##### 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 June 30, 2008.
|- | ----------------------------------------------------------------------------------------------------------------------------



| ̈ | 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 of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|Nine Greenway Plaza, Suite 1000, Houston, Texas                |  | 77046                            
|(Address of principal executive offices)                       |  | (Zip Code)                       

(713) 787-3100

(Registrants telephone number, including area code)





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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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         |  |  ̈
|                        |  |                                                    | 
|Non-accelerated filer   |  | x    (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 July 31, 2008, there were 10.2 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 |  | 3       
|                              |  | Item 1.  |  | Financial Statements                                                                                       |  | 3   
|                              |  |          |  | Consolidated Balance Sheets  June 30, 2008 (unaudited) and December 31, 2007                              |  | 3   
|                              |  |          | 
|                              |  |          |  | Consolidated Statements of Earnings  Three months and six months ended June 30, 2008 and 2007 (unaudited) |  | 4   
|                              |  |          | 
|                              |  |          |  | Consolidated Statement of Changes in Shareholders Equity  Six months ended June 30, 2008 (unaudited)     |  | 5   
|                              |  |          | 
|                              |  |          |  | Consolidated Statements of Cash Flows  Six months ended June 30, 2008 and 2007 (unaudited)                |  | 6   
|                              |  |          | 
|                              |  |          |  | Notes to Interim Consolidated Financial Statements (unaudited)                                             |  | 7   
|                              |  |          | 
|                              |  | Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                      |  | 15  
|                              |  |          | 
|                              |  | Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                 |  | 27  
|                              |  |          | 
|                              |  | Item 4.  |  | Controls and Procedures                                                                                    |  | 27  
|                              | 
|Part II. OTHER INFORMATION    |  | 27      
|                              |  | Item 1.  |  | Legal Proceedings                                                                                          |  | 27  
|                              |  |          | 
|                              |  | Item 1A. |  | Risk Factors                                                                                               |  | 28  
|                              |  |          | 
|                              |  | Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                |  | 28  
|                              |  |          | 
|                              |  | Item 3.  |  | Defaults Upon Senior Securities                                                                            |  | 28  
|                              |  |          | 
|                              |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                        |  | 29  
|                              |  |          | 
|                              |  | Item 5.  |  | Other Information                                                                                          |  | 29  
|                              |  |          | 
|                              |  | Item 6.  |  | Exhibits                                                                                                   |  | 29  
|                              | 
|Signatures                    |  | 30      



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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)



|                                                                                                                                   |  |              |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                   |  | June 30,2008 |           |   | December 31,2007 |  
|ASSETS                                                                                                                             |  |              |           |   |                  |   |           |  
|Cash and due from banks                                                                                                            |  | $            | 21,954    |   |                  | $ | 18,817    |  
|Interest-bearing deposits in banks                                                                                                 |  |              | 28,297    |   |                  |   | 18,581    |  
|Federal funds sold and other temporary investments                                                                                 |  |              | 10,716    |   |                  |   | 41,017    |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                          |  |              | 60,967    |   |                  |   | 78,415    |  
|Securities available-for-sale, at estimated fair value                                                                             |  |              | 41,508    |   |                  |   | 12,207    |  
|Securities held-to-maturity, at amortized cost                                                                                     |  |              | 107,424   |   |                  |   | 134,056   |  
|Mortgages held-for-sale                                                                                                            |  |              |          |   |                  |   | 1,396     |  
|Loans receivable                                                                                                                   |  |              | 1,169,151 |   |                  |   | 1,097,268 |  
|Allowance for loan losses                                                                                                          |  |              | (12,054   | ) |                  |   | (11,161   | )
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|Net loans receivable                                                                                                               |  |              | 1,157,097 |   |                  |   | 1,086,107 |  
|Federal Home Loan Bank of Dallas stock, at cost                                                                                    |  |              | 7,943     |   |                  |   | 5,880     |  
|Investment in real estate                                                                                                          |  |              | 2,063     |   |                  |   | 835       |  
|Premises and equipment, net                                                                                                        |  |              | 17,050    |   |                  |   | 16,831    |  
|Goodwill                                                                                                                           |  |              | 27,975    |   |                  |   | 27,942    |  
|Other intangible assets, net                                                                                                       |  |              | 6,406     |   |                  |   | 6,780     |  
|Cash surrender value of life insurance policies                                                                                    |  |              | 14,398    |   |                  |   | 14,091    |  
|Accrued interest receivable and other assets                                                                                       |  |              | 17,882    |   |                  |   | 16,657    |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|                                                                                                                                   |  | $            | 1,460,713 |   |                  | $ | 1,401,197 |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                               |  |              |           |   |                  |   |           |  
|Deposits:                                                                                                                          |  |              |           |   |                  |   |           |  
|Noninterest-bearing                                                                                                                |  | $            | 123,594   |   |                  | $ | 106,382   |  
|Interest-bearing                                                                                                                   |  |              | 931,149   |   |                  |   | 934,992   |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|Total deposits                                                                                                                     |  |              | 1,054,743 |   |                  |   | 1,041,374 |  
|Borrowings and repurchase agreements                                                                                               |  |              | 212,257   |   |                  |   | 173,395   |  
|Junior subordinated debentures                                                                                                     |  |              | 20,619    |   |                  |   | 20,619    |  
|Accrued interest payable and other liabilities                                                                                     |  |              | 12,882    |   |                  |   | 8,330     |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|Total liabilities                                                                                                                  |  |              | 1,300,501 |   |                  |   | 1,243,718 |  
|Commitments and contingencies                                                                                                      |  |              |          |   |                  |   |          |  
|Shareholders equity:                                                                                                              |  |              |           |   |                  |   |           |  
|Preferred stock, $1 par value, 20,000 shares authorized; none issued                                                               |  |              |          |   |                  |   |          |  
|Common stock, $1 par value, 50,000 shares authorized; 10,240 shares at June 30, 2008 and 10,128 shares at December 31, 2007 issued |  |              | 10,240    |   |                  |   | 10,128    |  
|Additional paid-in capital                                                                                                         |  |              | 109,169   |   |                  |   | 108,173   |  
|Retained earnings                                                                                                                  |  |              | 41,414    |   |                  |   | 39,763    |  
|Common stock in treasury, at cost (6 shares at June 30, 2008 and 4 shares at December 31, 2007)                                    |  |              | (98       | ) |                  |   | (69       | )
|Accumulated other comprehensive loss                                                                                               |  |              | (513      | ) |                  |   | (516      | )
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|Total shareholders equity                                                                                                         |  |              | 160,212   |   |                  |   | 157,479   |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|                                                                                                                                   |  | $            | 1,460,713 |   |                  | $ | 1,401,197 |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  

The accompanying notes are an integral part of these statements.



3



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Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

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



|                                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                    |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                    |  | 2008                       |        |   | 2007                     |   |        | 2008 |  |   | 2007   |  
|Interest income:                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Loans, including fees                               |  | $                          | 18,238 |   |                          | $ | 16,346 |      |  | $ | 36,616 |   |  | $ | 32,154 |  
|Mortgages held-for-sale                             |  |                            | 25     |   |                          |   | 1,202  |      |  |   | 57     |   |  |   | 2,323  |  
|Securities                                          |  |                            | 1,250  |   |                          |   | 1,745  |      |  |   | 2,569  |   |  |   | 4,018  |  
|Federal funds sold and other                        |  |                            | 552    |   |                          |   | 382    |      |  |   | 1,355  |   |  |   | 660    |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total interest income                               |  |                            | 20,065 |   |                          |   | 19,675 |      |  |   | 40,597 |   |  |   | 39,155 |  
|Interest expense:                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Deposits                                            |  |                            | 7,123  |   |                          |   | 9,525  |      |  |   | 15,665 |   |  |   | 18,981 |  
|Borrowings and repurchase agreements                |  |                            | 1,767  |   |                          |   | 1,779  |      |  |   | 3,522  |   |  |   | 3,668  |  
|Junior subordinated debentures                      |  |                            | 330    |   |                          |   | 373    |      |  |   | 686    |   |  |   | 828    |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total interest expense                              |  |                            | 9,220  |   |                          |   | 11,677 |      |  |   | 19,873 |   |  |   | 23,477 |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net interest income                                 |  |                            | 10,845 |   |                          |   | 7,998  |      |  |   | 20,724 |   |  |   | 15,678 |  
|Provision for loan losses                           |  |                            | 3,777  |   |                          |   | 945    |      |  |   | 5,278  |   |  |   | 1,845  |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net interest income after provision for loan losses |  |                            | 7,068  |   |                          |   | 7,053  |      |  |   | 15,446 |   |  |   | 13,833 |  
|Noninterest income:                                 |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Trust and investment management fees                |  |                            | 4,660  |   |                          |   | 4,268  |      |  |   | 9,067  |   |  |   | 8,512  |  
|Mortgage banking                                    |  |                            | 135    |   |                          |   | 2,052  |      |  |   | 189    |   |  |   | 4,244  |  
|Insurance commissions and fees                      |  |                            | 1,385  |   |                          |   | 1,562  |      |  |   | 3,112  |   |  |   | 3,275  |  
|Real estate operations                              |  |                            | (452   | ) |                          |   | 107    |      |  |   | (397   | ) |  |   | 125    |  
|Net loss on sale of available-for-sale securities   |  |                            |       |   |                          |   | (32    | )    |  |   |       |   |  |   | (181   | )
|Other                                               |  |                            | 432    |   |                          |   | 764    |      |  |   | 866    |   |  |   | 1,201  |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total noninterest income                            |  |                            | 6,160  |   |                          |   | 8,721  |      |  |   | 12,837 |   |  |   | 17,176 |  
|Noninterest expense:                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Compensation                                        |  |                            | 7,467  |   |                          |   | 7,855  |      |  |   | 15,545 |   |  |   | 15,718 |  
|Occupancy                                           |  |                            | 1,485  |   |                          |   | 1,499  |      |  |   | 2,923  |   |  |   | 2,898  |  
|Equipment                                           |  |                            | 487    |   |                          |   | 497    |      |  |   | 1,018  |   |  |   | 1,017  |  
|Advertising and promotion                           |  |                            | 219    |   |                          |   | 271    |      |  |   | 423    |   |  |   | 467    |  
|Outside data processing                             |  |                            | 717    |   |                          |   | 904    |      |  |   | 1,411  |   |  |   | 1,712  |  
|Professional fees                                   |  |                            | 739    |   |                          |   | 458    |      |  |   | 1,895  |   |  |   | 848    |  
|Intangible amortization                             |  |                            | 188    |   |                          |   | 211    |      |  |   | 375    |   |  |   | 420    |  
|Loss on early debt extinguishment                   |  |                            |       |   |                          |   | 391    |      |  |   |       |   |  |   | 391    |  
|Other                                               |  |                            | 1,295  |   |                          |   | 1,203  |      |  |   | 2,284  |   |  |   | 2,280  |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total noninterest expense                           |  |                            | 12,597 |   |                          |   | 13,289 |      |  |   | 25,874 |   |  |   | 25,751 |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net earnings before income taxes                    |  |                            | 631    |   |                          |   | 2,485  |      |  |   | 2,409  |   |  |   | 5,258  |  
|Income tax expense                                  |  |                            | 150    |   |                          |   | 827    |      |  |   | 758    |   |  |   | 1,825  |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|NET EARNINGS                                        |  | $                          | 481    |   |                          | $ | 1,658  |      |  | $ | 1,651  |   |  | $ | 3,433  |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Earnings Per Common Share:                          |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic                                               |  | $                          | 0.05   |   |                          | $ | 0.22   |      |  | $ | 0.17   |   |  | $ | 0.45   |  
|Diluted                                             |  |                            | 0.04   |   |                          |   | 0.20   |      |  |   | 0.15   |   |  |   | 0.42   |  
|Average common shares outstanding                   |  |                            | 9,886  |   |                          |   | 7,559  |      |  |   | 9,866  |   |  |   | 7,557  |  
|Diluted average common shares outstanding           |  |                            | 10,780 |   |                          |   | 8,200  |      |  |   | 10,747 |   |  |   | 8,166  |  

The accompanying notes are an integral part of these statements.



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Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY

For the Six Months Ended June 30, 2008

(Unaudited, amounts in thousands)



|                                                                                                  |  |              |   |  |                          |        |   |                  |   |               |   |  |                                            |        |  |                          |     |   |  |   |      |   |  |   |         |  
|------------------------------------------------------------------------------------------------- |  | ------------ | - |  | ------------------------ | ------ | - | ---------------- | - | ------------- | - |  | ------------------------------------------ | ------ |  | ------------------------ | --- | - |  | - | ---- | - |  | - | ------- | -
|                                                                                                  |  | Common stock |   |  | Additionalpaid-incapital |        |   | Retainedearnings |   | Treasurystock |   |  | Accumulatedothercomprehensiveincome (loss) |        |  | Totalshareholdersequity |    
|                                                                                                  |  | Shares       |   |  | Amount                   |        |   |                  |   |               |  
|Balance at January 1, 2008                                                                        |  | 10,128       |   |  | $                        | 10,128 |   |                  | $ | 108,173       |   |  | $                                          | 39,763 |  | $                        | (69 | ) |  | $ | (516 | ) |  | $ | 157,479 |  
|Stock-based compensation cost recognized in earnings                                              |  |             |   |  |                          |       |   |                  |   | 598           |   |  |                                            |       |  |                          |    |   |  |   |     |   |  |   | 598     |  
|Issuance of common shares for exercise of options                                                 |  | 41           |   |  |                          | 41     |   |                  |   | 388           |   |  |                                            |       |  |                          |    |   |  |   |     |   |  |   | 429     |  
|Issuance of restricted stock                                                                      |  | 75           |   |  |                          | 75     |   |                  |   | (75           | ) |  |                                            |       |  |                          |    |   |  |   |     |   |  |   |        |  
|Forfeitures of restricted stock                                                                   |  | (4           | ) |  |                          | (4     | ) |                  |   | 4             |   |  |                                            |       |  |                          |    |   |  |   |     |   |  |   |        |  
|Excess tax benefit from stock-based compensation                                                  |  |             |   |  |                          |       |   |                  |   | 81            |   |  |                                            |       |  |                          |    |   |  |   |     |   |  |   | 81      |  
|Purchase of treasury stock (2 shares)                                                             |  |             |   |  |                          |       |   |                  |   |              |   |  |                                            |       |  |                          | (29 | ) |  |   |     |   |  |   | (29     | )
|Comprehensive income:                                                                             |  |              |   |  |                          |        |   |                  |   |               |   |  |                                            |        |  |                          |     |   |  |   |      |   |  |   |         |  
|Net earnings                                                                                      |  |             |   |  |                          |       |   |                  |   |              |   |  |                                            | 1,651  |  |                          |    |   |  |   |     |   |  |   | 1,651   |  
|Change in net unrealized loss on securities available-for-sale, net of deferred tax expense of $1 |  |             |   |  |                          |       |   |                  |   |              |   |  |                                            |       |  |                          |    |   |  |   | 3    |   |  |   | 3       |  
|                                                                                                  |  |              |   |  |                          |        |   |                  |   |               |   |  |                                            |        |  |                          |     |   |  |   |      |   |  |   |         |  
|Total comprehensive income                                                                        |  |              |   |  |                          |        |   |                  |   |               |   |  |                                            |        |  |                          |     |   |  |   |      |   |  |   | 1,654   |  
|                                                                                                  |  |              |   |  |                          |        |   |                  |   |               |   |  |                                            |        |  |                          |     |   |  |   |      |   |  |   |         |  
|Balance at June 30, 2008                                                                          |  | 10,240       |   |  | $                        | 10,240 |   |                  | $ | 109,169       |   |  | $                                          | 41,414 |  | $                        | (98 | ) |  | $ | (513 | ) |  | $ | 160,212 |  
|                                                                                                  |  |              |   |  |                          |        |   |                  |   |               |   |  |                                            |        |  |                          |     |   |  |   |      |   |  |   |         |  

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)



|                                                                                    |  |                          |         |   |      |   |          |  
|----------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | -------- | -
|                                                                                    |  | Six Months EndedJune 30, |        
|                                                                                    |  | 2008                     |         |   | 2007 |  
|Cash flows from operating activities:                                               |  |                          |         |   |      |   |          |  
|Net earnings                                                                        |  | $                        | 1,651   |   |      | $ | 3,433    |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                          |         |   |      |   |          |  
|Provision for loan losses                                                           |  |                          | 5,278   |   |      |   | 1,845    |  
|Amortization of premiums and discounts, net                                         |  |                          | 672     |   |      |   | 846      |  
|Stock-based compensation                                                            |  |                          | 598     |   |      |   | 541      |  
|Depreciation                                                                        |  |                          | 1,536   |   |      |   | 1,193    |  
|Gain on sale of mortgage loans                                                      |  |                          | (133    | ) |      |   | (3,912   | )
|(Gain) loss on sale of foreclosed real estate                                       |  |                          | 39      |   |      |   | (13      | )
|Realized loss on sales of available-for-sale securities, net                        |  |                          |        |   |      |   | 181      |  
|Loss on early debt extinguishment                                                   |  |                          |        |   |      |   | 391      |  
|Increase in mortgage loans held-for-sale                                            |  |                          | (16,775 | ) |      |   | (142,646 | )
|Proceeds from sale of mortgage loans                                                |  |                          | 18,304  |   |      |   | 150,323  |  
|Federal Home Loan Bank of Dallas stock dividends                                    |  |                          | (118    | ) |      |   | (194     | )
|Excess tax benefit from stock-based compensation                                    |  |                          | (81     | ) |      |   | (34      | )
|Decrease in accrued interest receivable                                             |  |                          | 765     |   |      |   | 476      |  
|Increase in other assets                                                            |  |                          | (2,459  | ) |      |   | (2,036   | )
|Increase (decrease) in accrued interest payable                                     |  |                          | 81      |   |      |   | (308     | )
|Increase in other liabilities                                                       |  |                          | 4,713   |   |      |   | 614      |  
|                                                                                    |  |                          |         |   |      |   |          |  
|Net cash provided by operating activities                                           |  |                          | 14,071  |   |      |   | 10,700   |  
|                                                                                    |  |                          |         |   |      |   |          |  
|Cash flows from investing activities:                                               |  |                          |         |   |      |   |          |  
|Purchases of available-for-sale securities                                          |  |                          | (30,203 | ) |      |   | (3,065   | )
|Principal collected on available-for-sale securities                                |  |                          | 775     |   |      |   | 4,827    |  
|Proceeds from sales of available-for-sale securities                                |  |                          |        |   |      |   | 67,882   |  
|Principal collected on held-to-maturity securities                                  |  |                          | 26,465  |   |      |   | 15,719   |  
|Proceeds from sales of held-to-maturity securities                                  |  |                          |        |   |      |   | 7,414    |  
|Proceeds from sales of foreclosed real estate                                       |  |                          | 1,739   |   |      |   | 51       |  
|Cash paid for acquisition                                                           |  |                          | (33     | ) |      |   | (37      | )
|Loan purchases                                                                      |  |                          |        |   |      |   | (26,371  | )
|Loan originations and principal collections, net                                    |  |                          | (79,608 | ) |      |   | (19,290  | )
|Purchases of Federal Home Loan Bank stock                                           |  |                          | (1,945  | ) |      |   | (1,794   | )
|Redemption of Federal Home Loan Bank stock                                          |  |                          |        |   |      |   | 3,283    |  
|Purchases of premises and equipment                                                 |  |                          | (1,421  | ) |      |   | (5,474   | )
|                                                                                    |  |                          |         |   |      |   |          |  
|Net cash provided (used) by investing activities                                    |  |                          | (84,231 | ) |      |   | 43,145   |  
|                                                                                    |  |                          |         |   |      |   |          |  
|Cash flows from financing activities:                                               |  |                          |         |   |      |   |          |  
|Net increase (decrease) in deposits                                                 |  |                          | 13,369  |   |      |   | (10,539  | )
|Decrease in short term Federal Home Loan Bank of Dallas borrowings                  |  |                          |        |   |      |   | (55,000  | )
|Proceeds from long term Federal Home Loan Bank of Dallas borrowings                 |  |                          | 77,000  |   |      |   | 35,000   |  
|Repayment of long term Federal Home Loan Bank of Dallas borrowings                  |  |                          | (25,000 | ) |      |   | (25,000  | )
|Decrease in repurchase agreements                                                   |  |                          | (13,045 | ) |      |   | (887     | )
|Payment on notes payable                                                            |  |                          | (93     | ) |      |   | (92      | )
|Proceeds from issuance of junior subordinated debentures                            |  |                          |        |   |      |   | 15,464   |  
|Retirement of junior subordinated debentures                                        |  |                          |        |   |      |   | (15,855  | )
|Excess tax benefit from stock-based compensation                                    |  |                          | 81      |   |      |   | 34       |  
|Proceeds from issuance of common stock, net                                         |  |                          | 400     |   |      |   | 671      |  
|                                                                                    |  |                          |         |   |      |   |          |  
|Net cash provided (used) by financing activities                                    |  |                          | 52,712  |   |      |   | (56,204  | )
|                                                                                    |  |                          |         |   |      |   |          |  
|Net decrease in cash and cash equivalents                                           |  |                          | (17,448 | ) |      |   | (2,359   | )
|Cash and cash equivalents at beginning of period                                    |  |                          | 78,415  |   |      |   | 39,096   |  
|                                                                                    |  |                          |         |   |      |   |          |  
|Cash and cash equivalents at end of period                                          |  | $                        | 60,967  |   |      | $ | 36,737   |  
|                                                                                    |  |                          |         |   |      |   |          |  
|Supplementary cash flows information:                                               |  |                          |         |   |      |   |          |  
|Interest paid on deposits and borrowed funds                                        |  | $                        | 19,792  |   |      | $ | 22,887   |  
|Income taxes paid                                                                   |  |                          | 1,754   |   |      |   | 2,593    |  
|Noncash operating, investing and financing activities:                              |  |                          |         |   |      |   |          |  
|Real estate acquired in satisfaction of loans                                       |  |                          | 3,340   |   |      |   | 458      |  

The accompanying notes are an integral part of these statements.



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008 and 2007

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

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Encore Bancshares, Inc. is a holding company that was formed on March 28, 2000 as
Guardian Holdings, Inc. and had no operations until it acquired GSF Holding, Inc., 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, and Encore
Banks wholly-owned subsidiaries, Town & Country Insurance Agency, Inc. (Town & Country), and Linscomb & Williams, Inc. (Linscomb & Williams). 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, 2007 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, 2007. Operating results for the six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or any other period.

Nature of Operations

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

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

Adoption of New Accounting Pronouncements

On January 1, 2008, we adopted the following new accounting pronouncements:

SFAS 157  Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements;and

SFAS 159  SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities



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Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008 and 2007

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



The adoption of SFAS 157 and SFAS 159 did not have any effect on our consolidated financial
statements at the date of adoption other than expanded disclosures required by SFAS 157.

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, 2007. 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 Ended June 30, |      |   | Six Months Ended June 30, |  
|                                                                   |  | 2008                        |      |   | 2007                      |   |     | 2008 |  |   | 2007 |  
|Unrealized holding gains (losses) on available-for-sale securities |  | $                           | (140 | ) |                           | $ | (24 | )    |  | $ | 4    |   |  | $ | 1,591 |  
|Reclassification adjustment for losses realized in income          |  |                             |     |   |                           |   | (32 | )    |  |   |     |   |  |   | (181  | )
|                                                                   |  |                             |      |   |                           |   |     |      |  |   |      |   |  |   |       |  
|Net unrealized gains (losses)                                      |  |                             | (140 | ) |                           |   | (56 | )    |  |   | 4    |   |  |   | 1,410 |  
|Tax (expense) benefit                                              |  |                             | 51   |   |                           |   | 22  |      |  |   | (1   | ) |  |   | (506  | )
|                                                                   |  |                             |      |   |                           |   |     |      |  |   |      |   |  |   |       |  
|Net-of-tax amount                                                  |  | $                           | (89  | ) |                           | $ | (34 | )    |  | $ | 3    |   |  | $ | 904   |  
|                                                                   |  |                             |      |   |                           |   |     |      |  |   |      |   |  |   |       |  

Recent Accounting Pronouncements

SFAS No. 141(R), Business Combinations (SFAS 141R). Issued by the Financial Accounting Standards Board (FASB) in December 2007, SFAS 141R
establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also
provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business
combination. The provisions of SFAS 141R are effective for business combinations for which the acquisition date is within financial statements issued for fiscal years beginning after December 15, 2008, and earlier application is prohibited. We
do not expect the adoption of SFAS 141R to have a material effect on our consolidated financial statements; however, the future effect is dependent upon whether we make any future acquisitions and the specifics of those acquisitions.

SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements  An Amendment of ARB No. 51 (SFAS 160). Issued by the
FASB in December 2007, SFAS 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements(ARB 51), to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This statement also amends certain of ARB 51s consolidation procedures for consistency with the requirements of SFAS 141R. In addition, SFAS 160 also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. The provisions of SFAS 160 are effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. We do not expect the adoption of SFAS 160 to have a material
effect on our consolidated financial statements.

FASB Staff Position No. 157-2 (FSP 157-2). FSP 157-2 delays the effective date of
SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The delay is intended to allow the FASB and
constituents additional time to



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008 and 2007

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



consider the effect of various implementation issues that have arisen, or that may arise, from the application of SFAS 157. FSP 157-2 defers the effective
date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of FSP 157-2. We are currently evaluating what impact, if any, FSP 157-2 will have on our consolidated
financial statements.

FASB Staff Position No. 142-3 (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of FSP 142-3 is to improve the consistency between the useful life
of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R and other US GAAP. The provisions of FSP 142-3 are effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. We do not expect FSP 142-3 to have a material effect on our consolidated financial statements; however, the effect is
dependent upon whether we make any future acquisitions and the specifics of those acquisitions.

FASB Staff Position No. EITF 03-6-1 (EITF
03-6-1). EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under
the two-class method described in SFAS No. 128, Earnings per Share. The provisions of EITF 03-6-1 are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those
years. All prior-period EPS data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of EITF 03-6-1. Early application is not
permitted. We do not expect EITF 03-6-1 to have a material effect on our consolidated financial statements.

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

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



|                                    |  |               |         |                   |   |               |  |           |         |  |   |        
|----------------------------------- |  | ------------- | ------- | ----------------- | - | ------------- |  | --------- | ------- |  | - | -------
|                                    |  | June 30, 2008 |         | December 31, 2007
|                                    |  | Amortizedcost |         | Fairvalue         |   | Amortizedcost |  | Fairvalue
|Available-for-Sale:                 |  |               |         |                   |   |               |  |           |         |  |   |        
|Mortgage-backed securities          |  | $             | 33,327  |                   | $ | 33,163        |  | $         | 3,910   |  | $ | 3,809  
|Other                               |  |               | 4,354   |                   |   | 4,326         |  |           | 4,354   |  |   | 4,347  
|                                    |  |               |         |                   |   |               |  |           |         |  |   |        
|Total                               |  |               | 37,681  |                   |   | 37,489        |  |           | 8,264   |  |   | 8,156  
|Marketable equity securities        |  |               | 4,000   |                   |   | 4,019         |  |           | 4,000   |  |   | 4,051  
|                                    |  |               |         |                   |   |               |  |           |         |  |   |        
|Total available-for-sale securities |  | $             | 41,681  |                   | $ | 41,508        |  | $         | 12,264  |  | $ | 12,207 
|                                    |  |               |         |                   |   |               |  |           |         |  |   |        
|Held-to-Maturity:                   |  |               |         |                   |   |               |  |           |         |  |   |        
|Mortgage-backed securities          |  | $             | 107,424 |                   | $ | 107,484       |  | $         | 134,056 |  | $ | 133,454
|                                    |  |               |         |                   |   |               |  |           |         |  |   |        



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Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008 and 2007

(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:



|                                    |  |              |           |                  |   |          
|----------------------------------- |  | ------------ | --------- | ---------------- | - | ---------
|                                    |  | June 30,2008 |           | December 31,2007
|Commercial Loans:                   |  |              |           |                  |   |          
|Commercial                          |  | $            | 127,639   |                  | $ | 127,583  
|Commercial real estate              |  |              | 298,562   |                  |   | 277,047  
|Real estate construction            |  |              | 91,371    |                  |   | 100,975  
|                                    |  |              |           |                  |   |          
|Total commercial loans              |  |              | 517,572   |                  |   | 505,605  
|                                    |  |             
|Consumer Loans:                     |  |              |           |                  |   |          
|Residential real estate first lien  |  |              | 256,201   |                  |   | 271,346  
|Residential real estate second lien |  |              | 269,409   |                  |   | 195,583  
|Home equity lines                   |  |              | 79,913    |                  |   | 79,023   
|Consumer installmentindirect       |  |              | 18,806    |                  |   | 25,262   
|Consumer other                      |  |              | 27,250    |                  |   | 20,449   
|                                    |  |              |           |                  |   |          
|Total consumer loans                |  |              | 651,579   |                  |   | 591,663  
|                                    |  |              |           |                  |   |          
|Total loans receivable              |  | $            | 1,169,151 |                  | $ | 1,097,268
|                                    |  |              |           |                  |   |          

Included in loans receivable is $3,057 and $3,117 of net deferred loan origination costs at
June 30, 2008 and December 31, 2007.

Changes in the allowance for loan losses were as follows:



|                                           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------ |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                           |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                           |  | 2008                        |        |   | 2007                      |   |        | 2008 |  |   | 2007   |  
|Balance at beginning of period             |  | $                           | 11,603 |   |                           | $ | 9,790  |      |  | $ | 11,161 |   |  | $ | 9,056  |  
|Provision for loan losses                  |  |                             | 3,777  |   |                           |   | 945    |      |  |   | 5,278  |   |  |   | 1,845  |  
|Loans charged-off                          |  |                             | (3,477 | ) |                           |   | (655   | )    |  |   | (4,585 | ) |  |   | (973   | )
|Recoveries of loans previously charged-off |  |                             | 151    |   |                           |   | 88     |      |  |   | 200    |   |  |   | 240    |  
|                                           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Balance at end of period                   |  | $                           | 12,054 |   |                           | $ | 10,168 |      |  | $ | 12,054 |   |  | $ | 10,168 |  
|                                           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  

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



|                                                            |  |              |        |                  |   |       
|----------------------------------------------------------- |  | ------------ | ------ | ---------------- | - | ------
|                                                            |  | June 30,2008 |        | December 31,2007
|Impaired loans on non-accrual without a valuation allowance |  | $            | 1,775  |                  | $ |      
|Impaired loans on non-accrual with a valuation allowance    |  |              | 6,804  |                  |   | 6,901 
|                                                            |  |              |        |                  |   |       
|Total impaired loans                                        |  | $            | 8,579  |                  | $ | 6,901 
|                                                            |  |              |        |                  |   |       
|Valuation allowance related to impaired loans               |  | $            | 1,439  |                  | $ | 2,581 
|                                                            |  |              |        |                  |   |       
|Total non-accrual loans                                     |  | $            | 12,118 |                  | $ | 11,208
|                                                            |  |              |        |                  |   |       
|Total loans past due 90 days or more and still accruing     |  | $            | 240    |                  | $ | 2,183 
|                                                            |  |              |        |                  |   |       



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Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008 and 2007

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



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 June 30, 2008 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 |        
|As of June 30, 2008                   |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Tier 1 capital (to average assets)    |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Tier 1 (leverage)                     |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Encore Bancshares, Inc.               |  | $      | 146,344 |       | 10.07                        | % |        | $                                                                            | 58,131 |  | 4.00 | %      |  |       | N/A     |  | N/A   |  
|Encore Bank, N.A.                     |  |        | 118,243 |       | 8.16                         |   |        |                                                                              | 57,997 |  | 4.00 |        |  | $     | 72,496  |  | 5.00  | %
|Tier 1 capital (to risk-based assets) |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Encore Bancshares, Inc.               |  | $      | 146,344 |       | 12.82                        | % |        | $                                                                            | 45,675 |  | 4.00 | %      |  |       | N/A     |  | N/A   |  
|Encore Bank, N.A.                     |  |        | 118,243 |       | 10.37                        |   |        |                                                                              | 45,592 |  | 4.00 |        |  | $     | 68,388  |  | 6.00  | %
|Total capital (to risk-based assets)  |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Encore Bancshares, Inc.               |  | $      | 158,398 |       | 13.87                        | % |        | $                                                                            | 91,350 |  | 8.00 | %      |  |       | N/A     |  | N/A   |  
|Encore Bank, N.A.                     |  |        | 130,298 |       | 11.43                        |   |        |                                                                              | 91,184 |  | 8.00 |        |  | $     | 113,981 |  | 10.00 | %

As part of Encore Banks conversion to a national bank, the OCC required that Encore Bank
have a leverage ratio of at least 7.75% as of December 31, 2008.

NOTE E  COMMITMENTS AND CONTINGENCIES

In the second quarter of 2008, an arbitration panel made a final award related to an arbitration matter with the former owner of a company we acquired in
2005. The final award did not have a material adverse effect on our results of operations, financial position or cash flows.

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



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008 and 2007

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



NOTE F  EARNINGS PER COMMON SHARE

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



|                                                                                        |  |                             |        |                           |   |       |  |      |        |  |   |      
|--------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ------------------------- | - | ----- |  | ---- | ------ |  | - | -----
|                                                                                        |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|                                                                                        |  | 2008                        |        | 2007                      |   | 2008  |  | 2007
|Basic:                                                                                  |  |                             |        |                           |   |       |  |      |        |  |   |      
|Net earnings                                                                            |  | $                           | 481    |                           | $ | 1,658 |  | $    | 1,651  |  | $ | 3,433
|Average common shares outstanding, net of nonvested restricted stock                    |  |                             | 9,886  |                           |   | 7,559 |  |      | 9,866  |  |   | 7,557
|Per Share                                                                               |  | $                           | 0.05   |                           | $ | 0.22  |  | $    | 0.17   |  | $ | 0.45 
|Diluted:                                                                                |  |                             |        |                           |   |       |  |      |        |  |   |      
|Average common shares outstanding                                                       |  |                             | 9,886  |                           |   | 7,559 |  |      | 9,866  |  |   | 7,557
|Add: Net effect of nonvested restricted stock and the assumed exercise of stock options |  |                             | 582    |                           |   | 494   |  |      | 583    |  |   | 473  
|Contingent share-based consideration                                                    |  |                             | 312    |                           |   | 147   |  |      | 298    |  |   | 136  
|Diluted average common shares outstanding                                               |  |                             | 10,780 |                           |   | 8,200 |  |      | 10,747 |  |   | 8,166
|Per Share                                                                               |  | $                           | 0.04   |                           | $ | 0.20  |  | $    | 0.15   |  | $ | 0.42 

In July 2007, we completed our initial public offering of 1,905 shares of common stock at $21.00 per share. In
August 2007, our underwriters exercised their over-allotment option for an additional 286 shares of common stock, also at $21.00 per share. No dividends have been declared on our common stock.

NOTE G  FAIR VALUE OF FINANCIAL INSTRUMENTS

Effective January 1, 2008, we adopted SFAS 157, Fair Value Measurements. In accordance with SFAS 157, 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The table below presents the balances of assets measured at fair value on a recurring basis as of June 30, 2008:



|                                  |  |       |        |         |   |       
|--------------------------------- |  | ----- | ------ | ------- | - | ------
|Description                       |  | Total |        | Level 1
|Available-for-sale securities (1) |  | $     | 35,841 |         | $ | 35,841
|                                  |  |       |        |         |   |       
|Total                             |  | $     | 35,841 |         | $ | 35,841
|                                  |  |       |        |         |   |       



|(1) | Excludes cost-basis equity securities of $5,667.
|--- | ------------------------------------------------



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008 and 2007

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



Also, we may be required, from time to time, to measure certain other financial assets at fair value
on a non-recurring basis in accordance with US GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a non-recurring
basis during the first six months of 2008 that were still held on the balance sheet at June 30, 2008, 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 SixMonths EndedJune 30, 2008
|Loans (1)   |  | $     | 6,876 |         | $ | 6,876                                   |  | $ | 289
|            |  |       |       |         |   |                                         |  |   |    
|Total       |  | $     | 6,876 |         | $ | 6,876                                   |  | $ | 289
|            |  |       |       |         |   |                                         |  |   |    



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

We have only partially applied SFAS 157 as allowed by FSP 157-2. The major categories of non-financial assets for which we have not applied the provisions
of SFAS 157 are goodwill, other intangible assets and investment in real estate.

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, 2007. 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.



13



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##### Table of Contents

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008 and 2007

(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 June 30, 2008 |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|                                         |  |         |           |   |                 
|Net interest income (expense)            |  | $       | 11,116    |   |                  | $ | 37        |  | $     | 22     |  | $            | (330    | ) |  | $ | 10,845   
|Provision for loan losses                |  |         | 3,777     |   |                  |   |          |  |       |       |  |              |        |   |  |   | 3,777    
|Noninterest income                       |  |         | 66        |   |                  |   | 4,660     |  |       | 1,458  |  |              | (24     | ) |  |   | 6,160    
|Noninterest expense                      |  |         | 8,823     |   |                  |   | 2,725     |  |       | 1,049  |  |              |        |   |  |   | 12,597   
|                                         |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Earnings (loss) before income taxes      |  |         | (1,418    | ) |                  |   | 1,972     |  |       | 431    |  |              | (354    | ) |  |   | 631      
|Income tax expense (benefit)             |  |         | (586      | ) |                  |   | 709       |  |       | 154    |  |              | (127    | ) |  |   | 150      
|                                         |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Net earnings (loss)                      |  | $       | (832      | ) |                  | $ | 1,263     |  | $     | 277    |  | $            | (227    | ) |  | $ | 481      
|                                         |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Total assets at June 30, 2008            |  | $       | 1,472,045 |   |                  | $ | 48,146    |  | $     | 13,188 |  | $            | (72,666 | ) |  | $ | 1,460,713
|                                         |  |         |           |   |                 
|For the three months ended June 30, 2007 |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|                                         |  |         |           |   |                 
|Net interest income (expense)            |  | $       | 8,258     |   |                  | $ | 77        |  | $     | 36     |  | $            | (373    | ) |  | $ | 7,998    
|Provision for loan losses                |  |         | 945       |   |                  |   |          |  |       |       |  |              |        |   |  |   | 945      
|Noninterest income                       |  |         | 2,807     |   |                  |   | 4,268     |  |       | 1,637  |  |              | 9       |   |  |   | 8,721    
|Noninterest expense                      |  |         | 8,853     |   |                  |   | 2,988     |  |       | 1,057  |  |              | 391     |   |  |   | 13,289   
|                                         |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Earnings (loss) before income taxes      |  |         | 1,267     |   |                  |   | 1,357     |  |       | 616    |  |              | (755    | ) |  |   | 2,485    
|Income tax expense (benefit)             |  |         | 370       |   |                  |   | 483       |  |       | 232    |  |              | (258    | ) |  |   | 827      
|                                         |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Net earnings (loss)                      |  | $       | 897       |   |                  | $ | 874       |  | $     | 384    |  | $            | (497    | ) |  | $ | 1,658    
|                                         |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Total assets at June 30, 2007            |  | $       | 1,292,112 |   |                  | $ | 44,395    |  | $     | 9,101  |  | $            | (58,407 | ) |  | $ | 1,287,201
|                                         |  |         |           |   |                 
|For the six months ended June 30, 2008   |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|                                         |  |         |           |   |                 
|Net interest income (expense)            |  | $       | 21,246    |   |                  | $ | 101       |  | $     | 63     |  | $            | (686    | ) |  | $ | 20,724   
|Provision for loan losses                |  |         | 5,278     |   |                  |   |          |  |       |       |  |              |        |   |  |   | 5,278    
|Noninterest income                       |  |         | 585       |   |                  |   | 9,067     |  |       | 3,190  |  |              | (5      | ) |  |   | 12,837   
|Noninterest expense                      |  |         | 17,926    |   |                  |   | 5,795     |  |       | 2,153  |  |              |        |   |  |   | 25,874   
|                                         |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Earnings (loss) before income taxes      |  |         | (1,373    | ) |                  |   | 3,373     |  |       | 1,100  |  |              | (691    | ) |  |   | 2,409    
|Income tax expense (benefit)             |  |         | (601      | ) |                  |   | 1,213     |  |       | 394    |  |              | (248    | ) |  |   | 758      
|                                         |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Net earnings (loss)                      |  | $       | (772      | ) |                  | $ | 2,160     |  | $     | 706    |  | $            | (443    | ) |  | $ | 1,651    
|                                         |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Total assets at June 30, 2008            |  | $       | 1,472,045 |   |                  | $ | 48,146    |  | $     | 13,188 |  | $            | (72,666 | ) |  | $ | 1,460,713
|                                         |  |         |           |   |                 
|For the six months ended June 30, 2007   |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|                                         |  |         |           |   |                 
|Net interest income (expense)            |  | $       | 16,293    |   |                  | $ | 150       |  | $     | 63     |  | $            | (828    | ) |  | $ | 15,678   
|Provision for loan losses                |  |         | 1,845     |   |                  |   |          |  |       |       |  |              |        |   |  |   | 1,845    
|Noninterest income                       |  |         | 5,288     |   |                  |   | 8,512     |  |       | 3,353  |  |              | 23      |   |  |   | 17,176   
|Noninterest expense                      |  |         | 17,306    |   |                  |   | 6,015     |  |       | 2,039  |  |              | 391     |   |  |   | 25,751   
|                                         |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Earnings (loss) before income taxes      |  |         | 2,430     |   |                  |   | 2,647     |  |       | 1,377  |  |              | (1,196  | ) |  |   | 5,258    
|Income tax expense (benefit)             |  |         | 766       |   |                  |   | 950       |  |       | 504    |  |              | (395    | ) |  |   | 1,825    
|                                         |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Net earnings (loss)                      |  | $       | 1,664     |   |                  | $ | 1,697     |  | $     | 873    |  | $            | (801    | ) |  | $ | 3,433    
|                                         |  |         |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Total assets at June 30, 2007            |  | $       | 1,292,112 |   |                  | $ | 44,395    |  | $     | 9,101  |  | $            | (58,407 | ) |  | $ | 1,287,201



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

Special Cautionary Note Regarding Forward-Looking Statements

Statements and financial discussion and analysis
contained in this quarterly report on Form 10-Q that are not 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, 2007, factors that could contribute to those differences include, but are not limited to:



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



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



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



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



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



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



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



| |  |  | fiscal and 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.

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 and two loan production offices in southwest Florida. We also operate five wealth management offices and three insurance offices in Texas. As of
June 30, 2008, we reported, on a consolidated basis, total assets of $1.5 billion, total loans of $1.2 billion, total deposits of $1.1 billion, shareholders equity of $160.2 million and $2.7 billion in assets under management.

Results of Operations

Net earnings for the quarter ended
June 30, 2008 were $481,000, or $0.04 per diluted share, compared with $1.7 million, or $0.20 per diluted share, for the quarter ended June 30, 2007. During the quarter, a previously disclosed $6.3 million loan to a Houston law firm was
resolved, resulting in a charge-off of $2.1 million. Subsequently, we considered it prudent to increase the allowance for loan losses due to challenges of the current credit environment. Further, net earnings were favorably impacted by a $2.8
million improvement in net interest income and lower expenses, partially offset by a $1.9 million decrease in mortgage banking income, as a result of the strategic decision to discontinue second mortgage sales beginning in



15



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##### Table of Contents

the third quarter of 2007. We posted a return on average common equity of 1.21% and 6.07%, a return on average assets of 0.13% and 0.51%, and an efficiency
ratio of 72.97% and 78.07% for the quarters ended June 30, 2008 and 2007. The efficiency ratio is calculated by dividing total noninterest expense (excluding amortization of intangibles) by the sum of net interest income and noninterest income
(excluding gains or losses on sales of securities).

Net earnings for the six months ended June 30, 2008 were $1.7 million, or $0.15 per diluted
share, compared with $3.4 million, or $0.42 per diluted share, for the same period of 2007. Net interest income increased by $5.0 million, but this increase was offset by a $3.4 million increase in the provision for loan losses and a $4.3 million
decrease in noninterest income. The change in net earnings was different than the earnings per share primarily because of the additional shares issued in our initial public offering in the third quarter of 2007. We posted a return on average common
equity of 2.08% and 6.39%, a return on average assets of 0.23% and 0.53%, and an efficiency ratio of 75.98% and 76.68% for the six months ended June 30, 2008 and 2007.

Net Interest Income

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

Net interest income was $10.8 million for the three months ended June 30, 2008, an increase of $2.8 million, or 35.6%, compared with the second quarter of 2007. Average interest-earning assets increased $191.4 million, or 15.9%, from
the second quarter of 2007 compared with the second quarter of 2008, due primarily to growth in loans. The net interest margin for the second quarter of 2008 increased 46 basis points to 3.13%, compared with the same quarter of 2007. The improvement
in the margin was due primarily to a more favorable asset and liability mix, as Encore Bank continued to replace low yielding mortgage related assets with higher yielding loans. Average loans were $1.2 billion for the second quarter of 2008, a
$232.6 million, or 24.8%, increase compared with the same quarter of 2007. Consistent with our strategy, this increase in loans was partially offset by a $43.5 million, or 23.8%, decrease in average securities during the same period. As a result of
this shift in asset mix, loans accounted for 84.0% of earning assets during the second quarter of 2008, compared with 78.0% of earning assets for the same period of 2007. We also benefited from a steepening yield curve which allowed us to decrease
the pricing of our deposits by an average rate that was more than the decline in average yield on our earning assets. In addition, noninterest-bearing deposits were $123.5 million for the second quarter of 2008, a $13.7 million, or 12.5%, increase
compared with the same period of 2007.

Net interest income was $20.7 million for the six months ended June 30, 2008, an increase of $5.0 million, or
32.2%, compared with the same period of 2007. Average interest-earning assets increased $161.7 million, or 13.3%, due primarily to growth in loans. For the six months ended June 30, 2008, the net interest margin was 3.03%, an increase of 42
basis points, compared with the same period of 2007. The improvement in the margin was due primarily to a more favorable asset mix. Average loans were $1.1 billion for the six months ended June 30, 2008, a $217.7 million, or 23.5%, increase
compared with the same period of 2007. During the same periods, average securities decreased $66.6 million, or 32.1%, as the proceeds from the reductions in securities were used to fund loan growth.



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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. We have no tax-exempt securities and an insignificant amount of tax-exempt loans, and no tax equivalent adjustments have been made with respect to these loans.



|                                           |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|------------------------------------------ |  | ----------------------------------- | --------- | - | ------------------- | - | ----------------- |  | ---- | ------------------------- |  | - | ------------------- | - | ----------------- | - | ------ |  | ---- | -
|                                           |  | For the Three Months Ended June 30, |          
|                                           |  | 2008                                |           |   | 2007                |  
|                                           |  | AverageOutstandingBalance           |           |   | InterestEarned/Paid |   | AverageYield/Rate |  |      | AverageOutstandingBalance |  |   | InterestEarned/Paid |   | AverageYield/Rate |  
|                                           |  | (dollars in thousands)              |          
|Assets:                                    |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest-earning assets:                   |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Loans                                      |  | $                                   | 1,170,959 |   |                     | $ | 18,238            |  | 6.26 | %                         |  | $ | 938,356             |   |                   | $ | 16,346 |  | 6.99 | %
|Mortgages held-for-sale                    |  |                                     | 1,151     |   |                     |   | 25                |  | 8.74 |                           |  |   | 53,926              |   |                   |   | 1,202  |  | 8.94 |  
|Securities                                 |  |                                     | 139,510   |   |                     |   | 1,250             |  | 3.60 |                           |  |   | 183,008             |   |                   |   | 1,745  |  | 3.82 |  
|Federal funds sold and other               |  |                                     | 82,841    |   |                     |   | 552               |  | 2.68 |                           |  |   | 27,755              |   |                   |   | 382    |  | 5.52 |  
|                                           |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-earning assets              |  |                                     | 1,394,461 |   |                     |   | 20,065            |  | 5.79 |                           |  |   | 1,203,045           |   |                   |   | 19,675 |  | 6.56 |  
|Less: Allowance for loan losses            |  |                                     | (11,526   | ) |                     |   |                   |  |      |                           |  |   | (9,843              | ) |                   |   |        |  |      |  
|Noninterest-earning assets                 |  |                                     | 103,918   |   |                     |   |                   |  |      |                           |  |   | 103,512             |   |                   |   |        |  |      |  
|                                           |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total assets                               |  | $                                   | 1,486,853 |   |                     |   |                   |  |      |                           |  | $ | 1,296,714           |   |                   |   |        |  |      |  
|                                           |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Liabilities and shareholders equity:      |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest-bearing liabilities:              |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest checking                          |  | $                                   | 194,973   |   |                     | $ | 641               |  | 1.32 | %                         |  | $ | 167,956             |   |                   | $ | 1,267  |  | 3.03 | %
|Money market and savings                   |  |                                     | 307,047   |   |                     |   | 1,363             |  | 1.79 |                           |  |   | 340,950             |   |                   |   | 3,677  |  | 4.33 |  
|Time deposits                              |  |                                     | 466,199   |   |                     |   | 5,119             |  | 4.42 |                           |  |   | 373,669             |   |                   |   | 4,581  |  | 4.92 |  
|                                           |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-bearing deposits            |  |                                     | 968,219   |   |                     |   | 7,123             |  | 2.96 |                           |  |   | 882,575             |   |                   |   | 9,525  |  | 4.33 |  
|Borrowings and repurchase agreements       |  |                                     | 202,229   |   |                     |   | 1,767             |  | 3.51 |                           |  |   | 161,698             |   |                   |   | 1,779  |  | 4.41 |  
|Junior subordinated debentures             |  |                                     | 20,619    |   |                     |   | 330               |  | 6.44 |                           |  |   | 20,930              |   |                   |   | 373    |  | 7.15 |  
|                                           |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-bearing liabilities         |  |                                     | 1,191,067 |   |                     |   | 9,220             |  | 3.11 |                           |  |   | 1,065,203           |   |                   |   | 11,677 |  | 4.40 |  
|                                           |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Noninterest-bearing liabilities:           |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Noninterest-bearing deposits               |  |                                     | 123,453   |   |                     |   |                   |  |      |                           |  |   | 109,753             |   |                   |   |        |  |      |  
|Other liabilities                          |  |                                     | 12,015    |   |                     |   |                   |  |      |                           |  |   | 12,127              |   |                   |   |        |  |      |  
|                                           |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total liabilities                          |  |                                     | 1,326,535 |   |                     |   |                   |  |      |                           |  |   | 1,187,083           |   |                   |   |        |  |      |  
|Shareholders equity                       |  |                                     | 160,318   |   |                     |   |                   |  |      |                           |  |   | 109,631             |   |                   |   |        |  |      |  
|                                           |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total liabilities and shareholders equity |  | $                                   | 1,486,853 |   |                     |   |                   |  |      |                           |  | $ | 1,296,714           |   |                   |   |        |  |      |  
|                                           |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Net interest income                        |  |                                     |           |   |                     | $ | 10,845            |  |      |                           |  |   |                     |   |                   | $ | 7,998  |  |      |  
|                                           |  |                                     |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Net interest spread                        |  |                                     |           |   |                     |   |                   |  | 2.68 | %                         |  |   |                     |   |                   |   |        |  | 2.16 | %
|Net interest margin                        |  |                                     |           |   |                     |   |                   |  | 3.13 | %                         |  |   |                     |   |                   |   |        |  | 2.67 | %



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##### Table of Contents

|                                                                  |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|----------------------------------------------------------------- |  | --------------------------------- | --------- | - | ------------------- | - | ----------------- |  | ---- | ------------------------- |  | - | ------------------- | - | ----------------- | - | ------ |  | ---- | -
|                                                                  |  | For the Six Months Ended June 30, |          
|                                                                  |  | 2008                              |           |   | 2007                |  
|                                                                  |  | AverageOutstandingBalance         |           |   | InterestEarned/Paid |   | AverageYield/Rate |  |      | AverageOutstandingBalance |  |   | InterestEarned/Paid |   | AverageYield/Rate |  
|                                                                  |  | (dollars in thousands)            |          
|Assets:                                                           |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest-earning assets:                                          |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Loans                                                             |  | $                                 | 1,145,199 |   |                     | $ | 36,616            |  | 6.43 | %                         |  | $ | 927,498             |   |                   | $ | 32,154 |  | 6.99 | %
|Mortgages held-for-sale                                           |  |                                   | 1,308     |   |                     |   | 57                |  | 8.76 |                           |  |   | 53,107              |   |                   |   | 2,323  |  | 8.82 |  
|Securities                                                        |  |                                   | 140,804   |   |                     |   | 2,569             |  | 3.67 |                           |  |   | 207,450             |   |                   |   | 4,018  |  | 3.91 |  
|Federal funds sold and other                                      |  |                                   | 86,130    |   |                     |   | 1,355             |  | 3.16 |                           |  |   | 23,700              |   |                   |   | 660    |  | 5.62 |  
|                                                                  |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-earning assets                                     |  |                                   | 1,373,441 |   |                     |   | 40,597            |  | 5.94 |                           |  |   | 1,211,755           |   |                   |   | 39,155 |  | 6.52 |  
|Less: Allowance for loan losses                                   |  |                                   | (11,352   | ) |                     |   |                   |  |      |                           |  |   | (9,557              | ) |                   |   |        |  |      |  
|Noninterest-earning assets                                        |  |                                   | 103,092   |   |                     |   |                   |  |      |                           |  |   | 102,554             |   |                   |   |        |  |      |  
|                                                                  |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total assets                                                      |  | $                                 | 1,465,181 |   |                     |   |                   |  |      |                           |  | $ | 1,304,752           |   |                   |   |        |  |      |  
|                                                                  |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Liabilities, shareholders equity and puttable common stock:      |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest-bearing liabilities:                                     |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Interest checking                                                 |  | $                                 | 188,728   |   |                     | $ | 1,594             |  | 1.70 | %                         |  | $ | 175,608             |   |                   | $ | 2,568  |  | 2.95 | %
|Money market and savings                                          |  |                                   | 320,144   |   |                     |   | 3,743             |  | 2.35 |                           |  |   | 337,987             |   |                   |   | 7,296  |  | 4.35 |  
|Time deposits                                                     |  |                                   | 450,398   |   |                     |   | 10,328            |  | 4.61 |                           |  |   | 374,023             |   |                   |   | 9,117  |  | 4.92 |  
|                                                                  |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-bearing deposits                                   |  |                                   | 959,270   |   |                     |   | 15,665            |  | 3.28 |                           |  |   | 887,618             |   |                   |   | 18,981 |  | 4.31 |  
|Borrowings and repurchase agreements                              |  |                                   | 198,042   |   |                     |   | 3,522             |  | 3.58 |                           |  |   | 167,147             |   |                   |   | 3,668  |  | 4.43 |  
|Junior subordinated debentures                                    |  |                                   | 20,619    |   |                     |   | 686               |  | 6.69 |                           |  |   | 20,806              |   |                   |   | 828    |  | 8.03 |  
|                                                                  |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total interest-bearing liabilities                                |  |                                   | 1,177,931 |   |                     |   | 19,873            |  | 3.39 |                           |  |   | 1,075,571           |   |                   |   | 23,477 |  | 4.40 |  
|                                                                  |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Noninterest-bearing liabilities:                                  |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Noninterest-bearing deposits                                      |  |                                   | 115,179   |   |                     |   |                   |  |      |                           |  |   | 107,862             |   |                   |   |        |  |      |  
|Other liabilities                                                 |  |                                   | 12,664    |   |                     |   |                   |  |      |                           |  |   | 12,941              |   |                   |   |        |  |      |  
|                                                                  |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total liabilities                                                 |  |                                   | 1,305,774 |   |                     |   |                   |  |      |                           |  |   | 1,196,374           |   |                   |   |        |  |      |  
|Shareholders equity and puttable common stock                    |  |                                   | 159,407   |   |                     |   |                   |  |      |                           |  |   | 108,378             |   |                   |   |        |  |      |  
|                                                                  |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Total liabilities, shareholders equity and puttable common stock |  | $                                 | 1,465,181 |   |                     |   |                   |  |      |                           |  | $ | 1,304,752           |   |                   |   |        |  |      |  
|                                                                  |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Net interest income                                               |  |                                   |           |   |                     | $ | 20,724            |  |      |                           |  |   |                     |   |                   | $ | 15,678 |  |      |  
|                                                                  |  |                                   |           |   |                     |   |                   |  |      |                           |  |   |                     |   |                   |   |        |  |      |  
|Net interest spread                                               |  |                                   |           |   |                     |   |                   |  | 2.55 | %                         |  |   |                     |   |                   |   |        |  | 2.12 | %
|Net interest margin                                               |  |                                   |           |   |                     |   |                   |  | 3.03 | %                         |  |   |                     |   |                   |   |        |  | 2.61 | %

Provision for Loan Losses

The provision for loan losses is the amount we determine necessary to be charged against the current periods earnings to maintain the allowance for loan losses at a level that is considered adequate in relation
to the estimated losses inherent in the loan portfolio. The provision was $3.8 million and $5.3 million for the three months and six months ended June 30, 2008, compared with $945,000 and $1.8 million for the same periods of 2007. The increase
in the provision in both periods compared with the same periods of 2007 was due primarily to an additional provision of $2.1 million to reserve for possible losses as a result of the current credit environment and reflects the amount we considered
necessary to fund estimated losses inherent in the loan portfolio primarily as a result of the growth in the loan portfolio and changes in historical loss factors and other qualitative factors.



18



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Noninterest Income

Noninterest income represented 36.2% and 52.2% of total revenue for the three months ended June 30, 2008 and 2007.

Noninterest income
decreased $2.6 million, or 29.4%, to $6.2 million for the three months ended June 30, 2008, compared with the same period in 2007. The decrease was due primarily to a $1.9 million decrease in mortgage banking income and $405,000 in writedowns
of real estate, which was recorded in real estate operations. Partially offsetting the decreases was a $392,000, or 9.2%, increase in trust and investment management fees.

Noninterest income decreased $4.3 million, or 25.3%, to $12.8 million for the six months ended June 30, 2008, compared with the same period in 2007. The decrease was due primarily to a $4.1 million decrease in
mortgage banking income and the real estate writedowns. Partially offsetting the decreases was a $555,000, or 6.5%, increase in trust and investment management fees.

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



|                                                  |  |                                    |       |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | ---------------------------------- | ----- | - | -------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                  |  | For the Three MonthsEnded June 30, |       |   | For the Six MonthsEnded June 30, |  
|                                                  |  | 2008                               |       |   | 2007                             |   |       | 2008 |  |   | 2007   |  
|                                                  |  | (dollars in thousands)             |      
|Trust and investment management fees              |  | $                                  | 4,660 |   |                                  | $ | 4,268 |      |  | $ | 9,067  |   |  | $ | 8,512  |  
|Mortgage banking                                  |  |                                    | 135   |   |                                  |   | 2,052 |      |  |   | 189    |   |  |   | 4,244  |  
|Insurance commissions and fees                    |  |                                    | 1,385 |   |                                  |   | 1,562 |      |  |   | 3,112  |   |  |   | 3,275  |  
|Real estate operations                            |  |                                    | (452  | ) |                                  |   | 107   |      |  |   | (397   | ) |  |   | 125    |  
|Net loss on sale of available-for-sale securities |  |                                    |      |   |                                  |   | (32   | )    |  |   |       |   |  |   | (181   | )
|Other                                             |  |                                    | 432   |   |                                  |   | 764   |      |  |   | 866    |   |  |   | 1,201  |  
|                                                  |  |                                    |       |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Total noninterest income                          |  | $                                  | 6,160 |   |                                  | $ | 8,721 |      |  | $ | 12,837 |   |  | $ | 17,176 |  
|                                                  |  |                                    |       |   |                                  |   |       |      |  |   |        |   |  |   |        |  

Noninterest Expense

Noninterest expense was $12.6 million for the second quarter of 2008, down $692,000, or 5.2%, compared with the second quarter of 2007. The decrease in expenses was due in part to lower compensation, which was a result of last years
expense reduction initiative. In addition, the second quarter of 2007 included a nonrecurring charge for early debt extinguishment which resulted from refinancing a portion of our trust preferred securities.

Noninterest expense for the six months ended June 30, 2008 was $25.9 million, up $123,000, or 0.5%, compared with the same period of 2007. Increases in professional
fees were offset by a reduction in data processing costs, a result of lower pricing from our data service provider, and no loss on early debt extinguishment in 2008.

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



|                                  |  |                                    |        |                                  |   |        |  |      |        |  |   |       
|--------------------------------- |  | ---------------------------------- | ------ | -------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                  |  | For the Three MonthsEnded June 30, |        | For the Six MonthsEnded June 30,
|                                  |  | 2008                               |        | 2007                             |   | 2008   |  | 2007
|                                  |  | (dollars in thousands)            
|Compensation                      |  | $                                  | 7,467  |                                  | $ | 7,855  |  | $    | 15,545 |  | $ | 15,718
|Non-staff expenses:               |  |                                    |        |                                  |   |        |  |      |        |  |   |       
|Occupancy                         |  |                                    | 1,485  |                                  |   | 1,499  |  |      | 2,923  |  |   | 2,898 
|Equipment                         |  |                                    | 487    |                                  |   | 497    |  |      | 1,018  |  |   | 1,017 
|Advertising and promotion         |  |                                    | 219    |                                  |   | 271    |  |      | 423    |  |   | 467   
|Outside data processing           |  |                                    | 717    |                                  |   | 904    |  |      | 1,411  |  |   | 1,712 
|Professional fees                 |  |                                    | 739    |                                  |   | 458    |  |      | 1,895  |  |   | 848   
|Intangible amortization           |  |                                    | 188    |                                  |   | 211    |  |      | 375    |  |   | 420   
|Loss on early debt extinguishment |  |                                    |       |                                  |   | 391    |  |      |       |  |   | 391   
|Other                             |  |                                    | 1,295  |                                  |   | 1,203  |  |      | 2,284  |  |   | 2,280 
|                                  |  |                                    |        |                                  |   |        |  |      |        |  |   |       
|Total noninterest expense         |  | $                                  | 12,597 |                                  | $ | 13,289 |  | $    | 25,874 |  | $ | 25,751
|                                  |  |                                    |        |                                  |   |        |  |      |        |  |   |       



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Income Tax Expense

The provision for income taxes decreased to $150,000 for the three months ended June 30, 2008, compared with $827,000 for the same three months of 2007. The effective tax rate for the three months ended June 30, 2008 and 2007 was
23.8% and 33.3%. The provision for income taxes decreased to $758,000 for the six months ended June 30, 2008, compared with $1.8 million for the same period of 2007. The effective tax rate for the six months ended June 30, 2008 and 2007
was 31.5% and 34.7%. The change in the effective tax rate for both periods primarily reflects a change in the percentage of income that is non-taxable.

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, 2007.

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



|                                         |  |                        |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|---------------------------------------- |  | ---------------------- | --------- | - | ---------------- | - | --------- |  | ----- | ------ |  | ------------ | ------- | - |  | - | ---------
|                                         |  | Banking                |           |   | WealthManagement |   | Insurance |  | Other |        |  | Consolidated
|                                         |  | (dollars in thousands)
|For the three months ended June 30, 2008 |  |                        |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Net interest income (expense)            |  | $                      | 11,116    |   |                  | $ | 37        |  | $     | 22     |  | $            | (330    | ) |  | $ | 10,845   
|Provision for loan losses                |  |                        | 3,777     |   |                  |   |          |  |       |       |  |              |        |   |  |   | 3,777    
|Noninterest income                       |  |                        | 66        |   |                  |   | 4,660     |  |       | 1,458  |  |              | (24     | ) |  |   | 6,160    
|Noninterest expense                      |  |                        | 8,823     |   |                  |   | 2,725     |  |       | 1,049  |  |              |        |   |  |   | 12,597   
|                                         |  |                        |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Earnings (loss) before income taxes      |  |                        | (1,418    | ) |                  |   | 1,972     |  |       | 431    |  |              | (354    | ) |  |   | 631      
|Income tax expense (benefit)             |  |                        | (586      | ) |                  |   | 709       |  |       | 154    |  |              | (127    | ) |  |   | 150      
|                                         |  |                        |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Net earnings (loss)                      |  | $                      | (832      | ) |                  | $ | 1,263     |  | $     | 277    |  | $            | (227    | ) |  | $ | 481      
|                                         |  |                        |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Total assets at June 30, 2008            |  | $                      | 1,472,045 |   |                  | $ | 48,146    |  | $     | 13,188 |  | $            | (72,666 | ) |  | $ | 1,460,713
|                                         |  |                        |           |   |                 
|For the three months ended June 30, 2007 |  |                        |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Net interest income (expense)            |  | $                      | 8,258     |   |                  | $ | 77        |  | $     | 36     |  | $            | (373    | ) |  | $ | 7,998    
|Provision for loan losses                |  |                        | 945       |   |                  |   |          |  |       |       |  |              |        |   |  |   | 945      
|Noninterest income                       |  |                        | 2,807     |   |                  |   | 4,268     |  |       | 1,637  |  |              | 9       |   |  |   | 8,721    
|Noninterest expense                      |  |                        | 8,853     |   |                  |   | 2,988     |  |       | 1,057  |  |              | 391     |   |  |   | 13,289   
|                                         |  |                        |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Earnings (loss) before income taxes      |  |                        | 1,267     |   |                  |   | 1,357     |  |       | 616    |  |              | (755    | ) |  |   | 2,485    
|Income tax expense (benefit)             |  |                        | 370       |   |                  |   | 483       |  |       | 232    |  |              | (258    | ) |  |   | 827      
|                                         |  |                        |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Net earnings (loss)                      |  | $                      | 897       |   |                  | $ | 874       |  | $     | 384    |  | $            | (497    | ) |  | $ | 1,658    
|                                         |  |                        |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Total assets at June 30, 2007            |  | $                      | 1,292,112 |   |                  | $ | 44,395    |  | $     | 9,101  |  | $            | (58,407 | ) |  | $ | 1,287,201
|                                         |  |                        |           |   |                 
|For the six months ended June 30, 2008   |  |                        |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Net interest income (expense)            |  | $                      | 21,246    |   |                  | $ | 101       |  | $     | 63     |  | $            | (686    | ) |  | $ | 20,724   
|Provision for loan losses                |  |                        | 5,278     |   |                  |   |          |  |       |       |  |              |        |   |  |   | 5,278    
|Noninterest income                       |  |                        | 585       |   |                  |   | 9,067     |  |       | 3,190  |  |              | (5      | ) |  |   | 12,837   
|Noninterest expense                      |  |                        | 17,926    |   |                  |   | 5,795     |  |       | 2,153  |  |              |        |   |  |   | 25,874   
|                                         |  |                        |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Earnings (loss) before income taxes      |  |                        | (1,373    | ) |                  |   | 3,373     |  |       | 1,100  |  |              | (691    | ) |  |   | 2,409    
|Income tax expense (benefit)             |  |                        | (601      | ) |                  |   | 1,213     |  |       | 394    |  |              | (248    | ) |  |   | 758      
|                                         |  |                        |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Net earnings (loss)                      |  | $                      | (772      | ) |                  | $ | 2,160     |  | $     | 706    |  | $            | (443    | ) |  | $ | 1,651    
|                                         |  |                        |           |   |                  |   |           |  |       |        |  |              |         |   |  |   |          
|Total assets at June 30, 2008            |  | $                      | 1,472,045 |   |                  | $ | 48,146    |  | $     | 13,188 |  | $            | (72,666 | ) |  | $ | 1,460,713



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##### Table of Contents

|                                       |  |                        |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|-------------------------------------- |  | ---------------------- | --------- | ---------------- | - | --------- |  | ----- | ----- |  | ------------ | ------- | - |  | - | ---------
|                                       |  | Banking                |           | WealthManagement |   | Insurance |  | Other |       |  | Consolidated
|                                       |  | (dollars in thousands)
|For the six months ended June 30, 2007 |  |                        |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net interest income (expense)          |  | $                      | 16,293    |                  | $ | 150       |  | $     | 63    |  | $            | (828    | ) |  | $ | 15,678   
|Provision for loan losses              |  |                        | 1,845     |                  |   |          |  |       |      |  |              |        |   |  |   | 1,845    
|Noninterest income                     |  |                        | 5,288     |                  |   | 8,512     |  |       | 3,353 |  |              | 23      |   |  |   | 17,176   
|Noninterest expense                    |  |                        | 17,306    |                  |   | 6,015     |  |       | 2,039 |  |              | 391     |   |  |   | 25,751   
|                                       |  |                        |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Earnings (loss) before income taxes    |  |                        | 2,430     |                  |   | 2,647     |  |       | 1,377 |  |              | (1,196  | ) |  |   | 5,258    
|Income tax expense (benefit)           |  |                        | 766       |                  |   | 950       |  |       | 504   |  |              | (395    | ) |  |   | 1,825    
|                                       |  |                        |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Net earnings (loss)                    |  | $                      | 1,664     |                  | $ | 1,697     |  | $     | 873   |  | $            | (801    | ) |  | $ | 3,433    
|                                       |  |                        |           |                  |   |           |  |       |       |  |              |         |   |  |   |          
|Total assets at June 30, 2007          |  | $                      | 1,292,112 |                  | $ | 44,395    |  | $     | 9,101 |  | $            | (58,407 | ) |  | $ | 1,287,201

Banking

Our
banking segment lost $832,000 for the three months ended June 30, 2008, compared with net earnings of $897,000 for same period in 2007. Net interest income increased $2.9 million, or 34.6%, but was offset by an increase in the provision for
loan losses of $2.8 million and a decrease in noninterest income of $2.7 million. The net loss for the six months ended June 30, 2008 was $772,000, compared with earnings of $1.7 million for same period in 2007. Net interest income increased
$5.0 million, or 30.4%, but was offset by an increase in the provision for loan losses of $3.4 million, noninterest income decreased $4.7 million and noninterest expense increased $620,000, or 3.6%.

Net interest income for the three months ended June 30, 2008 increased $2.9 million, or 34.6%, compared with the same period of 2007. Net interest income for the
six months ended June 30, 2008 increased $5.0 million, or 30.4%, compared with the same period of 2007. The increase in both periods resulted primarily from an improvement in the net interest margin and an increase in the volume of
interest-earning assets. The net interest margin improved as a result of a more optimal mix of assets and liabilities and a steepening yield curve. 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 June 30, 2008 totaled $3.8 million, compared with
$945,000 for the same period of 2007. The provision for loan losses for the six months ended June 30, 2008 totaled $5.3 million, compared with $1.8 million for the same period of 2007. 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 June 30, 2008
decreased $2.7 million, compared with the same period in 2007. Noninterest income for the six months ended June 30, 2008 decreased $4.7 million, compared with the same period of 2007. The decrease in both periods was due primarily to lower
mortgage banking income.

Noninterest expense for the three months ended June 30, 2008 was flat compared with the same period in 2007. Noninterest
expense for the six months ended June 30, 2008 increased $620,000, or 3.6%, compared with the same period of 2007. The increase in expenses was due primarily to severance cost that was recorded in the first quarter of 2008.

Wealth Management

Net earnings for the three months ended
June 30, 2008 increased $389,000, or 44.5%, compared with the same period in 2007. Net earnings for the six months ended June 30, 2008 increased $463,000, or 27.3%, compared with the same period in 2007. The increase in earnings in both
periods was due primarily to an increase in assets under management and lower operating expenses. Assets under management increased 2.0% from June 30, 2007 to $2.7 billion as of June 30, 2008.

Noninterest income for the three months ended June 30, 2008 increased $392,000, or 9.2%, compared with the same period in 2007, due primarily to the aforementioned
increase in assets under management. Noninterest income for the six months ended June 30, 2008, increased $555,000, or 6.5%.

Noninterest expense for
the three months ended June 30, 2008 decreased $263,000, or 8.8%, compared with the same period in 2007. Noninterest expense for the six months ended June 30, 2008 decreased $220,000, or 3.7%.

Insurance

Net earnings for the three months ended June 30, 2008
decreased $107,000, or 27.9%, compared with the same period of 2007. Net earnings for the six months ended June 30, 2008 decreased $167,000, or 19.1%, compared with the same period of 2007. The decrease in both periods was due primarily to a
soft property and casualty market, resulting in lower commission income.



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Noninterest income for the three months ended June 30, 2008 decreased $179,000, or 10.9%, compared with the same
period of 2007. Noninterest income for the six months ended June 30, 2008 decreased $163,000, or 4.9%, compared with the same period in 2007. The decrease in both periods was due primarily to a soft property and casualty market.

Noninterest expense for the three months ended June 30, 2008 was flat compared with the same period of 2007. Noninterest expense for the six months ended
June 30, 2008 increased $114,000, or 5.6%, compared with the same period of 2007.

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 a refinance of $15.5 million of the debentures in April 2007. In connection with this refinance activity, we took a $391,000 charge in 2007 for early debt extinguishment, which is reflected in noninterest expense.

Financial Condition

Our total assets increased $59.5
million, or 4.2%, to $1.5 billion as of June 30, 2008 compared with total assets of $1.4 billion as of December 31, 2007. Our loan portfolio grew $71.9 million, or 6.6%, to $1.2 billion as of June 30, 2008. Our securities portfolio
increased $2.7 million, or 1.8%, to $148.9 million compared with $146.3 million as of December 31, 2007. Shareholders equity increased $2.7 million, or 1.7%, to $160.2 million compared with $157.5 million as of December 31, 2007.

Loan Portfolio

Our primary lending focus is to
professional firms, privately-owned businesses, investors and affluent individuals. To these customers, we make commercial, commercial real estate, real estate construction, residential real estate and consumer loans. Total commercial loans, which
consist of commercial, commercial real estate and real estate construction loans, accounted for 44.3% of our portfolio as of June 30, 2008. Total consumer loans, which consist of residential real estate, home equity lines of credit, consumer
installment-indirect and other consumer loans, made up 55.7% of our loan portfolio as of June 30, 2008.

Total loans were $1.2 billion as of
June 30, 2008, an increase of $71.9 million, or 6.6%, compared with loans of $1.1 billion as of December 31, 2007. The majority of loan growth occurred in residential real estate second lien, which increased $73.8 million, or 37.7%, and
commercial real estate, which increased $21.5 million, or 7.8%, to $298.6 million.

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



|                                    |  |                        |           |         |                        |   |        |   |           |  |       |  
|----------------------------------- |  | ---------------------- | --------- | ------- | ---------------------- | - | ------ | - | --------- |  | ----- | -
|                                    |  | As of June 30,2008     |           |         | As of December 31,2007 |  
|                                    |  | Amount                 |           | Percent |                        |   | Amount |   | Percent   | 
|                                    |  | (dollars in thousands) |          
|Commercial:                         |  |                        |           |         |                        |   |        |   |           |  |       |  
|Commercial                          |  | $                      | 127,639   |         | 10.9                   | % |        | $ | 127,583   |  | 11.6  | %
|Commercial real estate              |  |                        | 298,562   |         | 25.6                   |   |        |   | 277,047   |  | 25.3  |  
|Real estate construction            |  |                        | 91,371    |         | 7.8                    |   |        |   | 100,975   |  | 9.2   |  
|                                    |  |                        |           |         |                        |   |        |   |           |  |       |  
|Total commercial                    |  |                        | 517,572   |         | 44.3                   |   |        |   | 505,605   |  | 46.1  |  
|Consumer:                           |  |                        |           |         |                        |   |        |   |           |  |       |  
|Residential real estate first lien  |  |                        | 256,201   |         | 21.9                   |   |        |   | 271,346   |  | 24.7  |  
|Residential real estate second lien |  |                        | 269,409   |         | 23.1                   |   |        |   | 195,583   |  | 17.8  |  
|Home equity lines                   |  |                        | 79,913    |         | 6.8                    |   |        |   | 79,023    |  | 7.2   |  
|Consumer installment - indirect     |  |                        | 18,806    |         | 1.6                    |   |        |   | 25,262    |  | 2.3   |  
|Consumer other                      |  |                        | 27,250    |         | 2.3                    |   |        |   | 20,449    |  | 1.9   |  
|                                    |  |                        |           |         |                        |   |        |   |           |  |       |  
|Total consumer                      |  |                        | 651,579   |         | 55.7                   |   |        |   | 591,663   |  | 53.9  |  
|                                    |  |                        |           |         |                        |   |        |   |           |  |       |  
|Total loans receivable              |  | $                      | 1,169,151 |         | 100.0                  | % |        | $ | 1,097,268 |  | 100.0 | %
|                                    |  |                        |           |         |                        |   |        |   |           |  |       |  



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Nonperforming Assets

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



|                                                                  |  |                        |        |   |                        |   |        |  
|----------------------------------------------------------------- |  | ---------------------- | ------ | - | ---------------------- | - | ------ | -
|                                                                  |  | As of June 30,2008     |        |   | As of December 31,2007 |  
|                                                                  |  | (dollars in thousands) |       
|Nonaccrual loans                                                  |  | $                      | 12,118 |   |                        | $ | 11,208 |  
|Accruing loans past due 90 days or more                           |  |                        | 240    |   |                        |   | 2,183  |  
|Restructured loans (1)                                            |  |                        |       |   |                        |   |       |  
|                                                                  |  |                        |        |   |                        |   |        |  
|Total nonperforming loans                                         |  |                        | 12,358 |   |                        |   | 13,391 |  
|                                                                  |  |                        |        |   |                        |   |        |  
|Investment in real estate                                         |  |                        | 2,063  |   |                        |   | 835    |  
|                                                                  |  |                        |        |   |                        |   |        |  
|Total nonperforming assets                                        |  | $                      | 14,421 |   |                        | $ | 14,226 |  
|                                                                  |  |                        |        |   |                        |   |        |  
|Nonperforming assets to total loans and investment in real estate |  |                        | 1.23   | % |                        |   | 1.30   | %



|(1) | All troubled debt restructurings are included in nonaccrual loans.
|--- | ------------------------------------------------------------------

Nonperforming assets were $14.4 million and $14.2 million as of June 30, 2008 and December 31, 2007. Nonperforming assets were impacted by the resolution of a $6.3 million loan to a Houston law firm. This reduction was offset by
an increase in nonaccrual commercial real estate loans, which consisted primarily of two loans in Florida. Our ratio of nonperforming assets to total loans and investment in real estate was 1.23% and 1.30% as of June 30, 2008 and
December 31, 2007. Loans 90 days past due or more and still accruing were $240,000 at June 30, 2008, compared with $2.2 million at December 31, 2007. The decrease was due primarily to a construction loan in Houston that was brought
current. Investment in real estate was $2.1 million at June 30, 2008 compared with $835,000 at December 31, 2007, a $1.2 million increase due primarily to repossession of residential real estate in Houston.

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 on loans inherent in the loan portfolio. The
amount of the allowance is affected by loan charge-offs, which decrease the allowance; recoveries on loans previously charged off, which increase the allowance; and the provision for loan losses charged to earnings, which increases the allowance. In
determining the provision for loan losses, we monitor fluctuations in the allowance resulting from actual charge-offs and recoveries and periodically review the size and composition of the loan portfolio in light of current and anticipated economic
conditions. If actual losses exceed the amount of the allowance for loan losses, our earnings could be adversely affected.

The allowance for loan losses
represents 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 six months of 2008 were $4.4 million, or 0.77% of average total loans on an annualized basis, compared with $733,000, or 0.16% of average
total loans on an annualized basis for the first six months of 2007. Net charge-offs in 2008 include a $2.1 million partial charge-off of a previously disclosed 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 forthe Six MonthsEnded June 30,2008 |           |   | As of and forthe Year EndedDecember 31,2007 |  
|                                                          |  | (dollars in thousands)                        |          
|Average loans outstanding                                 |  | $                                             | 1,145,199 |   |                                             | $ | 972,760   |  
|                                                          |  |                                               |           |   |                                             |   |           |  
|Total loans outstanding at end of period                  |  | $                                             | 1,169,151 |   |                                             | $ | 1,097,268 |  
|                                                          |  |                                               |           |   |                                             |   |           |  
|Allowance for loan losses at beginning of period          |  | $                                             | 11,161    |   |                                             | $ | 9,056     |  
|                                                          |  |                                              
|Charge-offs:                                              |  |                                               |           |   |                                             |   |           |  
|Commercial:                                               |  |                                               |           |   |                                             |   |           |  
|Commercial                                                |  |                                               | (2,350    | ) |                                             |   | (62       | )
|Commercial real estate                                    |  |                                               | (369      | ) |                                             |   |          |  
|Real estate construction                                  |  |                                               | (66       | ) |                                             |   | (79       | )
|                                                          |  |                                               |           |   |                                             |   |           |  
|Total commercial                                          |  |                                               | (2,785    | ) |                                             |   | (141      | )
|                                                          |  |                                               |           |   |                                             |   |           |  
|Consumer:                                                 |  |                                               |           |   |                                             |   |           |  
|Residential real estate first lien                        |  |                                               | (236      | ) |                                             |   | (190      | )
|Residential real estate second lien                       |  |                                               | (528      | ) |                                             |   | (760      | )
|Home equity lines                                         |  |                                               | (505      | ) |                                             |   | (334      | )
|Consumer installment - indirect                           |  |                                               | (497      | ) |                                             |   | (962      | )
|Consumer other                                            |  |                                               | (34       | ) |                                             |   | (226      | )
|                                                          |  |                                               |           |   |                                             |   |           |  
|Total consumer                                            |  |                                               | (1,800    | ) |                                             |   | (2,472    | )
|                                                          |  |                                               |           |   |                                             |   |           |  
|Total charge-offs                                         |  |                                               | (4,585    | ) |                                             |   | (2,613    | )
|                                                          |  |                                               |           |   |                                             |   |           |  
|Recoveries:                                               |  |                                               |           |   |                                             |   |           |  
|Commercial:                                               |  |                                               |           |   |                                             |   |           |  
|Commercial                                                |  |                                               | 20        |   |                                             |   | 46        |  
|Commercial real estate                                    |  |                                               | 6         |   |                                             |   |          |  
|Real estate construction                                  |  |                                               |          |   |                                             |   |          |  
|                                                          |  |                                               |           |   |                                             |   |           |  
|Total commercial                                          |  |                                               | 26        |   |                                             |   | 46        |  
|                                                          |  |                                               |           |   |                                             |   |           |  
|Consumer:                                                 |  |                                               |           |   |                                             |   |           |  
|Residential real estate first lien                        |  |                                               | 20        |   |                                             |   | 34        |  
|Residential real estate second lien                       |  |                                               | 5         |   |                                             |   | 178       |  
|Home equity lines                                         |  |                                               | 2         |   |                                             |   | 43        |  
|Consumer installment - indirect                           |  |                                               | 43        |   |                                             |   | 294       |  
|Consumer other                                            |  |                                               | 104       |   |                                             |   | 94        |  
|                                                          |  |                                               |           |   |                                             |   |           |  
|Total consumer                                            |  |                                               | 174       |   |                                             |   | 643       |  
|                                                          |  |                                               |           |   |                                             |   |           |  
|Total recoveries                                          |  |                                               | 200       |   |                                             |   | 689       |  
|                                                          |  |                                               |           |   |                                             |   |           |  
|Net charge-offs                                           |  |                                               | (4,385    | ) |                                             |   | (1,924    | )
|                                                          |  |                                               |           |   |                                             |   |           |  
|Provision for loan losses                                 |  |                                               | 5,278     |   |                                             |   | 4,029     |  
|                                                          |  |                                               |           |   |                                             |   |           |  
|Allowance for loan losses at end of period                |  | $                                             | 12,054    |   |                                             | $ | 11,161    |  
|                                                          |  |                                               |           |   |                                             |   |           |  
|Ratio of net charge-offs to average loans                 |  |                                               | 0.77      | % |                                             |   | 0.20      | %
|Ratio of allowance for loan losses to period end loans    |  |                                               | 1.03      |   |                                             |   | 1.02      |  
|Ratio of allowance for loan losses to nonperforming loans |  |                                               | 97.54     |   |                                             |   | 83.35     |  



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##### Table of Contents

Deposits

Our
deposits averaged $1.1 billion for the six months ended June 30, 2008 and $1.0 billion for the year ended December 31, 2007. As of June 30, 2008, core deposits (which consist of noninterest-bearing deposits, interest checking, money
market and savings and time deposits less than $100,000) were $801.7 million, or 76.0%, of total deposits, while time deposits $100,000 and greater and brokered deposits made up 24.0% of total deposits. As of June 30, 2008, total deposits
increased $13.4 million, or 1.3%, to $1.1 billion compared with total deposits of $1.0 billion as of December 31, 2007.

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



|                                   |  |                               |           |             |                             |   |                |   |             |  |      |  
|---------------------------------- |  | ----------------------------- | --------- | ----------- | --------------------------- | - | -------------- | - | ----------- |  | ---- | -
|                                   |  | Six Months EndedJune 30, 2008 |           |             | Year EndedDecember 31, 2007 |  
|                                   |  | AverageBalance                |           | AverageRate |                             |   | AverageBalance |   | AverageRate | 
|                                   |  | (dollars in thousands)        |          
|Noninterest-bearing deposits       |  | $                             | 115,179   |             |                            | % |                | $ | 109,448     |  |     | %
|Interest checking                  |  |                               | 188,728   |             | 1.70                        |   |                |   | 172,701     |  | 2.97 |  
|Money market and savings           |  |                               | 320,144   |             | 2.35                        |   |                |   | 348,567     |  | 4.23 |  
|Time deposits less than $100,000   |  |                               | 200,931   |             | 4.70                        |   |                |   | 175,393     |  | 4.86 |  
|                                   |  |                               |           |             |                             |   |                |   |             |  |      |  
|Core deposits                      |  |                               | 824,982   |             | 2.45                        |   |                |   | 806,109     |  | 3.52 |  
|                                   |  |                               |           |             |                             |   |                |   |             |  |      |  
|Time deposits $100,000 and greater |  |                               | 234,218   |             | 4.55                        |   |                |   | 192,234     |  | 5.02 |  
|Brokered deposits                  |  |                               | 15,249    |             | 4.43                        |   |                |   | 13,220      |  | 4.54 |  
|                                   |  |                               |           |             |                             |   |                |   |             |  |      |  
|Total deposits                     |  | $                             | 1,074,449 |             | 2.93                        | % |                | $ | 1,011,563   |  | 3.82 | %
|                                   |  |                               |           |             |                             |   |                |   |             |  |      |  

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 $212.3 million
as of June 30, 2008. The outstanding balance as of June 30, 2008 includes $172.0 million in long term advances and $40.1 million in repurchase agreements with clients. Included in the long term advances are $95.0 million of long term
advances that have call provisions that are at the discretion of the FHLB which could shorten the maturity of the borrowings. Additionally, we had $154,000 in notes payable related to the acquisition of Town & Country Insurance Agency, Inc.

We increased our borrowings and repurchase agreements $38.9 million, or 22.4%, to $212.3 million as of June 30, 2008 from $173.4 million as of
December 31, 2007. The increase was due primarily to the addition of long term FHLB advances to fund the growth in our second mortgage portfolio.



25



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##### Table of Contents

The following table summarizes our two issues of junior subordinated debentures outstanding as of June 30, 2008:



|                         |  |                           |  |                                     |        |                                 |      |   |                  |                      |                    |                      |                                      |   |                   |  |          
|------------------------ |  | ------------------------- |  | ----------------------------------- | ------ | ------------------------------- | ---- | - | ---------------- | -------------------- | ------------------ | -------------------- | ------------------------------------ | - | ----------------- |  | ---------
|Description              |  | Issuanceand CallDates (1) |  | TrustPreferredSecuritiesOutstanding |        | InterestRate as ofJune 30, 2008 |      |   | Fixed/Adjustable |                      | Interest RateBasis |                      | JuniorSubordinatedDebt Owedto Trusts |   | FinalMaturityDate
|(dollars in thousands)  
|Encore StatutoryTrust II |  | 9/17/2003                 |  | $                                   | 5,000  |                                 | 5.76 | % |                  | Adjustable quarterly |                    | 3 monthLIBOR + 2.95% |                                      | $ | 5,155             |  | 9/24/2033
|                         |  |                           |  |                                     |        |                                 |     
|Encore CapitalTrust 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 customers 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 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 June 30, 2008, our year-to-date average deposits were $1.1 billion, or 73.3% of average total assets.

Shareholders Equity

Shareholders equity increased $2.7
million, or 1.7%, to $160.2 million as of June 30, 2008 compared with $157.5 million as of December 31, 2007, primarily due to net earnings.

Regulatory Capital

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



26



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##### Table of Contents

The following table presents capital amounts and ratios for us and Encore Bank as of June 30, 2008:



|                        |  |                        |         |       |                             |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|----------------------- |  | ---------------------- | ------- | ----- | --------------------------- | - | ------ | ---------------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------- |  | ----- | -
|                        |  | Actual                 |         |       | For CapitalAdequacyPurposes |   |        | To Be Categorized asWell CapitalizedUnder Prompt CorrectiveAction Provisions |       
|                        |  | Amount                 |         | Ratio |                             |   | Amount |                                                                              | Ratio  |  |      | Amount |  | Ratio |        
|                        |  | (dollars in thousands) |        
|Encore Bancshares, Inc. |  |                        |         |       |                             |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Leverage                |  | $                      | 146,344 |       | 10.07                       | % |        | $                                                                            | 58,131 |  | 4.00 | %      |  |       | N/A     |  | N/A   |  
|Tier 1 risk-based       |  |                        | 146,344 |       | 12.82                       |   |        |                                                                              | 45,675 |  | 4.00 |        |  |       | N/A     |  | N/A   |  
|Total risked-based      |  |                        | 158,398 |       | 13.87                       |   |        |                                                                              | 91,350 |  | 8.00 |        |  |       | N/A     |  | N/A   |  
|                        |  |                        |         |       |                             |  
|Encore Bank, N.A.       |  |                        |         |       |                             |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Leverage (1)            |  | $                      | 118,243 |       | 8.16                        | % |        | $                                                                            | 57,997 |  | 4.00 | %      |  | $     | 72,496  |  | 5.00  | %
|Tier 1 risk-based       |  |                        | 118,243 |       | 10.37                       |   |        |                                                                              | 45,592 |  | 4.00 |        |  |       | 68,388  |  | 6.00  |  
|Total risked-based      |  |                        | 130,298 |       | 11.43                       |   |        |                                                                              | 91,184 |  | 8.00 |        |  |       | 113,981 |  | 10.00 |  



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

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, 2007.



|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, 2007.



|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 second
quarter of 2008, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II  Other Information



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

In the second quarter of 2008, an arbitration
panel made a final award related to an arbitration matter with the former owner of a company we acquired in 2005. The final award did not have a material adverse effect on our results of operations, financial position or cash flows.

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



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##### Table of Contents

|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, 2007. 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
|------- | -----------------------------------------------------------

The
following table presents information with respect to repurchases of common stock made by us during the three months ended June 30, 2008. These shares were delivered to us by employees as payment for taxes on the vesting of restricted stock
issued under our 2000 Stock Incentive Plan.

ISSUER PURCHASES OF EQUITY SECURITIES



|                               |  |                                 |     |  |                             |       |                                                                              |   |                                                                            |  
|------------------------------ |  | ------------------------------- | --- |  | --------------------------- | ----- | ---------------------------------------------------------------------------- | - | -------------------------------------------------------------------------- | -
|Period                         |  | Total Number ofShares Purchased |     |  | Average Price Paidper Share |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor
Programs |   | Maximum Numberof Shares that MayYet Be PurchasedUnder the Plans orPrograms
|April 1, 2008  April 30, 2008 |  |                                |     |  | $                           |      |                                                                              |  |                                                                            | 
|May 1, 2008  May 31, 2008     |  |                                |     |  | $                           |      |                                                                              |  |                                                                            | 
|June 1, 2008  June 30, 2008   |  | 1,682                           | (1) |  | $                           | 17.36 |                                                                              |  |                                                                            | 
|Total                          |  | 1,682                           |     |  | $                           | 17.36 |                                                                              |  |                                                                            | 



|(1) | The 1,682 shares repurchased were not part of a publicly announced repurchase plan or program. These shares were owned and tendered by employees as payment for taxes on the vesting
of restricted stock under our 2000 Stock Incentive Plan.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

Not applicable



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##### Table of Contents

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

On
May 15, 2008, we held our Annual Meeting of Shareholders to consider and act upon the items listed below:



|1. | James S. DAgostino, Jr., G. Walter Christopherson, Charles W. Jenness, J. Bryan King, Walter M. Mischer, Jr., Edwin E. Smith, Eugene H. Vaughan, David E. Warden, Steven A.
Webster and Randa Duncan Williams were elected as directors to serve on our Board of Directors until our 2009 Annual Meeting of Shareholders, and each until their successors are duly elected and qualified, or until their earlier resignation or
removal. The table below contains a summary of shares voted for or withheld with respect to each nominated director:
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                         |  |           |  |          
|------------------------ |  | --------- |  | ---------
|                         |  | For       |  | Withheld 
|James S. DAgostino, Jr. |  | 8,415,868 |  | 994      
|G. Walter Christopherson |  | 8,390,168 |  | 26,694   
|Charles W. Jenness       |  | 8,390,168 |  | 26,694   
|J. Bryan King            |  | 8,412,968 |  | 3,894    
|Walter M. Mischer, Jr.   |  | 8,353,070 |  | 63,792   
|Edwin E. Smith           |  | 8,416,368 |  | 494      
|Eugene H. Vaughan        |  | 8,412,968 |  | 3,894    
|David E. Warden          |  | 8,184,296 |  | 232,566  
|Steven A. Webster        |  | 7,044,524 |  | 1,372,338
|Randa Duncan Williams    |  | 6,443,595 |  | 1,973,267



|2. | The shareholders approved the Encore Bancshares, Inc. 2008 Stock Awards and Incentive Plan. A total of 7,149,829 shares were voted in favor of the plan, 501,454 shares were voted
against the plan and 62,974 shares abstained from voting.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | The shareholders ratified the appointment of Grant Thornton LLP as our independent registered public accounting firm for the year ending December 31, 2008. A total of 8,407,918
shares were voted in favor of the appointment, 3,894 shares were voted against the appointment and 5,050 shares abstained from voting.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

Not applicable



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



|       |  |                                                                                                                                                                                                                                                      
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1    |  | Amended and Restated Articles of Incorporation of Encore Bancshares, Inc. (incorporated 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 by reference to Exhibit 3.2 to the S-1 Registration Statement).                                                                                          
|       | 
|3.3    |  | Amended and Restated Bylaws of Encore Bancshares, Inc. (incorporated 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 by reference to Exhibit 4.1 to the S-1 Registration Statement).                                                                               
|       | 
|31.1*  |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                           
|       | 
|31.2*  |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                           
|       | 
|32.1** |  | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                      



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

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



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##### Table of Contents

SIGNATURES

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



| |  |  |  |                        
| |  |  |  | -----------------------
| |  |  |  |                        
| |  | 
| |  |  |  | Encore Bancshares, Inc.
| |  |  |  | (Registrant)           
| |  |  |  |                        



|               |  |  |  |                                                               
|-------------- |  |  |  | --------------------------------------------------------------
|               |  |  |  |                                                               
|               |  | 
|August 4, 2008 |  |  |  | /s/ James S. DAgostino, Jr.                                  
|(Date)         |  |  |  | James S. DAgostino, Jr., Chief ExecutiveOfficer and President
|               |  |  |  |                                                               



|               |  |  |  |                                                                                 
|-------------- |  |  |  | --------------------------------------------------------------------------------
|               |  |  |  |                                                                                 
|               |  | 
|August 4, 2008 |  |  |  | /s/ L. Anderson Creel                                                           
|(Date)         |  |  |  | L. Anderson Creel, Chief FinancialOfficer, Executive Vice Presidentand Treasurer
|               |  |  |  |                                                                                 



30