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

HOUSTON, TX, July 22, 2004 – Sterling Bancshares, Inc. (NASDAQ: SBIB) today announced results for the second quarter ended June 30, 2004.

The Company reported net income of $7.1 million or $0.16 per diluted share for the second quarter of 2004 compared to $4.6 million or $0.10 per diluted share for the second quarter of 2003. Net income for the second quarter of 2004 included:
. • an after-tax gain of $3.2 million, or $0.07 per diluted share, related to the securitization
and sale of certain interest-only securities,

. • losses of $554 thousand, or $0.01 per diluted share, after-taxes for the sale of U.S.
Treasury securities, and 

. • impairment charges on certain bank properties of $721 thousand, or $0.02 per diluted
share, net of taxes.

Net income for the second quarter of 2003 included after-tax losses of $1.5 million, or $0.03 per diluted share, from the Company’s mortgage-banking operations which were sold on September 30, 2003 and  separately reported as discontinued operations.

For the six months ended June 30, 2004, net income was $12.3 million, or $0.27 per diluted share, compared with $15.9 million, or $0.36 per diluted share earned for the same period in 2003.  Net income for the 2003 period included an after-tax net gain on the sale of rural banking offices of $2.1 million or $0.05 per diluted share.

 “We are pleased to report increased earnings and significant improvements in asset quality for the second quarter,” commented J. Downey Bridgwater, President and Chief Executive Officer.  “Sterling is well positioned to capitalize on the strengthening economy, growing Texas markets and rising interest rate environment.  Our continued focus is on achieving productive, profitable, quality growth through new and existing customer relationships and actively seeking acquisition candidates in Texas that will be accretive to earnings and strategically align with our focus on owner-operated businesses. We continue to be excited about our future growth prospects.”

The Company expanded its expense management initiative during the second quarter.  After a thorough review by management and employees, numerous expense reduction and alignment projects were identified including the consolidation of smaller offices, disposition of unprofitable initiatives, modification of certain perquisite benefit programs and continued reductions of staff levels through attrition.  The Company will implement these projects during the remainder of 2004. These are expected to reduce the Company’s current non-interest expense base in 2004 and allow for greater control of expense growth in 2005. “We expect these expense initiatives, when combined with a favorable rate environment and higher revenues, to improve Sterling’s efficiency ratio to the mid-60% levels by mid to late 2005,” said Mr. Bridgwater.  “The Company remains committed to growth while maintaining a high level of personal service that our customers have always enjoyed.”  

At June 30, 2004, nonperforming assets were $13.7 million or 0.63% of total loans and foreclosed properties, an improvement of 28% during the second quarter of 2004 and 45% since June 30, 2003. Net charge-offs for the second quarter of 2004 were $2.1 million or 0.38% (annualized) of average total loans, compared to $3.0 million or 0.45% (annualized) of average total loans in the second quarter of 2003. 
Overall, the allowance for credit losses at June 30, 2004 was $27.3 million and represented 1.26% of total period-end loans, up from 1.19% at June 30, 2003.  At June 30, 2004, the allowance was 252.91% of nonperforming loans.  The provision for credit losses for the second quarter of 2004 was $2.8 million, down $3.3 million from $6.1 million in the second quarter of 2003.

Net interest income was $32.3 million for the second quarter of 2004, a decrease of $675 thousand from the first quarter of 2004. The net interest margin for the second quarter of 2004 was 4.55%, down three basis points from the first quarter of 2004 and down 16 basis points from the 4.71% margin for the second quarter of 2003.  
On June 30, 2004, the Federal Open Market Committee increased the overnight interest rate by 25 basis points. This was the first rate increase in more than four years.  “The Company’s balance sheet is positioned to benefit from increases in interest rates because of our commercial lending focus and large core deposit base,” said Stephen Raffaele, Executive Vice President and Chief Financial Officer. “We expect this rate increase to help further stabilize Sterling’s net interest margin.  Future rate increases should improve our margin.”

Average loans held for investment were $2.1 billion for the second quarter of 2004, up slightly on a linked-quarter basis and up 7.0% from the second quarter of 2003.  The Company has experienced higher than expected loan prepayment activity during 2004.  This along with the Company’s internal efforts to improve asset quality has affected 2004 loan growth.  

Average total deposits for the second quarter of 2004 were $2.5 billion, unchanged from the prior quarter. Noninterest-bearing deposits represented 34.0% of total deposits at June 30, 2004, a ratio above most of the Company’s industry peers.   
Noninterest income was $10.8 million in the second quarter of 2004, up $3.7 million compared with the second quarter of last year.  Noninterest income for the second quarter of 2004 included a pre-tax gain on the securitization and sale of certain interest-only securities of $4.9 million, offset by realized losses on the sale of U.S. Treasury securities of $853 thousand before taxes. 

As previously reported, the Company securitized and sold certain interest-only securities included in the available-for-sale portfolio for a pre-tax gain of $4.9 million in April 2004.  This securitization facilitated the sale of these securities by improving their marketability. These interest-only securities were part of the Company’s capital markets activities.

Noninterest expense for the second quarter of 2004 was $30.1 million, up $2.6 million as compared with the second quarter of 2003.  This increase was due, in part, to a pre-tax impairment charge of $1.1 million in the second quarter of 2004 on one tract of unused land and one bank building which the Company intends to sell.
On September 30, 2003, the Company completed the sale of its mortgage-banking operations. The results of its operations 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 June 30, 2004, Sterling had total assets of $3.1 billion, total loans of $2.2 billion and total deposits of $2.5 billion.  The Company’s shareholders’ equity of $297 million at June 30, 2004 is strong at 9.62% of total assets.  Book value per common share at period-end was $6.62.
 
Conference Call
Downey Bridgwater, President and Chief Executive Officer and Stephen Raffaele, Executive Vice President and Chief Financial Officer invite you to listen to the Company’s second quarter earnings conference call that will be broadcast live via telephone and over the Internet on Thursday, July 22, 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 (847) 619-6398.  An audio archive of the call will be available on the web site beginning Friday, July 23, 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 $3.1 billion, which operates 37 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/20040722-139910.pdf.