " shall have the meaning set forth in Section 5.24 .

" Commissioner " shall mean the Texas Banking Commissioner.

" Condition " shall have the meaning set forth in Section 5.1 .

" Controlled Property " shall have the meaning set forth in Section 5.24 .

" Determination Date " shall mean the fifth trading day preceding the anticipated Closing Date.

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

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

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

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

" ERISA " shall have the meaning set forth in Section 5.12 .

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

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

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

" Expenses " shall have the meaning set forth in Section 8.14 .

" FDIC " shall mean the Federal Deposit Insurance Corporation.

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

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

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

" HIPPA " shall have the meaning set forth in Section 5.12 .

" HIPPA Regulations " shall have the meaning set forth in Section 5.12 .

" Indemnified Party " shall have the meaning set forth in Section 8.9 .

" Key Bank Officials " shall mean John N. Bedford, Harry J. Brooks, Milan B. Saunders, Wayne W. Webb and Larry W. Harris.

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

" Liens " shall have the meaning set forth in Section 5.3 .

" Maximum Amount " shall have the meaning set forth in Section 8.9 .

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

" Merger Consideration " shall have the meaning set forth in Section 3.1(a) .

" Merger Sub " shall have the meaning set forth in the introductory paragraph to this Agreement.

" NASDAQ " shall mean the NASDAQ National Market of the National Association of Securities Dealers, Inc.

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" Noncompete Agreements " shall mean the Noncompete Agreements in one of the forms of Annex B attached hereto executed by the Key Bank Officials.

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

" Permitted Liens " shall mean (i) Liens for current taxes not yet due and payable and incurred in the ordinary course of business, (ii) with respect to a lease, the interest of the lessor thereunder, including any Liens on the interest of such lessor as noted in Section 5.10 of the Bank Disclosure Schedule, and (iii) such imperfections of title, Liens, restrictions and easements that do not, individually or in the aggregate, materially impair the use or value of the properties or assets or otherwise materially impair the current operations relating to the business of the Bank or its Subsidiaries or the Bank’s consolidated financial condition or consolidated results of operations.

" Per Share Cash Consideration " shall have the meaning set forth in Section 3.2(a) .

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

" Property " shall have the meaning set forth in Section 5.24 .

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

" Qualified Plan " shall have the meaning set forth in Section 5.12(b) .

" Registration Statement " shall have the meaning set forth in Section 8.2 .

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

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

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

" Release Agreement " shall have the meaning set forth in Section 8.17 .

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

" Reports " shall have the meaning set forth in Section 5.17 .

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" SEC " shall mean the Securities and Exchange Commission.

" Securities Act " shall mean the Securities Act of 1933, as amended.

" Starting Date " shall mean the last trading day immediately preceding the date of this Agreement.

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

" Sterling Common Stock " shall mean the common stock, par value $1.00 per share, of Sterling.

" Sterling Financial Statements " shall have the meaning set forth in Section 6.4 .

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

" Sterling SEC Reports " shall have the meaning set forth in Section 6.5 .

" Subsidiary " shall mean, in the case of either Sterling or the Bank, any corporation, association or other entity in which it owns or controls, directly or indirectly, 25% or more of the outstanding voting securities or 25% or more of the total equity interests; provided , however , that the term shall not include any such entity in which such voting securities or equity interests are owned or controlled in a fiduciary capacity, without sole voting power, or were acquired in securing or collecting a debt previously contracted in good faith.

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

" Surviving Bank " shall have the meaning set forth in Section 2.1 .

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

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

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

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

" Termination Fee " shall have the meaning set forth in Section 8.14 .

" TFC " shall mean the Texas Finance Code, as amended, including the regulations promulgated thereunder.

ARTICLE II

THE MERGER AND RELATED TRANSACTIONS

Section 2.1 Merger .

(a) Upon the terms and subject to the conditions set forth in this Agreement and in accordance with the TFC and the TBCA, at the Effective Time, the Bank shall be merged with and into Merger Sub. As a result of the Merger, the separate existence of the Bank shall thereupon cease, and Merger Sub shall continue as the surviving bank of the Merger (the " Surviving Bank ") and as a wholly-owned Subsidiary of Sterling.

(b) The articles of association of Merger Sub as in effect immediately prior to the Effective Time shall be the articles of association of the Surviving Bank.

(c) The bylaws of Merger Sub as in effect immediately prior to the Effective Time shall be the bylaws of the Surviving Bank.

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

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

Section 2.2 Time and Place of Closing . The closing of the transactions contemplated hereby (the "Closing") will take place at the offices of Locke Liddell & Sapp LLP in Houston, Texas on the date (the "Closing Date") that the Effective Time occurs, or at such other time, and at such place, as may be agreed to in writing by the parties hereto.

Section 2.3 Effective Time . On the Business Day selected by Sterling occurring within ten Business Days following the date on which the expiration of all applicable waiting periods in connection with Approvals of Regulatory Authorities necessary to effectuate the Merger have occurred and all conditions to the consummation of this Agreement as set forth in Article IX have been satisfied or waived, unless an earlier or later date has been agreed by the parties, appropriate articles and certificates of merger shall be executed and filed in accordance with the TFC and the TBCA, and the Merger provided for herein shall become effective upon such filing

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or at such time as may be specified in such articles and certificates of merger. The time of such filing or such later effective time is herein called the "Effective Time."

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

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

(b) In addition, the parties hereto agree that if Sterling so determines, each of the parties will execute such additional agreements and documents and take such other actions as Sterling determines necessary or appropriate to facilitate the Merger and the acquisition of the Bank by Sterling.

Section 2.5 Tax-Free Reorganization . The parties hereto intend that the Merger shall constitute a reorganization within the meaning of Section 368 of the Code. The parties hereto adopt this Agreement as a "plan of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the Treasury Regulations promulgated thereunder. The parties hereto shall prepare and file or report all necessary Tax Returns and other documentation, including financial statements, consistent with the treatment of the Merger as a reorganization with the meaning of Section 368 of the Code.

ARTICLE III

MERGER CONSIDERATION; EXCHANGE PROCEDURES

Section 3.1 Merger Consideration .

(a) Subject to the terms and conditions of this Agreement, each share of Bank Common Stock that is outstanding immediately prior to the Effective Time (excluding any Dissenting Shares and any shares of Bank Common Stock cancelled pursuant to Section 3.1(b) ) shall be converted into and become the right to receive cash and/or shares of Sterling Common Stock as set forth in this Article III which, together with the consideration provided for in Section 4.5 hereinbelow with respect to fractional shares, is referred to herein as the " Merger Consideration ."

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

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(c) Each of the shares of Sterling Common Stock issued and outstanding immediately before the Effective Time shall continue to be issued and outstanding as one share of common stock of Sterling. Each of the shares of the capital stock of Merger Sub issued and outstanding immediately before the Effective Time shall remain outstanding, shall be unaffected by the Merger, and shall constitute the only outstanding shares of capital stock of the Surviving Bank.

(d) Notwithstanding any other provision of this Agreement, each holder of shares of Bank Common Stock exchanged pursuant to the Merger, who would otherwise have been entitled to receive a fraction of a share of Sterling Common Stock (after taking into account all certificates delivered by such holder) shall receive, in lieu thereof, cash (without interest) in accordance with Section 4.5 hereof. No such holder will be entitled to dividends, voting rights or other rights as a shareholder in respect of any fractional share.

(e) Notwithstanding anything in this Agreement to the contrary, no share of Bank Common Stock, the holder of which shall have complied with §32.303 of the TFC, and the provisions of Article 5.12 of the TBCA as to appraisal rights (a " Dissenting Share "), shall be deemed converted into and to represent the right to receive the Merger Consideration hereunder, and the holders of Dissenting Shares, if any, shall be entitled to payment, solely from the Surviving Bank, of the appraised value of such Dissenting Shares to the extent permitted by and in accordance with the provisions of Article 5.12 of the TBCA; provided , however , that (i) if any holder of Dissenting Shares shall, under the circumstances permitted by the TBCA, subsequently deliver a written withdrawal of his or her demand for appraisal of such Dissenting Shares, (ii) if any holder fails to establish his or her entitlement to rights to payment as provided in such Article 5.12, or (iii) if neither any holder of Dissenting Shares nor the Surviving Bank has filed a petition demanding a determination of the value of all Dissenting Shares within the time provided in such Article 5.12, such holder or holders (as the case may be) shall forfeit such right to payment for such Dissenting Shares pursuant to such Article 5.12 and each such Dissenting Share shall thereupon be converted into and shall represent the right to receive the Merger Consideration therefore. The Bank shall give Sterling (i) prompt notice of any written objections to the Merger submitted to the Bank in accordance with Article 5.12, any attempted withdrawals of such objections, and any other instruments served pursuant to applicable law received by the Bank relating to shareholders’ rights of appraisal and (ii) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal under the TFC and the TBCA. The Bank shall not, except with the prior written consent of Sterling, voluntarily make any payment with respect to any demands for appraisals of Bank Common Stock, offer to settle or settle any such demands or approve any withdrawal of any such demands.

Section 3.2 Determination of Merger Consideration .

(a) Subject to the terms and conditions of this Agreement, the aggregate consideration payable by Sterling in exchange for all shares of Bank Common Stock issued and outstanding immediately prior to the Effective Time (excluding any Dissenting Shares and any shares of Bank Common Stock cancelled pursuant to Section 3.1(b) ) shall be $52,000,000 (the " Aggregate Merger Consideration "). Each share of Bank Common Stock issued and outstanding as of the Effective Time (excluding shares to be canceled pursuant to Section 3.1(b) and Dissenting Shares) will be converted into the right to receive:

• (i) the number of shares of Sterling Common Stock that is equal to $26,520,000 divided by the Average Closing Price, then further divided by the Bank Shares Number; and

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• (ii) the amount in cash that is equal to $25,480,000 divided by the Bank Shares Number (the " Per Share Cash Consideration ").

(b) The number of shares of Sterling Common Stock to be exchanged for each share of Bank Common Stock shall be adjusted appropriately to reflect any stock dividend reclassification, split-up, combination, exchange of shares or similar transaction with respect to Sterling Common Stock between the Starting Date and the Closing Date.

(c) Notwithstanding any adjustment to the Sterling Common Stock pursuant to Section 3.2(b) , in no event shall the aggregate Per Share Cash Consideration exceed 49% of the Aggregate Merger Consideration.

Section 3.3 Bank Stock Options and Warrants .

(a) Prior to the Closing Date, the Bank shall (i) cause each unexpired and unexercised option or warrant of the Bank (collectively, the " Bank Options ") to either be (a) exercised and fully paid and converted into shares of Bank Common Stock, or (b) terminated, and (ii) cause the Bank Stock Plans to be terminated. The Bank shall not permit any holder of the Bank Options to exercise such Bank Option by any means other than the payment of the exercise price thereof in cash, unless the Bank is contractually obligated to do so. With respect to any such holder, the Bank shall use its best efforts to encourage such holder to exercise such Bank Option by payment in cash. A list of the Bank Options and the holders thereof is set forth in Section 5.2 of the Bank Disclosure Schedule.

(b) The Bank shall take all actions necessary or reasonably requested by Sterling to ensure that following the Effective Time, no holder of any Bank Option will have any right thereunder to acquire any equity securities of the Bank, Sterling or any of their respective Subsidiaries or any right to payment in respect of any such securities of the Bank, except for payment of the Merger Consideration with respect to the shares of Bank Common Stock into which such Bank Options are converted prior to the Effective Time.

ARTICLE IV

EXCHANGE OF SHARES

Section 4.1 Exchange Agent . As of the Effective Time, Sterling shall deposit with a bank or trust company designated by Sterling and reasonably acceptable to the Bank for the benefit of the holders of shares of Bank Common Stock (the " Exchange Agent "), for exchange in accordance with this Article IV , (i) certificates representing shares of Sterling Common Stock, and (ii) cash, each in a number or an amount sufficient to make all payments of the Merger Consideration pursuant to Article III . Such shares of Sterling Common Stock and cash, together with any dividends or distributions with respect thereto paid in respect of a record date after the Effective Time, being hereinafter referred to as the " Exchange Fund ". The Exchange Agent

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shall, pursuant to irrevocable instructions from Sterling, deliver the Merger Consideration contemplated to be issued pursuant hereto out of the Exchange Fund. The Exchange Fund shall not be used for any other purpose.

Section 4.2 Exchange Procedures . Promptly after the Effective Time, the Exchange Agent shall mail to each holder of record of a certificate or certificates which, immediately prior to the Effective Time, represented outstanding shares of Bank Common Stock (the " Certificates "), other than shares canceled in accordance with Section 3.1(b): (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates theretofore representing shares of Bank Common Stock shall pass, only upon proper delivery of such Certificates to the Exchange Agent, and shall be in such form and have such other provisions as Sterling shall specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon surrender of a Certificate for cancellation to the Exchange Agent (or to such other agent or agents as may be appointed by Sterling), together with such letter of transmittal, duly executed, and any other required documents, the holder of such Certificate shall be entitled to receive in exchange therefor (i) shares of Sterling Common Stock representing, in the aggregate, the whole number of shares that such holder has the right to receive pursuant to Section 3.2, (ii) a check in the amount equal to the cash portion of the Merger Consideration that such holder has the right to receive pursuant to Section 3.2, and (iii) a check in the amount equal to the cash, if any, that such holder has the right to receive in lieu of any fractional shares of Sterling Common Stock pursuant to Section 3.1(d) and Section 4.5 , and the Certificates so surrendered shall forthwith be cancelled. No interest will be paid or will accrue on any cash payable pursuant to the provisions of Article III or this Section 4.2. In the event of a transfer of ownership of Bank Common Stock that is not registered in the transfer records of the Bank, one or more certificates of Sterling Common Stock evidencing, in the aggregate, the proper number of shares of Sterling Common Stock pursuant to Section 3.2 , a check in the proper amount of the cash portion of the Merger Consideration pursuant to Section 3.2 and a check in the proper amount of cash in lieu of any fractional shares of Sterling Common Stock pursuant to Section 3.1(d) and Section 4.5 , may be issued to a transferee if the Certificate representing such Bank Common Stock is presented to the Exchange Agent accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 4.2 , each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender Merger Consideration as provided in Article III and cash in lieu of any fractional shares of Sterling Common Stock as contemplated by Section 3.1 (d) and Section 4.5 . The Certificates for Bank Common Stock so surrendered shall be duly endorsed as the Exchange Agent may require. Sterling shall not be obligated to deliver the consideration to which any former holder of Bank Common Stock is entitled as a result of the Merger until such holder surrenders his or her Certificates formerly representing shares of Bank Common Stock for exchange as provided in this Article IV . In addition, Certificates surrendered for exchange by any person constituting an "affiliate" of the Bank for purposes of Rule 145(c) under the Securities Act shall not be exchanged for certificates representing whole shares of Sterling Common Stock until Sterling has received a written agreement from such person as provided in Section 8.8 .

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Section 4.3 Voting and Dividends . Former shareholders of record of the Bank who are to receive shares of Sterling Common Stock pursuant to Section 3.2 shall be entitled to vote after the Effective Time at any meeting of Sterling shareholders the number of whole shares of Sterling Common Stock into which their respective shares of Bank Common Stock are converted, regardless of whether such holders have exchanged their Certificates representing Bank Common Stock for certificates representing Sterling Common Stock in accordance with the provisions of this Agreement. Until surrendered for exchange in accordance with the provisions of Section 4.2 , each Certificate theretofore representing shares of the Bank Common Stock (other than shares to be canceled pursuant to Section 3.1 ) shall from and after the Effective Time represent for all purposes only the right to receive the Merger Consideration, as set forth in this Agreement. Former shareholders of record of the Bank who are to receive shares of Sterling Common Stock pursuant to Section 3.2 shall be entitled to any dividends paid to holders of record of Sterling Common Stock after the Effective Time, provided that no dividend or other distribution payable to the holders of record of Sterling Common Stock, at or as of any time after the Effective Time, shall be paid to the holder of any Certificate representing shares of Bank Common Stock issued and outstanding at the Effective Time until such holder physically surrenders such Certificate for exchange as provided in Section 4.2 , promptly after which time all such dividends or distributions shall be paid (without interest).

Section 4.4 No Further Ownership Rights in Bank Common Stock . All shares of Sterling Common Stock and/or cash issued upon the surrender for exchange of shares of Bank Common Stock in accordance with the terms hereof (including any cash paid in lieu of fractional shares of Sterling Common Stock pursuant to Section 3.1(d) and Section 4.5 ) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Bank Common Stock, and after the Effective Time there shall be no further registration of transfers on the stock transfer books of the Surviving Bank of the shares of Bank Common Stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Bank for any reason, they shall be canceled and exchanged as provided in this Article IV .

Section 4.5 No Fractional Shares . No certificates or scrip representing fractional shares of Sterling Common Stock shall be issued upon the surrender for exchange of Certificates for Bank Common Stock pursuant to this Article IV , and no dividend or other distribution, stock split or interest shall relate to any such fractional share, and such fractional interests shall not entitle the owner thereof to any voting or other rights of a security holder of Sterling. In lieu of any fractional share, each holder of shares of Bank Common Stock who would otherwise have been entitled to a fraction of a share of Sterling Common Stock upon surrender of the Certificates for such Bank Common Stock for exchange pursuant to this Article IV will be paid an amount in cash (without interest) equal to the product of (i) such fractional part of a share of Sterling Common Stock multiplied by (ii) the Average Closing Price.

Section 4.6 Termination of Exchange Fund . Any portion of the Exchange Fund that remains undistributed to the former shareholders of the Bank for six months after the Effective Time shall be delivered to Sterling upon demand, and any shareholders of the Bank who have not theretofore complied with this Article IV shall thereafter look only to Sterling for payment of their claim for the Merger Consideration.

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Section 4.7 Escheat of Exchange Fund . None of Sterling, Merger Sub, the Bank, or the Exchange Agent shall be liable to any person in respect of any Merger Consideration from the Exchange Fund delivered to a public office pursuant to any applicable abandoned property, escheat or similar law. If any Certificates representing shares of Bank Common Stock shall not have been surrendered immediately prior to the date on which any Merger Consideration in respect of such Certificate would otherwise escheat to or become the property of any government authority, any such Merger Consideration in respect of such Certificate shall, at such time and to the extent permitted by applicable law, become the property of the Surviving Bank, free and clear of all claims or interest of any Person previously entitled thereto.

Section 4.8 Lost Certificates . If any Certificates shall have been lost, stolen or destroyed, then upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required by Sterling or the Exchange Agent, the posting by such Person of a bond in such reasonable amount as Sterling or the Exchange Agent may direct as indemnity against any claim that may be made against the Surviving Bank with respect to such Certificate, the Exchange Agent will pay in exchange for such lost, stolen or destroyed Certificate the Merger Consideration to be paid in respect of the shares of Bank Common Stock represented by such Certificate, as contemplated by this Agreement.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Bank represents and warrants to Sterling as follows:

Section 5.1 Organization, Standing and Authority . The Bank is a banking association duly organized, validly existing and in good standing under the laws of the State of Texas. The Bank is duly qualified to do business and in good standing in all jurisdictions (whether federal, state, local or foreign) where its ownership or leasing of property or the conduct of its business requires it to be so qualified and in which the failure to be duly qualified would have a material adverse effect on the financial condition, results of operations, business, properties (the " Condition ") of the Bank and any of its Subsidiaries or on the ability of the Bank or its Subsidiaries to consummate the transactions contemplated hereby (a " Bank Material Adverse Effect "). The Bank has all requisite power and authority (i) to carry on its business as now conducted, (ii) to own, lease and operate its assets, properties and business and (iii) to execute and deliver this Agreement and perform the terms of this Agreement. The Bank has in effect all federal, state, local and foreign governmental, regulatory and other authorizations, franchises, permits and licenses (collectively, " Authorizations ") necessary for it to own or lease its properties and assets and to carry on its business as now conducted. The Bank has heretofore furnished to Sterling a complete and correct copy of its articles of association and bylaws, as amended or restated to the date hereof. Such articles of association and bylaws, as amended, are in full force and effect and the Bank is not in violation of any of the provisions of its articles of association or bylaws.

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Section 5.2 Bank Common Stock .

(a) The authorized capital stock of the Bank consists of 5,000,000 shares of Bank Common Stock, par value $5.00 per share, and 1,000,000 shares of preferred stock, par value $1.00 per share. As of the date hereof, (i) 1,465,000 shares of Bank Common Stock were issued and outstanding and no shares of the Bank’s preferred stock were issued and outstanding, (ii) no shares of Bank Common Stock or the Bank’s preferred stock were held by the Bank in its treasury, (iii) 224,100 shares of Bank Common Stock were reserved for issuance pursuant to stock options granted and outstanding under the Bank Stock Plans and options issued outside of any plan, and (iv) 50,000 shares of Bank Common Stock were reserved for issuance pursuant to warrants issued by the Bank. All of the issued and outstanding shares of Bank Common Stock are, and all shares of the Bank Common Stock which may be issued upon the exercise or conversion of the Bank Options will be, when issued, duly authorized, validly issued and fully paid and nonassessable. None of the outstanding shares of Bank Common Stock has been, nor will any shares of the Bank Common Stock which may be issued upon the exercise or conversion of the Bank Options be issued, in violation of any preemptive rights or any provision of the Bank’s articles of association or bylaws. As of the date of this Agreement, no shares of Bank Common Stock have been reserved for any purpose except as set forth above or in Section 5.2 of the Bank Disclosure Schedule.

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

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

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

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

Section 5.3 Subsidiaries . Section 5.3 of the Bank Disclosure Schedule contains a complete list of the Bank’s Subsidiaries. All of the outstanding shares of each Subsidiary are owned by the Bank and no equity securities are or may be required to be issued by reason of any options, warrants, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, shares of any Subsidiary, and there are no contracts, commitments, understandings or arrangements by which any Subsidiary is bound to issue additional shares of its capital stock or options, warrants or rights to purchase or acquire any additional shares of its capital stock. All of the shares of capital stock of each Subsidiary are duly authorized, validly issued, fully paid and nonassessable and are owned by the Bank free and clear of any claim, lien, pledge or encumbrance of whatsoever kind (" Liens "). Each Subsidiary (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated or organized, (ii) is duly qualified to do business and in good standing in all jurisdictions (whether federal, state, local or foreign) where its ownership or leasing of property or the conduct of its business requires it to be so qualified and in which the failure to be so qualified would have a Bank Material Adverse Effect, (iii) has all requisite power and authority to own or lease its properties and assets and to carry on its business as now conducted, and (iv) has in effect all Authorizations necessary for it to own or lease its properties and assets and to carry on its business as now conducted. The Bank has heretofore furnished to Sterling a complete and correct copy of each of its Subsidiaries’ certificates or articles of incorporation and bylaws, or equivalent organizational documents, as amended or restated to the date hereof. Such certificates or articles of incorporation and bylaws, as amended, and equivalent organizational documents of Subsidiary are in full force and effect. None of the Subsidiaries is in violation of any provision of its certificate or articles of incorporation or bylaws or equivalent organizational documents. Except for the capital stock of its Subsidiaries and as set forth in Section 5.3 of the Bank Disclosure Schedule, the Bank does not own, directly or indirectly, any capital stock or other ownership interests in any corporation, limited liability company, partnership, joint venture or other entity.

Section 5.4 Authorization of Merger and Related Transactions .

(a) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby (including, without limitation, the consummation of the Merger) have been duly and validly authorized by all necessary action in respect thereof on the part of the Bank, including unanimous approval of the Merger by the Bank Board, subject to the approval of the Merger by the shareholders of the Bank to the extent required by applicable law. The only shareholder approval required for the approval of the Merger is the approval of two-thirds of the outstanding shares of Bank Common Stock. This Agreement, subject to any requisite shareholder approval hereof with respect to the Merger, represents a valid and legally

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binding obligation of the Bank, enforceable against the Bank in accordance with its terms, except as such enforcement may be limited by the Remedies Exception.

(b) Except as set forth in Section 5.4 of the Bank Disclosure Schedule, neither the execution and delivery of this Agreement by the Bank, the consummation by the Bank of the transactions contemplated hereby nor compliance by the Bank with any of the provisions hereof will (i) conflict with or result in a breach of any provision of the articles of association or bylaws of the Bank or the comparable documents of any of its Subsidiaries, (ii) constitute or result in a breach or violation of any term, condition or provision of, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give rise to any right of termination, cancellation or acceleration with respect to, or result in the creation of any Lien upon, any property or assets of the Bank or any of its Subsidiaries pursuant to any note, bond, mortgage, indenture, license, agreement, lease or other instrument or obligation to which any of them is a party or by which any of them or any of their properties or assets may be subject or (iii) subject to receipt of the requisite approvals referred to in Section 9.1 of this Agreement, violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Bank or its Subsidiaries or any of their properties or assets.

(c) Other than (i) the Approvals or exemptions required from (A) the Commissioner, the FDIC, the Federal Reserve Board or other applicable Regulatory Authority and (B) any Person described in Section 5.4 of the Bank Disclosure Schedule, and (ii) the filing of articles and certificates of merger in accordance with the TFC and the TBCA, no notice to, exemption by or Approval of any Regulatory Authority or any other Person is necessary for the consummation by the Bank of the Merger, the resulting change of control of its Subsidiaries, and the other transactions contemplated by this Agreement.

Section 5.5 Financial Statements and Regulatory Reports .

(a) The Bank (i) has delivered to Sterling copies of the audited consolidated balance sheets and the related audited consolidated statements of income, shareholders’ equity and cash flows (including related notes and schedules) of the Bank and its consolidated Subsidiaries as of and for the periods ended December 31, 2005 and December 31, 2004, and of the unaudited balance sheet and the related unaudited statement of income, as of and for the three months ended September 30, 2006 (the " Bank Financial Statements "), and (ii) has furnished Sterling with a true and complete copy of each material report filed by the Bank with the Federal Reserve Board or by any of its Subsidiaries with any Regulatory Authorities from and after November 20, 2003 (each a " Regulatory Reporting Document "), which are all the material documents that the Bank or any of its Subsidiaries was required to file with the Regulatory Authorities since such date and all of which complied when filed in all material respects with all applicable laws and regulations.

(b) The Bank Financial Statements (as of the dates thereof and for the periods covered thereby) (i) are in accordance with the books and records of the Bank and its Subsidiaries, which are complete and accurate in all material respects and which have been maintained in accordance with good business practices, and (ii) present fairly the consolidated financial position and the consolidated results of operations, changes in shareholders’ equity and

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cash flows of the Bank and its Subsidiaries as of the dates and for the periods indicated, in accordance with GAAP, subject in the case of unaudited interim financial statements for the three months ended September 30, 2006 to normal recurring year-end adjustments and except for the absence of certain footnote information in such unaudited interim financial statements. Neither Briggs & Veselka Co. nor any other firm of independent certified public accountants has prepared or delivered to the Bank any management letters that express any material concerns or issues regarding the Bank’s internal controls, accounting practices or financial conditions since November 20, 2003.

(c) Neither the Bank nor its Subsidiaries have any liabilities or obligations of a type which should be included in or reflected on the Bank Financial Statements if prepared in accordance with GAAP, whether related to tax or non-tax matters, accrued or contingent, due or not yet due, liquidated or unliquidated, or otherwise, except as and to the extent disclosed or reflected in the Bank Financial Statements. The Bank will provide Sterling with the unaudited consolidated and unconsolidated statements of financial position of the Bank and its Subsidiaries as of the end of each month hereafter, prepared on a basis consistent with prior periods and promptly following their availability, the Bank will provide Sterling with the Reports of Condition and Statements of Income (" Call Reports ") of its Subsidiaries for all periods ending after September 30, 2006. The Bank and its Subsidiaries have no off balance sheet liabilities associated with financial derivative products or potential liabilities associated with financial derivative products.

Section 5.6 Absence of Undisclosed Liabilities . Except as set forth in Section 5.6 of the Bank Disclosure Schedule, neither the Bank nor any of its Subsidiaries has any known obligations or liabilities (contingent or otherwise) in an amount equal to, or in excess of, $50,000, in the aggregate, except obligations and liabilities (i) which are fully accrued or reserved against in the consolidated balance sheet of the Bank and its Subsidiaries as of September 30, 2006, included in the Bank Financial Statements or reflected in the notes thereto, or (ii) which were incurred after September 30, 2006, in the ordinary course of business consistent with past practice and have been fully accrued and reserved for on the books of the Bank as of the date hereof. Since September 30, 2006, neither the Bank nor any of its Subsidiaries has incurred or paid any known obligation or liability which would have a Bank Material Adverse Effect.

Section 5.7 Tax Matters . Except as set forth in Section 5.7 of the Bank Disclosure Schedule:

(a) All Tax Returns required to be filed by or on behalf of the Bank or any of its Subsidiaries have been timely filed, or requests for extensions have been timely filed, granted and have not expired. All such Tax Returns filed are complete and accurate in all respects and all Taxes payable by or with respect to the Bank and its Subsidiaries for the periods covered by such Tax Returns (whether or not shown on such Tax Returns) have been timely paid in full or are adequately reserved for in accordance with GAAP on the September 30, 2006 financial statements included in the Bank Financial Statements. With respect to the periods for which Tax Returns have not been filed, the Bank and its Subsidiaries have established adequate reserves determined in accordance with GAAP for the payment of all Taxes.

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

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

(d) Adequate provision for any Taxes due or to become due for the Bank and any of its Subsidiaries for any period or periods through and including September 30, 2006, has been made, in accordance with GAAP, and is reflected on the September 30, 2006 financial statements included in the Bank Financial Statements. Deferred Taxes of the Bank and its Subsidiaries have been provided for in the Bank Financial Statements in accordance with GAAP. None of the assets or properties of the Bank or any of its Subsidiaries is subject to any Tax lien, other than such liens for Taxes which are not due and payable, which may thereafter be paid without penalty or the validity of which are being contested in good faith by appropriate proceedings and for which adequate provisions are being maintained in accordance with GAAP.

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

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

(g) Neither the Bank nor any of its Subsidiaries owns any interest in an entity or arrangement characterized as a partnership for United States federal income tax purposes; neither the Bank nor any of its Subsidiaries has been a United States real property holding company within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code; no debt of the Bank or any of its Subsidiaries is "corporate acquisition indebtedness" within the meaning of Section 279(b) of the Code; neither the Bank nor any of its Subsidiaries has entered into any "reportable transaction" as defined in the Treasury Regulations; and neither the Bank nor any of its Subsidiaries has any liability for the

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Taxes of any Person (other than any of the Bank and its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise.

(h) Neither the Bank nor any of its Subsidiaries will be required to include any item of income in, or exclude any item of deduction from, taxable income for any Taxable Period (or portion thereof) ending after the Closing Date as a result of any: (i) change in method of accounting for a Taxable Period ending on or prior to the Closing Date; (ii) "closing agreement" as described in Section 7121 of the Code (or any corresponding or similar provision of state, local or foreign income Tax law) executed on or prior to the Closing Date; (iii) intercompany transactions or any excess loss account described in Treasury Regulations under Section 1502 of the Code (or any corresponding or similar provision of state, local or foreign income Tax law); (iv) installment sale or open transaction disposition made on or prior to the Closing Date; or (v) prepaid amount received on or prior to the Closing Date.

(i) Neither the Bank nor any of its Subsidiaries has distributed stock of another Person, or has had its stock distributed by another Person, in a transaction that was purported or intended to be governed in whole or in part by Sections 355 or 361 of the Code.

Section 5.8 Allowance for Credit Losses . Each allowance for credit losses shown in the consolidated balance sheets of the Bank and its Subsidiaries as of December 31, 2005, and as of September 30, 2006 and included in the Bank Financial Statements, complies in all material respects with GAAP. The reserves for possible loan losses shown on the September 30, 2006 Call Reports filed, and all subsequent Call Reports to be filed, with a Regulatory Agency for the Bank are or will be adequate to provide for possible losses, net of recoveries relating to loans previously charged off, on loans outstanding (including accrued interest receivable) as of the date of such reports.

Section 5.9 Other Regulatory Matters . Neither the Bank nor any of its Subsidiaries has taken or agreed to take any action or has any knowledge of any fact or circumstance that would materially impede or delay receipt of any approval referred to in Section 9.1(b) .

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

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Section 5.11 Compliance with Laws . Except as set forth in Section 5.11 of the Bank Disclosure Schedule:

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

(b) Neither the Bank nor any of its Subsidiaries has received any notification or communication from any agency or department of any federal, state or local government, including without limitation the Federal Reserve Board, the FDIC, the Commissioner, the SEC, the Environmental Protection Agency, the Texas Commission on Environmental Quality and the staffs thereof (collectively, the " Regulatory Authorities ") (i) asserting that since November 20, 2003, the Bank or any of its Subsidiaries is not in compliance with any of the statutes, regulations, or ordinances which such agency, department or Regulatory Authority enforces, or the internal policies and procedures of the Bank or its Subsidiaries, (ii) threatening to revoke any license, franchise, permit or governmental authorization which is material to the Condition of the Bank or any of its Subsidiaries, (iii) requiring or threatening to require the Bank or any of its Subsidiaries, or indicating that the Bank or any of its Subsidiaries may be required, to enter into a cease and desist order, agreement or memorandum of understanding or any other agreement restricting or limiting or purporting to restrict or limit in any manner the operations of the Bank or any of its Subsidiaries, including, without limitation, any restriction on the payment of dividends, or (iv) directing, restricting or limiting, or purporting to direct, restrict or limit in any manner the operations of the Bank or any of its Subsidiaries, including, without limitation, any restriction on the payment of dividends (any such notice, communication, memorandum, agreement or order described in this sentence being herein referred to as a " Regulatory Agreement "). Neither the Bank nor any Subsidiary has received or been made aware of any complaints or inquiries under the Community Reinvestment Act, the Fair Housing Act, the Equal Credit Opportunity Act or any other state or federal anti-discrimination fair lending law and, to the knowledge of the Bank and its Subsidiaries, there is no fact or circumstance that would form the basis of any such complaint or inquiry.

(c) Since November 20, 2003, neither the Bank nor any of its Subsidiaries has been a party to any effective Regulatory Agreement other than the original De Novo Requirements from the State Banking Department and the FDIC which have now expired.

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

Section 5.12 Employee Benefit Plans . Except as set forth in Section 5.12 of the Bank Disclosure Schedule:

(a) The Bank has delivered to Sterling prior to the execution of this Agreement true and complete copies (and, in the case of each material plan, financial data with respect thereto)

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of all pension, retirement, profit-sharing, deferred compensation, stock option, employee stock ownership, severance pay, vacation, bonus or other incentive plans, all other employee programs, arrangements or agreements, all medical, vision, dental or other health plans, all life insurance plans and all other employee benefit plans, programs or arrangements, or fringe benefit plans, including, without limitation, all "employee benefit plans" as that term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (" ERISA "), whether or not terminated, and trust agreements and insurance contracts under or with respect to which the Bank or any of its Subsidiaries has or could have any liabili