##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the Quarter Ended September 30, 2007.
|- | ----------------------------------------------------------------------------------------------------------------------------------



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from 
to .
|- | ---------------------------------------------------------------------------------------------------

Commission file
number: 001-33598



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Encore Bancshares, Inc.

(Exact name of registrant as specific in its charter)

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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Texas                                                          |  | 76-0655696                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



|                                                |  |           
|----------------------------------------------- |  | ----------
|Nine Greenway Plaza, Suite 1000, Houston, Texas |  | 77046     
|(Address of principal executive offices)        |  | (Zip Code)

(713) 787-3100

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

As of October 31, 2007, there were 10,120,440 shares of common stock, $1.00 par value, issued and outstanding.



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##### Table of Contents

ENCORE BANCSHARES, INC.

TABLE OF CONTENTS



|           |  |                       |  |                                                                                                                  |  |   
|---------- |  | --------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | --
|           |  |                       |  | Page                                                                                                            
|Part I.    |  | FINANCIAL INFORMATION |  |                                                                                                                 
|           |  |                       | 
|           |  | Item 1.               |  | Financial Statements                                                                                             |  |   
|           |  |                       | 
|           |  |                       |  | Consolidated Balance Sheets  September 30, 2007 (unaudited) and December 31, 2006                               |  | 3 
|           |  |                       | 
|           |  |                       |  | Consolidated Statements of Earnings  Three months and nine months ended September 30, 2007 and 2006 (unaudited) |  | 4 
|           |  |                       | 
|           |  |                       |  | Consolidated Statement of Changes in Shareholders Equity  Nine months ended September 30, 2007 (unaudited)     |  | 5 
|           |  |                       | 
|           |  |                       |  | Consolidated Statements of Cash Flows  Nine months ended September 30, 2007 and 2006 (unaudited)                |  | 6 
|           |  |                       | 
|           |  |                       |  | Notes to Interim Consolidated Financial Statements (unaudited)                                                   |  | 7 
|           |  |                       | 
|           |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 16
|           |  |                       | 
|           |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                                       |  | 29
|           |  |                       | 
|           |  | Item 4.               |  | Controls and Procedures                                                                                          |  | 30
|           |  |                      
|Part II.   |  | OTHER INFORMATION     |  |                                                                                                                 
|           |  |                       | 
|           |  | Item 1.               |  | Legal Proceedings                                                                                                |  | 30
|           |  |                       | 
|           |  | Item 1A.              |  | Risk Factors                                                                                                     |  | 30
|           |  |                       | 
|           |  | Item 2.               |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                      |  | 30
|           |  |                       | 
|           |  | Item 3.               |  | Default Upon Senior Securities                                                                                   |  | 30
|           |  |                       | 
|           |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                                              |  | 30
|           |  |                       | 
|           |  | Item 5.               |  | Other Information                                                                                                |  | 30
|           |  |                       | 
|           |  | Item 6.               |  | Exhibits                                                                                                         |  | 31
|           | 
|Signatures |  | 32                   



2



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##### Table of Contents

Part I  Financial Information



|Item 1. | Financial Statements
|------- | --------------------

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Unaudited, dollars in thousands, except per share amounts)



|                                                                                                                                                   |  |                    |           |   |                  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                   |  | September 30, 2007 |           |   | December 31,2006 |  
|ASSETS                                                                                                                                             |  |                    |           |   |                  |   |           |  
|Cash and due from banks                                                                                                                            |  | $                  | 19,044    |   |                  | $ | 27,428    |  
|Interest-bearing deposits in banks                                                                                                                 |  |                    | 1,804     |   |                  |   | 2,904     |  
|Federal funds sold and other                                                                                                                       |  |                    | 100,630   |   |                  |   | 8,764     |  
|                                                                                                                                                   |  |                    |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                          |  |                    | 121,478   |   |                  |   | 39,096    |  
|Securities available-for-sale, at estimated fair value                                                                                             |  |                    | 12,205    |   |                  |   | 83,701    |  
|Securities held-to-maturity, at amortized cost                                                                                                     |  |                    | 140,507   |   |                  |   | 172,555   |  
|Mortgages held-for-sale                                                                                                                            |  |                    | 2,244     |   |                  |   | 57,769    |  
|Loans receivable                                                                                                                                   |  |                    | 1,030,133 |   |                  |   | 908,368   |  
|Allowance for loan losses                                                                                                                          |  |                    | (10,711   | ) |                  |   | (9,056    | )
|                                                                                                                                                   |  |                    |           |   |                  |   |           |  
|Net loans receivable                                                                                                                               |  |                    | 1,019,422 |   |                  |   | 899,312   |  
|Federal Home Loan Bank of Dallas stock, at cost                                                                                                    |  |                    | 5,805     |   |                  |   | 7,719     |  
|Investments in real estate                                                                                                                         |  |                    | 731       |   |                  |   | 235       |  
|Premises and equipment, net                                                                                                                        |  |                    | 15,814    |   |                  |   | 12,639    |  
|Goodwill                                                                                                                                           |  |                    | 27,922    |   |                  |   | 27,869    |  
|Other intangible assets, net                                                                                                                       |  |                    | 6,991     |   |                  |   | 7,618     |  
|Cash surrender value of life insurance policies                                                                                                    |  |                    | 13,951    |   |                  |   | 13,551    |  
|Accrued interest receivable and other assets                                                                                                       |  |                    | 16,062    |   |                  |   | 14,779    |  
|                                                                                                                                                   |  |                    |           |   |                  |   |           |  
|                                                                                                                                                   |  | $                  | 1,383,132 |   |                  | $ | 1,336,843 |  
|                                                                                                                                                   |  |                    |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                               |  |                    |           |   |                  |   |           |  
|Deposits:                                                                                                                                          |  |                    |           |   |                  |   |           |  
|Noninterest-bearing                                                                                                                                |  | $                  | 115,742   |   |                  | $ | 131,476   |  
|Interest-bearing                                                                                                                                   |  |                    | 916,442   |   |                  |   | 899,335   |  
|                                                                                                                                                   |  |                    |           |   |                  |   |           |  
|Total deposits                                                                                                                                     |  |                    | 1,032,184 |   |                  |   | 1,030,811 |  
|Borrowings and repurchase agreements                                                                                                               |  |                    | 166,359   |   |                  |   | 171,732   |  
|Junior subordinated debentures                                                                                                                     |  |                    | 20,619    |   |                  |   | 20,619    |  
|Accrued interest payable and other liabilities                                                                                                     |  |                    | 8,538     |   |                  |   | 8,004     |  
|                                                                                                                                                   |  |                    |           |   |                  |   |           |  
|Total liabilities                                                                                                                                  |  |                    | 1,227,700 |   |                  |   | 1,231,166 |  
|Commitments and contingencies                                                                                                                      |  |                    |          |   |                  |   |          |  
|Puttable common stock, $1 par value, 773,616 shares issued and outstanding at December 31, 2006                                                    |  |                    |          |   |                  |   | 774       |  
|Puttable common stock in excess of par                                                                                                             |  |                    |          |   |                  |   | 9,492     |  
|                                                                                                                                                   |  |                    |           |   |                  |   |           |  
|Total puttable common stock                                                                                                                        |  |                    |          |   |                  |   | 10,266    |  
|Shareholders equity:                                                                                                                              |  |                    |           |   |                  |   |           |  
|Preferred stock, $1 par value, 20,000,000 shares authorized; none issued                                                                           |  |                    |          |   |                  |   |          |  
|Common stock, $1 par value, 50,000,000 shares authorized; 10,124,440 shares at September 30, 2007 and 7,016,699 shares at
December 31, 2006 issued |  |                    | 10,124    |   |                  |   | 7,016     |  
|Additional paid-in capital                                                                                                                         |  |                    | 107,954   |   |                  |   | 57,585    |  
|Retained earnings                                                                                                                                  |  |                    | 38,060    |   |                  |   | 32,529    |  
|Common stock in treasury, at cost (4,000 shares at September 30, 2007 and December 31, 2006)                                                       |  |                    | (69       | ) |                  |   | (69       | )
|Accumulated other comprehensive loss                                                                                                               |  |                    | (637      | ) |                  |   | (1,650    | )
|                                                                                                                                                   |  |                    |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                         |  |                    | 155,432   |   |                  |   | 95,411    |  
|                                                                                                                                                   |  |                    |           |   |                  |   |           |  
|                                                                                                                                                   |  | $                  | 1,383,132 |   |                  | $ | 1,336,843 |  
|                                                                                                                                                   |  |                    |           |   |                  |   |           |  

The accompanying notes are an integral part of these statements.



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited, dollars in thousands, except per share amounts)



|                                                    |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|--------------------------------------------------- | ---- | ------------------------------- | ---------- | ------------------------------ | ---- | --------- |  | ---- | --------- | - |  | - | ---------
|                                                    |      | Three Months EndedSeptember 30, |            | Nine Months EndedSeptember 30,
|                                                    | 2007 |                                 | 2006       |                                | 2007 |           |  | 2006
|Interest income:                                    |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|Loans, including fees                               |      | $                               | 17,309     |                                | $    | 14,651    |  | $    | 49,463    |   |  | $ | 41,470   
|Mortgages held-for-sale                             |      |                                 | 1,346      |                                |      | 1,787     |  |      | 3,669     |   |  |   | 5,104    
|Securities                                          |      |                                 | 1,463      |                                |      | 2,705     |  |      | 5,481     |   |  |   | 8,656    
|Federal funds sold and other                        |      |                                 | 914        |                                |      | 370       |  |      | 1,574     |   |  |   | 990      
|                                                    |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|Total interest income                               |      |                                 | 21,032     |                                |      | 19,513    |  |      | 60,187    |   |  |   | 56,220   
|Interest expense:                                   |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|Deposits                                            |      |                                 | 9,947      |                                |      | 8,603     |  |      | 28,928    |   |  |   | 21,079   
|Borrowings and repurchase agreements                |      |                                 | 1,651      |                                |      | 2,898     |  |      | 5,319     |   |  |   | 11,060   
|Junior subordinated debentures                      |      |                                 | 368        |                                |      | 462       |  |      | 1,196     |   |  |   | 1,296    
|                                                    |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|Total interest expense                              |      |                                 | 11,966     |                                |      | 11,963    |  |      | 35,443    |   |  |   | 33,435   
|                                                    |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|Net interest income                                 |      |                                 | 9,066      |                                |      | 7,550     |  |      | 24,744    |   |  |   | 22,785   
|Provision for loan losses                           |      |                                 | 1,008      |                                |      | 765       |  |      | 2,853     |   |  |   | 2,287    
|                                                    |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|Net interest income after provision for loan losses |      |                                 | 8,058      |                                |      | 6,785     |  |      | 21,891    |   |  |   | 20,498   
|Noninterest income:                                 |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|Trust and investment management fees                |      |                                 | 4,501      |                                |      | 3,899     |  |      | 13,013    |   |  |   | 13,156   
|Mortgage banking                                    |      |                                 | 1,167      |                                |      | 2,243     |  |      | 5,411     |   |  |   | 8,018    
|Insurance commissions and fees                      |      |                                 | 1,450      |                                |      | 1,364     |  |      | 4,725     |   |  |   | 4,342    
|Real estate operations, including net gain on sales |      |                                 | 178        |                                |      | 81        |  |      | 303       |   |  |   | 355      
|Net loss on sale of available-for-sale securities   |      |                                 |           |                                |      |          |  |      | (181      | ) |  |   |         
|Other                                               |      |                                 | 225        |                                |      | 293       |  |      | 1,426     |   |  |   | 968      
|                                                    |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|Total noninterest income                            |      |                                 | 7,521      |                                |      | 7,880     |  |      | 24,697    |   |  |   | 26,839   
|Noninterest expense:                                |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|Compensation                                        |      |                                 | 7,318      |                                |      | 7,482     |  |      | 23,036    |   |  |   | 23,775   
|Occupancy                                           |      |                                 | 1,438      |                                |      | 1,236     |  |      | 4,336     |   |  |   | 3,831    
|Equipment                                           |      |                                 | 506        |                                |      | 511       |  |      | 1,523     |   |  |   | 1,534    
|Advertising and promotion                           |      |                                 | 328        |                                |      | 227       |  |      | 795       |   |  |   | 718      
|Outside data processing                             |      |                                 | 884        |                                |      | 861       |  |      | 2,596     |   |  |   | 2,419    
|Professional fees                                   |      |                                 | 401        |                                |      | 497       |  |      | 1,249     |   |  |   | 1,404    
|Intangible amortization                             |      |                                 | 209        |                                |      | 237       |  |      | 629       |   |  |   | 719      
|Loss on early debt extinguishment                   |      |                                 |           |                                |      |          |  |      | 391       |   |  |   |         
|Other                                               |      |                                 | 1,405      |                                |      | 1,018     |  |      | 3,685     |   |  |   | 3,289    
|                                                    |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|Total noninterest expense                           |      |                                 | 12,489     |                                |      | 12,069    |  |      | 38,240    |   |  |   | 37,689   
|                                                    |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|Net earnings before income taxes                    |      |                                 | 3,090      |                                |      | 2,596     |  |      | 8,348     |   |  |   | 9,648    
|Income tax expense                                  |      |                                 | 842        |                                |      | 897       |  |      | 2,667     |   |  |   | 3,334    
|                                                    |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|NET EARNINGS                                        |      | $                               | 2,248      |                                | $    | 1,699     |  | $    | 5,681     |   |  | $ | 6,314    
|                                                    |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|Earnings Per Common Share:                          |      |                                 |            |                                |      |           |  |      |           |   |  |   |          
|Basic                                               |      | $                               | 0.24       |                                | $    | 0.23      |  | $    | 0.70      |   |  | $ | 0.84     
|Diluted                                             |      |                                 | 0.22       |                                |      | 0.21      |  |      | 0.64      |   |  |   | 0.80     
|Average common shares outstanding                   |      |                                 | 9,347,162  |                                |      | 7,503,526 |  |      | 8,160,116 |   |  |   | 7,500,999
|Diluted average common shares outstanding           |      |                                 | 10,156,090 |                                |      | 7,934,716 |  |      | 8,836,428 |   |  |   | 7,906,746

The accompanying notes are an integral part of these statements.



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY

For the Nine Months Ended September 30, 2007

(Unaudited, dollars in thousands)



|                                                                                                                                    |        |              |   |        |                          |        |   |                  |   |         |               |  |   |                                            |   |  |                          |     |   |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------- | ------ | ------------ | - | ------ | ------------------------ | ------ | - | ---------------- | - | ------- | ------------- |  | - | ------------------------------------------ | - |  | ------------------------ | --- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                                                    |        | Common stock |   |        | Additionalpaid-incapital |        |   | Retainedearnings |   |         | Treasurystock |  |   | Accumulatedothercomprehensiveincome (loss) |   |  | Totalshareholdersequity |    
|                                                                                                                                    | Shares |              |   | Amount |                          |        |   |                  |   |        
|Balance at December 31, 2006                                                                                                        |        | 7,016,699    |   |        | $                        | 7,016  |   |                  | $ | 57,585  |               |  | $ | 32,529                                     |   |  | $                        | (69 | ) |  | $ | (1,650 | ) |  | $ | 95,411  |  
|Reclassification of puttable common stock                                                                                           |        | 773,616      |   |        |                          | 774    |   |                  |   | 9,492   |               |  |   |                                           |   |  |                          |    |   |  |   |       |   |  |   | 10,266  |  
|Adoption of FIN 48                                                                                                                  |        |             |   |        |                          |       |   |                  |   |        |               |  |   | (150                                       | ) |  |                          |    |   |  |   |       |   |  |   | (150    | )
|Stock-based compensation cost recognized in earnings                                                                                |        |             |   |        |                          |       |   |                  |   | 800     |               |  |   |                                           |   |  |                          |    |   |  |   |       |   |  |   | 800     |  
|Issuance of common shares in public offering, net of costs                                                                          |        | 2,190,475    |   |        |                          | 2,191  |   |                  |   | 39,502  |               |  |   |                                           |   |  |                          |    |   |  |   |       |   |  |   | 41,693  |  
|Issuance of common shares for exercise of options                                                                                   |        | 76,000       |   |        |                          | 76     |   |                  |   | 626     |               |  |   |                                           |   |  |                          |    |   |  |   |       |   |  |   | 702     |  
|Issuance of restricted stock                                                                                                        |        | 71,450       |   |        |                          | 71     |   |                  |   | (71     | )             |  |   |                                           |   |  |                          |    |   |  |   |       |   |  |   |        |  
|Forfeitures of restricted stock                                                                                                     |        | (3,800       | ) |        |                          | (4     | ) |                  |   | 4       |               |  |   |                                           |   |  |                          |    |   |  |   |       |   |  |   |        |  
|Excess tax benefit from stock-based compensation                                                                                    |        |             |   |        |                          |       |   |                  |   | 16      |               |  |   |                                           |   |  |                          |    |   |  |   |       |   |  |   | 16      |  
|Comprehensive income:                                                                                                               |        |              |   |        |                          |        |   |                  |   |         |               |  |   |                                            |   |  |                          |     |   |  |   |        |   |  |   |         |  
|Net earnings                                                                                                                        |        |             |   |        |                          |       |   |                  |   |        |               |  |   | 5,681                                      |   |  |                          |    |   |  |   |       |   |  |   | 5,681   |  
|Change in net unrealized loss on securities available-for-sale, net of deferred tax expense of $614 and reclassification
adjustment |        |             |   |        |                          |       |   |                  |   |        |               |  |   |                                           |   |  |                          |    |   |  |   | 1,013  |   |  |   | 1,013   |  
|                                                                                                                                    |        |              |   |        |                          |        |   |                  |   |         |               |  |   |                                            |   |  |                          |     |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                                          |        |              |   |        |                          |        |   |                  |   |         |               |  |   |                                            |   |  |                          |     |   |  |   |        |   |  |   | 6,694   |  
|                                                                                                                                    |        |              |   |        |                          |        |   |                  |   |         |               |  |   |                                            |   |  |                          |     |   |  |   |        |   |  |   |         |  
|Balance at September 30, 2007                                                                                                       |        | 10,124,440   |   |        | $                        | 10,124 |   |                  | $ | 107,954 |               |  | $ | 38,060                                     |   |  | $                        | (69 | ) |  | $ | (637   | ) |  | $ | 155,432 |  
|                                                                                                                                    |        |              |   |        |                          |        |   |                  |   |         |               |  |   |                                            |   |  |                          |     |   |  |   |        |   |  |   |         |  

The accompanying notes are an integral part of this statement.



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Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2007 and 2006

(Unaudited, dollars in thousands)



|                                                                                                                             |  |      |          |   |      |   |          |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                                                             |  | 2007 |          |   | 2006 |  
|Cash flows from operating activities:                                                                                        |  |      |          |   |      |   |          |  
|Net earnings                                                                                                                 |  | $    | 5,681    |   |      | $ | 6,314    |  
|Adjustments to reconcile net earnings to net cash provided by operating activities, net of effects of business combinations: |  |      |          |   |      |   |          |  
|Provision for loan losses                                                                                                    |  |      | 2,853    |   |      |   | 2,287    |  
|Amortization of premiums and discounts, net                                                                                  |  |      | 1,252    |   |      |   | 1,424    |  
|Stock-based compensation                                                                                                     |  |      | 800      |   |      |   | 981      |  
|Depreciation                                                                                                                 |  |      | 1,866    |   |      |   | 1,666    |  
|Gain on sale of mortgage loans                                                                                               |  |      | (4,838   | ) |      |   | (7,115   | )
|Gain on sale of foreclosed real estate                                                                                       |  |      | (45      | ) |      |   | (126     | )
|Realized loss on sales of available-for-sale securities, net                                                                 |  |      | 181      |   |      |   |         |  
|Loss on early debt extinguishment                                                                                            |  |      | 391      |   |      |   |         |  
|Increase in mortgage loans held-for-sale                                                                                     |  |      | (166,898 | ) |      |   | (324,772 | )
|Proceeds from sale of mortgage loans                                                                                         |  |      | 227,261  |   |      |   | 323,990  |  
|Federal Home Loan Bank of Dallas stock dividends                                                                             |  |      | (277     | ) |      |   | (542     | )
|Excess tax benefit from stock-based compensation                                                                             |  |      | (16      | ) |      |   |         |  
|Increase in accrued interest receivable                                                                                      |  |      | (777     | ) |      |   | (854     | )
|(Increase) decrease in other assets                                                                                          |  |      | (1,523   | ) |      |   | 829      |  
|Decrease in accrued interest payable                                                                                         |  |      | (199     | ) |      |   | (216     | )
|Increase in other liabilities                                                                                                |  |      | 602      |   |      |   | 257      |  
|                                                                                                                             |  |      |          |   |      |   |          |  
|Net cash provided by operating activities                                                                                    |  |      | 66,314   |   |      |   | 4,123    |  
|                                                                                                                             |  |      |          |   |      |   |          |  
|Cash flows from investing activities:                                                                                        |  |      |          |   |      |   |          |  
|Purchases of available-for-sale securities                                                                                   |  |      | (6,727   | ) |      |   |         |  
|Principal collected on available-for-sale securities                                                                         |  |      | 4,906    |   |      |   | 18,936   |  
|Proceeds from sales of available-for-sale securities                                                                         |  |      | 71,008   |   |      |   |         |  
|Principal collected on held-to-maturity securities                                                                           |  |      | 24,066   |   |      |   | 32,656   |  
|Proceeds from sales of held-to-maturity securities                                                                           |  |      | 7,414    |   |      |   |         |  
|Proceeds from sales of foreclosed real estate                                                                                |  |      | 1,291    |   |      |   | 993      |  
|Cash paid for acquisition, net of cash acquired                                                                              |  |      | (54      | ) |      |   | (125     | )
|Loan purchases                                                                                                               |  |      | (26,371  | ) |      |   |         |  
|Loan originations and principal collections, net                                                                             |  |      | (93,575  | ) |      |   | (29,448  | )
|Purchases of Federal Home Loan Bank stock                                                                                    |  |      | (3,661   | ) |      |   | (506     | )
|Redemption of Federal Home Loan Bank stock                                                                                   |  |      | 5,852    |   |      |   | 8,494    |  
|Purchases of premises and equipment                                                                                          |  |      | (6,101   | ) |      |   | (979     | )
|                                                                                                                             |  |      |          |   |      |   |          |  
|Net cash provided (used) by investing activities                                                                             |  |      | (21,952  | ) |      |   | 30,021   |  
|                                                                                                                             |  |      |          |   |      |   |          |  
|Cash flows from financing activities:                                                                                        |  |      |          |   |      |   |          |  
|Net increase in deposits                                                                                                     |  |      | 1,373    |   |      |   | 124,334  |  
|Decrease in short term Federal Home Loan Bank of Dallas borrowings                                                           |  |      | (55,000  | ) |      |   | (44,000  | )
|Proceeds from long term Federal Home Loan Bank of Dallas borrowings                                                          |  |      | 85,000   |   |      |   |         |  
|Repayment of long term Federal Home Loan Bank of Dallas borrowings                                                           |  |      | (25,000  | ) |      |   | (125,000 | )
|Increase (decrease) in repurchase agreements                                                                                 |  |      | (10,234  | ) |      |   | 20,826   |  
|Payment on notes payable                                                                                                     |  |      | (139     | ) |      |   | (123     | )
|Proceeds from issuance of junior subordinated debentures                                                                     |  |      | 15,464   |   |      |   |         |  
|Retirement of junior subordinated debentures                                                                                 |  |      | (15,855  | ) |      |   |         |  
|Excess tax benefit from stock-based compensation                                                                             |  |      | 16       |   |      |   |         |  
|Proceeds from issuance of common stock, net                                                                                  |  |      | 42,395   |   |      |   | 130      |  
|                                                                                                                             |  |      |          |   |      |   |          |  
|Net cash provided (used) by financing activities                                                                             |  |      | 38,020   |   |      |   | (23,833  | )
|                                                                                                                             |  |      |          |   |      |   |          |  
|Net increase in cash and cash equivalents                                                                                    |  |      | 82,382   |   |      |   | 10,311   |  
|Cash and cash equivalents at beginning of period                                                                             |  |      | 39,096   |   |      |   | 36,154   |  
|                                                                                                                             |  |      |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                                                                   |  | $    | 121,478  |   |      | $ | 46,465   |  
|                                                                                                                             |  |      |          |   |      |   |          |  
|Supplementary cash flows information:                                                                                        |  |      |          |   |      |   |          |  
|Interest paid on deposits and borrowed funds                                                                                 |  | $    | 35,642   |   |      | $ | 33,651   |  
|Income taxes paid                                                                                                            |  |      | 3,816    |   |      |   | 4,409    |  
|Noncash operating, investing and financing activities:                                                                       |  |      |          |   |      |   |          |  
|Real estate acquired in satisfaction of loans                                                                                |  |      | 682      |   |      |   | 233      |  

The accompanying notes are an integral part of these statements.



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007 and 2006

(Unaudited,
dollars in thousands, except per share amounts)

NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Encore Bancshares, Inc. (the Company) is a holding company that was formed on March 28, 2000 as Guardian Holdings, Inc. and had no operations until it acquired GSF Holding, Inc., whose name was changed to Encore Holdings, Inc. (Encore
Holdings) effective November 19, 2001 and its wholly-owned subsidiary, Guardian Savings and Loan Association effective September 30, 2000. Guardian Savings and Loan Association, a federally chartered savings institution, changed its name
to Guardian Savings Bank effective September 28, 2000 and then to Encore Bank (the Bank) effective September 1, 2001. The Bank converted from a federal savings association to a national banking association effective March 30, 2007 and
changed its name to Encore Bank, National Association. In connection with the conversion, the Company became a bank holding company and Encore Holdings was merged into the Company. As part of a corporate reorganization following the conversion of
the Bank to a national banking association, on June 30, 2007, the Bank was merged with and into Encore Trust Company. The resulting bank, which was renamed Encore Bank, National Association, operates as a national banking association with its
main office in Houston, Texas. Since the merger, the business of Encore Trust Company is being conducted as a division of the Bank.

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the
accounts of the Company, the Bank, and the Banks wholly-owned subsidiaries, Town and Country Insurance Agency, Inc., and Linscomb & Williams, Inc. We have made all adjustments that, in our opinion, are necessary for a fair
presentation of results of the interim periods, and all such adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements should be read in
conjunction with our annual audited consolidated financial statements and related notes. The consolidated balance sheet at December 31, 2006 was derived from audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America (US GAAP).

We must make estimates and assumptions that affect
amounts reported in our interim consolidated financial statements and in disclosures of contingent assets and liabilities. Ultimate results could differ from those estimates.

These interim consolidated financial statements and the notes thereto should be read in conjunction with the Companys Prospectus dated July 17,
2007. Operating results for the nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007 or any other period.

Nature of Operations

We are primarily in the business of attracting deposits and investing these funds in loans and mortgage-backed securities, as well as providing trust and investment management services and property and casualty insurance products.

We provide a variety of financial services through our seventeen private client offices located in the greater Houston area and southwest
Florida, our two loan production offices in southwest Florida and five wealth management offices and three insurance offices in Texas. Our product offerings, places of business and service delivery are positioned to best meet the needs of
professional firms, privately-owned businesses, investors and affluent individuals.

Adoption of New Accounting Pronouncements

On January 1, 2007, we adopted the following new accounting pronouncements:

FIN 48  Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement No. 109;and

FAS 155  Statement of Financial Accounting Standards No. 155, Accounting for Certain
Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140.



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007 and 2006

(Unaudited, dollars in thousands, except per share amounts)



The adoption of FAS 155 did not have any effect on our consolidated financial statements at the date
of adoption. The adoption of FIN 48 resulted in a cumulative adjustment of $150 that decreased retained earnings as discussed in Note D (Income Taxes).

Descriptions of our significant accounting policies are included in Note A to our consolidated financial statements as of and for the year ended December 31, 2006 included in our Prospectus dated July 17,
2007, which was filed on July 18, 2007 pursuant to Rule 424(b) under the Securities Act of 1933, as amended. There have been no significant changes to these policies, except as discussed below for income taxes, based on adoption of the new
pronouncement.

Income Taxes

We file a consolidated federal income tax return. We account for income taxes in accordance with FAS 109, Accounting for Income Taxes,as interpreted by FIN 48, resulting in two components of income tax
expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period. We determine deferred income taxes using the balance sheet method. Under this method, the net deferred tax asset or liability
is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and recognizes enacted changes in tax rates and laws. Deferred income tax expense results from changes in deferred tax assets and liabilities
between periods. Deferred tax assets are recognized subject to our judgment that realization is more likely than not. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to
recognize. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and penalties are recognized as a component of income tax expense.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net earnings. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net earnings, are components of comprehensive income.

The changes in the components of other comprehensive income (loss) are as follows:



|                                                                   |      |                                  |      |      |                                 |   |      |   |  |      |       |   |  |   |        |  
|------------------------------------------------------------------ | ---- | -------------------------------- | ---- | ---- | ------------------------------- | - | ---- | - |  | ---- | ----- | - |  | - | ------ | -
|                                                                   |      | Three Months Ended September 30, |      |      | Nine Months Ended September 30, |  
|                                                                   | 2007 |                                  |      | 2006 |                                 |   | 2007 |   |  | 2006 |      
|Unrealized holding gains (losses) on available-for-sale securities |      | $                                | 217  |      |                                 | $ | 470  |   |  | $    | 1,808 |   |  | $ | (1,615 | )
|Reclassification adjustment for losses realized in income          |      |                                  |     |      |                                 |   |     |   |  |      | (181  | ) |  |   |       |  
|                                                                   |      |                                  |      |      |                                 |   |      |   |  |      |       |   |  |   |        |  
|Net unrealized gain (losses)                                       |      |                                  | 217  |      |                                 |   | 470  |   |  |      | 1,627 |   |  |   | (1,615 | )
|Tax (expense) benefit                                              |      |                                  | (108 | )    |                                 |   | (173 | ) |  |      | (614  | ) |  |   | 598    |  
|                                                                   |      |                                  |      |      |                                 |   |      |   |  |      |       |   |  |   |        |  
|Net-of-tax amount                                                  |      | $                                | 109  |      |                                 | $ | 297  |   |  | $    | 1,013 |   |  | $ | (1,017 | )
|                                                                   |      |                                  |      |      |                                 |   |      |   |  |      |       |   |  |   |        |  



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007 and 2006

(Unaudited, dollars in thousands, except per share amounts)



Recent Accounting Pronouncements

SFAS No. 157,Fair Value Measurements (SFAS 157) defines fair value, establishes a framework for measuring fair value
in US GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements. For calendar year companies, the Statement is effective beginning January 1, 2008. We are currently evaluating what
impact, if any, this Statement will have on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is
to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. We have
not completed our evaluation of the impact of this Statement; however, we do not expect it to be material to our consolidated financial statements.

NOTE B  SECURITIES AVAILABLE-FOR-SALE AND SECURITIES HELD-TO-MATURITY

The amortized cost and fair values for the
major categories of securities available-for-sale and held-to-maturity were as follows:



|                                    |               |                    |            |                   |               |         |            |   |         |  |   |        
|----------------------------------- | ------------- | ------------------ | ---------- | ----------------- | ------------- | ------- | ---------- | - | ------- |  | - | -------
|                                    |               | September 30, 2007 |            | December 31, 2006
|                                    | Amortizedcost |                    | Fair value |                   | Amortizedcost |         | Fair value
|Available-for-Sale:                 |               |                    |            |                   |               |         |            |   |         |  |   |        
|Mortgage-backed securities          |               | $                  | 3,937      |                   | $             | 3,757   |            | $ | 76,904  |  | $ | 75,185 
|Other                               |               |                    | 4,418      |                   |               | 4,423   |            |   | 4,547   |  |   | 4,491  
|                                    |               |                    |            |                   |               |         |            |   |         |  |   |        
|Total                               |               |                    | 8,355      |                   |               | 8,180   |            |   | 81,451  |  |   | 79,676 
|Marketable equity securities        |               |                    | 4,000      |                   |               | 4,025   |            |   | 4,000   |  |   | 4,025  
|                                    |               |                    |            |                   |               |         |            |   |         |  |   |        
|Total available-for-sale securities |               | $                  | 12,355     |                   | $             | 12,205  |            | $ | 85,451  |  | $ | 83,701 
|                                    |               |                    |            |                   |               |         |            |   |         |  |   |        
|Held-to-Maturity:                   |               |                    |            |                   |               |         |            |   |         |  |   |        
|Mortgage-backed securities          |               | $                  | 140,507    |                   | $             | 138,477 |            | $ | 172,555 |  | $ | 167,389
|                                    |               |                    |            |                   |               |         |            |   |         |  |   |        

Mortgage-backed securities classified as held-to-maturity with a carrying amount of $7,426 were
sold during the nine months ended September 30, 2007 at a net realized loss of $12. These securities had less than 15% of the original principal amount at acquisition remaining.



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007 and 2006

(Unaudited, dollars in thousands, except per share amounts)



NOTE C  LOANS RECEIVABLE

A summary of the major categories of loans outstanding is shown in the following table:



|                              |  |                   |           |                  |   |        
|----------------------------- |  | ----------------- | --------- | ---------------- | - | -------
|                              |  | September 30,2007 |           | December 31,2006
|Commercial Loans:             |  |                   |           |                  |   |        
|Commercial                    |  | $                 | 111,072   |                  | $ | 113,526
|Commercial real estate        |  |                   | 249,576   |                  |   | 190,550
|Real estate construction      |  |                   | 132,557   |                  |   | 121,848
|                              |  |                   |           |                  |   |        
|Total commercial loans        |  |                   | 493,205   |                  |   | 425,924
|Consumer Loans:               |  |                   |           |                  |   |        
|Residential real estate       |  |                   | 411,260   |                  |   | 336,077
|Home equity lines             |  |                   | 76,096    |                  |   | 78,158 
|Consumer installmentindirect |  |                   | 29,210    |                  |   | 44,360 
|Consumer other                |  |                   | 20,362    |                  |   | 23,849 
|                              |  |                   |           |                  |   |        
|Total consumer loans          |  |                   | 536,928   |                  |   | 482,444
|                              |  |                   |           |                  |   |        
|Total loans receivable        |  | $                 | 1,030,133 |                  | $ | 908,368
|                              |  |                   |           |                  |   |        

Included in loans receivable is $2,855 and $2,867 of net deferred loan origination costs at
September 30, 2007 and December 31, 2006, respectively.

Changes in the allowance for loan losses were as follows:



|                                           |      |                                  |        |      |                                 |   |        |   |  |      |        |   |  |   |        |  
|------------------------------------------ | ---- | -------------------------------- | ------ | ---- | ------------------------------- | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                           |      | Three Months Ended September 30, |        |      | Nine Months Ended September 30, |  
|                                           | 2007 |                                  |        | 2006 |                                 |   | 2007   |   |  | 2006 |       
|Balance at beginning of period             |      | $                                | 10,168 |      |                                 | $ | 9,540  |   |  | $    | 9,056  |   |  | $ | 8,719  |  
|Provision for loan losses                  |      |                                  | 1,008  |      |                                 |   | 765    |   |  |      | 2,853  |   |  |   | 2,287  |  
|Loans charged-off                          |      |                                  | (727   | )    |                                 |   | (348   | ) |  |      | (1,700 | ) |  |   | (1,460 | )
|Recoveries of loans previously charged-off |      |                                  | 262    |      |                                 |   | 166    |   |  |      | 502    |   |  |   | 577    |  
|                                           |      |                                  |        |      |                                 |   |        |   |  |      |        |   |  |   |        |  
|Balance at end of period                   |      | $                                | 10,711 |      |                                 | $ | 10,123 |   |  | $    | 10,711 |   |  | $ | 10,123 |  
|                                           |      |                                  |        |      |                                 |   |        |   |  |      |        |   |  |   |        |  

The following is a summary of information pertaining to impaired and non-accrual loans:



|                                                            |  |                   |       |                  |   |      
|----------------------------------------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                                                            |  | September 30,2007 |       | December 31,2006
|Impaired loans without a valuation allowance                |  | $                 |      |                  | $ |     
|Impaired loans on non-accrual with a valuation allowance    |  |                   | 6,784 |                  |   | 6,955
|                                                            |  |                   |       |                  |   |      
|Total impaired loans                                        |  | $                 | 6,784 |                  | $ | 6,955
|                                                            |  |                   |       |                  |   |      
|Valuation allowance related to impaired loans               |  | $                 | 4,617 |                  | $ | 5,022
|                                                            |  |                   |       |                  |   |      
|Total non-accrual loans                                     |  | $                 | 8,734 |                  | $ | 9,411
|                                                            |  |                   |       |                  |   |      
|Total loans past due ninety days or more and still accruing |  | $                 | 20    |                  | $ | 96   
|                                                            |  |                   |       |                  |   |      



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007 and 2006

(Unaudited, dollars in thousands, except per share amounts)



NOTE D  INCOME TAXES

On January 1, 2007, we adopted FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. As a result of the implementation of FIN 48, the Company reclassified
from deferred tax liabilities $1,023 of unrecognized tax benefits related to the treatment of sales of bank securities. The Company recorded a cumulative effect adjustment to retained earnings of $150 related to interest and penalties. During the
third quarter of 2007, the Company resolved this tax issue and recorded a credit to tax expense for $150. The effective tax rate for the nine months ended September 30, 2007, was 31.9% as compared to 34.6% in 2006.

At January 1, 2007, the total amount of unrecognized tax benefits was $1,023, none of which was related to tax benefits that, if recognized, would
affect the annual effective tax rate. During the third quarter of 2007, we recognized the full amount of these unrecognized tax benefits when the Company filed for an application for an accounting method change with the IRS.

The Company and its subsidiaries file income tax returns in U.S. federal and various state and local taxing jurisdictions. In general, the Company is no
longer subject to income tax examinations for years prior to 2003. The Company has elected to recognize both interest and penalties as a component of income tax expense.

NOTE E  REGULATORY MATTERS

Since the conversion of the Bank to a national bank on
March 30, 2007, the Company and the Bank are subject to various regulatory capital adequacy requirements administered by the Federal Reserve Board (FRB) and the Office of the Comptroller of the Currency (OCC). Actual and minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as of September 30, 2007 are set forth in the following table:



|                                      |        |        |         |  |                             |        |  |                                                                              |        |  |        |   |       |   |        |  |       |  
|------------------------------------- | ------ | ------ | ------- |  | --------------------------- | ------ |  | ---------------------------------------------------------------------------- | ------ |  | ------ | - | ----- | - | ------ |  | ----- | -
|                                      |        | Actual |         |  | For capitaladequacypurposes |        |  | To be categorized aswell capitalized underprompt correctiveaction
provisions |       
|                                      | Amount |        | Ratio   |  |                             | Amount |  | Ratio                                                                        |        |  | Amount |   | Ratio |  
|As of September 30, 2007              |        |        |         |  |                             |        |  |                                                                              |        |  |        |   |       |   |        |  |       |  
|Tier 1 capital (to average assets)    |        |        |         |  |                             |        |  |                                                                              |        |  |        |   |       |   |        |  |       |  
|Tier 1 (leverage)                     |        |        |         |  |                             |        |  |                                                                              |        |  |        |   |       |   |        |  |       |  
|Encore Bancshares, Inc.               |        | $      | 141,156 |  | 10.71                       | %      |  | $                                                                            | 52,699 |  | 4.00   | % |       |   | N/A    |  | N/A   |  
|Encore Bank, N.A.                     |        |        | 107,658 |  | 8.14                        |        |  |                                                                              | 52,894 |  | 4.00   |   |       | $ | 66,118 |  | 5.00  | %
|Tier 1 capital (to risk-based assets) |        |        |         |  |                             |        |  |                                                                              |        |  |        |   |       |   |        |  |       |  
|Encore Bancshares, Inc.               |        | $      | 141,156 |  | 14.20                       | %      |  | $                                                                            | 39,762 |  | 4.00   | % |       |   | N/A    |  | N/A   |  
|Encore Bank, N.A.                     |        |        | 107,658 |  | 10.85                       |        |  |                                                                              | 39,699 |  | 4.00   |   |       | $ | 59,549 |  | 6.00  | %
|Total capital (to risk-based assets)  |        |        |         |  |                             |        |  |                                                                              |        |  |        |   |       |   |        |  |       |  
|Encore Bancshares, Inc.               |        | $      | 151,867 |  | 15.28                       | %      |  | $                                                                            | 79,524 |  | 8.00   | % |       |   | N/A    |  | N/A   |  
|Encore Bank, N.A.                     |        |        | 118,369 |  | 11.93                       |        |  |                                                                              | 79,398 |  | 8.00   |   |       | $ | 99,248 |  | 10.00 | %

As part of the Banks conversion to a national bank, the OCC required that the Bank meet
certain additional capital requirements. Specifically, as of December 31, 2007, the Bank is required to have a leverage ratio of at least 7.28% and as of December 31, 2008, the Bank is required to have a leverage ratio of at least 7.75%.



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007 and 2006

(Unaudited, dollars in thousands, except per share amounts)



NOTE F  STOCK-BASED COMPENSATION

Our shareholders approved a stock incentive plan in 2000 (the 2000 Stock Incentive Plan) which authorizes the issuance of up to 1,650,000 shares of common
stock under incentive stock and nonqualified stock options, stock appreciation rights, restricted stock awards, performance awards and phantom stock awards. The general terms of awards under the 2000 Stock Incentive Plan
shall be specified by the Compensation Committee of the Board of Directors at the date of grant. During the nine months ended September 30, 2007, no stock options were granted and employees exercised 52,000 options at a weighted average price
of $8.78 and non-employees exercised 24,000 options at a weighted average price of $10.25.

We have also granted shares of restricted stock
pursuant to our stock incentive plan. The outstanding shares of restricted stock vest over a period of three to five years. We account for restricted stock grants by recording the fair value of the grant to compensation expense over the vesting
period.

A summary of the status of our nonvested shares of restricted stock as of September 30, 2007, and changes during the nine
months then ended is as follows:



|                                  |  |         |   |  |                                     |      
|--------------------------------- |  | ------- | - |  | ----------------------------------- | -----
|Nonvested Shares                  |  | Shares  |   |  | WeightedAverageGrant DateFair Value
|Outstanding at December 31, 2006  |  | 283,383 |   |  | $                                   | 13.54
|Granted                           |  | 71,450  |   |  |                                     | 15.83
|Vested                            |  | (30,000 | ) |  |                                     | 9.00 
|Forfeited                         |  | (3,800  | ) |  |                                     | 14.45
|                                  |  |         |   |  |                                     |      
|Outstanding at September 30, 2007 |  | 321,033 |   |  |                                     | 14.46
|                                  |  |         |   |  |                                     |      

Total stock-based compensation cost recognized in the accompanying consolidated statements of
earnings was $800 and $981 for the nine months ended September 30, 2007 and 2006. At September 30, 2007, there was approximately $2,642 of total unrecognized compensation expense related to unvested restricted stock that is expected to be
recognized over a weighted-average period of 3.16 years.

NOTE G  JUNIOR SUBORDINATED DEBENTURES

In April 2007, we formed Encore Capital Trust III (Trust III), a statutory business trust, and purchased all the common securities of Trust III for $464.
Trust III issued $15,000 of preferred securities. The sole assets of Trust III are our junior subordinated debentures with an aggregate principal amount of $15,464, which are due April 19, 2037. The junior subordinated debentures bear a fixed
rate of 6.85% until April 19, 2012, at which date we may call the debentures, and a floating rate equal to 3 month LIBOR + 1.75% thereafter. Cash distributions on the common and preferred securities are made in the same amount and to the extent
interest on the junior subordinated debentures is received by Trust III. With the proceeds of these junior subordinated debentures, we redeemed the $15,464 in junior subordinated debentures originally issued on April 10, 2002 at a floating rate
equal to 6 month LIBOR + 3.70%.

NOTE H  COMMITMENTS AND CONTINGENCIES

We are a defendant in legal actions arising from transactions conducted in the ordinary course of business. We believe, after consultation with legal
counsel, that the ultimate liability, if any, arising from such actions will not have a material adverse effect on our consolidated financial statements.



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Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007 and 2006

(Unaudited, dollars in thousands, except per share amounts)



NOTE I  PUTTABLE COMMON STOCK

The acquisition agreement and related put agreement, pursuant to which we issued cash and 773,616 shares of common stock in exchange for all of the shares
of Linscomb & Williams, Inc. (L&W), gave the shareholders of L&W a non-transferable right to put such stock back to us on August 31, 2009, in exchange for all of the shares of L&W if such put right was not
otherwise extinguished pursuant to the terms of the agreement. The put option was extinguishable at any time if our common stock became listed for trading on the New York Stock Exchange, the NASDAQ National Market (now known as the NASDAQ Global
Market) or the American Stock Exchange, or we were acquired by another company in a transaction in which our shareholders receive securities, cash or a combination thereof, issued by a publicly traded company on or before August 31, 2009.

At December 31, 2006, we classified the puttable common stock outside of shareholders equity as the ability to extinguish the
put was not considered to be completely within our control. The put agreement was terminated on March 30, 2007. As a result, the puttable common stock was reclassified and included in shareholders equity as of March 31, 2007.

NOTE J  INITIAL PUBLIC OFFERING

In July 2007, we completed our initial public offering of 1,904,761 shares of common stock at $21.00 per share. In August, our underwriters exercised their over-allotment option for an additional 285,714 shares of common stock, also at
$21.00 per share. Our common shares are listed on the Nasdaq Global Market under the symbol EBTX.

Net proceeds to the Company,
including the over-allotment shares, were $41,693, after underwriting discounts of $3,220 and $1,087 in offering expenses. Of the net proceeds, $10,000 was contributed to the capital of Encore Bank to support anticipated balance sheet growth and the
balance will be used for general corporate purposes, including possible future acquisitions. Since the offering, the net proceeds that were not contributed to the Bank have been invested in short-term investments.

NOTE K  EARNINGS PER COMMON SHARE

The factors
used in the earnings per common share computation follow:



|                                                                                        |      |                                  |            |                                 |      |           |      |   |           |  |   |          
|--------------------------------------------------------------------------------------- | ---- | -------------------------------- | ---------- | ------------------------------- | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                                                        |      | Three Months Ended September 30, |            | Nine Months Ended September 30,
|                                                                                        | 2007 |                                  | 2006       |                                 | 2007 |           | 2006
|Basic:                                                                                  |      |                                  |            |                                 |      |           |      |   |           |  |   |          
|Net earnings                                                                            |      | $                                | 2,248      |                                 | $    | 1,699     |      | $ | 5,681     |  | $ | 6,314    
|Average common shares outstanding, net of nonvested restricted stock                    |      |                                  | 9,347,162  |                                 |      | 7,503,526 |      |   | 8,160,116 |  |   | 7,500,999
|Per Share                                                                               |      | $                                | 0.24       |                                 | $    | 0.23      |      | $ | 0.70      |  | $ | 0.84     
|Diluted:                                                                                |      |                                  |            |                                 |      |           |      |   |           |  |   |          
|Average common shares outstanding                                                       |      |                                  | 9,347,162  |                                 |      | 7,503,526 |      |   | 8,160,116 |  |   | 7,500,999
|Add: Net effect of nonvested restricted stock and the assumed exercise of stock options |      |                                  | 633,758    |                                 |      | 349,184   |      |   | 527,043   |  |   | 343,276  
|Contingent share-based consideration                                                    |      |                                  | 175,170    |                                 |      | 82,006    |      |   | 149,269   |  |   | 62,471   
|Diluted average common shares outstanding                                               |      |                                  | 10,156,090 |                                 |      | 7,934,716 |      |   | 8,836,428 |  |   | 7,906,746
|Per Share                                                                               |      | $                                | 0.22       |                                 | $    | 0.21      |      | $ | 0.64      |  | $ | 0.80     

The 773,616 shares of puttable common stock (see Note I) have been considered outstanding for all
periods since issuance on August 31, 2005 and prior to March 31, 2007 for purposes of computing basic and diluted earnings per share. These shares are included in shareholders equity as outstanding common stock beginning
March 31, 2007. No dividends have been declared on common stock.



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Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007 and 2006

(Unaudited, dollars in thousands, except per share amounts)



NOTE L  DERIVATIVES AND HEDGING ACTIVITIES

Periodically we use forward interest rate locks to hedge the risk of changes in the fair value of newly originated mortgages held-for-sale. Net losses of
$458 and $31 for the first nine months of 2007 and 2006 from these activities are included in the consolidated statements of earnings in Mortgage banking. There were no derivatives outstanding at September 30, 2007 or
December 31, 2006.

NOTE M  RELATED PARTY TRANSACTIONS

Deposits of executive officers, significant shareholders and directors were $41,305 and $30,254 (including time deposits of $1,324 and $1,199) at September 30, 2007 and December 31, 2006.

NOTE N  SEGMENT INFORMATION

We have three
lines of business which are banking, wealth management and insurance, that are delineated by the products and services that each segment offers. The segments are managed separately with different clients, employees, systems, risks and marketing
strategies. Banking includes our commercial and private client banking services. Wealth management provides personal wealth management services through Encore Trust, a division of the Bank, and Linscomb & Williams, Inc. and insurance
includes the selling of property and casualty insurance products by Town & Country Insurance Agency.

The accounting policies of
each line of business are the same as those described in the summary of significant accounting policies included in Note A. Revenues, expenses, and assets are recorded by each line of business, and we separately review financial information. In
addition to direct expenses, each line of business was allocated certain general corporate expenses such as executive administration, accounting, internal audit, and human resources based on the average asset level of the operating segment.
Activities that are not directly attributable to the reportable operating segments, including the elimination of intercompany transactions, are presented under other.



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Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007 and 2006

(Unaudited, dollars in thousands, except per share amounts)



Financial results by operating segment were as follows:



|                                              |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|--------------------------------------------- |  | ------- | --------- | ---------------- | - | --------- |  | ----- | ----- |  | ------------ | ------- | - |  | - | ---------
|                                              |  | Banking |           | WealthManagement |   | Insurance |  | Other |       |  | Consolidated
|For the three months ended September 30, 2007 |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net interest income (expense)                 |  | $       | 9,315     |                  | $ | 82        |  | $     | 37    |  | $            | (368    | ) |  | $ | 9,066    
|Provision for loan losses                     |  |         | 1,008     |                  |   |          |  |       |      |  |              |        |   |  |   | 1,008    
|Noninterest income                            |  |         | 1,559     |                  |   | 4,501     |  |       | 1,460 |  |              | 1       |   |  |   | 7,521    
|Noninterest expense                           |  |         | 8,338     |                  |   | 3,137     |  |       | 1,014 |  |              |        |   |  |   | 12,489   
|                                              |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Earnings (loss) before income taxes           |  |         | 1,528     |                  |   | 1,446     |  |       | 483   |  |              | (367    | ) |  |   | 3,090    
|Income tax expense (benefit)                  |  |         | 261       |                  |   | 531       |  |       | 167   |  |              | (117    | ) |  |   | 842      
|                                              |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net earnings (loss)                           |  | $       | 1,267     |                  | $ | 915       |  | $     | 316   |  | $            | (250    | ) |  | $ | 2,248    
|                                              |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Total assets at September 30, 2007            |  | $       | 1,392,156 |                  | $ | 45,425    |  | $     | 9,219 |  | $            | (63,668 | ) |  | $ | 1,383,132
|For the three months ended September 30, 2006 |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net interest income (expense)                 |  | $       | 7,927     |                  | $ | 66        |  | $     | 19    |  | $            | (462    | ) |  | $ | 7,550    
|Provision for loan losses                     |  |         | 765       |                  |   |          |  |       |      |  |              |        |   |  |   | 765      
|Noninterest income                            |  |         | 2,620     |                  |   | 3,898     |  |       | 1,352 |  |              | 10      |   |  |   | 7,880    
|Noninterest expense                           |  |         | 8,223     |                  |   | 2,860     |  |       | 986   |  |              |        |   |  |   | 12,069   
|                                              |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Earnings (loss) before income taxes           |  |         | 1,559     |                  |   | 1,104     |  |       | 385   |  |              | (452    | ) |  |   | 2,596    
|Income tax expense (benefit)                  |  |         | 445       |                  |   | 440       |  |       | 133   |  |              | (121    | ) |  |   | 897      
|                                              |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net earnings (loss)                           |  | $       | 1,114     |                  | $ | 664       |  | $     | 252   |  | $            | (331    | ) |  | $ | 1,699    
|                                              |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Total assets at September 30, 2006            |  | $       | 1,304,825 |                  | $ | 41,419    |  | $     | 8,219 |  | $            | (55,511 | ) |  | $ | 1,298,952
|For the nine months ended September 30, 2007  |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net interest income (expense)                 |  | $       | 25,608    |                  | $ | 232       |  | $     | 100   |  | $            | (1,196  | ) |  | $ | 24,744   
|Provision for loan losses                     |  |         | 2,853     |                  |   |          |  |       |      |  |              |        |   |  |   | 2,853    
|Noninterest income                            |  |         | 6,847     |                  |   | 13,013    |  |       | 4,813 |  |              | 24      |   |  |   | 24,697   
|Noninterest expense                           |  |         | 25,644    |                  |   | 9,152     |  |       | 3,053 |  |              | 391     |   |  |   | 38,240   
|                                              |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Earnings (loss) before income taxes           |  |         | 3,958     |                  |   | 4,093     |  |       | 1,860 |  |              | (1,563  | ) |  |   | 8,348    
|Income tax expense (benefit)                  |  |         | 1,027     |                  |   | 1,481     |  |       | 671   |  |              | (512    | ) |  |   | 2,667    
|                                              |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net earnings (loss)                           |  | $       | 2,931     |                  | $ | 2,612     |  | $     | 1,189 |  | $            | (1,051  | ) |  | $ | 5,681    
|                                              |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Total assets at September 30, 2007            |  | $       | 1,392,156 |                  | $ | 45,425    |  | $     | 9,219 |  | $            | (63,668 | ) |  | $ | 1,383,132
|For the nine months ended September 30, 2006  |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net interest income (expense)                 |  | $       | 23,890    |                  | $ | 145       |  | $     | 46    |  | $            | (1,296  | ) |  | $ | 22,785   
|Provision for loan losses                     |  |         | 2,287     |                  |   |          |  |       |      |  |              |        |   |  |   | 2,287    
|Noninterest income                            |  |         | 9,248     |                  |   | 13,155    |  |       | 4,425 |  |              | 11      |   |  |   | 26,839   
|Noninterest expense                           |  |         | 24,704    |                  |   | 10,042    |  |       | 2,943 |  |              |        |   |  |   | 37,689   
|                                              |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Earnings (loss) before income taxes           |  |         | 6,147     |                  |   | 3,258     |  |       | 1,528 |  |              | (1,285  | ) |  |   | 9,648    
|Income tax expense (benefit)                  |  |         | 1,821     |                  |   | 1,295     |  |       | 524   |  |              | (306    | ) |  |   | 3,334    
|                                              |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net earnings (loss)                           |  | $       | 4,326     |                  | $ | 1,963     |  | $     | 1,004 |  | $            | (979    | ) |  | $ | 6,314    
|                                              |  |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Total assets at September 30, 2006            |  | $       | 1,304,825 |                  | $ | 41,419    |  | $     | 8,219 |  | $            | (55,511 | ) |  | $ | 1,298,952



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Special Cautionary Note Regarding Forward-Looking Statements

Statements and financial discussion and analysis
contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Encore
Bancshares intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of invoking
these safe harbor provisions. The words believe, may, should, anticipate, estimate, expect, intend, continue, would, could,
hope, might, assume, objective, seek, plan, strive, or similar words, or the negatives of these words, identify forward-looking statements.

Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we express or
imply in any forward-looking statements. The possible events or factors that could contribute to those differences include, but are not limited to:



| |  |  | General business or economic conditions, either nationally, regionally or in the local markets we serve, may be less favorable than expected, resulting in, among
other things, a deterioration of credit quality or a reduced demand for credit or a decline in wealth management fees;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in the interest rate environment, which may reduce our margins or impact the value of changes in market rates and prices may impact the value of securities,
loans, deposits and other financial instruments;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Legislative or regulatory developments including changes in laws concerning taxes, banking, securities, investment advisory, trust, insurance and other aspects of
the financial securities industry;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The continued service of key management personnel;
| | - |  | --------------------------------------------------



| |  |  | Our ability to attract, motivate and retain key employees;
| | - |  | ----------------------------------------------------------



| |  |  | Factors that increase competitive pressure among financial services organizations, including product and pricing pressures;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to expand and grow our business and operations, including the establishment of additional private client offices and acquisition of additional banks,
and our ability to realize the cost savings and revenue enhancements we expect from such activities; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Fiscal and government policies of the United States federal government.
| | - |  | -----------------------------------------------------------------------

Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe we have
chosen these assumptions or bases in good faith and that they are reasonable. We caution you, however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be
material. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-Q. These statements speak only as of the date of this Form 10-Q (or an earlier date to the extent
applicable). Except as required by applicable law, we undertake no obligation to update publicly these statements in light of new information or future events.

Overview

Encore Bancshares, Inc. is a bank holding company and wealth management organization that provides banking, investment management,
financial planning and insurance services to professional firms, privately-owned businesses, investors and affluent individuals. We are headquartered in Houston, Texas and currently manage, through our primary subsidiary, Encore Bank, N.A., eleven
private client offices in the greater Houston market and six private client offices and two loan production offices in southwest Florida. We also operate five wealth management offices and three insurance offices in Texas. As of September 30,
2007, we reported, on a consolidated basis, total assets of $1.4 billion, total loans of $1.0 billion, total deposits of $1.0 billion, shareholders equity of $155.4 million and $2.8 billion in assets under management.



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##### Table of Contents

Results of Operations

Net earnings for the quarter ended September 30, 2007 were $2.2 million, or $0.22 per diluted share, compared with $1.7 million, or $0.21 per diluted share, for the quarter ended September 30, 2006, an increase in net earnings of
$549,000, or 32.3%. The increase was due primarily to higher net interest income. We posted a return on average common equity of 6.20% and 6.60%, a return on average assets of 0.66% and 0.51%, and an efficiency ratio of 74.03% and 76.68% for the
quarters ended September 30, 2007 and 2006, respectively. The efficiency ratio is calculated by dividing total noninterest expense (excluding amortization of intangibles) by the sum of net interest income and noninterest income (excluding gains
or losses on sales of securities).

Net earnings for the nine months ended September 30, 2007 were $5.7 million, or $0.64 per diluted share, compared
with $6.3 million, or $0.80 per diluted share for the same period of 2006. We posted a return on average common equity of 6.31% and 8.44%, a return on average assets of 0.58% and 0.64%, and an efficiency ratio of 75.80% and 74.50% for the nine
months ended September 30, 2007 and 2006, respectively.

Net Interest Income

Our operating results are significantly impacted by net interest income, which represents the amount by which interest income on interest-earning assets, including securities and loans, exceeds interest expense
incurred on interest-bearing liabilities, including deposits and other borrowed funds. Net interest income is a key source of our earnings. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities,
combine to affect net interest income.

Net interest income was $9.1 million for the three months ended September 30, 2007, an increase of $1.5
million, or 20.1%, compared with the third quarter of 2006. Average interest-earning assets increased $34.4 million, or 2.8%, from the third quarter of 2006 to the third quarter of 2007, due primarily to an increase in liquid investments, resulting
from net proceeds of the common equity offering. The net interest margin for the third quarter of 2007 increased 41 basis points to 2.86%, compared with the same quarter of 2006. The improvement in the margin was due primarily to a more favorable
asset mix and an increase in noninterest-bearing deposits. Average loans were $973.6 million for the third quarter of 2007, a $133.0 million, or 15.8%, increase compared with the same quarter of 2006. Consistent with our strategy, this increase in
loans was partially offset by a $121.7 million, or 43.8%, decrease in average securities during the same period. As a result of this shift in asset mix, loans accounted for 77.3% of earning assets during the third quarter of 2007, compared with
68.6% of earning assets for the same period of 2006. In addition, noninterest-bearing deposits were $108.2 million for the third quarter of 2007, a $19.1 million, or 21.5%, increase compared with the same period of 2006.

Net interest income was $24.7 million for the nine months ended September 30, 2007, an increase of $2.0 million, or 8.6%, compared with the same period of 2006.
Average interest-earning assets increased $3.1 million, or 0.2%, due primarily to an increase in liquid investments, resulting from the common equity offering. For the nine months ended September 30, 2007, the net interest margin was 2.69%, an
increase of 20 basis points, compared with the same period of 2006. The improvement in the margin was due primarily to a more favorable asset mix and an increase in noninterest-bearing deposits. Average loans were $943.0 million for the nine months
ended September 30, 2007, a $118.6 million, or 14.4%, increase compared with the same period of 2006. During the same periods, average securities decreased $106.4 million, or 35.9%, as the proceeds from the reductions in securities was used to
fund loan growth.

The following tables set forth for the periods indicated an analysis of net interest income by each major category of interest-earning
assets and interest-bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts and the average rate earned or paid. The tables also set forth the average rate earned on total interest-earning assets, the
average rate paid on total interest-bearing liabilities and the net interest margin for the same periods. All balances are daily average balances and nonaccrual loans were included in the average loans with a zero yield for the purpose of
calculating the rate earned on total loans. We have no tax-exempt securities and an insignificant amount of tax-exempt loans, and no tax equivalent adjustments have been made with respect to these loans.



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|                                                                  |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|----------------------------------------------------------------- | ------------------------- | ---------------------------------------- | --------- | ------------------- |  | ----------------- | ------ |  | ------------------------- | - |  | ------------------- | --------- | ----------------- |  | - | ------ |  | ---- | -
|                                                                  |                           | For the Three Months Ended September 30, |          
|                                                                  | 2007                      |                                          |           | 2006                | 
|                                                                  | AverageOutstandingBalance |                                          |           | InterestEarned/Paid |  | AverageYield/Rate |        |  | AverageOutstandingBalance |   |  | InterestEarned/Paid |           | AverageYield/Rate | 
|                                                                  | (dollars in thousands)    |                                         
|Assets:                                                           |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Interest-earning assets:                                          |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Loans                                                             |                           | $                                        | 973,641   |                     |  | $                 | 17,309 |  | 7.05                      | % |  | $                   | 840,674   |                   |  | $ | 14,651 |  | 6.91 | %
|Mortgages held-for-sale                                           |                           |                                          | 60,959    |                     |  |                   | 1,346  |  | 8.76                      |   |  |                     | 80,951    |                   |  |   | 1,787  |  | 8.76 |  
|Securities                                                        |                           |                                          | 156,159   |                     |  |                   | 1,463  |  | 3.72                      |   |  |                     | 277,854   |                   |  |   | 2,705  |  | 3.86 |  
|Federal funds sold and other                                      |                           |                                          | 68,347    |                     |  |                   | 914    |  | 5.31                      |   |  |                     | 25,248    |                   |  |   | 370    |  | 5.81 |  
|                                                                  |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Total interest-earning assets                                     |                           |                                          | 1,259,106 |                     |  |                   | 21,032 |  | 6.63                      |   |  |                     | 1,224,727 |                   |  |   | 19,513 |  | 6.32 |  
|Less: Allowance for loan losses                                   |                           |                                          | (10,391   | )                   |  |                   |        |  |                           |   |  |                     | (9,726    | )                 |  |   |        |  |      |  
|Noninterest-earning assets                                        |                           |                                          | 102,667   |                     |  |                   |        |  |                           |   |  |                     | 100,204   |                   |  |   |        |  |      |  
|                                                                  |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Total assets                                                      |                           | $                                        | 1,351,382 |                     |  |                   |        |  |                           |   |  | $                   | 1,315,205 |                   |  |   |        |  |      |  
|                                                                  |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Liabilities, shareholders equity and puttable common stock:      |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Interest-bearing liabilities:                                     |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Interest checking                                                 |                           | $                                        | 169,860   |                     |  | $                 | 1,347  |  | 3.15                      | % |  | $                   | 168,222   |                   |  | $ | 1,184  |  | 2.79 | %
|Money market and savings                                          |                           |                                          | 358,732   |                     |  |                   | 3,907  |  | 4.32                      |   |  |                     | 294,911   |                   |  |   | 3,206  |  | 4.31 |  
|Time deposits                                                     |                           |                                          | 375,896   |                     |  |                   | 4,693  |  | 4.95                      |   |  |                     | 373,687   |                   |  |   | 4,213  |  | 4.47 |  
|                                                                  |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Total interest-bearing deposits                                   |                           |                                          | 904,488   |                     |  |                   | 9,947  |  | 4.36                      |   |  |                     | 836,820   |                   |  |   | 8,603  |  | 4.08 |  
|Borrowings and repurchase agreements                              |                           |                                          | 158,203   |                     |  |                   | 1,651  |  | 4.14                      |   |  |                     | 252,416   |                   |  |   | 2,898  |  | 4.55 |  
|Junior subordinated debentures                                    |                           |                                          | 20,619    |                     |  |                   | 368    |  | 7.08                      |   |  |                     | 20,619    |                   |  |   | 462    |  | 8.89 |  
|                                                                  |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Total interest-bearing liabilities                                |                           |                                          | 1,083,310 |                     |  |                   | 11,966 |  | 4.38                      |   |  |                     | 1,109,855 |                   |  |   | 11,963 |  | 4.28 |  
|                                                                  |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Noninterest-bearing liabilities:                                  |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Noninterest-bearing deposits                                      |                           |                                          | 108,168   |                     |  |                   |        |  |                           |   |  |                     | 89,038    |                   |  |   |        |  |      |  
|Other liabilities                                                 |                           |                                          | 16,128    |                     |  |                   |        |  |                           |   |  |                     | 14,161    |                   |  |   |        |  |      |  
|                                                                  |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Total liabilities                                                 |                           |                                          | 1,207,606 |                     |  |                   |        |  |                           |   |  |                     | 1,213,054 |                   |  |   |        |  |      |  
|Shareholders equity and puttable common stock                    |                           |                                          | 143,776   |                     |  |                   |        |  |                           |   |  |                     | 102,151   |                   |  |   |        |  |      |  
|                                                                  |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Total liabilities, shareholders equity and puttable common stock |                           | $                                        | 1,351,382 |                     |  |                   |        |  |                           |   |  | $                   | 1,315,205 |                   |  |   |        |  |      |  
|                                                                  |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Net interest income                                               |                           |                                          |           |                     |  | $                 | 9,066  |  |                           |   |  |                     |           |                   |  | $ | 7,550  |  |      |  
|                                                                  |                           |                                          |           |                     |  |                   |        |  |                           |   |  |                     |           |                   |  |   |        |  |      |  
|Net interest spread                                               |                           |                                          |           |                     |  |                   |        |  | 2.25                      | % |  |                     |           |                   |  |   |        |  | 2.04 | %
|Net interest margin                                               |                           |                                          |           |                     |  |                   |        |  | 2.86                      | % |  |                     |           |                   |  |   |        |  | 2.45 | %



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##### Table of Contents

|                                                                  |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|----------------------------------------------------------------- | ---- | --------------------------------------- | --------- | ---- | ------------------- | - | ----------------- |  | ---- | ------------------------- |  | - | ------------------- | - | ----------------- | - | ------ |  | ---- | -
|                                                                  |      | For the Nine Months Ended September 30, |          
|                                                                  | 2007 |                                         |           | 2006 |                    
|                                                                  |      | AverageOutstandingBalance               |           |      | InterestEarned/Paid |   | AverageYield/Rate |  |      | AverageOutstandingBalance |  |   | InterestEarned/Paid |   | AverageYield/Rate |  
|                                                                  |      | (dollars in thousands)                  |          
|Assets:                                                           |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest-earning assets:                                          |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Loans                                                             |      | $                                       | 943,048   |      |                     | $ | 49,463            |  | 7.01 | %                         |  | $ | 824,456             |   |                   | $ | 41,470 |  | 6.73 | %
|Mortgages held-for-sale                                           |      |                                         | 55,753    |      |                     |   | 3,669             |  | 8.80 |                           |  |   | 77,673              |   |                   |   | 5,104  |  | 8.79 |  
|Securities                                                        |      |                                         | 190,165   |      |                     |   | 5,481             |  | 3.85 |                           |  |   | 296,578             |   |                   |   | 8,656  |  | 3.90 |  
|Federal funds sold and other                                      |      |                                         | 38,746    |      |                     |   | 1,574             |  | 5.43 |                           |  |   | 25,951              |   |                   |   | 990    |  | 5.10 |  
|                                                                  |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-earning assets                                     |      |                                         | 1,227,712 |      |                     |   | 60,187            |  | 6.55 |                           |  |   | 1,224,658           |   |                   |   | 56,220 |  | 6.14 |  
|Less: Allowance for loan losses                                   |      |                                         | (9,838    | )    |                     |   |                   |  |      |                           |  |   | (9,217              | ) |                   |   |        |  |      |  
|Noninterest-earning assets                                        |      |                                         | 102,592   |      |                     |   |                   |  |      |                           |  |   | 99,339              |   |                   |   |        |  |      |  
|                                                                  |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total assets                                                      |      | $                                       | 1,320,466 |      |                     |   |                   |  |      |                           |  | $ | 1,314,780           |   |                   |   |        |  |      |  
|                                                                  |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Liabilities, shareholders equity and puttable common stock:      |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest-bearing liabilities:                                     |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest checking                                                 |      | $                                       | 173,671   |      |                     | $ | 3,915             |  | 3.01 | %                         |  | $ | 166,603             |   |                   | $ | 2,969  |  | 2.38 | %
|Money market and savings                                          |      |                                         | 344,978   |      |                     |   | 11,203            |  | 4.34 |                           |  |   | 241,540             |   |                   |   | 6,738  |  | 3.73 |  
|Time deposits                                                     |      |                                         | 374,654   |      |                     |   | 13,810            |  | 4.93 |                           |  |   | 359,101             |   |                   |   | 11,372 |  | 4.23 |  
|                                                                  |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-bearing deposits                                   |      |                                         | 893,303   |      |                     |   | 28,928            |  | 4.33 |                           |  |   | 767,244             |   |                   |   | 21,079 |  | 3.67 |  
|Borrowings and repurchase agreements                              |      |                                         | 164,133   |      |                     |   | 5,319             |  | 4.33 |                           |  |   | 330,328             |   |                   |   | 11,060 |  | 4.48 |  
|Junior subordinated debentures                                    |      |                                         | 20,743    |      |                     |   | 1,196             |  | 7.71 |                           |  |   | 20,619              |   |                   |   | 1,296  |  | 8.40 |  
|                                                                  |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-bearing liabilities                                |      |                                         | 1,078,179 |      |                     |   | 35,443            |  | 4.40 |                           |  |   | 1,118,191           |   |                   |   | 33,435 |  | 4.00 |  
|                                                                  |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Noninterest-bearing liabilities:                                  |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Noninterest-bearing deposits                                      |      |                                         | 107,965   |      |                     |   |                   |  |      |                           |  |   | 83,416              |   |                   |   |        |  |      |  
|Other liabilities                                                 |      |                                         | 14,015    |      |                     |   |                   |  |      |                           |  |   | 13,099              |   |                   |   |        |  |      |  
|                                                                  |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total liabilities                                                 |      |                                         | 1,200,159 |      |                     |   |                   |  |      |                           |  |   | 1,214,706           |   |                   |   |        |  |      |  
|Shareholders equity and puttable common stock                    |      |                                         | 120,307   |      |                     |   |                   |  |      |                           |  |   | 100,074             |   |                   |   |        |  |      |  
|                                                                  |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total liabilities, shareholders equity and puttable common stock |      | $                                       | 1,320,466 |      |                     |   |                   |  |      |                           |  | $ | 1,314,780           |   |                   |   |        |  |      |  
|                                                                  |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Net interest income                                               |      |                                         |           |      |                     | $ | 24,744            |  |      |                           |  |   |                     |   |                   | $ | 22,785 |  |      |  
|                                                                  |      |                                         |           |      |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Net interest spread                                               |      |                                         |           |      |                     |   |                   |  | 2.15 | %                         |  |   |                     |   |                   |   |        |  | 2.14 | %
|Net interest margin                                               |      |                                         |           |      |                     |   |                   |  | 2.69 | %                         |  |   |                     |   |                   |   |        |  | 2.49 | %

Provision for Loan Losses

The provision for loan losses is the amount we determine necessary to be charged against the current periods earnings to maintain the allowance for loan losses at a level that is considered adequate in relation
to the estimated losses inherent in the loan portfolio. The provision was $1.0 million and $2.9 million for the three months and nine months ended September 30, 2007. The provision represents a $243,000, or 31.8%, and $566,000, or 24.7%,
increase compared with the same periods of 2006. The increase in the provision for both periods reflects the amount we consider necessary to fund losses inherent in the loan portfolio primarily as a result of the growth in loans.



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##### Table of Contents

Noninterest Income

Noninterest income represented 45.3% and 51.1% of total revenue for the three months ended September 30, 2007 and 2006, respectively.

Noninterest income decreased $359,000, or 4.6%, to $7.5 million for the three months ended September 30, 2007, compared with the same period in 2006. The decrease was due primarily to a $1.1 million, or 48.0%, decrease in mortgage
banking income, partially offset by an increase in trust and investment management fees. The decrease in mortgage banking income was due to a combination of lower dollar volume of loans sold and lower pricing, which resulted from a slowdown in the
housing market and changes in the market for mortgage loans. The majority of the reduction in mortgage banking fees was related to second mortgages. Partially offsetting the decrease in mortgage banking income was an increase in trust and investment
management fees. Trust and investment management fees rose $602,000, or 15.4%, to $4.5 million. The increase was due primarily to a 16.2% increase in assets under management.

Noninterest income decreased $2.1 million, or 8.0%, to $24.7 million for the nine months ended September 30, 2007, compared with the same period in 2006. The decrease was due primarily to a $2.6 million, or
32.5%, decrease in mortgage banking income. Mortgage banking income decreased $2.2 million due to a combination of lower dollar volume of loans sold and lower pricing as discussed in the preceding paragraph. Additionally, mortgage banking income was
reduced by $427,000 because of hedging activities. Offsetting these reductions in noninterest income were a $383,000, or 8.8%, increase in insurance commissions due to growth in commercial clients resulting in higher commercial commissions and a
$391,000 gain on sale of a FDIC insurance credit, which is included in other noninterest income.

As a result of the unfavorable mortgage market conditions
that have developed, and giving consideration to our assessment that the credit quality of the mortgage loans we originate is strong and the yield is favorable, we intend to originate these loans for our portfolio. We began this practice with all
new loans originated in the latter part of the third quarter. We anticipate that the near-term decrease in mortgage banking income resulting from this change in strategy will be mitigated in the long term by an increase in interest income as a
result of the growth in the loan portfolio from the retained mortgage loans. In an effort to further mitigate the decrease in mortgage banking income, we initiated a cost reduction effort in the fourth quarter of 2007, which includes a staff
consolidation of approximately 5%. We expect that these cost reductions will yield expense savings of approximately $2.0 million in 2008 which will mostly be reinvested in growing our business.

The following table presents, for the periods indicated, the major categories of noninterest income:



|                                                    |                        |                                         |       |                                        |      |       |  |      |        |   |  |   |       
|--------------------------------------------------- | ---------------------- | --------------------------------------- | ----- | -------------------------------------- | ---- | ----- |  | ---- | ------ | - |  | - | ------
|                                                    |                        | For the Three MonthsEnded September 30, |       | For the Nine MonthsEnded September 30,
|                                                    | 2007                   |                                         | 2006  |                                        | 2007 |       |  | 2006
|                                                    | (dollars in thousands)
|Trust and investment management fees                |                        | $                                       | 4,501 |                                        | $    | 3,899 |  | $    | 13,013 |   |  | $ | 13,156
|Mortgage banking                                    |                        |                                         | 1,167 |                                        |      | 2,243 |  |      | 5,411  |   |  |   | 8,018 
|Insurance commissions and fees                      |                        |                                         | 1,450 |                                        |      | 1,364 |  |      | 4,725  |   |  |   | 4,342 
|Real estate operations, including net gain on sales |                        |                                         | 178   |                                        |      | 81    |  |      | 303    |   |  |   | 355   
|Net loss on sale of available-for-sale securities   |                        |                                         |      |                                        |      |      |  |      | (181   | ) |  |   |      
|Other                                               |                        |                                         | 225   |                                        |      | 293   |  |      | 1,426  |   |  |   | 968   
|                                                    |                        |                                         |       |                                        |      |       |  |      |        |   |  |   |       
|Total noninterest income                            |                        | $                                       | 7,521 |                                        | $    | 7,880 |  | $    | 24,697 |   |  | $ | 26,839
|                                                    |                        |                                         |       |                                        |      |       |  |      |        |   |  |   |       

Noninterest Expense

Noninterest expense was $12.5 million for the third quarter of 2007, up $420,000, or 3.5%, compared with the third quarter of 2006. The change was due primarily to the cost associated with opening new private client offices. Partially
offsetting these expenses were lower commissions associated with originating mortgages and increased cost deferrals associated with booking a greater number of second mortgage loans into the loan portfolio. Other expense increased due to a mark to
market adjustment of an investment in real estate, as well as the write off of a receivable associated with the sale of certain trust related assets in 2006.

Noninterest expense for the nine months ended September 30, 2007 was $38.2 million, up $551,000, or 1.5%, compared with the same period of 2006. The change was due primarily to the $391,000 debt extinguishment expense associated with
refinancing $15.5 million of junior subordinated debentures in April 2007, as well as the cost of opening and operating new private client offices. These expenses were mostly offset by lower commissions associated with originating mortgages and a
reduction in expenses (primarily in compensation) resulting from the sale of certain trust related assets.



20



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##### Table of Contents

In addition, the bank launched a cost savings initiative in the fourth quarter of 2007, which is discussed in the section
under the heading Noninterest Income.

The following table presents, for the periods indicated, the major categories of noninterest
expense:



|                                  |                        |                                         |        |                                        |      |        |      |   |        |  |   |       
|--------------------------------- | ---------------------- | --------------------------------------- | ------ | -------------------------------------- | ---- | ------ | ---- | - | ------ |  | - | ------
|                                  |                        | For the Three MonthsEnded September 30, |        | For the Nine MonthsEnded September 30,
|                                  | 2007                   |                                         | 2006   |                                        | 2007 |        | 2006
|                                  | (dollars in thousands)
|Compensation                      |                        | $                                       | 7,318  |                                        | $    | 7,482  |      | $ | 23,036 |  | $ | 23,775
|Non-staff expenses:               |                        |                                         |        |                                        |      |        |      |   |        |  |   |       
|Occupancy                         |                        |                                         | 1,438  |                                        |      | 1,236  |      |   | 4,336  |  |   | 3,831 
|Equipment                         |                        |                                         | 506    |                                        |      | 511    |      |   | 1,523  |  |   | 1,534 
|Advertising and promotion         |                        |                                         | 328    |                                        |      | 227    |      |   | 795    |  |   | 718   
|Outside data processing           |                        |                                         | 884    |                                        |      | 861    |      |   | 2,596  |  |   | 2,419 
|Professional fees                 |                        |                                         | 401    |                                        |      | 497    |      |   | 1,249  |  |   | 1,404 
|Intangible amortization           |                        |                                         | 209    |                                        |      | 237    |      |   | 629    |  |   | 719   
|Loss on early debt extinguishment |                        |                                         |       |                                        |      |       |      |   | 391    |  |   |      
|Other                             |                        |                                         | 1,405  |                                        |      | 1,018  |      |   | 3,685  |  |   | 3,289 
|                                  |                        |                                         |        |                                        |      |        |      |   |        |  |   |       
|Total noninterest expense         |                        | $                                       | 12,489 |                                        | $    | 12,069 |      | $ | 38,240 |  | $ | 37,689
|                                  |                        |                                         |        |                                        |      |        |      |   |        |  |   |       

Income Tax Expense

The provision for income taxes decreased $55,000, or 6.1%, to $842,000 for the three months ended September 30, 2007, compared with $897,000 for the same three months of 2006. The change in income tax expense reflects a $150,000 credit
due to a reversal of a tax liability for interest and penalties related to a tax position that was recently resolved. The effective tax rate for the three months ended September 30, 2007 and 2006 was 27.2% and 34.6%.

The provision for income taxes decreased $667,000, or 20.0%, to $2.7 million for the nine months ended September 30, 2007, compared with $3.3 million for the same
period of 2006. The change in income tax expense primarily reflects the decrease in earnings before income tax expense and the $150,000 credit discussed above. The effective tax rate for the nine months ended September 30, 2007 and 2006 was
31.9% and 34.6%.

Result of Segment Operations

We
manage the company along three operating segments: banking, wealth management and insurance. The column identified as Other includes the parent company and the elimination transactions between segments. The accounting policies of the
individual operating segments are the same as our accounting policies described in Note A to our interim consolidated financial statements.



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##### Table of Contents

The following table presents the net earnings and total assets for each of our operating segments as of and for the
periods indicated:



|                                              |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|--------------------------------------------- | ---------------------- | ------- | --------- | ---------------- | - | --------- |  | ----- | ----- |  | ------------ | ------- | - |  | - | ---------
|                                              |                        | Banking |           | WealthManagement |   | Insurance |  | Other |       |  | Consolidated
|                                              | (dollars in thousands)
|For the three months ended September 30, 2007 |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net interest income (expense)                 |                        | $       | 9,315     |                  | $ | 82        |  | $     | 37    |  | $            | (368    | ) |  | $ | 9,066    
|Provision for loan losses                     |                        |         | 1,008     |                  |   |          |  |       |      |  |              |        |   |  |   | 1,008    
|Noninterest income                            |                        |         | 1,559     |                  |   | 4,501     |  |       | 1,460 |  |              | 1       |   |  |   | 7,521    
|Noninterest expense                           |                        |         | 8,338     |                  |   | 3,137     |  |       | 1,014 |  |              |        |   |  |   | 12,489   
|                                              |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Earnings (loss) before income taxes           |                        |         | 1,528     |                  |   | 1,446     |  |       | 483   |  |              | (367    | ) |  |   | 3,090    
|Income tax expense (benefit)                  |                        |         | 261       |                  |   | 531       |  |       | 167   |  |              | (117    | ) |  |   | 842      
|                                              |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net earnings (loss)                           |                        | $       | 1,267     |                  | $ | 915       |  | $     | 316   |  | $            | (250    | ) |  | $ | 2,248    
|                                              |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Total assets at September 30, 2007            |                        | $       | 1,392,156 |                  | $ | 45,425    |  | $     | 9,219 |  | $            | (63,668 | ) |  | $ | 1,383,132
|For the three months ended September 30, 2006 |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net interest income (expense)                 |                        | $       | 7,927     |                  | $ | 66        |  | $     | 19    |  | $            | (462    | ) |  | $ | 7,550    
|Provision for loan losses                     |                        |         | 765       |                  |   |          |  |       |      |  |              |        |   |  |   | 765      
|Noninterest income                            |                        |         | 2,620     |                  |   | 3,898     |  |       | 1,352 |  |              | 10      |   |  |   | 7,880    
|Noninterest expense                           |                        |         | 8,223     |                  |   | 2,860     |  |       | 986   |  |              |        |   |  |   | 12,069   
|                                              |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Earnings (loss) before income taxes           |                        |         | 1,559     |                  |   | 1,104     |  |       | 385   |  |              | (452    | ) |  |   | 2,596    
|Income tax expense (benefit)                  |                        |         | 445       |                  |   | 440       |  |       | 133   |  |              | (121    | ) |  |   | 897      
|                                              |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net earnings (loss)                           |                        | $       | 1,114     |                  | $ | 664       |  | $     | 252   |  | $            | (331    | ) |  | $ | 1,699    
|                                              |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Total assets at September 30, 2006            |                        | $       | 1,304,825 |                  | $ | 41,419    |  | $     | 8,219 |  | $            | (55,511 | ) |  | $ | 1,298,952
|For the nine months ended September 30, 2007  |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net interest income (expense)                 |                        | $       | 25,608    |                  | $ | 232       |  | $     | 100   |  | $            | (1,196  | ) |  | $ | 24,744   
|Provision for loan losses                     |                        |         | 2,853     |                  |   |          |  |       |      |  |              |        |   |  |   | 2,853    
|Noninterest income                            |                        |         | 6,847     |                  |   | 13,013    |  |       | 4,813 |  |              | 24      |   |  |   | 24,697   
|Noninterest expense                           |                        |         | 25,644    |                  |   | 9,152     |  |       | 3,053 |  |              | 391     |   |  |   | 38,240   
|                                              |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Earnings (loss) before income taxes           |                        |         | 3,958     |                  |   | 4,093     |  |       | 1,860 |  |              | (1,563  | ) |  |   | 8,348    
|Income tax expense (benefit)                  |                        |         | 1,027     |                  |   | 1,481     |  |       | 671   |  |              | (512    | ) |  |   | 2,667    
|                                              |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net earnings (loss)                           |                        | $       | 2,931     |                  | $ | 2,612     |  | $     | 1,189 |  | $            | (1,051  | ) |  | $ | 5,681    
|                                              |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Total assets at September 30, 2007            |                        | $       | 1,392,156 |                  | $ | 45,425    |  | $     | 9,219 |  | $            | (63,668 | ) |  | $ | 1,383,132
|For the nine months ended September 30, 2006  |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net interest income (expense)                 |                        | $       | 23,890    |                  | $ | 145       |  | $     | 46    |  | $            | (1,296  | ) |  | $ | 22,785   
|Provision for loan losses                     |                        |         | 2,287     |                  |   |          |  |       |      |  |              |        |   |  |   | 2,287    
|Noninterest income                            |                        |         | 9,248     |                  |   | 13,155    |  |       | 4,425 |  |              | 11      |   |  |   | 26,839   
|Noninterest expense                           |                        |         | 24,704    |                  |   | 10,042    |  |       | 2,943 |  |              |        |   |  |   | 37,689   
|                                              |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Earnings (loss) before income taxes           |                        |         | 6,147     |                  |   | 3,258     |  |       | 1,528 |  |              | (1,285  | ) |  |   | 9,648    
|Income tax expense (benefit)                  |                        |         | 1,821     |                  |   | 1,295     |  |       | 524   |  |              | (306    | ) |  |   | 3,334    
|                                              |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net earnings (loss)                           |                        | $       | 4,326     |                  | $ | 1,963     |  | $     | 1,004 |  | $            | (979    | ) |  | $ | 6,314    
|                                              |                        |         |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Total assets at September 30, 2006            |                        | $       | 1,304,825 |                  | $ | 41,419    |  | $     | 8,219 |  | $            | (55,511 | ) |  | $ | 1,298,952



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Banking

Net earnings
for the three months ended September 30, 2007 increased $153,000, or 13.7%, to $1.3 million, compared with the same period in 2006. Net interest income increased $1.4 million, or 17.5%, but was offset by an increase in the provision for loan
losses of $243,000, a decrease in noninterest income of $1.1 million, or 40.5%, and an increase in noninterest expense of $115,000, or 1.4%. Net earnings for the nine months ended September 30, 2007 decreased $1.4 million, or 32.2%, to $2.9
million, compared with the same period in 2006. Net interest income increased $1.7 million, or 7.2%, but was offset by an increase in the provision for loan losses of $566,000, or 24.7%, a decrease in noninterest income of $2.4 million, or 26.0%,
and an increase in noninterest expense of $940,000, or 3.8%.

Net interest income for the three months ended September 30, 2007 increased $1.4
million, or 17.5%, compared with the same period of 2006. Net interest income for the nine months ended September 30, 2007 increased $1.7 million, or 7.2%, compared with the same period of 2006. The increase in both periods resulted primarily
from an improvement in the net interest margin and a higher volume of interest-earning assets. The net interest margin improved as a result of a more optimal mix of earning assets. See the analysis of net interest income included in the section of
this report captioned Net Interest Income.

The provision for loan losses for the three months ended September 30, 2007 totaled $1.0
million, compared with $765,000 for the same period of 2006. The provision for loan losses for the nine months ended September 30, 2007 totaled $2.9 million, compared with $2.3 million for the same period of 2006. See analysis of the provision
for loan losses included in the section of this report captioned Provision for Loan Losses.

Noninterest income for the three months
ended September 30, 2007 decreased $1.1 million, or 40.5%, compared with the same period in 2006. Noninterest income for the nine months ended September 30, 2007 decreased $2.4 million, or 26.0%, compared with the same period of 2006. The
decrease in both periods was due primarily to lower mortgage banking income as a result of lower dollar volume and price of loans sold. Partially offsetting this decrease in the nine month period was a gain due to the sale of the FDIC insurance
credit.

Noninterest expense for the three months ended September 30, 2007 increased $115,000, or 1.4%, compared with the same period in 2006.
Noninterest expense for the nine months ended September 30, 2007 increased $940,000, or 3.8%, compared with the same period of 2006. The increase in both periods resulted from additional expenses associated with opening new private client
offices. These expenses were partially offset by lower commissions and other expenses in our mortgage banking activities as well as increased cost deferrals associated with booking loans in the loan portfolio.

Wealth Management

Net earnings for the three months ended
September 30, 2007 increased $251,000, or 37.8%, compared with the same period in 2006. Net earnings for the nine months ended September 30, 2007 increased $649,000, or 33.1%, compared with the same period in 2006. The increase in earnings
in both periods was due primarily to an increase in assets under management. Assets under management were $2.8 billion as of September 30, 2007 compared with $2.4 billion as of September 30, 2006, a 16.2% increase.

Noninterest income for the three months ended September 30, 2007 increased $603,000, or 15.5%, compared with the same period in 2006, due primarily to increased
assets under management. Noninterest income for the nine months ended September 30, 2007, decreased $142,000, or 1.1%, due primarily to the sale of certain trust related assets in June 2006. Excluding the sale, noninterest income increased $1.5
million, or 13.4%.

Noninterest expense for the three months ended September 30, 2007 increased $277,000, or 9.7%, compared with the same period in
2006. Noninterest expense for the nine months ended September 30, 2007 decreased $890,000, or 8.9%, due primarily to the sale of certain trust related assets in June 2006. Excluding the aforementioned sale, noninterest expense increased
$741,000, or 8.8%. Excluding the sale, the increase in both periods was due primarily to higher compensation expense due to hiring of additional staff and merit increases.

Insurance

Net earnings for the three months ended September 30, 2007 increased $64,000, or 25.4%, compared with
the same period of 2006. Net earnings for the nine months ended September 30, 2007 increased $185,000, or 18.4%, compared with the same period of 2006. The growth in both periods was due primarily to growth in commercial lines.

Noninterest income for the three months ended September 30, 2007 increased $108,000, or 8.0%, compared with the same period of 2006. Noninterest income for the nine
months ended September 30, 2007 increased $388,000, or 8.8%, compared with the same period in 2006. The increase in both periods was due primarily to increases in commercial lines.



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##### Table of Contents

Noninterest expense for the three months ended September 30, 2007 increased $28,000, or 2.8%, compared with the same
period of 2006. Noninterest expense for the nine months ended September 30, 2007 increased $110,000, or 3.7%, compared with the same period of 2006. The increase in both periods was due primarily to commissions paid associated with the new
business.

Other

Other consists primarily
of interest expense on our junior subordinated debentures, which is not allocated to the business segments. Interest expense on these borrowings decreased due to a refinance of $15.5 million of the debentures. In connection with this refinance
activity, we took a $391,000 charge for early debt extinguishment in the nine month period, which is reflected in noninterest expense.

Financial
Condition

Our total assets increased $46.3 million, or 3.5%, to $1.4 billion as of September 30, 2007 compared with total assets of $1.3 billion
as of December 31, 2006. Our loan portfolio grew $121.8 million, or 13.4%, to $1.0 billion as of September 30, 2007. Our securities portfolio decreased $103.5 million, or 40.4%, to $152.7 million compared with $256.3 million as of
December 31, 2006. Primarily as a result of our initial public offering, shareholders equity increased $49.8 million, or 47.1%, to $155.4 million compared with shareholders equity and puttable common stock of $105.7 million as of
December 31, 2006. The puttable common stock was reclassified to shareholders equity on March 30, 2007 as a result of the termination of the put agreement to which the shares were subject.

Loan Portfolio

Our primary lending focus is to professional firms,
privately-owned businesses, investors and affluent individuals. To these customers, we make commercial, commercial real estate, real estate construction, residential real estate and consumer loans. Total commercial loans, which consist of
commercial, commercial real estate and real estate construction loans, accounted for 47.9% of our portfolio as of September 30, 2007. Total consumer loans, which consist of residential real estate, home equity lines of credit, consumer
installment-indirect and other consumer loans, made up 52.1% of our loan portfolio as of September 30, 2007.

Total loans were $1.0 billion as of
September 30, 2007, an increase of $121.8 million, or 13.4%, compared with loans of $908.4 million as of December 31, 2006. The majority of loan growth occurred in commercial real estate, which increased $59.0 million, or 31.0%, to $249.6
million and residential real estate, which increased $75.2 million, or 22.4%. This growth was due primarily to continued strength in our market areas in Texas.

The following table summarizes our loan portfolio by type of loan as of the dates indicated:



|                              |                        |                         |           |  |                        |        |  |         |         |  |       |  
|----------------------------- | ---------------------- | ----------------------- | --------- |  | ---------------------- | ------ |  | ------- | ------- |  | ----- | -
|                              |                        | As of September 30,2007 |           |  | As of December 31,2006 |       
|                              | Amount                 |                         | Percent   |  |                        | Amount |  | Percent |        
|                              | (dollars in thousands) |                        
|Commercial:                   |                        |                         |           |  |                        |        |  |         |         |  |       |  
|Commercial                    |                        | $                       | 111,072   |  | 10.8                   | %      |  | $       | 113,526 |  | 12.5  | %
|Commercial real estate        |                        |                         | 249,576   |  | 24.2                   |        |  |         | 190,550 |  | 21.0  |  
|Real estate construction      |                        |                         | 132,557   |  | 12.9                   |        |  |         | 121,848 |  | 13.4  |  
|                              |                        |                         |           |  |                        |        |  |         |         |  |       |  
|Total commercial              |                        |                         | 493,205   |  | 47.9                   |        |  |         | 425,924 |  | 46.9  |  
|Consumer:                     |                        |                         |           |  |                        |        |  |         |         |  |       |  
|Residential real estate       |                        |                         | 411,260   |  | 39.9                   |        |  |         | 336,077 |  | 37.0  |  
|Home equity lines             |                        |                         | 76,096    |  | 7.4                    |        |  |         | 78,158  |  | 8.6   |  
|Consumer installmentindirect |                        |                         | 29,210    |  | 2.8                    |        |  |         | 44,360  |  | 4.9   |  
|Consumer other                |                        |                         | 20,362    |  | 2.0                    |        |  |         | 23,849  |  | 2.6   |  
|                              |                        |                         |           |  |                        |        |  |         |         |  |       |  
|Total consumer                |                        |                         | 536,928   |  | 52.1                   |        |  |         | 482,444 |  | 53.1  |  
|                              |                        |                         |           |  |                        |        |  |         |         |  |       |  
|Total loans receivable        |                        | $                       | 1,030,133 |  | 100.0                  | %      |  | $       | 908,368 |  | 100.0 | %
|                              |                        |                         |           |  |                        |        |  |         |         |  |       |  



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##### Table of Contents

Nonperforming Assets

The following table presents information regarding nonperforming assets as of the dates indicated:



|                                                                  |                        |                         |       |   |                         |   |       |  
|----------------------------------------------------------------- | ---------------------- | ----------------------- | ----- | - | ----------------------- | - | ----- | -
|                                                                  |                        | As of September 30,2007 |       |   | As of December 31, 2006 |  
|                                                                  | (dollars in thousands) |                        
|Nonaccrual loans                                                  |                        | $                       | 8,734 |   |                         | $ | 9,411 |  
|Accruing loans past due 90 days or more                           |                        |                         | 20    |   |                         |   | 96    |  
|Restructured loans                                                |                        |                         |      |   |                         |   |      |  
|                                                                  |                        |                         |       |   |                         |   |       |  
|Total nonperforming loans                                         |                        |                         | 8,754 |   |                         |   | 9,507 |  
|                                                                  |                        |                         |       |   |                         |   |       |  
|Investment in real estate                                         |                        |                         | 731   |   |                         |   | 235   |  
|                                                                  |                        |                         |       |   |                         |   |       |  
|Total nonperforming assets                                        |                        | $                       | 9,485 |   |                         | $ | 9,742 |  
|                                                                  |                        |                         |       |   |                         |   |       |  
|Nonperforming assets to total loans and investment in real estate |                        |                         | 0.92  | % |                         |   | 1.07  | %

Nonperforming assets were $9.5 million and $9.7 million as of September 30, 2007 and December 31, 2006.
Our ratio of nonperforming assets to total loans and investment in real estate was 0.92% and 1.07% as of September 30, 2007 and December 31, 2006. The decrease in nonaccrual loans was offset by an increase in investment in real estate.
Nonaccrual loans consist primarily of one loan in the amount of $6.3 million to a law firm. The repayment of the loan depends primarily on the outcome of a lawsuit filed on behalf of clients seeking damages resulting from product defects.

Allowance for Loan Losses

Our allowance for loan
losses is a reserve established through charges to earnings in the form of a provision for loan losses. The allowance for loan losses is maintained at a level which we believe is adequate to absorb all probable losses on loans inherent in the loan
portfolio. The amount of the allowance is affected by loan charge-offs, which decrease the allowance; recoveries on loans previously charged off, which increase the allowance; and the provision for loan losses charged to earnings, which increases
the allowance. In determining the provision for loan losses, we monitor fluctuations in the allowance resulting from actual charge-offs and recoveries and periodically review the size and composition of the loan portfolio in light of current and
anticipated economic conditions. If actual losses exceed the amount of the allowance for loan losses, our earnings could be adversely affected.

The
allowance for loan losses represents managements estimate of the amount necessary to provide for losses inherent in the loan portfolio in the normal course of business. Due to the uncertainty of risks in the loan portfolio, managements
judgment of the amount of the allowance necessary to absorb loan losses is approximate. The allowance for loan losses is also subject to regulatory examinations and determination by the regulatory agencies as to its adequacy in comparison with peer
institutions.



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##### Table of Contents

The following table summarizes the activity in our allowance for loan losses as of and for the periods
indicated:



|                                                          |                        |                                                     |           |   |                                             |   |         |  
|--------------------------------------------------------- | ---------------------- | --------------------------------------------------- | --------- | - | ------------------------------------------- | - | ------- | -
|                                                          |                        | As of and forthe Nine MonthsEnded September 30,2007 |           |   | As of and forthe Year EndedDecember 31,2006 |  
|                                                          | (dollars in thousands) |                                                    
|Average loans outstanding                                 |                        | $                                                   | 943,048   |   |                                             | $ | 840,330 |  
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Total loans outstanding at end of period                  |                        | $                                                   | 1,030,133 |   |                                             | $ | 908,368 |  
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Allowance for loan losses at beginning of period          |                        | $                                                   | 9,056     |   |                                             | $ | 8,719   |  
|Charge-offs:                                              |                        |                                                     |           |   |                                             |   |         |  
|Commercial:                                               |                        |                                                     |           |   |                                             |   |         |  
|Commercial                                                |                        |                                                     | (42       | ) |                                             |   | (1,488  | )
|Commercial real estate                                    |                        |                                                     |          |   |                                             |   |        |  
|Real estate construction                                  |                        |                                                     |          |   |                                             |   |        |  
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Total commercial                                          |                        |                                                     | (42       | ) |                                             |   | (1,488  | )
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Consumer:                                                 |                        |                                                     |           |   |                                             |   |         |  
|Residential real estate                                   |                        |                                                     | (840      | ) |                                             |   | (210    | )
|Home equity lines                                         |                        |                                                     | (35       | ) |                                             |   | (236    | )
|Consumer installmentindirect                             |                        |                                                     | (602      | ) |                                             |   | (1,362  | )
|Consumer other                                            |                        |                                                     | (181      | ) |                                             |   | (558    | )
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Total consumer                                            |                        |                                                     | (1,658    | ) |                                             |   | (2,366  | )
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Total charge-offs                                         |                        |                                                     | (1,700    | ) |                                             |   | (3,854  | )
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Recoveries:                                               |                        |                                                     |           |   |                                             |   |         |  
|Commercial:                                               |                        |                                                     |           |   |                                             |   |         |  
|Commercial                                                |                        |                                                     | 6         |   |                                             |   |        |  
|Commercial real estate                                    |                        |                                                     |          |   |                                             |   |        |  
|Real estate construction                                  |                        |                                                     |          |   |                                             |   |        |  
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Total commercial                                          |                        |                                                     | 6         |   |                                             |   |        |  
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Consumer:                                                 |                        |                                                     |           |   |                                             |   |         |  
|Residential real estate                                   |                        |                                                     | 190       |   |                                             |   | 187     |  
|Home equity lines                                         |                        |                                                     | 43        |   |                                             |   | 1       |  
|Consumer installmentindirect                             |                        |                                                     | 185       |   |                                             |   | 405     |  
|Consumer other                                            |                        |                                                     | 78        |   |                                             |   | 107     |  
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Total consumer                                            |                        |                                                     | 496       |   |                                             |   | 700     |  
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Total recoveries                                          |                        |                                                     | 502       |   |                                             |   | 700     |  
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Net charge-offs                                           |                        |                                                     | (1,198    | ) |                                             |   | (3,154  | )
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Provision for loan losses                                 |                        |                                                     | 2,853     |   |                                             |   | 3,491   |  
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Allowance for loan losses at end of period                |                        | $                                                   | 10,711    |   |                                             | $ | 9,056   |  
|                                                          |                        |                                                     |           |   |                                             |   |         |  
|Ratio of net charge-offs to average loans                 |                        |                                                     | 0.17      | % |                                             |   | 0.38    | %
|Ratio of allowance for loan losses to period end loans    |                        |                                                     | 1.04      |   |                                             |   | 1.00    |  
|Ratio of allowance for loan losses to nonperforming loans |                        |                                                     | 122.36    |   |                                             |   | 95.26   |  



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##### Table of Contents

Deposits

Our
deposits averaged $1.0 billion for the nine months ended September 30, 2007 and $882.6 million for the year ended December 31, 2006. As of September 30, 2007, core deposits (which consist of noninterest-bearing deposits, interest
checking, money market and savings and time deposits less than $100,000) were $822.7 million, or 79.7%, of total deposits, while time deposits $100,000 and greater and brokered deposits made up 20.3% of total deposits. As of September 30, 2007,
total deposits increased $1.4 million, or 0.1%, to $1.0 billion compared with total deposits of $1.0 billion as of December 31, 2006.

The following
table presents the daily average balance and weighted average rates paid on deposits for the periods indicated:



|                                   |                        |                                     |             |  |                             |                |  |             |         |  |      |  
|---------------------------------- | ---------------------- | ----------------------------------- | ----------- |  | --------------------------- | -------------- |  | ----------- | ------- |  | ---- | -
|                                   |                        | Nine Months EndedSeptember 30, 2007 |             |  | Year EndedDecember 31, 2006 |               
|                                   | AverageBalance         |                                     | AverageRate |  |                             | AverageBalance |  | AverageRate |        
|                                   | (dollars in thousands) |                                    
|Noninterest-bearing deposits       |                        | $                                   | 107,965     |  |                            | %              |  | $           | 87,788  |  |     | %
|Interest checking                  |                        |                                     | 173,671     |  | 3.01                        |                |  |             | 168,881 |  | 2.50 |  
|Money market and savings           |                        |                                     | 344,978     |  | 4.34                        |                |  |             | 264,219 |  | 3.96 |  
|Time deposits less than $100,000   |                        |                                     | 171,858     |  | 4.85                        |                |  |             | 171,390 |  | 4.23 |  
|                                   |                        |                                     |             |  |                             |                |  |             |         |  |      |  
|Core deposits                      |                        |                                     | 798,472     |  | 3.57                        |                |  |             | 692,278 |  | 3.17 |  
|                                   |                        |                                     |             |  |                             |                |  |             |         |  |      |  
|Time deposits $100,000 and greater |                        |                                     | 189,983     |  | 5.03                        |                |  |             | 176,461 |  | 4.49 |  
|Brokered deposits                  |                        |                                     | 12,813      |  | 4.56                        |                |  |             | 13,842  |  | 4.80 |  
|                                   |                        |                                     |             |  |                             |                |  |             |         |  |      |  
|Total deposits                     |                        | $                                   | 1,001,268   |  | 3.86                        | %              |  | $           | 882,581 |  | 3.46 | %
|                                   |                        |                                     |             |  |                             |                |  |             |         |  |      |  

Borrowings, Repurchase Agreements and Junior Subordinated Debentures

We utilize borrowings to supplement deposits in funding our lending and investing activities. These borrowings are typically advances from the FHLB, which have terms
ranging from overnight to several years. All borrowings from the FHLB are collateralized by investment securities or first mortgage loans. Additionally, we borrow from other financial institutions using investment securities as collateral and have
issued junior subordinated debentures to subsidiary trusts.

Our borrowings and repurchase agreements were $166.4 million as of September 30, 2007.
The outstanding balance as of September 30, 2007 includes $120.0 million in long-term advances and $46.1 million in repurchase agreements with clients. Included in the long term advances are $95.0 million of long term advances that have call
provisions that are at the discretion of the FHLB which could shorten the maturity of the borrowings. Additionally, we had $293,000 in notes payable related to the acquisition of Town & Country Insurance Agency.

We decreased our borrowings and repurchase agreements $5.4 million, or 3.1%, to $166.4 million as of September 30, 2007 from $171.7 million as of December 31,
2006. The decrease was due primarily to reduced funding requirements resulting from our securities sales.

On April 19, 2007, we issued $15.5 million
of junior subordinated debentures, which mature on April 19, 2037, bear a fixed rate of 6.85% until April 19, 2012 and a floating rate equal to 3 month LIBOR +1.75% thereafter. With the proceeds of these junior subordinated debentures, on
April 23, 2007 we redeemed an aggregate of $15.5 million of junior subordinated debentures we had issued on April 10, 2002 at a floating rate equal to 6 month LIBOR +3.70%.



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##### Table of Contents

The following table summarizes our two issues of junior subordinated debentures outstanding as of September 30,
2007:



|                          |  |                           |  |                                     |        |                                      |      |   |                   |                      |                    |                      |                                      |   |                   |  |          
|------------------------- |  | ------------------------- |  | ----------------------------------- | ------ | ------------------------------------ | ---- | - | ----------------- | -------------------- | ------------------ | -------------------- | ------------------------------------ | - | ----------------- |  | ---------
|Description               |  | Issuanceand CallDates (1) |  | TrustPreferredSecuritiesOutstanding |        | Interest Rate as ofSeptember 30,2007 |      |   | Fixed/ Adjustable |                      | Interest RateBasis |                      | JuniorSubordinatedDebt Owedto Trusts |   | FinalMaturityDate
|(dollars in thousands)   
|Encore Statutory Trust II |  | 9/17/2003                 |  | $                                   | 5,000  |                                      | 8.64 | % |                   | Adjustable quarterly |                    | 3 monthLIBOR + 2.95% |                                      | $ | 5,155             |  | 9/24/2033
|Encore Capital Trust III  |  | 4/19/2007                 |  |                                     | 15,000 |                                      | 6.85 | % |                   | Fixed rate (2)       |                    | 6.85%(2)             |                                      |   | 15,464            |  | 4/19/2037

---

|(1) | Each issue of junior subordinated debentures is callable by us after five years from issuance date.
|--- | ---------------------------------------------------------------------------------------------------

|(2) | The debentures bear a fixed interest rate until April 19, 2012, when the rate begins to float on a quarterly basis based on the 3 month LIBOR plus 1.75%.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Shareholders Equity

Shareholders equity increased $49.8 million, or 47.1%, to $155.4 million as of September 30, 2007 compared with shareholders equity and puttable common stock of $105.7 million as of December 31, 2006, primarily due to
our initial public offering and net earnings. The puttable common stock was reclassified to shareholders equity on March 30, 2007 as a result of the termination of the put agreement to which the shares were subject.

Regulatory Capital

We actively manage our capital. Our potential
sources of capital are earnings and common or preferred equity. From time to time, we have issued trust preferred securities through a subsidiary trust either to fund organic growth or to support an acquisition. Trust preferred securities can be
eligible for treatment as Tier 1 regulatory capital provided such securities comprise less than 25% of Tier 1 regulatory capital. Any amount above this limit can be eligible for treatment as Tier 1 capital. We currently have the capacity to issue
additional trust preferred securities that would be treated as Tier 1 capital.

Each of the federal bank regulatory agencies has established minimum
capital adequacy and leverage capital requirements for banking organizations. Since the conversion of Encore Bank to a national bank on March 30, 2007, Encore Bank is subject to the capital adequacy requirements of the Office of the Comptroller
of the Currency (OCC) and we, as a bank holding company, are subject to the capital adequacy requirements of the Federal Reserve. As of September 30, 2007, Encore Bank was categorized as well capitalized under the regulatory
framework for prompt corrective action. To be categorized well capitalized, Encore Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios as set forth in the table below. There are no conditions
or events since that notification that we believe have changed Encore Banks capital position. We intend that Encore Bank will maintain a capital position that meets or exceeds the well capitalized requirements as defined by the
OCC.



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##### Table of Contents

The following table presents capital amounts and ratios for us and Encore Bank as of September 30, 2007:



|                        |                        |        |         |  |                             |        |  |                                                                              |        |  |        |   |       |   |        |  |       |  
|----------------------- | ---------------------- | ------ | ------- |  | --------------------------- | ------ |  | ---------------------------------------------------------------------------- | ------ |  | ------ | - | ----- | - | ------ |  | ----- | -
|                        |                        | Actual |         |  | For CapitalAdequacyPurposes |        |  | To Be Categorized asWell CapitalizedUnder Prompt CorrectiveAction Provisions |       
|                        | Amount                 |        | Ratio   |  |                             | Amount |  | Ratio                                                                        |        |  | Amount |   | Ratio |  
|                        | (dollars in thousands) |       
|Encore Bancshares, Inc. |                        |        |         |  |                             |        |  |                                                                              |        |  |        |   |       |   |        |  |       |  
|Leverage                |                        | $      | 141,156 |  | 10.71                       | %      |  | $                                                                            | 52,699 |  | 4.00   | % |       |   | N/A    |  | N/A   |  
|Tier 1 risk-based       |                        |        | 141,156 |  | 14.20                       |        |  |                                                                              | 39,762 |  | 4.00   |   |       |   | N/A    |  | N/A   |  
|Total risked-based      |                        |        | 151,867 |  | 15.28                       |        |  |                                                                              | 79,524 |  | 8.00   |   |       |   | N/A    |  | N/A   |  
|                        |                        |        |         |  |                             |       
|Encore Bank, N.A.       |                        |        |         |  |                             |        |  |                                                                              |        |  |        |   |       |   |        |  |       |  
|Leverage (1)            |                        | $      | 107,658 |  | 8.14                        | %      |  | $                                                                            | 52,894 |  | 4.00   | % |       | $ | 66,118 |  | 5.00  | %
|Tier 1 risk-based       |                        |        | 107,658 |  | 10.85                       |        |  |                                                                              | 39,699 |  | 4.00   |   |       |   | 59,549 |  | 6.00  |  
|Total risked-based      |                        |        | 118,369 |  | 11.93                       |        |  |                                                                              | 79,398 |  | 8.00   |   |       |   | 99,248 |  | 10.00 |  

---

|(1) | As part of Encore Banks conversion to a national bank, the OCC required that Encore Bank have a leverage ratio of at least 7.28% as of December 31, 2007 and at least
7.75% as of December 31, 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In July 2007, we completed our initial public offering of 1,904,761 shares of our common stock at $21.00
per share. In August 2007, our underwriters exercised their over-allotment option for an additional 285,714 shares of our common stock, also at $21.00 per share. Net proceeds to the Company, including the over-allotment shares, were $41.7 million.
Of the net proceeds, $10.0 million was contributed to the capital of Encore Bank to support anticipated balance sheet growth and the remainder will be used for general corporate purposes, including possible future acquisitions.

Recent Development

Effective October 1, 2007, Encore
Banks Executive Vice President and Chief Credit Officer, John Fields, resigned from his position. Mr. Fields has been with Encore Bank since 2000 and has served in his current position since that time.

To ensure continuity of our strong credit culture as well as adherence to credit policies and practices, the duties of Chief Credit Officer have been assumed on an
interim basis by Chairman and CEO, James DAgostino, until a permanent replacement is named. In addition, Jim Riley, an experienced banker, who joined the bank in March 2007 as a credit consultant, will continue to support credit
administration.

Critical Accounting Policies

We have
made no changes in our methods of application of our critical accounting policies from the information provided in our Prospectus dated July 17, 2007, which was filed on July 18, 2007 pursuant to Rule 424(b) under the Securities Act of
1933, as amended, except for our adoption of FIN 48, Accounting for Uncertainty in Income Taxes, and FAS 155, Accounting for Certain Hybrid Financial Instruments, effective January 1, 2007, as described in Note A to our interim
consolidated financial statements.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

There
have been no material changes in market risk from the information provided in the Asset/Liability Management section of Managements Discussion and Analysis of Financial Condition and Results of Operations in our Prospectus dated July 17,
2007, which was filed on July 18, 2007 pursuant to Rule 424(b) under the Securities Act of 1933, as amended.



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##### Table of Contents

|Item 4. | Controls and Procedures
|------- | -----------------------

(a) Evaluation of Disclosure Controls and
Procedures

As of the end of the period covered by this report, an evaluation was carried out by our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Changes in Internal Control over Financial Reporting

During the third quarter of 2007, there were no changes in our
internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II  Other Information



|Item 1. | Legal Proceedings
|------- | -----------------

We are a defendant in legal actions arising from
transactions conducted in the ordinary course of business. We believe, after consultation with legal counsel, that the ultimate liability, if any, arising from such actions will not have a material adverse effect on our consolidated financial
statements.



|Item 1A. | Risk Factors
|-------- | ------------

In addition to the information contained in this
report, you should consider the factors discussed under the heading Risk Factors in our Prospectus dated July 17, 2007, which was filed with the SEC on July 18, 2007 under Rule 424(b) under the Securities Act of 1933, as
amended. There have been no material changes in our Risk Factors from those disclosed in the Prospectus.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

Not applicable



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not applicable



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

Not applicable



|Item 5. | Other Information
|------- | -----------------

Not applicable



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##### Table of Contents

|Item 6. | Exhibits
|------- | --------



|       |  |                                                                                                                                                                                                                     
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1    |  | Amended and Restated Articles of Incorporation of Encore Bancshares, Inc. (incorporated by reference to Exhibit 3.1 to the Companys Registration Statement on Form S-1 (Registration No.
333-142735) (Form S-1)).
|       | 
|3.2    |  | Articles of Amendment to the Companys Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.2 to Form S-1).                                                                       
|       | 
|3.3    |  | Amended and Restated Bylaws of Encore Bancshares, Inc. (incorporated by reference to Exhibit 3.3 to Form S-1).                                                                                                      
|       | 
|4.1    |  | Form of certificate representing shares of Encore Bancshares, Inc. Common Stock (incorporated by reference to Exhibit 4.1 to Form S-1).                                                                             
|       | 
|31.1*  |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                         
|       | 
|31.2*  |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                         
|       | 
|32.1** |  | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                     

---

|* | Filed with this Quarterly Report on Form 10-Q
|- | ---------------------------------------------

|** | Furnished with this Quarterly Report on Form 10-Q
|-- | -------------------------------------------------



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.



|                 |  |                                                                                   
|---------------- |  | ----------------------------------------------------------------------------------
|                 |  | Encore Bancshares, Inc.                                                           
|                 |  | (Registrant)                                                                      
|                 | 
|November 9, 2007 |  | /s/ James S. DAgostino, Jr.                                                      
|(Date)           |  | James S. DAgostino, Jr., Chief Executive Officer and President                   
|                 | 
|November 9, 2007 |  | /s/ L. Anderson Creel                                                             
|(Date)           |  | L. Anderson Creel, Chief Financial Officer, Executive Vice President and Treasurer



32