SEVERANCE AND NON-COMPETE AGREEMENT

 

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                                                                    EXHIBIT 10.2

 

                     SEVERANCE AND NON-COMPETITION AGREEMENT

 

         THIS SEVERANCE AND NON-COMPETITION AGREEMENT (the "Agreement") is

entered into effective as of this 2nd day of May, 2005 by and among Sterling

Bancshares, Inc., a Texas corporation ("Bancshares"), Sterling Bank, a banking

association chartered by the State of Texas and an indirect subsidiary of

Bancshares ("Bank") and Sonny Lyles (the "Executive Officer").

 

         WHEREAS, the Executive Officer is being employed by Bancshares and/or

Bank in a position in which he will have access to, and will gain knowledge of,

confidential and proprietary information of Bancshares, Bank, Sterling

Bancorporation, Inc. and their respective affiliates (each, a "Sterling Entity,"

and together, the "Sterling Entities"), and the parties wish to ensure that the

Executive Officer will enjoy access to the Sterling Entities' existing and

future confidential and proprietary information;

 

         WHEREAS, the Sterling Entities' confidential and proprietary

information constitutes a substantial asset of the Sterling Entities that the

parties mutually wish to protect;

 

         WHEREAS, the Executive Officer is already subject to certain

confidentiality obligations under Texas law, and the parties reasonably believe

that it would be difficult, if not impossible, for the Executive Officer to

refrain from using or disclosing the confidential and proprietary information of

the Sterling Entities in the event that the Executive Officer were to work for

any other financial institution after terminating his/her employment with

Bancshares and/or the Bank;

 

         WHEREAS, the parties mutually desire to achieve a level of certainty

and predictability concerning the post-employment activities the Executive

Officer may perform, and when;

 

         WHEREAS, the parties mutually desire to compensate the Executive

Officer for any restriction on his ability to engage in certain competitive

activities; and

 

         WHEREAS, the parties mutually desire to ensure that the Executive

Officer receives certain severance benefits in the event that his employment is

terminated by Bancshares and Bank without cause, or following a "Change of

Control" (as herein defined) under the conditions set forth herein.

 

         NOW, THEREFORE, in consideration of the foregoing and the premises,

representations, and mutual covenants hereinafter set forth, the parties do

hereby agree as follows:

 

         1. Definitions. The following words and terms shall have the meanings

set forth below for purposes of this Agreement:

 

                  (a) Cause. A termination of employment is for "Cause" only if

         it is due to:

 

                           (i) serious intentional misconduct on the part of the

                  Executive Officer;

 

 

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                           (ii) fraud, misappropriation or embezzlement related

                  to any of the Sterling Entities on the part of the Executive

                   Officer;

 

                           (iii) the conviction of the Executive Officer of any

                  felony or crime involving moral turpitude;

 

                           (iv) a material violation by the Executive Officer of

                  any applicable federal or state banking law or regulation that

                  has had, or may have, a material adverse effect on any

                  Sterling Entity;

 

                           (v) a material breach of any corporate policy

                   including, without limitation, the Code of Business Conduct

                  and Ethics and the Code of Ethics for Senior Officers, as

                  applicable to the Executive Officer which, if correctable,

                  remains uncorrected for 30 days following written notice to

                  the Executive Officer by a Sterling Entity of such breach;

 

                           (vi) a material breach of this Agreement which, if

                  correctable, remains uncorrected for 30 days following written

                  notice to the Executive Officer by a Sterling Entity of such

                  breach; or

 

                           (vii) the willful and continued failure by the

                  Executive Officer to perform substantially the Executive

                  Officer's duties on behalf of any Sterling Entity, other than

                  any such failure resulting from the Executive Officer's

                  incapacity due to Disability, which failure is not promptly

                  abated after a demand for substantial performance is delivered

                  to the Executive Officer by Bancshares or other applicable

                  Sterling Entity that specifically identifies the manner in

                  which the Executive Officer has not substantially performed

                  the Executive Officer's duties and gives the Executive Officer

                  a reasonable period of cure.

 

For purposes of this definition, any act or failure to act on the Executive

Officer's part shall be considered "material" or "willful" if done or omitted to

be done by the Executive Officer otherwise than in good faith and without

reasonable belief that the Executive Officer's action or omission was in the

best interest of the Sterling Entities.

 

                  (b) Change of Control. A "Change of Control" shall be deemed

         to have occurred if:

 

                           (i) any "person" or "group" (within the meanings of

                  Sections 13(d) or 14(d)(2) of the Securities Exchange Act of

                  1934) becomes the "beneficial owner" (as defined in Rule 13d-3

                  under the Securities Exchange Act of 1934), directly or

                  indirectly, of securities of Bancshares representing

                  thirty-five percent (35%) or more of the combined voting power

                  of Bancshares' then outstanding securities eligible to vote

                  for the election of the board of directors of Bancshares (the

                   "Bancshares Voting Securities"); provided, however, that the

                  event described in this paragraph (i) shall not be deemed to

                  be a Change of Control by virtue of any of the following

                  acquisitions: (A) by Bancshares, (B) by any employee benefit

                  plan (or related trust) sponsored or maintained by Bancshares,

                  (C) by any underwriter temporarily holding securities pursuant

                  to an offering of such

 

 

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                  securities, or (D) pursuant to a Non-Qualifying Transaction

                  (as defined in paragraph (ii) below);

 

                           (ii) the consummation of a merger, consolidation,

                  share exchange or similar form of corporate transaction

                  involving Bancshares that requires the approval of Bancshares'

                  shareholders, whether for such transaction or the issuance of

                  securities in the transaction (a "Business Combination"),

                  unless immediately following such Business Combination: (A)

                  more than seventy-five percent (75%) of the total voting power

                  of (x) the corporation resulting from such Business

                  Combination (the "Surviving Corporation"), or (y) if

                  applicable, the ultimate parent corporation that directly or

                  indrectly has beneficial ownership of 100% of the voting

                   securities eligible to elect directors of the Surviving

                  Corporation (the "Parent Corporation"), is represented by

                  Bancshares Voting Securities that were outstanding immediately

                  prior to such Business Combination (or if applicable, is

                  represented by shares into which such Bancshares Voting

                  Securities were converted pursuant to such Business

                  Combination), and such voting power among the holders thereof

                  is in substantially the same proportion of the voting power of

                  such Bancshares Voting Securities among the holders thereof

                  immediately prior the Business Combination, (B) no person

                   (other than any employee benefit plan (or related trust)

                  sponsored or maintained by the Surviving Corporation or the

                  Parent Corporation), is or becomes the beneficial owner,

                  directly or indrectly, of fifty-percent (50%) or more of the

                  total voting power of the outstanding voting securities

                  eligibile to elect directors of the Parent Corporation (or, if

                  there is no Parent Corporation, the Surviving Corporation) and

                  (C) at least the majoirity of the board of directors of the

                  Parent Corporation (or, if there is no Parent Corporation, the

                  Surviving Corporation) following the consummation of the

                  Business Combination were Incumbent Directors (as herein

                  defined) at the time the board of directors of Bancshares

                  approved the execution of the intial agreement providing for

                  such Business Combination (any Business Combinaion which

                  satisfies all of the criteria specified in (A), (B) and (C)

                  above shall be deemed to be a "Non-Qualifying Transaction");

 

                           (iii) the individuals who constitute the board of

                  directors of Bancshares as of the date of this Agreement (the

                  "Incumbent Directors") shall cease for any reason to

                  constitute at least a majority of the members of the board of

                  directors of Bancshares, provided that any person becoming a

                  director subsequent to the date of this Agreement, whose

                  election or nomination was approved by a vote of at least a

                  majority of the Incumbent Directors then comprising the board

                  of directors of Bancshares shall be, for purposes of this

                  Agreement, considered an Incumbent Director; provided,

                  however, that no individual initially elected or nominated as

                  a director of Bancshares as a result of an actual or

                  threatened contest with respect to directors or as a result of

                  any other actual or threatened solicitation of proxies (or

                  consents) by or on behalf of any person other than the board

                  of directors shall be deemed to be an Incumbent Director;

 

                           (iv) the consummation of a sale of all or

                  substantially all of the assets of Bancshares; or

 

 

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                           (v) the shareholders of Bancshares shall approve a

                  plan of complete liquidation or dissolution of Bancshares.

 

                   (c) Change of Control Termination. A "Change of Control

         Termination" shall mean the termination of the Executive Officer's

         employment with the Sterling Entities (or any Parent Corporation or

         Surviving Corporation), within a two-year period commencing on the

         effective date of a Change of Control, due to (i) an Involuntary

         Termination or (ii) a termination for Good Reason.

 

                  (d) Disability. "Disability" means the Executive Officer's

         permanent and total disability as defined in any long-term disability

         plan sponsored by Bancshares and applicable to the Executive Officer or

         in the absence of any such long-term disability plan, the term

         "Disability" shall mean the absence of the Executive Officer from his

         or her duties with the Sterling Entities on a full-time basis for at

         least twelve (12) consecutive weeks as a result of the Executive

         Officer's incapacity due to illness, accident, injury, physical or

         mental incapacity or other disability.

 

                  (e) General Release of Liability. A "General Release of

         Liability" means the legal document in which the Executive Officer, in

         exchange for benefits under this Agreement, releases the Sterling

         Entities, their affiliates, their directors, officers, employees and

         agents, their employee benefit plans and the fiduciaries and agents of

         said plans from liability and damages in any way related to the

         Executive Officer's employment with or separation from the Sterling

         Entities.

 

                  (f) Good Reason. "Good Reason" means, without the Executive

         Officer's express written consent, the occurrence of any one of the

         following events after a Change of Control:

 

                           (i) (A) any change in the duties or responsibilities

                  of the Executive Officer that is inconsistent in any material

                  and adverse respect with the Executive Officer's position,

                  duties, responsibilities or status with the Sterling Entities

                  immediately prior to such Change of Control or (B) a material

                  and adverse change in the Executive Officer's titles or

                  offices with the Sterling Entities (or any Parent Corporation

                  or Surviving Corporation) and including, if applicable,

                  membership or position on a board of directors with Bancshares

                  or Bank (or their respective successor), as in effect

                  immediately prior to such Change of Control;

 

                           (ii) a reduction of ten percent (10%) or more in the

                  Executive Officer's rate of annual base salary or annual

                  target bonus opportunity (including any material and adverse

                  change in the formula for such annual bonus target) as in

                  effect immediately prior to such Change of Control or as the

                  same may be increased from time to time thereafter, or the

                  failure of the applicable Sterling Entity (or any Parent

                  Corporation or Surviving Corporation) to pay any such amounts

                  when due;

 

                           (iii) any requirement that the Executive be based

                  anywhere more than twenty-five (25) miles from the office

                  where the Executive Officer was located at

 

 

 

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                  the time of the Change of Control, if such relocation

                  increases the Executive Officer's commute by more than

                  twenty-five (25) miles;

 

                            (iv) the failure of the Sterling Entities (or any

                  Parent Corporation or Surviving Corporation) to continue in

                  effect benefits and a total compensation package including,

                  without limitation, employee benefit plans, compensation

                  plans, welfare benefit plans, material fringe benefit plans,

                  vacation policies and other similar benefit plans providing

                  not less than ninety percent (90%) of the Executive Officer's

                  total compensation package in the twelve (12) months

                  immediately preceding the Change of Control; and

 

                           (v) the failure of Bancshares to obtain the

                  assumption (and, if applicable, guarantee) agreement from any

                  Surviving Corporation (and, if applicable, Parent Corporation)

                  as contemplated in Section 13(b).

 

                  (g) Involuntary Termination. An "Involuntary Termination"

          means an involuntary termination of employment of the Executive Officer

         by the Sterling Entities (or any successor thereto including a Parent

         Corporation or Surviving Corporation); provided, however, that

         "Involuntary Termination" shall not include termination of employment

         by reason of death, Disability or Cause.

 

         2. Compensation and Stock Award. In consideration of the services to be

provided by the Executive and the covenants and agreements contained in Sections

3, 4 and 5 of this Agreement, Bancshares shall award the Executive Officer a

$75,000 cash bonus during the first available payroll period of 2005 following

employment and three thousand (3,000) shares of Bancshares' common stock, and

five thousand (5,000) shares of restricted stock, $1.00 par value, to be vested

in equal increments over a four-year period upon commencement of your employment

and execution of the Agreement. The 3,000 shares of common stock issued to the

Executive Officer hereunder shall be awarded under the terms of Bancshares' 2003

Stock Incentive and Compensation Plan (or any successor plan) and shall not be

subject to any forfeiture or vesting requirements.

 

         3. Non-Competition. Executive Officer acknowledges that the Sterling

Entities are providing Executive with access to Confidential Information as

defined below. Ancillary to Executive Officer's agreement not to disclose

Confidential Information, to protect the Confidential Information described

below, and in consideration for Executive Officer receiving access to this

Confidential Information, being entitled to Severance Payments, having rights

after a Change in Control, and other benefits provided in this Agreement, the

Sterling Entities and Executive Officer agree to the following non-competition

provisions. The Executive Officer shall not, during the time that he/she is

employed by any Sterling Entity and, in the event of a termination of employment

for Cause, an Involuntary Termination, or a termination of employment by the

Executive Officer, for a period of twelve (12) m