For More Information Contact:
J. Downey Bridgwater, President & Chief Executive Officer 713-507-2670
Stephen Raffaele, Executive Vice President & Chief Financial Officer  
713-507-7408 

October 21, 2004 – Sterling Bancshares, Inc. (NASDAQ: SBIB) today announced results for the third quarter ended September 30, 2004.

The Company reported net income of $6.5 million or $0.14 per diluted share for the third quarter of 2004 compared to $27.3 million or $0.61 per diluted share for the third quarter of 2003.  Net income for the third quarter of 2003 included after-tax income of $19.9 million or $0.44 per diluted share from the Company’s mortgage-banking segment which was sold on September 30, 2003 and separately reported as discontinued operations.  Income from continuing operations for the third quarter of 2003 was $7.4 million or $0.17 per diluted share.

For the nine months ended September 30, 2004, net income was $18.8 million or $0.42 per diluted share compared with $43.2 million or $0.97 per diluted share earned for the same period in 2003.  Net income for the nine months ended September 30, 2004, includes after-tax net gains on the sales of securities of $3.0 million or $0.07 per diluted share and impairment charges on certain bank properties of $721 thousand or $0.02 per diluted share, net of taxes.  Net income for the 2003 period included income from discontinued operations of $20.1 million or $0.45 per diluted share and an after-tax net gain on the sale of rural banking offices of $2.1 million or $0.05 per diluted share.

“I am pleased with the Company’s performance for the third quarter,” commented J. Downey Bridgwater, President and Chief Executive Officer. “Our earnings reflect an increase in our net interest margin, asset quality within our targeted ranges and growth in our loan portfolio as we focus on serving our new and existing customers.  By continuing our focus on the owner-operated business market and generating quality loan growth, we believe that Sterling will continue to capitalize on the strengthening economy, growing Texas markets and rising interest rate environment,” he added.

The Company continued its expense management initiative during the quarter.  Numerous expense reduction and alignment projects have been identified including the consolidation of smaller offices, disposition of unprofitable initiatives, modification of certain perquisite benefit programs and continued reductions of staffing levels through attrition.  These projects are expected to continue to reduce the Company’s current noninterest expense base during the remainder of 2004 and allow for greater control of expense growth in 2005.

As one of these initiatives, the Company sold one unprofitable banking facility during the third quarter of 2004.  This sale is expected to reduce noninterest expenses by $440 thousand annually.  “With the increases in our net interest margin and higher revenues, we expect these expense initiatives to improve Sterling’s efficiency ratio to the mid-60% level by mid- to late-2005,” said Mr. Bridgwater. “Throughout the entire process of implementing these initiatives, we have maintained our focus on providing the high level of personal service that our customers expect,” he commented.

Net interest income was $34.3 million for the third quarter of 2004, an increase of $1.9 million from the second quarter of 2004.  The net interest margin for the third quarter of 2004 was 4.75%, up 20 basis points from the second quarter of 2004 and up 17 basis points from the 4.58% margin for the third quarter of 2003.  During the third quarter of 2004, the Federal Open Market Committee increased overnight interest rates by 50 basis points for a total increase of 75 basis points for the year. 
Period-end loans increased $58.9 million to $2.2 billion at September 30, 2004, up 2.7% from June 30, 2004, or 10.8% linked-quarter annualized.  On average, loans were up $16.3 million during the third quarter of 2004.  

Average total deposits for the third quarter of 2004 were $2.4 billion, down $58.6 million on a linked-quarter basis.  Average brokered deposits decreased $101.6 million from the second quarter of 2004 as the Company reduced brokered deposits in order to fully utilize increases in core deposits and pursue other more favorable borrowing alternatives.  The Company’s average core deposits increased $35.8 million during the third quarter.  Core deposits are a stable source of inexpensive funding for the Company.  Noninterest-bearing deposits comprised 36.7% of total deposits at September 30, 2004, a ratio above most of the Company’s industry peers.   

Overall, the allowance for credit losses at September 30, 2004 was $28.0 million and represented 1.26% of total period-end loans, flat compared to June 30, 2004.  At September 30, 2004, the allowance was 232.45% of nonperforming loans.  The provision for credit losses for the third quarter of 2004 was $2.1 million, down $2.0 million from $4.1 million for the third quarter of 2003.

At September 30, 2004, nonperforming assets were $16.3 million or 0.73% of total loans and foreclosed properties, an improvement of 28.1% since September 30, 2003.  Net charge-offs for the third quarter of 2004 were $1.5 million or 0.27% annualized of average total loans, compared to $4.4 million or 0.65% annualized of average total loans in the third quarter of 2003. 

Noninterest income was $6.8 million in the third quarter of 2004, down $683 thousand compared with the third quarter of last year.  Noninterest expense for the third quarter of 2004 was $29.5 million, up $1.6 million as compared with the third quarter of 2003.  This increase was primarily attributable to the operating expenses of two additional offices.

On September 30, 2003, the Company sold its mortgage-banking segment resulting in an after-tax gain of $22.1 million.  The results of its operations and gain on sale are reported as income from discontinued operations.  Separately, as a banking operation, Sterling Bank benefited by financing the mortgage-banking operation’s mortgage loans held for sale.  Due to decisions made by the buyer, Sterling Bank lost the benefit of the mortgage warehouse shortly after completing the sale.
At September 30, 2004, Sterling had total assets of $3.2 billion, total loans of $2.2 billion and total deposits of $2.4 billion.  Shareholders’ equity of $307 million at September 30, 2004 was 9.50% of total assets. Book value per common share at period-end was $6.84. 
 
Conference Call
Downey Bridgwater and Stephen Raffaele invite investors and analysts to listen to the Company’s third quarter earnings conference call that will be broadcast live via telephone and over the Internet on Thursday, October 21, 2004 at 11:00AM Eastern Time.  To participate, please visit the Investor Relations section of the Company’s web site at www.banksterling.com or call (630) 691-2748. An audio archive of the call will be available on the web site beginning Friday, October 22, 2004.
 
Forward-Looking Statements
Except for historical information contained herein, this press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, including, but not limited to, the following: general business and economic conditions in the markets the Company serves 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; the Company's liquidity requirements could be adversely affected by changes in its assets and liabilities; legislative or regulatory developments including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial securities industry; competitive factors may increase, including product and pricing pressures among financial services organizations; the effect of changes in accounting policies and practices, as may be adopted by regulatory agencies, as well as the Financial Accounting Standards Board and other accounting regulatory agencies; and changes in fiscal and governmental policies of the United States federal government could have an adverse effect on the Company's business. Please also read the additional risks and factors described from time to time in the Company's reports filed with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
 
About Sterling Bancshares
Sterling Bancshares, Inc., is a Houston-based bank holding company with total assets of $3.2 billion, which operates 36 banking offices in the greater metro areas of Houston, San Antonio, and Dallas, Texas. These cities are the 4th, 8th and 9th largest in the United States based on population.  The Company’s common stock is traded through the NASDAQ National Market System under the symbol “SBIB”.  

To view Sterling Bancshares, Inc. selected financial information
(unaudited), visit http://www.shareholder.com/sbib/news/20041021-146065.pdf