##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended September 30, 2009.
|- | ---------------------------------------------------------------------------------------------------------------------------------



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

Commission file number: 001-33598





Encore
Bancshares, Inc.

(Exact name of registrant as specified in its charter)







|                                                              |  |                                  
|------------------------------------------------------------- |  | ---------------------------------
|Texas                                                         |  | 76-0655696                       
|(State or other jurisdiction ofincorporation 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)





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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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, 2009, there were 10.5 million 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, 2009 (unaudited) and December 31, 2008                                  |  | 3 
|           |  |                       | 
|           |  |                       |  | Consolidated Statements of OperationsThree months and nine months ended September 
30, 2009 and 2008 (unaudited) |  | 4 
|           |  |                       | 
|           |  |                       |  | Consolidated Statement of Changes in Shareholders EquityNine months ended September 
30, 2009 (unaudited)       |  | 5 
|           |  |                       | 
|           |  |                       |  | Consolidated Statements of Cash FlowsNine months ended September 
30, 2009 and 2008 (unaudited)                  |  | 6 
|           |  |                       | 
|           |  |                       |  | Notes to Interim Consolidated Financial Statements (unaudited)                                                    |  | 7 
|           |  |                       | 
|           |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                             |  | 21
|           |  |                       | 
|           |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                                        |  | 35
|           |  |                       | 
|           |  | Item 4.               |  | Controls and Procedures                                                                                           |  | 35
|           |  |                      
|Part II.   |  | OTHER INFORMATION     |  | 36                                                                                                               
|           |  |                       | 
|           |  | Item 1.               |  | Legal Proceedings                                                                                                 |  | 36
|           |  |                       | 
|           |  | Item 1A.              |  | Risk Factors                                                                                                      |  | 36
|           |  |                       | 
|           |  | Item 2.               |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                       |  | 36
|           |  |                       | 
|           |  | Item 3.               |  | Defaults Upon Senior Securities                                                                                   |  | 36
|           |  |                       | 
|           |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                                               |  | 36
|           |  |                       | 
|           |  | Item 5.               |  | Other Information                                                                                                 |  | 36
|           |  |                       | 
|           |  | Item 6.               |  | Exhibits                                                                                                          |  | 37
|           | 
|Signatures |  | 38                   



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, amounts in thousands, except per share amounts)



|                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                               |  | September 30,2009 |           |   | December 31,2008 |  
|ASSETS                                                                                                                                                                         |  |                   |           |   |                  |   |           |  
|Cash and due from banks                                                                                                                                                        |  | $                 | 15,035    |   |                  | $ | 23,044    |  
|Interest-bearing deposits in banks                                                                                                                                             |  |                   | 144,238   |   |                  |   | 91,459    |  
|Federal funds sold and other temporary investments                                                                                                                             |  |                   | 6,818     |   |                  |   | 3,549     |  
|                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                      |  |                   | 166,091   |   |                  |   | 118,052   |  
|Securities available-for-sale, at estimated fair value                                                                                                                         |  |                   | 134,079   |   |                  |   | 78,816    |  
|Securities held-to-maturity, at amortized cost                                                                                                                                 |  |                   | 117,316   |   |                  |   | 95,875    |  
|Mortgages held-for-sale                                                                                                                                                        |  |                   |          |   |                  |   | 150       |  
|Loans receivable                                                                                                                                                               |  |                   | 1,106,169 |   |                  |   | 1,218,404 |  
|Allowance for loan losses                                                                                                                                                      |  |                   | (27,575   | ) |                  |   | (25,105   | )
|                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Net loans receivable                                                                                                                                                           |  |                   | 1,078,594 |   |                  |   | 1,193,299 |  
|Federal Home Loan Bank of Dallas stock, at cost                                                                                                                                |  |                   | 9,565     |   |                  |   | 9,534     |  
|Investment in real estate                                                                                                                                                      |  |                   | 6,952     |   |                  |   | 2,781     |  
|Premises and equipment, net                                                                                                                                                    |  |                   | 15,953    |   |                  |   | 17,362    |  
|Goodwill                                                                                                                                                                       |  |                   | 27,873    |   |                  |   | 27,873    |  
|Other intangible assets, net                                                                                                                                                   |  |                   | 5,521     |   |                  |   | 6,031     |  
|Cash surrender value of life insurance policies                                                                                                                                |  |                   | 15,182    |   |                  |   | 14,686    |  
|Accrued interest receivable and other assets                                                                                                                                   |  |                   | 23,594    |   |                  |   | 23,385    |  
|                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|                                                                                                                                                                               |  | $                 | 1,600,720 |   |                  | $ | 1,587,844 |  
|                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|                                                                                                                                                                               |  |                  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                           |  |                   |           |   |                  |   |           |  
|Deposits:                                                                                                                                                                      |  |                   |           |   |                  |   |           |  
|Noninterest-bearing                                                                                                                                                            |  | $                 | 152,367   |   |                  | $ | 131,709   |  
|Interest-bearing                                                                                                                                                               |  |                   | 1,012,466 |   |                  |   | 969,088   |  
|                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Total deposits                                                                                                                                                                 |  |                   | 1,164,833 |   |                  |   | 1,100,797 |  
|Borrowings and repurchase agreements                                                                                                                                           |  |                   | 221,492   |   |                  |   | 272,026   |  
|Junior subordinated debentures                                                                                                                                                 |  |                   | 20,619    |   |                  |   | 20,619    |  
|Accrued interest payable and other liabilities                                                                                                                                 |  |                   | 7,316     |   |                  |   | 8,660     |  
|                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                              |  |                   | 1,414,260 |   |                  |   | 1,402,102 |  
|Commitments and contingencies                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Shareholders equity:                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Preferred stock, $1 par value, 20,000 shares authorized; 34 shares issued at September 30, 2009 and December 31, 2008;
aggregate liquidation preference of $34,222 and $34,127 |  |                   | 28,847    |   |                  |   | 28,461    |  
|Common stock, $1 par value, 50,000 shares authorized; 10,508 shares at September 30, 2009 and 10,247 shares at
December 31, 2008 issued                                        |  |                   | 10,508    |   |                  |   | 10,247    |  
|Additional paid-in capital                                                                                                                                                     |  |                   | 115,860   |   |                  |   | 115,489   |  
|Retained earnings                                                                                                                                                              |  |                   | 30,066    |   |                  |   | 31,523    |  
|Common stock in treasury, at cost (9 shares at September 30, 2009 and 6 shares at December 31, 2008)                                                                           |  |                   | (123      | ) |                  |   | (98       | )
|Accumulated other comprehensive income                                                                                                                                         |  |                   | 1,302     |   |                  |   | 120       |  
|                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                     |  |                   | 186,460   |   |                  |   | 185,742   |  
|                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|                                                                                                                                                                               |  | $                 | 1,600,720 |   |                  | $ | 1,587,844 |  
|                                                                                                                                                                               |  |                   |           |   |                  |   |           |  

The accompanying notes are an integral part of these statements.



3



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

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



|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                         |  | Three MonthsEnded September 30, |        |   | Nine MonthsEnded September 30, |  
|                                                         |  | 2009                            |        |   | 2008                           |   |        | 2009 |  |   | 2008   |  
|Interest income:                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Loans, including fees                                    |  | $                               | 17,045 |   |                                | $ | 18,738 |      |  | $ | 51,744 |   |  | $ | 55,354 |  
|Mortgages held-for-sale                                  |  |                                 | 34     |   |                                |   | 13     |      |  |   | 94     |   |  |   | 70     |  
|Securities                                               |  |                                 | 2,258  |   |                                |   | 1,469  |      |  |   | 6,341  |   |  |   | 4,038  |  
|Federal funds sold and other temporary investments       |  |                                 | 180    |   |                                |   | 261    |      |  |   | 492    |   |  |   | 1,616  |  
|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total interest income                                    |  |                                 | 19,517 |   |                                |   | 20,481 |      |  |   | 58,671 |   |  |   | 61,078 |  
|Interest expense:                                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Deposits                                                 |  |                                 | 5,131  |   |                                |   | 6,458  |      |  |   | 16,506 |   |  |   | 22,123 |  
|Borrowings and repurchase agreements                     |  |                                 | 2,129  |   |                                |   | 2,085  |      |  |   | 6,364  |   |  |   | 5,607  |  
|Junior subordinated debentures                           |  |                                 | 302    |   |                                |   | 330    |      |  |   | 927    |   |  |   | 1,016  |  
|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total interest expense                                   |  |                                 | 7,562  |   |                                |   | 8,873  |      |  |   | 23,797 |   |  |   | 28,746 |  
|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net interest income                                      |  |                                 | 11,955 |   |                                |   | 11,608 |      |  |   | 34,874 |   |  |   | 32,332 |  
|Provision for loan losses                                |  |                                 | 7,685  |   |                                |   | 5,249  |      |  |   | 13,651 |   |  |   | 10,527 |  
|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net interest income after provision for loan losses      |  |                                 | 4,270  |   |                                |   | 6,359  |      |  |   | 21,223 |   |  |   | 21,805 |  
|Noninterest income:                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Trust and investment management fees                     |  |                                 | 4,501  |   |                                |   | 4,277  |      |  |   | 12,337 |   |  |   | 13,344 |  
|Mortgage banking                                         |  |                                 | 110    |   |                                |   | 28     |      |  |   | 612    |   |  |   | 217    |  
|Insurance commissions and fees                           |  |                                 | 1,365  |   |                                |   | 1,385  |      |  |   | 4,379  |   |  |   | 4,497  |  
|Net gain (loss) on sale of available-for-sale securities |  |                                 | 387    |   |                                |   | (2     | )    |  |   | 387    |   |  |   | (2     | )
|Other                                                    |  |                                 | 450    |   |                                |   | 412    |      |  |   | 1,529  |   |  |   | 1,328  |  
|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total noninterest income                                 |  |                                 | 6,813  |   |                                |   | 6,100  |      |  |   | 19,244 |   |  |   | 19,384 |  
|Noninterest expense:                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Compensation                                             |  |                                 | 7,761  |   |                                |   | 6,991  |      |  |   | 22,506 |   |  |   | 22,536 |  
|Occupancy                                                |  |                                 | 1,496  |   |                                |   | 1,477  |      |  |   | 4,504  |   |  |   | 4,400  |  
|Equipment                                                |  |                                 | 430    |   |                                |   | 494    |      |  |   | 1,312  |   |  |   | 1,512  |  
|Advertising and promotion                                |  |                                 | 214    |   |                                |   | 187    |      |  |   | 630    |   |  |   | 610    |  
|Outside data processing                                  |  |                                 | 797    |   |                                |   | 762    |      |  |   | 2,344  |   |  |   | 2,173  |  
|Professional fees                                        |  |                                 | 912    |   |                                |   | 671    |      |  |   | 2,891  |   |  |   | 2,566  |  
|Intangible amortization                                  |  |                                 | 171    |   |                                |   | 187    |      |  |   | 511    |   |  |   | 562    |  
|FDIC assessment                                          |  |                                 | 270    |   |                                |   | 50     |      |  |   | 1,068  |   |  |   | 111    |  
|Other                                                    |  |                                 | 1,238  |   |                                |   | 1,379  |      |  |   | 3,971  |   |  |   | 4,049  |  
|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total noninterest expense                                |  |                                 | 13,289 |   |                                |   | 12,198 |      |  |   | 39,737 |   |  |   | 38,519 |  
|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net earnings (loss) before income taxes                  |  |                                 | (2,206 | ) |                                |   | 261    |      |  |   | 730    |   |  |   | 2,670  |  
|Income tax expense (benefit)                             |  |                                 | (453   | ) |                                |   | 33     |      |  |   | 527    |   |  |   | 791    |  
|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net earnings (loss)                                      |  | $                               | (1,753 | ) |                                | $ | 228    |      |  | $ | 203    |   |  | $ | 1,879  |  
|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Earnings (loss) available to common shareholders         |  | $                               | (2,306 | ) |                                | $ | 228    |      |  | $ | (1,457 | ) |  | $ | 1,879  |  
|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Earnings (loss) per common share:                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                    |  | $                               | (0.22  | ) |                                | $ | 0.02   |      |  | $ | (0.14  | ) |  | $ | 0.18   |  
|Diluted                                                  |  |                                 | (0.22  | ) |                                |   | 0.02   |      |  |   | (0.14  | ) |  |   | 0.17   |  
|Average common shares outstanding                        |  |                                 | 10,441 |   |                                |   | 10,237 |      |  |   | 10,337 |   |  |   | 10,194 |  
|Diluted average common shares outstanding                |  |                                 | 10,441 |   |                                |   | 10,934 |      |  |   | 10,337 |   |  |   | 10,904 |  

The accompanying notes are an integral part of these statements.



4



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY

Nine Months Ended September 30, 2009

(Unaudited, amounts in thousands)



|                                                                                                    |  |                |        |              |        |        |                          |   |        |                  |  |   |                        |   |  |                                     |        |                          |  |   |      |   |  |   |       |  |   |         |  
|--------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ------------ | ------ | ------ | ------------------------ | - | ------ | ---------------- |  | - | ---------------------- | - |  | ----------------------------------- | ------ | ------------------------ |  | - | ---- | - |  | - | ----- |  | - | ------- | -
|                                                                                                    |  | PreferredStock |        | Common Stock |        |        | AdditionalPaid-inCapital |   |        | RetainedEarnings |  |   | CommonStock inTreasury |   |  | AccumulatedOtherComprehensiveIncome |        | TotalShareholdersEquity | 
|                                                                                                    |  |                | Shares |              |        | Amount |                          |   |        |                  |  |  
|Balance at January 1, 2009                                                                          |  | $              | 28,461 |              | 10,247 |        |                          | $ | 10,247 |                  |  | $ | 115,489                |   |  | $                                   | 31,523 |                          |  | $ | (98  | ) |  | $ | 120   |  | $ | 185,742 |  
|Stock-based compensation cost recognized in earnings                                                |  |                |       |              |       |        |                          |   |       |                  |  |   | 674                    |   |  |                                     |       |                          |  |   |     |   |  |   |      |  |   | 674     |  
|Issuance of restricted stock                                                                        |  |                |       |              | 269    |        |                          |   | 269    |                  |  |   | (269                   | ) |  |                                     |       |                          |  |   |     |   |  |   |      |  |   |        |  
|Forfeitures of restricted stock                                                                     |  |                |       |              | (8     | )      |                          |   | (8     | )                |  |   | 8                      |   |  |                                     |       |                          |  |   |     |   |  |   |      |  |   |        |  
|Excess tax expense from stock-based compensation                                                    |  |                |       |              |       |        |                          |   |       |                  |  |   | (42                    | ) |  |                                     |       |                          |  |   |     |   |  |   |      |  |   | (42     | )
|Purchase of treasury stock (3 shares)                                                               |  |                |       |              |       |        |                          |   |       |                  |  |   |                       |   |  |                                     |       |                          |  |   | (25  | ) |  |   |      |  |   | (25     | )
|Comprehensive income:                                                                               |  |                |        |              |        |        |                          |   |        |                  |  |   |                        |   |  |                                     |        |                          |  |   |      |   |  |   |       |  |   |         |  
|Net earnings                                                                                        |  |                |       |              |       |        |                          |   |       |                  |  |   |                       |   |  |                                     | 203    |                          |  |   |     |   |  |   |      |  |   | 203     |  
|Change in net unrealized gain on securities available-for-sale, net of deferred tax expense of $634 |  |                |       |              |       |        |                          |   |       |                  |  |   |                       |   |  |                                     |       |                          |  |   |     |   |  |   | 1,182 |  |   | 1,182   |  
|                                                                                                    |  |                |        |              |        |        |                          |   |        |                  |  |   |                        |   |  |                                     |        |                          |  |   |      |   |  |   |       |  |   |         |  
|Total comprehensive income                                                                          |  |                |        |              |        |        |                          |   |        |                  |  |   |                        |   |  |                                     |        |                          |  |   |      |   |  |   |       |  |   | 1,385   |  
|Dividends on preferred stock and amortization of preferred stock discount                           |  |                | 386    |              |       |        |                          |   |       |                  |  |   |                       |   |  |                                     | (1,660 | )                        |  |   |     |   |  |   |      |  |   | (1,274  | )
|                                                                                                    |  |                |        |              |        |        |                          |   |        |                  |  |   |                        |   |  |                                     |        |                          |  |   |      |   |  |   |       |  |   |         |  
|Balance at September 30, 2009                                                                       |  | $              | 28,847 |              | 10,508 |        |                          | $ | 10,508 |                  |  | $ | 115,860                |   |  | $                                   | 30,066 |                          |  | $ | (123 | ) |  | $ | 1,302 |  | $ | 186,460 |  
|                                                                                                    |  |                |        |              |        |        |                          |   |        |                  |  |   |                        |   |  |                                     |        |                          |  |   |      |   |  |   |       |  |   |         |  

The accompanying notes are an integral part of this statement.



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Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)



|                                                                                    |  |                                |          |   |      |   |          |  
|----------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                    |  | Nine MonthsEnded September 30, |         
|                                                                                    |  | 2009                           |          |   | 2008 |  
|Cash flows from operating activities:                                               |  |                                |          |   |      |   |          |  
|Net earnings                                                                        |  | $                              | 203      |   |      | $ | 1,879    |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                                |          |   |      |   |          |  
|Provision for loan losses                                                           |  |                                | 13,651   |   |      |   | 10,527   |  
|Amortization of premiums and discounts, net                                         |  |                                | 605      |   |      |   | 1,000    |  
|Stock-based compensation                                                            |  |                                | 674      |   |      |   | 920      |  
|Depreciation                                                                        |  |                                | 2,012    |   |      |   | 2,138    |  
|Gain on sale of loans                                                               |  |                                | (487     | ) |      |   | (140     | )
|Loss on sale of foreclosed real estate                                              |  |                                | 227      |   |      |   | 61       |  
|Realized (gain) loss on sales of available-for-sale securities, net                 |  |                                | (387     | ) |      |   | 2        |  
|Increase in mortgages held-for-sale                                                 |  |                                | (44,177  | ) |      |   | (21,675  | )
|Proceeds from sale of mortgage loans                                                |  |                                | 44,814   |   |      |   | 22,779   |  
|Federal Home Loan Bank of Dallas stock dividends                                    |  |                                | (21      | ) |      |   | (156     | )
|Excess tax benefit from stock-based compensation                                    |  |                                |         |   |      |   | (81      | )
|(Increase) decrease in accrued interest receivable                                  |  |                                | (171     | ) |      |   | 535      |  
|Increase in other assets                                                            |  |                                | (914     | ) |      |   | (1,983   | )
|Increase (decrease) in accrued interest payable                                     |  |                                | (155     | ) |      |   | 34       |  
|Increase (decrease) in other liabilities                                            |  |                                | (1,578   | ) |      |   | 567      |  
|                                                                                    |  |                                |          |   |      |   |          |  
|Net cash provided by operating activities                                           |  |                                | 14,296   |   |      |   | 16,407   |  
|                                                                                    |  |                                |          |   |      |   |          |  
|Cash flows from investing activities:                                               |  |                                |          |   |      |   |          |  
|Purchases of available-for-sale securities                                          |  |                                | (120,497 | ) |      |   | (47,250  | )
|Principal collected on available-for-sale securities                                |  |                                | 15,355   |   |      |   | 2,413    |  
|Proceeds from sales of available-for-sale securities                                |  |                                | 51,808   |   |      |   | 150      |  
|Purchases of held-to-maturity securities                                            |  |                                | (52,187  | ) |      |   |         |  
|Principal collected on held-to-maturity securities                                  |  |                                | 30,925   |   |      |   | 33,493   |  
|Proceeds from sales of foreclosed real estate                                       |  |                                | 3,324    |   |      |   | 2,363    |  
|Cash paid for acquisition                                                           |  |                                |         |   |      |   | (33      | )
|Proceeds from sales of loans receivable                                             |  |                                |         |   |      |   | 55       |  
|Loan originations and principal collections, net                                    |  |                                | 92,969   |   |      |   | (112,476 | )
|Purchases of Federal Home Loan Bank stock                                           |  |                                | (10      | ) |      |   | (4,477   | )
|Purchases of premises and equipment                                                 |  |                                | (240     | ) |      |   | (2,639   | )
|                                                                                    |  |                                |          |   |      |   |          |  
|Net cash provided (used) by investing activities                                    |  |                                | 21,447   |   |      |   | (128,401 | )
|                                                                                    |  |                                |          |   |      |   |          |  
|Cash flows from financing activities:                                               |  |                                |          |   |      |   |          |  
|Net increase (decrease) in deposits                                                 |  |                                | 64,036   |   |      |   | (2,895   | )
|Proceeds from long term Federal Home Loan Bank of Dallas borrowings                 |  |                                |         |   |      |   | 100,000  |  
|Repayment of long term Federal Home Loan Bank of Dallas borrowings                  |  |                                | (35      | ) |      |   | (25,004  | )
|Increase (decrease) in repurchase agreements                                        |  |                                | (50,437  | ) |      |   | 1,174    |  
|Payment on notes payable                                                            |  |                                | (62      | ) |      |   | (139     | )
|Excess tax benefit from stock-based compensation                                    |  |                                |         |   |      |   | 81       |  
|Proceeds from issuance of common stock, net of purchases of treasury stock          |  |                                | (25      | ) |      |   | 400      |  
|Preferred dividends paid                                                            |  |                                | (1,181   | ) |      |   |         |  
|                                                                                    |  |                                |          |   |      |   |          |  
|Net cash provided by financing activities                                           |  |                                | 12,296   |   |      |   | 73,617   |  
|                                                                                    |  |                                |          |   |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                                |  |                                | 48,039   |   |      |   | (38,377  | )
|Cash and cash equivalents at beginning of period                                    |  |                                | 118,052  |   |      |   | 78,415   |  
|                                                                                    |  |                                |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                          |  | $                              | 166,091  |   |      | $ | 40,038   |  
|                                                                                    |  |                                |          |   |      |   |          |  
|Supplementary cash flows information:                                               |  |                                |          |   |      |   |          |  
|Interest paid on deposits and borrowed funds                                        |  | $                              | 23,952   |   |      | $ | 28,712   |  
|Income taxes paid                                                                   |  |                                | 1,030    |   |      |   | 1,754    |  
|Noncash operating, investing and financing activities:                              |  |                                |          |   |      |   |          |  
|Real estate acquired in satisfaction of loans                                       |  |                                | 8,085    |   |      |   | 4,160    |  

The accompanying notes are an integral part of these statements.



6



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009 and 2008

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

NOTE ASUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Encore Bancshares, Inc. is a financial holding company that was formed on March 28, 2000 as Guardian Holdings, Inc. and had no operations until it acquired GSF Holding, Inc., now known as Encore Holdings, Inc. (Encore Holdings), 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, we became a bank holding company and Encore Holdings was merged into Encore Bancshares, Inc. As part of a corporate reorganization following the conversion of the Bank to a national banking
association, as of June 30, 2007, the Bank was merged with and into Encore Trust Company, N.A. (Encore Trust). The resulting bank, which was renamed Encore Bank, National Association (Encore Bank), operates as a national banking association
with its main office in Houston, Texas. Since the merger, the business of Encore Trust is being conducted as a division of Encore Bank. Our election to become a financial holding company was effective July 21, 2008.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Encore Bancshares, Inc., Encore Bank, Linscomb & Williams, Inc. (Linscomb & Williams) and Town & Country Insurance Agency, Inc.
(Town & Country). 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,
2008 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 our Annual
Report on Form 10-K for the year ended December 31, 2008. Operating results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009 or any
other period.

Nature of Operations

We are primarily in the business of attracting deposits and investing these funds in loans and 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, 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.

Reclassification

In the second quarter of 2009, we reclassified net expenses of foreclosed real estate from other noninterest income to other noninterest expense for all
periods presented. These reclassifications had no impact on financial condition, results of operations or equity in any of the reported periods.



7



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30, 2009 and 2008

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



Adoption of Updates to the FASB Codification

On January 1, 2009, we adopted the following updates to the FASB Codification:

FASB ASC 260-45-60A, Earnings Per Share, provides that unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. We determined that our outstanding nonvested restricted stock
awards are participating securities. Accordingly, earnings per common share is computed using the two-class method prescribed by FASB ASC 260, Earnings Per Share. In accordance with the adoption of the provisions of this standard, all
previously reported earnings per common share data has been retrospectively adjusted to conform to the new computation method.

FASB ASC 805-30-9, Business Combinations, provides additional guidance regarding the recognition, measurement and disclosure of assets and liabilities arising from contingencies in a business combination. FASB ASC 805-30-9 is
effective for assets or liabilities arising from contingencies we acquire in business combinations occurring after January 1, 2009. The adoption of FASB ASC 805-30-9 had no effect on our consolidated financial statements; however, the future
effect is dependant upon whether we make any acquisitions and the specifics of those acquisitions.

FASB ASC 810-10-65-1,
Consolidation, establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. In addition, FASB ASC 810-10-65-1 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling interest. The adoption of FASB ASC 810-10-65-1 did not have a material effect on our consolidated financial statements.

In the second quarter of 2009, we adopted the following updates to the FASB Codification:

FASB ASC 855, Subsequent Events, issued in May 2009, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be
issued. The adoption of FASB ASC 855 did not have a material effect on our consolidated financial statements; however, any future effect is dependent on the occurrence of subsequent events that fall under the scope of this standard.

FASB ASC 825-10-65 amends FASB ASC 825, Financial Instruments, to require an entity to provide disclosures about fair value of
financial instruments at interim reporting periods. Under FASB ASC 825-10-65, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim
reporting periods. In addition, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of
all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. The new interim disclosures are included in our interim financial statements.



8



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30, 2009 and 2008

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



FASB ASC 820-10-65, Fair Value Measurements and Disclosures, affirms that the
objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant
decrease in market activity for an asset when the market for that asset is not active. FASB ASC 820-10-65 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence and expands certain
disclosure requirements. FASB ASC 820-10-65 is effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively. The adoption of FASB ASC 820-10-65 did not have a material effect on our consolidated
financial statements.

FASB ASC 320-10-65, InvestmentsDebt and Equity Securities, (i) changes existing
guidance for determining whether an impairment of a debt security is other than temporary and (ii) replaces the existing requirement that the entitys management assert it has both the intent and ability to hold an impaired security until
recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under FASB ASC 320-10-65,
declines in the fair value of held-to-maturity and available-for-sale debt securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses.
The amount of the impairment related to other factors is recognized in other comprehensive income. The adoption of FASB ASC 320-10-65 did not have a material effect on our consolidated financial statements.

Descriptions of our significant accounting policies are included in Note A to our consolidated financial statements included in our Annual Report on
Form 10-K for the year ended December 31, 2008. There have been no significant changes to these policies.

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 EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|                                                                  |  | 2009                            |      |   | 2008                           |   |      | 2009 |  |   | 2008  |  
|Unrealized holding gains on available-for-sale securities         |  | $                               | 389  |   |                                | $ | 387  |      |  | $ | 1,429 |   |  | $ | 391  |  
|Reclassification adjustment for gains (losses) realized in income |  |                                 | 387  |   |                                |   | (2   | )    |  |   | 387   |   |  |   | (2   | )
|                                                                  |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      |  
|Unrealized holding gains on available-for-sale securities         |  |                                 | 776  |   |                                |   | 385  |      |  |   | 1,816 |   |  |   | 389  |  
|Tax expense                                                       |  |                                 | (272 | ) |                                |   | (138 | )    |  |   | (634  | ) |  |   | (139 | )
|                                                                  |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      |  
|Net-of-tax amount                                                 |  | $                               | 504  |   |                                | $ | 247  |      |  | $ | 1,182 |   |  | $ | 250  |  
|                                                                  |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      |  

Subsequent Events

We have evaluated and determined that no significant subsequent events occurred, other than the reclassification of a commercial real estate loan from
restructured still accruing to nonaccrual status as discussed in Note C, through November 3, 2009.



9



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30, 2009 and 2008

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



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:



|                                                     |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|---------------------------------------------------- |  | ------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                     |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|September 30, 2009                                   |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Available-for-sale:                                  |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|U.S. Government securities                           |  | $             | 26,004  |                      | $ | 83                    |  | $ | (16        | ) |  | $ | 26,071 
|Securities of U.S. states and political subdivisions |  |               | 1,296   |                      |   |                      |  |   | (22        | ) |  |   | 1,274  
|Mortgage-backed securities                           |  |               | 97,630  |                      |   | 2,048                 |  |   | (11        | ) |  |   | 99,667 
|Other securities                                     |  |               | 4,402   |                      |   | 18                    |  |   | (38        | ) |  |   | 4,382  
|                                                     |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                |  |               | 129,332 |                      |   | 2,149                 |  |   | (87        | ) |  |   | 131,394
|Marketable equity securities                         |  |               | 2,516   |                      |   | 169                   |  |   |           |   |  |   | 2,685  
|                                                     |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Total available-for-sale securities                  |  | $             | 131,848 |                      | $ | 2,318                 |  | $ | (87        | ) |  | $ | 134,079
|                                                     |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-maturity:                                    |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|U.S. Government securities                           |  | $             | 19,966  |                      | $ | 26                    |  | $ | (173       | ) |  | $ | 19,819 
|Securities of U.S. states and political subdivisions |  |               | 11,437  |                      |   | 590                   |  |   | (2         | ) |  |   | 12,025 
|Mortgage-backed securities                           |  |               | 68,042  |                      |   | 1,034                 |  |   | (19        | ) |  |   | 69,057 
|Other securities                                     |  |               | 17,871  |                      |   | 1,584                 |  |   |           |   |  |   | 19,455 
|                                                     |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Total held-to-maturity securities                    |  | $             | 117,316 |                      | $ | 3,234                 |  | $ | (194       | ) |  | $ | 120,356
|                                                     |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|December 31, 2008                                    |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Available-for-sale:                                  |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Mortgage-backed securities                           |  | $             | 71,897  |                      | $ | 712                   |  | $ |           |   |  | $ | 72,609 
|Other securities                                     |  |               | 4,202   |                      |   |                      |  |   | (60        | ) |  |   | 4,142  
|                                                     |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                |  |               | 76,099  |                      |   | 712                   |  |   | (60        | ) |  |   | 76,751 
|Marketable equity securities                         |  |               | 2,016   |                      |   | 49                    |  |   |           |   |  |   | 2,065  
|                                                     |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Total available-for-sale securities                  |  | $             | 78,115  |                      | $ | 761                   |  | $ | (60        | ) |  | $ | 78,816 
|                                                     |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-maturity:                                    |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Mortgage-backed securities                           |  | $             | 95,875  |                      | $ | 1,057                 |  | $ | (4         | ) |  | $ | 96,928 
|                                                     |  |               |         |                      |   |                       |  |   |            |   |  |   |        



10



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30, 2009 and 2008

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



We own certain debt securities with unrealized losses as of September 30, 2009 and
December 31, 2008. These securities, with unrealized losses segregated by length of impairment, were as follows:



|                                                     |  |                     |  |            |       |                  |   |      |  
|---------------------------------------------------- |  | ------------------- |  | ---------- | ----- | ---------------- | - | ---- | -
|Description of Securities                            |  | Number ofSecurities |  | Fair Value |       | UnrealizedLosses |  
|September 30, 2009:                                  |  |                     |  |            |       |                  |   |      |  
|Less than 12 months                                  |  |                     |  |            |       |                  |   |      |  
|Available-for-sale:                                  |  |                     |  |            |       |                  |   |      |  
|U.S. Government securities                           |  | 1                   |  | $          | 2,984 |                  | $ | (16  | )
|Securities of U.S. states and political subdivisions |  | 2                   |  |            | 1,274 |                  |   | (22  | )
|Mortgage-backed securities                           |  | 1                   |  |            | 1,728 |                  |   | (11  | )
|Other securities                                     |  | 2                   |  |            | 497   |                  |   | (38  | )
|                                                     |  |                     |  |            |       |                  |   |      |  
|Total available-for-sale securities                  |  | 6                   |  | $          | 6,483 |                  | $ | (87  | )
|                                                     |  |                     |  |            |       |                  |   |      |  
|Held-to-maturity:                                    |  |                     |  |            |       |                  |   |      |  
|U.S. Government securities                           |  | 1                   |  | $          | 4,808 |                  | $ | (173 | )
|Securities of U.S. states and political subdivisions |  | 1                   |  |            | 497   |                  |   | (2   | )
|Mortgage-backed securities                           |  | 3                   |  |            | 2,092 |                  |   | (9   | )
|                                                     |  |                     |  |            |       |                  |   |      |  
|Total held-to-maturity securities                    |  | 5                   |  | $          | 7,397 |                  | $ | (184 | )
|                                                     |  |                     |  |            |       |                  |   |      |  
|                                                     |  |                     | 
|More than 12 months                                  |  |                     |  |            |       |                  |   |      |  
|Held-to-maturity:                                    |  |                     |  |            |       |                  |   |      |  
|Mortgage-backed securities                           |  | 5                   |  | $          | 799   |                  | $ | (10  | )
|                                                     |  |                     |  |            |       |                  |   |      |  
|December 31, 2008:                                   |  |                     |  |            |       |                  |   |      |  
|                                                     |  |                     | 
|Less than 12 months                                  |  |                     |  |            |       |                  |   |      |  
|Available-for-sale:                                  |  |                     |  |            |       |                  |   |      |  
|Other securities                                     |  | 1                   |  | $          | 310   |                  | $ | (38  | )
|                                                     |  |                     |  |            |       |                  |   |      |  
|Held-to-maturity:                                    |  |                     |  |            |       |                  |   |      |  
|Mortgage-backed securities                           |  | 2                   |  | $          | 536   |                  | $ | (1   | )
|                                                     |  |                     |  |            |       |                  |   |      |  
|                                                     |  |                     | 
|More than 12 months                                  |  |                     |  |            |       |                  |   |      |  
|Available-for-sale:                                  |  |                     |  |            |       |                  |   |      |  
|Other securities                                     |  | 1                   |  | $          | 165   |                  | $ | (22  | )
|                                                     |  |                     |  |            |       |                  |   |      |  
|Held-to-maturity:                                    |  |                     |  |            |       |                  |   |      |  
|Mortgage-backed securities                           |  | 3                   |  | $          | 287   |                  | $ | (3   | )
|                                                     |  |                     |  |            |       |                  |   |      |  

We do not believe any of the above securities are impaired due to credit quality. These securities
have unrealized losses primarily due to changes in market interest rates. We expect to recover the entire amortized cost of these securities since we do not intend to sell such securities. Additionally, it is more likely than not that we will not be
required to sell these securities before recovery of our cost basis. Accordingly, as of September 30, 2009 and December 31, 2008, we believe the impairments detailed in the table are temporary and no impairment loss has been realized in
the accompanying consolidated statements of operations.



11



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30, 2009 and 2008

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



The following table shows the amortized cost and estimated fair value of securities by contractual
maturity at September 30, 2009. Contractual maturities may differ from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment schedules. Mortgage-backed securities and equity
securities are shown separately since they are not due at a single maturity date.



|                                      |  |                              |         |                            |   |               |  |           |         |  |   |        
|------------------------------------- |  | ---------------------------- | ------- | -------------------------- | - | ------------- |  | --------- | ------- |  | - | -------
|                                      |  | Available-for-SaleSecurities |         | Held-to-MaturitySecurities
|                                      |  | AmortizedCost                |         | FairValue                  |   | AmortizedCost |  | FairValue
|Within one year                       |  | $                            | 1,994   |                            | $ | 1,997         |  | $         |        |  | $ |       
|Over one year through five years      |  |                              | 18,009  |                            |   | 18,023        |  |           | 20,484  |  |   | 21,092 
|After five years through ten years    |  |                              | 3,000   |                            |   | 2,984         |  |           | 12,353  |  |   | 13,182 
|Over ten years                        |  |                              | 4,832   |                            |   | 4,838         |  |           | 16,437  |  |   | 17,025 
|                                      |  |                              |         |                            |   |               |  |           |         |  |   |        
|Total                                 |  |                              | 27,835  |                            |   | 27,842        |  |           | 49,274  |  |   | 51,299 
|Mortgage-backed and equity securities |  |                              | 104,013 |                            |   | 106,237       |  |           | 68,042  |  |   | 69,057 
|                                      |  |                              |         |                            |   |               |  |           |         |  |   |        
|Total securities                      |  | $                            | 131,848 |                            | $ | 134,079       |  | $         | 117,316 |  | $ | 120,356
|                                      |  |                              |         |                            |   |               |  |           |         |  |   |        

Mortgage-backed securities consist of federal agency pass-through securities and have a weighted
average yield of 3.40% and 4.05% at September 30, 2009 and December 31, 2008. As of September 30, 2009, the mortgage-backed securities have contractual maturities from less than a year to 2039. Accrued interest receivable on
mortgage-backed securities was $585 and $637 at September 30, 2009 and December 31, 2008.

At September 30, 2009 and
December 31, 2008, securities with a carrying value of $54,006 and $75,698 were pledged as collateral for repurchase agreements, public funds, trust deposits, and for other purposes, as required or permitted by law.

Gross realized gains were $577 and zero and gross realized losses were $190 and $2 on sales of available-for-sale securities for the nine months ended
September 30, 2009 and 2008.

Mortgage-backed securities previously classified as available-for-sale were transferred to held-to-maturity
during 2004. The amortized cost and fair value at the time of transfer were $127,049 and $128,782. The securities were transferred at fair value and the unrealized gain net of tax was recorded in accumulated other comprehensive income. Amortization
of unrealized gain was $286 and $182 for the nine months ended September 30, 2009 and 2008.



12



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30, 2009 and 2008

(Unaudited, amounts 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 30,2009 |           | December 31,2008
|Commercial:                         |  |                   |           |                  |   |          
|Commercial                          |  | $                 | 107,034   |                  | $ | 135,534  
|Commercial real estate              |  |                   | 326,256   |                  |   | 311,909  
|Real estate construction            |  |                   | 45,891    |                  |   | 95,668   
|                                    |  |                   |           |                  |   |          
|Total commercial                    |  |                   | 479,181   |                  |   | 543,111  
|                                    |  |                  
|Consumer:                           |  |                   |           |                  |   |          
|Residential real estate first lien  |  |                   | 228,090   |                  |   | 241,969  
|Residential real estate second lien |  |                   | 292,265   |                  |   | 302,141  
|Home equity lines                   |  |                   | 76,369    |                  |   | 82,555   
|Consumer installmentindirect       |  |                   | 9,743     |                  |   | 14,409   
|Consumer other                      |  |                   | 20,521    |                  |   | 34,219   
|                                    |  |                   |           |                  |   |          
|Total consumer                      |  |                   | 626,988   |                  |   | 675,293  
|                                    |  |                   |           |                  |   |          
|Total loans receivable              |  | $                 | 1,106,169 |                  | $ | 1,218,404
|                                    |  |                   |           |                  |   |          

Included in loans receivable is $2,894 and $2,925 of net deferred loan origination costs at
September 30, 2009 and December 31, 2008.

Changes in the allowance for loan losses were as follows:



|                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                           |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                           |  | 2009                            |        |   | 2008                           |   |        | 2009 |  |   | 2008    |  
|Balance at beginning of period             |  | $                               | 25,214 |   |                                | $ | 12,054 |      |  | $ | 25,105  |   |  | $ | 11,161 |  
|Provision for loan losses                  |  |                                 | 7,685  |   |                                |   | 5,249  |      |  |   | 13,651  |   |  |   | 10,527 |  
|Loans charged-off                          |  |                                 | (6,028 | ) |                                |   | (2,845 | )    |  |   | (12,264 | ) |  |   | (7,430 | )
|Recoveries of loans previously charged-off |  |                                 | 704    |   |                                |   | 162    |      |  |   | 1,083   |   |  |   | 362    |  
|                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Balance at end of period                   |  | $                               | 27,575 |   |                                | $ | 14,620 |      |  | $ | 27,575  |   |  | $ | 14,620 |  
|                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  

In our press release dated October 23, 2009, we reported a $5,424 commercial real estate loan as
a restructured loan still accruing. As a result of additional information received concerning that loan since October 23, we have reclassified that loan to nonaccrual status as of September 30, 2009. Our nonaccrual loans as of
September 30, 2009 increased from $32,945 in the press release to $38,369 in this Form 10-Q.



13



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30, 2009 and 2008

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



The following is a summary of information pertaining to impaired and nonaccrual loans:



|                                                           |  |                   |        |                  |   |       
|---------------------------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                                           |  | September 30,2009 |        | December 31,2008
|Impaired loans on nonaccrual without a valuation allowance |  | $                 | 19,792 |                  | $ | 10,408
|Impaired loans on nonaccrual with a valuation allowance    |  |                   | 15,452 |                  |   | 15,272
|                                                           |  |                   |        |                  |   |       
|Total impaired loans (1)                                   |  | $                 | 35,244 |                  | $ | 25,680
|                                                           |  |                   |        |                  |   |       
|Valuation allowance related to impaired loans              |  | $                 | 7,560  |                  | $ | 7,288 
|                                                           |  |                   |        |                  |   |       
|Total nonaccrual loans                                     |  | $                 | 38,369 |                  | $ | 30,531
|                                                           |  |                   |        |                  |   |       
|Total accruing loans past due 90 days or more              |  | $                 |       |                  | $ | 646   
|                                                           |  |                   |        |                  |   |       



|(1) | Does not include consumer loans which are not evaluated separately for impairment.
|--- | ----------------------------------------------------------------------------------

NOTE DREGULATORY MATTERS

We and Encore Bank are subject to various regulatory
capital adequacy requirements administered by the Board of Governors of the Federal Reserve System (Federal Reserve) 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, 2009 are set forth in the following table:



|                                      |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|------------------------------------- |  | ------ | ------- | ----- | ---------------------------- | - | ------ | ---------------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------- |  | ----- | -
|                                      |  | Actual |         |       | For CapitalAdequacy Purposes |   |        | To Be Categorized asWell Capitalized UnderPrompt CorrectiveAction
Provisions |       
|                                      |  | Amount |         | Ratio |                              |   | Amount |                                                                              | Ratio  |  |      | Amount |  | Ratio |        
|September 30, 2009                    |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Tier 1 capital (to average assets)    |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Tier 1 (leverage)                     |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Encore Bancshares, Inc.               |  | $      | 172,973 |       | 10.94                        | % |        | $                                                                            | 63,237 |  | 4.00 | %      |  |       | N/A     |  | N/A   |  
|Encore Bank, N.A.                     |  |        | 141,426 |       | 8.96                         |   |        |                                                                              | 63,138 |  | 4.00 |        |  | $     | 78,923  |  | 5.00  | %
|Tier 1 capital (to risk-based assets) |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Encore Bancshares, Inc.               |  | $      | 172,973 |       | 15.30                        | % |        | $                                                                            | 45,215 |  | 4.00 | %      |  |       | N/A     |  | N/A   |  
|Encore Bank, N.A.                     |  |        | 141,426 |       | 12.53                        |   |        |                                                                              | 45,133 |  | 4.00 |        |  | $     | 67,700  |  | 6.00  | %
|Total capital (to risk-based assets)  |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Encore Bancshares, Inc.               |  | $      | 187,276 |       | 16.57                        | % |        | $                                                                            | 90,430 |  | 8.00 | %      |  |       | N/A     |  | N/A   |  
|Encore Bank, N.A.                     |  |        | 155,713 |       | 13.80                        |   |        |                                                                              | 90,267 |  | 8.00 |        |  | $     | 112,833 |  | 10.00 | %

NOTE E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.



14



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30, 2009 and 2008

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



NOTE FEARNINGS PER COMMON SHARE

On January 1, 2009, we adopted FASB ASC 260-45-60A, Earnings Per Share, which requires that nonvested restricted stock be included in the
calculation of basic average common shares outstanding for all periods presented. Prior to January 1, 2009, we had included the effect of nonvested restricted stock in the calculation of diluted average common shares outstanding.

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



|                                                                                           |  |                                 |        |                                |      |   |        |  |   |        |   |  |   |       
|------------------------------------------------------------------------------------------ |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ------ |  | - | ------ | - |  | - | ------
|                                                                                           |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                                                           |  | 2009                            |        |                                | 2008 |   | 2009   |  |   | 2008  
|Basic:                                                                                     |  |                                 |        |                                |      |   |        |  |   |        |   |  |   |       
|Earnings (loss) available to common shareholders                                           |  | $                               | (2,306 | )                              |      | $ | 228    |  | $ | (1,457 | ) |  | $ | 1,879 
|Average common shares outstanding, including nonvested restricted stock                    |  |                                 | 10,441 |                                |      |   | 10,237 |  |   | 10,337 |   |  |   | 10,194
|Per Share                                                                                  |  | $                               | (0.22  | )                              |      | $ | 0.02   |  | $ | (0.14  | ) |  | $ | 0.18  
|Diluted:                                                                                   |  |                                 |        |                                |      |   |        |  |   |        |   |  |   |       
|Average common shares outstanding                                                          |  |                                 | 10,441 |                                |      |   | 10,237 |  |   | 10,337 |   |  |   | 10,194
|Add:     Net effect of the assumed exercise of stock options                               |  |                                 |       |                                |      |   | 359    |  |   |       |   |  |   | 399   
|Contingent share-based consideration                                                       |  |                                 |       |                                |      |   | 338    |  |   |       |   |  |   | 311   
|                                                                                           |  |                                 |        |                                |      |   |        |  |   |        |   |  |   |       
|Diluted average common shares outstanding                                                  |  |                                 | 10,441 |                                |      |   | 10,934 |  |   | 10,337 |   |  |   | 10,904
|Per Share                                                                                  |  | $                               | (0.22  | )                              |      | $ | 0.02   |  | $ | (0.14  | ) |  | $ | 0.17  
|Anti-dilutive stock options and warrants not included in treasury stock method computation |  |                                 | 1,347  |                                |      |   |       |  |   | 1,353  |   |  |   |      
|Preferred dividends deducted from net earnings                                             |  | $                               | 553    |                                |      | $ |       |  | $ | 1,660  |   |  | $ |      

No dividends have been declared on our common stock.

NOTE GFAIR VALUE OF ASSETS AND LIABILITIES

We use fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we
may be required to record at fair value other assets on a nonrecurring basis such as certain loans, goodwill and other intangible assets and investment in real estate. These nonrecurring fair value adjustments typically involve application of
lower-of-cost-or-market accounting or write downs of individual assets.

In accordance with FASB ASC 820-10-35, Fair Value Measurements and
Disclosures, we group our financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
These levels are:



| |  |  | Level 1Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S.
Treasury, other U. S. government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or
liabilities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing
services for identical or comparable assets or liabilities.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted
cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or
liabilities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30, 2009 and 2008

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



The table below presents the balances of assets measured at fair value on a recurring basis as of
September 30, 2009:



|                                  |  |       |         |         |   |         |  |   |        
|--------------------------------- |  | ----- | ------- | ------- | - | ------- |  | - | -------
|Description                       |  | Total |         | Level 1 |   | Level 2
|Available-for-sale securities (1) |  | $     | 130,396 |         | $ | 29,455  |  | $ | 100,941
|                                  |  |       |         |         |   |         |  |   |        
|Total                             |  | $     | 130,396 |         | $ | 29,455  |  | $ | 100,941
|                                  |  |       |         |         |   |         |  |   |        



|(1) | Excludes cost-basis equity securities of $3,683.
|--- | ------------------------------------------------

For assets measured at fair value on a nonrecurring basis during 2009 that were still held on the balance sheet at September 30, 2009, the following table provides the level of valuation assumptions used to determine the amount of
adjustment and the carrying value of the related individual assets at period end:



|                              |  |       |        |         |   |                                                   |  |   |      
|----------------------------- |  | ----- | ------ | ------- | - | ------------------------------------------------- |  | - | -----
|Description                   |  | Total |        | Level 2 |   | Losses for theNine Months EndedSeptember 30, 2009
|Loans (1)                     |  | $     | 34,799 |         | $ | 34,799                                            |  | $ | 3,406
|Investment in real estate (2) |  |       | 6,952  |         |   | 6,952                                             |  |   | 285  
|                              |  |       |        |         |   |                                                   |  |   |      
|Total                         |  | $     | 41,751 |         | $ | 41,751                                            |  | $ | 3,691
|                              |  |       |        |         |   |                                                   |  |   |      



|(1) | Represents carrying value of loans and related write downs for which adjustments are based on the appraised value of the collateral.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents carrying value of foreclosed assets measured at fair value upon initial recognition or subsequent impairment.
|--- | ------------------------------------------------------------------------------------------------------------------------

The following table summarizes the carrying values and estimated fair values of financial instruments:



|                                       |  |                    |           |                     |   |                |  |                     |           |  |   |          
|-------------------------------------- |  | ------------------ | --------- | ------------------- | - | -------------- |  | ------------------- | --------- |  | - | ---------
|                                       |  | September 30, 2009 |           | December 31, 2008  
|                                       |  | CarryingAmount     |           | EstimatedFair Value |   | CarryingAmount |  | EstimatedFair Value
|Financial assets:                      |  |                    |           |                     |   |                |  |                     |           |  |   |          
|Cash and cash equivalents              |  | $                  | 166,091   |                     | $ | 166,091        |  | $                   | 118,052   |  | $ | 118,052  
|Securities available-for-sale          |  |                    | 134,079   |                     |   | 134,079        |  |                     | 78,816    |  |   | 78,816   
|Securities held-to-maturity            |  |                    | 117,316   |                     |   | 120,356        |  |                     | 95,875    |  |   | 96,928   
|Mortgages held-for-sale                |  |                    |          |                     |   |               |  |                     | 150       |  |   | 150      
|Loans receivable, net                  |  |                    | 1,078,594 |                     |   | 1,098,246      |  |                     | 1,193,299 |  |   | 1,220,926
|Federal Home Loan Bank of Dallas stock |  |                    | 9,565     |                     |   | 9,565          |  |                     | 9,534     |  |   | 9,534    
|Accrued interest receivable            |  |                    | 5,736     |                     |   | 5,736          |  |                     | 5,565     |  |   | 5,565    
|                                       |  |                    |           |                    
|Financial liabilities:                 |  |                    |           |                     |   |                |  |                     |           |  |   |          
|Deposits                               |  | $                  | 1,164,833 |                     | $ | 1,165,763      |  | $                   | 1,100,797 |  | $ | 1,102,255
|Borrowings and repurchase agreements   |  |                    | 221,492   |                     |   | 227,806        |  |                     | 272,026   |  |   | 277,802  
|Accrued interest payable               |  |                    | 1,189     |                     |   | 1,189          |  |                     | 1,344     |  |   | 1,344    
|Junior subordinated debentures         |  |                    | 20,619    |                     |   | 21,819         |  |                     | 20,619    |  |   | 21,198   

Under FASB ASC 820-10-35, we base our fair values on the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value
measurements, in accordance with the fair value hierarchy in FASB ASC 820-10-35.



16



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30, 2009 and 2008

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



Fair value measurements where there exists limited or no observable market data and, therefore, are
based primarily upon our own estimates, are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other such factors. Therefore, the results cannot be determined
with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including
discount rates and estimates of future cash flows, that could significantly affect the results of current or future values.

The following is
a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not recorded at fair value (FASB ASC 820-10-35 disclosures).

Cash and Cash Equivalents

The carrying
amounts reported in the consolidated balance sheets for cash and cash equivalents approximate those assets fair values.

Securities

Fair value measurement of securities is based upon quoted prices, if available. If quoted prices are not available, fair values are
measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows. Securities available-for-sale are recorded at fair value on a recurring basis.

Loans Receivable

We do not record loans at
fair value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for estimating fair value for FASB ASC 820-10-35 disclosure purposes. However, from time to time, we record nonrecurring fair value adjustments
to loans to reflect (1) partial write downs that are based on the observable market price or current appraised value of the collateral, or (2) the full charge-off of the loan carrying value. The fair value estimates for FASB ASC 820-10-35
purposes differentiate loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity.

The fair value of commercial and commercial real estate loans is calculated by discounting contractual cash flows using discount rates that reflect our current pricing for loans with similar
characteristics and remaining maturity.

For real estate 1-4 family first and junior lien mortgages, fair value is calculated by discounting
contractual cash flows, adjusted for prepayment estimates, using discount rates based on current industry pricing or our own estimate of an appropriate risk-adjusted discount rate for loans of similar size, type, remaining maturity and repricing
characteristics.

For all other consumer loans, the fair value is generally calculated by discounting the contractual cash flows, adjusted for
prepayment estimates, based on the current rates we offer for loans with similar characteristics.

The fair value of significant nonperforming
loans is based on recent external appraisals. Where appraisals are not available, estimated cash flows are discounted using a rate commensurate with the credit risk associated with those cash flows. Assumptions regarding credit risk, cash flows and
discount rates are judgmentally determined using available market information and specific borrower information.



17



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30, 2009 and 2008

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



Mortgages Held-for-Sale

Mortgages held-for-sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on commitments on hand from investors or prevailing market prices. As such, we
classify loans subjected to nonrecurring fair value adjustments as Level 2.

Federal Home Loan Bank of Dallas Stock

The fair value of FHLB stock is estimated to be equal to its carrying amount as reported in the accompanying balance sheet, given it is not a publicly traded
equity security, it has an adjustable dividend rate, and all transactions in the stock are executed at the stated par value.

Investment in
Real Estate

Investment in real estate is primarily foreclosed properties securing residential loans. Foreclosed assets are adjusted to
fair value less costs to sell upon transfer of the loans to investment in real estate. Subsequently, these assets are carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market
prices or appraised values of the collateral and, accordingly, we classify foreclosed assets as Level 2.

Goodwill and Other Intangible
Assets

We assess goodwill for impairment annually, and more frequently in certain circumstances. We assess goodwill for impairment on a
reporting unit level using appropriate weighted market and income approaches. Impairment exists when the carrying amount of the goodwill exceeds its implied fair value. We recognize impairment losses as a charge to noninterest expense and an
adjustment to the carrying value of the goodwill asset. Subsequent reversals of goodwill impairment are prohibited.

We amortize client
relationship intangibles on an accelerated basis based on useful lives of 15 to 20 years. We review these intangibles for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Impairment
is indicated if the sum of undiscounted estimated future net cash flows is less than the carrying value of the asset. Impairment is permanently recognized by writing down the asset to the extent that the carrying value exceeds the estimated fair
value.

Deposits

The fair
value of deposits with no stated maturity, such as noninterest-bearing checking accounts and money market accounts, is equal to the amount payable upon demand as of September 30, 2009 and December 31, 2008. The fair value of certificates
of deposit is based on the lower of redemption or discounted value of contractual cash flows. Discount rates for certificates of deposit are estimated using current market rates.

Borrowings and Repurchase Agreements

The fair values of our borrowings and repurchase
agreements are estimated using discounted cash flow analyses based on our current incremental borrowing rates for similar types of borrowing arrangements.

Fair value of FHLB advances is estimated using the rates currently being offered for advances with similar remaining maturities.

Junior Subordinated Debentures

The fair values of our junior subordinated debentures with
floating interest rates are estimated to be equal to their carrying value reported in the consolidated balance sheets since these instruments reprice periodically according to prevailing market interest rates. The discounted cash flow method is used
to estimate the fair value of our fixed rate debentures. Contractual cash flows are discounted using rates currently offered for new debentures with similar remaining maturities.



18



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30, 2009 and 2008

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



Accrued Interest

The carrying amounts of accrued interest are considered to approximate their fair values due to their short-term nature.

Unrecognized Financial Instruments

The fair value of commitments to extend credit is
estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date.

We have reviewed the unfunded portion of commitments to extend credit
as well as standby and other letters of credit, and have determined that the fair value of such financial instruments is not material.

Nonfinancial Instruments

We have not considered the value of our long term relationships with depositors, commonly known as
core deposit intangibles, when estimating the fair value of deposit liabilities. These intangibles are considered to be separate intangible assets that are not financial instruments. Nonetheless, financial institutions core deposits have
typically traded at premiums to their book values under both historical and current market conditions.

NOTE H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 Encore Bank, and Linscomb & Williams, and insurance includes the selling of property and casualty insurance products by Town & Country.

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 to our
consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. 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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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30, 2009 and 2008

(Unaudited, amounts 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, 2009 |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net interest income (expense)                 |  | $       | 12,213    |   |                  | $ | 39        |  | $     | 5     |  | $            | (302    | ) |  | $ | 11,955    |  
|Provision for loan losses                     |  |         | 7,685     |   |                  |   |          |  |       |      |  |              |        |   |  |   | 7,685     |  
|Noninterest income                            |  |         | 937       |   |                  |   | 4,501     |  |       | 1,375 |  |              |        |   |  |   | 6,813     |  
|Noninterest expense                           |  |         | 9,090     |   |                  |   | 3,088     |  |       | 1,111 |  |              |        |   |  |   | 13,289    |  
|                                              |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Earnings (loss) before income taxes           |  |         | (3,625    | ) |                  |   | 1,452     |  |       | 269   |  |              | (302    | ) |  |   | (2,206    | )
|Income tax expense (benefit)                  |  |         | (1,028    | ) |                  |   | 586       |  |       | 94    |  |              | (105    | ) |  |   | (453      | )
|                                              |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net earnings (loss)                           |  | $       | (2,597    | ) |                  | $ | 866       |  | $     | 175   |  | $            | (197    | ) |  | $ | (1,753    | )
|                                              |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Total assets at September 30, 2009            |  | $       | 1,608,348 |   |                  | $ | 50,174    |  | $     | 7,390 |  | $            | (65,192 | ) |  | $ | 1,600,720 |  
|                                              |  |         |           |   |                 
|For the three months ended September 30, 2008 |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net interest income (expense)                 |  | $       | 11,871    |   |                  | $ | 51        |  | $     | 16    |  | $            | (330    | ) |  | $ | 11,608    |  
|Provision for loan losses                     |  |         | 5,249     |   |                  |   |          |  |       |      |  |              |        |   |  |   | 5,249     |  
|Noninterest income                            |  |         | 425       |   |                  |   | 4,277     |  |       | 1,398 |  |              |        |   |  |   | 6,100     |  
|Noninterest expense                           |  |         | 8,113     |   |                  |   | 3,083     |  |       | 1,002 |  |              |        |   |  |   | 12,198    |  
|                                              |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Earnings (loss) before income taxes           |  |         | (1,066    | ) |                  |   | 1,245     |  |       | 412   |  |              | (330    | ) |  |   | 261       |  
|Income tax expense (benefit)                  |  |         | (446      | ) |                  |   | 451       |  |       | 147   |  |              | (119    | ) |  |   | 33        |  
|                                              |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net earnings (loss)                           |  | $       | (620      | ) |                  | $ | 794       |  | $     | 265   |  | $            | (211    | ) |  | $ | 228       |  
|                                              |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Total assets at September 30, 2008            |  | $       | 1,481,311 |   |                  | $ | 49,263    |  | $     | 6,997 |  | $            | (59,348 | ) |  | $ | 1,478,223 |  
|                                              |  |         |           |   |                 
|For the nine months ended September 30, 2009  |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net interest income (expense)                 |  | $       | 35,675    |   |                  | $ | 115       |  | $     | 11    |  | $            | (927    | ) |  | $ | 34,874    |  
|Provision for loan losses                     |  |         | 13,651    |   |                  |   |          |  |       |      |  |              |        |   |  |   | 13,651    |  
|Noninterest income                            |  |         | 2,358     |   |                  |   | 12,337    |  |       | 4,549 |  |              |        |   |  |   | 19,244    |  
|Noninterest expense                           |  |         | 27,310    |   |                  |   | 9,226     |  |       | 3,201 |  |              |        |   |  |   | 39,737    |  
|                                              |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Earnings (loss) before income taxes           |  |         | (2,928    | ) |                  |   | 3,226     |  |       | 1,359 |  |              | (927    | ) |  |   | 730       |  
|Income tax expense (benefit)                  |  |         | (839      | ) |                  |   | 1,213     |  |       | 477   |  |              | (324    | ) |  |   | 527       |  
|                                              |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net earnings (loss)                           |  | $       | (2,089    | ) |                  | $ | 2,013     |  | $     | 882   |  | $            | (603    | ) |  | $ | 203       |  
|                                              |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Total assets at September 30, 2009            |  | $       | 1,608,348 |   |                  | $ | 50,174    |  | $     | 7,390 |  | $            | (65,192 | ) |  | $ | 1,600,720 |  
|                                              |  |         |           |   |                 
|For the nine months ended September 30, 2008  |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net interest income (expense)                 |  | $       | 33,117    |   |                  | $ | 152       |  | $     | 79    |  | $            | (1,016  | ) |  | $ | 32,332    |  
|Provision for loan losses                     |  |         | 10,527    |   |                  |   |          |  |       |      |  |              |        |   |  |   | 10,527    |  
|Noninterest income                            |  |         | 1,457     |   |                  |   | 13,344    |  |       | 4,588 |  |              | (5      | ) |  |   | 19,384    |  
|Noninterest expense                           |  |         | 26,486    |   |                  |   | 8,878     |  |       | 3,155 |  |              |        |   |  |   | 38,519    |  
|                                              |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Earnings (loss) before income taxes           |  |         | (2,439    | ) |                  |   | 4,618     |  |       | 1,512 |  |              | (1,021  | ) |  |   | 2,670     |  
|Income tax expense (benefit)                  |  |         | (1,047    | ) |                  |   | 1,664     |  |       | 541   |  |              | (367    | ) |  |   | 791       |  
|                                              |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net earnings (loss)                           |  | $       | (1,392    | ) |                  | $ | 2,954     |  | $     | 971   |  | $            | (654    | ) |  | $ | 1,879     |  
|                                              |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Total assets at September 30, 2008            |  | $       | 1,481,311 |   |                  | $ | 49,263    |  | $     | 6,997 |  | $            | (59,348 | ) |  | $ | 1,478,223 |  



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##### Table of Contents

|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 statements of historical fact constitute forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and involve a number of risks and uncertainties, many of which are beyond our control. The words
believe, may, should, anticipate, estimate, expect, intend, continue, would, could, hope, might,
assume, objective, seek, plan, strive and similar words, or the negatives of these words, are intended to identify forward-looking statements.

Many possible events or factors could affect our future financial results and performance and could cause our actual results to differ materially from the
expectations of future results we express or imply in any forward-looking statements. In addition to the other factors discussed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2008,
factors that could contribute to those differences include, but are not limited to:



| |  |  | changes in the strength of general business or economic conditions, either nationally, regionally or in the local markets we serve, may result in,
among other things, a deterioration of credit quality or a reduced demand for credit or a decline in wealth management fees;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | volatility and disruption in national and international financial markets;
| | - |  | --------------------------------------------------------------------------



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



| |  |  | increased credit risk in our assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a
percentage of the total loan portfolio;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the concentration of our loan portfolio in loans collateralized by real estate;
| | - |  | -------------------------------------------------------------------------------



| |  |  | our level of commercial real estate and commercial loans;
| | - |  | ---------------------------------------------------------



| |  |  | incorrect assumptions underlying the establishment of and provisions made to the allowance for loan losses;
| | - |  | -----------------------------------------------------------------------------------------------------------



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



| |  |  | government intervention in the U.S. financial system;
| | - |  | -----------------------------------------------------



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



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



| |  |  | changes in the availability of funds resulting in increased costs or reduced liquidity;
| | - |  | ---------------------------------------------------------------------------------------



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



| |  |  | the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 governmental 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 report (or an earlier date to the extent applicable). We undertake no obligation to update publicly such forward-looking statements in light of new information or future events.



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##### Table of Contents

Overview

Encore Bancshares, Inc. is a financial 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, National Association (Encore Bank), eleven private client offices in the
greater Houston market and six private client offices in southwest Florida. We also operate five wealth management offices and three insurance offices in Texas. As of September 30, 2009, we had, on a consolidated basis, total assets of $1.6
billion, total loans of $1.1 billion, total deposits of $1.2 billion, shareholders equity of $186.5 million and $2.5 billion in assets under management.

In the second quarter of 2009, we reclassified net expenses of foreclosed real estate from other noninterest income to other noninterest expense for all periods presented. These reclassifications had no
impact on financial condition, results of operations or equity in any of the reported periods.

Critical Accounting Policies

We have made no changes in our methods of application of our critical accounting policies from the information previously disclosed in the
Critical Accounting Policies section of Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.

This report contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the
United States of America (GAAP). These measures include net interest income, net interest spread and net interest margin on a taxable-equivalent basis, which is standard practice in the banking industry. We have included in this report information
relating to these non-GAAP financial measures for the applicable periods presented. We believe these non-GAAP financial measures provide information useful to investors in understanding our financial results and believe that its presentation,
together with the accompanying reconciliations, provides a complete understanding of factors and trends affecting our business and allows investors to view performance in a manner similar to management, the entire financial services sector, bank
stock analysts and bank regulators. These non-GAAP measures should not be considered a substitute for operating results determined in accordance with GAAP and we strongly encourage investors to review our consolidated financial statements in their
entirety and not to rely on any single financial measure. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies non-GAAP financial measures having the same or
similar names.

Results of Operations

The net loss for the quarter ended September 30, 2009 was $1.8 million, compared with net earnings of $228,000 for the quarter ended September 30, 2008. Loss per diluted common share for the third quarter of 2009 was $0.22,
compared with earnings per diluted common share of $0.02 for the comparable period of 2008. Earnings per common share include the accrual of dividends on preferred stock which was issued in the fourth quarter of 2008. The decrease in earnings was
due primarily to higher credit costs, as we provisioned $2.4 million in excess of net charge-offs for the third quarter of 2009 reflecting deterioration of real estate values in Florida.

We posted a return on average common equity of (5.72)% and 0.56%, a return on average assets of (0.43)% and 0.06%, and an efficiency ratio of 71.37% and 67.82% for the quarters ended September 30,
2009 and 2008. 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).

For the nine months ended September 30, 2009, net earnings were $203,000, compared with $1.9 million for the same period of 2008. The loss per
diluted common share (as a result of deducting preferred dividends from net earnings) for the nine months ended September 30, 2009 was $0.14, compared with earnings per diluted common share of $0.17 for the comparable period of 2008. Net
interest income on a fully taxable-equivalent basis (TE) increased $2.9 million, or 8.9%, but was more than offset by higher credit costs and higher expenses. The increase in expenses was due primarily to higher FDIC insurance assessments. We posted
a return on average common equity of (1.22)% and 1.56%, a return on average assets of 0.02% and 0.17%, and an efficiency ratio of 73.00% and 73.39% for the nine months ended September 30, 2009 and 2008.



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##### Table of Contents

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 (TE) was $12.1 million for the three months ended September 30,
2009, an increase of $473,000, or 4.1%, compared with the third quarter of 2008. Average earning assets grew $145.5 million, or 10.5%, due primarily to growth in securities and deposits in banks. The net interest margin (TE) decreased 21 basis
points to 3.13% for the same comparison period. The margin compression was due primarily to a decrease in loans and greater liquidity on the balance sheet as a result of the recession. Partially offsetting this margin compression was an improvement
in average noninterest-bearing deposits, which were $147.9 million for the third quarter of 2009, a $28.9 million, or 24.3%, increase compared with the same period of 2008.

Net interest income (TE) was $35.2 million for the nine months ended September 30, 2009, an increase of $2.9 million, or 8.9%, compared with the same period of 2008. Average interest-earning assets
increased $132.4 million, or 9.6%, due primarily to growth in securities and deposits in banks. For the nine months ended September 30, 2009, the net interest margin (TE) was 3.12%, a decrease of 2 basis points, compared with the same period of
2008. Average noninterest-bearing deposits were $149.3 million for the nine months ended September 30, 2009, a $32.9 million, or 28.2%, increase compared with the same period of 2008.



23



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##### Table of Contents

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. To give effect to our tax-exempt securities and loans, taxable-equivalent adjustments have been made with respect to these assets in 2009. Taxable-equivalent amounts in 2008 were
immaterial.



|                                                |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|----------------------------------------------- |  | -------------------------------- | --------- | - | ------------------- | - | ----------------- |  | ---- | ------------------------- |  | - | ------------------- | - | ----------------- | - | ------ |  | ---- | -
|                                                |  | Three Months Ended September 30, |          
|                                                |  | 2009                             |           |   | 2008                |  
|                                                |  | AverageOutstandingBalance        |           |   | InterestEarned/Paid |   | AverageYield/Rate |  |      | AverageOutstandingBalance |  |   | InterestEarned/Paid |   | AverageYield/Rate |  
|                                                |  | (dollars in thousands)           |          
|Assets:                                         |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest-earning assets:                        |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Loans (1)                                       |  | $                                | 1,123,482 |   |                     | $ | 17,114            |  | 6.04 | %                         |  | $ | 1,186,606           |   |                   | $ | 18,738 |  | 6.28 | %
|Mortgages held-for-sale                         |  |                                  | 1,716     |   |                     |   | 34                |  | 7.86 |                           |  |   | 596                 |   |                   |   | 13     |  | 8.68 |  
|Securities (1)                                  |  |                                  | 235,819   |   |                     |   | 2,315             |  | 3.89 |                           |  |   | 156,354             |   |                   |   | 1,469  |  | 3.74 |  
|Federal funds sold and other                    |  |                                  | 168,213   |   |                     |   | 180               |  | 0.42 |                           |  |   | 40,128              |   |                   |   | 261    |  | 2.59 |  
|                                                |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-earning assets (1)               |  |                                  | 1,529,230 |   |                     |   | 19,643            |  | 5.10 |                           |  |   | 1,383,684           |   |                   |   | 20,481 |  | 5.89 |  
|Less: Allowance for loan losses                 |  |                                  | (23,972   | ) |                     |   |                   |  |      |                           |  |   | (12,630             | ) |                   |   |        |  |      |  
|Noninterest-earning assets                      |  |                                  | 109,852   |   |                     |   |                   |  |      |                           |  |   | 108,224             |   |                   |   |        |  |      |  
|                                                |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total assets                                    |  | $                                | 1,615,110 |   |                     |   |                   |  |      |                           |  | $ | 1,479,278           |   |                   |   |        |  |      |  
|                                                |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Liabilities and shareholders equity:           |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest-bearing liabilities:                   |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest checking                               |  | $                                | 191,553   |   |                     | $ | 227               |  | 0.47 | %                         |  | $ | 192,424             |   |                   | $ | 610    |  | 1.26 | %
|Money market and savings                        |  |                                  | 306,789   |   |                     |   | 833               |  | 1.08 |                           |  |   | 283,130             |   |                   |   | 1,217  |  | 1.71 |  
|Time deposits                                   |  |                                  | 525,821   |   |                     |   | 4,071             |  | 3.07 |                           |  |   | 448,983             |   |                   |   | 4,631  |  | 4.10 |  
|                                                |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-bearing deposits                 |  |                                  | 1,024,163 |   |                     |   | 5,131             |  | 1.99 |                           |  |   | 924,537             |   |                   |   | 6,458  |  | 2.78 |  
|Borrowings and repurchase agreements            |  |                                  | 222,978   |   |                     |   | 2,129             |  | 3.79 |                           |  |   | 240,104             |   |                   |   | 2,085  |  | 3.45 |  
|Junior subordinated debentures                  |  |                                  | 20,619    |   |                     |   | 302               |  | 5.81 |                           |  |   | 20,619              |   |                   |   | 330    |  | 6.37 |  
|                                                |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-bearing liabilities              |  |                                  | 1,267,760 |   |                     |   | 7,562             |  | 2.37 |                           |  |   | 1,185,260           |   |                   |   | 8,873  |  | 2.98 |  
|                                                |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Noninterest-bearing liabilities:                |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Noninterest-bearing deposits                    |  |                                  | 147,888   |   |                     |   |                   |  |      |                           |  |   | 119,024             |   |                   |   |        |  |      |  
|Other liabilities                               |  |                                  | 10,792    |   |                     |   |                   |  |      |                           |  |   | 12,186              |   |                   |   |        |  |      |  
|                                                |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total liabilities                               |  |                                  | 1,426,440 |   |                     |   |                   |  |      |                           |  |   | 1,316,470           |   |                   |   |        |  |      |  
|Shareholders equity                            |  |                                  | 188,670   |   |                     |   |                   |  |      |                           |  |   | 162,808             |   |                   |   |        |  |      |  
|                                                |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total liabilities and shareholders equity      |  | $                                | 1,615,110 |   |                     |   |                   |  |      |                           |  | $ | 1,479,278           |   |                   |   |        |  |      |  
|                                                |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Net interest income (1)                         |  |                                  |           |   |                     | $ | 12,081            |  |      |                           |  |   |                     |   |                   | $ | 11,608 |  |      |  
|                                                |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Net interest spread (1)                         |  |                                  |           |   |                     |   |                   |  | 2.73 | %                         |  |   |                     |   |                   |   |        |  | 2.91 | %
|Net interest margin (1)                         |  |                                  |           |   |                     |   |                   |  | 3.13 | %                         |  |   |                     |   |                   |   |        |  | 3.34 | %
|Net interest income (GAAP)                      |  |                                  |           |   |                     | $ | 11,955            |  |      |                           |  |   |                     |   |                   | $ | 11,608 |  |      |  
|Taxable-equivalent adjustment                   |  |                                  |           |   |                     |   | 126               |  |      |                           |  |   |                     |   |                   |   |       |  |      |  
|                                                |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Net interest income on taxable-equivalent basis |  |                                  |           |   |                     | $ | 12,081            |  |      |                           |  |   |                     |   |                   | $ | 11,608 |  |      |  
|                                                |  |                                  |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  



|(1) | On taxable-equivalent basis in 2009 to consistently reflect income from taxable and tax-exempt loans and securities based on a 34% federal tax rate. Taxable-equivalent
amounts in 2008 were immaterial.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



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##### Table of Contents

|                                                |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|----------------------------------------------- |  | ------------------------------- | --------- | - | ------------------- | - | ----------------- |  | ---- | ------------------------- |  | - | ------------------- | - | ----------------- | - | ------ |  | ---- | -
|                                                |  | Nine Months Ended September 30, |          
|                                                |  | 2009                            |           |   | 2008                |  
|                                                |  | AverageOutstandingBalance       |           |   | InterestEarned/Paid |   | AverageYield/Rate |  |      | AverageOutstandingBalance |  |   | InterestEarned/Paid |   | AverageYield/Rate |  
|                                                |  | (dollars in thousands)          |          
|Assets:                                         |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest-earning assets:                        |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Loans (1)                                       |  | $                               | 1,165,897 |   |                     | $ | 51,949            |  | 5.96 | %                         |  | $ | 1,159,102           |   |                   | $ | 55,354 |  | 6.38 | %
|Mortgages held-for-sale                         |  |                                 | 1,574     |   |                     |   | 94                |  | 7.98 |                           |  |   | 1,069               |   |                   |   | 70     |  | 8.75 |  
|Securities (1)                                  |  |                                 | 213,257   |   |                     |   | 6,461             |  | 4.05 |                           |  |   | 146,025             |   |                   |   | 4,038  |  | 3.69 |  
|Federal funds sold and other                    |  |                                 | 128,552   |   |                     |   | 492               |  | 0.51 |                           |  |   | 70,684              |   |                   |   | 1,616  |  | 3.05 |  
|                                                |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-earning assets (1)               |  |                                 | 1,509,280 |   |                     |   | 58,996            |  | 5.23 |                           |  |   | 1,376,880           |   |                   |   | 61,078 |  | 5.93 |  
|Less: Allowance for loan losses                 |  |                                 | (24,932   | ) |                     |   |                   |  |      |                           |  |   | (11,781             | ) |                   |   |        |  |      |  
|Noninterest-earning assets                      |  |                                 | 110,792   |   |                     |   |                   |  |      |                           |  |   | 104,815             |   |                   |   |        |  |      |  
|                                                |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total assets                                    |  | $                               | 1,595,140 |   |                     |   |                   |  |      |                           |  | $ | 1,469,914           |   |                   |   |        |  |      |  
|                                                |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Liabilities and shareholders equity:           |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest-bearing liabilities:                   |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest checking                               |  | $                               | 183,676   |   |                     | $ | 652               |  | 0.47 | %                         |  | $ | 189,969             |   |                   | $ | 2,204  |  | 1.55 | %
|Money market and savings                        |  |                                 | 259,776   |   |                     |   | 2,196             |  | 1.13 |                           |  |   | 307,716             |   |                   |   | 4,960  |  | 2.15 |  
|Time deposits                                   |  |                                 | 548,363   |   |                     |   | 13,658            |  | 3.33 |                           |  |   | 449,923             |   |                   |   | 14,959 |  | 4.44 |  
|                                                |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-bearing deposits                 |  |                                 | 991,815   |   |                     |   | 16,506            |  | 2.23 |                           |  |   | 947,608             |   |                   |   | 22,123 |  | 3.12 |  
|Borrowings and repurchase agreements            |  |                                 | 234,755   |   |                     |   | 6,364             |  | 3.62 |                           |  |   | 212,165             |   |                   |   | 5,607  |  | 3.53 |  
|Junior subordinated debentures                  |  |                                 | 20,619    |   |                     |   | 927               |  | 6.01 |                           |  |   | 20,619              |   |                   |   | 1,016  |  | 6.58 |  
|                                                |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-bearing liabilities              |  |                                 | 1,247,189 |   |                     |   | 23,797            |  | 2.55 |                           |  |   | 1,180,392           |   |                   |   | 28,746 |  | 3.25 |  
|                                                |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Noninterest-bearing liabilities:                |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Noninterest-bearing deposits                    |  |                                 | 149,348   |   |                     |   |                   |  |      |                           |  |   | 116,470             |   |                   |   |        |  |      |  
|Other liabilities                               |  |                                 | 10,810    |   |                     |   |                   |  |      |                           |  |   | 12,503              |   |                   |   |        |  |      |  
|                                                |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total liabilities                               |  |                                 | 1,407,347 |   |                     |   |                   |  |      |                           |  |   | 1,309,365           |   |                   |   |        |  |      |  
|Shareholders equity                            |  |                                 | 187,793   |   |                     |   |                   |  |      |                           |  |   | 160,549             |   |                   |   |        |  |      |  
|                                                |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total liabilities and shareholders equity      |  | $                               | 1,595,140 |   |                     |   |                   |  |      |                           |  | $ | 1,469,914           |   |                   |   |        |  |      |  
|                                                |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Net interest income (1)                         |  |                                 |           |   |                     | $ | 35,199            |  |      |                           |  |   |                     |   |                   | $ | 32,332 |  |      |  
|                                                |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Net interest spread (1)                         |  |                                 |           |   |                     |   |                   |  | 2.68 | %                         |  |   |                     |   |                   |   |        |  | 2.68 | %
|Net interest margin (1)                         |  |                                 |           |   |                     |   |                   |  | 3.12 | %                         |  |   |                     |   |                   |   |        |  | 3.14 | %
|Net interest income (GAAP)                      |  |                                 |           |   |                     | $ | 34,874            |  |      |                           |  |   |                     |   |                   | $ | 32,332 |  |      |  
|Taxable-equivalent adjustment                   |  |                                 |           |   |                     |   | 325               |  |      |                           |  |   |                     |   |                   |   |       |  |      |  
|                                                |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Net interest income on taxable-equivalent basis |  |                                 |           |   |                     | $ | 35,199            |  |      |                           |  |   |                     |   |                   | $ | 32,332 |  |      |  
|                                                |  |                                 |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  



|(1) | On taxable-equivalent basis in 2009 to consistently reflect income from taxable and tax-exempt loans and securities based on a 34% federal tax rate. Taxable-equivalent
amounts in 2008 were immaterial.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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 we consider adequate in relation to the estimated losses inherent in the loan portfolio. The provision was $7.7 million and $13.7 million for the three months and nine months ended September 30, 2009, compared with
$5.2 million and $10.5 million for the same periods of 2008. The changes in the provision in both periods compared with the same periods of 2008 reflect the amount we considered necessary to fund estimated losses inherent in the loan portfolio
primarily as a result of the recessionary economic environment, weakness in our Florida market, higher net charge-offs in 2009 and other qualitative factors. Included in the provision for loan losses in the third quarter of 2009 were specific
reserves of $5.6 million for two loans in Florida.

Noninterest Income

Noninterest income represented 36.30% and 34.45% of total revenue for the three months ended September 30, 2009 and 2008.

Noninterest income increased $713,000, or 11.7%, to $6.8 million for the three months ended September 30, 2009, compared with the same period in 2008.
The increase reflected growth in trust and investment management fees and gain on sale of securities.

Noninterest income was essentially flat
for the nine months ended September 30, 2009, compared with the same period in 2008. A decrease in trust and investment management fees was partially offset by increased mortgage banking income and gain on sale of securities.

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



|                                                         |  |                                 |       |      |                                |       |      |  |      |        |  |   |        |  
|-------------------------------------------------------- |  | ------------------------------- | ----- | ---- | ------------------------------ | ----- | ---- |  | ---- | ------ |  | - | ------ | -
|                                                         |  | Three MonthsEnded September 30, |       |      | Nine MonthsEnded September 30, |      
|                                                         |  | 2009                            |       | 2008 |                                |       | 2009 |  | 2008 |       
|                                                         |  | (dollars in thousands)          |      
|Trust and investment management fees                     |  | $                               | 4,501 |      | $                              | 4,277 |      |  | $    | 12,337 |  | $ | 13,344 |  
|Mortgage banking                                         |  |                                 | 110   |      |                                | 28    |      |  |      | 612    |  |   | 217    |  
|Insurance commissions and fees                           |  |                                 | 1,365 |      |                                | 1,385 |      |  |      | 4,379  |  |   | 4,497  |  
|Net gain (loss) on sale of available-for-sale securities |  |                                 | 387   |      |                                | (2    | )    |  |      | 387    |  |   | (2     | )
|Other                                                    |  |                                 | 450   |      |                                | 412   |      |  |      | 1,529  |  |   | 1,328  |  
|                                                         |  |                                 |       |      |                                |       |      |  |      |        |  |   |        |  
|Total noninterest income                                 |  | $                               | 6,813 |      | $                              | 6,100 |      |  | $    | 19,244 |  | $ | 19,384 |  
|                                                         |  |                                 |       |      |                                |       |      |  |      |        |  |   |        |  

Noninterest Expense

Noninterest expense was $13.3 million for the third quarter of 2009, up $1.1 million, or 8.9%, compared with the third quarter of 2008, primarily due to a
combination of higher FDIC insurance assessments, higher professional expenses related to loan collection and higher compensation expense.

For the nine months ended September 30, 2009, noninterest expense was $39.7 million, an increase of $1.2 million, or 3.2%, compared with the same period of 2008. The increase was due primarily to higher FDIC insurance assessments,
which included the special assessment of $684,000 in the second quarter of 2009, and higher professional expenses related to loan collection.

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



|                          |  |                                 |        |                                |   |        |  |      |        |  |   |       
|------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                          |  | Three MonthsEnded September 30, |        | Nine MonthsEnded September 30,
|                          |  | 2009                            |        | 2008                           |   | 2009   |  | 2008
|                          |  | (dollars in thousands)         
|Compensation              |  | $                               | 7,761  |                                | $ | 6,991  |  | $    | 22,506 |  | $ | 22,536
|Non-staff expenses:       |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Occupancy                 |  |                                 | 1,496  |                                |   | 1,477  |  |      | 4,504  |  |   | 4,400 
|Equipment                 |  |                                 | 430    |                                |   | 494    |  |      | 1,312  |  |   | 1,512 
|Advertising and promotion |  |                                 | 214    |                                |   | 187    |  |      | 630    |  |   | 610   
|Outside data processing   |  |                                 | 797    |                                |   | 762    |  |      | 2,344  |  |   | 2,173 
|Professional fees         |  |                                 | 912    |                                |   | 671    |  |      | 2,891  |  |   | 2,566 
|Intangible amortization   |  |                                 | 171    |                                |   | 187    |  |      | 511    |  |   | 562   
|FDIC assessment           |  |                                 | 270    |                                |   | 50     |  |      | 1,068  |  |   | 111   
|Other                     |  |                                 | 1,238  |                                |   | 1,379  |  |      | 3,971  |  |   | 4,049 
|                          |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Total noninterest expense |  | $                               | 13,289 |                                | $ | 12,198 |  | $    | 39,737 |  | $ | 38,519
|                          |  |                                 |        |                                |   |        |  |      |        |  |   |       



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##### Table of Contents

Income Tax Expense

The benefit for income taxes was $453,000 for the three months ended September 30, 2009, compared with a provision of $33,000 for the same three months of 2008. The effective tax rate for the three
months ended September 30, 2009 and 2008 was 20.5% and 12.6%. The provision for income taxes decreased to $527,000 for the nine months ended September 30, 2009, compared with $791,000 for the same period of 2008. The effective tax rate for
the nine months ended September 30, 2009 and 2008 was 72.2% and 29.6%. The effective rate in the current period was affected by lower income levels and immaterial return-to-accrual reconciliation differences booked in the current year, which
resulted in a higher than normal effective tax rate.

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 consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2008.

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) |          
|Three months ended September 30, 2009 |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net interest income (expense)         |  | $                      | 12,213    |   |                  | $ | 39        |  | $     | 5     |  | $            | (302    | ) |  | $ | 11,955    |  
|Provision for loan losses             |  |                        | 7,685     |   |                  |   |          |  |       |      |  |              |        |   |  |   | 7,685     |  
|Noninterest income                    |  |                        | 937       |   |                  |   | 4,501     |  |       | 1,375 |  |              |        |   |  |   | 6,813     |  
|Noninterest expense                   |  |                        | 9,090     |   |                  |   | 3,088     |  |       | 1,111 |  |              |        |   |  |   | 13,289    |  
|                                      |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Earnings (loss) before income taxes   |  |                        | (3,625    | ) |                  |   | 1,452     |  |       | 269   |  |              | (302    | ) |  |   | (2,206    | )
|Income tax expense (benefit)          |  |                        | (1,028    | ) |                  |   | 586       |  |       | 94    |  |              | (105    | ) |  |   | (453      | )
|                                      |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net earnings (loss)                   |  | $                      | (2,597    | ) |                  | $ | 866       |  | $     | 175   |  | $            | (197    | ) |  | $ | (1,753    | )
|                                      |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Total assets at September 30, 2009    |  | $                      | 1,608,348 |   |                  | $ | 50,174    |  | $     | 7,390 |  | $            | (65,192 | ) |  | $ | 1,600,720 |  
|                                      |  |                        |           |   |                 
|Three months ended September 30, 2008 |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net interest income (expense)         |  | $                      | 11,871    |   |                  | $ | 51        |  | $     | 16    |  | $            | (330    | ) |  | $ | 11,608    |  
|Provision for loan losses             |  |                        | 5,249     |   |                  |   |          |  |       |      |  |              |        |   |  |   | 5,249     |  
|Noninterest income                    |  |                        | 425       |   |                  |   | 4,277     |  |       | 1,398 |  |              |        |   |  |   | 6,100     |  
|Noninterest expense                   |  |                        | 8,113     |   |                  |   | 3,083     |  |       | 1,002 |  |              |        |   |  |   | 12,198    |  
|                                      |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Earnings (loss) before income taxes   |  |                        | (1,066    | ) |                  |   | 1,245     |  |       | 412   |  |              | (330    | ) |  |   | 261       |  
|Income tax expense (benefit)          |  |                        | (446      | ) |                  |   | 451       |  |       | 147   |  |              | (119    | ) |  |   | 33        |  
|                                      |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net earnings (loss)                   |  | $                      | (620      | ) |                  | $ | 794       |  | $     | 265   |  | $            | (211    | ) |  | $ | 228       |  
|                                      |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Total assets at September 30, 2008    |  | $                      | 1,481,311 |   |                  | $ | 49,263    |  | $     | 6,997 |  | $            | (59,348 | ) |  | $ | 1,478,223 |  
|                                      |  |                        |           |   |                 
|Nine months ended September 30, 2009  |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net interest income (expense)         |  | $                      | 35,675    |   |                  | $ | 115       |  | $     | 11    |  | $            | (927    | ) |  | $ | 34,874    |  
|Provision for loan losses             |  |                        | 13,651    |   |                  |   |          |  |       |      |  |              |        |   |  |   | 13,651    |  
|Noninterest income                    |  |                        | 2,358     |   |                  |   | 12,337    |  |       | 4,549 |  |              |        |   |  |   | 19,244    |  
|Noninterest expense                   |  |                        | 27,310    |   |                  |   | 9,226     |  |       | 3,201 |  |              |        |   |  |   | 39,737    |  
|                                      |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Earnings (loss) before income taxes   |  |                        | (2,928    | ) |                  |   | 3,226     |  |       | 1,359 |  |              | (927    | ) |  |   | 730       |  
|Income tax expense (benefit)          |  |                        | (839      | ) |                  |   | 1,213     |  |       | 477   |  |              | (324    | ) |  |   | 527       |  
|                                      |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net earnings (loss)                   |  | $                      | (2,089    | ) |                  | $ | 2,013     |  | $     | 882   |  | $            | (603    | ) |  | $ | 203       |  
|                                      |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Total assets at September 30, 2009    |  | $                      | 1,608,348 |   |                  | $ | 50,174    |  | $     | 7,390 |  | $            | (65,192 | ) |  | $ | 1,600,720 |  



27



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##### Table of Contents

|                                     |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |          
|------------------------------------ |  | ---------------------- | --------- | - | ---------------- | - | --------- |  | ----- | ----- |  | ------------ | ------- | - |  | - | ---------
|                                     |  | Banking                |           |   | WealthManagement |   | Insurance |  | Other |       |  | Consolidated
|                                     |  | (dollars in thousands)
|Nine months ended September 30, 2008 |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net interest income (expense)        |  | $                      | 33,117    |   |                  | $ | 152       |  | $     | 79    |  | $            | (1,016  | ) |  | $ | 32,332   
|Provision for loan losses            |  |                        | 10,527    |   |                  |   |          |  |       |      |  |              |        |   |  |   | 10,527   
|Noninterest income                   |  |                        | 1,457     |   |                  |   | 13,344    |  |       | 4,588 |  |              | (5      | ) |  |   | 19,384   
|Noninterest expense                  |  |                        | 26,486    |   |                  |   | 8,878     |  |       | 3,155 |  |              |        |   |  |   | 38,519   
|                                     |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Earnings (loss) before income taxes  |  |                        | (2,439    | ) |                  |   | 4,618     |  |       | 1,512 |  |              | (1,021  | ) |  |   | 2,670    
|Income tax expense (benefit)         |  |                        | (1,047    | ) |                  |   | 1,664     |  |       | 541   |  |              | (367    | ) |  |   | 791      
|                                     |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net earnings (loss)                  |  | $                      | (1,392    | ) |                  | $ | 2,954     |  | $     | 971   |  | $            | (654    | ) |  | $ | 1,879    
|                                     |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Total assets at September 30, 2008   |  | $                      | 1,481,311 |   |                  | $ | 49,263    |  | $     | 6,997 |  | $            | (59,348 | ) |  | $ | 1,478,223

Banking

Our banking segment had a net loss of $2.6 million for the three months ended September 30, 2009, compared with a net loss of $620,000 for the same period in 2008. Net interest income increased
$342,000, or 2.9%, but the provision for loan losses increased $2.4 million and noninterest expense increased $977,000. Net loss for the nine months ended September 30, 2009 was $2.1 million, compared with a net loss of $1.4 million for same
period in 2008. Net interest income increased $2.6 million, or 7.7%, and noninterest income increased $901,000, but the provision for loan losses increased $3.1 million and noninterest expense increased $824,000.

Net interest income for the three months ended September 30, 2009 increased $342,000, or 2.9%, compared with the same period of 2008. Net interest
income for the nine months ended September 30, 2009 increased $2.6 million, or 7.7%, compared with the same period of 2008. The increase in both periods resulted primarily from an increase in the volume of interest-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, 2009 totaled $7.7 million, compared with $5.2 million for the same period of 2008. The provision for loan losses for the nine months ended September 30, 2009 totaled $13.7 million,
compared with $10.5 million for the same period of 2008. 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, 2009 increased $512,000 compared with the same period in 2008. The increase was due mainly
to gain on sale of securities. Noninterest income for the nine months ended September 30, 2009 increased $901,000 compared with the same period of 2008. The increase was due primarily to higher mortgage banking income and gain on sales of
securities.

Noninterest expense for the three months ended September 30, 2009 increased $977,000, or 12.0%, compared with the same
period of 2008, due primarily to higher FDIC insurance assessments, professional expenses and compensation expense. Noninterest expense for the nine months ended September 30, 2009 increased $824,000, or 3.1%, compared with the same period of
2008, primarily due to the special FDIC assessment of $684,000.

Wealth Management

Net earnings for the three months ended September 30, 2009 increased $72,000, or 9.1%, compared with the same period in 2008. Net earnings for the nine
months ended September 30, 2009 decreased $941,000, or 31.9%, compared with the same period in 2008. The decrease in earnings for the nine months was due primarily to a decrease in assets under management, resulting in a decline in fees.

Noninterest income, which consisted primarily of trust and asset management fees, for the three months ended September 30, 2009
increased $224,000, or 5.2%, compared with the same period in 2008. Noninterest income for the nine months ended September 30, 2009, decreased $1.0 million, or 7.5%, compared with the same period of 2008, due primarily to decrease in assets
under management, which resulted from declining equity values.

Noninterest expense for the three months ended September 30, 2009 was
flat. Noninterest expense for the nine months ended September 30, 2009 increased $348,000, or 3.9%, compared with the same period of 2008, due primarily to a credit in 2008 for a legal settlement.



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Insurance

Net earnings declined for the three months and nine months ended September 30, 2009 compared with the same period in 2008 due primarily to higher noninterest expense in both periods as a result of
higher compensation expense. Noninterest income for the three months and nine months ended September 30, 2009 was flat compared with the same periods in 2008.

Other

Other consists of interest expense on our junior subordinated
debentures, which is not allocated to the business segments. Interest expense on these borrowings decreased due to falling interest rates.

Financial Condition

Our total assets increased $12.9 million, or 0.8%, to $1.6 billion as of September 30, 2009 compared
with December 31, 2008. Our loan portfolio declined $112.2 million, or 9.2%, to $1.1 billion as of September 30, 2009. Our securities portfolio increased $76.7 million, or 43.9%, to $251.4 million compared with $174.7 million as of
December 31, 2008. Shareholders equity increased $718,000, or 0.4%, to $186.5 million compared with $185.7 million as of December 31, 2008.

Loan Portfolio

Our primary lending focus is to professional firms, privately-owned
businesses, investors and affluent individuals. To these clients, 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 43.3% of our loan portfolio as of September 30, 2009. Total consumer loans, which consist of residential real estate, home equity lines of credit, consumer installment-indirect and other
consumer loans, made up 56.7% of our loan portfolio as of September 30, 2009.

Total loans were $1.1 billion as of September 30,
2009, a decrease of $112.2 million, or 9.2%, compared with December 31, 2008. The reduction in the loan portfolio was primarily in the commercial and construction categories as our clients continue to de-lever as a result of the weak economy.

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



|                                    |  |                        |           |         |                  |   |        |   |           |  |       |  
|----------------------------------- |  | ---------------------- | --------- | ------- | ---------------- | - | ------ | - | --------- |  | ----- | -
|                                    |  | September 30,2009      |           |         | December 31,2008 |  
|                                    |  | Amount                 |           | Percent |                  |   | Amount |   | Percent   | 
|                                    |  | (dollars in thousands) |          
|Commercial:                         |  |                        |           |         |                  |   |        |   |           |  |       |  
|Commercial                          |  | $                      | 107,034   |         | 9.7              | % |        | $ | 135,534   |  | 11.1  | %
|Commercial real estate              |  |                        | 326,256   |         | 29.5             |   |        |   | 311,909   |  | 25.6  |  
|Real estate construction            |  |                        | 45,891    |         | 4.1              |   |        |   | 95,668    |  | 7.9   |  
|                                    |  |                        |           |         |                  |   |        |   |           |  |       |  
|Total commercial                    |  |                        | 479,181   |         | 43.3             |   |        |   | 543,111   |  | 44.6  |  
|Consumer:                           |  |                        |           |         |                  |   |        |   |           |  |       |  
|Residential real estate first lien  |  |                        | 228,090   |         | 20.6             |   |        |   | 241,969   |  | 19.8  |  
|Residential real estate second lien |  |                        | 292,265   |         | 26.4             |   |        |   | 302,141   |  | 24.8  |  
|Home equity lines                   |  |                        | 76,369    |         | 6.9              |   |        |   | 82,555    |  | 6.8   |  
|Consumer installmentindirect       |  |                        | 9,743     |         | 0.9              |   |        |   | 14,409    |  | 1.2   |  
|Consumer other                      |  |                        | 20,521    |         | 1.9              |   |        |   | 34,219    |  | 2.8   |  
|                                    |  |                        |           |         |                  |   |        |   |           |  |       |  
|Total consumer                      |  |                        | 626,988   |         | 56.7             |   |        |   | 675,293   |  | 55.4  |  
|                                    |  |                        |           |         |                  |   |        |   |           |  |       |  
|Total loans receivable              |  | $                      | 1,106,169 |         | 100.0            | % |        | $ | 1,218,404 |  | 100.0 | %
|                                    |  |                        |           |         |                  |   |        |   |           |  |       |  



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Nonperforming Assets

In our press release dated October 23, 2009, we reported a $5.4 million commercial real estate loan as a restructured loan still accruing. As a result of additional information received concerning
that loan since October 23, we have reclassified that loan to nonaccrual status as of September 30, 2009. Accordingly, our nonaccrual loans as of September 30, 2009 were $38.4 million, not $32.9 million as reported in the press
release. After the reclassification, as of September 30, 2009, nonperforming assets were $45.3 million, or 4.07% of total loans and investment in real estate, and the allowance for loan losses to nonperforming loans ratio was 71.87%.

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



|                                                                  |  |                        |        |   |                  |   |        |  
|----------------------------------------------------------------- |  | ---------------------- | ------ | - | ---------------- | - | ------ | -
|                                                                  |  | September 30,2009      |        |   | December 31,2008 |  
|                                                                  |  | (dollars in thousands) |       
|Nonaccrual loans (1)                                              |  | $                      | 38,369 |   |                  | $ | 30,531 |  
|Accruing loans past due 90 days or more                           |  |                        |       |   |                  |   | 646    |  
|                                                                  |  |                        |        |   |                  |   |        |  
|Total nonperforming loans                                         |  |                        | 38,369 |   |                  |   | 31,177 |  
|                                                                  |  |                        |        |   |                  |   |        |  
|Investment in real estate                                         |  |                        | 6,952  |   |                  |   | 2,781  |  
|                                                                  |  |                        |        |   |                  |   |        |  
|Total nonperforming assets                                        |  | $                      | 45,321 |   |                  | $ | 33,958 |  
|                                                                  |  |                        |        |   |                  |   |        |  
|Nonperforming assets to total loans and investment in real estate |  |                        | 4.07   | % |                  |   | 2.78   | %



|(1) | Restructured loans are included in nonaccrual loans.
|--- | ----------------------------------------------------

Nonperforming assets were $45.3 million and $34.0 million as of September 30, 2009 and December 31, 2008. Our ratio of nonperforming assets to total loans and investment in real estate was 4.07% and 2.78% as of September 30,
2009 and December 31, 2008. Investment in real estate was $7.0 million at September 30, 2009 compared with $2.8 million at December 31, 2008, a $4.2 million increase due primarily to repossession of commercial real estate property in
Florida and several homes under construction in Houston.

The following table presents information regarding nonperforming loans and the
associated specific reserves within the allowance for loan losses for each loan category:



|                                                          |  |                    |        |                                |   |                    |  |                                |        |  |   |      
|--------------------------------------------------------- |  | ------------------ | ------ | ------------------------------ | - | ------------------ |  | ------------------------------ | ------ |  | - | -----
|                                                          |  | September 30, 2009 |        | December 31, 2008             
|                                                          |  | OutstandingBalance |        | SpecificAllocation ofAllowance |   | OutstandingBalance |  | SpecificAllocation ofAllowance
|Commercial:                                               |  |                    |        |                                |   |                    |  |                                |        |  |   |      
|Commercial                                                |  | $                  | 676    |                                | $ | 303                |  | $                              | 5,643  |  | $ | 4,267
|Commercial real estate                                    |  |                    | 20,222 |                                |   | 4,289              |  |                                | 11,166 |  |   | 1,628
|Real estate construction                                  |  |                    | 10,820 |                                |   | 2,968              |  |                                | 9,975  |  |   | 1,393
|                                                          |  |                    |        |                                |   |                    |  |                                |        |  |   |      
|Total commercial                                          |  |                    | 31,718 |                                |   | 7,560              |  |                                | 26,784 |  |   | 7,288
|Consumer:                                                 |  |                    |        |                                |   |                    |  |                                |        |  |   |      
|Residential real estate first lien (1)                    |  |                    | 5,774  |                                |   |                   |  |                                | 3,601  |  |   |     
|Residential real estate second lien and home equity lines |  |                    | 676    |                                |   |                   |  |                                | 731    |  |   |     
|Consumer                                                  |  |                    | 201    |                                |   |                   |  |                                | 61     |  |   |     
|                                                          |  |                    |        |                                |   |                    |  |                                |        |  |   |      
|Total consumer                                            |  |                    | 6,651  |                                |   |                   |  |                                | 4,393  |  |   |     
|                                                          |  |                    |        |                                |   |                    |  |                                |        |  |   |      
|Total nonperforming loans                                 |  | $                  | 38,369 |                                | $ | 7,560              |  | $                              | 31,177 |  | $ | 7,288
|                                                          |  |                    |        |                                |   |                    |  |                                |        |  |   |      



|(1) | Adjusted to fair value after 180 days past due.
|--- | -----------------------------------------------



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The decrease in nonaccrual commercial loans was primarily attributable to the payoff of a $3.0 million loan
to a law firm and the resolution of several private banking loans in Houston. This decrease was more than offset by the addition of several commercial real estate loans in Florida. Nonaccrual construction loans increased primarily due to the
addition of a commercial construction loan in Florida, which was partially offset by the repossession of properties securing a $2.4 million loan to a Houston residential builder. The increase in residential real estate first lien nonaccrual loans
was due primarily to residential loans in Florida.

When managements measured value of an impaired loan is less than the recorded
investment in the loan, the amount of the impairment is recorded as a specific reserve. The specific reserves are determined on an individual loan basis based on our current evaluation of loss exposure for each credit, given the payment status,
financial condition of the borrower and value of any underlying collateral. The amount of specific reserves can change from period to period as a result of changes in the circumstances of individual loans such as charge-offs, pay-offs, changes in
collateral values or other factors. Notwithstanding the specific allocations of the allowance for loan losses, the total allowance is available to absorb losses from any segment of loans.

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 estimated
losses 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, which includes the current weakness in our Florida markets. If actual losses exceed the amount of the allowance for loan losses, our earnings could be adversely affected.

The allowance for loan losses represents our estimate of the amount necessary to provide for estimated losses inherent in the loan portfolio in the normal
course of business. Due to the uncertainty of risks in the loan portfolio, our 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.

Net charge-offs for the first nine months
of 2009 were $11.2 million, or 1.28% of average total loans on an annualized basis, compared with $7.1 million, or 0.81% of average total loans on an annualized basis for the first nine months of 2008. The increase was due primarily to a rise in
first mortgage net charge-offs, which consisted mostly of loans in Florida. We also experienced a modest increase in second mortgage net charge-offs, which resulted from the deteriorating economy. Commercial real estate net charge-offs consisted
mainly of loans in Florida. Construction net charge-offs consisted primarily of residential real estate in Houston. Net charge-offs in the first nine months of 2008 include a $2.1 million partial charge-off of a loan to a Houston law firm.



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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 for theNine Months EndedSeptember 30,2009 |           |   | As of and forthe Year EndedDecember 31,2008 |  
|                                                          |  | (dollars in thousands)                              |          
|Average loans outstanding                                 |  | $                                                   | 1,165,897 |   |                                             | $ | 1,170,717 |  
|                                                          |  |                                                     |           |   |                                             |   |           |  
|Total loans outstanding at end of period                  |  | $                                                   | 1,106,169 |   |                                             | $ | 1,218,404 |  
|                                                          |  |                                                     |           |   |                                             |   |           |  
|Allowance for loan losses at beginning of period          |  | $                                                   | 25,105    |   |                                             | $ | 11,161    |  
|                                                          |  |                                                    
|Charge-offs:                                              |  |                                                     |           |   |                                             |   |           |  
|Commercial:                                               |  |                                                     |           |   |                                             |   |           |  
|Commercial                                                |  |                                                     | (2,507    | ) |                                             |   | (8,601    | )
|Commercial real estate                                    |  |                                                     | (2,065    | ) |                                             |   | (1,527    | )
|Real estate construction                                  |  |                                                     | (2,047    | ) |                                             |   | (830      | )
|                                                          |  |                                                     |           |   |                                             |   |           |  
|Total commercial                                          |  |                                                     | (6,619    | ) |                                             |   | (10,958   | )
|                                                          |  |                                                     |           |   |                                             |   |           |  
|Consumer:                                                 |  |                                                     |           |   |                                             |   |           |  
|Residential real estate first lien                        |  |                                                     | (1,954    | ) |                                             |   | (634      | )
|Residential real estate second lien                       |  |                                                     | (1,917    | ) |                                             |   | (1,323    | )
|Home equity lines                                         |  |                                                     | (1,143    | ) |                                             |   | (1,813    | )
|Consumer installmentindirect                             |  |                                                     | (556      | ) |                                             |   | (1,016    | )
|Consumer other                                            |  |                                                     | (75       | ) |                                             |   | (80       | )
|                                                          |  |                                                     |           |   |                                             |   |           |  
|Total consumer                                            |  |                                                     | (5,645    | ) |                                             |   | (4,866    | )
|                                                          |  |                                                     |           |   |                                             |   |           |  
|Total charge-offs                                         |  |                                                     | (12,264   | ) |                                             |   | (15,824   | )
|                                                          |  |                                                     |           |   |                                             |   |           |  
|Recoveries:                                               |  |                                                     |           |   |                                             |   |           |  
|Commercial:                                               |  |                                                     |           |   |                                             |   |           |  
|Commercial                                                |  |                                                     | 648       |   |                                             |   | 139       |  
|Commercial real estate                                    |  |                                                     |          |   |                                             |   | 6         |  
|Real estate construction                                  |  |                                                     | 6         |   |                                             |   |          |  
|                                                          |  |                                                     |           |   |                                             |   |           |  
|Total commercial                                          |  |                                                     | 654       |   |                                             |   | 145       |  
|                                                          |  |                                                     |           |   |                                             |   |           |  
|Consumer:                                                 |  |                                                     |           |   |                                             |   |           |  
|Residential real estate first lien                        |  |                                                     | 109       |   |                                             |   | 41        |  
|Residential real estate second lien                       |  |                                                     | 58        |   |                                             |   | 130       |  
|Home equity lines                                         |  |                                                     | 127       |   |                                             |   | 9         |  
|Consumer installmentindirect                             |  |                                                     | 134       |   |                                             |   | 139       |  
|Consumer other                                            |  |                                                     | 1         |   |                                             |   | 129       |  
|                                                          |  |                                                     |           |   |                                             |   |           |  
|Total consumer                                            |  |                                                     | 429       |   |                                             |   | 448       |  
|                                                          |  |                                                     |           |   |                                             |   |           |  
|Total recoveries                                          |  |                                                     | 1,083     |   |                                             |   | 593       |  
|                                                          |  |                                                     |           |   |                                             |   |           |  
|Net charge-offs                                           |  |                                                     | (11,181   | ) |                                             |   | (15,231   | )
|                                                          |  |                                                     |           |   |                                             |   |           |  
|Provision for loan losses                                 |  |                                                     | 13,651    |   |                                             |   | 29,175    |  
|                                                          |  |                                                     |           |   |                                             |   |           |  
|                                                          |  |                                                    
|Allowance for loan losses at end of period                |  | $                                                   | 27,575    |   |                                             | $ | 25,105    |  
|                                                          |  |                                                     |           |   |                                             |   |           |  
|                                                          |  |                                                    
|Ratio of net charge-offs to average loans                 |  |                                                     | 1.28      | % |                                             |   | 1.30      | %
|Ratio of allowance for loan losses to period end loans    |  |                                                     | 2.49      |   |                                             |   | 2.06      |  
|Ratio of allowance for loan losses to nonperforming loans |  |                                                     | 71.87     |   |                                             |   | 80.52     |  



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Securities

Total securities were $251.4 million as of September 30, 2009, an increase of $76.7 million, or 43.9%, compared with $174.7 million as of December 31, 2008. The increase was due to securities
purchases which consisted of U.S. Government, municipal and corporate bonds.

Deposits

Our deposits averaged $1.1 billion for the nine months ended September 30, 2009, an increase of $79.8 million, or 7.5%, compared with average deposits
for the year ended December 31, 2008. As of September 30, 2009, core deposits (which consist of noninterest-bearing deposits, interest checking, money market and savings and time deposits less than $100,000) were $846.7 million, or 72.7%,
of total deposits, while time deposits $100,000 and greater and brokered deposits made up 27.3% of total deposits. As of September 30, 2009, total deposits increased $64.0 million, or 5.8%, to $1.2 billion compared with total deposits as of
December 31, 2008. The increase was due primarily to an increase in noninterest-bearing deposit accounts and jumbo certificates of deposit.

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



|                                   |  |                                     |           |             |                             |   |                |   |             |  |      |  
|---------------------------------- |  | ----------------------------------- | --------- | ----------- | --------------------------- | - | -------------- | - | ----------- |  | ---- | -
|                                   |  | Nine Months EndedSeptember 30, 2009 |           |             | Year EndedDecember 31, 2008 |  
|                                   |  | AverageBalance                      |           | AverageRate |                             |   | AverageBalance |   | AverageRate | 
|                                   |  | (dollars in thousands)              |          
|Noninterest-bearing deposits       |  | $                                   | 149,348   |             |                            | % |                | $ | 120,682     |  |     | %
|Interest checking                  |  |                                     | 183,676   |             | 0.47                        |   |                |   | 187,412     |  | 1.34 |  
|Money market and savings           |  |                                     | 259,776   |             | 1.13                        |   |                |   | 291,749     |  | 1.97 |  
|Time deposits less than $100,000   |  |                                     | 203,553   |             | 3.49                        |   |                |   | 195,321     |  | 4.39 |  
|                                   |  |                                     |           |             |                             |   |                |   |             |  |      |  
|Core deposits                      |  |                                     | 796,353   |             | 1.37                        |   |                |   | 795,164     |  | 2.12 |  
|                                   |  |                                     |           |             |                             |   |                |   |             |  |      |  
|Time deposits $100,000 and greater |  |                                     | 313,938   |             | 3.29                        |   |                |   | 239,696     |  | 4.25 |  
|Brokered deposits                  |  |                                     | 30,872    |             | 2.68                        |   |                |   | 26,458      |  | 3.15 |  
|                                   |  |                                     |           |             |                             |   |                |   |             |  |      |  
|Total deposits                     |  | $                                   | 1,141,163 |             | 1.93                        | % |                | $ | 1,061,318   |  | 2.63 | %
|                                   |  |                                     |           |             |                             |   |                |   |             |  |      |  

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 Federal Home Loan Bank of Dallas (FHLB), which have terms ranging from overnight to several years. All borrowings from the FHLB are collateralized by a blanket lien on Encore Banks mortgage-related assets. Additionally, we borrow from
customers using investment securities as collateral and have issued junior subordinated debentures to subsidiary trusts.

Our borrowings and
repurchase agreements were $221.5 million as of September 30, 2009. The outstanding balance as of September 30, 2009 includes $210.0 million in long term advances and $11.5 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.

We decreased our borrowings and repurchase agreements $50.5 million, or 18.6%, to $221.5 million as of September 30, 2009 from $272.0 million as of December 31, 2008. The decrease was due
primarily to a decrease in repurchase agreements with clients, as clients shifted into demand deposit accounts.



33



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##### Table of Contents

The following table summarizes our two issues of junior subordinated debentures outstanding as of
September 30, 2009:



|                          |  |                           |  |                                     |        |                                     |      |   |                  |                      |                    |              |   |                                      |   |                   |  |          
|------------------------- |  | ------------------------- |  | ----------------------------------- | ------ | ----------------------------------- | ---- | - | ---------------- | -------------------- | ------------------ | ------------ | - | ------------------------------------ | - | ----------------- |  | ---------
|Description               |  | Issuanceand CallDates (1) |  | TrustPreferredSecuritiesOutstanding |        | InterestRate as ofSeptember 30,2009 |      |   | Fixed/Adjustable |                      | Interest RateBasis |              |   | JuniorSubordinatedDebt Owedto Trusts |   | FinalMaturityDate
|                          |  | (dollars in thousands)   
|Encore Statutory Trust II |  | 9/17/2003                 |  | $                                   | 5,000  |                                     | 3.24 | % |                  | Adjustable quarterly |                    | 3 month      |   |                                      | $ | 5,155             |  | 9/24/2033
|                          |  |                           |  |                                     |        |                                     |      |   |                  |                      |                    | LIBOR + 2.95 | % |                                      |   |                   |  |          
|                          |  |                           |  |                                     |        |                                     |     
|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%.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Liquidity and Funding

Our liquidity represents our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the
issuance of standby letters of credit and commitments to fund future borrowings to our loan clients also affect our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore the total
commitment amounts do not necessarily represent future cash requirements affecting our liquidity position. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs and accommodate
fluctuations in asset and liability levels due to changes in our business operations or unanticipated events.

Liquidity needs of a financial
institution can be met from either assets or liabilities. On the asset side, our primary sources of liquidity are cash and due from banks, federal funds sold, maturities of securities and scheduled repayments and maturities of loans. On the
liability side, our principal sources of liquidity are deposits, borrowed funds and the accessibility to money and capital markets. Client deposits are our largest source of funds. As of September 30, 2009, our year-to-date average deposits
were $1.1 billion, or 71.5% of average total assets.

Shareholders Equity

Shareholders equity increased $718,000, or 0.4%, to $186.5 million as of September 30, 2009 compared with $185.7 million as of December 31,
2008.

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 core capital elements. Any amount above this limit can be
eligible for treatment as Tier 2 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. Encore Bank is subject to the capital adequacy
requirements of the Office of the Comptroller of the Currency (OCC) and we, as a financial holding company, are subject to the capital adequacy requirements of the Federal Reserve. As of the most recent notification from the OCC, 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,
2009:



|                        |  |                        |         |       |                             |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|----------------------- |  | ---------------------- | ------- | ----- | --------------------------- | - | ------ | ---------------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------- |  | ----- | -
|                        |  | Actual                 |         |       | For CapitalAdequacyPurposes |   |        | To Be Categorized asWell CapitalizedUnder Prompt CorrectiveAction
Provisions |       
|                        |  | Amount                 |         | Ratio |                             |   | Amount |                                                                              | Ratio  |  |      | Amount |  | Ratio |        
|                        |  | (dollars in thousands) |        
|Encore Bancshares, Inc. |  |                        |         |       |                             |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Leverage                |  | $                      | 172,973 |       | 10.94                       | % |        | $                                                                            | 63,237 |  | 4.00 | %      |  |       | N/A     |  | N/A   |  
|Tier 1 risk-based       |  |                        | 172,973 |       | 15.30                       |   |        |                                                                              | 45,215 |  | 4.00 |        |  |       | N/A     |  | N/A   |  
|Total risk-based        |  |                        | 187,276 |       | 16.57                       |   |        |                                                                              | 90,430 |  | 8.00 |        |  |       | N/A     |  | N/A   |  
|                        |  |                        |         |       |                             |  
|Encore Bank, N.A.       |  |                        |         |       |                             |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Leverage                |  | $                      | 141,426 |       | 8.96                        | % |        | $                                                                            | 63,138 |  | 4.00 | %      |  | $     | 78,923  |  | 5.00  | %
|Tier 1 risk-based       |  |                        | 141,426 |       | 12.53                       |   |        |                                                                              | 45,133 |  | 4.00 |        |  |       | 67,700  |  | 6.00  |  
|Total risk-based        |  |                        | 155,713 |       | 13.80                       |   |        |                                                                              | 90,267 |  | 8.00 |        |  |       | 112,833 |  | 10.00 |  



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

There have been no material changes in market risk from the information previously disclosed in the Asset/Liability Management section of Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.



|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 Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934). Based upon 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 2009, 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.



35



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##### Table of Contents

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 Annual Report on Form 10-K for the year ended December 31, 2008. There have been no material changes in our Risk
Factors from those disclosed in our Form 10-K.



|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 herein by reference to Exhibit 3.1 to Encore Bancshares, Inc.s Registration
Statement on Form S-1, Registration No. 333-142735 (the S-1 Registration Statement)).                 
|       | 
|3.2    |  | Articles of Amendment to Articles of Incorporation of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 to the S-1 Registration
Statement).                                                                                                         
|       | 
|3.3    |  | Statement of Designations establishing the terms of the Series A Preferred Stock of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to Encore
Bancshares, Inc.s Current Report on Form 8-K filed on December 8, 2008).                           
|       | 
|3.4    |  | Amended and Restated Bylaws of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.3 to the S-1 Registration Statement).                                                                                                                                
|       | 
|4.1    |  | Form of specimen certificate representing shares of Encore Bancshares, Inc. common stock (incorporated herein by reference to Exhibit 4.1 to the S-1 Registration Statement).                                                                                              
|       | 
|4.2    |  | Warrant, dated December 5, 2008, to purchase 364,026 shares of Encore Bancshares, Inc.s Common Stock (incorporated herein by reference to Exhibit 4.1 to Encore
Bancshares, Inc.s Current Report on Form 8-K filed on December 8, 2008).                                 
|       | 
|4.3    |  | Form of Certificate for Encore Bancshares, Inc.s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (incorporated herein by reference to
Exhibit 4.2 to Encore Bancshares, Inc.s Current Report on Form 8-K filed on December 8, 2008).
|       | 
|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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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 3, 2009 |  |  |  | /s/    JAMES S. DAGOSTINO,
JR.                                                   
|(Date)           |  |  |  | James S. DAgostino, Jr., Chief Executive Officer                                 
|                 |  | 
|November 3, 2009 |  |  |  | /s/    L. ANDERSON
CREEL                                                          
|(Date)           |  |  |  | L. Anderson Creel, Chief Financial Officer, Executive Vice President and Treasurer



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