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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K







|x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2008.
|- | ---------------------------------------------------------------------------------------------------------------------------------



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

For the transition period 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)                       

Registrants telephone number, including area code: (713) 787-3100

Securities registered pursuant to Section 12(b) of the Act:







|                              |  |                                           
|----------------------------- |  | ------------------------------------------
|Title of each class:          |  | Name of each exchange on which registered:
|Common Stock, $1.00 par value |  | NASDAQ Global Market                      

Securities registered pursuant to Section 12(g) of the Act: NONE





Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes   ̈    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈

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 the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ̈        Accelerated filer  x        Non-accelerated filer   ̈        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

The aggregate market value as of June 30, 2008 (the last business day of registrants most recently completed second quarter) of the shares of common stock held by non-affiliates of the registrant was
approximately $113.1 million based on the closing price of the common stock on such date.

The number of shares outstanding of the
registrants Common Stock, $1.00 par value, as of February 28, 2009 was 10.2 million.

DOCUMENTS INCORPORATED BY
REFERENCE:

Portions of the Companys Proxy Statement relating to the 2009 Annual Meeting of Shareholders, which will be filed
within 120 days after December 31, 2008, are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.









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ENCORE BANCSHARES, INC.

TABLE OF CONTENTS



|           |  |     |  |                                                                                                                  |  |     
|---------- |  | --- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |     |  | PART I.                                                                                                          |  | Page
|ITEM       |  | 1.  |  | Business                                                                                                         |  | 3   
|ITEM       |  | 1A. |  | Risk Factors                                                                                                     |  | 23  
|ITEM       |  | 1B. |  | Unresolved Staff Comments                                                                                        |  | 33  
|ITEM       |  | 2.  |  | Properties                                                                                                       |  | 34  
|ITEM       |  | 3.  |  | Legal Proceedings                                                                                                |  | 35  
|ITEM       |  | 4.  |  | Submission of Matters to a Vote of Security Holders                                                              |  | 35  
|           |  |     | 
|           |  |     |  | PART II.                                                                                                         |  |     
|ITEM       |  | 5.  |  | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 35  
|ITEM       |  | 6.  |  | Selected Consolidated Financial Data                                                                             |  | 38  
|ITEM       |  | 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 40  
|ITEM       |  | 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                       |  | 74  
|ITEM       |  | 8.  |  | Financial Statements and Supplementary Data                                                                      |  | 74  
|ITEM       |  | 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures                            |  | 74  
|ITEM       |  | 9A. |  | Controls and Procedures                                                                                          |  | 75  
|ITEM       |  | 9B. |  | Other Information                                                                                                |  | 77  
|           |  |     | 
|           |  |     |  | PART III.                                                                                                        |  |     
|ITEM       |  | 10. |  | Directors, Executive Officers and Corporate Governance                                                           |  | 77  
|ITEM       |  | 11. |  | Executive Compensation                                                                                           |  | 77  
|ITEM       |  | 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                   |  | 77  
|ITEM       |  | 13. |  | Certain Relationships and Related Transactions and Director Independence                                         |  | 77  
|ITEM       |  | 14. |  | Principal Accounting Fees and Services                                                                           |  | 77  
|           |  |     | 
|           |  |     |  | PART IV.                                                                                                         |  |     
|ITEM       |  | 15. |  | Exhibits and Financial Statement Schedules                                                                       |  | 78  
|           | 
|SIGNATURES |  | 81 



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PART I

Item 1. Business

The disclosures set forth in this item are
qualified by Item 1A. Risk Factors and by the section captioned Special Cautionary Notice Regarding Forward-Looking Statements in Part II, Item 7 of this Annual Report on Form 10-K and other cautionary statements set forth
elsewhere in this report.

General

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), 11 private client offices in the greater Houston area and six private client
offices in southwest Florida. We also operate five wealth management offices and three insurance offices in Texas through Encore Trust, a division of Encore Bank, Linscomb & Williams, Inc. (Linscomb & Williams), a subsidiary of
Encore Bank, and Town & Country Insurance Agency, Inc. (Town & Country), a subsidiary of the Company. Our principal executive office is located at Nine Greenway Plaza, Suite 1000, Houston, Texas 77046, and our telephone number is
(713) 787-3100.

Our website address is www.encorebank.com. We make available free of charge on or through our website
our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon
as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K and
is not part of this or any other report.

Recent Market Developments

Negative developments beginning in the latter half of 2007 in the sub-prime mortgage market and the securitization markets for such loans, together with volatility in oil prices and other factors, triggered
uncertainty in the financial markets in general and a general deterioration in economic conditions began. This resulted in tightening credit markets, liquidity issues, increased commercial and consumer delinquencies, increased market volatility and
a widespread reduction in business activity. These conditions have continued through 2008 and are anticipated to continue through 2009.

In
recent months, new laws and regulations have been enacted in response to these conditions. The United States government, particularly the U.S. Department of the Treasury (U.S. Treasury) and the Federal Deposit Insurance Corporation (FDIC), have
taken a variety of extraordinary measures designed to restore confidence in the financial markets and to strengthen financial institutions, including capital injections, guarantees of bank liabilities and the acquisition of illiquid assets from
banks. One such law, the Emergency Economic Stabilization Act of 2008 (ESSA) granted the U.S. Treasury the authority to take a range of actions for the purpose of stabilizing and providing liquidity to the U.S. financial markets and included
several programs, including many of the programs described below. We cannot predict at this time the effect that the recent legislative initiatives may have on our business, financial condition or results of operations.

U.S. Treasury Capital Purchase Program. On October 3, 2008, the EESA (initially introduced as the Troubled Asset Relief Program or TARP) was
enacted. TARP gave the U.S. Treasury authority to deploy up to $700 billion into the financial system with an objective of improving liquidity in capital markets. On October 14, 2008, the U.S. Treasury announced the Capital Purchase Program
(CPP), which provides for direct equity investment of perpetual preferred stock by the U.S. Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions,
including limits on executive compensation, stock redemptions and declaration of dividends. The CPP provides for the purchase by the U.S. Treasury of perpetual senior preferred stock in an aggregate amount ranging from 1% to 3% of a
participants risk-weighted assets. The CPP also requires a public company participant to issue to the U.S. Treasury warrants to purchase common stock equal to 15% of the capital invested by the U.S. Treasury.



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Pursuant to our participation in the CPP, on December 5, 2008, we issued and sold to the U.S.
Treasury (i) 34,000 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share, with a liquidation value of $1,000 per share (Series A Preferred Stock), and (ii) a warrant (Warrant) to purchase up to
364,026 shares of our common stock, at an exercise price of $14.01 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $34.0 million in cash. The Series A Preferred Stock and the Warrant were issued
in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Securities Purchase Agreement, dated December 5, 2008, pursuant to which the securities issued to the U.S. Treasury
under the CPP were sold, prevents us from paying a dividend on our common stock, limits our ability to repurchase shares of our common stock (with certain exceptions), grants the holders of the Series A Preferred Stock, the Warrant and our common
stock to be issued upon exercise of the Warrant certain registration rights and subjects us to certain executive compensation limitations included in the EESA, as amended.

FDIC Temporary Liquidity Guarantee Program. On November 21, 2008, the Board of Directors of the FDIC adopted a final rule relating to the
Temporary Liquidity Guarantee Program (TLGP) announced by the FDIC on October 14, 2008 to prevent systemic risk, promote financial stability by preserving confidence in the banking system and encourage liquidity in order to ease lending to
creditworthy businesses and consumers. The TLGP applies to, among others, all U.S. depository institutions insured by the FDIC and all U.S. bank holding companies, unless they have opted out. We did not opt out and, along with Encore Bank, have
chosen to participate in the TLGP. Under the TLGP, specific categories of newly issued senior unsecured debt issued by us or Encore Bank on or before June 30, 2009 would be guaranteed by the FDIC until June 30, 2012. Under the transaction
account guarantee component of the TLGP, all noninterest-bearing transaction deposit accounts maintained at Encore Bank are insured in full by the FDIC until December 31, 2009, regardless of the standard maximum deposit insurance amounts.
Coverage under the TLGP is available to eligible financial institutions at a cost of 50 to 100 basis points per annum, depending on the initial maturity of the senior unsecured debt and 10 basis points per annum for deposit insurance coverage on
non-interest bearing transaction account deposits on balances above $250,000.

Comprehensive Financial Stability Plan of 2009. On
February 10, 2009, U.S. Treasury Secretary Timothy Geithner announced a new comprehensive financial stability plan (Financial Stability Plan), which builds upon existing programs and earmarks the second $350 billion of unused funds originally
authorized under the EESA.

The major elements of the Financial Stability Plan include: (i) a capital assistance program that will
invest in convertible preferred stock of certain qualifying institutions, (ii) a consumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage asset-backed securities issuances, (iii) a
new public-private investment fund that will leverage public and private capital with public financing to purchase up to $500 billion to $1 trillion of legacy toxic assets from financial institutions, and (iv) assistance for
homeowners by providing up to $75 billion to reduce mortgage payments and interest rates and establishing loan modification guidelines for government and private programs.

Institutions receiving assistance under the Financial Stability Plan going forward will be subject to higher transparency and accountability standards,
including restrictions on dividends, acquisitions and executive compensation and additional disclosure requirements.

American Recovery
and Reinvestment Act of 2009. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law. Section 7001 of the ARRA amended Section 111 of the EESA in its entirety. While the U.S. Treasury
must promulgate regulations to implement the restrictions and standards set forth in Section 7001, the ARRA, among other things, significantly expands the executive compensation restrictions previously imposed by the EESA. Such restrictions
apply to any entity that has received or will receive financial assistance under the TARP, and shall generally continue to apply for as long as any obligation arising from financial assistance provided under TARP, including preferred stock we issued
under the CPP, remains outstanding. These ARRA restrictions shall not apply to any TARP recipient during such time



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when the U.S. Treasury (i) only holds a warrant to purchase common stock of such recipient or (ii) holds no preferred stock or warrant to purchase
common stock of such recipient.

As a result of our participation in the CPP, the restrictions and standards set forth in Section 7001
of the ARRA are applicable to us, subject to regulations to be promulgated by the U.S. Treasury. Pursuant to Section 7001(g) of the ARRA, we are permitted to repay the $34.0 million received under the CPP, subject to approval by our primary
Federal banking regulator, without regard to certain repayment restrictions in the Securities Purchase Agreement.

History and Franchise Transformation

Encore Bank was founded as Guardian Savings and Loan of Dallas in 1928. In September 2000, our current Chief Executive Officer, James
S. DAgostino, Jr., led a group of primarily local Houston investors in our acquisition of Guardian for $8.0 million. At the closing of the acquisition, we recapitalized our company with $25.0 million. At the time of the acquisition,
Guardians balance sheet was comprised primarily of investment securities and purchased loans funded principally by borrowings and certificates of deposit originated through brokers or our 24 branch offices in Atlanta, Boston,
Kansas City and St. Louis, and one Houston location.

Starting in September 2000, our new management team took action to
transform the bank by aligning its assets and liabilities with our business strategies. We changed the name of the bank to Encore Bank in September 2001. We targeted professional firms, privately-owned businesses, investors and affluent
individuals as clients, and initiated our strategy of providing them with superior service in a private banking environment. In four separate transactions in the period from December 2001 to September 2003, we sold all 24 branches
located outside our target markets, disposing of $674.9 million in deposits and $50.8 million in real estate. While divesting these branches, we established new private client offices in our target markets. By December 2003, we had opened nine new
private client offices in Texas and southwest Florida. We also recruited new lending officers and began changing our asset mix, replacing lower yielding investment securities and purchased mortgage loans with our own higher yielding originated
loans. On the liability side, we actively solicited deposits, replacing brokered deposits with core deposits. We now have 17 private client offices in our target markets. As of December 31, 2008, originated loans constituted 91.3% of our loan
portfolio and core deposits constituted 69.9% of our total deposits.

In addition to building out our core banking platform, we have also
completed and integrated the following series of acquisitions to add wealth management and insurance services to our product offering:

Insurance. On April 30, 2004, we acquired Town & Country. The agency, with offices in Houston and Galveston and approximately 8,870 clients, sells property and casualty insurance and is one of the largest independent
agencies in the Houston area and has a clientele that matches our target demographic. On January 1, 2005, Town & Country purchased certain assets and assumed certain liabilities of the Bumstead Insurance Agency, further enhancing the
agencys penetration of affluent households.

Trust. On March 31, 2005, we acquired National Fiduciary Services, N.A. and
renamed the entity Encore Trust Company, N.A., which subsequently became a division of Encore Bank (Encore Trust) as of June 30, 2007. Encore Trust provides personal trust services in the greater Houston metropolitan area, Dallas and Austin,
Texas. As of December 31, 2008, Encore Trust had $740.6 million in assets under management.

Investment Management and
Financial Planning. On August 31, 2005, we acquired Linscomb & Williams, an investment management and financial planning firm based in Houston. With over 30 years of experience, Linscomb & Williams is, in the opinion of
management, one of Houstons largest and most respected financial planning firms. As of December 31, 2008, Linscomb & Williams had $1.5 billion in assets under management.



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Business Strategies

We intend to use the platform we have built and the following strategies in an effort to continue to grow loans and deposits and improve profitability.

Optimize our deposit mix. Increasing personal and business checking (noninterest and interest checking, or transaction deposits) is key to our
strategy of decreasing our funding costs and continuing to increase our net interest margin from 3.18% for the year ended December 31, 2008. We have increased our business demand deposits, which has resulted largely from our continued growth in
lending to privately-owned businesses and professional firms and our offering of cash management services. We have increased our transaction deposits to $329.1 million, or 29.9% of total deposits, as of December 31, 2008 from $157.9 million, or
21.7% of total deposits, as of December 31, 2004, a compounded annual growth rate of 20.2%. Our strategy of reducing our deposit cost is largely dependent on increasing core deposits.

Continue to increase loan originations. Historically, we have grown loans organically to replace purchased mortgages as they paid down. From 2004
through 2008, we increased our total originated loans by $724.0 million, a compounded annual growth rate of 30.1%, and our total commercial loans by $357.5 million, a compounded annual growth rate of 30.8%. Given the current recession, we expect
that this growth will moderate in the near term as we believe the opportunities to make prudent loans will lessen.

Expand wealth
management and insurance businesses. We believe that our ability to offer sophisticated wealth management products and services within a high-touch community bank framework gives us a competitive advantage over traditional brokerage firms. We
believe that the current recession and stock market turmoil have created confusion and lack of trust in Wall Street investment management firms. This environment offers us the opportunity to market our objective investment management services.
However, we expect that declines in market value will impact our overall levels of assets under management in the short term.

Cost
Containment. Over the past several years, we have kept expenses approximately unchanged, despite investment in new private client offices and loan officers. Our goal in the current recessionary environment is to continue to maintain cost
control, as our operating plan includes no significant investment in new private client offices or expansion into new markets during the next twelve months.

Acquire compatible banks and financial services companies. We intend to continue to explore acquisition opportunities for bank and financial service companies, but will be selective in the acquisitions we
pursue. Given the current recession, we believe there could be FDIC assisted transactions that would offer the opportunity to acquire an attractive deposit franchise. We will focus on targets within our existing footprint or other attractive markets
with significant core deposits and/or a potential client base compatible with our operating philosophy.

Operating Philosophy

We focus on providing our banking, wealth management and insurance products and services to professional firms, privately-owned businesses, investors and
affluent individuals. These clients include attorneys, doctors and other professionals, real estate developers, executives, entrepreneurs, high net worth families, and their business interests. Our individual clients generally have a net worth of
between $500,000 and $20 million. We offer a broad array of products and services tailored to the objectives of our target clients, ranging from checking accounts to state-of-the-art cash management to real estate loans to sophisticated financial
and estate planning, all within a high-touch community bank framework.

Our clients are served by a private banker or relationship manager
who understands each clients financial needs and offers products and services designed to meet those needs. Our private bankers and relationship managers are able to offer traditional banking services and to collaborate with investment
management, financial planning, trust and insurance specialists in our subsidiaries to meet our clients financial needs.



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Banking Services

Lending Activities

We specialize in lending to professional firms, privately-owned businesses,
investors and affluent individuals. The types of loans we make to businesses include commercial loans, commercial real estate loans, real estate construction loans, revolving lines of credit, working capital loans, equipment financing and letters of
credit. We focus our lending efforts on commercial-related loans because they are generally higher yielding and often generate a deposit relationship. These loans are primarily originated in our target markets. The types of loans we make to
individuals include residential mortgage loans and mortgage loans on investment and vacation properties, unsecured and secured personal lines of credit, home equity lines of credit and overdraft protection.

In connection with our transformation, we purchased residential real estate loans and consumer loans in order to build our loan portfolio and leverage
our capital. During the last several years, we have been replacing these purchased loans with our own originated loans. The following table sets forth, as of the dates indicated, the balance of loans we originated and purchased:



|                                |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------- |  | ---------------------- | --------- | - | ---- | - | --------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                |  | December 31,           |          
|                                |  | 2008                   |           |   | 2007 |   |           | 2006 |  |   | 2005    |   |  | 2004 |        
|                                |  | (dollars in thousands) |          
|Originated loans                |  | $                      | 1,112,815 |   |      | $ | 954,140   |      |  | $ | 751,802 |   |  | $    | 606,907 |   |  | $ | 388,798 |  
|Purchased loans                 |  |                        | 105,589   |   |      |   | 143,128   |      |  |   | 156,566 |   |  |      | 201,297 |   |  |   | 271,896 |  
|                                |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total loans                     |  | $                      | 1,218,404 |   |      | $ | 1,097,268 |      |  | $ | 908,368 |   |  | $    | 808,204 |   |  | $ | 660,694 |  
|                                |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Originated loans to total loans |  |                        | 91.3      | % |      |   | 87.0      | %    |  |   | 82.8    | % |  |      | 75.1    | % |  |   | 58.8    | %

The following is a discussion of our major types of lending:

Commercial Loans

Our commercial
loans are primarily made within our market areas and are underwritten on the basis of the borrowers ability to service the debt from income. As a general practice, we take as collateral a lien on accounts receivable, inventory, equipment, or
other assets owned by the borrower and obtain the personal guaranty of the business owner. In general, commercial loans involve more credit risk than residential mortgage loans and commercial mortgage loans and, therefore, usually yield a higher
return. The increased risk derives from the expectation that commercial loans generally will be serviced principally from the operation of the business, which may not be successful, and from the type of collateral securing these loans. Generally,
historical trends have shown these types of loans to have higher delinquencies than loans collateralized by real estate. As a result of these additional complexities, variables and risks, commercial loans require more thorough underwriting and
servicing than other types of loans.

Underwriting commercial loans focuses on an analysis of cash flow, including primary and secondary
sources of repayment, and the stability of the underlying business which provides the cash flow stream for debt service. Coupled with this analysis is an assessment of the financial strength of the guarantor, the borrowers liquidity and
leverage, management experience of the owners or principals, economic conditions, industry trends and the collateral securing the loan. We require a first lien position in all collateral and the loan to value ratio of commercial loans varies based
on the collateral securing the loan. Generally, loans collateralized by accounts receivable are financed at 50% to 80% of accounts receivable less than 90 days past due. Loans collateralized by inventory will be made at 50% to 80% of the inventory
value. We offer a broad range of short- to medium-term commercial loans that generally have floating interest rates. As of December 31, 2008, we had $135.5 million in commercial loans, which represented 11.1% of our total loans.

Included in commercial loans as of December 31, 2008 are $22.2 million in loans to law firms, compared with $36.4 million as of
December 31, 2007, which are generally made to fund case expenses and which are collateralized by the anticipated fees to be received in pending cases. We require that the amount of anticipated



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fees be several times greater than the amount of the loan. However, the law firm may be unsuccessful in the final outcome in these cases, and
if successful, the ultimate collection of legal fees can be affected by changes in regulation or legislative action, such as tort reform. We also require personal guarantees of the principals of the law firm. These loans represented 16.4% of total
commercial loans and 1.8% of total loans as of December 31, 2008, and are our largest concentration within our commercial loans.

Commercial Real Estate Loans

In addition to commercial loans, we originate commercial real estate mortgage loans to finance
the purchase of real property, which generally consists of real estate with completed structures. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is dependent, in large part, on
sufficient income from the properties securing the loans to cover operating expenses and debt service. As a general practice, we require our commercial real estate loans to be secured by well-managed income producing property with adequate margins
and to be guaranteed by responsible parties. We look for opportunities where cash flow from the collateral provides adequate debt service coverage and the guarantors net worth is centered in assets other than the project we are financing.

Our commercial real estate loans are generally secured by first liens on real estate and, if rental property, an assignment of the lease,
have fixed or floating interest rates and amortize over a 10- to 25-year period with balloon payments due at the end of one to ten years. Payments on loans secured by such properties are often dependent on the successful operation or management of
the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans.

In underwriting commercial real estate loans, we seek to minimize the risks in a variety of ways, including giving careful consideration to the
propertys operating history, future operating projections, current and projected occupancy, location and physical condition. Our underwriting analysis also includes credit checks, reviews of appraisals and environmental hazards or EPA reports,
the borrowers liquidity and leverage, management experience of the owners or principals, economic conditions and industry trends. Our policies require us to visit properties on an annual basis, but our practice is to conduct more frequent
visits of properties if possible. Generally, we will originate commercial real estate loans in an amount up to 80% of the value of improved property, up to 65% of the value of raw land and up to 75% of the value of land to be acquired and developed.
As of December 31, 2008, we had $311.9 million in commercial real estate loans, which represented 25.6% of our total loans.

Residential Real Estate Loans

Our lending activities also include the origination of first and second lien residential real
estate loans that we consider to be predominately prime, collateralized by residential real estate that is located primarily in our market areas. We offer a variety of mortgage loan products which generally are amortized over 15 to 30 years. We
originate second mortgage loans through a network of brokers, primarily in the Houston, Dallas and Austin, Texas markets.

Our first lien
residential real estate loans are collateralized by 1-4 family residential real estate and generally have been originated in amounts of no more than 90% of appraised value, with most being jumbo adjustable rate mortgages. We sell most of our first
lien residential real estate loans, although we generally elect to keep for our own account loans that are nonconforming with an adjustable rate that adjusts within a period of not more than five years and made to a client who has a relationship
with us or the potential for a relationship. We retain a valid lien on real estate and obtain a title insurance policy that insures that the property is free of encumbrances. We also require hazard insurance in the amount of the loan and, if the
property is in a flood plain as designated by the Department of Housing and Urban Development, we require flood insurance. We offer the option to borrowers to advance funds on a monthly basis from which we make disbursements for items such as real
estate taxes, private mortgage insurance and hazard insurance.



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Our second lien residential real estate loans are collateralized by 1-4 family residential real estate,
located primarily in the Texas markets of Houston, Dallas and Austin. These loans are predominantly prime and used as supplemental funding in the purchase of a home. Though these loans represent a second lien position on the collateral, we
generally underwrite these loans with full documentation and an average combined loan to value of less than 90%. Historically, until the third quarter of 2007, we sold most of our second mortgage loans into the secondary market within 60 days of
production, but as a result of the disruption in the mortgage market beginning in 2007, have elected to retain them in our loan portfolio. Given the current credit environment, we do not expect to resume sales of second mortgage loans into the
secondary market in the foreseeable future. However, when the market for these loans improves, we anticipate that we will evaluate resuming sales into the secondary market.

For the year ended December 31, 2008, we originated $247.7 million in residential real estate loans, sold $25.3 million in such loans and recognized
$162,000 in gains on such sales.

Since 2000, we purchased residential mortgage loans serviced by others in order to build our loan
portfolio and leverage our capital. We have not purchased any loans with evidence of deterioration of credit quality for which it was probable, at acquisition date, that we would be unable to collect all contractually required payments. Other than
in certain circumstances, including to meet certain regulatory requirements, we do not intend to purchase such loans in the future, as it is inconsistent with our goal of developing client relationships. As of December 31, 2008, we had
$105.6 million in purchased residential real estate loans, which represented 19.4% of our residential real estate loans.

As of
December 31, 2008, our residential real estate loan portfolio was $544.1 million, which represented 44.6% of our total loans. Of this amount, $86.2 million is repriceable in one year or less and an additional $108.6 million is repriceable
in greater than one year to five years.

Real Estate Construction Loans

We make loans to finance the construction of residential properties to clients with a relationship with us or the potential of a relationship. We also
make construction loans to custom high-end home builders who operate in the markets where our clients are located, and to a limited extent, to finance commercial properties. Substantially all of our residential construction loans are originated in
our Houston market. Real estate construction loans generally are secured by first liens on real estate and have floating interest rates. We employ a third party construction inspector to make regular inspections prior to approval of periodic draws
on these loans. Underwriting guidelines similar to those described above under Commercial Real Estate Loans are also used in our construction lending activities. Real estate construction loans involve additional risks attributable to the fact that
loan funds are advanced upon the security of a project under construction, and the value of the project is typically dependent on its successful completion. As a result of these uncertainties, construction lending often involves the disbursement of
substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If we are forced to foreclose on a project prior to completion, there is no assurance
that we will be able to recover the entire unpaid portion of the loan. In addition, we may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time.

As of December 31, 2008, real estate construction loans totaled $95.7 million, which represented 7.9% of our total loans. Of this total,
$32.8 million in real estate construction loans were to finance residential construction with an identified purchaser, $21.4 million were to finance residential construction with no identified purchaser and $41.5 million were to
finance commercial construction.

Consumer Loans

From 2002 through 2005, we originated indirect automobile and boat loans. We eliminated this lending function in the third quarter of 2005, as this type of lending was not consistent with our goal of developing client
relationships. As of December 31, 2008, we had $14.4 million in consumer installment-indirect loans, which represented 1.2% of our total loans.



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Substantially all of our other consumer loan origination function exists to support client relationships.
We provide a variety of consumer loans, including automobile loans, personal loans and lines of credit (secured and unsecured) and deposit account collateralized loans. The terms of these loans typically range from 12 to 120 months
and vary based upon the nature of the collateral and size of the loan.

Generally, consumer loans entail greater risk than do real estate
secured loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on
the borrowers continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which can
be recovered on such loans. As of December 31, 2008, we had $34.2 million in other consumer loans, excluding indirect automobile and boat loans, which represented 2.8% of our total loans.

Underwriting Strategy

While Encore
Banks legal lending limit for loans to one borrower as of December 31, 2008 was $18.6 million, we generally operate within an internal lending guideline equal to less than half of our legal lending limit. Lending officers are
assigned various levels of loan approval authority based upon their respective levels of experience and expertise. Loans with relationships over the lending authority of the account officer must be approved by the loan committee, which includes our
Chief Executive Officer, Chief Credit Officer, Chief Financial Officer, Executive Vice President of Houston Banking, President of Florida Operations, and a senior loan officer, and loans with a total relationship exceeding $7.5 million must be
approved by the board of directors of Encore Bank. Prior to January 1, 2009, loans over the authority of the account officer up to $2.5 million that conformed to policy were approved by a regional loan committee in Houston or Florida
chaired by the respective head of the regional banking group. The regional loan committees were eliminated in an effort to centralize our credit underwriting decisions.

Loan decisions are documented as to the borrowers business, purpose of the loan, evaluation of the repayment source and the associated risks, evaluation of collateral, covenants and monitoring requirements, and
the risk rating rationale. When making consumer loans, we use standard credit scoring systems to assess the credit risk of consumers. Our loan committee generally meets weekly to evaluate applications for new and renewed loans, or modifications to
loans, in which the loan relationship is above an individual loan officers approval authority. Our strategy for approving or disapproving loans is to follow conservative loan policies and consistent underwriting practices which include:



| |  |  | knowing our clients;
| | - |  | --------------------



| |  |  | granting loans on sound and collectible basis;
| | - |  | ----------------------------------------------



| |  |  | ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | developing and maintaining our targeted levels of diversification for our loan portfolio as a whole and for loans within each category; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ensuring that each loan is properly documented and that any insurance coverage requirements are satisfied.
| | - |  | ----------------------------------------------------------------------------------------------------------

Managing credit risk is a company-wide process. Our strategy for credit risk management includes well-defined, centralized credit policies, uniform
underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes regular credit examinations and management reviews of loans exhibiting deterioration in credit
quality. In addition, a third party loan review is performed approximately quarterly to identify problem assets. We strive to identify potential



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problem loans early in an effort to aggressively seek resolution of these situations before the loans become a loss, record any necessary charge-offs
promptly and maintain adequate allowance levels for probable loan losses inherent in the loan portfolio. A quarterly review of potential problem loans and the allowance for loan losses is conducted by Encore Banks asset classification
committee, which reviews credit concerns and reports to the board of directors.

Deposit Products and Other Sources of Funds

Our primary sources of funds for use in our lending and investing activities consist of deposits, maturities and principal and interest
payments on loans and securities and other borrowings. We closely monitor rates and terms of competing sources of funds and utilize those sources we believe to be most cost effective and consistent with our asset and liability management policies.

Deposits

Deposits are
our principal source of funds for use in lending and for other general business purposes. We provide checking, savings, money market accounts, time deposits ranging from 90 days to five years and individual retirement accounts. For businesses, we
provide a range of cash management products and services. As of December 31, 2008, core deposits (which consist of noninterest-bearing deposits, interest checking, money markets, savings and time deposits less than $100,000) were $770.0
million, or 69.9% of total deposits, while time deposits $100,000 and greater and brokered deposits made up 30.1% of total deposits. We attempt to price our deposit products in order to promote core deposit growth and maintain our liquidity
requirements in order to satisfy client needs.

Borrowings, Repurchase Agreements and Junior Subordinated Debentures

We borrow from the Federal Home Loan Bank of Dallas (FHLB) pursuant to a blanket lien based on the value of our loans and securities. These borrowings
provide a cost effective alternative in a competitive deposit market. As of December 31, 2008, we had $210.0 million in long-term borrowings from the FHLB with remaining maturity of greater than one year, $95.0 million of which have various
call dates prior to the maturity date.

We also obtain other overnight borrowed funds under arrangements with certain clients and
investment banks whereby investment securities are sold under an agreement to repurchase the next business day. These borrowing arrangements are collateralized by pledging applicable investment securities. The borrowing costs of these arrangements
are priced lower than the daily Federal funds rate. As of December 31, 2008, we had $62.0 million in repurchase agreements.

In
addition, we have raised additional regulatory capital through the issuance of junior subordinated debentures in connection with trust preferred securities issuances by separate non-consolidated statutory trust subsidiaries in September 2003 and
April 2007.

Wealth Management Services

We provide a wide variety of wealth management services to our clients through our subsidiary, Linscomb & Williams, and the trust division of Encore Bank, Encore Trust, which we manage as one segment. As of December 31, 2008,
we had $2.2 billion in assets under management in our wealth management group.

Linscomb & Williams

Linscomb & Williams is an investment management and financial planning firm that operates primarily in the Houston market. Linscomb &
Williams provides fee-based financial planning services for clients and investment management services for a quarterly management fee based on the value of assets in the account. The



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majority of Linscomb & Williams fees originate from investment management services. Linscomb & Williams has been in Houston for over
30 years and all of the senior staff from the firm have remained with our company after we acquired it in August 2005. As of December 31, 2008, Linscomb & Williams had $1.5 billion in assets under management.

Through Linscomb & Williams, we offer personal financial planning based on a comprehensive review and coordination of a clients financial
situation and objectives that may include asset preservation/protection, employee benefits, estate planning, investments and asset allocation, retirement planning, risk management and insurance and tax planning. We also assist our clients in
preparing for special situations by offering financial planning tailored to specific situations such as charitable giving, death of a spouse, divorce, education funding, executive benefits/stock options, inheritance, legal settlements, long-term
care, retirement plan distributions and wealth transfer. Additionally, we provide financial services for businesses through financial counseling for employees, financial planning for executives and financial workshops for employees.

Our investment management services include comprehensive investment planning and implementation for individual and business clients including
understanding client objectives and risk tolerance, developing appropriate asset allocation, selecting and implementing specific investments, regular reviewing and monitoring of client portfolios and providing regular market comments, comprehensive
quarterly reports and attentive servicing of each clients needs. For discretionary investment management services, we charge a quarterly management fee in arrears, which is generally determined on a sliding scale based on the portfolio value.
Our services are independent, and a key point of differentiation to our clients is that we do not have proprietary funds to sell them, and all client assets are held in custody with a third party.

We also provide investment consulting services to individuals, companies and qualified retirement plans, which may include assistance in developing a
written statement of investment policy to provide guidance on asset allocation, asset allocation studies, assistance with money manager searches and/or mutual fund selection, manager and/or mutual fund performance measurement and/or portfolio
monitoring, review of portfolio allocation and construction and assistance with programs of employee investment education for firms sponsoring participant-directed retirement plans.

Encore Banks Trust Division

Encore Trust became a division of Encore Bank as of June 30, 2007 in connection with the merger of Encore Bank with Encore Trust Company, N.A. Prior to this merger, Encore Trust Company, N.A. was a subsidiary of Encore Bank. Encore
Trust provides trust services primarily to individuals in Houston, Austin and Dallas. The personal trust business focuses primarily on the Houston market to service the needs of individuals. We also administer court-appointed trusts on behalf of
individuals in Houston, Austin and Dallas who receive monetary awards. As of December 31, 2008, Encore Trust had $740.6 million in assets under management.

We deliver trust services to individuals under the supervision of trust professionals. Our level of involvementfrom full management to specific assistanceis based on our clients needs, the type of
trust established and the responsibilities assigned in the trust agreement. Our trust officers possess an average of 25 years of trust experience, which enables them to provide prudent and efficient management of trust assets in administering
complex financial holdings. We administer personal trusts, assist with estate trust administration, handle charitable trust and foundation needs and manage employee retirement assets in retirement programs, such as profit sharing plans, defined
benefit plans, money purchase plans, individual retirement plans and non-qualified retirement trusts for employee benefit trusts.

We also
provide management of judgment or settlement awards for minors or incapacitated persons. We handle Section 142 Trusts, Section 867 Trusts, Special Needs Trusts, 468b Qualified Settlement Fund Trusts and U.S. Government Periodic Payment
Trusts, which offer alternatives to registries of the court, annuities and guardianships. While the company we acquired and made a division of Encore Bank known as Encore Trust has



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been in business for over 50 years, approximately ten years ago the company created a special team to focus specifically on court trust business.
Court-created trusts benefit clients by providing the flexibility to adapt the administration of the trust to the needs of our clients, as those needs change, protecting assets to balance near and long-term needs, allowing distributions without
court expense, providing professional money management, creating a competitive return on investment, safeguarding against inflation, providing accurate trust accounting, allowing the ability to adjust to market conditions, avoiding liability and
malpractice issues and having the balance of principal returned at the trust end, unlike the payout system of annuities.

Insurance

We offer a wide variety of personal and commercial property and casualty insurance products through our insurance agency, Town & Country. With
offices in Houston, Galveston and, most recently, Fort Worth, Town & Country has been providing personal and commercial insurance for over 40 years. As of December 31, 2008, we had approximately 8,870 insurance clients and were one of
the largest independent insurance agencies in the Houston metropolitan area. Town & Country provides commercial, personal, and life and health insurance for businesses and individuals through a staff of 35 licensed and experienced insurance
professionals. Our independent insurance professionals can help clients select the coverage and price best suited to their particular needs. In addition to home, auto, business and life insurance, we also offer condominium and renters insurance,
fine art coverage, personal umbrella policies and boat insurance. Our commercial coverages include general liability, auto liability, workers compensation, property, professional liability, directors and officers liability, and accounts receivable
coverage. Our insurance partners include Chubb Group, Fidelity National Financial, America First, Liberty Mutual, ACE, Hanover Insurance, Progressive, Texas Mutual Insurance Company, Travelers, The Hartford, Republic, Safeco, Utica National, Zurich
Insurance, Lloyds and many more.

Competition

The banking, wealth management and insurance businesses are highly competitive, and our profitability depends principally on our ability to compete in the market areas in which we are located. In our banking business, we experience
substantial competition in attracting and retaining deposits and in making loans. The primary factors we encounter in competing for deposits are convenient office locations and rates offered. Direct competition for deposits comes from other
commercial banks and thrift institutions, money market mutual funds and corporate and government securities which may offer more attractive rates than insured depository institutions are willing to pay. The primary factors we encounter in competing
for loans include, among other things, the interest rate, loan origination fees and the range of services offered. Competition for loans normally comes from other commercial banks, thrift institutions, mortgage bankers and mortgage brokers, and
insurance companies. We believe that we have been able to compete effectively with other financial institutions by emphasizing client service, by establishing long-term relationships and building client loyalty, and by providing products and
services designed to address the specific needs of our clients.

Our senior management reviews rate surveys weekly to ensure that we are
consistently offering competitive rates. The financial institutions included in the surveys are located in our market areas and were selected based on their asset size, branch network and their consistent advertisement of similar products. We also
survey the top ten mortgage lenders in each market to ensure that our rates are competitive. In addition, newspapers we advertise in are monitored weekly to review the competitions advertising for both deposit and loan products.

Our loan and deposit rates are set by region, which enables us to respond timely to the local market conditions. We closely monitor competitor responses
regarding our rates and product types to ensure that we are emphasizing the most effective products and utilizing the most efficient rates in each market. Ultimately, we seek to balance the rate levels in each region to achieve the appropriate
overall target cost of funds.

In providing wealth management services, we compete with a wide variety of firms including national and
regional investment management and financial planning firms, broker-dealers, accounting firms, trust companies



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##### Index to Financial Statements

and law firms. Many of these companies have greater resources and may already have relationships with our clients in related product areas. We believe that
our ability to compete effectively with other firms is dependent upon the quality and level of service, personal relationships, price and investment performance. These factors are also the basis for competition in the insurance industry. With
respect to our insurance business, some of Town & Countrys competitors are larger and have greater resources than we do and operate on an international scale. We are also in competition with insurance companies that write insurance
directly for their customers as well as companies that provide self-insurance and other employer-sponsored programs.

Supervision and Regulation

The following is a summary description of the relevant laws, rules and regulations governing banks and bank holding companies and our
wealth management and insurance subsidiaries. The descriptions of, and references to, the statutes and regulations below are brief summaries and do not purport to be complete. The descriptions are qualified in their entirety by reference to the
specific statutes and regulations discussed.

General

The supervision and regulation of bank holding companies and their subsidiaries is intended primarily for the protection of depositors, the Deposit Insurance Fund (DIF) of the FDIC and the banking system as a whole,
and not for the protection of the bank holding company, shareholders or creditors. The banking agencies have broad enforcement power over bank holding companies and banks, including the power to impose substantial fines and other penalties for
violations of laws and regulations.

Various legislation and proposals to overhaul the bank regulatory system and limit the investments
that a depository institution may make with insured funds are introduced in Congress from time to time. Such legislation may change banking statutes and our operating environment and that of our banking subsidiary in substantial and unpredictable
ways. In addition, the Texas state legislature from time to time considers legislation affecting insurance agencies operating in the state. We cannot determine the ultimate effect that any potential legislation, if enacted, or implemented
regulations with respect thereto, would have upon the financial condition or results of operations of us or our subsidiaries.

Encore Bancshares, Inc.

On March 30, 2007, we converted from a thrift holding company to a bank holding company and registered with the Board of Governors
of the Federal Reserve System (Federal Reserve) under the Bank Holding Company Act of 1956, as amended (BHCA). Our conversion was accomplished in connection with the conversion of Encore Bank from a federal savings association to a national bank.
Accordingly, we are subject to supervision, regulation and examination by the Federal Reserve. The Gramm-Leach-Bliley Act, the BHCA and other federal laws subject financial and bank holding companies to particular restrictions on the types of
activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.

Regulatory Restrictions on Dividends; Source of Strength. We are regarded as a legal entity separate and distinct from Encore Bank. The principal
source of our revenue is dividends received from Encore Bank. As described in more detail below, federal law places limitations on the amount that national banks may pay in dividends, which Encore Bank must adhere to when paying dividends to us. It
is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organizations expected
future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding companys ability to serve as a source of strength to its banking subsidiaries.

Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to each of its banking
subsidiaries and commit resources to their support. Such support may be required at times



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when, absent this Federal Reserve policy, a holding company may not be inclined to provide it. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an undercapitalized banking subsidiary.

In the event of a bank holding
companys bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and to cure immediately any deficit under any commitment by the debtor holding company to any of the federal banking agencies to
maintain the capital of an insured depository institution. Any claim for breach of such obligation will generally have priority over most other unsecured claims.

Scope of Permissible Activities. Under the BHCA, bank holding companies generally may not acquire a direct or indirect interest in or control of more than 5% of the voting shares of any company that is not a
bank or bank holding company or from engaging in activities other than those of banking, managing or controlling banks or furnishing services to or performing services for its subsidiaries, except that it may engage in, directly or indirectly,
certain activities that the Federal Reserve has determined to be closely related to banking or managing and controlling banks as to be a proper incident thereto. These activities include, among other things, numerous services and functions performed
in connection with lending, investing and financial counseling and tax planning. In approving acquisitions or the addition of activities, the Federal Reserve considers, among other things, whether the acquisition or the additional activities can
reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources, decreased or unfair competition,
conflicts of interest or unsound banking practices.

The Gramm-Leach-Bliley Act, effective March 11, 2000, eliminated many of the
historical barriers to affiliations among banks, securities firms, insurance companies and other financial service providers and permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature.

Safe and Sound Banking Practices. Bank holding
companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserves Regulation Y, for example, generally requires a holding company to give the Federal Reserve prior notice of any redemption or repurchase of its
own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the holding companys consolidated net worth. The Federal Reserve
may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve could take the position that paying a
dividend would constitute an unsafe or unsound banking practice.

The Federal Reserve has broad authority to prohibit activities of bank
holding companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and
reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1.0 million for each day the activity continues.

Anti-Tying Restrictions. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as
extensions of credit, to other services offered by a holding company or its affiliates.

Capital Adequacy Requirements. The Federal
Reserve has adopted a system using risk-based capital guidelines to evaluate the capital adequacy of bank holding companies. Under the guidelines, specific categories of assets are assigned different risk weights, based generally on the perceived
credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a risk-weighted asset base. The guidelines require a minimum total risk-based capital ratio of 8.0% (of which at least 4.0% is
required to consist of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2 capital. As of December 31, 2008, our ratio of Tier 1 capital to total risk-weighted assets was 14.58% and our ratio of total capital to total
risk-weighted assets was 15.84%.



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In addition to the risk-based capital guidelines, the Federal Reserve uses a leverage ratio as an
additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a companys Tier 1 capital divided by its average total consolidated assets. Certain highly rated bank holding companies may maintain a minimum
leverage ratio of 3.0%, but other bank holding companies are required to maintain a leverage ratio of 4.0%. As of December 31, 2008, our leverage ratio was 11.61%.

The federal banking agencies risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest
regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization
that are higher than the minimum ratios when circumstances warrant. Federal Reserve guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant reliance on intangible assets.

Imposition of Liability for
Undercapitalized Subsidiaries. Bank regulators are required to take prompt corrective action to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes
undercapitalized, it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiarys
compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institutions holding company is entitled to a priority of payment in bankruptcy.

The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institutions assets at the time it
became undercapitalized or the amount necessary to cause the institution to be adequately capitalized. The bank regulators have greater power in situations where an institution becomes significantly or critically
undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other affiliates.

Acquisitions by Bank Holding Companies. The BHCA requires
every bank holding company to obtain the prior approval of the Federal Reserve before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own
or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve is required to consider, among other things, the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and various competitive factors.

Control Acquisitions. The Change in Bank Control Act (CBCA) prohibits a person or group of persons from acquiring control of a bank holding company unless the Federal Reserve has been notified and
has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12
of the Exchange Act, such as us, under the circumstances set forth in the presumption, constitutes acquisition of control of our company.

In addition, the CBCA prohibits any entity from acquiring 25% (5% in the case of an acquiror that is a bank holding company) or more of a bank holding companys or banks voting securities, or otherwise obtaining control or a
controlling influence over a bank holding company or bank without the prior approval of the Federal Reserve. In most circumstances, an entity that owns 25% or more of the voting securities of a banking organization owns enough of the capital
resources to have a controlling influence over such banking organization for purposes of the CBCA. On September 22, 2008, the Federal Reserve issued a policy statement on equity



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investments in bank holding companies and banks, which allows the Federal Reserve to generally be able to conclude that an entitys investment is not
controlling if the entity does not own in excess of 15% of the voting power and 33% of the total equity of the bank holding company or bank. Depending on the nature of the overall investment and the capital structure of the banking
organization, based on the policy statement, the Federal Reserve Board will permit noncontrolling investments in the form of voting and nonvoting shares that represent in the aggregate (i) less than one-third of the total equity of the banking
organization (and less than one-third of any class of voting securities, assuming conversion of all convertible nonvoting securities held by the entity) and (ii) less than 15% of any class of voting securities of the banking organization.

Encore Bank

On March 30, 2007,
Encore Bank converted from a federal savings association to a national bank. As a national banking association, the deposits of Encore Bank are insured by the DIF of the FDIC. Encore Banks primary regulator is the Office of the Comptroller of
the Currency (OCC). By virtue of the insurance of its deposits, however, Encore Bank is also subject to supervision and regulation by the FDIC. In addition, because Encore Bank is also a member of the Federal Reserve System, it is subject to
regulation pursuant to the Federal Reserve Act. Such supervision and regulation subjects Encore Bank to special restrictions, requirements, potential enforcement actions and periodic examination by the OCC. Because the Federal Reserve regulates us
as a holding company parent of Encore Bank, the Federal Reserves supervisory authority over us directly affects Encore Bank.

Financial Modernization. Under the Gramm-Leach-Bliley Act, a national bank may establish a financial subsidiary and engage, subject to limitations on investment, in activities that are financial in nature, other than insurance
underwriting, insurance company portfolio investment, real estate development, real estate investment, annuity issuance and merchant banking activities. To do so, a bank must be well capitalized, well managed and have a Community Reinvestment Act
(CRA) rating of satisfactory or better. National banks with financial subsidiaries must remain well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions,
which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a bank may not acquire a company that is engaged in activities that are financial in nature unless that bank has a CRA rating of satisfactory or
better. Currently, Encore Bank has a CRA rating of satisfactory.

Branching. The establishment of a branch must be approved by the
OCC, which considers a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community and consistency with corporate powers.

Restrictions on Transactions with Affiliates and Insiders. Transactions between Encore Bank and its non-banking affiliates, including us, are
subject to Section 23A of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by, or is under common control with that bank. In general, Section 23A imposes limits on the amount of such
transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties which are collateralized by our securities or obligations of our non-banking subsidiaries.

Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that certain transactions
between the bank and its affiliates be on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons. The Federal Reserve has also
issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act, and interpretive guidance with respect to affiliate transactions.

The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to herein as
insiders) contained in the Federal Reserve Act and Regulation O apply to all insured depository institutions and their subsidiaries. These restrictions include limits on loans to one borrower



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and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests.
These loans cannot exceed the institutions total unimpaired capital and surplus, and the OCC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of
applicable restrictions.

Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Capital adequacy requirements serve
to limit the amount of dividends that may be paid by Encore Bank to us as its parent company. Until capital surplus equals or exceeds capital stock, a national bank must transfer to surplus 10% of its net income for the preceding four quarters in
the case of an annual dividend or 10% of its net income for the preceding two quarters in the case of a quarterly or semiannual dividend. As of December 31, 2008, Encore Banks capital surplus exceeded its capital stock. Without prior
approval, a national bank may not declare a dividend if the total amount of all dividends declared by that bank in any calendar year exceeds the total of that banks retained net income for the current year and retained net income for the
preceding two years. Under federal law, Encore Bank cannot pay a dividend if, after paying the dividend, it will be undercapitalized. The OCC may declare a dividend payment to be unsafe and unsound even though Encore Bank would continue
to meet its capital requirements after the dividend.

Because we are a legal entity separate and distinct from our subsidiaries, our right
to participate in the distribution of assets of any subsidiary upon the subsidiarys liquidation or reorganization will be subject to the prior claims of the subsidiarys creditors. In the event of a liquidation or other resolution of an
insured depository institution, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, arising as a result of
their status as shareholders, including any depository institution holding company (such as us) or any shareholder or creditor thereof.

Examinations. The OCC periodically examines and evaluates insured banks. Based upon such an evaluation, the OCC may revalue the assets of the institution and require that it establish specific reserves to compensate for the
difference between the OCC-determined value and the book value of such assets.

Audit Reports. Insured institutions with total
assets of $500 million or more must submit annual audit reports prepared by independent auditors to federal regulators. In some instances, the audit report of the institutions holding company can be used to satisfy this requirement. Auditors
must receive examination reports, supervisory agreements, and reports of enforcement actions. For institutions with total assets of $1 billion or more, financial statements prepared in accordance with accounting principles generally accepted in the
U.S., managements certifications concerning responsibility for the financial statements, internal controls and compliance with legal requirements designated by the OCC, and an attestation by the auditor regarding the statements of management
relating to the internal controls must be submitted. For institutions with total assets of $3 billion or more, independent auditors may be required to review quarterly financial statements. The Federal Deposit Insurance Corporation Improvement Act
of 1991 (FDICIA) requires that independent audit committees, consisting of outside directors only, be formed. The committees of such institutions must include members with experience in banking or financial management, must have access to outside
counsel, and must not include representatives of large clients.

Capital Adequacy Requirements. Similar to the Federal
Reserves requirements for bank holding companies, the OCC has adopted regulations establishing minimum requirements for the capital adequacy of national banks. The OCC may establish higher minimum requirements if, for example, a bank has
previously received special attention or has a high susceptibility to interest rate risk.

The OCCs risk-based capital guidelines
generally require national banks to have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0% and a ratio of total capital to total risk-weighted assets of 8.0%. As of December 31, 2008, Encore Banks ratio of Tier 1
capital to total risk-weighted assets was 10.16% and its ratio of total capital to total risk-weighted assets was 11.42%.



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##### Index to Financial Statements

The OCCs leverage guidelines require national banks to maintain Tier 1 capital of no less than 4.0%
of average total assets, except in the case of certain highly rated banks for which the requirement is 3.0% of average total assets unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository
institution. As of December 31, 2008, Encore Banks ratio of Tier 1 capital to average total assets (leverage ratio) was 8.08%. As part of Encore Banks conversion to a national bank, the OCC required that Encore Bank meet certain
additional capital requirements in 2007 and 2008. Specifically, for 2008, Encore Bank was required to have a leverage ratio of at least 7.75% as of December 31, 2008. These additional capital requirements do not apply after December 31,
2008.

Corrective Measures for Capital Deficiencies. The federal banking regulators are required to take prompt corrective action
with respect to capital-deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are well capitalized, adequately capitalized, under capitalized,
significantly under capitalized and critically under capitalized. A well capitalized bank has a total risk-based capital ratio of 10.0% or higher; a Tier 1 risk-based capital ratio of 6.0% or higher; a leverage
ratio of 5.0% or higher; and is not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure. An adequately capitalized bank has a total risk-based capital ratio of
8.0% or higher; a Tier 1 risk-based capital ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or higher if that bank was rated a composite 1 in its most recent examination report and is not experiencing significant growth); and does
not meet the criteria for a well capitalized bank. A bank is under capitalized if it fails to meet any one of the ratios required to be adequately capitalized.

In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations authorize broad restrictions on certain
activities of undercapitalized institutions including asset growth, acquisitions, branch establishment, and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital
distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.

As an institutions capital decreases, the OCCs enforcement powers increase. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management, and other restrictions. The OCC has only limited discretion in dealing with a critically undercapitalized institution
and is required to undertake stringent measures to protect the interests of deposits and the federal deposit insurance fund, which depending on the circumstances, could include the appointment of a receiver or conservator.

Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.

Deposit Insurance Assessments. Encore Bank must pay assessments to the FDIC for deposit insurance protection. The FDIC maintains the DIF by designating a reserve ratio between a range of 1.15% to 1.50%. If the
reserve ratio falls below 1.15%, the FDIC must adopt a restoration plan that provides that the DIF will return to 1.15% generally within 5 years. If the reserve ratio exceeds 1.35%, the FDIC must generally dividend to DIF members half of the amount
above the amount necessary to maintain the DIF at 1.35%. The FDIC declares a 50% dividend when the reserve ratio reaches 1.35% and a 100% dividend when the reserve ratio reaches above 1.50%. The designated reserve ratio is currently set at 1.25%.
The FDIC has the discretion to price deposit insurance according to the risk for all insured institutions regardless of the level of the reserve ratio.

The DIF reserve ratio is maintained by assessing depository institutions an insurance premium based upon statutory factors that include the balance of insured deposits as well as the degree of risk the institution
poses to the insurance fund. Under a risk-based assessment system required by the FDICIA, FDIC-insured depository institutions pay quarterly insurance premiums at rates based on their risk classification. Institutions assigned to



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higher-risk classifications (that is, institutions that pose a greater risk of loss to their respective deposit insurance funds) pay assessments at higher
rates than institutions that pose a lower risk. An institutions risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to regulators. An institutions risk assignment
includes assignment to Risk Category I, II, III, or IV.

On January 1, 2009, the FDIC increased the DIF assessment rates as part of
the FDICs DIF restoration plan. As a result, initial base assessment rates currently range from 12 to 14 basis points for Risk Category I institutions, 17 basis points for Risk Category II institutions, 35 basis points for Risk Category III
institutions, and 50 basis points for Risk Category IV institutions. On February 27, 2009, the Board of Directors of the FDIC issued final rules to amend the restoration plan for the DIF, change the risk-based assessment system and set
assessment rates to begin in the second quarter of 2009. Beginning April 1, 2009, total base assessment rates will range from 7 to 24 basis points for Risk Category I institutions, 17 to 43 basis points for Risk Category II institutions, 27 to
58 basis points for Risk Category III institutions, and 40 to 77.5 basis points for Risk Category IV institutions. Institutions with $1 billion or more in assets have their assessment base determined using average daily balances, as opposed to
utilizing quarter-end balances. Institutions with less than $1 billion in assets have the option of continuing to use quarter-end balances to determine their assessment bases. Assessments are paid quarterly by all institutions and are based upon the
assessment base that an institution reports at the end of that quarter. Risk assessments remain in effect for future assessment periods until changed by the FDIC.

Also, on February 27, 2009, the FDIC issued an interim rule for a special assessment of 20 basis points to restore the DIF to an acceptable level. This special assessment could be lowered to 10 basis points if
the FDICs borrowing authority, currently set at $30 billion, is increased pursuant to legislation which was recently introduced in Congress. Following the comment period and assuming the interim rule becomes final, the special assessment will
be made on June 30, 2009 and will be collected September 30, 2009. This assessment will be in addition to the new assessment rates which become effective April 1, 2009.

Enforcement Powers. The FDIC and the other federal banking agencies have broad enforcement powers, including the power to terminate deposit
insurance, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject us or our banking subsidiaries, as well as
officers, directors and other institution-affiliated parties of these organizations, to administrative sanctions and potentially substantial civil money penalties. The appropriate federal banking agency may appoint the FDIC as conservator or
receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking institution is undercapitalized and has
no reasonable prospect of becoming adequately capitalized, fails to become adequately capitalized when required to do so, fails to submit a timely and acceptable capital restoration plan or materially fails to implement an accepted capital
restoration plan.

Brokered Deposit Restrictions. Adequately capitalized institutions (as defined for purposes of the prompt
corrective action rules described above) cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions
may not accept, renew, or roll over brokered deposits.

Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA) contains a cross-guarantee provision which generally makes commonly controlled insured depository institutions liable to the FDIC for any losses incurred in connection with the failure of a commonly controlled
depository institution.

Community Reinvestment Act. Under the Community Reinvestment Act as implemented by Congress in 1977, a
financial institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it limit an institutions discretion to develop the types of products and services that it believes are best



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##### Index to Financial Statements

suited to its particular community, consistent with the CRA. The CRA requires federal examiners, in connection with the examination of a financial
institution, to assess the institutions record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA also requires all institutions to make
public disclosure of their CRA ratings. Encore Bank received a satisfactory rating in meeting community credit needs under the CRA in our most recent examination for CRA performance.

Consumer Laws and Regulations. In addition to the laws and regulations discussed herein, Encore Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer
Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act and the Fair Housing Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal
with clients when taking deposits or making loans to such clients. Encore Bank must comply with all applicable provisions of these consumer protection laws and regulations as part of its ongoing compliance and client relations programs.

Privacy. In addition to expanding the activities in which banks and bank holding companies may engage, the Gramm-Leach-Bliley Act imposes new
requirements on financial institutions with respect to client privacy. The Gramm-Leach-Bliley Act generally prohibits disclosure of client information to non-affiliated third parties unless the client has been given the opportunity to object and has
not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to clients annually. Financial institutions, however, will be required to comply with state law if it is more protective of client
privacy than the Gramm-Leach-Bliley Act. The privacy provisions became effective on July 1, 2002. The Gramm-Leach-Bliley Act contains a variety of other provisions including a prohibition against ATM surcharges unless the client has first been
provided notice of the imposition and amount of the fee.

Anti-Money Laundering and Anti-Terrorism Legislation. Congress enacted the
Bank Secrecy Act of 1970 (BSA) to require financial institutions, including us and Encore Bank, to maintain certain records and to report certain transactions to prevent such institutions from being used to hide money derived from criminal activity
and tax evasion. The BSA establishes, among other things, (1) record keeping requirements to assist government enforcement agencies in tracing financial transactions and flow of funds; (2) reporting requirements for Suspicious Activity
Reports and Currency Transaction Reports to assist government enforcement agencies in detecting patterns of criminal activity; (3) enforcement provisions authorizing criminal and civil penalties for illegal activities and violations of the BSA
and its implementing regulations; and (4) safe harbor provisions that protect financial institutions from civil liability for their cooperative efforts.

Title III of the Patriot Act (Patriot Act) amended the BSA and incorporates anti-terrorist financing provisions into the requirements of the BSA and its implementing regulations. Among other things, the Patriot Act
requires all financial institutions, including us, Encore Bank and our nonbanking affiliates and subsidiaries, to institute and maintain a risk-based anti-money laundering compliance program that includes a customer identification program, provides
for information sharing with law enforcement and between certain financial institutions by means of an exemption from the privacy provisions of the Gramm-Leach-Bliley Act, prohibits U.S. banks and broker-dealers from maintaining accounts with
foreign shell banks, establishes due diligence and enhanced due diligence requirements for certain foreign correspondent banking and foreign private banking accounts and imposes additional record keeping requirements for certain
correspondent banking arrangements. The Patriot Act also grants broad authority to the Secretary of the U.S. Treasury to take actions to combat money laundering, and federal bank regulators are required to evaluate the effectiveness of an applicant
in combating money laundering in determining whether to approve any application submitted by a financial institution. We have adopted policies, procedures and controls designed to comply with the BSA and the Patriot Act.

The U.S. Treasurys Office of Foreign Asset Control (OFAC) administers and enforces economic and trade sanctions against targeted foreign countries,
entities and individuals based on U.S. foreign policy and national



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security goals. As a result, financial institutions, including us and Encore Bank and our nonbanking affiliates and subsidiaries, must scrutinize
transactions to ensure that they do not represent obligations of, or ownership interests in, entities owned or controlled by sanctioned targets. In addition, we and Encore Bank and our nonbanking affiliates and subsidiaries restrict transactions
with certain targeted countries except as permitted by OFAC.

Regulation of Nonbanking Subsidiaries

Linscomb & Williams. Linscomb & Williams is a Texas corporation and an investment adviser that is registered with the SEC under
the Investment Advisers Act of 1940. Under the Investment Advisers Act, an investment adviser is subject to supervision and inspection by the SEC. A significant element of supervision under the Investment Advisers Act is the requirement to make
significant disclosures to the public under Part II of Form ADV of the advisers services and fees, the qualifications of its associated persons, financial difficulties and potential conflicts of interests. An investment adviser must keep
extensive books and records, including all customer agreements, communications with clients, orders placed and proprietary trading by the adviser or any advisory representative.

Town & Country. Town & Country is a Texas corporation licensed to sell insurance policies in the State of Texas by the Texas
Department of Insurance. The Texas Insurance Code provides that licensed agents are subject to regulation requirements of the Texas Department of Insurance. The requirements include maintaining books and records and continuing education. In
addition, Town & Country is licensed to sell insurance in a number of other states and accordingly, is subject to regulation in those states.

Expanding Enforcement Authority

One of the major additional burdens imposed on the banking industry by FDICIA is the
increased ability of banking regulators to monitor the activities of banks and their holding companies. In addition, the Federal Reserve and FDIC possess extensive authority to police unsafe or unsound practices and violations of applicable laws and
regulations by depository institutions and their holding companies. For example, the FDIC may terminate the deposit insurance of any institution which it determines has engaged in an unsafe or unsound practice. The agencies can also assess civil
money penalties, issue cease and desist or removal orders, seek injunctions, and publicly disclose such actions. FDICIA, FIRREA and other laws have expanded the agencies authority in recent years, and the agencies have not yet fully tested the
limits of their powers.

Effect on Economic Environment

The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means
available to the Federal Reserve to affect the money supply are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These
means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits.

Federal Reserve monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in
the future. The nature of future monetary policies and the effect of such policies on our business and operations of us and those of our subsidiaries cannot be predicted.

Legislative Initiatives

In light of current conditions and the market outlook for continuing weak
economic conditions, regulators have increased their focus on the regulation of financial institutions. A number of government initiatives designed to respond to the current conditions have been introduced recently and proposals for legislation that



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could substantially intensify the regulation of financial institutions are expected to be introduced in Congress and State Legislatures. Such initiatives may
change banking statutes and the operating environment for us and Encore Bank in substantial and unpredictable ways. We cannot determine the ultimate effect that any potential legislation, if enacted, or implementing regulations with respect thereto,
would have, upon the financial condition or results of our operations or the operations of Encore Bank. A change in statutes, regulations or regulatory policies applicable to us or Encore Bank could have a material effect on the financial condition,
results of operations or business of our company and Encore Bank. For additional details about the recent legislative initiatives, please refer to the section captioned Recent Market Developments in Part I, Item I of this Annual Report
on Form 10-K.

Employees

As of
December 31, 2008, we had 303 full-time employees. Management considers our relations with employees to be good. Neither we nor Encore Bank or any of its subsidiaries are a party to any collective bargaining agreement.

Item 1A. Risk Factors

An investment in our common stock involves risks. The following is a description of the material risks and uncertainties that we believe affect our business and an investment in our common stock. Additional risks and uncertainties that we
are unaware of, or that we currently deem immaterial, also may become important factors that affect us and our business. If any of the risks described in this Annual Report on Form 10-K were to occur, our financial condition and results of
operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly and you could lose all or part of your investment.

Risks Associated With Our Business

Difficult market conditions
and economic trends have adversely affected the banking industry and could adversely affect our business, financial condition and results of operations.

We are operating in a challenging and uncertain economic environment, including generally uncertain conditions nationally and locally in our markets. Financial institutions continue to be affected by declines in the
real estate market that have negatively impacted the credit performance of mortgage, construction and commercial real estate loans and resulted in significant write-downs of assets by many financial institutions. Concerns over the stability of the
financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other. We retain direct exposure to the residential and commercial real estate markets, and we are affected by these
events. Continued declines in real estate values, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment, including job losses, could have an adverse affect on our borrowers or their customers, which
could adversely affect our business, financial condition and results of operations.

Our ability to assess the creditworthiness of
customers and to estimate the losses inherent in our credit portfolio is made more complex by these difficult market and economic conditions. We also expect to face increased regulation and government oversight as a result of these downward trends.
This increased government action may increase our costs and limit our ability to pursue certain business opportunities. In addition, we may be required to pay even higher FDIC deposit insurance premiums than the recently increased level, because
financial institution failures resulting from the depressed market conditions and other factors have depleted and may continue to deplete the deposit insurance fund and reduce its ratio of reserves to insured deposits.



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A prolonged national economic recession or further deterioration of these conditions in our markets could
drive losses beyond that which is provided for in our allowance for loan losses and result in the following consequences:



| |  |  | increases in loan delinquencies;
| | - |  | --------------------------------



| |  |  | increases in nonperforming assets and foreclosures;
| | - |  | ---------------------------------------------------



| |  |  | decreases in demand for our products and services, which could adversely affect our liquidity position; and
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | decreases in the value of the collateral securing our loans, especially real estate, which could reduce customers borrowing power.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

We do not believe these difficult conditions are likely to improve in the near future. A worsening of these conditions
would likely exacerbate the adverse effects of these difficult economic conditions on us, our customers and the other financial institutions in our markets. As a result, we may experience increases in foreclosures, delinquencies and customer
bankruptcies, as well as more restricted access to funds.

The U.S Treasury and the FDIC have initiated programs to address economic
stabilization, yet the efficacy of these programs in stabilizing the economy and the banking system at large are uncertain.

Current levels of market
volatility are unprecedented and could adversely impact our results of operations and access to capital.

The capital and credit markets
have been experiencing volatility and disruption for more than a year. In recent months, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit capacity
for certain issuers without regard to those issuers underlying financial strength. If the current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience further adverse effects,
which may be material, on our ability to access capital and on our business, financial condition and results of operations.

Liquidity risk could impair
our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to
raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to
us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as
a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or
negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.

If we are unable to continue to transform our balance sheet by originating loans and growing core deposits and if our strategic decision to open a number of new
private client offices and offer wealth management services and insurance products does not continue to generate new business, our business and results of operations may be negatively affected.

We have transformed our balance sheet by replacing lower yielding investment securities and purchased mortgage loans with our own higher yielding
originated loans. We have also rolled out a full line of deposit and cash management products, which has enabled us to replace brokered deposits with core deposits. In connection with this transformation, we have disposed of our out-of-market
locations and expanded the number of private client offices we operate in our target markets in Texas and southwest Florida. Additionally, we have made



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##### Index to Financial Statements

strategic acquisitions enabling us to offer wealth management services and insurance products to our clients. Our ability to continue the growth of
originated loans and core deposits depends, in part, upon our ability to leverage our current offices and infrastructure, successfully attract core deposits, identify attractive commercial lending opportunities and retain experienced lending
officers. Our ability to continue to successfully execute our business plan requires effective planning and management implementation, which may be affected by factors outside of our control. If we are not able to attract significant business from
our target markets, our business and results of operations may be negatively affected.

Our dependence on loans secured by real estate subjects us to
risks relating to fluctuations in the real estate market and related interest rates and legislation that could result in significant additional costs and capital requirements that could adversely affect our financial condition and results of
operations.

Approximately 84.9% of our loan portfolio as of December 31, 2008 was comprised of loans collateralized by real
estate, with 65.9% of the real estate located in Texas and 20.3% located in Florida. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the
time the credit is extended. The real estate markets in Florida, and to a lesser extent, Texas, have deteriorated in the last year. A continued weakening of the real estate market in our primary market areas could have an adverse effect on the
demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing the loans and the value of real estate owned by us. As real estate values decline, it is also more likely that we would
be required to increase our allowance for loan losses, which could adversely affect our financial condition and results of operations.

As
of December 31, 2008, we had $95.7 million, or 7.9%, of our total loans in real estate construction loans. Of this amount, $32.8 million were made to finance residential construction with an identified purchaser and $21.4 million were made to
finance residential construction with no identified purchaser. Substantially all of these loans are located in the Houston area. Further, $41.5 million of real estate construction loans were made to finance commercial construction, with
approximately half of these loans made to finance construction projects located in Texas and half in southwest Florida. Construction loans are subject to risks during the construction phase that are not present in standard residential real estate
and commercial real estate loans. These risks include:



| |  |  | the viability of the contractor;
| | - |  | --------------------------------



| |  |  | the contractors ability to complete the project, to meet deadlines and time schedules and to stay within cost estimates; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | concentrations of such loans with a single contractor and its affiliates.
| | - |  | -------------------------------------------------------------------------

Real estate construction loans also present risks of default in the event of declines in property values or volatility in the real estate market during
the construction phase. If any of these risks were to occur, it could adversely affect our financial condition and results of operations.

In December 2006, banking regulators issued guidance regarding high concentrations of commercial and real estate construction loans within bank loan portfolios. The guidance requires institutions that exceed certain levels of real estate
lending to maintain higher capital ratios than institutions with lower concentrations if they do not have appropriate risk management policies and practices in place. If there is any deterioration in our commercial real estate portfolio or if our
regulators conclude that we have not implemented appropriate risk management policies and practices, it could adversely affect our business and result in a requirement of increased capital levels, and such capital may not be available at that time.

Our commercial real estate and commercial loans expose us to increased credit risks, and these risks will increase if we succeed in increasing these
types of loans.

We focus our lending efforts on commercial-related loans and intend to grow commercial real estate and commercial loans
further as a proportion of our portfolio. In general, commercial real estate loans and commercial loans yield higher returns and often generate a deposit relationship, but also pose greater credit risks



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than do owner-occupied residential real estate loans. As our various commercial loan portfolios increase, the corresponding risks and potential for losses
from these loans will also increase.

We make both secured and some unsecured commercial loans. Unsecured loans generally involve a higher
degree of risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers businesses. Secured commercial loans are generally collateralized by accounts receivable, inventory,
equipment or other assets owned by the borrower and include a personal guaranty of the business owner. Compared to real estate, that type of collateral is more difficult to monitor, its value is harder to ascertain, it may depreciate more rapidly
and it may not be as readily saleable if repossessed. Further, commercial loans generally will be serviced primarily from the operation of the business, which may not be successful, and commercial real estate loans generally will be serviced from
income on the properties securing the loans.

Additionally, as of December 31, 2008, 16.4% of our commercial loans were loans to law
firms, which are generally made to fund case expenses and which are collateralized by the anticipated fees to be received in pending cases. We require that the amount of anticipated fees be several times greater than the amount of the loan and
personal guarantees of the principals of the law firm. However, the law firm may be unsuccessful in the final outcome in these cases, and if successful, the ultimate collection of legal fees can be negatively affected by changes in
regulation or legislative action, such as tort reform.

As a consequence of our efforts to transform our balance sheet over the last five years by
originating new loans, in certain circumstances there is limited repayment history against which we can fully assess the adequacy of our allowance for loan losses. If our allowance for loan losses is not adequate to cover actual loan losses, our
results of operations will be negatively affected.

As a consequence of our efforts to transform our balance sheet over the last five
years, many of our loans have been made recently, and in those circumstances, there is limited repayment history against which we can fully assess the adequacy of our allowance for loan losses. Loans totaling $1.1 billion, or 87.9%, of our loan
portfolio as of December 31, 2008 represents loans originated since the beginning of 2004 and $105.6 million, or 8.7%, of our loan portfolio represents purchased loans. As a lender, we are exposed to the risk that our loan clients may not repay
their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. We make various assumptions and judgments about the collectibility of our loan portfolio, including
the creditworthiness of the borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses to cover any loan losses inherent in the loan portfolio.
In determining the size of the allowance, we rely on a periodic analysis of our loan portfolio, our historical loss experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect or if we experience
significant loan losses, our current allowance may not be sufficient to cover actual loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. A material addition to the
allowance for loan losses could cause our results of operations to be negatively affected. Due to the relatively unseasoned nature of our loan portfolio, we cannot assure you that we will not experience an increase in delinquencies and losses as
these loans continue to mature.

In addition, federal regulators periodically review our allowance for loan losses and may require us to
increase our provision for loan losses or recognize further charge-offs, based on judgments different than those of our management. Any significant increase in our allowance for loan losses or charge-offs required by these regulatory agencies could
have a material adverse effect on our results of operations and financial condition.

Our profitability depends significantly on local economic
conditions in the areas where our operations and loans are concentrated.

Our profitability depends on the general economic conditions
in our primary markets in Texas and southwest Florida. Unlike larger banks that are more geographically diversified, we provide banking and



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financial services to clients primarily in the greater Houston area, including Harris, Ft. Bend and Montgomery counties, and southwest Florida, including
Lee, Collier, Pinellas and Hillsborough counties. As of December 31, 2008, $650.7 million, or 68.4%, of our commercial real estate, real estate construction and residential real estate loans were made to borrowers in Texas and $197.6 million,
or 20.8%, of such loans (which includes $29.9 million in purchased loans) were made to borrowers in Florida. The local economic conditions in these areas have a significant impact on our commercial, real estate and construction and consumer
loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. In addition, if the population or income growth in either of these regions is slower than projected, income levels, deposits and housing
starts could be adversely affected and could result in the curtailment of our expansion, growth and profitability. Recently, economic conditions in Florida and, to a lesser extent, Texas have declined and if either of these regions experiences a
downturn or a recession for a prolonged period of time, we would likely experience significant increases in nonperforming loans, which could lead to operating losses, impaired liquidity and eroding capital.

Moreover, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other
international or domestic calamities, unemployment or other factors beyond our control could impact these local economic conditions and could negatively affect the financial results of our banking operations.

If the goodwill that we recorded in connection with business acquisitions becomes impaired, it could have a negative impact on our profitability.

Goodwill represents the amount of acquisition cost over the fair value of net assets we acquired in the purchase of another entity including our trust
function, investment management and insurance subsidiaries. We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate the carrying value of the asset might be impaired. Examples of those
events or circumstances include the following:



| |  |  | significant adverse change in business climate;
| | - |  | -----------------------------------------------



| |  |  | significant unanticipated loss of clients/assets under management;
| | - |  | ------------------------------------------------------------------



| |  |  | unanticipated loss of key personnel; or
| | - |  | ---------------------------------------



| |  |  | significant reductions in profitability.
| | - |  | ----------------------------------------

We determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. At December 31, 2008, our goodwill totaled $27.9 million. While we have
recorded no such impairment charges since we initially recorded the goodwill, there can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse
effect on our financial condition and results of operations.

The properties that we own and our foreclosed real estate assets could subject us to
environmental risks and associated costs.

There is a risk that hazardous substances or wastes, contaminants, pollutants or other
environmentally restricted substances could be discovered on our properties or our foreclosed assets (particularly in the case of real estate loans). In this event, we might be required to remove the substances from the affected properties or to
engage in abatement procedures at our sole cost and expense. Besides being liable under applicable federal and state statutes for our own conduct, we may also be held liable under certain circumstances for actions of borrowers or other third parties
with respect to property that collateralizes one or more of our loans or property



27



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##### Table of Contents

##### Index to Financial Statements

that we own. Potential environmental liability could include the cost of remediation and also damages for any injuries caused to third-parties. We cannot
assure you that the cost of removal or abatement will not substantially exceed the value of the affected properties or the loans secured by those properties, that we would have adequate remedies against prior owners or other responsible parties or
that we would be able to resell the affected properties either prior to or following completion of any such removal or abatement procedures. If material environmental problems are discovered prior to foreclosure, we generally will not foreclose on
the related collateral. Furthermore, despite actions on our part, the value of the property as collateral will generally be substantially reduced and, as a result, we may suffer a loss upon collection of the loan.

The small- to medium-sized businesses we lend to may have fewer resources to weather a downturn in the economy, which may impair a borrowers ability to repay a
loan to us, and such impairment could materially harm our operating results.

We make loans to professional firms and privately-owned
businesses that are considered to be small- to medium-sized businesses. Small- to medium-sized businesses frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional
capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrowers ability to repay a loan. In addition, the success of a small- to medium-sized business often depends on the
management talents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay our loan.
Economic downturns and other events that negatively impact our target market could cause us to incur substantial credit losses that could materially harm our operating results.

Our banking business is subject to interest rate risk and fluctuations in interest rates may adversely affect our results of operations and financial condition.

The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, our
results of operations are significantly dependent on our net interest income, which is the difference between interest earned from interest-earning assets, such as loans and investment securities, and interest paid on interest-bearing liabilities,
such as deposits and borrowings. We expect that we will periodically experience gaps in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes
in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this gap will negatively impact our results of operations. Many factors impact
interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply, and international disorder and instability in domestic and foreign financial markets.

As of December 31, 2008, we were liability sensitive, meaning that our interest-bearing liabilities reprice more quickly than our interest-earning
assets, so in the event of an increase in interest rates, our net interest income will be affected negatively. Although our asset liability management strategy is designed to control our risk from changes in market interest rates, it may not be able
to prevent changes in interest rates from having a material adverse effect on our results of operations and financial condition.

The wealth management
fees we receive may decrease as a result of poor investment performance, in either relative or absolute terms, which could decrease our revenues and results of operations.

For the year ended December 31, 2008, we received $17.3 million in fees from our wealth management business, which represented 77.7% of our
total noninterest income. We derive our revenues from this business primarily from investment management fees based on assets under management and, to a lesser extent, fee-based financial planning services. Our ability to maintain or increase assets
under management is subject to a number of factors, including investors perception of our past performance, in either relative or absolute terms, market and economic conditions, and competition from investment management companies.



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##### Index to Financial Statements

Financial markets are affected by many factors, all of which are beyond our control, including general
economic conditions; securities market conditions; the level and volatility of interest rates and equity prices; competitive conditions; liquidity of global markets; international and regional political conditions; regulatory and legislative
developments; monetary and fiscal policy; investor sentiment; availability and cost of capital; technological changes and events; outcome of legal proceedings; changes in currency values; inflation; credit ratings; and the size, volume and timing of
transactions. A decline in the fair value of the assets under management caused by a decline in general economic conditions would decrease our wealth management fee income.

Investment performance is one of the most important factors in retaining existing clients and competing for new wealth management clients. Poor
investment performance could reduce our revenues and impair our growth in the following ways:



| |  |  | existing clients may withdraw funds from our wealth management business in favor of better performing products;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | asset-based management fees could decline from a decrease in assets under management;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | our ability to attract funds from existing and new clients might diminish; and
| | - |  | ------------------------------------------------------------------------------



| |  |  | our wealth managers and investment advisors may depart, to join a competitor or otherwise.
| | - |  | ------------------------------------------------------------------------------------------

Even when market conditions are generally favorable, our investment performance may be adversely affected by the investment style of our wealth
management and investment advisors and the particular investments that they make. To the extent our future investment performance is perceived to be poor in either relative or absolute terms, the revenues and profitability of our wealth management
business will likely be reduced and our ability to attract new clients will likely be impaired. As such, fluctuations in the equity and debt markets can have a direct impact upon our results of operations.

Linscomb & Williams investment advisory contracts are subject to termination on short notice, and termination of a significant number of investment
advisory contracts could have a material adverse impact on our revenues.

Linscomb & Williams derived 95.0% of its revenue for
the year ended December 31, 2008 from investment advisory contracts with its clients. These contracts are typically terminable by clients without penalty upon relatively short notice (generally not more than 60 days). Our wealth management
clients can terminate their relationships with us, reduce their aggregate assets under management, or shift their funds to other types of accounts with different rate structures for any number of reasons, including investment performance, changes in
prevailing interest rates, inflation, changes in investment preferences of clients, changes in our reputation in the marketplace, changes in management or control of clients, loss of key investment management personnel and financial market
performance. We cannot be certain that Linscomb & Williams management will be able to retain all of their clients. If its clients terminate their investment advisory contracts, Linscomb & Williams, and consequently we, could
lose a substantial portion of our revenues.

Our insurance agencys commission revenues are based on premiums set by insurers and any decreases in
these premium rates could adversely affect our operations and revenues.

Our insurance agency subsidiary, Town & Country, is
engaged in insurance agency and brokerage activities. For the year ended December 31, 2008, Town & Country received $5.7 million in commissions and fees, which represented 25.5% of our total noninterest income. Town & Country
derives revenues primarily from commissions paid by the insurance underwriters on the sale of insurance products to clients. These commissions are highly dependent on the premiums charged by insurance underwriters, which historically have been
cyclical in nature, vary by region and display a high degree of volatility based on the prevailing economic and competitive factors that affect insurance underwriters. These factors, which are not within Town & Countrys



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##### Index to Financial Statements

control, include the capacity of insurance underwriters to place new business, non-underwriting profits of insurance underwriters, consumer demand for
insurance products, the availability of comparable products from other insurance underwriters at a lower cost and the availability to consumers of alternative insurance products, such as government benefits and self-insurance plans.

Town & Country also receives contingent commissions, which are commissions paid by insurance underwriters based on profitability of the
business, premium growth, total premium volume, or some combination of these factors. Town & Country generally receives these contingent commissions in the first and second quarters of each year. Due to the nature of these commissions, it
is difficult for us to predict their payment. Increases in loss ratios experienced by insurance underwriters will result in a decreased profit to them and may result in decreases in the payment of contingent commissions to us.

Town & Country cannot predict the timing or extent of future changes in premiums and thus commissions. As a result, we cannot predict the effect
that future premium rates will have on our operations. While increases in premium rates may result in revenue increases, decreases in premium rates may result in revenue decreases. These decreases may adversely affect our operations and revenues for
the periods in which they occur.

Our business would be harmed if we lost the services of any of our senior management team and senior relationship
bankers and are unable to recruit or retain suitable replacements.

We believe that our success to date and our prospects for future
success in our banking, wealth management and insurance businesses depend significantly on the continued services and performance of our chief executive officer, James S. DAgostino, Jr., and the other members of our senior management team.
While we have granted restricted stock to, and have change in control agreements with certain key officers, our ability to retain such officers may be hindered by the fact that we have not entered into employment or non-competition agreements with
most of them. Therefore, they may terminate their employment with us at any time, and we could have difficulty replacing such officers with persons who are experienced in the specialized aspects of our business or who have ties to the communities
within our primary market areas. The unexpected loss of services of any of these key officers could materially harm our business.

Our growth could be
hindered unless we are able to recruit and retain qualified employees.

Competition for highly qualified employees in a number of
industries, including the financial services industry, is intense in our market areas. Our business plan includes, and is dependent upon, our hiring and retaining highly qualified and motivated executives and employees at every level and, in
particular, experienced loan officers and relationship managers. We expect to experience substantial competition in our endeavor to identify, hire and retain the top-quality employees that we believe are key to our future success. If we are unable
to hire and retain qualified employees, we may not be able to grow our banking, wealth management and insurance franchise and successfully execute our business plan.

We operate in a highly regulated environment and, as a result, are subject to extensive regulation and supervision and changes in federal and local laws and regulations that could adversely affect our financial
performance.

We and Encore Bank are subject to extensive regulation, supervision and examination by federal banking authorities. Any
change in applicable regulations or federal or state legislation could have a substantial impact on us and Encore Bank and our respective operations. In response to the recession, recent market volatility and lack of liquidity in the credit markets,
new legislation has been introduced and passed and it is likely that there will be significant changes to the banking regulatory regime in the future. Such additional legislation and regulations could significantly affect our powers, authority and
operations or the powers, authority and operations of Encore Bank, which could have a material adverse effect on our financial condition and results of operations. Further, regulators have significant discretion and power to prevent or remedy unsafe
or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of this regulatory discretion and power may have a negative impact on us.



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##### Index to Financial Statements

Our wealth management subsidiary, Linscomb & Williams, is registered with the SEC under the
Investment Advisers Act of 1940. The Investment Advisers Act imposes numerous obligations and fiduciary duties on registered investment advisers including record-keeping, operating and marketing requirements, disclosure obligations and prohibitions
on fraudulent activities. The failure of Linscomb & Williams to comply with the Investment Advisers Act and regulations promulgated thereunder could cause the SEC to institute proceedings and impose sanctions for violations of this act,
including censure, termination of an investment advisers registration, or prohibition to serve as adviser to funds registered with the SEC and could lead to litigation by investors in those funds or harm to our reputation, any of which could
adversely affect our financial performance.

In addition, our insurance subsidiary, Town & Country, is subject to regulation by
the Texas Department of Insurance. State insurance regulators and the National Association of Insurance Commissioners continually re-examine existing laws and regulations, and such re-examination may result in the enactment of insurance-related laws
and regulations, or the issuance of interpretations thereof, that adversely affect the financial performance of Town & Country, and hence, us.

We face strong competition with other financial institutions and financial service companies, which could adversely affect our results of operations and financial condition.

The banking, wealth management and insurance businesses are highly competitive, and our profitability depends heavily on our ability to compete in our
markets with other financial institutions and financial service companies offering products and services at prices similar to those offered by us. In our banking business, we face vigorous competition from banks and other financial institutions,
including savings and loan associations, savings banks, finance companies and credit unions. A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems and a wider array of
banking services. We also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations which may offer more favorable financing
than we can offer. Some of our nonbank competitors are not subject to the same extensive regulations that govern us. To the extent that we are forced to compete on the basis of price, we may not be able to maintain our current fee structure.

In our wealth management and insurance businesses, we compete with national and regional investment management and financial planning
firms, broker-dealers, accounting firms, trust companies and law firms. Many of these companies are more geographically diversified and have greater resources than we do. This competition in all of our businesses may reduce or limit our margins on
banking services, reduce our market share, reduce our noninterest income and adversely affect our results of operations and financial condition.

An
interruption in or breach in security of our information systems may result in a loss of client business and have an adverse effect on our results of operations and financial condition.

We rely heavily on communications and information systems to conduct our business. Any failure or interruption or breach in security of these systems
could result in failures or disruptions in our client relationship management, general ledger, deposits, servicing or loan origination systems. We cannot assure you that such failures or interruptions will not occur or, if they do occur, that they
will be adequately addressed by us. The occurrence of any failures or interruptions could result in a loss of client business and have an adverse effect on our results of operations and financial condition.

Risks Associated With an Investment in Our Common Stock

Our
directors and executive officers own a significant number of shares of our common stock, allowing management further control over our corporate affairs.

As of February 28, 2009, our directors and executive officers beneficially own 32.5% of the outstanding shares of our common stock. Accordingly, these directors and executive officers are able to control, to a



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##### Index to Financial Statements

significant extent, the outcome of all matters required to be submitted to our shareholders for approval, including decisions relating to the election of
directors, the determination of our day-to-day corporate and management policies and other significant corporate transactions.

Our corporate
organizational documents and the provisions of Texas law to which we are subject may delay or prevent a change in control of our company that you may favor.

Our amended and restated articles of incorporation and amended and restated bylaws contain certain provisions which may delay, discourage or prevent an attempted acquisition or change of control of our company. These
provisions include:



| |  |  | a provision that any special meeting of our shareholders may be called only by a majority of the board of directors, the Chairman of the Board, the President or the
holders of at least 50% of our total number of shares of common stock entitled to vote at the meeting;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a provision establishing certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered at
an annual or special meeting of shareholders; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a provision that denies shareholders the right to amend our bylaws.
| | - |  | -------------------------------------------------------------------

Our amended and restated articles of incorporation provide for noncumulative voting for directors and authorize our board of directors to issue shares of preferred stock, $1.00 par value per share, without shareholder
approval and upon such terms as our board of directors may determine. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions, financings and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a controlling interest in us. In addition, certain provisions of Texas law, including a provision which restricts certain business combinations
between a Texas corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control of our company.

We currently do not intend to pay dividends on our common stock. In addition, our future ability to pay dividends is subject to restrictions.

We have not paid any dividends to our holders of common stock in the past and we currently do not intend to pay any dividends on our common stock in the foreseeable future. In the event that we decide to pay
dividends, there are a number of restrictions on our ability to pay dividends. It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if
prospective earnings retention is consistent with the organizations expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding
companys ability to serve as a source of strength to its banking subsidiaries.

Our principal source of funds to pay dividends on our
common stock will be cash dividends that we receive from Encore Bank. The payment of dividends by Encore Bank to us is subject to certain restrictions imposed by federal banking laws, regulations and authorities. The federal banking statutes
prohibit federally insured banks from making any capital distributions (including a dividend payment) if, after making the distribution, the institution would be under capitalized as defined by statute. In addition, the relevant federal
regulatory agencies have authority to prohibit an insured bank from engaging in an unsafe or unsound practice, as determined by the agency, in conducting an activity. The payment of dividends could be deemed to constitute such an unsafe or unsound
practice, depending on the financial condition of Encore Bank. Regulatory authorities could impose administratively stricter limitations on the ability of Encore Bank to pay dividends to us if such limits were deemed appropriate to preserve certain
capital adequacy requirements.



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##### Index to Financial Statements

Future dividend payments and common stock repurchases are restricted by the terms of the U.S. Treasurys equity
investment in us.

Under the terms of the CPP, for so long as any preferred stock issued under the CPP remains outstanding, we are
prohibited from increasing dividends on our common stock, and from making certain repurchases of equity securities, including our common stock, without the U.S. Treasurys consent until the third anniversary of the U.S. Treasurys
investment or until the U.S. Treasury has transferred all of the preferred stock it purchased under the CPP to third parties. Further, as long as the preferred stock issued to the U.S. Treasury is outstanding, dividend payments and repurchases or
redemptions relating to certain equity securities, including our common stock, are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions.

The holders of our junior subordinated debentures have rights that are senior to those of our common shareholders.

We have two issues of junior subordinated debentures outstanding, with an aggregate liquidation amount totaling $20.6 million related to the issuance of
trust preferred securities by our non-consolidated subsidiary trusts, which are treated as capital for regulatory ratio compliance purposes. Although these securities are viewed as capital for regulatory purposes, they are debt securities and have
provisions which, in the event of noncompliance, could have an adverse effect on our operations. For example, these securities permit us to defer the periodic payment of interest for various periods, but if such payments are deferred, we would be
prohibited from paying cash dividends on our common stock during deferral periods and until deferred interest is paid. Future payment of interest depends upon the earnings of Encore Bank and its subsidiaries and dividends from Encore Bank to us,
which may be inadequate to service the obligations.

Item 1B. Unresolved Staff Comments

None.



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##### Index to Financial Statements

Item 2. Properties

We operate 17 private client offices through Encore Bank. We also operate four offices of Encore Trust, three offices of Town & Country and one
office of Linscomb & Williams. We lease all of our locations, except with respect to our private client offices located in the Houston area at 6330 San Felipe, 5815 Kirby, 3754 Westheimer, 5548 FM 1960 West and
4647 Sweetwater Blvd., where in each location we own the building and lease the underlying land, and underlying land of our private client office in Ft. Myers, Florida, where we own the building and underlying land. Our principal office is
located at Nine Greenway Plaza, Suite 1000, Houston, Texas, 77046. The following table sets forth our banking, wealth management and insurance office locations, the date we opened or acquired them, and, with respect to our private client
offices, the amount of deposits:



|                                      |  |                      |  |  |  |                                 |                        |  | 
|------------------------------------- |  | -------------------- |  |  |  | ------------------------------- | ---------------------- |  | 
|Type of Office                        |  | Date Opened/Acquired |  |  |  | Deposits as ofDecember 31, 2008
|Private Client OfficesHouston Market |  |                      |  |  |  |                                 | (dollars in thousands)
|Houston, Texas                        |  |                      |  |  |  |                                 |                        |  | 
|12520 Memorial Drive                  |  | 11/01/2000           |  |  |  | $                               | 119,407                |  | 
|2049 West Gray                        |  | 8/01/2002            |  |  |  |                                 | 99,920                 |  | 
|6330 San Felipe                       |  | 3/17/2003            |  |  |  |                                 | 63,042                 |  | 
|909 Fannin, Suite 1350                |  | 8/04/2003            |  |  |  |                                 | 75,130                 |  | 
|6400 Fannin, Suite 222                |  | 2/15/2007            |  |  |  |                                 | 15,511                 |  | 
|5815 Kirby                            |  | 1/20/2004            |  |  |  |                                 | 59,109                 |  | 
|3754 Westheimer                       |  | 1/05/2004            |  |  |  |                                 | 37,583                 |  | 
|5548 FM 1960 West                     |  | 7/14/2003            |  |  |  |                                 | 57,406                 |  | 
|Nine Greenway Plaza, Suite 110        |  | 3/21/2005            |  |  |  |                                 | 288,708                |  | 
|Sugar Land, Texas                     |  |                      |  |  |  |                                 |                        |  | 
|4647 Sweetwater Blvd., Suite A.       |  | 5/30/2006            |  |  |  |                                 | 20,294                 |  | 
|The Woodlands, Texas                  |  |                      |  |  |  |                                 |                        |  | 
|9595 Six Pines Drive, Suite 1500      |  | 9/07/2004            |  |  |  |                                 | 32,216                 |  | 
|                                      |  |                      |  | 
|Private Client OfficesFlorida Market |  |                      |  |  |  |                                 |                        |  | 
|Sun City Center                       |  |                      |  |  |  |                                 |                        |  | 
|1653 Sun City Plaza, Suite 1001       |  | 9/04/2001            |  |  |  |                                 | 69,343                 |  | 
|Ft. Myers                             |  |                      |  |  |  |                                 |                        |  | 
|7920 Summerlin Lakes Dr.              |  | 10/16/2001           |  |  |  |                                 | 30,997                 |  | 
|Clearwater                            |  |                      |  |  |  |                                 |                        |  | 
|2566 McCullen Booth Road, Suite G     |  | 3/25/2002            |  |  |  |                                 | 28,540                 |  | 
|Belleair Bluffs                       |  |                      |  |  |  |                                 |                        |  | 
|2973 West Bay Drive                   |  | 4/08/2002            |  |  |  |                                 | 49,855                 |  | 
|Naples                                |  |                      |  |  |  |                                 |                        |  | 
|10600 Tamiami Trail N., Suite 604     |  | 4/19/2004            |  |  |  |                                 | 35,387                 |  | 
|3003 Tamiami Trail, Suite 100         |  | 1/03/2007            |  |  |  |                                 | 18,349                 |  | 
|                                      |  |                      |  | 
|Encore Trust Offices                  |  |                      |  |  |  |                                 |                        |  | 
|Houston, Texas                        |  |                      |  |  |  |                                 |                        |  | 
|11000 Richmond, Suite 215             |  | 3/31/2005            |  |  |  |                                 | N/A                    |  | 
|Nine Greenway Plaza, Suite 1000       |  | 3/31/2005            |  |  |  |                                 | N/A                    |  | 
|Dallas, Texas                         |  |                      |  |  |  |                                 |                        |  | 
|5956 Sherry Lane Place, Suite 630     |  | 3/31/2005            |  |  |  |                                 | N/A                    |  | 
|Austin, Texas                         |  |                      |  |  |  |                                 |                        |  | 
|100 Congress Ave., Suite 2100         |  | 3/31/2005            |  |  |  |                                 | N/A                    |  | 
|                                      |  |                      |  | 
|Town & Country Offices                |  |                      |  |  |  |                                 |                        |  | 
|Houston, Texas                        |  |                      |  |  |  |                                 |                        |  | 
|10575 Katy Freeway, Suite 150         |  | 4/30/2004            |  |  |  |                                 | N/A                    |  | 
|Galveston, Texas                      |  |                      |  |  |  |                                 |                        |  | 
|1605 Tremont                          |  | 4/30/2004            |  |  |  |                                 | N/A                    |  | 
|Ft. Worth, Texas                      |  |                      |  |  |  |                                 |                        |  | 
|307 W. 7th Street, Suite 1800         |  | 4/01/2006            |  |  |  |                                 | N/A                    |  | 
|                                      |  |                      |  | 
|Linscomb & Williams Office            |  |                      |  |  |  |                                 |                        |  | 
|Houston, Texas                        |  |                      |  |  |  |                                 |                        |  | 
|1400 Post Oak Blvd., Suite 1000       |  | 8/31/2005            |  |  |  |                                 | N/A                    |  | 



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##### Index to Financial Statements

Item 3. 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 and Encore
Bank and its subsidiaries from time to time will be party to or otherwise involved in legal proceedings arising in the normal course of business. Management does not believe that there is any pending or threatened legal proceeding against us or
Encore Bank or its subsidiaries which, if determined adversely, would have a material adverse effect on our or Encore Banks financial condition, results of operations or cash flows.

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

There were no matters submitted to a vote of security holders during the fourth quarter of 2008.

PART II

Item 5. Market for the
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Market Prices

Our common stock is listed on the NASDAQ Global Market under the ticker symbol EBTX. Before the effective date of our registration statement
on July 17, 2007, there had been no public market for our common stock. The following table presents the high and low intra-day sales prices for our common stock reported on the NASDAQ Global Market for the periods indicated:



|                  |  |      |       |      |   |       |  |     |       |  |   |      
|----------------- |  | ---- | ----- | ---- | - | ----- |  | --- | ----- |  | - | -----
|                  |  | 2008 |       | 2007
|                  |  | High |       | Low  |   | High  |  | Low
|First Quarter     |  | $    | 20.87 |      | $ | 16.05 |  |     |       |  |   |      
|Second Quarter    |  |      | 19.94 |      |   | 15.65 |  |     |       |  |   |      
|Third Quarter (1) |  |      | 19.49 |      |   | 14.07 |  | $   | 23.95 |  | $ | 20.70
|Fourth Quarter    |  |      | 17.74 |      |   | 10.25 |  |     | 22.28 |  |   | 19.26



|(1) | For 2007, the information is presented beginning on July 17, 2007.
|--- | ------------------------------------------------------------------

As of February 28, 2009, we had 10.2 million shares outstanding and 143 shareholders of record. The number of beneficial owners is unknown to us at this time.

Dividend Policy

Holders of our common stock are
entitled to receive dividends when, as and if declared by our board of directors out of funds legally available for that purpose. We have not paid any dividends to our holders of common stock in the past and we currently do not intend to pay
dividends on our common stock in the foreseeable future. In the event that we decide to pay dividends, there are a number of restrictions on our ability to do so.

For a foreseeable period of time, our principal source of cash revenues will be dividends paid by Encore Bank with respect to its capital stock. There are certain restrictions on the payment of these dividends imposed
by federal banking laws, regulations and authorities. The declaration and payment of dividends on our common stock will depend upon our results of operations and financial condition, liquidity and capital requirements, the general economic and
regulatory climate, our ability to service any equity or debt obligations senior to the common stock and other factors deemed relevant by our board of directors. Regulatory authorities could impose administratively stricter limitations on the
ability of Encore Bank to pay dividends to us if such limits were deemed appropriate to preserve certain capital adequacy requirements.



35



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##### Table of Contents

##### Index to Financial Statements

In addition, the terms of our junior subordinated debentures may limit our ability to pay dividends on
our common stock. Beginning on December 5, 2008 and until (i) the third anniversary of the U.S. Treasurys investment, (ii) we have redeemed the Series A Preferred Stock or (iii) the U.S. Treasury has transferred the Series
A Preferred Stock to a third party, the consent of the U.S. Treasury will be required for us to declare or pay any dividend or make any distribution on our common stock. Also, as long as the Series A Preferred Stock is outstanding, dividend
payments will be prohibited until all accrued and unpaid dividends are paid on the Series A Preferred Stock, subject to certain limited exceptions.

Recent Sales of Unregistered Securities

On December 5, 2008, we issued and sold to the U.S. Treasury (i) 34,000
shares of our Series A Preferred Stock, with a liquidation value of $1,000 per share, and (ii) a Warrant to purchase up to 364,026 shares of our common stock, at an exercise price of $14.01 per share, for an aggregate purchase price of $34.0
million in cash. The Series A Preferred Stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

The Warrant is exercisable immediately at anytime until December 5, 2018 for 364,026 shares of our common stock at an exercise price of $14.01 per
share. The number of shares of our common stock underlying the Warrant and the exercise price are subject to adjustment for certain dilutive events. Additionally, if, on or prior to December 31, 2009, we receive aggregate gross cash proceeds of
at least $34.0 million from one or more sales of Tier 1 qualifying perpetual preferred stock or common stock, the number of the shares of common stock underlying the Warrant then held by the U.S. Treasury will be reduced by 50% to 182,013 shares.
Pursuant to the Securities Purchase Agreement, the U.S. Treasury has agreed not to exercise voting power with respect to any shares of our common stock issued upon exercise of the Warrant.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 31, 2008 with respect to equity compensation plans approved by shareholders under which our common stock is authorized for issuance. All outstanding stock
options have been issued under plans approved by shareholders.



|                                                           |  |                                                                                               |  |                                                                            |      |                                                                                                                                    |        
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------- | ---- | ---------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan Category                                              |  | Number of CommonShares to Be Issued UponExercise of OutstandingOptions, Warrants
andRights(a) |  | Weighted AverageExercise Price
ofOutstandingOptions, Warrantsand Rights(b) |      | Number of Securities Available for FutureIssuance Under Equity Compensation Plans(Excluding Securities Reflected in Column (a))(c)
|Equity compensation plans approved by security holders     |  | 1,003,932                                                                                     |  | $                                                                          | 9.79 |                                                                                                                                    | 484,010
|Equity compensation plans not approved by security holders |  |                                                                                              |  |                                                                            |     |                                                                                                                                    |       
|                                                           |  |                                                                                               |  |                                                                            |      |                                                                                                                                    |        
|Total                                                      |  | 1,003,932                                                                                     |  | $                                                                          | 9.79 |                                                                                                                                    | 484,010



36



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##### Table of Contents

##### Index to Financial Statements

Issuer Purchases of Equity Securities

The following table sets forth information regarding repurchases of our common stock made by us during the fiscal year ended December 31, 2008:



|             |  |                                    |  |                             |       |                                                                                  |     |                                                                                                             |    
|------------ |  | ---------------------------------- |  | --------------------------- | ----- | -------------------------------------------------------------------------------- | --- | ----------------------------------------------------------------------------------------------------------- | ---
|Period       |  | Total Number of SharesPurchased(1) |  | Average Price PaidPer Share |       | Total Number of SharesPurchased as Part
ofPublicly Announced Plans orPrograms(2) |     | Maximum Number (orApproximate DollarValue) of Shares that MayYet Be Purchased Underthe
Plans or Programs(2)
|June 2, 2008 |  | 1,682                              |  | $                           | 17.36 |                                                                                  | N/A |                                                                                                             | N/A



|(1) | All shares of common stock reported in the table above were repurchased by us at the fair market value of our common stock on June 2, 2008 in connection with the satisfaction
of tax withholding obligations under restricted stock agreements between us and certain of our key employees and directors.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | We have no publicly announced plans or programs.
|--- | ------------------------------------------------

Performance Graph

The following Stock Performance Graph compares the cumulative total shareholder return on our common stock for the period since our
shares of common stock were registered under Section 12 of the Exchange Act on July 17, 2007 to December 31, 2008, with the cumulative total return of the Russell 2000 Index and KBW Bank Index for the same period. This presentation
assumes that the value of the investment in our common stock and each index on July 17, 2007 was $100.00 and that subsequent cash dividends were reinvested. The historical stock price performance of our common stock shown on the graph below is
not necessarily indicative of future stock price performance.

LOGO



|                        |  |               |        |          |   |         |  |          |       |  |   |      
|----------------------- |  | ------------- | ------ | -------- | - | ------- |  | -------- | ----- |  | - | -----
|                        |  | Period Ending
|Index                   |  | 7/17/07       |        | 12/31/07 |   | 6/30/08 |  | 12/31/08
|Encore Bancshares, Inc. |  | $             | 100.00 |          | $ | 95.19   |  | $        | 74.52 |  | $ | 52.38
|KBW Bank Index          |  |               | 100.00 |          |   | 78.27   |  |          | 51.35 |  |   | 39.15
|Russell 2000            |  |               | 100.00 |          |   | 90.13   |  |          | 81.15 |  |   | 58.77



37



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##### Table of Contents

##### Index to Financial Statements

Item 6. Selected Consolidated Financial Data

The following table summarizes our historical consolidated financial data for the periods and at the dates indicated. You should read this information in
conjunction with our audited consolidated financial statements and related notes included in this Form 10-K. You should not assume the results of operations for past periods indicate results for any future period.



|                                                    |  |                                               |           |   |      |   |           |  |      |           |      |   |           |  |   |          
|--------------------------------------------------- |  | --------------------------------------------- | --------- | - | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                    |  | As of and for the Years Ended December 31,   
|                                                    |  | 2008                                          |           |   | 2007 |   | 2006      |  | 2005 |           | 2004
|                                                    |  | (amounts in thousands, except per share data)
|Operations Statement Data:                          |  |                                               |           |   |      |   |           |  |      |           |      |   |           |  |   |          
|Interest income                                     |  | $                                             | 81,271    |   |      | $ | 81,427    |  | $    | 75,810    |      | $ | 64,653    |  | $ | 58,470   
|Interest expense                                    |  |                                               | 36,997    |   |      |   | 47,252    |  |      | 45,637    |      |   | 38,400    |  |   | 34,456   
|                                                    |  |                                               |           |   |      |   |           |  |      |           |      |   |           |  |   |          
|Net interest income                                 |  |                                               | 44,274    |   |      |   | 34,175    |  |      | 30,173    |      |   | 26,253    |  |   | 24,014   
|Provision for loan losses                           |  |                                               | 29,175    |   |      |   | 4,029     |  |      | 3,491     |      |   | 3,198     |  |   | 3,159    
|                                                    |  |                                               |           |   |      |   |           |  |      |           |      |   |           |  |   |          
|Net interest income after provision for loan losses |  |                                               | 15,099    |   |      |   | 30,146    |  |      | 26,682    |      |   | 23,055    |  |   | 20,855   
|Noninterest income (1)                              |  |                                               | 22,300    |   |      |   | 30,966    |  |      | 35,083    |      |   | 29,334    |  |   | 21,822   
|Noninterest expense                                 |  |                                               | 50,361    |   |      |   | 50,607    |  |      | 50,338    |      |   | 45,502    |  |   | 32,547   
|                                                    |  |                                               |           |   |      |   |           |  |      |           |      |   |           |  |   |          
|Net earnings (loss) before income taxes             |  |                                               | (12,962   | ) |      |   | 10,505    |  |      | 11,427    |      |   | 6,887     |  |   | 10,130   
|Income tax expense (benefit)                        |  |                                               | (4,888    | ) |      |   | 3,121     |  |      | 3,949     |      |   | 2,098     |  |   | 3,267    
|                                                    |  |                                               |           |   |      |   |           |  |      |           |      |   |           |  |   |          
|Net earnings (loss)                                 |  | $                                             | (8,074    | ) |      | $ | 7,384     |  | $    | 7,478     |      | $ | 4,789     |  | $ | 6,863    
|                                                    |  |                                               |           |   |      |   |           |  |      |           |      |   |           |  |   |          
|Earnings (loss) available to common shareholders    |  | $                                             | (8,240    | ) |      | $ | 7,384     |  | $    | 7,478     |      | $ | 4,789     |  | $ | 6,863    
|                                                    |  |                                               |           |   |      |   |           |  |      |           |      |   |           |  |   |          
|Common Share Data:                                  |  |                                               |           |   |      |   |           |  |      |           |      |   |           |  |   |          
|Basic earnings (loss) per share                     |  | $                                             | (0.83     | ) |      | $ | 0.86      |  | $    | 1.00      |      | $ | 0.70      |  | $ | 1.15     
|Diluted earnings (loss) per share                   |  |                                               | (0.83     | ) |      |   | 0.79      |  |      | 0.94      |      |   | 0.66      |  |   | 1.11     
|Book value per share                                |  |                                               | 15.36     |   |      |   | 15.56     |  |      | 13.57     |      |   | 12.68     |  |   | 11.83    
|Tangible book value per share                       |  |                                               | 12.05     |   |      |   | 12.13     |  |      | 9.01      |      |   | 8.07      |  |   | 11.01    
|Average common shares outstanding                   |  |                                               | 9,881     |   |      |   | 8,576     |  |      | 7,501     |      |   | 6,825     |  |   | 5,986    
|Diluted average common shares outstanding           |  |                                               | 9,881     |   |      |   | 9,296     |  |      | 7,926     |      |   | 7,288     |  |   | 6,176    
|Shares outstanding at end of period (2)             |  |                                               | 10,241    |   |      |   | 10,124    |  |      | 7,786     |      |   | 7,692     |  |   | 6,174    
|                                                    |  |                                               |           |   |     
|Period End Balance Sheet Data:                      |  |                                               |           |   |      |   |           |  |      |           |      |   |           |  |   |          
|Total assets                                        |  | $                                             | 1,587,844 |   |      | $ | 1,401,197 |  | $    | 1,336,843 |      | $ | 1,316,565 |  | $ | 1,273,071
|Investment securities                               |  |                                               | 174,691   |   |      |   | 146,263   |  |      | 256,256   |      |   | 323,074   |  |   | 480,143  
|Loans receivable                                    |  |                                               | 1,218,404 |   |      |   | 1,097,268 |  |      | 908,368   |      |   | 808,204   |  |   | 660,694  
|Allowance for loan losses                           |  |                                               | 25,105    |   |      |   | 11,161    |  |      | 9,056     |      |   | 8,719     |  |   | 7,658    
|Goodwill and other intangible assets, net           |  |                                               | 33,904    |   |      |   | 34,722    |  |      | 35,487    |      |   | 35,442    |  |   | 5,080    
|Deposits                                            |  |                                               | 1,100,797 |   |      |   | 1,041,374 |  |      | 1,030,811 |      |   | 815,074   |  |   | 729,328  
|Shareholders equity (3)                            |  |                                               | 185,742   |   |      |   | 157,479   |  |      | 105,677   |      |   | 97,513    |  |   | 73,051   
|Junior subordinated debentures                      |  |                                               | 20,619    |   |      |   | 20,619    |  |      | 20,619    |      |   | 20,619    |  |   | 20,619   
|                                                    |  |                                               |           |   |     
|Average Balance Sheet Data:                         |  |                                               |           |   |      |   |           |  |      |           |      |   |           |  |   |          
|Total assets                                        |  | $                                             | 1,483,021 |   |      | $ | 1,341,105 |  | $    | 1,316,572 |      | $ | 1,293,781 |  | $ | 1,261,970
|Investment securities                               |  |                                               | 150,096   |   |      |   | 179,767   |  |      | 288,082   |      |   | 385,502   |  |   | 506,800  
|Loans receivable                                    |  |                                               | 1,170,717 |   |      |   | 972,760   |  |      | 840,330   |      |   | 747,079   |  |   | 626,225  
|Deposits                                            |  |                                               | 1,061,318 |   |      |   | 1,011,563 |  |      | 882,581   |      |   | 767,358   |  |   | 739,126  
|Shareholders equity (4)                            |  |                                               | 162,929   |   |      |   | 129,316   |  |      | 100,827   |      |   | 87,358    |  |   | 67,160   



38



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##### Table of Contents

##### Index to Financial Statements

|                                                                  |  |                                               |    |  |       |   |  |       |   |  |        |   |  |        |  
|----------------------------------------------------------------- |  | --------------------------------------------- | -- |  | ----- | - |  | ----- | - |  | ------ | - |  | ------ | -
|                                                                  |  | As of and for the Years Ended December 31,    |   
|                                                                  |  | 2008                                          |    |  | 2007  |   |  | 2006  |   |  | 2005   |   |  | 2004   |  
|                                                                  |  | (dollars in thousands, except per share data) |   
|Selected Performance Ratios:                                      |  |                                               |    |  |       |   |  |       |   |  |        |   |  |        |  
|Return on average assets                                          |  | (0.54                                         | )% |  | 0.55  | % |  | 0.57  | % |  | 0.37   | % |  | 0.54   | %
|Return on average common equity (5)                               |  | (5.13                                         | )  |  | 5.71  |   |  | 7.42  |   |  | 5.48   |   |  | 10.22  |  
|Return on average tangible common equity (5)                      |  | (6.53                                         | )  |  | 7.84  |   |  | 11.40 |   |  | 7.37   |   |  | 10.70  |  
|Net interest margin (6)                                           |  | 3.18                                          |    |  | 2.74  |   |  | 2.46  |   |  | 2.14   |   |  | 1.96   |  
|Efficiency ratio (1)(7)                                           |  | 72.36                                         |    |  | 76.19 |   |  | 75.68 |   |  | 80.42  |   |  | 69.87  |  
|Noninterest income to total revenue                               |  | 33.50                                         |    |  | 47.54 |   |  | 53.76 |   |  | 52.77  |   |  | 47.61  |  
|                                                                  |  |                                               |    |  |      
|Asset Quality Ratios (8):                                         |  |                                               |    |  |       |   |  |       |   |  |        |   |  |        |  
|Nonperforming assets to total loans and investment in real estate |  | 2.78                                          | %  |  | 1.30  | % |  | 1.07  | % |  | 0.56   | % |  | 0.92   | %
|Net charge-offs to average loans                                  |  | 1.30                                          |    |  | 0.20  |   |  | 0.38  |   |  | 0.29   |   |  | 0.18   |  
|Allowance for loan losses to year end loans                       |  | 2.06                                          |    |  | 1.02  |   |  | 1.00  |   |  | 1.08   |   |  | 1.16   |  
|Allowance for loan losses to nonperforming loans (9)              |  | 80.52                                         |    |  | 83.35 |   |  | 95.26 |   |  | 250.26 |   |  | 179.77 |  
|                                                                  |  |                                               |    |  |      
|Capital Ratios:                                                   |  |                                               |    |  |       |   |  |       |   |  |        |   |  |        |  
|Leverage ratio (10)                                               |  | 11.61                                         | %  |  | 10.47 | % |  | 6.90  | % |  | 6.23   | % |  | 6.63   | %
|Tier 1 risk-based capital ratio (10)                              |  | 14.58                                         |    |  | 13.59 |   |  | 10.17 |   |  | 9.89   |   |  | 12.63  |  
|Total risk-based capital ratio (10)                               |  | 15.84                                         |    |  | 14.65 |   |  | 11.19 |   |  | 10.97  |   |  | 13.78  |  
|Tangible common equity to tangible assets (11)                    |  | 7.94                                          |    |  | 8.98  |   |  | 5.39  |   |  | 4.85   |   |  | 5.36   |  



|(1) | For the years ended December 31, 2006, 2005 and 2004, noninterest income included nonrecurring gains on the sale of branches and certain real estate of $370,000, $303,000 and
$3.9 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes nonvested restricted stock.
|--- | ------------------------------------

|(3) | Shareholders equity as of December 31, 2006 and 2005 includes $10.3 million in puttable common stock. The put agreement to which the stock was subject was terminated on
March 30, 2007. For a discussion of the puttable common stock, please refer to the section captioned Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial
ConditionShareholders Equity and Puttable Common Stock, in Part II, Item 7 of this Annual Report on Form 10-K.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Average shareholders equity for the years ended December 31, 2007, 2006 and 2005 includes $2.5 million, $10.3 million and $3.4 million in puttable common stock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Return based on earnings (loss) available to common shareholders. The ratios for years ended December 31, 2007, 2006 and 2005 include puttable common stock as a part of
shareholders equity.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Net interest margin is calculated by dividing net interest income by average earning assets.
|--- | --------------------------------------------------------------------------------------------

|(7) | Calculated by dividing total noninterest expense, less amortization of intangibles, by the sum of net interest income plus noninterest income, excluding gains and losses on sales of
securities and impairment write down on securities.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | At period end, except net charge-offs to average loans, which is for periods ended at such dates.
|--- | -------------------------------------------------------------------------------------------------

|(9) | Nonperforming loans consist of nonaccrual loans, loans contractually past due 90 days or more, restructured loans and any other loan management deems to be nonperforming.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Regulatory capital ratios for December 31, 2008 and 2007 are for Encore Bancshares, Inc. Regulatory capital ratios for December 31, 2006, 2005 and 2004 are for Encore
Bank. On March 30, 2007, we became a bank holding company and Encore Bank became a national bank. For all periods prior to March 30, 2007, the capital ratios are calculated in accordance with Office of Thrift Supervision regulations and as
of March 31, 2007, the capital ratios are calculated in accordance with OCC regulations. We were not required to monitor consolidated capital ratios as a thrift holding company, but we are required to do so as a bank holding company. See the
section of this Form 10-K captioned Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionRegulatory Capital for details relating to our regulatory capital ratios.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | At period end. Tangible common equity includes $10.3 million of puttable common stock as of December 31, 2006 and 2005.
|---- | -----------------------------------------------------------------------------------------------------------------------



39



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##### Index to Financial Statements

Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Statements and financial discussion and analysis contained in this Annual Report on Form 10-K 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 this Form 10-K, 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



| |  |  | 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-K. 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.



40



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##### Table of Contents

##### Index to Financial Statements

Managements Discussion and Analysis of Financial Condition and Results of Operations analyzes the
major elements of our consolidated balance sheets and consolidated statements of operations. This section should be read in conjunction with our audited consolidated financial statements and related notes as of December 31, 2008 and 2007 and
for each of the three years ended December 31, 2008, which are included in this Form 10-K.

General

We generate our revenue from net interest income and noninterest income. Net interest income is the difference between interest income on interest-earning
assets such as loans and securities and interest expense on interest-bearing liabilities such as client deposits and other borrowings that are used to fund those assets. Net interest income is a significant contributor to results of operations.
Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income.

During the past three years we have generated the largest portion of our noninterest income through trust and investment management fees. We also have an insurance agency that generates commissions on sales of insurance. Trust and
investment management fees, mortgage banking income, insurance commissions and gain or loss on the sale of securities are reported in our consolidated statement of operations under noninterest income. Offsetting these earnings are
operating expenses referred to as noninterest expense. Because banking is a labor intensive business, our largest operating expense is employee compensation.

While Encore Bank can trace its existence back to 1928, October 1, 2000 marked the beginning of our existing business strategy as our current ownership and management team formed our company and assumed
control of Encore Bank. Since that date, we have transformed from a mortgage loan, security and wholesale deposit strategy into a more relationship driven loan and deposit strategy. In the process of this transformation, we sold a significant amount
of assets, including investment securities and real estate and made significant investments in building a loan platform which would allow us to originate higher yielding commercial loans. We also made significant changes to our branch network by
selling our branches in St. Louis, Kansas City, Atlanta and Boston and opening new private client offices in Houston and southwest Florida. In addition, we added the insurance and wealth management lines of business which have significantly
diversified our noninterest income.

Effective March 30, 2007, Encore Bank converted from a federal savings association to a national
banking association subject to supervision and regulation by the OCC. In connection with the conversion, we became a bank holding company subject to supervision and regulation by the Federal Reserve. When we acquired Encore Bank, it was primarily a
mortgage lender, and the rules and regulations governing thrifts and regulation by the Office of Thrift Supervision were more suitable for an entity engaging in that activity. As we have transformed our business by increasing commercial loans, we
believe that operation as a national bank regulated by the OCC is consistent with our business plan.

As part of a corporate reorganization
following the conversion of Encore Bank to a national banking association, on June 1, 2007, Encore Bank and Encore Trust Company, N.A. entered into an Agreement and Plan of Merger pursuant to which Encore Bank was merged with and into Encore
Trust Company, N.A. as of June 30, 2007. The resulting bank, which was renamed Encore Bank, N.A., operates as a national banking association with its main office in Houston, Texas. Following the merger, the business of Encore Trust Company,
N.A. is being conducted as a division of Encore Bank. Our election to become a financial holding company was effective July 21, 2008.

Throughout this building process, lower yielding purchased mortgage loans and securities have paid down or matured and been replaced with our own originated loans. Consequently, while our total assets have only increased recently, our net
interest margin over this time period has improved primarily due to the higher yielding mix of earning assets.



41



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##### Table of Contents

##### Index to Financial Statements

Our core products have grown significantly from 2006 to 2008:



| |  |  | Average loans grew by 39.3% (up 27.1% excluding residential mortgage loans)
| | - |  | ---------------------------------------------------------------------------



| |  |  | Average core deposits grew by 14.9%
| | - |  | -----------------------------------

Capital
Purchase Program

On October 3, 2008, the EESA (initially introduced as the TARP) was enacted. On October 14, 2008, the U.S.
Treasury announced the CPP, which provides for direct equity investment of perpetual preferred stock by the U.S. Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of
restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. In connection with our participation in the CPP, on December 5, 2008 we issued and sold to the U.S. Treasury
(i) 34,000 shares of our Series A Preferred Stock, with a liquidation value of $1,000 per share, and (ii) a Warrant to purchase up to 364,026 shares of our common stock, at an exercise price of $14.01 per share, subject to certain to
anti-dilution and other adjustments, for an aggregate purchase price of $34.0 million in cash. For additional details about our participation in the CPP, please refer to the section captioned Recent Market DevelopmentsU.S. Treasury
Capital Purchase Program in Part I, Item I of this Annual Report on Form 10-K.

Critical Accounting Policies

The accounting principles we follow and the methods of applying these principles conform with generally accepted accounting principles in the United
States of America (US GAAP) and with general practices within the banking industry. Our critical accounting policies relate to (1) the allowance for loan losses, (2) income taxes and (3) goodwill and other intangible assets. These
critical accounting policies require the use of estimates, assumptions and judgments which are based on information available as of the date of the relevant financial statement. Accordingly, as this information changes, future financial statements
could reflect the use of different estimates, assumptions and judgments. Certain determinations inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that
could be materially different than originally reported.

Allowance for Loan Losses. We maintain an allowance for loan losses
sufficient to absorb probable losses inherent in the loan portfolio and Encore Banks asset classification committee and board of directors evaluate the adequacy of the allowance for loan losses on a quarterly basis. We estimate the adequacy of
the allowance using, among other things, historical loan loss experience, the growth, composition and diversification of our loan portfolio, delinquency and loan classification trends, adverse situations that may affect the borrowers ability
to repay, estimated value of the underlying collateral, the results of recent regulatory examinations and general economic conditions. Allocation of the allowance may be made for specific loans or loan categories, but the entire allowance is
available for any loan that, in our judgment, should be charged off.

The allowance consists of specific and general components. The
specific component relates to loans that are individually classified as impaired. The general component covers loans without a specific allowance and is based on the experience, ability and effectiveness of our lending management and staff, the
effectiveness of our loan policies, procedures and internal controls, strategic initiatives, the composition and concentrations of credit, underlying property or collateral values, nonperforming and loan classification trends, the effectiveness of
the internal loan review function and general economic conditions.

Changes in the estimate of the allowance for loan losses and the
related provision expense can materially affect our results of operations. Determining the allowance for loan losses requires us to make forecasts of losses that are highly uncertain and require a high degree of judgment. From time to time, events
or economic factors may impact the loan portfolio, causing us to provide additional amounts or release balances from the allowance for loan losses. The increase in the allowance for loan losses in excess of net charge-offs in 2008 was primarily due
to the decline in real estate values and the general economic downturn in Florida as well as an increase in adversely classified residential construction and commercial loans in the Houston area.



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##### Index to Financial Statements

Income Taxes. The calculation of our income tax provision is complex and requires the use of
estimates and judgment in its determination. We are subject to the income tax laws of the various jurisdictions where we conduct business, and we estimate income tax expense based on amounts expected to be owed to these various tax jurisdictions. We
assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information, and we maintain tax accruals consistent with our evaluation. Changes in the
estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by the taxing authorities, and newly enacted statutory, judicial, and regulatory guidance that could impact the
relative merits of the tax positions. These changes, when they occur, impact accrued taxes and can materially affect our operating results. On January 1, 2007, we adopted FIN 48  Financial Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. For additional information, see Note H, Income Taxes, to our consolidated financial statements included in this Form 10-K.

Goodwill and Other Intangible Assets.Goodwill and other intangible assets that have indefinite useful lives are subject to an
impairment test at least annually and more frequently if circumstances indicate their value may not be recoverable. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of each of our reporting
units compared to its carrying value. If a reporting units carrying value exceeds its fair value, a second test is completed comparing the implied fair value of the reporting units goodwill to its carrying value to measure the amount of
impairment. Other identifiable intangible assets that are subject to amortization are amortized on an accelerated basis over their estimated useful lives, ranging from two to 20 years. These amortizable intangible assets are reviewed for impairment
if circumstances indicate their value may not be recoverable. Based on our goodwill impairment test as of December 31, 2008, we do not believe any of our goodwill is impaired. In addition, as of December 31, 2008, we tested the useful
lives of our other intangible assets and determined that there has not been any significant change in the original estimated useful lives.

Accounting
Policies Recently Adopted and Pending 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
Measurement; and

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

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.

Recently issued and pending accounting pronouncements are disclosed in Note
A, Summary of Significant Accounting Policies, to our consolidated financial statements included in this Form 10-K.

Key Financial Measures

Our net loss was $8.1 million, or $0.83 per diluted share, for the year ended December 31, 2008, compared with net earnings of
$7.4 million, or $0.79 per diluted share, for 2007. The deepening economic recession and extremely challenging financial environment significantly intensified in the last quarter of 2008. Consequently, 2008 results were driven by escalating
credit costs, including additions to the allowance for loan losses, and an impairment charge related to a security. Results for 2008 include a $10.1 million, or 29.6%, improvement in net interest income. Offsetting this improvement was a $25.1
million increase in the provision for loan losses, which included a $6.0 million charge-off of a loan to a professional and a $13.9 million increase to the allowance for loan losses. The results also include a $2.0 million non-cash impairment charge
on a security acquired in connection with our Community Reinvestment Act requirements. Our net earnings decreased $94,000, or 1.3%, to $7.4 million for the year ended December 31, 2007 compared with $7.5 million for 2006 due primarily
to a



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##### Index to Financial Statements

decrease in mortgage banking income, mostly offset by an increase in net interest income. Our diluted earnings per common share decreased to $0.79 for 2007
compared with $0.94 for 2006, a 16.0% decline, primarily due to additional shares issued in our initial public offering in July 2007.

Our
return on average assets was (0.54)% for the year ended December 31, 2008 compared with 0.55% for 2007. Our return on average common equity was (5.13)% for the year ended December 31, 2008 compared with 5.71% for 2007. Our return on
average common equity was 5.71% for the year ended December 31, 2007 compared with 7.42% for 2006. Our return on average assets was 0.55% for the year ended December 31, 2007 compared with 0.57% for 2006. The decrease in both 2007 ratios
was due primarily to an increase in average assets and average equity, combined with a slight decrease in net earnings. The return on average common equity for a portion of 2007 and all of 2006 includes $10.3 million in puttable common stock
associated with the Linscomb & Williams acquisition. See the section of this Form 10-K captioned Financial ConditionShareholders Equity and Puttable Common Stock for a detailed discussion of the puttable common
stock.

Our net interest margin was 3.18% for the year ended December 31, 2008 compared with 2.74% for 2007, and 2.46% in 2006. Our
net interest margin continued to improve due to our more favorable mix of earning assets, as originated loans replaced lower yielding purchased mortgage loans and securities.

Our efficiency ratio (calculated by dividing total noninterest expense, less amortization of intangibles, by the sum of net interest income plus
noninterest income, excluding gains and losses on sales of securities and impairment write down on securities) was 72.36% for the year ended December 31, 2008 compared with 76.19% for 2007 and 75.68% in 2006. The efficiency ratio is a
supplemental financial measure utilized in managements internal evaluation of our performance and is not defined under US GAAP. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same dollar
amount of income, while a decrease indicates a more efficient allocation of resources.

Total assets increased $186.6 million, or
13.3%, to $1.6 billion as of December 31, 2008 compared to December 31, 2007. Total assets increased $64.4 million, or 4.8%, to $1.4 billion as of December 31, 2007 compared with December 31, 2006. Our loan
portfolio grew $121.1 million, or 11.0%, to $1.2 billion as of December 31, 2008, and $188.9 million, or 20.8%, to $1.1 billion as of December 31, 2007. Shareholders equity increased $28.3 million, or 17.9%, to
$185.7 million as of December 31, 2008, and $51.8 million, or 49.0%, to $157.5 million as of December 31, 2007.

Results of
Operations

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 revenue. Interest rate fluctuations, as well as changes in the amount and type of interest-earning assets and
interest-bearing liabilities, combine to affect net interest income. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. It is also
affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as rate changes.

2008 vs. 2007. Net interest income increased $10.1 million, or 29.6%, to $44.3 million for the year ended December 31, 2008 compared
with $34.2 million for 2007. The increase in net interest income was primarily due to a $142.5 million, or 11.4%, increase in average earning assets and a 44 basis point increase in our net interest margin to 3.18% in 2008. Average loans in
2008 increased $198.0 million, or 20.4%, compared with 2007. Consistent with our strategy, this increase in average loans was offset by a $29.7 million reduction in lower yielding securities. As a result of this shift, average loans
increased to 84.1% of average earning assets for 2008



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##### Index to Financial Statements

compared with 77.9% for 2007. The improvement in the margin was due to a combination of a more favorable asset mix, as we continued to replace low yielding
mortgage related assets with higher yielding loans, and 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 the average yield on our earning assets. Our net interest
margin further benefited from an increase of $11.2 million, or 10.3%, in average noninterest-bearing deposits.

2007 vs. 2006.
Net interest income increased $4.0 million, or 13.3%, to $34.2 million for the year ended December 31, 2007 compared with $30.2 million for 2006. The improvement in net interest income was due to a combination of a $23.3 million,
or 1.9%, increase in average earning assets and a 28 basis point increase in the net interest margin to 2.74% in 2007. This increase in net interest margin resulted primarily from an improvement in our asset composition, as average loans in 2007
rose $132.4 million, or 15.8%, versus 2006. The increase in average loans resulted primarily from growth in commercial real estate loans and residential real estate loans. The increase in average loans was partially offset by a reduction in
average securities of $108.3 million. Average loans represented 77.9% of average earning assets for 2007 compared with 68.6% in 2006. As a result of this shift in asset composition, the yield on average earning assets grew 33 basis points in
2007 to 6.52%, as the average loan yield was 314 basis points higher than the average securities yield. During 2007, average deposit balances increased $129.0 million, which was due primarily to an increase of $84.3 million, or 31.9%, in
average money market and savings deposits. The increase in deposits allowed us to decrease average borrowings in 2007 by $133.3 million, or 44.6%.



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##### Index to Financial Statements

The following table sets 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 table also sets 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 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.



|                                                                  |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|----------------------------------------------------------------- |  | ------------------------- | --------- | - | ---------------------- | - | ----------------- | ---- | ---- | ------------------------- |  | - | ---------------------- | - | ----------------- | - | ------ | ------------------------- | ---- | - | ---------------------- | - | ----------------- | - |  | - | ------ |  | ---- | -
|                                                                  |  | Years Ended December 31,  |          
|                                                                  |  | 2008                      |           |   | 2007                   |   |                   | 2006 |     
|                                                                  |  | AverageOutstandingBalance |           |   | InterestIncome/Expense |   | AverageYield/Rate |      |      | AverageOutstandingBalance |  |   | InterestIncome/Expense |   | AverageYield/Rate |   |        | AverageOutstandingBalance |      |   | InterestIncome/Expense |   | AverageYield/Rate |  
|                                                                  |  | (dollars in thousands)    |          
|Assets:                                                           |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Interest-earning assets:                                          |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Loans                                                             |  | $                         | 1,170,717 |   |                        | $ | 73,748            |      | 6.30 | %                         |  | $ | 972,760                |   |                   | $ | 67,999 |                           | 6.99 | % |                        | $ | 840,330           |   |  | $ | 56,753 |  | 6.75 | %
|Mortgages held-for-sale                                           |  |                           | 902       |   |                        |   | 79                |      | 8.76 |                           |  |   | 42,379                 |   |                   |   | 3,733  |                           | 8.81 |   |                        |   | 72,977            |   |  |   | 6,546  |  | 8.97 |  
|Securities                                                        |  |                           | 150,096   |   |                        |   | 5,623             |      | 3.75 |                           |  |   | 179,767                |   |                   |   | 6,923  |                           | 3.85 |   |                        |   | 288,082           |   |  |   | 11,239 |  | 3.90 |  
|Federal funds sold and other                                      |  |                           | 69,521    |   |                        |   | 1,821             |      | 2.62 |                           |  |   | 53,880                 |   |                   |   | 2,772  |                           | 5.14 |   |                        |   | 24,127            |   |  |   | 1,272  |  | 5.27 |  
|                                                                  |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Total interest-earning assets                                     |  |                           | 1,391,236 |   |                        |   | 81,271            |      | 5.84 |                           |  |   | 1,248,786              |   |                   |   | 81,427 |                           | 6.52 |   |                        |   | 1,225,516         |   |  |   | 75,810 |  | 6.19 |  
|Less: Allowance for loan losses                                   |  |                           | (12,408   | ) |                        |   |                   |      |      |                           |  |   | (10,069                | ) |                   |   |        |                           |      |   |                        |   | (9,442            | ) |  |   |        |  |      |  
|Noninterest-earning assets                                        |  |                           | 104,193   |   |                        |   |                   |      |      |                           |  |   | 102,388                |   |                   |   |        |                           |      |   |                        |   | 100,498           |   |  |   |        |  |      |  
|                                                                  |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Total assets                                                      |  | $                         | 1,483,021 |   |                        |   |                   |      |      |                           |  | $ | 1,341,105              |   |                   |   |        |                           |      |   |                        | $ | 1,316,572         |   |  |   |        |  |      |  
|                                                                  |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Liabilities, shareholders equity and puttable common stock:      |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Interest-bearing liabilities:                                     |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Interest checking                                                 |  | $                         | 187,412   |   |                        | $ | 2,515             |      | 1.34 | %                         |  | $ | 172,701                |   |                   | $ | 5,131  |                           | 2.97 | % |                        | $ | 168,881           |   |  | $ | 4,220  |  | 2.50 | %
|Money market and savings                                          |  |                           | 291,749   |   |                        |   | 5,759             |      | 1.97 |                           |  |   | 348,567                |   |                   |   | 14,756 |                           | 4.23 |   |                        |   | 264,219           |   |  |   | 10,457 |  | 3.96 |  
|Time deposits                                                     |  |                           | 461,475   |   |                        |   | 19,597            |      | 4.25 |                           |  |   | 380,847                |   |                   |   | 18,772 |                           | 4.93 |   |                        |   | 361,693           |   |  |   | 15,843 |  | 4.38 |  
|                                                                  |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Total interest-bearing deposits                                   |  |                           | 940,636   |   |                        |   | 27,871            |      | 2.96 |                           |  |   | 902,115                |   |                   |   | 38,659 |                           | 4.29 |   |                        |   | 794,793           |   |  |   | 30,520 |  | 3.84 |  
|Borrowings and repurchase agreements                              |  |                           | 225,969   |   |                        |   | 7,781             |      | 3.44 |                           |  |   | 165,647                |   |                   |   | 7,029  |                           | 4.24 |   |                        |   | 298,907           |   |  |   | 13,378 |  | 4.48 |  
|Junior subordinated debentures                                    |  |                           | 20,619    |   |                        |   | 1,345             |      | 6.52 |                           |  |   | 20,712                 |   |                   |   | 1,564  |                           | 7.55 |   |                        |   | 20,619            |   |  |   | 1,739  |  | 8.43 |  
|                                                                  |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Total interest-bearing liabilities                                |  |                           | 1,187,224 |   |                        |   | 36,997            |      | 3.12 |                           |  |   | 1,088,474              |   |                   |   | 47,252 |                           | 4.34 |   |                        |   | 1,114,319         |   |  |   | 45,637 |  | 4.10 |  
|                                                                  |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Noninterest-bearing liabilities:                                  |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Noninterest-bearing deposits                                      |  |                           | 120,682   |   |                        |   |                   |      |      |                           |  |   | 109,448                |   |                   |   |        |                           |      |   |                        |   | 87,788            |   |  |   |        |  |      |  
|Other liabilities                                                 |  |                           | 12,186    |   |                        |   |                   |      |      |                           |  |   | 13,867                 |   |                   |   |        |                           |      |   |                        |   | 13,638            |   |  |   |        |  |      |  
|                                                                  |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Total liabilities                                                 |  |                           | 1,320,092 |   |                        |   |                   |      |      |                           |  |   | 1,211,789              |   |                   |   |        |                           |      |   |                        |   | 1,215,745         |   |  |   |        |  |      |  
|Shareholders equity and puttable common stock                    |  |                           | 162,929   |   |                        |   |                   |      |      |                           |  |   | 129,316                |   |                   |   |        |                           |      |   |                        |   | 100,827           |   |  |   |        |  |      |  
|                                                                  |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Total liabilities, shareholders equity and puttable common stock |  | $                         | 1,483,021 |   |                        |   |                   |      |      |                           |  | $ | 1,341,105              |   |                   |   |        |                           |      |   |                        | $ | 1,316,572         |   |  |   |        |  |      |  
|                                                                  |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Net interest income                                               |  |                           |           |   |                        | $ | 44,274            |      |      |                           |  |   |                        |   |                   | $ | 34,175 |                           |      |   |                        |   |                   |   |  | $ | 30,173 |  |      |  
|                                                                  |  |                           |           |   |                        |   |                   |      |      |                           |  |   |                        |   |                   |   |        |                           |      |   |                        |   |                   |   |  |   |        |  |      |  
|Net interest spread (1)                                           |  |                           |           |   |                        |   |                   |      | 2.72 | %                         |  |   |                        |   |                   |   |        |                           | 2.18 | % |                        |   |                   |   |  |   |        |  | 2.09 | %
|Net interest margin (2)                                           |  |                           |           |   |                        |   |                   |      | 3.18 | %                         |  |   |                        |   |                   |   |        |                           | 2.74 | % |                        |   |                   |   |  |   |        |  | 2.46 | %



|(1) | Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(2) | Represents net interest income as a percentage of average interest-earning assets.
|--- | ----------------------------------------------------------------------------------



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##### Index to Financial Statements

The following table presents information regarding changes in interest income and interest expense for
the periods indicated for each major category of interest-earning assets and interest-bearing liabilities, which distinguishes between the changes attributable to (1) changes in volume (changes in volume multiplied by old rate),
(2) changes in rates (changes in rates multiplied by old volume) and (3) changes in rate-volume (changes in rate multiplied by change in volume). Changes in rate-volume are proportionately allocated between rate and volume variances.



|                                                 |  |                                     |        |   |               |   |         |                                     |        |   |         |      |  |   |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------ |  | ----------------------------------- | ------ | - | ------------- | - | ------- | ----------------------------------- | ------ | - | ------- | ---- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                 |  | Years Ended December 31,            |       
|                                                 |  | 2008 vs. 2007                       |        |   | 2007 vs. 2006 |  
|                                                 |  | Increase (Decrease)Due to Change In |        |   | Total         |   |         | Increase (Decrease)Due to Change In |        |   | Total   |     
|                                                 |  | Volume                              |        |   | Rate          |   |         |                                     | Volume |   |         | Rate |  |  
|                                                 |  | (dollars in thousands)              |       
|Interest-earning assets:                         |  |                                     |        |   |               |   |         |                                     |        |   |         |      |  |   |        |   |  |   |        |   |  |   |        |  
|Loans (net of unearned income)                   |  | $                                   | 12,917 |   |               | $ | (7,168  | )                                   |        | $ | 5,749   |      |  | $ | 9,200  |   |  | $ | 2,046  |   |  | $ | 11,246 |  
|Mortgages held-for-sale                          |  |                                     | (3,633 | ) |               |   | (21     | )                                   |        |   | (3,654  | )    |  |   | (2,697 | ) |  |   | (116   | ) |  |   | (2,813 | )
|Securities                                       |  |                                     | (1,116 | ) |               |   | (184    | )                                   |        |   | (1,300  | )    |  |   | (4,173 | ) |  |   | (143   | ) |  |   | (4,316 | )
|Federal funds sold and other                     |  |                                     | 658    |   |               |   | (1,609  | )                                   |        |   | (951    | )    |  |   | 1,531  |   |  |   | (31    | ) |  |   | 1,500  |  
|                                                 |  |                                     |        |   |               |   |         |                                     |        |   |         |      |  |   |        |   |  |   |        |   |  |   |        |  
|Total increase (decrease) in interest income     |  | $                                   | 8,826  |   |               | $ | (8,982  | )                                   |        | $ | (156    | )    |  | $ | 3,861  |   |  | $ | 1,756  |   |  | $ | 5,617  |  
|                                                 |  |                                     |        |   |               |   |         |                                     |        |   |         |      |  |   |        |   |  |   |        |   |  |   |        |  
|Interest-bearing liabilities:                    |  |                                     |        |   |               |   |         |                                     |        |   |         |      |  |   |        |   |  |   |        |   |  |   |        |  
|Interest checking                                |  | $                                   | 405    |   |               | $ | (3,021  | )                                   |        | $ | (2,616  | )    |  | $ | 97     |   |  | $ | 814    |   |  | $ | 911    |  
|Money market and savings                         |  |                                     | (2,105 | ) |               |   | (6,892  | )                                   |        |   | (8,997  | )    |  |   | 3,529  |   |  |   | 770    |   |  |   | 4,299  |  
|Time deposits                                    |  |                                     | 3,641  |   |               |   | (2,816  | )                                   |        |   | 825     |      |  |   | 870    |   |  |   | 2,059  |   |  |   | 2,929  |  
|Borrowings and repurchase agreements             |  |                                     | 2,242  |   |               |   | (1,490  | )                                   |        |   | 752     |      |  |   | (5,687 | ) |  |   | (662   | ) |  |   | (6,349 | )
|Junior subordinated debentures                   |  |                                     | (7     | ) |               |   | (212    | )                                   |        |   | (219    | )    |  |   | 8      |   |  |   | (183   | ) |  |   | (175   | )
|                                                 |  |                                     |        |   |               |   |         |                                     |        |   |         |      |  |   |        |   |  |   |        |   |  |   |        |  
|Total increase (decrease) in interest expense    |  |                                     | 4,176  |   |               |   | (14,431 | )                                   |        |   | (10,255 | )    |  |   | (1,183 | ) |  |   | 2,798  |   |  |   | 1,615  |  
|                                                 |  |                                     |        |   |               |   |         |                                     |        |   |         |      |  |   |        |   |  |   |        |   |  |   |        |  
|Total increase (decrease) in net interest income |  | $                                   | 4,650  |   |               | $ | 5,449   |                                     |        | $ | 10,099  |      |  | $ | 5,044  |   |  | $ | (1,042 | ) |  | $ | 4,002  |  
|                                                 |  |                                     |        |   |               |   |         |                                     |        |   |         |      |  |   |        |   |  |   |        |   |  |   |        |  

Provision for Loan Losses

We assess the adequacy of our allowance for loan losses by applying the provisions of SFAS No. 5 and No. 114. We determine specific allocations
for loans considered to be impaired and assign loss factors to the remainder of the loan portfolio to determine an appropriate level of allowance for loan losses. The allowance is increased, as necessary, by making a provision for loan losses. The
specific allocations for impaired loans are assigned based on an estimated net realizable value after a thorough review of the credit relationship. The potential loss factors associated with the remainder of the loan portfolio are based on our
internal net loss experience, as well as other qualitative risk factors.

Generally, commercial, commercial real estate and real estate
construction loans are assigned a risk grade at origination. These loans are then reviewed on a regular basis. The periodic reviews generally include loan payment and collateral status, the borrowers financial data, and key ratios such as cash
flows, operating income, liquidity and leverage. A material change in the borrowers credit risk profile can result in an increase or decrease in the loans assigned risk grade. Aggregate dollar volume by risk grade is monitored on an
ongoing basis. Consumer loans, including residential real estate, are evaluated periodically based on their repayment status.



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##### Table of Contents

##### Index to Financial Statements

The provision for loan losses represents our determination of the amount 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 $29.2 million, $4.0 million and
$3.5 million for the years ended December 31, 2008, 2007 and 2006. The increase in the provision in 2008 and 2007 primarily 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, changes in historical loss factors, the rise in nonperforming loans which has impacted both the specific reserves we hold as well as our general allowance and qualitative factors.

Noninterest Income

Noninterest
income represented 33.50%, 47.54% and 53.76% of total revenue for the years ended December 31, 2008, 2007 and 2006. Noninterest income was $22.3 million for 2008, a decrease of $8.7 million, or 28.0%, compared with 2007. The decrease was due
primarily to a decrease in mortgage banking income and a $2.0 million impairment charge for an investment acquired in connection with our Community Reinvestment Act requirements. This investment is the only one of its type in our portfolio and the
value was written down to $16,000. Trust and investment management fees were approximately the same year over year as assets under management were significantly impacted by the decline in the stock market in third and fourth quarter of 2008. From
December 31, 2007 to December 31, 2008, assets under management decreased 19.3%, however, most of the decline occurred in the second half of the year. The decrease in mortgage banking income was a result of our third quarter 2007 decision
to stop selling second mortgage loans that we had originated into the secondary market. Given the current credit environment, we do not expect to resume sales of second mortgage loans into the secondary market in the foreseeable future. We have, to
a limited extent, continued to originate and sell first mortgage loans into the secondary market. We also incurred a $550,000 loss from real estate operations due primarily to write downs of real estate held for investment. The majority of this loss
was related to a residential lot in Houston.

Noninterest income decreased $4.1 million, or 11.7%, to $31.0 million for the year
ended December 31, 2007 compared with $35.1 million for the year ended December 31, 2006. The decrease was primarily due to a $5.2 million, or 48.4%, decrease in mortgage banking income, partially offset by an increase in insurance
commissions and fees. The decrease in mortgage banking income was due to the credit crisis. As a result, in the third quarter of 2007, we discontinued selling second mortgage loans into the secondary market because it was no longer economical for us
to do so. Because the credit quality of these mortgage loans we had originated was predominantly prime and the yield attractive, we booked these loans to our residential real estate loan portfolio beginning in the third quarter of 2007. Partially
offsetting the decrease in mortgage banking income was an increase in insurance commissions and fees, which rose $486,000, or 8.9%, to $5.9 million due primarily to growth in commercial lines. Other noninterest income increased $391,000 due
primarily to a gain on sale of FDIC insurance credit.

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



|                                                  |  |                          |        |   |      |   |        |      |  |   |       
|------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------
|                                                  |  | Years Ended December 31,
|                                                  |  | 2008                     |        |   | 2007 |   |        | 2006
|                                                  |  | (dollars in thousands)  
|Trust and investment management fees              |  | $                        | 17,329 |   |      | $ | 17,546 |      |  | $ | 17,315
|Mortgage banking                                  |  |                          | 251    |   |      |   | 5,506  |      |  |   | 10,661
|Insurance commissions and fees                    |  |                          | 5,681  |   |      |   | 5,942  |      |  |   | 5,456 
|Real estate operations                            |  |                          | (550   | ) |      |   | 366    |      |  |   | 334   
|Net loss on sale of available-for-sale securities |  |                          | (3     | ) |      |   | (181   | )    |  |   |      
|Impairment write down on securities               |  |                          | (1,984 | ) |      |   |       |      |  |   |      
|Other                                             |  |                          | 1,576  |   |      |   | 1,787  |      |  |   | 1,317 
|                                                  |  |                          |        |   |      |   |        |      |  |   |       
|Total noninterest income                          |  | $                        | 22,300 |   |      | $ | 30,966 |      |  | $ | 35,083
|                                                  |  |                          |        |   |      |   |        |      |  |   |       



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##### Table of Contents

##### Index to Financial Statements

Noninterest Expense

Noninterest expense has remained approximately unchanged for the three years ended December 31, 2008, 2007 and 2006.

Noninterest expense was $50.4 million for the year ended December 31, 2008, down $246,000, or 0.5%, compared with $50.6 million for 2007. Professional fees were higher in 2008 due primarily to an arbitration
matter that was resolved and the full years effect of costs related to being a public company. These costs were offset by lower compensation expense, primarily incentive compensation, and reduced outside data processing expense due to lower
negotiated pricing. We also incurred $737,000 for a provision for unfunded loan commitments, which was a result of our growing loan portfolio and the deteriorating economic environment. In addition, 2007 included a nonrecurring charge for early debt
extinguishment which resulted from refinancing a portion of our trust preferred securities.

Noninterest expense increased $269,000, or
0.5%, to $50.6 million for the year ended December 31, 2007 compared with $50.3 million for 2006. The increase was due primarily to the $391,000 debt extinguishment expense associated with refinancing $15.5 million of junior
subordinated debentures in April 2007, the cost of opening and operating new private client offices and professional fees associated with being a public company. These expenses were mostly offset by lower commissions associated with originating
mortgages and a reduction in expenses (primarily in compensation) resulting from the sale of certain trust related assets. In addition, we launched a cost savings initiative in the fourth quarter of 2007, which included an approximately 5% staff
consolidation, and resulted in $235,000 of termination payments in the fourth quarter of 2007.

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



|                                  |  |                          |        |      |   |        |  |   |       
|--------------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------
|                                  |  | Years Ended December 31,
|                                  |  | 2008                     |        | 2007 |   | 2006  
|                                  |  | (dollars in thousands)  
|Compensation                      |  | $                        | 29,317 |      | $ | 30,117 |  | $ | 31,047
|Non-staff expenses:               |  |                          |        |      |   |        |  |   |       
|Occupancy                         |  |                          | 6,045  |      |   | 5,764  |  |   | 5,465 
|Equipment                         |  |                          | 1,960  |      |   | 2,076  |  |   | 2,050 
|Advertising and promotion         |  |                          | 842    |      |   | 1,018  |  |   | 1,092 
|Outside data processing           |  |                          | 2,970  |      |   | 3,479  |  |   | 3,253 
|Professional fees                 |  |                          | 3,470  |      |   | 2,046  |  |   | 1,809 
|Intangible amortization           |  |                          | 749    |      |   | 838    |  |   | 955   
|Loss on early debt extinguishment |  |                          |       |      |   | 391    |  |   |      
|Other                             |  |                          | 5,008  |      |   | 4,878  |  |   | 4,667 
|                                  |  |                          |        |      |   |        |  |   |       
|Total noninterest expense         |  | $                        | 50,361 |      | $ | 50,607 |  | $ | 50,338
|                                  |  |                          |        |      |   |        |  |   |       

Income Tax Expense

The income tax benefit was $4.9 million for the year ended December 31, 2008, compared with a provision of $3.1 million for 2007. The
provision for income taxes decreased $828,000, or 21.0%, to $3.1 million for the year ended December 31, 2007, compared with $3.9 million for 2006. The change in income tax expense primarily reflects the decrease in earnings before
income tax expense. The effective tax rate for the years 2008, 2007 and 2006 was 37.7%, 29.7% and 34.6%. The effective tax rate for the year 2007 reflects a $150,000 credit due to a settlement of a tax liability for interest and penalties related to
a tax position that was resolved and a lower net state income tax effect.



49



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##### Table of Contents

##### Index to Financial Statements

Results 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 of 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
this Form 10-K. The following table presents the results of operations and total assets for each of our operating segments as of and for the periods indicated:



|                                    |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|----------------------------------- |  | ---------------------- | --------- | - | ---------------- | - | --------- |  | ----- | ----- |  | ------------ | ------- | - |  | - | --------- | -
|                                    |  | Banking                |           |   | WealthManagement |   | Insurance |  | Other |       |  | Consolidated |        
|                                    |  | (dollars in thousands) |          
|Years Ended December 31,            |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|                                    |  |                        |           |   |                 
|2008                                |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net interest income (expense)       |  | $                      | 45,340    |   |                  | $ | 196       |  | $     | 83    |  | $            | (1,345  | ) |  | $ | 44,274    |  
|Provision for loan losses           |  |                        | 29,175    |   |                  |   |          |  |       |      |  |              |        |   |  |   | 29,175    |  
|Noninterest income                  |  |                        | (784      | ) |                  |   | 17,329    |  |       | 5,760 |  |              | (5      | ) |  |   | 22,300    |  
|Noninterest expense                 |  |                        | 35,148    |   |                  |   | 11,057    |  |       | 4,156 |  |              |        |   |  |   | 50,361    |  
|                                    |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Earnings (loss) before income taxes |  |                        | (19,767   | ) |                  |   | 6,468     |  |       | 1,687 |  |              | (1,350  | ) |  |   | (12,962   | )
|Income tax expense (benefit)        |  |                        | (7,298    | ) |                  |   | 2,270     |  |       | 626   |  |              | (486    | ) |  |   | (4,888    | )
|                                    |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net earnings (loss)                 |  | $                      | (12,469   | ) |                  | $ | 4,198     |  | $     | 1,061 |  | $            | (864    | ) |  | $ | (8,074    | )
|                                    |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Total assets as of December 31,     |  | $                      | 1,592,933 |   |                  | $ | 47,879    |  | $     | 6,738 |  | $            | (59,706 | ) |  | $ | 1,587,844 |  
|                                    |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|                                    |  |                        |           |   |                 
|2007                                |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net interest income (expense)       |  | $                      | 35,282    |   |                  | $ | 321       |  | $     | 136   |  | $            | (1,564  | ) |  | $ | 34,175    |  
|Provision for loan losses           |  |                        | 4,029     |   |                  |   |          |  |       |      |  |              |        |   |  |   | 4,029     |  
|Noninterest income                  |  |                        | 7,356     |   |                  |   | 17,546    |  |       | 6,035 |  |              | 29      |   |  |   | 30,966    |  
|Noninterest expense                 |  |                        | 34,022    |   |                  |   | 12,194    |  |       | 4,000 |  |              | 391     |   |  |   | 50,607    |  
|                                    |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Earnings (loss) before income taxes |  |                        | 4,587     |   |                  |   | 5,673     |  |       | 2,171 |  |              | (1,926  | ) |  |   | 10,505    |  
|Income tax expense (benefit)        |  |                        | 1,130     |   |                  |   | 1,941     |  |       | 744   |  |              | (694    | ) |  |   | 3,121     |  
|                                    |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net earnings (loss)                 |  | $                      | 3,457     |   |                  | $ | 3,732     |  | $     | 1,427 |  | $            | (1,232  | ) |  | $ | 7,384     |  
|                                    |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Total assets as of December 31,     |  | $                      | 1,411,934 |   |                  | $ | 46,270    |  | $     | 9,242 |  | $            | (66,249 | ) |  | $ | 1,401,197 |  
|                                    |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|                                    |  |                        |           |   |                 
|2006                                |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net interest income (expense)       |  | $                      | 31,622    |   |                  | $ | 218       |  | $     | 72    |  | $            | (1,739  | ) |  | $ | 30,173    |  
|Provision for loan losses           |  |                        | 3,491     |   |                  |   |          |  |       |      |  |              |        |   |  |   | 3,491     |  
|Noninterest income                  |  |                        | 12,226    |   |                  |   | 17,315    |  |       | 5,542 |  |              |        |   |  |   | 35,083    |  
|Noninterest expense                 |  |                        | 33,226    |   |                  |   | 13,232    |  |       | 3,880 |  |              |        |   |  |   | 50,338    |  
|                                    |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Earnings (loss) before income taxes |  |                        | 7,131     |   |                  |   | 4,301     |  |       | 1,734 |  |              | (1,739  | ) |  |   | 11,427    |  
|Income tax expense (benefit)        |  |                        | 2,194     |   |                  |   | 1,639     |  |       | 719   |  |              | (603    | ) |  |   | 3,949     |  
|                                    |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net earnings (loss)                 |  | $                      | 4,937     |   |                  | $ | 2,662     |  | $     | 1,015 |  | $            | (1,136  | ) |  | $ | 7,478     |  
|                                    |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Total assets as of December 31,     |  | $                      | 1,342,446 |   |                  | $ | 42,684    |  | $     | 8,231 |  | $            | (56,518 | ) |  | $ | 1,336,843 |  
|                                    |  |                        |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  

Banking. Our banking segment lost $12.5 million for the year ended December 31, 2008,
compared with net earnings of $3.5 million in 2007. Net interest income increased $10.1 million, or 28.5%, but was offset by a decrease in noninterest income of $8.1 million and an increase in the loan loss provision of $25.1 million. Net
earnings for the year ended December 31, 2007 decreased $1.5 million, or 30.0%, compared with 2006 primarily resulting from a decline in noninterest income of $4.9 million, or 39.8%, an increase in provision for loan losses of
$538,000, or 15.4%, and an increase in noninterest expense of $796,000, or 2.4%. These items more than offset the increase in net interest income of $3.7 million.



50



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##### Table of Contents

##### Index to Financial Statements

Net interest income for the year ended December 31, 2008 increased $10.1 million, or 28.5%,
compared with 2007, while net interest income for 2007 increased $3.7 million, or 11.6%, compared with 2006. The increases resulted primarily from an improvement in the net interest margin and increases in earning assets. The net interest
margin improved as a result of a more optimal mix of earning assets and funding liabilities. See the analysis of net interest income included in the section of this Form 10-K captioned Net Interest Income.

The provision for loan losses for the year ended December 31, 2008 totaled $29.2 million compared with $4.0 million in 2007 and
$3.5 million in 2006. See the analysis of the provision for loan losses included in the section of this Form 10-K captioned Provision for Loan Losses.

Noninterest income for the year ended December 31, 2008 decreased $8.1 million, compared with 2007. The decrease was due primarily to lower mortgage
banking income and an investment impairment. Noninterest income for the year ended December 31, 2007 decreased $4.9 million, or 39.8%, compared with 2006. This decrease was due primarily to a $5.2 million decline in mortgage banking
income, which resulted from the discontinuation of second mortgage sales in the third quarter of 2007.

Noninterest expense for the year
ended December 31, 2008 increased $1.1 million, or 3.3%, compared with 2007. The increase was due primarily to the $737,000 provision for unfunded loan commitments. Noninterest expense for the year ended December 31, 2007 increased
$796,000, or 2.4%, compared with 2006, primarily due to additional expenses associated with opening new private client offices.

Wealth
Management. Net earnings for the year ended December 31, 2008 increased $466,000, or 12.5%, compared with 2007. The rise in net earnings was due primarily to expense management. Net earnings for the year ended December 31, 2007
increased $1.1 million, or 40.2%, compared with 2006 due primarily to an increase in assets under management and a 7.8% expense reduction. Assets under management were $2.2 billion as of December 31, 2008 and $2.8 billion as of
December 31, 2007, due primarily to the sharp declines in the stock market during 2008.

Noninterest income for the year ended
December 31, 2008 decreased $217,000, or 1.2%, compared with 2007. The decrease was due primarily to a 19.3% decline in assets under management, which resulted from sharp declines in the stock market. Noninterest income for the year ended
December 31, 2007 increased $231,000, or 1.3%, in spite of fee income lost due to the sale of certain trust related assets in June 2006. Excluding the sale, noninterest income increased $2.0 million, or 12.5%.

Noninterest expense for the year ended December 31, 2008 decreased $1.1 million, or 9.3%, compared with 2007. The decrease was due primarily to
lower incentive compensation. Noninterest expense for the year ended December 31, 2007 decreased $1.0 million, or 7.8%, due primarily to reduced expenses resulting from the sale of certain trust related assets in June 2006. Excluding the
aforementioned sale, noninterest expense increased $634,000, or 5.5%. Excluding the sale, the increase was due primarily to higher compensation expense due to hiring of additional staff and merit increases.

Insurance. Net earnings for the year ended December 31, 2008 decreased $366,000, or 25.6%, compared with 2007 due to a soft property and
casualty market. Net earnings for the year ended December 31, 2007 increased $412,000, or 40.6%, compared with 2006, due to growth in commercial lines.

Noninterest income for the year ended December 31, 2008 decreased $275,000, or 4.6%, compared with 2007. The decrease was due primarily due to a soft property and casualty market. Noninterest income for the year
ended December 31, 2007 increased $493,000, or 8.9%, compared with 2006, due primarily to increases in commercial lines.

Noninterest
expense for the year ended December 31, 2008 increased $156,000, or 3.9%, compared with 2007. Noninterest expense for the year ended December 31, 2007 increased $120,000, or 3.1%, compared with 2006, due primarily to commissions paid
associated with new business.



51



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##### Table of Contents

##### Index to Financial Statements

Other. Other consists primarily of interest expense on our junior subordinated debentures, which
is not allocated to the business segments. Interest expense on the floating rate portion of these borrowings reflected interest rate increases and decreases from 2006 through 2008. Interest expense on these borrowings decreased in 2008 and 2007 due
to the refinancing of $15.5 million of the debentures in 2007. In connection with this refinance activity, we took a $391,000 charge for early debt extinguishment, which is reflected in noninterest expense.

Financial Condition

Total assets increased
$186.6 million, or 13.3%, to $1.6 billion as of December 31, 2008, compared with $1.4 billion as of December 31, 2007. Our loan portfolio increased $121.1 million, or 11.0%, to $1.2 billion as of December 31,
2008 compared with $1.1 billion as of December 31, 2007. Our securities portfolio increased $28.4 million, or 19.4%, to $174.7 million as of December 31, 2008 compared with $146.3 million as of December 31, 2007.
Shareholders equity increased $28.3 million, or 17.9%, to $185.7 million as of December 31, 2008. The increase was due primarily to the $34.0 million we received in connection with our issuance of Series A Preferred Stock and a
Warrant to purchase our common stock to the U.S. Treasury in connection with our participation in the CPP, which was partly offset by the net loss for the year.

Total assets increased $64.4 million, or 4.8%, to $1.4 billion as of December 31, 2007, compared with $1.3 billion as of December 31, 2006. Our loan portfolio grew $188.9 million, or 20.8%, to
$1.1 billion as of December 31, 2007. Our securities decreased $110.0 million, or 42.9%, to $146.3 million during the same period. As the securities portfolio has paid down, our strategy has been to replace it with originated
loans. Shareholders equity increased $51.8 million, or 49.0%, to $157.5 million as of December 31, 2007, primarily due to our initial public offering of common stock and net earnings for the year.

Loan Portfolio

Our primary lending
focus is to professional firms, privately-owned businesses, investors and affluent individuals. To these clients we make commercial, commercial real estate, real estate construction, residential real estate and consumer loans. Total commercial
loans, which consists of commercial, commercial real estate and real estate construction loans, accounted for 44.6% of our portfolio as of December 31, 2008. Total consumer loans, which consist of residential real estate, home equity lines of
credit, consumer installment-indirect and other consumer loans, made up 55.4% of our loan portfolio as of December 31, 2008.

Total
loans were $1.2 billion as of December 31, 2008, an increase of $121.1 million, or 11.0%, 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 $106.6 million, or 54.5%, and commercial real estate, which increased $34.9 million, or 12.6%, to $311.9 million. The majority of the loan growth, and substantially all of the growth in the residential second lien portfolio, was
in Texas. The growth in the residential real estate portfolio was due primarily to managements decision in the third quarter of 2007 to retain second mortgages in the loan portfolio rather than sell them. These loans are generally prime or
near prime, secured by property located in Texas. This increase was partially offset by a $29.4 million, or 10.8%, decrease in residential first mortgage loans, due primarily to the continued run off in our purchased first mortgage portfolio.
Consumer installment-indirect loans also decreased during 2008. Beginning in 2005, we stopped originating indirect automobile and boat loans. With the exception of residential mortgage or home equity lines, we do not actively seek to originate
consumer loans, and most of our other consumer loans are made due to requests from clients who have a relationship with us or the potential to have a relationship. Loan growth in 2008 was less than 2007 reflecting a slower economy in our market
areas. As of December 31, 2008, 2007 and 2006, loans comprised 76.7%, 78.3% and 68.0% of total assets.

Total loans increased
$188.9 million, or 20.8%, to $1.1 billion as of December 31, 2007 from $908.4 million as of December 31, 2006. The majority of loan growth occurred in commercial real estate, which increased $86.5 million to
$277.0 million, and residential real estate second lien, which increased $150.4 million to $195.6 million.



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##### Table of Contents

##### Index to Financial Statements

The following tables summarize our loan portfolio by type of loan as of the dates indicated:



|                                        |  |                        |           |         |       |   |        |   |           |  |       |  
|--------------------------------------- |  | ---------------------- | --------- | ------- | ----- | - | ------ | - | --------- |  | ----- | -
|                                        |  | December 31,           |          
|                                        |  | 2008                   |           |         | 2007  |  
|                                        |  | Amount                 |           | Percent |       |   | Amount |   | Percent   | 
|                                        |  | (dollars in thousands) |          
|Commercial:                             |  |                        |           |         |       |   |        |   |           |  |       |  
|Commercial                              |  | $                      | 135,534   |         | 11.1  | % |        | $ | 127,583   |  | 11.6  | %
|Commercial real estate                  |  |                        | 311,909   |         | 25.6  |   |        |   | 277,047   |  | 25.3  |  
|Real estate construction                |  |                        | 95,668    |         | 7.9   |   |        |   | 100,975   |  | 9.2   |  
|                                        |  |                        |           |         |       |   |        |   |           |  |       |  
|Total commercial                        |  |                        | 543,111   |         | 44.6  |   |        |   | 505,605   |  | 46.1  |  
|Consumer:                               |  |                        |           |         |       |   |        |   |           |  |       |  
|Residential real estate first lien (1)  |  |                        | 241,969   |         | 19.8  |   |        |   | 271,346   |  | 24.7  |  
|Residential real estate second lien (1) |  |                        | 302,141   |         | 24.8  |   |        |   | 195,583   |  | 17.8  |  
|Home equity lines                       |  |                        | 82,555    |         | 6.8   |   |        |   | 79,023    |  | 7.2   |  
|Consumer installmentindirect           |  |                        | 14,409    |         | 1.2   |   |        |   | 25,262    |  | 2.3   |  
|Consumer other                          |  |                        | 34,219    |         | 2.8   |   |        |   | 20,449    |  | 1.9   |  
|                                        |  |                        |           |         |       |   |        |   |           |  |       |  
|Total consumer                          |  |                        | 675,293   |         | 55.4  |   |        |   | 591,663   |  | 53.9  |  
|                                        |  |                        |           |         |       |   |        |   |           |  |       |  
|Total loans receivable                  |  | $                      | 1,218,404 |         | 100.0 | % |        | $ | 1,097,268 |  | 100.0 | %
|                                        |  |                        |           |         |       |   |        |   |           |  |       |  



|(1) | Includes $105.6 million and $142.5 million of purchased loans as of December 31, 2008 and 2007.
|--- | -----------------------------------------------------------------------------------------------



|                                        |  |                        |         |         |       |   |        |      |         |  |       |        |  |         |         |  |       |  
|--------------------------------------- |  | ---------------------- | ------- | ------- | ----- | - | ------ | ---- | ------- |  | ----- | ------ |  | ------- | ------- |  | ----- | -
|                                        |  | December 31,           |        
|                                        |  | 2006                   |         |         | 2005  |   |        | 2004 |        
|                                        |  | Amount                 |         | Percent |       |   | Amount |      | Percent |  |       | Amount |  | Percent |        
|                                        |  | (dollars in thousands) |        
|Commercial:                             |  |                        |         |         |       |   |        |      |         |  |       |        |  |         |         |  |       |  
|Commercial                              |  | $                      | 113,526 |         | 12.5  | % |        | $    | 98,712  |  | 12.2  | %      |  | $       | 72,479  |  | 11.0  | %
|Commercial real estate                  |  |                        | 190,550 |         | 21.0  |   |        |      | 135,920 |  | 16.8  |        |  |         | 76,481  |  | 11.6  |  
|Real estate construction                |  |                        | 121,848 |         | 13.4  |   |        |      | 65,055  |  | 8.1   |        |  |         | 36,651  |  | 5.5   |  
|                                        |  |                        |         |         |       |   |        |      |         |  |       |        |  |         |         |  |       |  
|Total commercial                        |  |                        | 425,924 |         | 46.9  |   |        |      | 299,687 |  | 37.1  |        |  |         | 185,611 |  | 28.1  |  
|Consumer:                               |  |                        |         |         |       |   |        |      |         |  |       |        |  |         |         |  |       |  
|Residential real estate first lien (1)  |  |                        | 290,866 |         | 32.0  |   |        |      | 314,083 |  | 38.8  |        |  |         | 327,170 |  | 49.5  |  
|Residential real estate second lien (1) |  |                        | 45,211  |         | 5.0   |   |        |      | 18,356  |  | 2.3   |        |  |         | 16,886  |  | 2.6   |  
|Home equity lines                       |  |                        | 78,158  |         | 8.6   |   |        |      | 69,092  |  | 8.6   |        |  |         | 11,681  |  | 1.8   |  
|Consumer installmentindirect           |  |                        | 44,360  |         | 4.9   |   |        |      | 74,314  |  | 9.2   |        |  |         | 77,067  |  | 11.6  |  
|Consumer other                          |  |                        | 23,849  |         | 2.6   |   |        |      | 32,672  |  | 4.0   |        |  |         | 42,279  |  | 6.4   |  
|                                        |  |                        |         |         |       |   |        |      |         |  |       |        |  |         |         |  |       |  
|Total consumer                          |  |                        | 482,444 |         | 53.1  |   |        |      | 508,517 |  | 62.9  |        |  |         | 475,083 |  | 71.9  |  
|                                        |  |                        |         |         |       |   |        |      |         |  |       |        |  |         |         |  |       |  
|Total loans receivable                  |  | $                      | 908,368 |         | 100.0 | % |        | $    | 808,204 |  | 100.0 | %      |  | $       | 660,694 |  | 100.0 | %
|                                        |  |                        |         |         |       |   |        |      |         |  |       |        |  |         |         |  |       |  



|(1) | Includes $152.6 million, $189.1 million and $243.7 million of purchased loans as of December 31, 2006, 2005 and 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------



53



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##### Index to Financial Statements

The contractual maturity ranges of our commercial and consumer loan portfolios and the amount of such
loans with predetermined and adjustable interest rates in each maturity range as of dates indicated are summarized in the following table:



|                                         |  |                        |         |                            |   |                 |  |       |         |  |   |          
|---------------------------------------- |  | ---------------------- | ------- | -------------------------- | - | --------------- |  | ----- | ------- |  | - | ---------
|                                         |  | December 31, 2008     
|                                         |  | One Yearor Less        |         | After OneThroughFive Years |   | After FiveYears |  | Total
|                                         |  | (dollars in thousands)
|Commercial:                              |  |                        |         |                            |   |                 |  |       |         |  |   |          
|Commercial                               |  | $                      | 96,593  |                            | $ | 33,511          |  | $     | 5,430   |  | $ | 135,534  
|Commercial real estate                   |  |                        | 83,985  |                            |   | 194,666         |  |       | 33,258  |  |   | 311,909  
|Real estate construction                 |  |                        | 68,271  |                            |   | 13,656          |  |       | 13,741  |  |   | 95,668   
|                                         |  |                        |         |                            |   |                 |  |       |         |  |   |          
|Total commercial                         |  |                        | 248,849 |                            |   | 241,833         |  |       | 52,429  |  |   | 543,111  
|Consumer:                                |  |                        |         |                            |   |                 |  |       |         |  |   |          
|Residential real estate first lien       |  |                        | 10,857  |                            |   | 12,720          |  |       | 218,392 |  |   | 241,969  
|Residential real estate second lien      |  |                        | 1,089   |                            |   | 1,329           |  |       | 299,723 |  |   | 302,141  
|Home equity lines                        |  |                        | 920     |                            |   | 1,079           |  |       | 80,556  |  |   | 82,555   
|Consumer installmentindirect            |  |                        | 921     |                            |   | 7,611           |  |       | 5,877   |  |   | 14,409   
|Consumer other                           |  |                        | 31,298  |                            |   | 2,921           |  |       |        |  |   | 34,219   
|                                         |  |                        |         |                            |   |                 |  |       |         |  |   |          
|Total consumer                           |  |                        | 45,085  |                            |   | 25,660          |  |       | 604,548 |  |   | 675,293  
|                                         |  |                        |         |                            |   |                 |  |       |         |  |   |          
|Total loans receivable                   |  | $                      | 293,934 |                            | $ | 267,493         |  | $     | 656,977 |  | $ | 1,218,404
|                                         |  |                        |         |                            |   |                 |  |       |         |  |   |          
|Loans with a predetermined interest rate |  | $                      | 72,222  |                            | $ | 165,029         |  | $     | 361,956 |  | $ | 599,207  
|Loans with an adjustable interest rate   |  |                        | 221,712 |                            |   | 102,464         |  |       | 295,021 |  |   | 619,197  
|                                         |  |                        |         |                            |   |                 |  |       |         |  |   |          
|Total loans receivable                   |  | $                      | 293,934 |                            | $ | 267,493         |  | $     | 656,977 |  | $ | 1,218,404
|                                         |  |                        |         |                            |   |                 |  |       |         |  |   |          

As of December 31, 2008, 49.2% of our total loan portfolio carried fixed interest rates and
50.8% of our loan portfolio had adjustable interest rates. Scheduled contractual principal repayments do not reflect the actual maturities of loans. The average maturity of our loans is substantially less than their average contractual term because
of prepayments. The average life of mortgage loans tends to increase when the current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, to decrease when current mortgage loan rates are substantially
lower than rates on existing mortgages due primarily to refinancing of adjustable rate and fixed rate loans at lower rates.

Real Estate
Loan Portfolio Concentrations

Loan concentrations may exist when there are borrowers engaged in similar activities or types of loans
extended to a diverse group of borrowers that could cause those borrowers or loans to be similarly impacted by economic or other conditions. We have a geographic concentration in our residential real estate and home equity lines portfolio in Texas,
Florida, Colorado and California.



54



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##### Index to Financial Statements

As of December 31, 2008, the geographic concentrations of residential mortgage and home equity lines
of credit by state were as follows:



|           |  |                                  |         |                                   |   |                 |  |       |        |                      |   |         |  |      |  
|---------- |  | -------------------------------- | ------- | --------------------------------- | - | --------------- |  | ----- | ------ | -------------------- | - | ------- |  | ---- | -
|           |  | December 31, 2008                |        
|           |  | ResidentialMortgageFirstLien (2) |         | ResidentialMortgageSecondLien (2) |   | HomeEquityLines |  | Total |        | Percent ofTotalLoans |  
|           |  | (dollars in thousands)           |        
|Texas      |  | $                                | 140,686 |                                   | $ | 276,638         |  | $     | 31,257 |                      | $ | 448,581 |  | 36.8 | %
|Florida    |  |                                  | 43,130  |                                   |   | 1,957           |  |       | 12,148 |                      |   | 57,235  |  | 4.7  |  
|Colorado   |  |                                  | 4,698   |                                   |   | 8,402           |  |       | 32,573 |                      |   | 45,673  |  | 3.7  |  
|California |  |                                  | 16,724  |                                   |   | 2,761           |  |       | 2,692  |                      |   | 22,177  |  | 1.8  |  
|Other (1)  |  |                                  | 36,731  |                                   |   | 12,383          |  |       | 3,885  |                      |   | 52,999  |  | 4.4  |  
|           |  |                                  |         |                                   |   |                 |  |       |        |                      |   |         |  |      |  
|Total      |  | $                                | 241,969 |                                   | $ | 302,141         |  | $     | 82,555 |                      | $ | 626,665 |  | 51.4 | %
|           |  |                                  |         |                                   |   |                 |  |       |        |                      |   |         |  |      |  



|(1) | Loans in any other individual state do not exceed 1.0% of total loans.
|--- | ----------------------------------------------------------------------

|(2) | Includes $105.6 million of purchased loans with $18.4 million located in Texas, $29.9 million in Florida, $4.7 million in Colorado and $16.8 million in California.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

Changes in real estate values and underlying economic or market conditions for these areas are monitored regularly. Subprime
loans, defined as loans in which the borrower has a FICO score of less than 620 at origination, amounted to $16.6 million at December 31, 2008. As of December 31, 2008, approximately 12.8% of our total loans consisted of residential real
estate loans and home equity lines of credit that include an interest only feature as a part of the loan terms. All of these loans are considered to be prime or near prime.

We originate commercial real estate and real estate construction loans primarily to clients in our market areas in Texas and southwest Florida, and a
significant portion of the property collateralizing our commercial real estate and real estate construction loans is located in these areas. Approximately 25.1% of commercial real estate loans and real estate construction loans are loans to owner
occupants. In certain circumstances, these loans may be collateralized by property outside of Texas or Florida.

The following tables set
forth, as of December 31, 2008, our commercial real estate loans and real estate construction loans based on the state where the property is located and based on the type of property collateralizing such loans:



|          |  |                        |         |                         |   |        |  |                       |         |  |      |  
|--------- |  | ---------------------- | ------- | ----------------------- | - | ------ |  | --------------------- | ------- |  | ---- | -
|          |  | December 31, 2008      |        
|          |  | CommercialReal Estate  |         | Real EstateConstruction |   | Total  |  | Percent ofTotal Loans |        
|          |  | (dollars in thousands) |        
|Texas     |  | $                      | 162,181 |                         | $ | 71,177 |  | $                     | 233,358 |  | 19.2 | %
|Florida   |  |                        | 130,872 |                         |   | 21,596 |  |                       | 152,468 |  | 12.5 |  
|Other (1) |  |                        | 18,856  |                         |   | 2,895  |  |                       | 21,751  |  | 1.8  |  
|          |  |                        |         |                         |   |        |  |                       |         |  |      |  
|Total     |  | $                      | 311,909 |                         | $ | 95,668 |  | $                     | 407,577 |  | 33.5 | %
|          |  |                        |         |                         |   |        |  |                       |         |  |      |  



|(1) | Loans in any other individual state do not exceed 0.7% of total loans.
|--- | ----------------------------------------------------------------------



55



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##### Index to Financial Statements

|                         |  |                        |         |                         |   |        |  |                       |         |  |      |  
|------------------------ |  | ---------------------- | ------- | ----------------------- | - | ------ |  | --------------------- | ------- |  | ---- | -
|                         |  | December 31, 2008      |        
|                         |  | CommercialReal Estate  |         | Real EstateConstruction |   | Total  |  | Percent ofTotal Loans |        
|                         |  | (dollars in thousands) |        
|1-4 family structures    |  | $                      |        |                         | $ | 54,141 |  | $                     | 54,141  |  | 4.4  | %
|Retail                   |  |                        | 78,052  |                         |   | 17,582 |  |                       | 95,634  |  | 7.9  |  
|Office building          |  |                        | 70,888  |                         |   | 14,634 |  |                       | 85,522  |  | 7.0  |  
|Land                     |  |                        | 55,232  |                         |   |       |  |                       | 55,232  |  | 4.5  |  
|Industrial and warehouse |  |                        | 42,562  |                         |   | 8,661  |  |                       | 51,223  |  | 4.2  |  
|1-4 family land          |  |                        | 28,888  |                         |   |       |  |                       | 28,888  |  | 2.4  |  
|Condominium              |  |                        |        |                         |   |       |  |                       |        |  |     |  
|Multi-family             |  |                        | 11,647  |                         |   | 250    |  |                       | 11,897  |  | 1.0  |  
|Other                    |  |                        | 24,640  |                         |   | 400    |  |                       | 25,040  |  | 2.1  |  
|                         |  |                        |         |                         |   |        |  |                       |         |  |      |  
|Total                    |  | $                      | 311,909 |                         | $ | 95,668 |  | $                     | 407,577 |  | 33.5 | %
|                         |  |                        |         |                         |   |        |  |                       |         |  |      |  

Delinquent and Nonperforming Assets

We have several procedures in place to assist in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be
followed by our management and delinquency levels are monitored by Encore Banks asset classification committee and reviewed by Encore Banks board of directors for any negative or adverse trends. There can be no assurance, however, that
our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

Trends in delinquency ratios represent an indicator, among other considerations, of credit risk within the loan portfolio. The entire balance of an account is considered delinquent if the minimum payment contractually required to be made is
not received by the specified date. Loans 90 days past due, the majority of which are nonperforming loans, totaled $31.2 million as of December 31, 2008, compared with $13.4 million as of December 31, 2007 and $9.5 million as of
December 31, 2006. The ratio of nonperforming loans and loans 90 days past due and still accruing to total loans was 2.56% as of December 31, 2008, compared with 1.22% as of December 31, 2007 and 1.05% as of December 31, 2006.
The increase from 2007 to 2008 was due primarily to residential construction loans in Houston and commercial real estate loans in Florida. The increase from 2006 to 2007 was due primarily to a loan in the amount of $6.3 million to a Texas law firm
and a $1.5 million construction loan in Houston.

We generally place a loan on nonaccrual status and cease to accrue interest when the loan
becomes 90 days past due or when loan payment performance is deemed uncertain, unless the loan is both well secured and in the process of collection. Cash payments received while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection. We are sometimes required to revise the interest rate or repayment terms in a troubled debt restructuring. If interest on nonaccrual loans as of December 31, 2008 had been accrued under the
original loan terms, approximately $2.0 million would have been recorded as income during 2008, compared with interest payments of $1.5 million actually recorded during 2008.

We generally obtain appraisals on loans categorized as nonperforming loans and potential problem loans. In instances where updated appraisals reflect
reduced collateral values, an evaluation of the borrowers overall financial condition is made to determine the need, if any, for possible write downs or appropriate additions to the allowance for loan losses. We record real estate acquired
through foreclosure at fair value at the time of acquisition, less estimated costs to sell the property, establishing a new cost basis. Subsequent to foreclosure, we carry the properties at the lower of cost or market value less costs to sell.



56



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##### Index to Financial Statements

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



|                                                                  |                        |              |        |      |  |   |        |   |  |      |       |   |      |   |       |   |  |   |       |  
|----------------------------------------------------------------- | ---------------------- | ------------ | ------ | ---- |  | - | ------ | - |  | ---- | ----- | - | ---- | - | ----- | - |  | - | ----- | -
|                                                                  |                        | December 31, |       
|                                                                  | 2008                   |              |        | 2007 |  |   | 2006   |   |  | 2005 |       |   | 2004 |  
|                                                                  | (dollars in thousands) |             
|Nonaccrual loans                                                  |                        | $            | 30,531 |      |  | $ | 11,208 |   |  | $    | 9,411 |   |      | $ | 3,064 |   |  | $ | 2,760 |  
|Accruing loans past due 90 days or more                           |                        |              | 646    |      |  |   | 2,183  |   |  |      | 96    |   |      |   | 420   |   |  |   | 1,500 |  
|Restructured loans (1)                                            |                        |              |       |      |  |   |       |   |  |      |      |   |      |   |      |   |  |   |      |  
|                                                                  |                        |              |        |      |  |   |        |   |  |      |       |   |      |   |       |   |  |   |       |  
|Total nonperforming loans                                         |                        |              | 31,177 |      |  |   | 13,391 |   |  |      | 9,507 |   |      |   | 3,484 |   |  |   | 4,260 |  
|Investment in real estate                                         |                        |              | 2,781  |      |  |   | 835    |   |  |      | 235   |   |      |   | 1,084 |   |  |   | 1,852 |  
|                                                                  |                        |              |        |      |  |   |        |   |  |      |       |   |      |   |       |   |  |   |       |  
|Total nonperforming assets                                        |                        | $            | 33,958 |      |  | $ | 14,226 |   |  | $    | 9,742 |   |      | $ | 4,568 |   |  | $ | 6,112 |  
|                                                                  |                        |              |        |      |  |   |        |   |  |      |       |   |      |   |       |   |  |   |       |  
|Nonperforming assets to total loans and investment in real estate |                        |              | 2.78   | %    |  |   | 1.30   | % |  |      | 1.07  | % |      |   | 0.56  | % |  |   | 0.92  | %



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

Nonperforming assets were $34.0 million, $14.2 million and $9.7 million as of December 31, 2008, 2007 and 2006. Our ratio of nonperforming assets to total loans and investment in real estate was
2.78% and 1.30% as of December 31, 2008 and 2007. Nonperforming assets were impacted by the resolution of a $6.3 million loan to a Houston law firm during the second quarter of 2008. However, this reduction was offset by several commercial real
estate loans in Florida totaling $10.3 million, two commercial loans to professionals in Houston totaling $4.0 million and two residential construction loan relationships in Houston totaling $7.2 million being placed on nonaccrual status. The
increase in nonaccrual loans in 2007 was primarily attributable to purchased residential mortgages and three commercial loans. The increase in nonaccrual loans in 2006 was attributable primarily to one loan to a law firm in the amount of $6.3
million, which was resolved in 2008. Loans 90 days past due or more and still accruing were $646,000 at December 31, 2008, compared with $2.2 million at December 31, 2007. Investment in real estate was $2.8 million at December 31,
2008 compared with $835,000 at December 31, 2007, a $1.9 million increase due primarily to repossession of residential real estate in Houston.

As of December 31, 2008, 2007 and 2006, investment in real estate was comprised primarily of real estate acquired in settlement of loans. As of December 31, 2005 and 2004, investment in real estate was comprised primarily of
branch locations that were purchased but not used and decreased during these periods as the result of sales of such locations.

We follow a
loan review program designed to evaluate the credit risk in our loan portfolio. Through this loan review process, we maintain an internally classified watch list which helps management assess the overall quality of the loan portfolio and the
adequacy of the allowance for loan losses. Loans included on the watch list that are not otherwise classified show warning elements where the present status portrays one or more deficiencies that require attention in the short term or where
pertinent ratios of the loan account have weakened to a point where more frequent monitoring is warranted. These loans do not have all of the characteristics of a classified loan (substandard or doubtful) but do show weakened elements compared with
those of a satisfactory credit.

In establishing the appropriate classification for specific assets, we consider, among other factors, the
estimated value of the underlying collateral, the borrowers ability to repay, the borrowers repayment history and the current delinquent status. As a result of this process, loans are classified as substandard, doubtful or loss.

Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position,
unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that we will sustain some losses if the
deficiencies are not corrected. Loans classified as doubtful are those loans which have characteristics similar to substandard loans but with an increased risk that collection



57



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##### Index to Financial Statements

or liquidation in full is highly questionable and improbable. Loans classified as loss are those loans that are in the process of being charged
off. Once a loan is deemed uncollectible as contractually agreed, the loan is charged off either partially or in full against the allowance for loan losses.

As of December 31, 2008, we had $79.3 million of loans classified as substandard, $715,000 classified as doubtful and none classified as loss. As of December 31, 2008, we had specific allocations of
$9.5 million in the allowance for loan losses related to these classified loans. As of December 31, 2007, we had $11.4 million of loans classified as substandard, $6.9 million classified as doubtful and none classified as loss. As of
December 31, 2007, we had specific allocations of $2.6 million in the allowance for loan losses related to these classified loans. The change in specific reserve from 2007 to 2008 reflects the rise in nonperforming assets which is a result of
the deteriorating economic environment.

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 results of operations
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.

The allowance for loan losses is comprised of two components: specific reserves and general reserves. Generally, all loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a specific
reserve is required. A loan is considered impaired when, based on current information, it is probable that we will not receive all amounts due in accordance with the contractual terms of the loan agreement. Once a loan has been identified as
impaired, we measure impairment in accordance with SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a LoanIncome Recognition and
Disclosures. The measurement of impaired loans is based on the present value of expected future cash flows discounted at the loans effective interest rate or the loans observable market price, or based on the fair value of the
collateral if the loan is collateral-dependent. When managements measured value of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve. These specific reserves are
determined on an individual loan basis based on our current evaluation of our loss exposure for each credit, given the payment status, financial condition of the borrower and value of any underlying collateral. Loans for which specific reserves are
provided are excluded from the general reserve described below. Changes in specific reserves from period to period are the result of changes in the circumstances of individual loans such as charge-offs, pay-offs, changes in collateral values or
other factors.

We also maintain a general reserve for each loan type in the loan portfolio. In determining the amount of the general
reserve portion of our allowance for loan losses, we consider factors such as our historical loan loss experience, the experience, ability and effectiveness of our lending management and staff, the effectiveness of our loan policies, procedures and
internal controls, strategic initiatives, the composition and concentrations of credit, underlying collateral values, nonperforming and loan classification trends, the effectiveness of the internal



58



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##### Index to Financial Statements

loan review function and general economic conditions. Our emphasis on continued growth of our loan portfolio through the origination of commercial and
commercial real estate loans has been one of the more significant factors we have taken into account in evaluating the general reserve. Based on these factors, we apply estimated percentages to the various categories of loans, not including any loan
that has a specific reserve allocated to it, based on our historical experience, portfolio trends and economic and industry trends. We use this information to set the general reserve portion of the allowance for loan losses at a level we deem
prudent.

Prior to 2007, we maintained an unallocated component within our allowance for loan losses based on additional risks of losses
that were not quantified precisely or attributed to particular loans or types of loans. During 2007, we revised our allowance methodology to provide for a more specific allocation of reserves. As of December 31, 2008 and 2007, all of the
allowance for loan losses was allocated to specific loan categories based on the factors discussed above and therefore no unallocated allowance remained at those dates. This compares with an unallocated portion of $209,000, or 2.3% of the total
allowance, as of December 31, 2006.

Based on an evaluation of the loan portfolio, we present a quarterly review of the allowance for
loan losses to Encore Banks asset classification committee and our board of directors, indicating any change in the allowance for loan losses since the last review and any recommendations as to adjustments in the allowance for loan losses.
This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as events change. The allowance for loan losses was $25.1 million as of December 31,
2008 compared with $11.2 million as of December 31, 2007 and $9.1 million as of December 31, 2006. These increases primarily reflect the growth in the loan portfolio, changes in historical loss factors, the rise in nonperforming
loans which has impacted both the specific reserves we hold as well as our general allowance, the deteriorating economic environment and, other qualitative factors.



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



|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------- |  | ------------------------------------------ | --------- | - | ---- | - | --------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                          |  | As of and for the Years Ended December 31, |          
|                                                          |  | 2008                                       |           |   | 2007 |   |           | 2006 |  |   | 2005    |   |  | 2004 |        
|                                                          |  | (dollars in thousands)                     |          
|Average loans outstanding                                 |  | $                                          | 1,170,717 |   |      | $ | 972,760   |      |  | $ | 840,330 |   |  | $    | 747,079 |   |  | $ | 626,225 |  
|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total loans outstanding at end of year                    |  | $                                          | 1,218,404 |   |      | $ | 1,097,268 |      |  | $ | 908,368 |   |  | $    | 808,204 |   |  | $ | 660,694 |  
|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Allowance for loan losses at beginning of year            |  | $                                          | 11,161    |   |      | $ | 9,056     |      |  | $ | 8,719   |   |  | $    | 7,658   |   |  | $ | 5,604   |  
|Charge-offs:                                              |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial:                                               |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial                                                |  |                                            | (8,601    | ) |      |   | (62       | )    |  |   | (1,488  | ) |  |      |        |   |  |   |        |  
|Commercial real estate                                    |  |                                            | (1,527    | ) |      |   |          |      |  |   |        |   |  |      |        |   |  |   |        |  
|Real estate construction                                  |  |                                            | (830      | ) |      |   | (79       | )    |  |   |        |   |  |      |        |   |  |   |        |  
|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total commercial                                          |  |                                            | (10,958   | ) |      |   | (141      | )    |  |   | (1,488  | ) |  |      |        |   |  |   |        |  
|Consumer:                                                 |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Residential real estate first lien                        |  |                                            | (634      | ) |      |   | (191      | )    |  |   | (97     | ) |  |      | (63     | ) |  |   | (210    | )
|Residential real estate second lien                       |  |                                            | (1,323    | ) |      |   | (759      | )    |  |   | (113    | ) |  |      | (263    | ) |  |   | (107    | )
|Home equity lines                                         |  |                                            | (1,813    | ) |      |   | (334      | )    |  |   | (236    | ) |  |      | (12     | ) |  |   |        |  
|Consumer installmentindirect                             |  |                                            | (1,016    | ) |      |   | (962      | )    |  |   | (1,362  | ) |  |      | (1,491  | ) |  |   | (663    | )
|Consumer other                                            |  |                                            | (80       | ) |      |   | (226      | )    |  |   | (558    | ) |  |      | (701    | ) |  |   | (757    | )
|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total consumer                                            |  |                                            | (4,866    | ) |      |   | (2,472    | )    |  |   | (2,366  | ) |  |      | (2,530  | ) |  |   | (1,737  | )
|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total charge-offs                                         |  |                                            | (15,824   | ) |      |   | (2,613    | )    |  |   | (3,854  | ) |  |      | (2,530  | ) |  |   | (1,737  | )
|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Recoveries:                                               |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial:                                               |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial                                                |  |                                            | 139       |   |      |   | 46        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial real estate                                    |  |                                            | 6         |   |      |   |          |      |  |   |        |   |  |      |        |   |  |   |        |  
|Real estate construction                                  |  |                                            |          |   |      |   |          |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total commercial                                          |  |                                            | 145       |   |      |   | 46        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Consumer:                                                 |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Residential real estate first lien                        |  |                                            | 41        |   |      |   | 34        |      |  |   | 79      |   |  |      | 39      |   |  |   | 303     |  
|Residential real estate second lien                       |  |                                            | 130       |   |      |   | 178       |      |  |   | 108     |   |  |      | 59      |   |  |   | 148     |  
|Home equity lines                                         |  |                                            | 9         |   |      |   | 43        |      |  |   | 1       |   |  |      | 1       |   |  |   |        |  
|Consumer installmentindirect                             |  |                                            | 139       |   |      |   | 294       |      |  |   | 405     |   |  |      | 147     |   |  |   | 64      |  
|Consumer other                                            |  |                                            | 129       |   |      |   | 94        |      |  |   | 107     |   |  |      | 147     |   |  |   | 117     |  
|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total consumer                                            |  |                                            | 448       |   |      |   | 643       |      |  |   | 700     |   |  |      | 393     |   |  |   | 632     |  
|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total recoveries                                          |  |                                            | 593       |   |      |   | 689       |      |  |   | 700     |   |  |      | 393     |   |  |   | 632     |  
|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net charge-offs                                           |  |                                            | (15,231   | ) |      |   | (1,924    | )    |  |   | (3,154  | ) |  |      | (2,137  | ) |  |   | (1,105  | )
|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Provision for loan losses                                 |  |                                            | 29,175    |   |      |   | 4,029     |      |  |   | 3,491   |   |  |      | 3,198   |   |  |   | 3,159   |  
|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Allowance for loan losses at end of year                  |  | $                                          | 25,105    |   |      | $ | 11,161    |      |  | $ | 9,056   |   |  | $    | 8,719   |   |  | $ | 7,658   |  
|                                                          |  |                                            |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Ratio of net charge-offs to average loans                 |  |                                            | 1.30      | % |      |   | 0.20      | %    |  |   | 0.38    | % |  |      | 0.29    | % |  |   | 0.18    | %
|Ratio of allowance for loan losses to year end loans      |  |                                            | 2.06      | % |      |   | 1.02      | %    |  |   | 1.00    | % |  |      | 1.08    | % |  |   | 1.16    | %
|Ratio of allowance for loan losses to nonperforming loans |  |                                            | 80.52     | % |      |   | 83.35     | %    |  |   | 95.26   | % |  |      | 250.26  | % |  |   | 179.77  | %



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##### Index to Financial Statements

Net charge-offs for 2008 were $15.2 million, or 1.30% of average total loans, compared with $1.9 million,
or 0.20% of average total loans in 2007. The decline in real estate prices that began in 2007 on the east and west coast of the United States developed into a recession that spread across the United States as 2008 progressed. Our markets in
southwest Florida, and to a lesser degree, Houston, were impacted by this recession. Commercial net charge-offs in 2008 include a $6.0 million charge-off for a loan to a professional and a $2.1 million partial charge-off of a $6.3 million loan to a
Houston law firm. Commercial real estate net charge-offs included several loans, primarily in Florida. Real estate construction net charge-offs consisted of multiple small loans primarily related to residential construction in Houston. The
residential real estate first lien net charge-offs were primarily related to our purchased loan portfolio. The residential real estate second lien net charge-offs grew at approximately the same rate as our loan portfolio. The growth in net
charge-offs in the home equity line of credit portfolio was primarily related to loans in California and Florida. However, as of January 2008 we no longer originated home equity lines of credit in California.

For the years 2004 to 2007, many of our net charge-offs were related to consumer installment-indirect loans, a line of business that we discontinued in
2005, although we will continue to hold these types of loans until they are repaid. The higher level of charge-offs is reflected in the pricing of these loans. We began originating commercial loans in 2002, and until 2006, we did not have any
charge-offs of such loans. The $1.5 million commercial loan charge-off in 2006 was related to one loan to a law firm in Houston.

Allocated Allowance for Loan Losses. The following tables describe the allocation of the allowance for loan losses among various categories of loans and certain other information for the dates indicated. The allocation is made for
analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of loans. The allowance allocation changed from 2007 to 2008 due to the
growth of the loan portfolio and the deteriorating economic conditions. Specifically, we increased our allowance for loan losses for all commercial loan types to reflect the deteriorating economic environment and loss history. We increased our
allowance for loan losses for second lien loans and lines of credit due to significant growth in the portfolio of these loans and the worsening recession.



|                                    |  |                        |        |                               |       |   |        |   |                               |  |       |  
|----------------------------------- |  | ---------------------- | ------ | ----------------------------- | ----- | - | ------ | - | ----------------------------- |  | ----- | -
|                                    |  | December 31,           |       
|                                    |  | 2008                   |        |                               | 2007  |  
|                                    |  | Amount                 |        | Percent ofLoans toTotal Loans |       |   | Amount |   | Percent ofLoans toTotal Loans | 
|                                    |  | (dollars in thousands) |       
|Commercial:                         |  |                        |        |                               |       |   |        |   |                               |  |       |  
|Commercial                          |  | $                      | 8,652  |                               | 11.1  | % |        | $ | 4,107                         |  | 11.6  | %
|Commercial real estate              |  |                        | 7,712  |                               | 25.6  |   |        |   | 3,090                         |  | 25.3  |  
|Real estate construction            |  |                        | 2,930  |                               | 7.9   |   |        |   | 1,190                         |  | 9.2   |  
|                                    |  |                        |        |                               |       |   |        |   |                               |  |       |  
|Total commercial                    |  |                        | 19,294 |                               | 44.6  |   |        |   | 8,387                         |  | 46.1  |  
|Consumer:                           |  |                        |        |                               |       |   |        |   |                               |  |       |  
|Residential real estate first lien  |  |                        | 1,397  |                               | 19.8  |   |        |   | 1,086                         |  | 24.7  |  
|Residential real estate second lien |  |                        | 2,757  |                               | 24.8  |   |        |   | 782                           |  | 17.8  |  
|Home equity lines                   |  |                        | 1,153  |                               | 6.8   |   |        |   | 308                           |  | 7.2   |  
|Consumer installmentindirect       |  |                        | 318    |                               | 1.2   |   |        |   | 404                           |  | 2.3   |  
|Consumer other                      |  |                        | 186    |                               | 2.8   |   |        |   | 194                           |  | 1.9   |  
|                                    |  |                        |        |                               |       |   |        |   |                               |  |       |  
|Total consumer                      |  |                        | 5,811  |                               | 55.4  |   |        |   | 2,774                         |  | 53.9  |  
|Unallocated                         |  |                        |       |                               |      |   |        |   |                              |  |      |  
|                                    |  |                        |        |                               |       |   |        |   |                               |  |       |  
|Total allowance for loan losses     |  | $                      | 25,105 |                               | 100.0 | % |        |   | $ 11,161                      |  | 100.0 | %
|                                    |  |                        |        |                               |       |   |        |   |                               |  |       |  



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##### Index to Financial Statements

|                                    |  |                        |       |                               |       |   |        |      |                               |  |       |        |  |                               |       |  |       |  
|----------------------------------- |  | ---------------------- | ----- | ----------------------------- | ----- | - | ------ | ---- | ----------------------------- |  | ----- | ------ |  | ----------------------------- | ----- |  | ----- | -
|                                    |  | December 31,           |      
|                                    |  | 2006                   |       |                               | 2005  |   |        | 2004 |                              
|                                    |  | Amount                 |       | Percent ofLoans toTotal Loans |       |   | Amount |      | Percent ofLoans toTotal Loans |  |       | Amount |  | Percent ofLoans toTotal Loans |      
|                                    |  | (dollars in thousands) |      
|Commercial:                         |  |                        |       |                               |       |   |        |      |                               |  |       |        |  |                               |       |  |       |  
|Commercial                          |  | $                      | 6,486 |                               | 12.5  | % |        | $    | 4,588                         |  | 12.2  | %      |  | $                             | 4,395 |  | 11.0  | %
|Commercial real estate              |  |                        | 368   |                               | 21.0  |   |        |      | 1,323                         |  | 16.8  |        |  |                               | 757   |  | 11.6  |  
|Real estate construction            |  |                        | 312   |                               | 13.4  |   |        |      | 285                           |  | 8.1   |        |  |                               | 102   |  | 5.5   |  
|                                    |  |                        |       |                               |       |   |        |      |                               |  |       |        |  |                               |       |  |       |  
|Total commercial                    |  |                        | 7,166 |                               | 46.9  |   |        |      | 6,196                         |  | 37.1  |        |  |                               | 5,254 |  | 28.1  |  
|Consumer:                           |  |                        |       |                               |       |   |        |      |                               |  |       |        |  |                               |       |  |       |  
|Residential real estate first lien  |  |                        | 176   |                               | 32.0  |   |        |      | 467                           |  | 38.8  |        |  |                               | 483   |  | 49.5  |  
|Residential real estate second lien |  |                        | 74    |                               | 5.0   |   |        |      | 27                            |  | 2.3   |        |  |                               | 61    |  | 2.6   |  
|Home equity lines                   |  |                        | 104   |                               | 8.6   |   |        |      | 86                            |  | 8.6   |        |  |                               | 11    |  | 1.8   |  
|Consumer installmentindirect       |  |                        | 864   |                               | 4.9   |   |        |      | 1,399                         |  | 9.2   |        |  |                               | 1,087 |  | 11.6  |  
|Consumer other                      |  |                        | 463   |                               | 2.6   |   |        |      | 544                           |  | 4.0   |        |  |                               | 762   |  | 6.4   |  
|                                    |  |                        |       |                               |       |   |        |      |                               |  |       |        |  |                               |       |  |       |  
|Total consumer                      |  |                        | 1,681 |                               | 53.1  |   |        |      | 2,523                         |  | 62.9  |        |  |                               | 2,404 |  | 71.9  |  
|Unallocated                         |  |                        | 209   |                               |      |   |        |      |                              |  |      |        |  |                               |      |  |      |  
|                                    |  |                        |       |                               |       |   |        |      |                               |  |       |        |  |                               |       |  |       |  
|Total allowance for loan losses     |  | $                      | 9,056 |                               | 100.0 | % |        | $    | 8,719                         |  | 100.0 | %      |  | $                             | 7,658 |  | 100.0 | %
|                                    |  |                        |       |                               |       |   |        |      |                               |  |       |        |  |                               |       |  |       |  

We believe that the allowance for loan losses as of December 31, 2008 is adequate to cover
estimated losses inherent in the portfolio as of such date. The estimate of losses represented by the allowance is subject to change as more information becomes known. Future losses, which could vary greatly in amount, will be recognized through
future loan loss provisions in the period in which such losses are determined.

Investment Securities

Securities within the securities portfolio are classified as held-to-maturity, available-for-sale or trading based on the intent and objective of the
investment and the ability to hold to maturity. As of December 31, 2008, we had no securities classified as trading. Fair values of securities are based on quoted market prices where available. If quoted market prices are not available,
estimated fair values are based on quoted market prices of comparable securities or are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows.

Securities available-for-sale are carried at fair value with unrealized holding gains and losses reported as a separate component of shareholders
equity called other comprehensive income. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities may be sold in response to interest rate changes, changes in prepayment risk or
changes to underlying bank funding. Available-for-sale securities were $78.8 million as of December 31, 2008 compared with $12.2 million as of December 31, 2007 and $83.7 million as of December 31, 2006. The increase was
primarily due to support liquidity and collateral needs. As of December 31, 2008, $72.6 million, or 92.1%, of the available-for-sale securities were invested in mortgage-backed securities, compared with $3.8 million, or 31.2%, as of
December 31, 2007. The remainder of the available-for-sale portfolio was invested primarily in securities to support our Community Reinvestment Act obligations.

Securities held-to-maturity are carried at amortized historical cost. Securities that we have the intent and ability to hold until maturity are classified as held-to-maturity. Held-to-maturity securities decreased to
$95.9 million as of December 31, 2008 compared with $134.1 million as of December 31, 2007 and $172.6 million as of December 31, 2006, due primarily to pay downs of such securities. All of the securities in the held-to-maturity
category were mortgage-backed securities.



62



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##### Index to Financial Statements

The following tables summarize the amortized cost of securities classified as available-for-sale and
held-to-maturity and their approximate fair values as of the dates shown:



|                           |  |                        |        |                      |   |                       |  |   |           |   |  |   |       
|-------------------------- |  | ---------------------- | ------ | -------------------- | - | --------------------- |  | - | --------- | - |  | - | ------
|                           |  | December 31, 2008     
|                           |  | AmortizedCost          |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|                           |  | (dollars in thousands)
|Available-for-sale:        |  |                        |        |                      |   |                       |  |   |           |   |  |   |       
|Mortgage-backed securities |  | $                      | 71,897 |                      | $ | 712                   |  | $ |          |   |  | $ | 72,609
|Other securities           |  |                        | 6,218  |                      |   | 49                    |  |   | (60       | ) |  |   | 6,207 
|                           |  |                        |        |                      |   |                       |  |   |           |   |  |   |       
|Total                      |  | $                      | 78,115 |                      | $ | 761                   |  | $ | (60       | ) |  | $ | 78,816
|                           |  |                        |        |                      |   |                       |  |   |           |   |  |   |       
|Held-to-maturity:          |  |                        |        |                      |   |                       |  |   |           |   |  |   |       
|Mortgage-backed securities |  | $                      | 95,875 |                      | $ | 1,057                 |  | $ | (4        | ) |  | $ | 96,928
|                           |  |                        |        |                      |   |                       |  |   |           |   |  |   |       



|                           |  |                        |         |                      |   |                       |  |        |           |  |               |         |                      |   |                       |  |   |           |  |   |         |   |  |   |        
|-------------------------- |  | ---------------------- | ------- | -------------------- | - | --------------------- |  | ------ | --------- |  | ------------- | ------- | -------------------- | - | --------------------- |  | - | --------- |  | - | ------- | - |  | - | -------
|                           |  | December 31, 2007      |         | December 31, 2006   
|                           |  | AmortizedCost          |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |        | FairValue |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|                           |  | (dollars in thousands)
|Available-for-sale:        |  |                        |         |                      |   |                       |  |        |           |  |               |         |                      |   |                       |  |   |           |  |   |         |   |  |   |        
|Mortgage-backed securities |  | $                      | 3,910   |                      | $ |                      |  | $ (101 | )         |  | $             | 3,809   |                      | $ | 76,904                |  | $ | 95        |  | $ | (1,814  | ) |  | $ | 75,185 
|Other securities           |  |                        | 8,354   |                      |   | 51                    |  | (7     | )         |  |               | 8,398   |                      |   | 8,547                 |  |   | 36        |  |   | (67     | ) |  |   | 8,516  
|                           |  |                        |         |                      |   |                       |  |        |           |  |               |         |                      |   |                       |  |   |           |  |   |         |   |  |   |        
|Total                      |  | $                      | 12,264  |                      | $ | 51                    |  | $ (108 | )         |  | $             | 12,207  |                      | $ | 85,451                |  | $ | 131       |  | $ | (1,881  | ) |  | $ | 83,701 
|                           |  |                        |         |                      |   |                       |  |        |           |  |               |         |                      |   |                       |  |   |           |  |   |         |   |  |   |        
|Held-to-maturity:          |  |                        |         |                      |   |                       |  |        |           |  |               |         |                      |   |                       |  |   |           |  |   |         |   |  |   |        
|Mortgage-backed securities |  | $                      | 134,056 |                      | $ | 179                   |  | $ (781 | )         |  | $             | 133,454 |                      | $ | 172,555               |  | $ | 36        |  | $ | (5,202) |   |  | $ | 167,389
|                           |  |                        |         |                      |   |                       |  |        |           |  |               |         |                      |   |                       |  |   |           |  |   |         |   |  |   |        

During the fourth quarter of 2008, we recorded a $2.0 million impairment charge on an investment
security we originally acquired to satisfy our Community Reinvestment Act requirements. This security is the only one of its type in our investment portfolio and we wrote the value down to $16,000.

Certain investment securities are valued at less than their historical cost. We believe these decreases in market valuation, which relate to primarily
two investment grade trust preferred securities, resulted primarily from recent disruptions in the credit markets which has affected all credit markets. We have the ability and intent to hold these securities until there is a recovery in fair value
and management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized
in results of operations in the period the other-than-temporary impairment is identified.

As of December 31, 2008, we had net
unrealized gains of $1.8 million compared with net unrealized losses of $659,000 as of December 31, 2007. The $2.4 million decrease in net unrealized losses was primarily due to falling interest rates. As of December 31, 2007, we
had net unrealized losses of $659,000 in the securities portfolio compared with net unrealized losses of $6.9 million as of December 31, 2006. The $6.3 million decrease in net unrealized losses was primarily attributable to changes in market
interest rates from December 31, 2006 to December 31, 2007.



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##### Index to Financial Statements

Mortgage-backed securities (MBSs) are securities that have been developed by pooling a number of real
estate mortgages and are principally issued by quasi-federal agencies such as Fannie Mae and Freddie Mac. These securities are deemed to have high credit ratings, and the minimum monthly cash flows of principal and interest are
guaranteed by the issuing agencies. These two issuers were recently taken over by the federal government and as a result, we believe the federal government will honor the obligations of these two companies. Other MBSs are issued by Ginnie Mae, which
is a Federal agency, and are guaranteed by the U.S. government.

Unlike U.S. government securities, which have a lump sum payment at
maturity, MBSs provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. MBSs which are purchased at a premium will generally suffer decreasing net yields as interest rates drop
because homeowners tend to refinance their mortgages. Thus, the premium paid must be amortized over a shorter period. Conversely, MBSs purchased at a discount will obtain higher net yields in a decreasing interest rate environment. As interest rates
rise, the opposite will generally be true. During a period of increasing interest rates, fixed rate MBSs do not tend to experience heavy prepayments of principal, and consequently the average life of this security will be lengthened. If interest
rates begin to fall, prepayments will increase, thereby shortening the estimated lives of these securities.

The following table summarizes
the contractual maturities of investment securities on an amortized cost basis and their weighted average yields as of December 31, 2008. This table shows the contractual maturities of the related investment securities and not the estimated
average lives of the securities. The contractual maturity of an MBS is the date at which the last underlying mortgage matures. In the case of a 15-year pool of loans or a 30-year pool of loans, the maturity date of the security will be the date the
last payment is due on the underlying mortgages.



|                           |  |                        |       |       |                                    |   |        |                                     |        |  |                 |        |  |       |       |  |        |   |       |   |        |        |      |       |  |   |         |  |      |  
|-------------------------- |  | ---------------------- | ----- | ----- | ---------------------------------- | - | ------ | ----------------------------------- | ------ |  | --------------- | ------ |  | ----- | ----- |  | ------ | - | ----- | - | ------ | ------ | ---- | ----- |  | - | ------- |  | ---- | -
|                           |  | December 31, 2008      |      
|                           |  | Due WithinOne Year     |       |       | After One Yearbut WithinFive Years |   |        | After Five Yearsbut WithinTen Years |        |  | After Ten Years |        |  |       |       |  |       
|                           |  | Amount                 |       | Yield |                                    |   | Amount |                                     | Yield  |  |                 | Amount |  | Yield |       |  | Amount |   | Yield |   |        | Amount |      | Yield | 
|                           |  | (dollars in thousands) |      
|Available-for-sale:        |  |                        |       |       |                                    |   |        |                                     |        |  |                 |        |  |       |       |  |        |   |       |   |        |        |      |       |  |   |         |  |      |  
|Mortgage-backed securities |  | $                      |      |       |                                   | % |        | $                                   |       |  |                | %      |  | $     | 9,540 |  | 5.98   | % |       | $ | 62,357 |        | 4.53 | %     |  | $ | 71,897  |  | 4.72 | %
|Other securities           |  |                        |      |       |                                   |   |        |                                     |       |  |                |        |  |       |      |  |       |   |       |   | 535    |        | 7.84 |       |  |   | 535     |  | 7.84 |  
|Held-to-maturity:          |  |                        |       |       |                                    |   |        |                                     |        |  |                 |        |  |       |       |  |        |   |       |   |        |        |      |       |  |   |         |  |      |  
|Mortgage-backed securities |  |                        | 3,967 |       | 4.42                               |   |        |                                     | 67,423 |  | 3.25            |        |  |       |      |  |       |   |       |   | 24,485 |        | 4.22 |       |  |   | 95,875  |  | 3.55 |  
|                           |  |                        |       |       |                                    |   |        |                                     |        |  |                 |        |  |       |       |  |        |   |       |   |        |        |      |       |  |   |         |  |      |  
|Total                      |  | $                      | 3,967 |       | 4.42                               | % |        | $                                   | 67,423 |  | 3.25            | %      |  | $     | 9,540 |  | 5.98   | % |       | $ | 87,377 |        | 4.47 | %     |  |   | 168,307 |  | 4.06 |  
|                           |  |                        |       |       |                                    |   |        |                                     |        |  |                 |        |  |       |       |  |        |   |       |   |        |        |      |       |  |   |         |  |      |  
|Equity securities          |  |                        |       |       |                                    |   |        |                                     |        |  |                 |        |  |       |       |  |        |   |       |   |        |        |      |       |  |   | 5,683   |  |     |  
|                           |  |                        |       |       |                                    |   |        |                                     |        |  |                 |        |  |       |       |  |        |   |       |   |        |        |      |       |  |   |         |  |      |  
|Total securities           |  |                        |       |       |                                    |   |        |                                     |        |  |                 |        |  |       |       |  |        |   |       |   |        |        |      |       |  | $ | 173,990 |  | 3.93 | %
|                           |  |                        |       |       |                                    |   |        |                                     |        |  |                 |        |  |       |       |  |        |   |       |   |        |        |      |       |  |   |         |  |      |  

Contractual maturity of an MBS is not a reliable indicator of its expected life because borrowers
have the right to prepay their obligations at any time. A third party analysis of our MBSs as of December 31, 2008 shows the estimated average lives for fixed MBSs to be 1.10 years and for adjustable MBSs to be 4.04 years. The estimated average
life will change if interest rates change. The estimated average life of the total securities portfolio was 2.52 years as of December 31, 2008.

Goodwill and Other Intangible Assets

SFAS No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and



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##### Index to Financial Statements

addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 also
addresses the accounting for goodwill and other intangible assets subsequent to their acquisition and provides that intangible assets with finite useful lives should continue to be amortized and that goodwill and intangible assets with indefinite
lives should no longer be amortized, but rather, be tested annually for impairment. Based on our goodwill impairment test as of December 31, 2008, we do not believe any of our goodwill is impaired. In addition, as of December 31, 2008, we
tested the useful lives of our other intangible assets and determined that there has not been any significant change in the original estimated useful lives.

The change in our carrying amount of goodwill for the years ended December 31, 2008 and 2007 is as follows:



|                                 |  |                         |        |   |      |   |       
|-------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------
|                                 |  | Years EndedDecember 31,
|                                 |  | 2008                    |        |   | 2007
|                                 |  | (dollars in thousands) 
|Balance, beginning               |  | $                       | 27,942 |   |      | $ | 27,869
|Goodwill from acquisitions       |  |                         | 33     |   |      |   | 73    
|Adjustment to purchase price (1) |  |                         | (102   | ) |      |   |      
|                                 |  |                         |        |   |      |   |       
|Balance, ending                  |  | $                       | 27,873 |   |      | $ | 27,942
|                                 |  |                         |        |   |      |   |       



|(1) | Income tax contingency related to the acquisition of Encore Trust.
|--- | ------------------------------------------------------------------

Deposits

Deposits are our primary source of funds and we rely on our private client offices to
attract and retain those deposits. We offer a variety of products, which consist of noninterest-bearing and interest-bearing checking accounts, money market and savings accounts and certificates of deposit. Deposits are gathered from individuals,
partnerships and corporations in our market areas. From time to time, we also purchase brokered deposits. Our deposits averaged $1.1 billion for the year ended December 31, 2008, $1.0 billion for 2007 and $882.6 million for 2006.

The interest rates we pay are based on the competitive environments in each of our markets. We manage our interest expense through weekly
deposit pricing reviews that compare our deposit rates with the competition and wholesale alternatives. The change in cost of our deposits reflects the impact of the increase or decrease in short term rates, such as the Federal Funds rate or the
London Inter Bank Offered Rate. Because of the competitive nature of the market for deposits, our rates tend to follow these benchmarks closely. In addition, we have experienced rapid loan growth in recent years, and have at times offered special
deposit products or attractive rates to fund this loan growth. The average cost of deposits, including noninterest-bearing deposits, for the year ended December 31, 2008 was 2.63% compared with 3.82% for the year ended December 31, 2007.
The decrease in average cost of deposits was primarily due to falling interest rates.

As of December 31, 2008, core deposits were
$770.0 million, or 69.9%, of total deposits, while time deposits $100,000 and greater and brokered deposits made up 30.1% of total deposits. As of December 31, 2008, total deposits increased to $1.1 billion from year end 2007, an
increase of $59.4 million, or 5.7%. During this time period, the mix of deposits changed as noninterest-bearing deposits increased $25.3 million to $131.7 million, or 23.8%, and interest checking, money market and savings and time
deposits increased $34.1 million to $969.1 million, or 3.6%. The increase in noninterest-bearing deposits was primarily due to growth in commercial clients in Houston and the increase in interest-bearing deposits was primarily due to time deposits
in Houston.

As of December 31, 2007, total deposits increased to $1.0 billion from year end 2006, an increase of
$10.6 million, or 1.0%.



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##### Index to Financial Statements

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



|                                   |  |                          |           |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|---------------------------------- |  | ------------------------ | --------- | ----------- | ---- | - | -------------- | ---- | ----------- |  | ---- | -------------- |  | ----------- | ------- |  | ---- | -
|                                   |  | Years Ended December 31, |          
|                                   |  | 2008                     |           |             | 2007 |   |                | 2006 |            
|                                   |  | AverageBalance           |           | AverageRate |      |   | AverageBalance |      | AverageRate |  |      | AverageBalance |  | AverageRate |        
|                                   |  | (dollars in thousands)   |          
|Noninterest-bearing deposits       |  | $                        | 120,682   |             |     | % |                | $    | 109,448     |  |     | %              |  | $           | 87,788  |  |     | %
|Interest checking                  |  |                          | 187,412   |             | 1.34 |   |                |      | 172,701     |  | 2.97 |                |  |             | 168,881 |  | 2.50 |  
|Money market and savings           |  |                          | 291,749   |             | 1.97 |   |                |      | 348,567     |  | 4.23 |                |  |             | 264,219 |  | 3.96 |  
|Time deposits less than $100,000   |  |                          | 195,321   |             | 4.39 |   |                |      | 175,393     |  | 4.86 |                |  |             | 171,390 |  | 4.23 |  
|                                   |  |                          |           |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Core deposits                      |  |                          | 795,164   |             | 2.12 |   |                |      | 806,109     |  | 3.52 |                |  |             | 692,278 |  | 3.17 |  
|                                   |  |                          |           |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Time deposits $100,000 and greater |  |                          | 239,696   |             | 4.25 |   |                |      | 192,234     |  | 5.02 |                |  |             | 176,461 |  | 4.49 |  
|Brokered deposits                  |  |                          | 26,458    |             | 3.15 |   |                |      | 13,220      |  | 4.54 |                |  |             | 13,842  |  | 4.80 |  
|                                   |  |                          |           |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total deposits                     |  | $                        | 1,061,318 |             | 2.63 | % |                | $    | 1,011,563   |  | 3.82 | %              |  | $           | 882,581 |  | 3.46 | %
|                                   |  |                          |           |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  

The following table sets forth the amount of our time deposits as of December 31, 2008 that
are $100,000 and greater by time remaining until maturity:



|                                     |  |                        |        
|------------------------------------ |  | ---------------------- | -------
|                                     |  | December 31, 2008     
|                                     |  | (dollars in thousands)
|Three months or less                 |  | $                      | 53,142 
|Over three months through six months |  |                        | 49,990 
|Over six months through one year     |  |                        | 115,599
|Over one year                        |  |                        | 56,172 
|                                     |  |                        |        
|Total                                |  | $                      | 274,903
|                                     |  |                        |        

While a majority of the time deposits in amounts of $100,000 and greater will mature within one
year, we expect that a significant portion of these deposits will be renewed as the rates we offer on time deposits are competitive in the market. If a significant portion of the time deposits are not renewed, it would have an adverse effect on our
liquidity. We monitor maturities and have other available funding sources such as FHLB advances to mitigate this effect.

Borrowings and
Repurchase Agreements and Junior Subordinated Debentures

We utilize borrowings to supplement deposits in funding our lending and
investing activities. These borrowings are typically advances from the FHLB, which have terms ranging from overnight to several years. All borrowings from the FHLB are collateralized by 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 $272.0 million as of December 31, 2008. The outstanding balance as of December 31, 2008 includes $210.0 million in long term FHLB advances ($95.0 million of
which have various call dates prior to the maturity date) and $62.0 million in repurchase agreements with clients. Additionally, as of December 31, 2008 we had $62,000 in notes payable related to the acquisition of the insurance agency.
These notes have an interest rate of 5.0% and mature in 2009.

We increased our borrowings and repurchase agreements $98.6 million, or
56.9%, to $272.0 million as of December 31, 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 residential second mortgage
portfolio.



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##### Index to Financial Statements

The following table summarizes our outstanding borrowings and repurchase agreements at the dates
indicated:



|                                                      |  |                                           |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------- |  | ----------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                      |  | As of and for the Years EndedDecember 31, |        
|                                                      |  | 2008                                      |         |   | 2007 |   |         | 2006 | 
|                                                      |  | (dollars in thousands)                    |        
|Ending balance                                        |  | $                                         | 272,026 |   |      | $ | 173,395 |      |  | $ | 171,732 |  
|Average balance for the year                          |  |                                           | 225,969 |   |      |   | 165,647 |      |  |   | 298,907 |  
|Maximum month end balance during the year             |  |                                           | 272,026 |   |      |   | 173,395 |      |  |   | 378,323 |  
|                                                      |  |                                           |        
|Average interest rate for the year                    |  |                                           | 3.44    | % |      |   | 4.24    | %    |  |   | 4.48    | %
|Weighted average interest rate at the end of the year |  |                                           | 3.12    | % |      |   | 3.95    | %    |  |   | 4.27    | %

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

As of December 31, 2008, we had two issues of junior subordinated debentures outstanding totaling
$20.6 million as follows:



|                          |  |                           |  |                                     |        |                                    |      |   |                  |                      |                    |                      |                                      |   |                   |  |          
|------------------------- |  | ------------------------- |  | ----------------------------------- | ------ | ---------------------------------- | ---- | - | ---------------- | -------------------- | ------------------ | -------------------- | ------------------------------------ | - | ----------------- |  | ---------
|Description               |  | Issuanceand CallDates (1) |  | TrustPreferredSecuritiesOutstanding |        | InterestRate as ofDecember 31,2008 |      |   | Fixed/Adjustable |                      | Interest RateBasis |                      | JuniorSubordinatedDebt Owedto Trusts |   | FinalMaturityDate
|                          |  | (dollars in thousands)   
|Encore Statutory Trust II |  | 9/17/2003                 |  | $                                   | 5,000  |                                    | 4.82 | % |                  | Adjustable quarterly |                    | 3 monthLIBOR + 2.95% |                                      | $ | 5,155             |  | 9/24/2033
|Encore Capital Trust III  |  | 4/19/2007                 |  |                                     | 15,000 |                                    | 6.85 | % |                  | Fixed rate (2)       |                    | 6.85% (2)            |                                      |   | 15,464            |  | 4/19/2037



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

Each of the trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and
investing the proceeds in our junior subordinated debentures. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payments of the
junior subordinated debentures held by the trust. The common securities of each trust are wholly-owned by us. Each trusts ability to pay amounts due on the trust preferred securities is solely dependent upon our making payment on the related
junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of our present and future senior indebtedness. We have fully and unconditionally guaranteed each
trusts obligations under the trust securities issued by such trust to the extent not paid or made by each trust, provided that such trust has funds available for such obligations.

Under the provisions of each issue of the junior subordinated debentures, we have the right to defer payment of interest on the debentures at any time,
or from time to time, for periods not exceeding five years. If interest payments on either issue of the junior subordinated debentures are deferred, the distributions on the applicable trust preferred securities will also be deferred. However, the
interest due would continue to accrue during any such interest payment deferral period.



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##### Index to Financial Statements

The trust preferred securities issued by the trusts are currently included in our Tier 1 capital for
regulatory purposes. On March 1, 2005, the Federal Reserve adopted final rules that would continue to allow trust preferred securities to be included in Tier 1 capital, subject to stricter quantitative and qualitative limits. Currently, trust
preferred securities and qualifying perpetual preferred stock are limited in the aggregate to no more than 25% of a bank holding companys core capital elements. The new rule amends the existing limit by providing that restricted core capital
elements (including trust preferred securities and qualifying perpetual preferred stock) can be no more than 25% of core capital, net of goodwill and associated deferred tax liability. Because the 25% limit currently is calculated without deducting
goodwill, the final rule reduces the amount of trust preferred securities that we can include in Tier 1 capital. The amount of such excess trust preferred securities are includable in Tier 2 capital. The new quantitative limits will be fully
effective on March 31, 2009. As of December 31, 2008, the new rules would not have affected the amount of trust preferred securities that we may include in our Tier 1 capital.

Each of the trusts issuing the trust preferred securities holds junior subordinated debentures we issued with a 30-year maturity. The final rules provide
that in the last five years before the junior subordinated debentures mature, the associated trust preferred securities will be excluded from Tier 1 capital and included in Tier 2 capital, subject (together with subordinated debt and certain other
investments) to an aggregate limit of 50% of Tier 1 capital. In addition, under the regulations, the trust preferred securities during this five-year period would be amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2
capital completely during the year prior to maturity of the debentures.

Liquidity

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 management involves forecasting funding requirements and maintaining sufficient
capacity to meet the needs and accommodate fluctuations in asset and liability levels due to changes in our business operations or unanticipated events.

Liquidity needs of a financial institution can be met from either assets or liabilities. On the asset side, our primary sources of liquidity are cash and due from banks, federal funds sold, maturities of securities
and scheduled repayments and maturities of loans. On the liability side, our principal sources of liquidity are deposits, borrowed funds and the accessibility to money and capital markets. Client deposits are our largest source of funds. For the
years ended December 31, 2008 and 2007, our average deposits were $1.1 billion, or 71.6% of average total assets, and $1.0 billion, or 75.4% of average total assets.

At December 31, 2008, we had approximately $95.0 million in short term investments and $78.8 million in securities available-for-sale, which together represented 10.9% of our balance sheet. Funds are also
available from borrowings from the FHLB pursuant to an existing commitment based on the value of the collateral pledged (either loans or securities) and repurchase agreements. As of December 31, 2008, we had $93.6 million in available credit
from the FHLB. We monitor our liquidity closely through balance sheet analysis as well as cash flow projections to ensure that we have adequate liquidity to meet our obligations.

We develop and maintain a contingency funding plan for our liquidity position. This plan provides an operating framework to manage our liquidity position
under various operating circumstances and allows us to ensure that we would be able to operate through a period of stress when access to normal sources of funding is constrained. The plan outlines sources and quantity of liquidity, highlights
actions and procedures for managing through a problem period and defines roles and responsibilities. This plan is reviewed and approved annually by our Asset Liability Committee (ALCO) and the board of directors.



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##### Index to Financial Statements

The primary source of our parent company funding has been dividends from our subsidiary bank, the payment
of which is subject to bank regulatory limitations. Accordingly, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately available to us. However, the parent company maintains excess
liquidity that would be sufficient to fully fund the parent company and nonbank affiliate operations for an extended period should funding from the bank be interrupted.

Shareholders Equity and Puttable Common Stock

Shareholders equity increased
$28.3 million, or 17.9%, to $185.7 million as of December 31, 2008, compared with $157.5 million as of December 31, 2007. Our ratio of average shareholders equity to average assets increased to 10.99% as of
December 31, 2008 compared with 9.64% as of December 31, 2007. The increase was due primarily to the $34.0 million we received from our participation in the CPP, which was partly offset by the net loss for the year.

Shareholders equity increased $51.8 million, or 49.0%, to $157.5 million as of December 31, 2007 compared with $105.7 million
as of December 31, 2006, primarily due to our initial public offering and net earnings. Our ratio of average shareholders equity and puttable common stock to average assets increased to 9.64% as of December 31, 2007 compared with
7.66% as of December 31, 2006.

The acquisition agreement and related put agreement, pursuant to which we issued cash and 773,616
shares of common stock in exchange for all of the shares of Linscomb & Williams, gave the shareholders of Linscomb & Williams a non-transferable right to put such stock back to us on August 31, 2009, in exchange for all of the
shares of Linscomb & Williams if such put right was not otherwise extinguished pursuant to the terms of the agreement. The put option was extinguishable at any time if our common stock became listed for trading on the New York Stock
Exchange, the NASDAQ National Market (now known as the NASDAQ Global Market) or the American Stock Exchange, or we were acquired by another company in a transaction in which our shareholders receive securities, cash or a combination thereof, issued
by a publicly traded company on or before August 31, 2009. At December 31, 2006 and 2005, we classified the puttable common stock outside of shareholders equity as the ability to extinguish the put was not considered to be completely
within our control. The put agreement was terminated on March 30, 2007. As a result, the puttable common stock was reclassified and included in shareholders equity as of March 31, 2007.

In July 2007, we completed our initial public offering of 1,904,761 shares of our common stock at $21.00 per share. In August 2007, our underwriters
exercised their over-allotment option for an additional 285,714 shares of our common stock, also at $21.00 per share. Our net proceeds, including the over-allotment shares, were $41.4 million. On December 5, 2008 in connection with our
participation in the CPP, we issued and sold to the U.S. Treasury (i) 34,000 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share, with a liquidation value of $1,000 per share, and (ii) a
Warrant to purchase up to 364,026 shares of our common stock, at an exercise price of $14.01 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $34.0 million in cash. In addition, we raised capital
through the issuance of junior subordinated debentures in connection with trust preferred securities issuances by various non-consolidated statutory trust subsidiaries in September 2003 and April 2007. This capital is available for general corporate
purposes, including loan and deposit growth.

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.



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##### Index to Financial Statements

Each of the federal bank regulatory agencies has established minimum capital adequacy and leverage
capital requirements for banking organizations. Since the conversion of Encore Bank to a national bank on March 30, 2007, Encore Bank is subject to the capital adequacy requirements of the 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 capital, 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.

The following table presents capital amounts and ratios for us and Encore Bank as of December 31, 2008:



|                        |  |                        |         |       |                             |   |        |                                                                             |        |  |      |        |  |       |         |  |       |  
|----------------------- |  | ---------------------- | ------- | ----- | --------------------------- | - | ------ | --------------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------- |  | ----- | -
|                        |  | Actual                 |         |       | For CapitalAdequacyPurposes |   |        | To Be Categorizedas WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                        |  | Amount                 |         | Ratio |                             |   | Amount |                                                                             | Ratio  |  |      | Amount |  | Ratio |        
|                        |  | (dollars in thousands) |        
|Encore Bancshares, Inc. |  |                        |         |       |                             |   |        |                                                                             |        |  |      |        |  |       |         |  |       |  
|Leverage                |  | $                      | 172,927 |       | 11.61                       | % |        | $                                                                           | 59,567 |  | 4.00 | %      |  | $     | N/A     |  | N/A   |  
|Tier 1 risk-based       |  |                        | 172,927 |       | 14.58                       |   |        |                                                                             | 47,448 |  | 4.00 |        |  |       | N/A     |  | N/A   |  
|Total risk-based        |  |                        | 187,890 |       | 15.84                       |   |        |                                                                             | 94,896 |  | 8.00 |        |  |       | N/A     |  | N/A   |  
|Encore Bank, N.A.       |  |                        |         |       |                             |   |        |                                                                             |        |  |      |        |  |       |         |  |       |  
|Leverage (1)            |  | $                      | 120,150 |       | 8.08                        | % |        | $                                                                           | 59,463 |  | 4.00 | %      |  | $     | 74,329  |  | 5.00  | %
|Tier 1 risk-based       |  |                        | 120,150 |       | 10.16                       |   |        |                                                                             | 47,308 |  | 4.00 |        |  |       | 70,962  |  | 6.00  |  
|Total risk-based        |  |                        | 135,051 |       | 11.42                       |   |        |                                                                             | 94,616 |  | 8.00 |        |  |       | 118,270 |  | 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

The risk-based capital requirements of the Federal Reserve and the OCC define capital and establish minimum capital
requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles
among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk
weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

The
risk-based capital standards issued by the Federal Reserve require all bank holding companies to have Tier 1 capital of at least 4.0% to be adequately capitalized and at least 6.0% to be well capitalized and total risk-based
capital (Tier 1 and Tier 2) of at least 8.0% of total risk-weighted assets to be adequately capitalized and at least 10.0% to be well capitalized. Tier 1 capital generally includes common shareholders equity and
qualifying perpetual preferred stock together with related surpluses and retained earnings, less deductions for goodwill and various other intangibles. Tier 2 capital may consist of a limited amount of intermediate-term preferred stock, a limited
amount of term subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock not qualifying as Tier 1 capital, and a limited amount of the general valuation allowance for loan losses. The sum of Tier 1
capital and Tier 2 capital is total risk-based capital.

The Federal Reserve has also adopted guidelines which supplement the risk-based
capital standards with a minimum ratio of Tier 1 capital to average total consolidated assets (leverage ratio) of 3.0% for institutions with well diversified risk, including no undue interest rate exposure; excellent asset quality; high liquidity;
good earnings; and that are generally considered to be strong banking organizations, rated composite 1 under applicable federal guidelines, and that are not experiencing or anticipating significant growth. Other banking



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##### Index to Financial Statements

organizations are required to maintain a leverage ratio of at least 4.0% in order to be categorized as adequately capitalized and at least 5.0%
to be categorized as well capitalized. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory
levels and comparable to peer group averages, without significant reliance on intangible assets.

Encore Bank is subject to capital
adequacy guidelines of the OCC that are substantially similar to the Federal Reserves guidelines. As part of Encore Banks conversion to a national bank, the OCC required that Encore Bank meet certain additional capital requirements for
2007 and 2008. Specifically, for 2008, Encore Bank was required to have a leverage ratio of at least 7.75% as of December 31, 2008. As of December 31, 2008, Encore Banks leverage ratio was 8.08%.

Asset/Liability Management

Our asset liability and
funds management policy provides us with the necessary guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We seek to maintain a sensitivity position
within established guidelines.

As a financial institution, the primary component of market risk is interest rate volatility. Fluctuations
in interest rates will ultimately impact both the level of income and expense recorded on most of the assets and liabilities, other than those which have a short term to maturity. Because of the nature of our operations, we are not subject to
foreign exchange or commodity price risk. We do not own any trading assets.

Interest rate risk is the potential of economic loss due to
future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet
to minimize the inherent risk while at the same time maximizing income. We recognize that certain risks are inherent, and that the goal is to identify and understand the risks.

We actively manage our exposure to adverse changes in interest rates through asset and liability management activities within guidelines established by
our ALCO. The ALCO, which is composed primarily of senior officers of Encore Bank, has the responsibility for ensuring compliance with asset/liability management policies. Interest rate risk is the exposure to adverse changes in net interest income
as a result of market fluctuations in interest rates. On a regular basis, the ALCO monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies.

We utilize a net interest income simulation model to analyze net interest income sensitivity. Potential changes in market interest rates and their
subsequent effects on net interest income are then evaluated. The model projects the effect of instantaneous movements in interest rates of both 100 and 200 basis points. Assumptions based on the historical behavior of our deposit rates and balances
in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations
in market interest rates on net interest income. Actual results will differ from the models simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and
timing of various management strategies.

Our interest sensitivity profile was liability sensitive as of December 31, 2008. Given an
instantaneous 100 basis point increase in rates that was sustained for 12 months, our base net interest income would decrease by an estimated 2.3% for the year ended December 31, 2008. Given a 200 basis point increase in interest rates for the
same period, our base net interest income would decrease by an estimated 5.2% for the year ended December 31, 2008. Given that interest rates are near zero, we did not run an instantaneous downward shock.



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We also manage our exposure to interest rates by structuring our balance sheet in the ordinary course of
business. An important measure of interest rate risk is the relationship of the repricing period of interest-earning assets and interest-bearing liabilities. The more closely the repricing periods are correlated, the less interest rate risk we have.
From time to time, we may use instruments such as leveraged derivatives, structured notes, interest rate swaps, caps, floors, financial options, financial futures contracts, or forward delivery contracts to reduce interest rate risk. As of
December 31, 2008, we had no hedging instruments.

An interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with general market interest rates. A measurement of interest rate risk is performed by analyzing the maturity and repricing relationships between interest-earning assets and
interest-bearing liabilities at specific points in time (gap). Interest rate sensitivity reflects the potential effect on net interest income of a movement in interest rates. An institution is considered to be asset sensitive, or having a positive
gap, when the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, an institution is considered to be
liability sensitive, or having a negative gap, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period.
During a period of rising interest rates, a negative gap would tend to affect net interest income adversely, while a positive gap would tend to increase net interest income. During a period of falling interest rates, a negative gap would tend to
result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely.

The following table
sets forth our interest rate sensitivity analysis as of December 31, 2008:



|                                                                        |  |                                     |         |    |           |   |          |            |  |   |             |    |  |          |          |    |          |   |         |             |  |   |                   |   |  |              |         |   |  |   |       |   |  |   |          
|----------------------------------------------------------------------- |  | ----------------------------------- | ------- | -- | --------- | - | -------- | ---------- |  | - | ----------- | -- |  | -------- | -------- | -- | -------- | - | ------- | ----------- |  | - | ----------------- | - |  | ------------ | ------- | - |  | - | ----- | - |  | - | ---------
|                                                                        |  | Volumes Subject to Repricing Within
|                                                                        |  | 0-30Days                            |         |    | 31-90Days |   |          | 91-180Days |  |   | 181-365Days |    |  | 1-2Years |          |    | 2-5Years |   |         | Over 5Years |  |   | Non-RateSensitive |   |  | TotalBalance
|                                                                        |  | (dollars in thousands)             
|Interest-earning assets:                                                |  |                                     |         |    |           |   |          |            |  |   |             |    |  |          |          |    |          |   |         |             |  |   |                   |   |  |              |         |   |  |   |       |   |  |   |          
|Loans                                                                   |  | $                                   | 434,803 |    |           | $ | 55,279   |            |  | $ | 54,510      |    |  | $        | 100,238  |    |          | $ | 121,026 |             |  | $ | 291,522           |   |  | $            | 159,665 |   |  | $ | 1,361 |   |  | $ | 1,218,404
|Securities                                                              |  |                                     | 28,303  |    |           |   | 2,290    |            |  |   | 4,589       |    |  |          | 13,169   |    |          |   | 69,254  |             |  |   | 53,865            |   |  |              | 3,417   |   |  |   | (196  | ) |  |   | 174,691  
|Other interest-earning assets                                           |  |                                     | 104,692 |    |           |   |         |            |  |   |            |    |  |          |         |    |          |   |        |             |  |   |                  |   |  |              |        |   |  |   |      |   |  |   | 104,692  
|                                                                        |  |                                     |         |    |           |   |          |            |  |   |             |    |  |          |          |    |          |   |         |             |  |   |                   |   |  |              |         |   |  |   |       |   |  |   |          
|Total interest-earning assets                                           |  |                                     | 567,798 |    |           |   | 57,569   |            |  |   | 59,099      |    |  |          | 113,407  |    |          |   | 190,280 |             |  |   | 345,387           |   |  |              | 163,082 |   |  |   | 1,165 |   |  |   | 1,497,787
|Interest-bearing liabilities:                                           |  |                                     |         |    |           |   |          |            |  |   |             |    |  |          |          |    |          |   |         |             |  |   |                   |   |  |              |         |   |  |   |       |   |  |   |          
|Interest checking, money market and savings                             |  |                                     | 449,955 |    |           |   |         |            |  |   |            |    |  |          |         |    |          |   |        |             |  |   |                  |   |  |              |        |   |  |   |      |   |  |   | 449,955  
|Time deposits                                                           |  |                                     | 49,473  |    |           |   | 77,204   |            |  |   | 84,598      |    |  |          | 188,183  |    |          |   | 54,810  |             |  |   | 64,865            |   |  |              |        |   |  |   |      |   |  |   | 519,133  
|FHLB advances                                                           |  |                                     | 25,000  |    |           |   | 60,000   |            |  |   |            |    |  |          |         |    |          |   | 10,000  |             |  |   | 112,000           |   |  |              | 2,985   |   |  |   |      |   |  |   | 209,985  
|Borrowings and repurchase agreements                                    |  |                                     | 61,995  |    |           |   | 31       |            |  |   | 15          |    |  |          |         |    |          |   |        |             |  |   |                  |   |  |              |        |   |  |   |      |   |  |   | 62,041   
|Junior subordinated debentures                                          |  |                                     |        |    |           |   | 5,155    |            |  |   |            |    |  |          |         |    |          |   |        |             |  |   | 15,464            |   |  |              |        |   |  |   |      |   |  |   | 20,619   
|                                                                        |  |                                     |         |    |           |   |          |            |  |   |             |    |  |          |          |    |          |   |         |             |  |   |                   |   |  |              |         |   |  |   |       |   |  |   |          
|Total interest-bearing liabilities                                      |  |                                     | 586,423 |    |           |   | 142,390  |            |  |   | 84,613      |    |  |          | 188,183  |    |          |   | 64,810  |             |  |   | 192,329           |   |  |              | 2,985   |   |  |   |      |   |  |   | 1,261,733
|                                                                        |  |                                     |         |    |           |   |          |            |  |   |             |    |  |          |          |    |          |   |         |             |  |   |                   |   |  |              |         |   |  |   |       |   |  |   |          
|Interest rate sensitivity gap                                           |  | $                                   | (18,625 | )  |           | $ | (84,821  | )          |  | $ | (25,514     | )  |  | $        | (74,776  | )  |          | $ | 125,470 |             |  | $ | 153,058           |   |  | $            | 160,097 |   |  | $ | 1,165 |   |  | $ | 236,054  
|                                                                        |  |                                     |         |    |           |   |          |            |  |   |             |    |  |          |          |    |          |   |         |             |  |   |                   |   |  |              |         |   |  |   |       |   |  |   |          
|Cumulative interest rate sensitivity gap                                |  | $                                   | (18,625 | )  |           | $ | (103,446 | )          |  | $ | (128,960    | )  |  | $        | (203,736 | )  |          | $ | (78,266 | )           |  | $ | 74,792            |   |  | $            | 234,889 |   |  |   |       |   |  |   |          
|                                                                        |  |                                     |         |    |           |   |          |            |  |   |             |    |  |          |          |    |          |   |         |             |  |   |                   |   |  |              |         |   |  |   |       |   |  |   |          
|Cumulative interest rate sensitive assets to rate sensitive liabilities |  |                                     | 96.8    | %  |           |   | 85.8     | %          |  |   | 84.1        | %  |  |          | 79.7     | %  |          |   | 92.7    | %           |  |   | 105.9             | % |  |              | 118.6   | % |  |   |       |   |  |   |          
|Cumulative gap as a percent of total earning assets                     |  |                                     | (1.2    | )% |           |   | (6.9     | )%         |  |   | (8.6        | )% |  |          | (13.6    | )% |          |   | (5.2    | )%          |  |   | 5.0               | % |  |              | 15.7    | % |  |   |       |   |  |   |          



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##### Index to Financial Statements

Certain shortcomings are inherent in the method of analysis presented in the gap table. For example,
although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that
restrict changes in interest rates, both on a short-term basis and over the life of the asset. More importantly, changes in interest rates, prepayments and early withdrawal levels may deviate significantly from those assumed in the calculations in
the table. As a result of these shortcomings, we focus more on a net interest income simulation model than on gap analysis. Although the gap analysis reflects a ratio of cumulative gap to total earning assets within acceptable limits, the net
interest income simulation model is considered by management to be more informative in forecasting future income at risk.

We face the risk
that borrowers might repay their loans sooner than the contractual maturity. If interest rates fall, our borrowers might repay their loans, forcing us to reinvest in a potentially lower yielding asset. This prepayment would have the effect of
lowering the overall portfolio yield which may result in lower net interest income. We have assumed that these loans will prepay, if the borrower has sufficient incentive to do so, using prepayment tables provided by third party consultants. In
addition, some of our assets, such as mortgage-backed securities or purchased loans, are held at a premium, and if these assets prepaid, we would have to write down the premium, which would temporarily reduce the yield.

Contractual Obligations

The
following table presents the payments due by period for our contractual obligations (other than deposit obligations) as of December 31, 2008:



|                               |  |                        |        |                 |   |                 |  |            |        |       |   |         |  |   |        
|------------------------------ |  | ---------------------- | ------ | --------------- | - | --------------- |  | ---------- | ------ | ----- | - | ------- |  | - | -------
|                               |  | Payments Due in:      
|                               |  | 2009                   |        | Fiscal2010-2011 |   | Fiscal2012-2013 |  | Thereafter |        | Total
|                               |  | (dollars in thousands)
|Operating leases               |  | $                      | 2,909  |                 | $ | 5,288           |  | $          | 3,540  |       | $ | 4,185   |  | $ | 15,922 
|FHLB advances                  |  |                        |       |                 |   | 17,000          |  |            | 95,000 |       |   | 97,985  |  |   | 209,985
|Other borrowed funds           |  |                        | 62,041 |                 |   |                |  |            |       |       |   |        |  |   | 62,041 
|Junior subordinated debentures |  |                        |       |                 |   |                |  |            |       |       |   | 20,619  |  |   | 20,619 
|                               |  |                        |        |                 |   |                 |  |            |        |       |   |         |  |   |        
|Total                          |  | $                      | 64,950 |                 | $ | 22,288          |  | $          | 98,540 |       | $ | 122,789 |  | $ | 308,567
|                               |  |                        |        |                 |   |                 |  |            |        |       |   |         |  |   |        

FHLB advances totaling $95.0 million have various call dates prior to the maturity date.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various transactions to meet the financing needs of our clients which, in accordance with US GAAP, are not included in our consolidated balance sheet. These transactions include
commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.



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##### Index to Financial Statements

Our commitments associated with outstanding letters of credit and commitments to extend credit as of
December 31, 2008 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.



|                             |  |                        |         |                 |   |                 |  |            |        |       |   |        |  |   |        
|---------------------------- |  | ---------------------- | ------- | --------------- | - | --------------- |  | ---------- | ------ | ----- | - | ------ |  | - | -------
|                             |  | Payments Due in:      
|                             |  | 2009                   |         | Fiscal2010-2011 |   | Fiscal2012-2013 |  | Thereafter |        | Total
|                             |  | (dollars in thousands)
|Standby letters of credit    |  | $                      | 2,440   |                 | $ | 569             |  | $          | 456    |       | $ |       |  | $ | 3,465  
|Commitments to extend credit |  |                        | 127,862 |                 |   | 11,880          |  |            | 13,716 |       |   | 35,342 |  |   | 188,800
|                             |  |                        |         |                 |   |                 |  |            |        |       |   |        |  |   |        
|Total                        |  | $                      | 130,302 |                 | $ | 12,449          |  | $          | 14,172 |       | $ | 35,342 |  | $ | 192,265
|                             |  |                        |         |                 |   |                 |  |            |        |       |   |        |  |   |        

Standby Letters of Credit. Standby letters of credit are written conditional commitments we
issue to guarantee the performance of a client to a third party. In the event the client does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount
of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the client.

Commitments to Extend Credit. We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses,
at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon clients maintaining specific credit standards at the time of funding. We minimize our exposure to loss under these commitments by
subjecting them to credit approval and monitoring procedures.

Impact of Inflation and Changing Prices

Our financial statements and related notes included in this Form 10-K have been prepared in accordance with US GAAP. These require the measurement of
financial position and operating results in historical dollars without considering changes in the relative purchasing power of money over time due to inflation. We have an asset and liability structure that is essentially monetary in nature. As a
result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Periods of high inflation are often accompanied by relatively higher interest rates, and periods of low inflation are
accompanied by relatively lower interest rates. As market interest rates rise or fall in relation to the rates earned on our loans and investments, the value of these assets decreases or increases.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

For information regarding the market risk of our financial instruments, see Item 7. Managements Discussion and Analysis of Financial Condition
and Results of OperationFinancial ConditionAsset/Liability Management. Our principal market risk exposure is to changes in interest rates.

Item 8. Financial Statements and Supplementary Data

The financial statements, the report thereon, the notes thereto and
supplementary data commence on page F-1 of this Annual Report on Form 10-K.

Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosures

None.



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##### Index to Financial Statements

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As
of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including 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, as amended (the Exchange Act)) that are designed to ensure that required information is
recorded, processed, summarized and reported within the required time frame, as specified in rules set forth by the Securities and Exchange Commission. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of December 31, 2008.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that occurred during the quarter ended December 31, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Managements Report on Internal Control Over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the Exchange Act).Our internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Management (with the participation of our Chief Executive Officer and Chief Financial Officer) conducted an evaluation of the effectiveness of internal control over financial reporting based on the
framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This assessment included controls over the preparation of the schedules equivalent to the basic financial
statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act. Based
on this evaluation, management concluded that the Companys internal control over financial reporting was effective as of December 31, 2008.

Grant Thornton LLP, an independent registered accounting firm, has issued an attestation report on the effectiveness of the Companys internal control over financial reporting and issued an audit report thereon,
which is included in this Annual Report on Form 10-K.

Compliance with Designated Laws and Regulations

Management is also responsible for ensuring compliance with the federal laws and regulations concerning loans to insiders and the federal and state laws
and regulations concerning dividend restrictions, both of which are designated by the Federal Deposit Insurance Corporation (FDIC) as safety and soundness laws and regulations.

Management assessed its compliance with the designated safety and soundness laws and regulations and has maintained records of its determinations and
assessments as required by the FDIC. Based on this assessment, management believes that the Company has complied, in all material respects, with the designated safety and soundness laws and regulations for the year ended December 31, 2008.



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##### Index to Financial Statements

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

Encore Banchshares, Inc.

We have audited Encore Bancshares, Inc.s (a Texas Corporation) internal control over financial reporting as of December 31,
2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Encore Bancshares, Inc.s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on Encore Bancshares, Inc.s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.

A companys internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because managements assessment and our audit were conducted to also
meet reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), managements assessment and our audit of Encore Bancshares, Inc.s internal control over financial reporting included
controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C). A companys internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

In our opinion, Encore Bancshares, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Encore Bancshares, Inc. (a Texas Corporation) and subsidiaries as of
December 31, 2008 and 2007, and the related consolidated statements of operations, changes in shareholders equity and cash flow for the three years in the period ended December 31, 2008, and our report dated March 16, 2009
expressed an unqualified opinion on those consolidated financial statements.

/s/ Grant Thornton LLP

Houston, Texas

March 16, 2009



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##### Index to Financial Statements

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item is incorporated herein by reference under the captions Election of Directors, Executive
Officers, Section 16(a) Beneficial Ownership Reporting Compliance, Corporate GovernanceCommittees of the Board of DirectorsAudit Committee, Corporate GovernanceDirector Nominations
Process and Corporate GovernanceCode of Ethics in our definitive Proxy Statement for our 2009 Annual Meeting of Shareholders (the 2009 Proxy Statement) to be filed with the Commission pursuant to Regulation 14A under the
Exchange Act within 120 days of our fiscal year end.

Item 11. Executive Compensation

The information required by this Item is incorporated herein by reference under the captions Executive Compensation and Other Matters and
Director Compensation in the 2009 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters

Certain information required by this Item 12 is included under Securities
Authorized for Issuance Under Equity Compensation Plans in Part II, Item 5 of this Annual Report on Form 10-K. The information required by this Item is incorporated herein by reference under the caption Beneficial Ownership of
Common Stock by Management of the Company and Principal Shareholders in the 2009 Proxy Statement.

Item 13. Certain
Relationships and Related Transactions and Director Independence

The information required by this Item is incorporated herein by
reference under the captions Corporate GovernanceDirector Independence and Certain Relationships and Related Transactions in the 2009 Proxy Statement.

Item 14. Principal Accounting Fees and Services

The information
required by this Item 14 is incorporated herein by reference under the caption Fees and Services of Independent Registered Public Accounting Firm in the 2009 Proxy Statement.



77



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##### Index to Financial Statements

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) The following
documents are filed as part of this Annual Report on Form 10-K:



|1. | Consolidated Financial Statements. Reference is made to Part II, Item 8, of this Annual Report on Form 10-K.
|-- | ------------------------------------------------------------------------------------------------------------



|2. | Financial Statement Schedules. These schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or
related notes.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | The exhibits to this Annual Report on Form 10-K listed below have been included only with the copy of this report filed with the Securities and Exchange Commission. We will
furnish a copy of any exhibit to shareholders upon written request to Encore Bancshares, Inc. and payment of a reasonable fee.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Each exhibit marked with an asterisk is filed or furnished with this Annual Report on Form 10-K as noted below.



|            |  |                                                                                                                                                                                                                                                                                                                                                                             
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit (1) |  | Description                                                                                                                                                                                                                                                                                                                                                                 
|2.1         |  | Stock Purchase Agreement, dated as of September 21, 2004, by and among Encore Bancshares, Inc., National Fiduciary Services, N.A., Memorial Funding, Inc. and William E. and Kathleen Mercer
(incorporated herein by reference to Exhibit 2.2 to Encore Bancshares, Inc.s Registration Statement on Form S-1, Registration No. 333-142735 (the S-1 Registration Statement))
|            | 
|2.2         |  | Amendment to Stock Purchase Agreement, dated as of March 15, 2005, by and among Encore Bancshares, Inc., National Fiduciary Services, N.A., Memorial Funding, Inc. and William E. and Kathleen
Mercer (incorporated herein by reference to Exhibit 2.3 to the S-1 Registration Statement)                                                                                   
|            | 
|2.3         |  | Agreement and Plan of Reorganization, dated as of August 29, 2005, by and between Encore Bancshares, Inc. and Linscomb & Williams, Inc. (incorporated herein by reference to Exhibit 2.4 to
the S-1 Registration Statement)                                                                                                                                                 
|            | 
|2.4         |  | First Amendment to Agreement and Plan of Reorganization, dated July 28, 2006, by and between Encore Bancshares, Inc. and Linscomb & Williams, Inc. (incorporated herein by reference to
Exhibit 2.5 to the S-1 Registration Statement)                                                                                                                                      
|            | 
|2.5         |  | Second Amendment to Agreement and Plan of Reorganization, dated March 30, 2007, by and between Encore Bancshares, Inc. and Linscomb & Williams, Inc. (incorporated herein by reference to
Exhibit 2.6 to the S-1 Registration Statement)                                                                                                                                    
|            | 
|2.6         |  | Stock Purchase Agreement, dated June 28, 2006, by and among Regions Bank, Encore Trust Company and RF Trust Company, Inc. (incorporated herein by reference to Exhibit 2.7 to the S-1
Registration Statement)                                                                                                                                                               
|            | 
|2.7         |  | Agreement and Plan of Merger, dated as of June 1, 2007, by and between Encore Trust Company, N.A. and Encore Bank, N.A. (incorporated herein by reference to Exhibit 2.8 to the S-1
Registration Statement)                                                                                                                                                                 
|            | 
|2.8         |  | Letter Agreement, dated December 5, 2008, including the Securities Purchase AgreementStandard Terms incorporated by reference therein, by and between Encore Bancshares, Inc. and the United
States Department of the Treasury (incorporated herein by reference to Exhibit 10.1 to Encore Bancshares, Inc.s Current Report on Form 8-K filed on December 8, 2008)        
|            | 
|3.1         |  | Amended and Restated Articles of Incorporation of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to the S-1 Registration Statement)                                                                                                                                                                                                               



78



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit (1) |  | Description                                                                                                                                                                                                                                                               
|3.2         |  | Articles of Amendment to Articles of Incorporation of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 to the S-1 Registration Statement)                                                                                                         
|            | 
|3.3         |  | Statement of Designations establishing the terms of the Series A Preferred Stock of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to Encore Bancshares, Inc.s
Current Report on Form 8-K filed on December 8, 2008)                           
|            | 
|3.4         |  | Amended and Restated Bylaws of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.3 to the S-1 Registration Statement)                                                                                                                                
|            | 
|4.1         |  | Form of specimen certificate representing shares of Encore Bancshares, Inc. common stock (incorporated herein by reference to Exhibit 4.1 to the S-1 Registration Statement)                                                                                              
|            | 
|4.2         |  | Warrant, dated December 5, 2008, to purchase 364,026 shares of Encore Bancshares, Inc.s Common Stock (incorporated herein by reference to Exhibit 4.1 to Encore Bancshares, Inc.s
Current Report on Form 8-K filed on December 8, 2008)                                 
|            | 
|4.3         |  | Form of Certificate for Encore Bancshares, Inc.s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (incorporated herein by reference to Exhibit 4.2 to
Encore Bancshares, Inc.s Current Report on Form 8-K filed on December 8, 2008)
|            | 
|10.1       |  | Encore Bancshares, Inc. 2000 Stock Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the S-1 Registration Statement)                                                                                                                        
|            | 
|10.2       |  | Form of Encore Bancshares, Inc. Stock Option Award Terms and Conditions and corresponding notice (incorporated herein by reference to Exhibit 10.2 to the S-1 Registration
Statement)                                                                                     
|            | 
|10.3       |  | Form of Encore Bancshares, Inc. Restricted Stock Award Agreement and corresponding notice (incorporated herein by reference to Exhibit 10.3 to the S-1 Registration
Statement)                                                                                            
|            | 
|10.4       |  | Encore Bancshares, Inc. 2008 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.2 to Encore Bancshares, Inc.s Registration Statement on Form S-8, Registration
No. 333-150996 (the S-8 Registration Statement))                              
|            | 
|10.5       |  | Form of Encore Bancshares, Inc. Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 4.3 to the S-8 Registration Statement)                                                                                                                      
|            | 
|10.6       |  | Form of Encore Bancshares, Inc. Nonqualified Stock Option Agreement (incorporated herein by reference to Exhibit 4.4 to the S-8 Registration Statement)                                                                                                                   
|            | 
|10.7       |  | Form of Encore Bancshares, Inc. Employee Restricted Stock Agreement (incorporated herein by reference to Exhibit 4.5 to the S-8 Registration Statement)                                                                                                                   
|            | 
|10.8       |  | Form of Encore Bancshares, Inc. Director Restricted Stock Agreement (incorporated herein by reference to Exhibit 4.6 to the S-8 Registration Statement)                                                                                                                   
|            | 
|10.9       |  | Executive Employment Agreement dated April 7, 2008 between William Reed Moraw and Town & Country Insurance Agency, Inc. (incorporated herein by reference to Exhibit 10.1 to Encore
Bancshares, Inc.s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)
|            | 
|10.10      |  | Amended and Restated Letter Change-in-Control Agreement dated July 16, 2007 between James S. DAgostino, Jr. and Encore Bancshares, Inc. (incorporated herein by reference to
Exhibit 10.14 to the S-1 Registration Statement)                                            
|            | 
|10.11      |  | Amended and Restated Letter Employment Agreement dated July 16, 2007 between J. Harold Williams and Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.15 to
the S-1 Registration Statement)                                                         
|            | 
|10.12      |  | Amended and Restated Letter Employment Agreement dated July 16, 2007 between G. Walter Christopherson and Encore Bancshares, Inc. (incorporated herein by reference to
Exhibit 10.16 to the S-1 Registration Statement)                                                   



79



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit (1) |  | Description                                                                                                                                                                                                                                   
|            | 
|10.13      |  | Amended and Restated Letter Employment Agreement dated July 16, 2007 between Heidi L. Davis and Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.17 to the S-1
Registration Statement)                                 
|            | 
|10.14      |  | Amended and Restated Letter Employment Agreement dated July 16, 2007 between George F. Williams and Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.18 to
the S-1 Registration Statement)                             
|            | 
|10.15      |  | Amended and Restated Letter Employment Agreement dated July 16, 2007 between Daniel J. Linscomb and Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.19 to
the S-1 Registration Statement)                             
|            | 
|10.16      |  | Amended and Restated Letter Change-in-Control Agreement dated July 16, 2007 between L. Anderson Creel and Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.20 to
the S-1 Registration Statement)                       
|            | 
|10.17      |  | Amended and Restated Letter Change-in-Control Agreement dated July 16, 2007 between Robert D. Mrlik and Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.21
to the S-1 Registration Statement)                         
|            | 
|10.18      |  | Amended and Restated Letter Change-in-Control Agreement dated July 16, 2007 between Thomas Ray and Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.22 to the
S-1 Registration Statement)                              
|            | 
|10.19      |  | Form of Indemnity Agreement with directors of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.1 to Encore Bancshares, Inc.s Current Report on Form 8-K filed on
December 7, 2007)                                    
|            | 
|10.20      |  | Form of Indemnity Agreement with directors of Encore Bank, N.A. (incorporated herein by reference to Exhibit 10.2 to Encore Bancshares, Inc.s Current Report on Form 8-K filed on December
7, 2007)                                          
|            | 
|10.21      |  | Form of Executive Compensation Letter Agreement with senior executive officers of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.3 to Encore Bancshares, Inc.s
Current Report on Form 8-K filed on December 8, 2008)
|            | 
|21.1*       |  | List of Subsidiaries of Encore Bancshares, Inc.                                                                                                                                                                                               
|            | 
|23.1*       |  | Consent of Grant Thornton LLP, independent registered public accounting firm.                                                                                                                                                                 
|            | 
|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.                                                               



| | Management contract or compensatory plan arrangement.
|- | -----------------------------------------------------

|* | Filed with this Annual Report on Form 10-K.
|- | -------------------------------------------

|** | Furnished with this Annual Report on Form 10-K.
|-- | -----------------------------------------------

|(1) | Encore Bancshares, Inc. has other long term debt agreements that meet the exclusion set forth in Section 601(b)(4)(iii)(A) of Regulation S-K. We hereby agree to furnish a copy
of such agreements to the Commission upon request.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Index to Financial Statements

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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)           
|Dated: March 16, 2009 |  | By:                     |  | /s/    James S. DAgostino, Jr.                                                      
|                      |  |                         |  | James S. DAgostino, Jr. Chairman of the Board, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                                         |  |                                                                                                   |  |               
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                                |  | Title                                                                                             |  | Date          
|                                                         |  |                                                                                                  
|/s/    James S. DAgostino, Jr. James S. DAgostino, Jr. |  | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)        |  | March 16, 2009
|                                                         |  |                                                                                                  
|/s/    L. Anderson Creel L. Anderson Creel               |  | Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) |  | March 16, 2009
|                                                         |  |                                                                                                  
|/s/    G. Walter Christopherson G. Walter Christopherson |  | Director                                                                                          |  | March 16, 2009
|                                                         |  |                                                                                                  
|/s/    Charles W. Jenness Charles W. Jenness             |  | Director                                                                                          |  | March 16, 2009
|                                                         |  |                                                                                                  
|/s/    John Bryan King John Bryan King                   |  | Director                                                                                          |  | March 16, 2009
|                                                         |  |                                                                                                  
|/s/    Walter M. Mischer, Jr. Walter M. Mischer, Jr.     |  | Director                                                                                          |  | March 16, 2009
|                                                         |  |                                                                                                  
|/s/    Edwin E. Smith Edwin E. Smith                     |  | Director                                                                                          |  | March 16, 2009
|                                                         |  |                                                                                                  
|/s/    Eugene H. Vaughan Eugene H. Vaughan               |  | Director                                                                                          |  | March 16, 2009
|                                                         |  |                                                                                                  
|/s/    David E. Warden David E. Warden                   |  | Director                                                                                          |  | March 16, 2009
|                                                         |  |                                                                                                  
|/s/    Steven A. Webster Steven A. Webster               |  | Director                                                                                          |  | March 16, 2009
|                                                         |  |                                                                                                  
|/s/    Randa Duncan Williams Randa Duncan Williams       |  | Director                                                                                          |  | March 16, 2009



81



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##### Index to Financial Statements

ENCORE BANCSHARES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                 |  |    
|---------------------------------------------------------------------------------------------------------------- |  | ---
|Consolidated Financial Statements                                                                                |  |    
|                                                                                                                 | 
|Report of Independent Registered Public Accounting Firm                                                          |  | F-2
|                                                                                                                 | 
|Consolidated Balance Sheets as of December 31, 2008 and 2007                                                     |  | F-3
|                                                                                                                 | 
|Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006                       |  | F-4
|                                                                                                                 | 
|Consolidated Statements of Changes in Shareholders Equity for the Years Ended December 
31, 2008, 2007 and 2006 |  | F-5
|                                                                                                                 | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006                       |  | F-6
|                                                                                                                 | 
|Notes to Consolidated Financial Statements                                                                       |  | F-7



F-1



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##### Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

Encore Bancshares, Inc.

We have audited the consolidated balance sheets of Encore Bancshares, Inc. (a Texas corporation) and subsidiaries (the Company) as of
December 31, 2008 and 2007, and the related consolidated statements of operations, changes in shareholders equity and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Encore
Bancshares, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note A to the consolidated financial statements, the Company adopted
Financial Accounting Standards Board (FASB) Interpretation No. 48 Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 on January 1, 2007.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Encore Bancshares, Inc.s
internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our report dated March 16, 2009 expressed an unqualified opinion on the Companys internal control over financial reporting.

/s/ Grant Thornton
LLP

Houston, Texas

March 16, 2009



F-2



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Amounts in
thousands, except per share amounts)



|                                                                                                                                            |  |              |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---- | - | --------- | -
|                                                                                                                                            |  | December 31, |          
|                                                                                                                                            |  | 2008         |           |   | 2007 |  
|ASSETS                                                                                                                                      |  |              |           |   |      |   |           |  
|Cash and due from banks                                                                                                                     |  | $            | 23,044    |   |      | $ | 18,817    |  
|Interest-bearing deposits in banks                                                                                                          |  |              | 91,459    |   |      |   | 18,581    |  
|Federal funds sold and other temporary investments                                                                                          |  |              | 3,549     |   |      |   | 41,017    |  
|                                                                                                                                            |  |              |           |   |      |   |           |  
|Cash and cash equivalents                                                                                                                   |  |              | 118,052   |   |      |   | 78,415    |  
|Securities available-for-sale, at estimated fair value                                                                                      |  |              | 78,816    |   |      |   | 12,207    |  
|Securities held-to-maturity, at amortized cost                                                                                              |  |              | 95,875    |   |      |   | 134,056   |  
|Mortgages held-for-sale                                                                                                                     |  |              | 150       |   |      |   | 1,396     |  
|Loans receivable                                                                                                                            |  |              | 1,218,404 |   |      |   | 1,097,268 |  
|Allowance for loan losses                                                                                                                   |  |              | (25,105   | ) |      |   | (11,161   | )
|                                                                                                                                            |  |              |           |   |      |   |           |  
|Net loans receivable                                                                                                                        |  |              | 1,193,299 |   |      |   | 1,086,107 |  
|Federal Home Loan Bank of Dallas stock, at cost                                                                                             |  |              | 9,534     |   |      |   | 5,880     |  
|Investment in real estate                                                                                                                   |  |              | 2,781     |   |      |   | 835       |  
|Premises and equipment, net                                                                                                                 |  |              | 17,362    |   |      |   | 16,831    |  
|Goodwill                                                                                                                                    |  |              | 27,873    |   |      |   | 27,942    |  
|Other intangible assets, net                                                                                                                |  |              | 6,031     |   |      |   | 6,780     |  
|Cash surrender value of life insurance policies                                                                                             |  |              | 14,686    |   |      |   | 14,091    |  
|Accrued interest receivable and other assets                                                                                                |  |              | 23,385    |   |      |   | 16,657    |  
|                                                                                                                                            |  |              |           |   |      |   |           |  
|                                                                                                                                            |  | $            | 1,587,844 |   |      | $ | 1,401,197 |  
|                                                                                                                                            |  |              |           |   |      |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                        |  |              |           |   |      |   |           |  
|Deposits:                                                                                                                                   |  |              |           |   |      |   |           |  
|Noninterest-bearing                                                                                                                         |  | $            | 131,709   |   |      | $ | 106,382   |  
|Interest-bearing                                                                                                                            |  |              | 969,088   |   |      |   | 934,992   |  
|                                                                                                                                            |  |              |           |   |      |   |           |  
|Total deposits                                                                                                                              |  |              | 1,100,797 |   |      |   | 1,041,374 |  
|Borrowings and repurchase agreements                                                                                                        |  |              | 272,026   |   |      |   | 173,395   |  
|Junior subordinated debentures                                                                                                              |  |              | 20,619    |   |      |   | 20,619    |  
|Accrued interest payable and other liabilities                                                                                              |  |              | 8,660     |   |      |   | 8,330     |  
|                                                                                                                                            |  |              |           |   |      |   |           |  
|Total liabilities                                                                                                                           |  |              | 1,402,102 |   |      |   | 1,243,718 |  
|Commitments and contingencies                                                                                                               |  |              |          |   |      |   |          |  
|Shareholders equity:                                                                                                                       |  |              |           |   |      |   |           |  
|Preferred stock, $1 par value, 20,000 shares authorized; 34 shares issued at December 31, 2008; aggregate liquidation preference of
$34,127 |  |              | 28,461    |   |      |   |          |  
|Common stock, $1 par value, 50,000 shares authorized; 10,247 shares at December 31, 2008 and 10,128 shares at December 31, 2007
issued      |  |              | 10,247    |   |      |   | 10,128    |  
|Additional paid-in capital                                                                                                                  |  |              | 115,489   |   |      |   | 108,173   |  
|Retained earnings                                                                                                                           |  |              | 31,523    |   |      |   | 39,763    |  
|Common stock in treasury, at cost (6 shares at December 31, 2008 and 4 shares at December 31, 2007)                                         |  |              | (98       | ) |      |   | (69       | )
|Accumulated other comprehensive income (loss)                                                                                               |  |              | 120       |   |      |   | (516      | )
|                                                                                                                                            |  |              |           |   |      |   |           |  
|Total shareholders equity                                                                                                                  |  |              | 185,742   |   |      |   | 157,479   |  
|                                                                                                                                            |  |              |           |   |      |   |           |  
|                                                                                                                                            |  | $            | 1,587,844 |   |      | $ | 1,401,197 |  
|                                                                                                                                            |  |              |           |   |      |   |           |  

The accompanying notes are an integral part of these statements.



F-3



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts
in thousands, except per share amounts)



|                                                    |  |                          |         |   |      |   |        |      |  |   |       
|--------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------ | ---- |  | - | ------
|                                                    |  | Years Ended December 31,
|                                                    |  | 2008                     |         |   | 2007 |   |        | 2006
|Interest income:                                    |  |                          |         |   |      |   |        |      |  |   |       
|Loans, including fees                               |  | $                        | 73,748  |   |      | $ | 67,999 |      |  | $ | 56,753
|Mortgages held-for-sale                             |  |                          | 79      |   |      |   | 3,733  |      |  |   | 6,546 
|Securities                                          |  |                          | 5,623   |   |      |   | 6,923  |      |  |   | 11,239
|Federal funds sold and other temporary investments  |  |                          | 1,821   |   |      |   | 2,772  |      |  |   | 1,272 
|                                                    |  |                          |         |   |      |   |        |      |  |   |       
|Total interest income                               |  |                          | 81,271  |   |      |   | 81,427 |      |  |   | 75,810
|Interest expense:                                   |  |                          |         |   |      |   |        |      |  |   |       
|Deposits                                            |  |                          | 27,871  |   |      |   | 38,659 |      |  |   | 30,520
|Borrowings and repurchase agreements                |  |                          | 7,781   |   |      |   | 7,029  |      |  |   | 13,378
|Junior subordinated debentures                      |  |                          | 1,345   |   |      |   | 1,564  |      |  |   | 1,739 
|                                                    |  |                          |         |   |      |   |        |      |  |   |       
|Total interest expense                              |  |                          | 36,997  |   |      |   | 47,252 |      |  |   | 45,637
|                                                    |  |                          |         |   |      |   |        |      |  |   |       
|Net interest income                                 |  |                          | 44,274  |   |      |   | 34,175 |      |  |   | 30,173
|Provision for loan losses                           |  |                          | 29,175  |   |      |   | 4,029  |      |  |   | 3,491 
|                                                    |  |                          |         |   |      |   |        |      |  |   |       
|Net interest income after provision for loan losses |  |                          | 15,099  |   |      |   | 30,146 |      |  |   | 26,682
|Noninterest income:                                 |  |                          |         |   |      |   |        |      |  |   |       
|Trust and investment management fees                |  |                          | 17,329  |   |      |   | 17,546 |      |  |   | 17,315
|Mortgage banking                                    |  |                          | 251     |   |      |   | 5,506  |      |  |   | 10,661
|Insurance commissions and fees                      |  |                          | 5,681   |   |      |   | 5,942  |      |  |   | 5,456 
|Real estate operations                              |  |                          | (550    | ) |      |   | 366    |      |  |   | 334   
|Net loss on sale of available-for-sale securities   |  |                          | (3      | ) |      |   | (181   | )    |  |   |      
|Impairment write down on securities                 |  |                          | (1,984  | ) |      |   |       |      |  |   |      
|Other                                               |  |                          | 1,576   |   |      |   | 1,787  |      |  |   | 1,317 
|                                                    |  |                          |         |   |      |   |        |      |  |   |       
|Total noninterest income                            |  |                          | 22,300  |   |      |   | 30,966 |      |  |   | 35,083
|Noninterest expense:                                |  |                          |         |   |      |   |        |      |  |   |       
|Compensation                                        |  |                          | 29,317  |   |      |   | 30,117 |      |  |   | 31,047
|Occupancy                                           |  |                          | 6,045   |   |      |   | 5,764  |      |  |   | 5,465 
|Equipment                                           |  |                          | 1,960   |   |      |   | 2,076  |      |  |   | 2,050 
|Advertising and promotion                           |  |                          | 842     |   |      |   | 1,018  |      |  |   | 1,092 
|Outside data processing                             |  |                          | 2,970   |   |      |   | 3,479  |      |  |   | 3,253 
|Professional fees                                   |  |                          | 3,470   |   |      |   | 2,046  |      |  |   | 1,809 
|Intangible amortization                             |  |                          | 749     |   |      |   | 838    |      |  |   | 955   
|Loss on early debt extinguishment                   |  |                          |        |   |      |   | 391    |      |  |   |      
|Other                                               |  |                          | 5,008   |   |      |   | 4,878  |      |  |   | 4,667 
|                                                    |  |                          |         |   |      |   |        |      |  |   |       
|Total noninterest expense                           |  |                          | 50,361  |   |      |   | 50,607 |      |  |   | 50,338
|                                                    |  |                          |         |   |      |   |        |      |  |   |       
|Net earnings (loss) before income taxes             |  |                          | (12,962 | ) |      |   | 10,505 |      |  |   | 11,427
|Income tax expense (benefit)                        |  |                          | (4,888  | ) |      |   | 3,121  |      |  |   | 3,949 
|                                                    |  |                          |         |   |      |   |        |      |  |   |       
|Net earnings (loss)                                 |  | $                        | (8,074  | ) |      | $ | 7,384  |      |  | $ | 7,478 
|                                                    |  |                          |         |   |      |   |        |      |  |   |       
|Earnings (loss) available to common shareholders    |  | $                        | (8,240  | ) |      | $ | 7,384  |      |  | $ | 7,478 
|                                                    |  |                          |         |   |      |   |        |      |  |   |       
|Earnings (loss) per common share:                   |  |                          |         |   |      |   |        |      |  |   |       
|Basic                                               |  | $                        | (0.83   | ) |      | $ | 0.86   |      |  | $ | 1.00  
|Diluted                                             |  |                          | (0.83   | ) |      |   | 0.79   |      |  |   | 0.94  
|Average common shares outstanding                   |  |                          | 9,881   |   |      |   | 8,576  |      |  |   | 7,501 
|Diluted average common shares outstanding           |  |                          | 9,881   |   |      |   | 9,296  |      |  |   | 7,926 

The accompanying notes are an integral part of these statements.



F-4



---

##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

Years Ended December 31, 2006, 2007 and 2008

(Amounts in thousands)



|                                                                                                                                    |  |                |        |              |        |        |                          |   |        |                      |  |   |                  |   |  |                       |        |   |                                            |   |        |                          |  |   |      |   |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ------------ | ------ | ------ | ------------------------ | - | ------ | -------------------- |  | - | ---------------- | - |  | --------------------- | ------ | - | ------------------------------------------ | - | ------ | ------------------------ |  | - | ---- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                                                    |  | PreferredStock |        | Common Stock |        |        | AdditionalPaid-inCapital |   |        | DeferredCompensation |  |   | RetainedEarnings |   |  | CommonStockinTreasury |        |   | AccumulatedOtherComprehensiveIncome (Loss) |   |        | TotalShareholdersEquity | 
|                                                                                                                                    |  |                | Shares |              |        | Amount |                          |   |        |                      |  |   |                 
|Balance at January 1, 2006                                                                                                          |  | $              |       |              | 6,925  |        |                          | $ | 6,925  |                      |  | $ | 58,518           |   |  | $                     | (2,176 | ) |                                            | $ | 25,051 |                          |  | $ | (121 | ) |  | $ | (950   | ) |  | $ | 87,247  |  
|Adoption of FAS 123R                                                                                                                |  |                |       |              |       |        |                          |   |       |                      |  |   | (2,176           | ) |  |                       | 2,176  |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   |        |  
|Stock-based compensation cost recognized in earnings                                                                                |  |                |       |              |       |        |                          |   |       |                      |  |   | 1,325            |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   | 1,325   |  
|Issuance of common shares                                                                                                           |  |                |       |              | 14     |        |                          |   | 14     |                      |  |   | 105              |   |  |                       |       |   |                                            |   |       |                          |  |   | 52   |   |  |   |       |   |  |   | 171     |  
|Issuance of restricted stock                                                                                                        |  |                |       |              | 92     |        |                          |   | 92     |                      |  |   | (92              | ) |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   |        |  
|Forfeitures of restricted stock                                                                                                     |  |                |       |              | (15    | )      |                          |   | (15    | )                    |  |   | 15               |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   |        |  
|Tax effect related to stock-based compensation                                                                                      |  |                |       |              |       |        |                          |   |       |                      |  |   | (110             | ) |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   | (110    | )
|Comprehensive income:                                                                                                               |  |                |        |              |        |        |                          |   |        |                      |  |   |                  |   |  |                       |        |   |                                            |   |        |                          |  |   |      |   |  |   |        |   |  |   |         |  
|Net earnings                                                                                                                        |  |                |       |              |       |        |                          |   |       |                      |  |   |                 |   |  |                       |       |   |                                            |   | 7,478  |                          |  |   |     |   |  |   |       |   |  |   | 7,478   |  
|Change in net unrealized loss on securities available-for-sale, net of deferred tax benefit of $394                                 |  |                |       |              |       |        |                          |   |       |                      |  |   |                 |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   | (700   | ) |  |   | (700    | )
|                                                                                                                                    |  |                |        |              |        |        |                          |   |        |                      |  |   |                  |   |  |                       |        |   |                                            |   |        |                          |  |   |      |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                                          |  |                |        |              |        |        |                          |   |        |                      |  |   |                  |   |  |                       |        |   |                                            |   |        |                          |  |   |      |   |  |   |        |   |  |   | 6,778   |  
|                                                                                                                                    |  |                |        |              |        |        |                          |   |        |                      |  |   |                  |   |  |                       |        |   |                                            |   |        |                          |  |   |      |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2006                                                                                                        |  |                |       |              | 7,016  |        |                          |   | 7,016  |                      |  |   | 57,585           |   |  |                       |       |   |                                            |   | 32,529 |                          |  |   | (69  | ) |  |   | (1,650 | ) |  |   | 95,411  |  
|Reclassification of puttable common stock                                                                                           |  |                |       |              | 774    |        |                          |   | 774    |                      |  |   | 9,492            |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   | 10,266  |  
|Adoption of FIN 48                                                                                                                  |  |                |       |              |       |        |                          |   |       |                      |  |   |                 |   |  |                       |       |   |                                            |   | (150   | )                        |  |   |     |   |  |   |       |   |  |   | (150    | )
|Stock-based compensation cost recognized in earnings                                                                                |  |                |       |              |       |        |                          |   |       |                      |  |   | 1,131            |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   | 1,131   |  
|Issuance of common shares in public offering, net of costs                                                                          |  |                |       |              | 2,191  |        |                          |   | 2,191  |                      |  |   | 39,214           |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   | 41,405  |  
|Issuance of common shares for exercise of options                                                                                   |  |                |       |              | 84     |        |                          |   | 84     |                      |  |   | 696              |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   | 780     |  
|Issuance of restricted stock                                                                                                        |  |                |       |              | 75     |        |                          |   | 75     |                      |  |   | (75              | ) |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   |        |  
|Forfeitures of restricted stock                                                                                                     |  |                |       |              | (12    | )      |                          |   | (12    | )                    |  |   | 12               |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   |        |  
|Excess tax benefit from stock-based compensation                                                                                    |  |                |       |              |       |        |                          |   |       |                      |  |   | 118              |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   | 118     |  
|Comprehensive income:                                                                                                               |  |                |        |              |        |        |                          |   |        |                      |  |   |                  |   |  |                       |        |   |                                            |   |        |                          |  |   |      |   |  |   |        |   |  |   |         |  
|Net earnings                                                                                                                        |  |                |       |              |       |        |                          |   |       |                      |  |   |                 |   |  |                       |       |   |                                            |   | 7,384  |                          |  |   |     |   |  |   |       |   |  |   | 7,384   |  
|Change in net unrealized loss on securities available-for-sale, net of deferred tax expense of $636 and reclassification
adjustment |  |                |       |              |       |        |                          |   |       |                      |  |   |                 |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   | 1,134  |   |  |   | 1,134   |  
|                                                                                                                                    |  |                |        |              |        |        |                          |   |        |                      |  |   |                  |   |  |                       |        |   |                                            |   |        |                          |  |   |      |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                                          |  |                |        |              |        |        |                          |   |        |                      |  |   |                  |   |  |                       |        |   |                                            |   |        |                          |  |   |      |   |  |   |        |   |  |   | 8,518   |  
|                                                                                                                                    |  |                |        |              |        |        |                          |   |        |                      |  |   |                  |   |  |                       |        |   |                                            |   |        |                          |  |   |      |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2007                                                                                                        |  |                |       |              | 10,128 |        |                          |   | 10,128 |                      |  |   | 108,173          |   |  |                       |       |   |                                            |   | 39,763 |                          |  |   | (69  | ) |  |   | (516   | ) |  |   | 157,479 |  
|Stock-based compensation cost recognized in earnings                                                                                |  |                |       |              |       |        |                          |   |       |                      |  |   | 1,235            |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   | 1,235   |  
|Issuance of preferred stock and common stock warrants                                                                               |  |                | 28,422 |              |       |        |                          |   |       |                      |  |   | 5,578            |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   | 34,000  |  
|Issuance of common shares for exercise of options                                                                                   |  |                |       |              | 48     |        |                          |   | 48     |                      |  |   | 454              |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   | 502     |  
|Issuance of restricted stock                                                                                                        |  |                |       |              | 79     |        |                          |   | 79     |                      |  |   | (79              | ) |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   |        |  
|Forfeitures of restricted stock                                                                                                     |  |                |       |              | (8     | )      |                          |   | (8     | )                    |  |   | 8                |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   |        |  
|Excess tax benefit from stock-based compensation                                                                                    |  |                |       |              |       |        |                          |   |       |                      |  |   | 120              |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   |       |   |  |   | 120     |  
|Purchase of treasury stock (2 shares)                                                                                               |  |                |       |              |       |        |                          |   |       |                      |  |   |                 |   |  |                       |       |   |                                            |   |       |                          |  |   | (29  | ) |  |   |       |   |  |   | (29     | )
|Comprehensive income (loss):                                                                                                        |  |                |        |              |        |        |                          |   |        |                      |  |   |                  |   |  |                       |        |   |                                            |   |        |                          |  |   |      |   |  |   |        |   |  |   |         |  
|Net loss                                                                                                                            |  |                |       |              |       |        |                          |   |       |                      |  |   |                 |   |  |                       |       |   |                                            |   | (8,074 | )                        |  |   |     |   |  |   |       |   |  |   | (8,074  | )
|Change in net unrealized loss on securities available-for-sale, net of deferred tax expense of $358 and reclassification
adjustment |  |                |       |              |       |        |                          |   |       |                      |  |   |                 |   |  |                       |       |   |                                            |   |       |                          |  |   |     |   |  |   | 636    |   |  |   | 636     |  
|                                                                                                                                    |  |                |        |              |        |        |                          |   |        |                      |  |   |                  |   |  |                       |        |   |                                            |   |        |                          |  |   |      |   |  |   |        |   |  |   |         |  
|Total comprehensive income (loss)                                                                                                   |  |                |        |              |        |        |                          |   |        |                      |  |   |                  |   |  |                       |        |   |                                            |   |        |                          |  |   |      |   |  |   |        |   |  |   | (7,438  | )
|Dividend on preferred stock                                                                                                         |  |                | 39     |              |       |        |                          |   |       |                      |  |   |                 |   |  |                       |       |   |                                            |   | (166   | )                        |  |   |     |   |  |   |       |   |  |   | (127    | )
|                                                                                                                                    |  |                |        |              |        |        |                          |   |        |                      |  |   |                  |   |  |                       |        |   |                                            |   |        |                          |  |   |      |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2008                                                                                                        |  | $              | 28,461 |              | 10,247 |        |                          | $ | 10,247 |                      |  | $ | 115,489          |   |  | $                     |       |   |                                            | $ | 31,523 |                          |  | $ | (98  | ) |  | $ | 120    |   |  | $ | 185,742 |  
|                                                                                                                                    |  |                |        |              |        |        |                          |   |        |                      |  |   |                  |   |  |                       |        |   |                                            |   |        |                          |  |   |      |   |  |   |        |   |  |   |         |  

The accompanying notes are an integral part of these statements.



F-5



---

##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts
in thousands)



|                                                                                           |  |                          |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------------------ |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                           |  | Years Ended December 31, |         
|                                                                                           |  | 2008                     |          |   | 2007 |   |          | 2006 | 
|Cash flows from operating activities:                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Net earnings (loss)                                                                        |  | $                        | (8,074   | ) |      | $ | 7,384    |      |  | $ | 7,478    |  
|Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: |  |                          |          |   |      |   |          |      |  |   |          |  
|Provision for loan losses                                                                  |  |                          | 29,175   |   |      |   | 4,029    |      |  |   | 3,491    |  
|Amortization of premiums and discounts, net                                                |  |                          | 1,292    |   |      |   | 1,624    |      |  |   | 1,889    |  
|Stock-based compensation                                                                   |  |                          | 1,235    |   |      |   | 1,131    |      |  |   | 1,391    |  
|Depreciation                                                                               |  |                          | 2,800    |   |      |   | 2,494    |      |  |   | 2,369    |  
|Gain on sale of loans                                                                      |  |                          | (162     | ) |      |   | (4,949   | )    |  |   | (9,571   | )
|(Gain) loss on sale of foreclosed real estate                                              |  |                          | 164      |   |      |   | (34      | )    |  |   | (111     | )
|Realized loss on sales of available-for-sale securities, net                               |  |                          | 3        |   |      |   | 181      |      |  |   |         |  
|Impairment write down on securities                                                        |  |                          | 1,984    |   |      |   |         |      |  |   |         |  
|Loss on early debt extinguishment                                                          |  |                          |         |   |      |   | 391      |      |  |   |         |  
|Increase in mortgages held-for-sale                                                        |  |                          | (24,025  | ) |      |   | (173,776 | )    |  |   | (395,193 | )
|Proceeds from sale of mortgage loans                                                       |  |                          | 25,449   |   |      |   | 235,098  |      |  |   | 391,031  |  
|Federal Home Loan Bank of Dallas stock dividends                                           |  |                          | (199     | ) |      |   | (353     | )    |  |   | (690     | )
|Increase in value of life insurance policies                                               |  |                          | (595     | ) |      |   | (540     | )    |  |   | (483     | )
|Deferred income tax benefit                                                                |  |                          | (6,732   | ) |      |   | (2,216   | )    |  |   | (1,095   | )
|Excess tax benefit from stock-based compensation                                           |  |                          | (120     | ) |      |   | (118     | )    |  |   | 110      |  
|(Increase) decrease in accrued interest receivable                                         |  |                          | 617      |   |      |   | (81      | )    |  |   | (766     | )
|(Increase) decrease in other assets                                                        |  |                          | (749     | ) |      |   | (99      | )    |  |   | 1,519    |  
|Increase (decrease) in accrued interest payable                                            |  |                          | 252      |   |      |   | (170     | )    |  |   | (431     | )
|Increase (decrease) in other liabilities                                                   |  |                          | (49      | ) |      |   | 346      |      |  |   | 73       |  
|                                                                                           |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                                  |  |                          | 22,266   |   |      |   | 70,342   |      |  |   | 1,011    |  
|                                                                                           |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities:                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Purchases of available-for-sale securities                                                 |  |                          | (72,430  | ) |      |   | (16,727  | )    |  |   |         |  
|Principal collected on available-for-sale securities                                       |  |                          | 4,418    |   |      |   | 14,933   |      |  |   | 23,936   |  
|Proceeds from sales of available-for-sale securities                                       |  |                          | 150      |   |      |   | 71,071   |      |  |   |         |  
|Purchases of held-to-maturity securities                                                   |  |                          | (1,129   | ) |      |   |         |      |  |   |         |  
|Principal collected on held-to-maturity securities                                         |  |                          | 39,027   |   |      |   | 30,406   |      |  |   | 40,877   |  
|Proceeds from sales of held-to-maturity securities                                         |  |                          |         |   |      |   | 7,414    |      |  |   |         |  
|Proceeds from sales of foreclosed real estate                                              |  |                          | 2,628    |   |      |   | 1,331    |      |  |   | 1,193    |  
|Cash paid for acquisition                                                                  |  |                          | (33      | ) |      |   | (73      | )    |  |   | (601     | )
|Loan purchases                                                                             |  |                          |         |   |      |   | (26,371  | )    |  |   | (15,621  | )
|Proceeds from sales of loans receivable                                                    |  |                          | 55       |   |      |   |         |      |  |   | 10,649   |  
|Loan originations and principal collections, net                                           |  |                          | (141,630 | ) |      |   | (161,591 | )    |  |   | (78,127  | )
|Purchases of Federal Home Loan Bank stock                                                  |  |                          | (4,477   | ) |      |   | (3,661   | )    |  |   | (1,824   | )
|Redemption of Federal Home Loan Bank stock                                                 |  |                          | 1,022    |   |      |   | 5,853    |      |  |   | 11,657   |  
|Purchases of premises and equipment                                                        |  |                          | (2,877   | ) |      |   | (7,746   | )    |  |   | (1,986   | )
|                                                                                           |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash used by investing activities                                                      |  |                          | (175,276 | ) |      |   | (85,161  | )    |  |   | (9,847   | )
|                                                                                           |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities:                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase in deposits                                                                   |  |                          | 59,423   |   |      |   | 10,563   |      |  |   | 215,737  |  
|Decrease in short term Federal Home Loan Bank of Dallas borrowings                         |  |                          |         |   |      |   | (55,000  | )    |  |   | (95,000  | )
|Proceeds from long term Federal Home Loan Bank of Dallas borrowings                        |  |                          | 115,000  |   |      |   | 85,000   |      |  |   | 10,000   |  
|Repayment of long term Federal Home Loan Bank of Dallas borrowings                         |  |                          | (25,015  | ) |      |   | (25,000  | )    |  |   | (125,000 | )
|Increase (decrease) in repurchase agreements                                               |  |                          | 8,831    |   |      |   | (3,152   | )    |  |   | 6,165    |  
|Payments on notes payable                                                                  |  |                          | (185     | ) |      |   | (185     | )    |  |   | (185     | )
|Proceeds from issuance of junior subordinated debentures                                   |  |                          |         |   |      |   | 15,464   |      |  |   |         |  
|Retirement of junior subordinated debentures                                               |  |                          |         |   |      |   | (15,855  | )    |  |   |         |  
|Excess tax benefit from stock-based compensation                                           |  |                          | 120      |   |      |   | 118      |      |  |   | (110     | )
|Proceeds from issuance of preferred stock and common stock warrants                        |  |                          | 34,000   |   |      |   |         |      |  |   |         |  
|Proceeds from issuance of common stock, net of purchase of treasury stock                  |  |                          | 473      |   |      |   | 42,185   |      |  |   | 171      |  
|                                                                                           |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                                  |  |                          | 192,647  |   |      |   | 54,138   |      |  |   | 11,778   |  
|                                                                                           |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase in cash and cash equivalents                                                  |  |                          | 39,637   |   |      |   | 39,319   |      |  |   | 2,942    |  
|Cash and cash equivalents at beginning of year                                             |  |                          | 78,415   |   |      |   | 39,096   |      |  |   | 36,154   |  
|                                                                                           |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                                   |  | $                        | 118,052  |   |      | $ | 78,415   |      |  | $ | 39,096   |  
|                                                                                           |  |                          |          |   |      |   |          |      |  |   |          |  
|Supplementary cash flows information:                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Interest paid on deposits and borrowed funds                                               |  | $                        | 36,745   |   |      | $ | 47,422   |      |  | $ | 44,619   |  
|Income taxes paid                                                                          |  |                          | 3,602    |   |      |   | 4,958    |      |  |   | 5,168    |  
|Noncash operating, investing and financing activities:                                     |  |                          |          |   |      |   |          |      |  |   |          |  
|Real estate acquired in satisfaction of loans                                              |  |                          | 5,192    |   |      |   | 837      |      |  |   | 233      |  
|Reclassification of puttable common stock                                                  |  |                          |         |   |      |   | 10,266   |      |  |   |         |  

The accompanying notes are an integral part of these statements.



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)

NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of our significant accounting policies applied in the preparation of the accompanying financial statements follows. Our accounting principles and the methods of applying them are in conformity with both accounting principles
generally accepted in the United States of America (US GAAP) and prevailing practices of the banking industry.

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, Linscomb & Williams, Inc. (Linscomb & Williams), and Town & Country Insurance
Agency, Inc. (Town & Country). All significant intercompany balances and transactions have been eliminated.

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, 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.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results could differ from
those estimates. Material estimates that we consider particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, and the valuation of goodwill
and other intangible assets.



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



Cash and Cash Equivalents

Cash and cash equivalents include cash, demand deposits at other financial institutions, federal funds sold and certificates of deposit that have an initial or remaining maturity when purchased of three months or
less.

Securities

Securities are
classified among two categories at the time the securities are purchased: held-to-maturity and available-for-sale. We reassess these classifications periodically. We do not hold trading securities.

Debt securities that we have the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized
cost. Debt securities that we might not hold until maturity and marketable equity securities are classified as available-for-sale and recorded at fair value, with unrealized gains and losses, after applicable taxes, excluded from
earnings and reported in other comprehensive income. Marketable equity securities without a readily determinable market value are classified as available-for-sale and recorded at cost.

We recognize purchase premiums and discounts on securities in interest income using the interest method over the contractual lives, adjusted for actual
prepayments. Declines in the fair value of cost basis, held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other than temporary
impairment losses, we consider (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) our intent and ability to retain
investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Loans Receivable

Loans that we have
the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, and any deferred fees or costs on originated
loans. We accrue interest income on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Discounts and
premiums on loans purchased are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for prepayments. We have not purchased loans with evidence of deterioration of credit quality for which it was
probable, at acquisition, that we will be unable to collect all contractually required payments receivable.

The accrual of interest on
loans is discontinued when, in managements opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. When the interest accrual is discontinued, all unpaid interest is
charged off against interest income. Subsequently, we recognize income only to the extent cash payments are received until, in our judgment, the borrowers ability to make periodic interest and principal payments are reasonably assured, in
which case the loan is returned to accrual status. We typically charge off loans no later than 120 days past due unless the loan is well secured and in process of collection. However, we charge off all loans when the loan principal and interest is
deemed not collectible.



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



Allowance for Loan Losses

We consider a loan impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms
of the loan agreement. We generally consider a period of delay in payment to include delinquency up to 90 days. We measure impaired loans and related allowance for loan losses based on the present value of expected future cash flows discounted at
the loans effective interest rate or based on the fair value of the collateral if the loan is collateral dependent. Loans without a specific reserve are collectively evaluated for impairment based on, among other things, historical loss
experience, the growth, composition and diversification of the loan portfolio, general economic conditions and nonperforming and loan classification trends.

We charge the provision for losses on loans to operations based on our periodic evaluation of the adequacy of the allowance for loan losses. We may ultimately incur losses different from our current estimates. We
report adjustments to the allowance for loan losses in the period such adjustments become known or can be reasonably estimated.

Mortgages Held-for-Sale

We carry mortgages held-for-sale at the lower of cost or estimated fair value in the aggregate. Fair value is based on commitments on
hand from investors or prevailing market prices. Gains and losses on sales are recorded in noninterest income and determined on a specific identification basis.

Insurance Commissions and Fees

We recognize commission revenue as of the effective date of the insurance policy or the date
the customer is billed, whichever is later. We also receive contingent commissions from insurance companies as additional incentive for achieving specified premium volume goals and/or the loss experience of the insurance placed by us. We recognize
contingent commissions from insurance companies when determinable, which is generally when such commissions are received or when we receive data from the insurance companies that allows the reasonable estimation of these amounts. We record
commission adjustments, including policy cancellations and override commissions, when the adjustments become reasonably estimable, which is generally in the period in which they occur.

Assets Under Administration and Asset Management Fees

We do not include assets held in fiduciary or
agency capacities in the consolidated balance sheets, since such items are not our assets.

We record fees from asset management activities
on the accrual basis, over the period in which the service is provided. Our fees are a function of the market value of assets administered and managed, the volume of transactions, and fees for other services rendered, as set forth in the underlying
client agreement. This revenue recognition involves the use of estimates and assumptions, including components that are calculated based on estimated asset valuations and transaction volumes.

Off-Balance-Sheet Credit Related Financial Instruments

In the ordinary course of business, we have entered into commitments to extend credit, including commitments under commercial lines of credit and letters of credit. We record these financial instruments when they are funded. We maintain a
reserve that covers estimated credit losses on these commitments which is



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



generally based on the historical loss factors for each type of loan commitment. This reserve is included in other liabilities, with any increases or
decreases to the reserve included in noninterest expense.

Investment in Real Estate

We initially record real estate acquired in settlement of loans at fair value at the date of foreclosure, establishing a new cost basis. Fair value is
defined as the amount of cash or cash equivalent value of other consideration that a real estate parcel would yield in a current sale between a willing buyer and a willing sellerthat is, in other than a forced or liquidation sale, less selling
costs. Subsequent to foreclosure, we perform periodic valuations and the real estate is carried at the lower of its carrying amount or fair value less selling costs. Subsequent declines in value below the new cost basis are recorded through the use
of a valuation allowance with a charge to real estate operations. Subsequent increases in value up to the amount of the valuation allowance are included in real estate operations Required development costs associated with foreclosed property under
construction are capitalized. Operating expenses, net of related income, and gains and losses on disposition are included in real estate operations. Recognition of gain on sale of real estate is dependent upon the transaction meeting certain
criteria relating to the nature of the property sold and the terms of the sale. Under certain circumstances, the gain, or a portion thereof, is deferred until the necessary criteria are met. At December 31, 2008 and 2007, investment in real
estate consisted of real estate acquired in settlement of loans, held for sale of $2,781 and $835.

Federal Home Loan Bank of Dallas Stock

Federal Home Loan Bank of Dallas (FHLB) stock is a restricted investment security, carried at cost, and evaluated for impairment. Both
cash and stock dividends received on FHLB stock are reported as income.

Premises and Equipment

Land is carried at cost. We record buildings, leasehold improvements and equipment at cost and we depreciate using the straight-line method over the
estimated useful lives of the assets ranging from 1.5 to 30 years. Leasehold improvements are depreciated over the shorter of the estimated life of the asset or the lease term plus option periods where failure to renew results in an economic
penalty. Capitalized costs, including interest, related to the construction of facilities are depreciated over the shorter of the estimated life of the asset or the lease term of the facility. Maintenance and repairs are charged to appropriate
expense accounts in the period incurred. Material improvements are capitalized and depreciated over their estimated useful lives. The cost and accumulated depreciation relating to assets retired or otherwise disposed of are eliminated from the
accounts, and any resulting gains or losses are credited or charged to income.

We record premises and equipment to be disposed of at the
lower of the carrying amount or estimated fair value less selling costs. Any loss due to the write down of assets is recognized currently in the consolidated statements of operations.

Goodwill

Goodwill is recorded when the purchase price is higher than the fair value of net assets
acquired in a business combination. Goodwill is not amortized, but is tested for impairment at least annually.



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



Other Intangible Assets

Other intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged
either on its own or in combination with a related contract, asset, or liability. Our intangible assets relate to client relationships. Other intangibles are amortized using accelerated methods over their estimated useful lives, ranging from 2 to 20
years. We review these intangibles for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable.

Advertising Costs

We expense advertising costs as incurred.

Derivatives and Hedging Activities

We may enter into derivative contracts in order to hedge the risk
of market interest rate changes on certain assets and liabilities and other firm commitments. On the date a derivative contract is entered into, it is designated a fair value hedge, a cash flow hedge or does not receive a hedging designation in
accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. A fair value hedge hedges exposure to changes in the fair value of an asset, liability or firm
commitment due to their fixed rate terms. Changes in the fair value of the hedging instrument are included in current earnings and are offset by changes in the fair value of the hedged item. The net effect resulting from the ineffective portion of a
hedging instrument is reflected in earnings. A cash flow hedge hedges exposure to the variability in cash flows associated with an existing asset or liability or a forecasted transaction due to their variable terms. The effective portion of changes
in the fair value of the hedging instrument is included in accumulated other comprehensive income and is subsequently reclassified into earnings as the hedged item impacts earnings. Any ineffective portion is recognized in current earnings. If the
derivative contract is not given a hedging designation, the change in fair value of the contract is recognized currently in earnings. At December 31, 2008 and 2007, we had no derivative instruments outstanding.

Income Taxes

On January 1, 2007, we adopted FIN
48Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.The adoption of FIN 48 resulted in a cumulative adjustment of $150
that decreased retained earnings as discussed in Note H (Income Taxes).

We determine deferred income tax assets and liabilities using the
balance sheet method, as clarified by FIN 48. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and
liabilities and gives current recognition to changes in tax rates and laws. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. FIN 48 requires that we recognize the financial
statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



Encore Bank is included in our consolidated federal income tax return. Under a tax sharing policy,
federal income tax expense is allocated to individual subsidiaries as if the tax was calculated on a separate return basis. Federal income tax benefits are allocated to individual subsidiaries to the extent the deductions are utilized in the
consolidated return.

Stock Compensation Plan

We measure and recognize compensation expense for all stock-based payments at fair value in accordance with Statement No. 123R, Share Based Payment (SFAS 123R).

Under the modified prospective approach, SFAS 123R applies to new awards and to awards that were outstanding on January 1, 2006 that are
subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized includes compensation for all stock-based payments granted prior to, but not yet vested on January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No. 123, Accounting for Stock Based Compensation (SFAS 123), and compensation cost for the stock-based payment granted subsequent to January 1, 2006, based on
the grant-date fair value estimated with the provisions of SFAS 123R.

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:



|                                                                   |  |      |      |   |      |   |       |      |  |   |        |  
|------------------------------------------------------------------ |  | ---- | ---- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                                   |  | 2008 |      |   | 2007 |   |       | 2006 | 
|Unrealized holding gains (losses) on available-for-sale securities |  | $    | 997  |   |      | $ | 1,951 |      |  | $ | (1,094 | )
|Reclassification adjustment for losses realized in income          |  |      | (3   | ) |      |   | (181  | )    |  |   |       |  
|                                                                   |  |      |      |   |      |   |       |      |  |   |        |  
|Net unrealized gain (losses)                                       |  |      | 994  |   |      |   | 1,770 |      |  |   | (1,094 | )
|Tax (expense) benefit                                              |  |      | (358 | ) |      |   | (636  | )    |  |   | 394    |  
|                                                                   |  |      |      |   |      |   |       |      |  |   |        |  
|Net-of-tax amount                                                  |  | $    | 636  |   |      | $ | 1,134 |      |  | $ | (700   | )
|                                                                   |  |      |      |   |      |   |       |      |  |   |        |  

Fair Values of Financial Instruments

We estimate the fair value of financial instruments based on the fair value hierarchy established in SFAS 157, Fair Value Measurements. Fair
value estimates involve uncertainties and matters of judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of bench marks for particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. For more information on the fair value of our financial instruments, see Note RFair Value of Assets and Liabilities.

Transfer of Financial Assets

Transfers of financial assets are accounted for as sales when we surrender control over the
assets. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from us, (ii) the transferee obtains the right to pledge or exchange the transferred assets, and (iii) we do not maintain
effective control over the transferred assets through an agreement to repurchase them before their maturity.



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



Basic and Diluted Earnings (Loss) Per Common Share

We calculate basic earnings (loss) per common share using earnings (loss) available to common shareholders (net earnings (loss) after deducting preferred
dividends) divided by the weighted average of common shares outstanding during the period, excluding nonvested restricted stock. Diluted earnings per common share include the dilutive effect of stock options and nonvested restricted stock awards
granted, using the treasury stock method, and contingent share-based consideration related to our acquisition of Linscomb & Williams.

Loss
Contingencies

We record loss contingencies, including claims and legal actions arising in the ordinary course of business, as
liabilities when the likelihood of loss is probable and the amount or range of loss can be reasonably estimated.

Reclassifications

We have made certain reclassifications in the financial statements to conform to the 2008 presentation. These reclassifications had no impact on financial
condition, results of operations or equity in any of the reported periods.

Recent Accounting Pronouncements

SFAS No. 141(R), Business Combinations (SFAS 141R). Issued by the 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 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 consider the effect of various implementation issues that have arisen, or that may



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



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 do not expect the full implementation of SFAS 157 to have a material effect 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.

FASB Staff Position No. 157-3 (FSP 157-3). Issued by the
FASB on October 10, 2008, FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. FSP 157-3 is effective on issuance, including prior periods for which financial statements have not been issued.



F-14



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



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

Year end securities available-for-sale and held-to-maturity consisted of the following:



|                                    |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|----------------------------------- |  | ------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                    |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|December 31, 2008                   |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Available-for-sale:                 |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Mortgage-backed securities          |  | $             | 71,897  |                      | $ | 712                   |  | $ |           |   |  | $ | 72,609 
|Other securities                    |  |               | 4,202   |                      |   |                      |  |   | (60        | ) |  |   | 4,142  
|                                    |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Total                               |  |               | 76,099  |                      |   | 712                   |  |   | (60        | ) |  |   | 76,751 
|Marketable equity securities        |  |               | 2,016   |                      |   | 49                    |  |   |           |   |  |   | 2,065  
|                                    |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Total available-for-sale securities |  | $             | 78,115  |                      | $ | 761                   |  | $ | (60        | ) |  | $ | 78,816 
|                                    |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-maturity:                   |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Mortgage-backed securities          |  | $             | 95,875  |                      | $ | 1,057                 |  | $ | (4         | ) |  | $ | 96,928 
|                                    |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|December 31, 2007                   |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Available-for-sale:                 |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Mortgage-backed securities          |  | $             | 3,910   |                      | $ |                      |  | $ | (101       | ) |  | $ | 3,809  
|Other securities                    |  |               | 4,354   |                      |   |                      |  |   | (7         | ) |  |   | 4,347  
|                                    |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Total                               |  |               | 8,264   |                      |   |                      |  |   | (108       | ) |  |   | 8,156  
|Marketable equity securities        |  |               | 4,000   |                      |   | 51                    |  |   |           |   |  |   | 4,051  
|                                    |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Total available-for-sale securities |  | $             | 12,264  |                      | $ | 51                    |  | $ | (108       | ) |  | $ | 12,207 
|                                    |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-maturity:                   |  |               |         |                      |   |                       |  |   |            |   |  |   |        
|Mortgage-backed securities          |  | $             | 134,056 |                      | $ | 179                   |  | $ | (781       | ) |  | $ | 133,454
|                                    |  |               |         |                      |   |                       |  |   |            |   |  |   |        

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



F-15



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



We own certain debt securities with unrealized losses as of December 31, 2008 and 2007. These
securities, with unrealized losses segregated by length of impairment at year end, were as follows:



|                                          |  |                     |  |            |         |                  |   |      |  
|----------------------------------------- |  | ------------------- |  | ---------- | ------- | ---------------- | - | ---- | -
|Description of Securities                 |  | Number ofSecurities |  | Fair Value |         | UnrealizedLosses |  
|December 31, 2008:                        |  |                     |  |            |         |                  |   |      |  
|Less than 12 months                       |  |                     |  |            |         |                  |   |      |  
|Available-for-sale:                       |  |                     |  |            |         |                  |   |      |  
|Other securities                          |  | 1                   |  | $          | 310     |                  | $ | (38  | )
|                                          |  |                     |  |            |         |                  |   |      |  
|Held-to-maturity:                         |  |                     |  |            |         |                  |   |      |  
|Federal agency mortgage-backed securities |  | 2                   |  | $          | 536     |                  | $ | (1   | )
|                                          |  |                     |  |            |         |                  |   |      |  
|More than 12 months                       |  |                     |  |            |         |                  |   |      |  
|Available-for-sale:                       |  |                     |  |            |         |                  |   |      |  
|Other securities                          |  | 1                   |  | $          | 165     |                  | $ | (22  | )
|                                          |  |                     |  |            |         |                  |   |      |  
|Held-to-maturity:                         |  |                     |  |            |         |                  |   |      |  
|Federal agency mortgage-backed securities |  | 3                   |  | $          | 287     |                  | $ | (3   | )
|                                          |  |                     |  |            |         |                  |   |      |  
|December 31, 2007:                        |  |                     |  |            |         |                  |   |      |  
|Less than 12 months                       |  |                     |  |            |         |                  |   |      |  
|Available-for-sale:                       |  |                     |  |            |         |                  |   |      |  
|Other securities                          |  | 2                   |  | $          | 680     |                  |   | (7   | )
|                                          |  |                     |  |            |         |                  |   |      |  
|Held-to-maturity:                         |  |                     |  |            |         |                  |   |      |  
|Federal agency mortgage-backed securities |  | 3                   |  | $          | 6,896   |                  | $ | (18  | )
|                                          |  |                     |  |            |         |                  |   |      |  
|More than 12 months                       |  |                     |  |            |         |                  |   |      |  
|Available-for-sale:                       |  |                     |  |            |         |                  |   |      |  
|Federal agency mortgage-backed securities |  | 5                   |  | $          | 3,809   |                  | $ | (101 | )
|                                          |  |                     |  |            |         |                  |   |      |  
|Held-to-maturity:                         |  |                     |  |            |         |                  |   |      |  
|Federal agency mortgage-backed securities |  | 21                  |  | $          | 114,155 |                  | $ | (763 | )
|                                          |  |                     |  |            |         |                  |   |      |  

We do not believe any of the above securities are impaired due to credit quality. These securities
have losses primarily due to changes in market interest rates, and we have the ability and intent to hold these securities until they recover in value. Accordingly, as of December 31, 2008 and 2007, we believe the impairments detailed in the
table are temporary and no impairment loss has been realized in the accompanying consolidated statements of operations.



F-16



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



The following table shows the amortized cost and estimated fair value of securities by contractual
maturity at December 31, 2008. Contractual maturities may differ from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment schedules. Mortgage-backed securities and equity
securities are shown separately since they are not due at a single maturity date.



|                                      |  |                              |        |                            |   |               |  |            |        |  |   |       
|------------------------------------- |  | ---------------------------- | ------ | -------------------------- | - | ------------- |  | ---------- | ------ |  | - | ------
|                                      |  | Available-for-SaleSecurities |        | Held-to-MaturitySecurities
|                                      |  | AmortizedCost                |        | FairValue                  |   | AmortizedCost |  | F airValue
|Within one year                       |  | $                            |       |                            | $ |              |  | $          |       |  | $ |      
|Over one year through five years      |  |                              |       |                            |   |              |  |            |       |  |   |      
|After five years through ten years    |  |                              |       |                            |   |              |  |            |       |  |   |      
|Over ten years                        |  |                              | 535    |                            |   | 475           |  |            |       |  |   |      
|                                      |  |                              |        |                            |   |               |  |            |        |  |   |       
|Total                                 |  |                              | 535    |                            |   | 475           |  |            |       |  |   |      
|Mortgage-backed and equity securities |  |                              | 77,580 |                            |   | 78,341        |  |            | 95,875 |  |   | 96,928
|                                      |  |                              |        |                            |   |               |  |            |        |  |   |       
|Total securities                      |  | $                            | 78,115 |                            | $ | 78,816        |  | $          | 95,875 |  | $ | 96,928
|                                      |  |                              |        |                            |   |               |  |            |        |  |   |       

Mortgage-backed securities consist of federal agency pass-through securities and have a weighted
average yield of 4.05% and 3.83% at December 31, 2008 and 2007. As of December 31, 2008 and 2007, the mortgage-backed securities have contractual maturities from less than a year to 2039. Accrued interest receivable on mortgage-backed
securities was $637 and $527 at December 31, 2008 and 2007.

At December 31, 2008 and 2007, securities with a carrying value of
$75,698 and $81,181 were pledged as collateral for repurchase agreements, public funds, trust deposits, and for other purposes, as required or permitted by law.

Gross realized gains on sales of available-for-sale securities were $0, $24 and $0 for the years ended December 31, 2008, 2007 and 2006. Gross realized losses on sales of available-for-sale securities were $3,
$217 and $0 for the years ended December 31, 2008, 2007 and 2006. Gross realized gains and losses on sales of held-to-maturity securities were $24 and $12 in 2007 and none in 2008 and 2006. In 2008, we recorded a $1,984 impairment write down on
an available-for-sale equity security acquired in connection with our Community Reinvestment Act requirements.

Mortgage-backed securities
previously classified as available-for-sale were transferred to held-to-maturity during 2004. The amortized cost and fair value at the time of transfer were $127,049 and $128,782. The securities were transferred at fair value and the unrealized gain
net of tax was recorded in accumulated other comprehensive income. Amortization of unrealized gain was $236, $76 and $37 for the years ended December 31, 2008, 2007 and 2006.



F-17



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



NOTE C  LOANS RECEIVABLE

Loans receivable at December 31 consisted of the following:



|                                    |  |      |           |      |   |          
|----------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                    |  | 2008 |           | 2007
|Commercial:                         |  |      |           |      |   |          
|Commercial                          |  | $    | 135,534   |      | $ | 127,583  
|Commercial real estate              |  |      | 311,909   |      |   | 277,047  
|Real estate construction            |  |      | 95,668    |      |   | 100,975  
|                                    |  |      |           |      |   |          
|Total commercial                    |  |      | 543,111   |      |   | 505,605  
|Consumer:                           |  |      |           |      |   |          
|Residential real estate first lien  |  |      | 241,969   |      |   | 271,346  
|Residential real estate second lien |  |      | 302,141   |      |   | 195,583  
|Home equity lines                   |  |      | 82,555    |      |   | 79,023   
|Consumer installmentindirect       |  |      | 14,409    |      |   | 25,262   
|Consumer other                      |  |      | 34,219    |      |   | 20,449   
|                                    |  |      |           |      |   |          
|Total consumer                      |  |      | 675,293   |      |   | 591,663  
|                                    |  |      |           |      |   |          
|Total loans receivable              |  | $    | 1,218,404 |      | $ | 1,097,268
|                                    |  |      |           |      |   |          

Included in loans receivable is $2,925 and $3,117 of net deferred loan origination costs at
December 31, 2008 and 2007. Consumer other loans include reclassified overdrafts of $331 and $880 as of December 31, 2008 and 2007.

Changes in the allowance for loan losses were as follows for the years ended December 31:



|                                           |  |      |         |   |      |   |        |      |  |   |        |  
|------------------------------------------ |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                           |  | 2008 |         |   | 2007 |   |        | 2006 | 
|Balance at beginning of year               |  | $    | 11,161  |   |      | $ | 9,056  |      |  | $ | 8,719  |  
|Provision for loan losses                  |  |      | 29,175  |   |      |   | 4,029  |      |  |   | 3,491  |  
|Loans charged-off                          |  |      | (15,824 | ) |      |   | (2,613 | )    |  |   | (3,854 | )
|Recoveries of loans previously charged-off |  |      | 593     |   |      |   | 689    |      |  |   | 700    |  
|                                           |  |      |         |   |      |   |        |      |  |   |        |  
|Balance at December 31,                    |  | $    | 25,105  |   |      | $ | 11,161 |      |  | $ | 9,056  |  
|                                           |  |      |         |   |      |   |        |      |  |   |        |  

Accrued interest receivable on loans was $4,802 and $5,515 at December 31, 2008 and 2007.



F-18



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



The following is a summary of information pertaining to impaired and nonaccrual loans at
December 31:



|                                                                     |  |      |        |      |   |        |  |   |      
|-------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | -----
|                                                                     |  | 2008 |        | 2007 |   | 2006  
|Impaired loans on nonaccrual without a valuation allowance           |  | $    | 10,408 |      | $ |       |  | $ |     
|Impaired loans on nonaccrual with a valuation allowance              |  |      | 15,272 |      |   | 6,901  |  |   | 6,955
|Impaired loans still accruing with a valuation allowance             |  |      |       |      |   |       |  |   |     
|                                                                     |  |      |        |      |   |        |  |   |      
|Total impaired loans                                                 |  | $    | 25,680 |      | $ | 6,901  |  | $ | 6,955
|                                                                     |  |      |        |      |   |        |  |   |      
|Valuation allowance related to impaired loans                        |  | $    | 7,288  |      | $ | 2,581  |  | $ | 5,022
|                                                                     |  |      |        |      |   |        |  |   |      
|Total nonaccrual loans (1)                                           |  | $    | 30,531 |      | $ | 11,208 |  | $ | 9,411
|                                                                     |  |      |        |      |   |        |  |   |      
|Total accruing loans past due 90 days or more                        |  | $    | 646    |      | $ | 2,183  |  | $ | 96   
|                                                                     |  |      |        |      |   |        |  |   |      
|Average investment in impaired loans for the years ended December 31 |  | $    | 20,770 |      | $ | 6,857  |  | $ | 8,317
|                                                                     |  |      |        |      |   |        |  |   |      

| | 
| | 

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

At December 31, 2008, impaired loans on nonaccrual with a valuation allowance consisted of $5,495 commercial, $4,140 commercial real estate and $5,637 real estate construction. Interest income recognized after a
loan is impaired is not material. No additional funds are committed to be advanced in connection with impaired loans.

NOTE D  PREMISES AND
EQUIPMENT

Premises and equipment at December 31 consisted of the following:



|                                    |  |               |  |      |         |   |      |   |        |  
|----------------------------------- |  | ------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                    |  | Life in Years |  | 2008 |         |   | 2007 |  
|Land                                |  |               |  | $    | 1,849   |   |      | $ | 1,849  |  
|Building                            |  | 30 years      |  |      | 4,663   |   |      |   | 2,631  |  
|Furniture and fixtures              |  | 3-10 years    |  |      | 7,942   |   |      |   | 7,671  |  
|Leasehold improvements              |  | 1.5-20 years  |  |      | 12,718  |   |      |   | 12,562 |  
|Construction in progressfacilities |  |               |  |      | 202     |   |      |   | 107    |  
|                                    |  |               |  |      |         |   |      |   |        |  
|                                    |  |               |  |      | 27,374  |   |      |   | 24,820 |  
|Accumulated depreciation            |  |               |  |      | (10,012 | ) |      |   | (7,989 | )
|                                    |  |               |  |      |         |   |      |   |        |  
|                                    |  |               |  | $    | 17,362  |   |      | $ | 16,831 |  
|                                    |  |               |  |      |         |   |      |   |        |  



F-19



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



During 2005, we moved our corporate headquarters and entered into a sublease, classified as an
operating lease. Under the terms of the sublease, we began paying annual rent of $835 in February 2007 and ending December 2014. The total lease cost is being recognized on a straight-line basis over the lease term. We do not have the option to
renew the sublease at the end of the lease term. Certain other offices and branch locations are operated in leased premises. We have the option to renew certain of these leases upon the completion of the non-cancelable lease term. The cost of lease
extensions is not included below. Rental expense under operating lease agreements in 2008, 2007 and 2006 was approximately $2,938, $3,044 and $2,858. Lease cost is recognized on a straight-line basis over the lease term. Future minimum rental
commitments associated with these leases are as follows:



|                         |  |        |       
|------------------------ |  | ------ | ------
|Years Ended December 31, |  | Amount
|2009                     |  | $      | 2,909 
|2010                     |  |        | 2,733 
|2011                     |  |        | 2,555 
|2012                     |  |        | 1,946 
|2013                     |  |        | 1,594 
|Thereafter               |  |        | 4,185 
|                         |  |        |       
|                         |  | $      | 15,922
|                         |  |        |       

NOTE E  GOODWILL AND OTHER INTANGIBLE ASSETS

We have reporting segments with goodwill, which include insurance with $3,092 and wealth management with $24,781. During the year ended December 31,
2008, goodwill increased $33 within the insurance reporting segment due to the payment of contingent consideration for Town & Country. Wealth management goodwill was reduced $102 for an adjustment to purchase price relating to income tax
contingencies.

Each reporting segment is tested for impairment at least annually. The fair value of each of the reporting segments is
established using appropriate weighted market and income approaches. Due to the decline in economic conditions in the fourth quarter of 2008, we updated the impairment tests for each reporting segment as of December 31, 2008. These tests
indicate that an impairment charge was not required. In addition, as of December 31, 2008, we tested the useful lives of our other intangible assets and determined that there has not been any significant change in the original estimated useful
lives.

The changes in the carrying amount of goodwill for the years ended December 31, 2008 and 2007 are as follows:



|                                    |  |      |        |   |      |   |       
|----------------------------------- |  | ---- | ------ | - | ---- | - | ------
|                                    |  | 2008 |        |   | 2007
|Balance as of January 1             |  | $    | 27,942 |   |      | $ | 27,869
|Goodwill from business combinations |  |      | 33     |   |      |   | 73    
|Adjustment to purchase price        |  |      | (102   | ) |      |   |      
|Impairment losses                   |  |      |       |   |      |   |      
|                                    |  |      |        |   |      |   |       
|Balance as of December 31           |  | $    | 27,873 |   |      | $ | 27,942
|                                    |  |      |        |   |      |   |       



F-20



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



Other intangible assets as of December 31, 2008 and 2007 are detailed in the following table:



|                              |  |                     |       |                         |   |                   |  |                     |       |                         |   |                   |  |   |         |  |   |      
|----------------------------- |  | ------------------- | ----- | ----------------------- | - | ----------------- |  | ------------------- | ----- | ----------------------- | - | ----------------- |  | - | ------- |  | - | -----
|                              |  | 2008                |       | 2007                   
|                              |  | GrossCarryingAmount |       | AccumulatedAmortization |   | NetCarryingAmount |  | GrossCarryingAmount |       | AccumulatedAmortization |   | NetCarryingAmount
|Amortizing intangible assets: |  |                     |       |                         |   |                   |  |                     |       |                         |   |                   |  |   |         |  |   |      
|Client relationships          |  | $                   | 9,419 |                         | $ | (3,388)           |  | $                   | 6,031 |                         | $ | 9,419             |  | $ | (2,639) |  | $ | 6,780
|                              |  |                     |       |                         |   |                   |  |                     |       |                         |   |                   |  |   |         |  |   |      

Estimated amortization expense for the following years ended December 31 is as follows:



|     |  |   |    
|---- |  | - | ---
|2009 |  | $ | 681
|2010 |  |   | 634
|2011 |  |   | 564
|2012 |  |   | 520
|2013 |  |   | 483

NOTE F  DEPOSITS

Interest-bearing deposits at December 31 are as follows:



|                                |  |      |         |      |   |        
|------------------------------- |  | ---- | ------- | ---- | - | -------
|                                |  | 2008 |         | 2007
|Interest checking               |  | $    | 197,384 |      | $ | 179,486
|Money market and savings        |  |      | 252,571 |      |   | 345,066
|Time deposits less than $100    |  |      | 188,302 |      |   | 193,900
|Time deposit $100 and greater   |  |      | 274,903 |      |   | 201,932
|Brokered deposits               |  |      | 55,928  |      |   | 14,608 
|                                |  |      |         |      |   |        
|Total interest-bearing deposits |  | $    | 969,088 |      | $ | 934,992
|                                |  |      |         |      |   |        

At December 31, 2008, the scheduled maturities of time and brokered deposits are as follows:



|           |  |   |        
|---------- |  | - | -------
|2009       |  | $ | 399,429
|2010       |  |   | 54,840 
|2011       |  |   | 30,145 
|2012       |  |   | 19,152 
|2013       |  |   | 15,567 
|Thereafter |  |   |       
|           |  |   |        
|           |  | $ | 519,133
|           |  |   |        

Interest expense by type of deposit for the years ended December 31 is as follows:



|                         |  |      |        |      |   |        |  |   |       
|------------------------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                         |  | 2008 |        | 2007 |   | 2006  
|Interest checking        |  | $    | 2,515  |      | $ | 5,131  |  | $ | 4,220 
|Money market and savings |  |      | 5,759  |      |   | 14,756 |  |   | 10,457
|Time deposits            |  |      | 18,763 |      |   | 18,172 |  |   | 15,178
|Brokered deposits        |  |      | 834    |      |   | 600    |  |   | 665   
|                         |  |      |        |      |   |        |  |   |       
|                         |  | $    | 27,871 |      | $ | 38,659 |  | $ | 30,520
|                         |  |      |        |      |   |        |  |   |       



F-21



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



We are required to maintain average cash balances on hand or with the Federal Reserve Bank. At
December 31, 2008 and 2007, these reserve balances amounted to $2,579 and $2,345.

NOTE G  BORROWINGS AND REPURCHASE AGREEMENTS

Subject to certain limitations, we may borrow funds from the FHLB in the form of advances. Our credit availability from the FHLB is
based on our financial and operating condition and the amount of collateral available to the FHLB. These borrowings were collateralized by a blanket lien on our mortgage-related assets. Following is a summary of outstanding borrowings from the FHLB
at December 31, 2008:



| |  |        |         |                     |           |   |                     |                   |           |         
| |  | ------ | ------- | ------------------- | --------- | - | ------------------- | ----------------- | --------- | --------
| |  | Amount |         | Interest Rate Range |           |   | Maturity Date Range |                   | Call Date
| |  | $      | 17,000  |                     | 3.43-3.98 | % |                     | 01/11/11-06/27/11 |           | None    
| |  |        | 35,500  |                     | 3.66-4.22 |   |                     | 01/11/12-09/04/12 |           | None    
| |  |        | 59,500  |                     | 3.54-4.37 |   |                     | 01/11/13-11/26/13 |           | None    
| |  |        | 2,985   |                     | 4.79      |   |                     | 08/03/15          |           | None    
| |  |        | 10,000  |                     | 4.14      |   |                     | 12/07/16          |           | 06/08/09
| |  |        | 10,000  |                     | 4.23      |   |                     | 04/05/17          |           | 04/06/09
| |  |        | 15,000  |                     | 4.17      |   |                     | 04/05/17          |           | 04/06/09
| |  |        | 10,000  |                     | 4.52      |   |                     | 05/09/17          |           | 05/10/10
| |  |        | 50,000  |                     | 4.15      |   |                     | 08/01/17          |           | 05/01/09
| |  |        |         |                     |           |   |                     |                   |           |         
| |  | $      | 209,985 |                     |           |   |                     |                   |           |         
| |  |        |         |                     |           |   |                     |                   |           |         

Each advance is payable per terms of the agreement. We are eligible to borrow up to an additional
$93,579 at year end 2008.

We also have borrowed funds from clients in the form of repurchase agreements. As of December 31, 2008, we
had $61,979 outstanding at an interest rate of 0.10% maturing January 2, 2009.

The maximum amount of repurchase agreements
outstanding at any month end and the daily average amount outstanding during 2008 were $77,759 and $55,466.

The contractual maturities of
borrowings and repurchase agreements at December 31, 2008 are as follows:



|     |  |   |        
|---- |  | - | -------
|2009 |  | $ | 62,041 
|2011 |  |   | 17,000 
|2012 |  |   | 35,500 
|2013 |  |   | 59,500 
|2015 |  |   | 2,985  
|2016 |  |   | 10,000 
|2017 |  |   | 85,000 
|     |  |   |        
|     |  | $ | 272,026
|     |  |   |        

There can be significant penalties for the early pay-off of FHLB borrowings. There were no early
debt extinguishments related to these borrowings during 2008, 2007 or 2006.



F-22



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



Included above are notes payable with a carrying value of $62 related to the acquisition of
Town & Country. These notes have an interest rate of 5.00% and mature in 2009.

NOTE H  INCOME TAXES

Allocation of federal and state income taxes between current and deferred portions for the year ended December 31 is as follows:



|                      |  |      |        |   |      |   |        |      |  |   |        |  
|--------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                      |  | 2008 |        |   | 2007 |   |        | 2006 | 
|Current tax provision |  |      |        |   |      |   |        |      |  |   |        |  
|Federal               |  | $    | 1,673  |   |      | $ | 5,529  |      |  | $ | 4,624  |  
|State                 |  |      | 292    |   |      |   | 256    |      |  |   | 420    |  
|                      |  |      |        |   |      |   |        |      |  |   |        |  
|                      |  |      | 1,965  |   |      |   | 5,785  |      |  |   | 5,044  |  
|Deferred tax benefit  |  |      |        |   |      |   |        |      |  |   |        |  
|Federal               |  |      | (6,657 | ) |      |   | (2,590 | )    |  |   | (1,044 | )
|State                 |  |      | (196   | ) |      |   | (74    | )    |  |   | (51    | )
|                      |  |      |        |   |      |   |        |      |  |   |        |  
|                      |  |      | (6,853 | ) |      |   | (2,664 | )    |  |   | (1,095 | )
|                      |  |      |        |   |      |   |        |      |  |   |        |  
|                      |  | $    | (4,888 | ) |      | $ | 3,121  |      |  | $ | 3,949  |  
|                      |  |      |        |   |      |   |        |      |  |   |        |  

The reasons for the differences between the amounts computed by applying the statutory federal
income tax rate of 35% and the reported income tax expense (benefit) for the years ended December 31 are summarized below:



|                                                                |  |      |        |   |      |   |       |      |  |   |       |  
|--------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                |  | 2008 |        |   | 2007 |   |       | 2006 | 
|Income tax expense (benefit) computed at federal statutory rate |  | $    | (4,537 | ) |      | $ | 3,677 |      |  | $ | 4,000 |  
|State income tax expense, net of federal effect                 |  |      | 190    |   |      |   | 101   |      |  |   | 369   |  
|Tax exempt interest income                                      |  |      | (296   | ) |      |   | (335  | )    |  |   | (386  | )
|Increase in cash surrender value                                |  |      | (208   | ) |      |   | (189  | )    |  |   | (169  | )
|FIN 48 adjustment                                               |  |      |       |   |      |   | (150  | )    |  |   |      |  
|Other                                                           |  |      | (37    | ) |      |   | 17    |      |  |   | 135   |  
|                                                                |  |      |        |   |      |   |       |      |  |   |       |  
|Income tax expense (benefit), as reported                       |  | $    | (4,888 | ) |      | $ | 3,121 |      |  | $ | 3,949 |  
|                                                                |  |      |        |   |      |   |       |      |  |   |       |  



F-23



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



The components of net deferred tax assets and liabilities included in accrued interest receivable and
other assets are as follows at December 31:



|                                                     |  |      |        |      |   |      
|---------------------------------------------------- |  | ---- | ------ | ---- | - | -----
|                                                     |  | 2008 |        | 2007
|Deferred tax assets:                                 |  |      |        |      |   |      
|Premises and equipment                               |  | $    | 815    |      | $ | 735  
|Allowance for loan losses                            |  |      | 8,751  |      |   | 3,976
|Net unrealized loss on available-for-sale securities |  |      |       |      |   | 291  
|Deferred revenues                                    |  |      | 442    |      |   | 499  
|Stock-based compensation                             |  |      | 1,359  |      |   | 1,170
|Nonaccrual interest                                  |  |      | 182    |      |   |     
|Other                                                |  |      | 1,134  |      |   | 220  
|                                                     |  |      |        |      |   |      
|Total deferred tax assets                            |  |      | 12,683 |      |   | 6,891
|                                                     |  |      |        |      |   |      
|Deferred tax liabilities:                            |  |      |        |      |   |      
|Other acquired intangible assets                     |  |      | 1,209  |      |   | 1,565
|Gain on sale of assets                               |  |      | 363    |      |   | 432  
|Cash-to-accrual conversion                           |  |      |       |      |   | 90   
|Federal Home Loan Bank of Dallas stock               |  |      | 650    |      |   | 904  
|Net unrealized gain on available-for-sale securities |  |      | 67     |      |   |     
|                                                     |  |      |        |      |   |      
|Total deferred tax liabilities                       |  |      | 2,289  |      |   | 2,991
|                                                     |  |      |        |      |   |      
|Net deferred tax assets                              |  | $    | 10,394 |      | $ | 3,900
|                                                     |  |      |        |      |   |      

We have determined that a valuation allowance is not required for any of the deferred tax assets
since it is more likely than not that these assets will be realized because they are supported by recoverable taxes paid in prior years, future reversals of existing temporary differences and to a lesser extent, anticipated future taxable income and
tax planning strategies.

On January 1, 2007, we adopted FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement No. 109. As a result of the implementation of FIN 48, we reclassified from deferred tax liabilities $1,023 of unrecognized tax benefits related to the treatment of sales of bank securities. We recorded a cumulative effect
adjustment to retained earnings of $150 related to interest and penalties. During the third quarter of 2007, we resolved this tax issue and recorded a credit to tax expense for $150. We had no penalties or interest accrued at December 31, 2008.
The effective tax rate for the year ended December 31, 2008, was 37.7% as compared to 29.7% in 2007.

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



|                             |  |   |        |  
|---------------------------- |  | - | ------ | -
|Balance at January 1, 2007   |  | $ | 1,023  |  
|Settlements                  |  |   | (1,023 | )
|                             |  |   |        |  
|Balance at December 31, 2007 |  | $ |       |  
|                             |  |   |        |  



F-24



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



We had no unrecognized tax benefits for the year ended December 31, 2008.

We file income tax returns in U.S. federal and various state and local taxing jurisdictions. In general, we are no longer subject to income tax
examinations for years prior to 2005. We have elected to recognize both interest and penalties as a component of income tax expense.

NOTE I 
REGULATORY MATTERS AND DIVIDENDS FROM SUBSIDIARIES

Regulatory Capital Compliance

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 December 31, 2008 and 2007, 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 |        
|December 31, 2008                     |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Tier 1 capital (to average assets)    |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Tier 1 (leverage)                     |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Encore Bancshares, Inc.               |  | $      | 172,927 |       | 11.61                        | % |        | $                                                                            | 59,567 |  | 4.00 | %      |  |       | N/A     |  | N/A   |  
|Encore Bank, N.A.                     |  |        | 120,150 |       | 8.08                         |   |        |                                                                              | 59,463 |  | 4.00 |        |  | $     | 74,329  |  | 5.00  | %
|Tier 1 capital (to risk-based assets) |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Encore Bancshares, Inc.               |  | $      | 172,927 |       | 14.58                        | % |        | $                                                                            | 47,448 |  | 4.00 | %      |  |       | N/A     |  | N/A   |  
|Encore Bank, N.A.                     |  |        | 120,150 |       | 10.16                        |   |        |                                                                              | 47,308 |  | 4.00 |        |  | $     | 70,962  |  | 6.00  | %
|Total capital (to risk-based assets)  |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Encore Bancshares, Inc.               |  | $      | 187,890 |       | 15.84                        | % |        | $                                                                            | 94,896 |  | 8.00 | %      |  |       | N/A     |  | N/A   |  
|Encore Bank, N.A.                     |  |        | 135,051 |       | 11.42                        |   |        |                                                                              | 94,616 |  | 8.00 |        |  | $     | 118,270 |  | 10.00 | %
|                                      |  |        |         |       |                              |  
|December 31, 2007                     |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Tier 1 capital (to average assets)    |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Tier 1 (leverage)                     |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Encore Bancshares, Inc.               |  | $      | 143,273 |       | 10.47                        | % |        | $                                                                            | 54,737 |  | 4.00 | %      |  |       | N/A     |  | N/A   |  
|Encore Bank, N.A.                     |  |        | 110,039 |       | 8.01                         |   |        |                                                                              | 54,952 |  | 4.00 |        |  | $     | 68,690  |  | 5.00  | %
|Tier 1 capital (to risk-based assets) |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Encore Bancshares, Inc.               |  | $      | 143,273 |       | 13.59                        | % |        | $                                                                            | 42,161 |  | 4.00 | %      |  |       | N/A     |  | N/A   |  
|Encore Bank, N.A.                     |  |        | 110,039 |       | 10.47                        |   |        |                                                                              | 42,048 |  | 4.00 |        |  | $     | 63,073  |  | 6.00  | %
|Total capital (to risk-based assets)  |  |        |         |       |                              |   |        |                                                                              |        |  |      |        |  |       |         |  |       |  
|Encore Bancshares, Inc.               |  | $      | 154,434 |       | 14.65                        | % |        | $                                                                            | 84,323 |  | 8.00 | %      |  |       | N/A     |  | N/A   |  
|Encore Bank, N.A.                     |  |        | 121,200 |       | 11.53                        |   |        |                                                                              | 84,097 |  | 8.00 |        |  | $     | 105,121 |  | 10.00 | %

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 capital, and total risk-based capital ratios as set forth in the above table. As
part of Encore Banks conversion to a national bank, the OCC required that Encore Bank meet certain additional capital requirements. Specifically, as of December 31, 2008, Encore Bank was required to have a leverage ratio of at least
7.75%.



F-25



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



Dividend Policy

Federal law places limitations on the amount that national banks may pay in dividends, which Encore Bank must adhere to when paying dividends to us. Encore Banks current practice is not to pay any dividends,
except to cover our expenses. See Note K for further restrictions on dividends.

NOTE J  STOCK-BASED COMPENSATION

Our shareholders approved a stock awards and incentive plan in 2008 (2008 Stock Awards and Incentive Plan) and a stock incentive plan in 2000 (2000 Stock
Incentive Plan) which authorize the issuance of up to 2,150 shares of common stock under incentive stock and nonqualified stock options, stock appreciation rights, restricted stock awards, performance awards and phantom stock
awards. The general terms of awards under the 2008 Stock Awards and Incentive Plan and the 2000 Stock Incentive Plan shall be specified by the Compensation Committee of the Board of Directors at the date of grant. At December 31, 2008, all
options granted under the 2000 Stock Incentive Plan have a maximum term of 10 years, and vest on the third anniversary of the grant date. No options have been granted under the 2008 Stock Awards and Incentive Plan.

Stock Options

The fair value of options granted is
estimated on the date of grant using the Black-Scholes option-pricing model. This model requires input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that
would otherwise have a significant effect on the value of employee stock options granted but not considered by the model. No options were granted in 2008, 2007 or 2006.

As a result of applying the provisions of SFAS 123R during the years ended December 31, 2008, 2007 and 2006, we recognized $7, $96 and $446 of compensation cost for employee stock options, net of forfeitures, in
the accompanying consolidated statements of operations.

A summary of employee option activity as of December 31, 2008, and changes
during the year then ended is as follows:



|                                 |  |        |   |  |                              |       |                                         |            |                          |   |    
|-------------------------------- |  | ------ | - |  | ---------------------------- | ----- | --------------------------------------- | ---------- | ------------------------ | - | ---
|Options                          |  | Shares |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm |            | AggregateIntrinsic Value
|Outstanding at January 1, 2008   |  | 789    |   |  | $                            | 10.33 |                                         |            |                          |   |    
|Exercised                        |  | (48    | ) |  |                              | 10.40 |                                         |            |                          |   |    
|Forfeited                        |  | (1     | ) |  |                              | 12.00 |                                         |            |                          |   |    
|                                 |  |        |   |  |                              |       |                                         |            |                          |   |    
|Outstanding at December 31, 2008 |  | 740    |   |  | $                            | 10.32 |                                         | 3.77 years |                          | $ | 944
|                                 |  |        |   |  |                              |       |                                         |            |                          |   |    
|Vested                           |  | 740    |   |  | $                            | 10.32 |                                         | 3.77 years |                          | $ | 944
|                                 |  |        |   |  |                              |       |                                         |            |                          |   |    
|Exercisable at December 31, 2008 |  | 740    |   |  | $                            | 10.32 |                                         | 3.77 years |                          | $ | 944
|                                 |  |        |   |  |                              |       |                                         |            |                          |   |    

In addition, we have issued stock options under the 2000 Stock Incentive Plan to non-employees for
various services rendered. The cost of these services was measured based on the estimated fair value of the award at date of grant. The estimated cost is recognized over the period the service was required to be rendered.



F-26



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



A summary of non-employee option activity as of December 31, 2008, and changes during the year
then ended is as follows:



|                                               |  |        |  |                              |      |                                         |            |                         |   |    
|---------------------------------------------- |  | ------ |  | ---------------------------- | ---- | --------------------------------------- | ---------- | ----------------------- | - | ---
|Options                                        |  | Shares |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualTerm |            | AggregateIntrinsicValue
|Outstanding at January 1 and December 31, 2008 |  | 264    |  | $                            | 8.31 |                                         | 2.71 years |                         | $ | 728
|                                               |  |        |  |                              |      |                                         |            |                         |   |    
|Vested                                         |  | 264    |  | $                            | 8.31 |                                         | 2.71 years |                         | $ | 728
|                                               |  |        |  |                              |      |                                         |            |                         |   |    
|Exercisable at December 31, 2008               |  | 264    |  | $                            | 8.31 |                                         | 2.71 years |                         | $ | 728
|                                               |  |        |  |                              |      |                                         |            |                         |   |    

We recognized $0, $1 and $79 of compensation cost for non-employee stock options, net of
forfeitures, in the accompanying consolidated statements of operations in 2008, 2007 and 2006.

No options were granted in 2008, 2007 or
2006; as a result there was no related grant date fair value. The total intrinsic value of options exercised during the years ended December 31, 2008, 2007 and 2006 was $356, $551 and $68.

Cash received from option exercises for the years ended December 31, 2008, 2007 and 2006 was $502, $780 and $116. The actual tax benefit realized
for the tax deductions from option exercises was not significant for the years ended December 31, 2008, 2007 and 2006.

Share Awards

We also grant shares of restricted stock pursuant to our 2008 Stock Awards and Incentive Plan and our 2000 Stock Incentive Plan. These
shares of restricted stock vest over a period of three to five years. We account for restricted stock grants by recording the fair value of the grant to compensation expense over the vesting period. Compensation expense related to restricted stock
was $1,228, $1,034 and $866 for the years ended December 31, 2008, 2007 and 2006.

A summary of the status of our nonvested shares of
restricted stock as of December 31, 2008, and changes during the year then ended is as follows:



|                                 |  |        |   |  |                                     |      
|-------------------------------- |  | ------ | - |  | ----------------------------------- | -----
|Nonvested Shares                 |  | Shares |   |  | WeightedAverageGrant DateFair Value
|Outstanding at January 1, 2008   |  | 312    |   |  | $                                   | 14.82
|Granted                          |  | 79     |   |  |                                     | 18.44
|Vested                           |  | (38    | ) |  |                                     | 15.51
|Forfeited                        |  | (8     | ) |  |                                     | 15.36
|                                 |  |        |   |  |                                     |      
|Outstanding at December 31, 2008 |  | 345    |   |  | $                                   | 15.41
|                                 |  |        |   |  |                                     |      

As of December 31, 2008, unrecognized compensation cost for all nonvested share-based
compensation arrangements expected to vest, totaled $2,174 which is expected to be recognized over a weighted average remaining period of 2.25 years.



F-27



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



NOTE K  PREFERRED STOCK

We are authorized to issue 20,000 shares of preferred stock. The preferred stock (or other securities convertible in whole or in part into preferred stock) is available for issuance from time to time for various
purposes, including, without limitation, making future acquisitions, raising additional equity capital and financing. Subject to certain limits set by our Articles of Incorporation, the preferred stock (or such convertible securities) may be issued
on such terms and conditions, and at such times and in such situations, as the Board of Directors in its sole discretion determines to be appropriate, without any further approval or action by the shareholders (unless otherwise required by laws,
rules, regulations or agreements applicable to us).

On December 5, 2008, we issued 34 shares of our Fixed Rate Cumulative
Perpetual Preferred Stock, Series A, par value $1.00 per share, with a liquidation value of $1,000 per share (Series A Preferred Stock) and a warrant to purchase up to 364 shares of our common stock at an exercise price of $14.01 per share (Warrant)
to the United States Department of the Treasury (Treasury) for an aggregate purchase price of $34,000 in cash. Cumulative dividends on the Series A Preferred Stock are paid quarterly and will accrue on the liquidation preference at a rate of
5% per annum for the first five years, and at a rate of 9% per annum thereafter. The Series A Preferred Stock has no maturity date and ranks senior to our common stock with respect to the payment of dividends and distributions and amounts
payable upon liquidation, dissolution and winding up of the Company. The Series A Preferred Stock generally is non-voting.

The proceeds
from Treasury were allocated based on the relative fair values of the Series A Preferred Stock and the Warrant. The fair value of the Series A Preferred Stock was determined using a market rate of 15.5% and the discount on the Series A Preferred
Stock will be accreted to par value over a ten year period. The fair value of the Warrant was determined on issuance date using the Black-Scholes option-pricing model.

Pursuant to the Securities Purchase Agreement between us and Treasury, we may redeem the Series A Preferred Stock in whole or in part, at par plus accrued and unpaid dividends after February 15, 2012. Prior to
this date, we may redeem the Series A Preferred Stock, in whole or in part, at par plus accrued and unpaid dividends under certain conditions. Any redemption is subject to the approval of the Board of Governors of the Federal Reserve System. The
redemption provisions were amended by the Recovery Act discussed below.

The Warrant is immediately exercisable and expires ten years after
issuance. The number of shares of our common stock underlying the Warrant and the exercise price are subject to adjustment for certain dilutive events. Additionally, if, on or prior to December 31, 2009, we receive aggregate gross cash proceeds
of at least $34,000 from one or more sales of Tier 1 qualifying perpetual preferred stock or common stock, the number of the shares of common stock underlying the Warrant then held by Treasury will be reduced by 50% to 182 shares. The Treasury has
agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant. Until such time as the Treasury ceases to own any of our debt or equity securities, compensation of certain of our executives will be
limited.

Recently, the American Recovery and Reinvestment Act of 2009 (Recovery Act) was signed into law, which, among other things,
removes the conditions for redemption of our Series A Preferred Stock prior to February 15, 2012. The redemption is still subject to approval of the Board of Governors of the Federal Reserve System. Additionally, the Recovery Act imposes new
and more stringent limits on executive compensation for participants in the Capital Purchase Program. Treasury is required to promulgate regulations to implement these changes; however, until Treasury promulgates such regulations, it is unclear how
exactly these changes will apply to participants in the Capital Purchase Program.



F-28



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



In addition, we are restricted from paying any dividends on our Series A Preferred Stock if required
payments on our outstanding junior subordinated debentures (Note Q) are not made or deferred. Beginning on December 5, 2008 and until December 5, 2011, or until we have redeemed the Series A Preferred Stock or the Treasury has transferred
the Series A Preferred Stock to a third party, the consent of the Treasury will be required for us to declare or pay any dividend or make any distribution on our common stock. Also, as long as the Series A Preferred Stock is outstanding, dividend
payments will be prohibited until all accrued and unpaid dividends are paid on the Series A Preferred Stock, subject to certain limited exceptions.

NOTE L  INITIAL PUBLIC OFFERING

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. Our common shares are listed on the NASDAQ Global Market under the symbol
EBTX.

Our net proceeds, including the over-allotment shares, were $41,405, after underwriting discounts of $3,220 and $1,375
in offering expenses. The net proceeds is available to contribute to the capital of Encore Bank to support anticipated balance sheet growth and for general corporate purposes, including possible future acquisitions. Since the offering, the net
proceeds that were not contributed to Encore Bank have been invested in short-term investments.

NOTE M  OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

In the normal course of business, we enter into various credit related financial instruments with off-balance-sheet risk to meet the
financing needs of our clients. These financial instruments principally include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount
recognized in the accompanying consolidated balance sheets.

Our exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and letters of credit written is represented by the contractual notional amount of those instruments. We follow the same credit policies in making commitments and conditional obligations
as we do for on-balance-sheet instruments. The credit risk involved and collateral required in issuing letters of credit are essentially the same as those involved in extending loan facilities to clients.

Our principal commitments as of December 31 are as follows:



|                             |  |      |         |      |   |        
|---------------------------- |  | ---- | ------- | ---- | - | -------
|                             |  | 2008 |         | 2007
|Commitments to extend credit |  | $    | 188,800 |      | $ | 279,880
|Standby letters of credit    |  |      | 3,465   |      |   | 6,376  

Commitments to extend credit are agreements to lend to a client as long as there is no violation
of any condition established in the contract and have fixed expiration dates or other termination clauses. Some of the commitments are expected to expire without being drawn upon, so that the total commitment amounts do not necessarily represent
future cash requirements. Letters of credit are commitments issued by us to guarantee the performance of a client to a third party, primarily borrowing arrangements. We evaluate each clients credit worthiness on a case-by-case basis. The
extension of credit is based on our credit evaluation of the client.



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial
properties. Included in unfunded commitments in 2008 are residential mortgages totaling $44,731. The fair value of these commitments is not significant.

Periodically we use forward interest rate locks to hedge the risk of changes in the fair value of newly originated mortgages held-for-sale. Net gains (losses) of $0, $(458) and $35 for 2008, 2007 and 2006 from these
activities are included in the consolidated statements of operations in Mortgage banking. There were no derivatives outstanding at December 31, 2008 and 2007.

NOTE N  CONCENTRATION OF CREDIT RISK

Our primary market areas are Houston, Texas and southwest
Florida and we grant loans to clients located primarily within these geographical areas. Although we have a diversified loan portfolio, a substantial portion of our clients ability to honor their contracts is dependent upon the economic
stability of the respective geographic area. We evaluate each clients creditworthiness on a case-by-case basis.

NOTE O  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.

The Linscomb & Williams merger
agreement, dated as of August 31, 2005 includes a contingent consideration provision through December 31, 2009. This provision is based upon future revenue and net earnings. At December 31, 2008, the maximum potential amount of future
undiscounted payments we could be required to make under this contingent consideration provision is approximately $6,096 in shares of our common stock.

NOTE P  RELATED PARTY TRANSACTIONS

Deposits of executive officers, significant shareholders (5% or more of common
stock) and directors were $25,182 and $40,283 (including time deposits of $1,476 and $1,380) at December 31, 2008 and 2007.

Loans to
executive officers, significant shareholders, directors and their related interests (related parties) for the years ended December 31 were as follows:



|                       |  |      |        |   |      |   |       |  
|---------------------- |  | ---- | ------ | - | ---- | - | ----- | -
|                       |  | 2008 |        |   | 2007 |  
|Balance at January 1   |  | $    | 8,209  |   |      | $ | 5,622 |  
|New loans              |  |      | 22,967 |   |      |   | 2,598 |  
|Repayments             |  |      | (9,264 | ) |      |   | (11   | )
|                       |  |      |        |   |      |   |       |  
|Balance at December 31 |  | $    | 21,912 |   |      | $ | 8,209 |  
|                       |  |      |        |   |      |   |       |  



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



At December 31, 2008 and 2007, $1,198 and $3,115 of borrowed funds in the form of
repurchase agreements were outstanding to related parties. As of December 31, 2008, we are paying monthly rent of $22 to lease two private client offices from related parties.

NOTE Q  JUNIOR SUBORDINATED DEBENTURES

In
September 2003, we formed Encore Statutory Trust II (the Statutory Trust), a statutory business trust. We purchased all the common securities of the Statutory Trust for $155. The Statutory Trust issued $5,000 of preferred securities. The sole assets
of the Statutory Trust are our junior subordinated debentures with an aggregate principal amount of $5,155, which are due September 24, 2033. The interest payable on the junior subordinated debentures is payable at a per annum rate equal to
LIBOR plus 2.95%, reset quarterly. Cash distributions on the common and preferred securities are made in the same amount and to the extent interest on the junior subordinated debentures is received by the Statutory Trust. The securities are
redeemable in whole at any time on any March 17, June 17, September 17 or December 17 on or after September 17, 2008, or earlier in the event of certain changes or amendments to regulatory requirements or federal tax rules.

In April 2007, we formed Encore Capital Trust III (Trust III), a statutory business trust, and purchased all the common securities of
Trust III for $464. Trust III issued $15,000 of preferred securities. The sole assets of Trust III are our junior subordinated debentures with an aggregate principal amount of $15,464, which are due April 19, 2037. The junior subordinated
debentures bear a fixed rate of 6.85% until April 19, 2012, at which date we may call the debentures, and a floating rate equal to 3 month LIBOR + 1.75% thereafter. Cash distributions on the common and preferred securities are made in the same
amount and to the extent interest on the junior subordinated debentures is received by Trust III. With the proceeds of these junior subordinated debentures, we redeemed the $15,464 in junior subordinated debentures originally issued on
April 10, 2002 at a floating rate equal to 6 month LIBOR + 3.70%. We recorded a loss on early debt extinguishment of $391 in noninterest expense in connection with this redemption.

Each trust is considered a variable interest entity. Although we own all of the outstanding common stock of the Statutory Trust and Trust III, we are not
required to include them in our consolidated financial statements.

Our obligations under the junior subordinated debentures, the related
indenture, the trust agreement relating to the trust securities, and the guarantee constitute a full and unconditional guarantee by us of the obligations of the Trusts under the respective preferred securities.

NOTE R  FAIR VALUE OF ASSETS AND LIABILITIES

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

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
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



| | 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 December 31,
2008:



|                                  |  |       |        |         |   |       
|--------------------------------- |  | ----- | ------ | ------- | - | ------
|Description                       |  | Total |        | Level 2
|Available-for-sale securities (1) |  | $     | 75,133 |         | $ | 75,133
|                                  |  |       |        |         |   |       
|Total                             |  | $     | 75,133 |         | $ | 75,133
|                                  |  |       |        |         |   |       



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

For
assets measured at fair value on a nonrecurring basis during 2008 that were still held on the balance sheet at December 31, 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 |   | Level 3 |  | Losses for theYear EndedDecember 31, 2008
|Loans (1)                    |  | $     | 20,185 |         | $ | 20,185  |  | $                                         |   |  | $ | 1,634
|Cost-basis equity securities |  |       | 16     |         |   |        |  |                                           | 16 |  |   | 1,984
|                             |  |       |        |         |   |         |  |                                           |    |  |   |      
|Total                        |  | $     | 20,201 |         | $ | 20,185  |  | $                                         | 16 |  | $ | 3,618
|                             |  |       |        |         |   |         |  |                                           |    |  |   |      



|(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.



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



The following table summarizes the carrying values and estimated fair values of financial instruments
as of December 31:



|                                       |  |                |           |                     |   |                |  |                     |           |  |   |          
|-------------------------------------- |  | -------------- | --------- | ------------------- | - | -------------- |  | ------------------- | --------- |  | - | ---------
|                                       |  | 2008           |           | 2007               
|                                       |  | CarryingAmount |           | EstimatedFair Value |   | CarryingAmount |  | EstimatedFair Value
|Financial assets:                      |  |                |           |                     |   |                |  |                     |           |  |   |          
|Cash and cash equivalents              |  | $              | 118,052   |                     | $ | 118,052        |  | $                   | 78,415    |  | $ | 78,415   
|Securities available-for-sale          |  |                | 78,816    |                     |   | 78,816         |  |                     | 12,207    |  |   | 12,207   
|Securities held-to-maturity            |  |                | 95,875    |                     |   | 96,928         |  |                     | 134,056   |  |   | 133,454  
|Mortgages held-for-sale                |  |                | 150       |                     |   | 150            |  |                     | 1,396     |  |   | 1,396    
|Loans receivable, net                  |  |                | 1,193,299 |                     |   | 1,220,926      |  |                     | 1,086,107 |  |   | 1,099,937
|Federal Home Loan Bank of Dallas stock |  |                | 9,534     |                     |   | 9,534          |  |                     | 5,880     |  |   | 5,880    
|Accrued interest receivable            |  |                | 5,565     |                     |   | 5,565          |  |                     | 6,182     |  |   | 6,182    
|Financial liabilities:                 |  |                |           |                     |   |                |  |                     |           |  |   |          
|Deposits                               |  | $              | 1,100,797 |                     | $ | 1,102,255      |  | $                   | 1,041,374 |  | $ | 1,044,300
|Borrowings and repurchase agreements   |  |                | 272,026   |                     |   | 277,802        |  |                     | 173,395   |  |   | 173,485  
|Accrued interest payable               |  |                | 1,344     |                     |   | 1,344          |  |                     | 1,092     |  |   | 1,092    
|Junior subordinated debentures         |  |                | 20,619    |                     |   | 21,198         |  |                     | 20,619    |  |   | 22,338   

Under SFAS 157, we base our fair values on the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value
measurements, in accordance with the fair value hierarchy in SFAS 157.

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

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not recorded at fair value (SFAS 107
disclosures).

Cash and Cash Equivalents

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

Securities

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



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



Loans Receivable

We do not record loans at fair value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for estimating fair value for SFAS 107 disclosure purposes. However, from time to time,
we record nonrecurring fair value adjustments to loans to reflect (1) partial write downs that are based on the observable market price or current appraised value of the collateral, or (2) the full charge-off of the loan carrying value.
The fair value estimates for SFAS 107 purposes differentiate loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity.

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

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

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

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

Mortgages Held-for-Sale

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

Federal Home Loan Bank of Dallas Stock

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

Investment in Real Estate

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



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



Goodwill and Other Intangible Assets

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

We amortize client relationship intangibles on an
accelerated basis based on useful lives of 2 to 20 years. We review these intangibles for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Impairment is indicated if the sum of
undiscounted estimated future net cash flows is less than the carrying value of the asset. Impairment is permanently recognized by writing down the asset to the extent that the carrying value exceeds the estimated fair value.

Deposits

The fair value of deposits with no stated
maturity, such as non-interest-bearing checking accounts and money market accounts is equal to the amount payable upon demand as of December 31, 2008 and 2007. The fair value of certificates of deposit is based on the lower of redemption or
discounted value of contractual cash flows. Discount rates for certificates of deposit are estimated using current market rates.

Borrowings and
Repurchase Agreements

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

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

Junior Subordinated Debentures

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

Accrued Interest

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

Unrecognized Financial Instruments

The fair value of
commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

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

Nonfinancial Instruments

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

NOTE S  EMPLOYEE BENEFIT PLAN

We have implemented a defined contribution plan (Plan) covering
all eligible personnel. Contribution expense related to the Plan was $555, $616 and $569 for the years ended December 31, 2008, 2007 and 2006.

NOTE T  EARNINGS (LOSS) PER COMMON SHARE

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



|                                                                                        |  |      |        |   |      |   |       |  |   |      
|--------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- |  | - | -----
|                                                                                        |  | 2008 |        |   | 2007 |   | 2006 
|Basic:                                                                                  |  |      |        |   |      |   |       |  |   |      
|Earnings (loss) available to common shareholders                                        |  | $    | (8,240 | ) |      | $ | 7,384 |  | $ | 7,478
|Average common shares outstanding, net of nonvested restricted stock                    |  |      | 9,881  |   |      |   | 8,576 |  |   | 7,501
|Per Share                                                                               |  | $    | (0.83  | ) |      | $ | 0.86  |  | $ | 1.00 
|Diluted:                                                                                |  |      |        |   |      |   |       |  |   |      
|Average common shares outstanding                                                       |  |      | 9,881  |   |      |   | 8,576 |  |   | 7,501
|Add: Net effect of nonvested restricted stock and the assumed exercise of stock options |  |      |       |   |      |   | 556   |  |   | 351  
|Contingent share-based consideration                                                    |  |      |       |   |      |   | 164   |  |   | 74   
|                                                                                        |  |      |        |   |      |   |       |  |   |      
|Diluted average common shares outstanding                                               |  |      | 9,881  |   |      |   | 9,296 |  |   | 7,926
|Per Share                                                                               |  | $    | (0.83  | ) |      | $ | 0.79  |  | $ | 0.94 

Earnings (loss) available to common shareholders is net earnings (loss) after deducting preferred
dividends of $166 in 2008. No dividends have been declared on common stock.

NOTE U  SEGMENT INFORMATION

We have three lines of business which are banking, wealth management and insurance, which 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.



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##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



The accounting policies of each line of business are the same as those described in the summary of
significant accounting policies. 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 inter-company transactions, are presented under Other.

Financial results by operating segment were as follows:



|                                    |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|----------------------------------- |  | ------- | --------- | - | ---------------- | - | --------- |  | ----- | ----- |  | ------------ | ------- | - |  | - | --------- | -
|                                    |  | Banking |           |   | WealthManagement |   | Insurance |  | Other |       |  | Consolidated |        
|2008                                |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net interest income (expense)       |  | $       | 45,340    |   |                  | $ | 196       |  | $     | 83    |  | $            | (1,345  | ) |  | $ | 44,274    |  
|Provision for loan losses           |  |         | 29,175    |   |                  |   |          |  |       |      |  |              |        |   |  |   | 29,175    |  
|Noninterest income                  |  |         | (784      | ) |                  |   | 17,329    |  |       | 5,760 |  |              | (5      | ) |  |   | 22,300    |  
|Noninterest expense                 |  |         | 35,148    |   |                  |   | 11,057    |  |       | 4,156 |  |              |        |   |  |   | 50,361    |  
|                                    |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Earnings (loss) before income taxes |  |         | (19,767   | ) |                  |   | 6,468     |  |       | 1,687 |  |              | (1,350  | ) |  |   | (12,962   | )
|Income tax expense (benefit)        |  |         | (7,298    | ) |                  |   | 2,270     |  |       | 626   |  |              | (486    | ) |  |   | (4,888    | )
|                                    |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net earnings (loss)                 |  | $       | (12,469   | ) |                  | $ | 4,198     |  | $     | 1,061 |  | $            | (864    | ) |  | $ | (8,074    | )
|                                    |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Total assets at December 31,        |  | $       | 1,592,933 |   |                  | $ | 47,879    |  | $     | 6,738 |  | $            | (59,706 | ) |  | $ | 1,587,844 |  
|2007                                |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net interest income (expense)       |  | $       | 35,282    |   |                  | $ | 321       |  | $     | 136   |  | $            | (1,564  | ) |  | $ | 34,175    |  
|Provision for loan losses           |  |         | 4,029     |   |                  |   |          |  |       |      |  |              |        |   |  |   | 4,029     |  
|Noninterest income                  |  |         | 7,356     |   |                  |   | 17,546    |  |       | 6,035 |  |              | 29      |   |  |   | 30,966    |  
|Noninterest expense                 |  |         | 34,022    |   |                  |   | 12,194    |  |       | 4,000 |  |              | 391     |   |  |   | 50,607    |  
|                                    |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Earnings (loss) before income taxes |  |         | 4,587     |   |                  |   | 5,673     |  |       | 2,171 |  |              | (1,926  | ) |  |   | 10,505    |  
|Income tax expense (benefit)        |  |         | 1,130     |   |                  |   | 1,941     |  |       | 744   |  |              | (694    | ) |  |   | 3,121     |  
|                                    |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net earnings (loss)                 |  | $       | 3,457     |   |                  | $ | 3,732     |  | $     | 1,427 |  | $            | (1,232  | ) |  | $ | 7,384     |  
|                                    |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Total assets at December 31,        |  | $       | 1,411,934 |   |                  | $ | 46,270    |  | $     | 9,242 |  | $            | (66,249 | ) |  | $ | 1,401,197 |  
|2006                                |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net interest income (expense)       |  | $       | 31,622    |   |                  | $ | 218       |  | $     | 72    |  | $            | (1,739  | ) |  | $ | 30,173    |  
|Provision for loan losses           |  |         | 3,491     |   |                  |   |          |  |       |      |  |              |        |   |  |   | 3,491     |  
|Noninterest income                  |  |         | 12,226    |   |                  |   | 17,315    |  |       | 5,542 |  |              |        |   |  |   | 35,083    |  
|Noninterest expense                 |  |         | 33,226    |   |                  |   | 13,232    |  |       | 3,880 |  |              |        |   |  |   | 50,338    |  
|                                    |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Earnings (loss) before income taxes |  |         | 7,131     |   |                  |   | 4,301     |  |       | 1,734 |  |              | (1,739  | ) |  |   | 11,427    |  
|Income tax expense (benefit)        |  |         | 2,194     |   |                  |   | 1,639     |  |       | 719   |  |              | (603    | ) |  |   | 3,949     |  
|                                    |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Net earnings (loss)                 |  | $       | 4,937     |   |                  | $ | 2,662     |  | $     | 1,015 |  | $            | (1,136  | ) |  | $ | 7,478     |  
|                                    |  |         |           |   |                  |   |           |  |       |       |  |              |         |   |  |   |           |  
|Total assets at December 31,        |  | $       | 1,342,446 |   |                  | $ | 42,684    |  | $     | 8,231 |  | $            | (56,518 | ) |  | $ | 1,336,843 |  



F-37



---

##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



NOTE V  PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial statements pertaining only to Encore Bancshares, Inc. are presented below. Investments in subsidiaries are stated using the equity
method of accounting.

Condensed Balance Sheets



|                                               |  |              |         |      |   |        
|---------------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                               |  | December 31,
|                                               |  | 2008         |         | 2007
|Assets:                                        |  |              |         |      |   |        
|Cash and due from banks                        |  | $            | 49,725  |      | $ | 32,261 
|                                               |  |              |         |      |   |        
|Total cash and cash equivalents                |  |              | 49,725  |      |   | 32,261 
|Investment in subsidiaries                     |  |              | 154,498 |      |   | 144,244
|Other assets                                   |  |              | 2,541   |      |   | 1,871  
|                                               |  |              |         |      |   |        
|                                               |  | $            | 206,764 |      | $ | 178,376
|                                               |  |              |         |      |   |        
|Liabilities:                                   |  |              |         |      |   |        
|Junior subordinated debentures                 |  | $            | 20,619  |      | $ | 20,619 
|Accrued interest payable and other liabilities |  |              | 403     |      |   | 278    
|                                               |  |              |         |      |   |        
|Total liabilities                              |  |              | 21,022  |      |   | 20,897 
|Shareholders equity                           |  |              | 185,742 |      |   | 157,479
|                                               |  |              |         |      |   |        
|                                               |  | $            | 206,764 |      | $ | 178,376
|                                               |  |              |         |      |   |        

Condensed Statements of Operations



|                                                                                       |  |                          |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                       |  | Years Ended December 31, |       
|                                                                                       |  | 2008                     |        |   | 2007 |   |        | 2006 | 
|Income:                                                                                |  |                          |        |   |      |   |        |      |  |   |        |  
|Other non-interest income                                                              |  | $                        | (5     | ) |      | $ | 29     |      |  | $ | 1      |  
|                                                                                       |  |                          |        |   |      |   |        |      |  |   |        |  
|Total income                                                                           |  |                          | (5     | ) |      |   | 29     |      |  |   | 1      |  
|                                                                                       |  |                          |        |   |      |   |        |      |  |   |        |  
|Expense:                                                                               |  |                          |        |   |      |   |        |      |  |   |        |  
|Interest expense                                                                       |  |                          | 1,345  |   |      |   | 1,564  |      |  |   | 1,739  |  
|Compensation                                                                           |  |                          |       |   |      |   |       |      |  |   | 1,392  |  
|Loss on early debt extinguishment                                                      |  |                          |       |   |      |   | 391    |      |  |   |       |  
|Other                                                                                  |  |                          | 535    |   |      |   | 150    |      |  |   | 96     |  
|                                                                                       |  |                          |        |   |      |   |        |      |  |   |        |  
|Total expense                                                                          |  |                          | 1,880  |   |      |   | 2,105  |      |  |   | 3,227  |  
|                                                                                       |  |                          |        |   |      |   |        |      |  |   |        |  
|Loss before income taxes and equity in undistributed earnings (losses) of subsidiaries |  |                          | (1,885 | ) |      |   | (2,076 | )    |  |   | (3,226 | )
|Income tax benefit                                                                     |  |                          | 549    |   |      |   | 718    |      |  |   | 1,139  |  
|Equity in undistributed earnings (losses) of subsidiaries                              |  |                          | (6,738 | ) |      |   | 8,742  |      |  |   | 9,565  |  
|                                                                                       |  |                          |        |   |      |   |        |      |  |   |        |  
|Net earnings (loss)                                                                    |  | $                        | (8,074 | ) |      | $ | 7,384  |      |  | $ | 7,478  |  
|                                                                                       |  |                          |        |   |      |   |        |      |  |   |        |  



F-38



---

##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



Condensed Statements of Cash Flows



|                                                                                    |  |                          |         |   |      |   |         |      |  |   |        |  
|----------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                    |  | Years Ended December 31, |        
|                                                                                    |  | 2008                     |         |   | 2007 |   |         | 2006 | 
|Operating Activities:                                                               |  |                          |         |   |      |   |         |      |  |   |        |  
|Net earnings (loss)                                                                 |  | $                        | (8,074  | ) |      | $ | 7,384   |      |  | $ | 7,478  |  
|Adjustments to reconcile net earnings (loss) to net cash from operating activities: |  |                          |         |   |      |   |         |      |  |   |        |  
|Equity in undistributed (earnings) losses of subsidiaries                           |  |                          | 6,738   |   |      |   | (8,742  | )    |  |   | (9,565 | )
|Stock-based compensation                                                            |  |                          |        |   |      |   |        |      |  |   | 1,391  |  
|Loss on early debt extinguishment                                                   |  |                          |        |   |      |   | 391     |      |  |   |       |  
|Change in prepaid expenses and other assets                                         |  |                          | (818    | ) |      |   | 298     |      |  |   | (429   | )
|Change in accrued interest payable and other liabilities                            |  |                          | 25      |   |      |   | (12     | )    |  |   | 31     |  
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |        |  
|Net cash from operating activities                                                  |  |                          | (2,129  | ) |      |   | (681    | )    |  |   | (1,094 | )
|Investing Activities:                                                               |  |                          |         |   |      |   |         |      |  |   |        |  
|Capital contributions to subsidiaries                                               |  |                          | (15,000 | ) |      |   | (10,000 | )    |  |   |       |  
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |        |  
|Net cash from investing activities                                                  |  |                          | (15,000 | ) |      |   | (10,000 | )    |  |   |       |  
|Financing Activities:                                                               |  |                          |         |   |      |   |         |      |  |   |        |  
|Proceeds from issuance of junior subordinated debentures                            |  |                          |        |   |      |   | 15,464  |      |  |   |       |  
|Retirement of junior subordinated debentures                                        |  |                          |        |   |      |   | (15,855 | )    |  |   |       |  
|Excess tax benefit from stock-based compensation                                    |  |                          | 120     |   |      |   | 118     |      |  |   |       |  
|Proceeds from issuance of preferred stock and common stock warrants                 |  |                          | 34,000  |   |      |   |        |      |  |   |       |  
|Proceeds from issuance of common stock, net of purchase of treasury stock           |  |                          | 473     |   |      |   | 42,185  |      |  |   | 171    |  
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |        |  
|Net cash from financing activities                                                  |  |                          | 34,593  |   |      |   | 41,912  |      |  |   | 171    |  
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |        |  
|Net change in cash and cash equivalents                                             |  |                          | 17,464  |   |      |   | 31,231  |      |  |   | (923   | )
|Cash and cash equivalents at beginning of year                                      |  |                          | 32,261  |   |      |   | 1,030   |      |  |   | 1,953  |  
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |        |  
|Cash and cash equivalents at end of year                                            |  | $                        | 49,725  |   |      | $ | 32,261  |      |  | $ | 1,030  |  
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |        |  



F-39



---

##### Table of Contents

##### Index to Financial Statements

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share amounts)



NOTE W  QUARTERLY FINANCIAL DATA (UNAUDITED)



|                                                    |  |                |         |               |      |                |        |               |      |        |      |   |        |  |      |        |      |   |        |  |   |        |  |   |       
|--------------------------------------------------- |  | -------------- | ------- | ------------- | ---- | -------------- | ------ | ------------- | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ |  | - | ------
|                                                    |  | Fourth Quarter |         | Third Quarter |      | Second Quarter |        | First Quarter
|                                                    |  | 2008           |         |               | 2007 |                | 2008   |               | 2007 |        | 2008 |   | 2007   |  | 2008 |        | 2007
|Interest income                                     |  | $              | 20,193  |               |      | $              | 21,240 |               | $    | 20,481 |      | $ | 21,032 |  | $    | 20,065 |      | $ | 19,675 |  | $ | 20,532 |  | $ | 19,480
|Interest expense                                    |  |                | 8,251   |               |      |                | 11,809 |               |      | 8,873  |      |   | 11,966 |  |      | 9,220  |      |   | 11,677 |  |   | 10,653 |  |   | 11,800
|                                                    |  |                |         |               |      |                |        |               |      |        |      |   |        |  |      |        |      |   |        |  |   |        |  |   |       
|Net interest income                                 |  |                | 11,942  |               |      |                | 9,431  |               |      | 11,608 |      |   | 9,066  |  |      | 10,845 |      |   | 7,998  |  |   | 9,879  |  |   | 7,680 
|Provision for loan losses                           |  |                | 18,648  |               |      |                | 1,176  |               |      | 5,249  |      |   | 1,008  |  |      | 3,777  |      |   | 945    |  |   | 1,501  |  |   | 900   
|                                                    |  |                |         |               |      |                |        |               |      |        |      |   |        |  |      |        |      |   |        |  |   |        |  |   |       
|Net interest income after provision for loan losses |  |                | (6,706  | )             |      |                | 8,255  |               |      | 6,359  |      |   | 8,058  |  |      | 7,068  |      |   | 7,053  |  |   | 8,378  |  |   | 6,780 
|Noninterest income                                  |  |                | 3,488   |               |      |                | 6,269  |               |      | 5,975  |      |   | 7,521  |  |      | 6,160  |      |   | 8,721  |  |   | 6,677  |  |   | 8,455 
|Noninterest expense                                 |  |                | 12,414  |               |      |                | 12,367 |               |      | 12,073 |      |   | 12,489 |  |      | 12,597 |      |   | 13,289 |  |   | 13,277 |  |   | 12,462
|                                                    |  |                |         |               |      |                |        |               |      |        |      |   |        |  |      |        |      |   |        |  |   |        |  |   |       
|Net earnings (loss) before income taxes             |  |                | (15,632 | )             |      |                | 2,157  |               |      | 261    |      |   | 3,090  |  |      | 631    |      |   | 2,485  |  |   | 1,778  |  |   | 2,773 
|Income tax expense (benefit)                        |  |                | (5,679  | )             |      |                | 454    |               |      | 33     |      |   | 842    |  |      | 150    |      |   | 827    |  |   | 608    |  |   | 998   
|                                                    |  |                |         |               |      |                |        |               |      |        |      |   |        |  |      |        |      |   |        |  |   |        |  |   |       
|Net earnings (loss)                                 |  | $              | (9,953  | )             |      | $              | 1,703  |               | $    | 228    |      | $ | 2,248  |  | $    | 481    |      | $ | 1,658  |  | $ | 1,170  |  | $ | 1,775 
|                                                    |  |                |         |               |      |                |        |               |      |        |      |   |        |  |      |        |      |   |        |  |   |        |  |   |       
|Earnings (loss) available to common shareholders    |  | $              | (10,119 | )             |      | $              | 1,703  |               | $    | 228    |      | $ | 2,248  |  | $    | 481    |      | $ | 1,658  |  | $ | 1,170  |  | $ | 1,775 
|                                                    |  |                |         |               |      |                |        |               |      |        |      |   |        |  |      |        |      |   |        |  |   |        |  |   |       
|Earnings (loss) per common share:                   |  |                |         |               |      |                |        |               |      |        |      |   |        |  |      |        |      |   |        |  |   |        |  |   |       
|Basic                                               |  | $              | (1.02   | )             |      | $              | 0.17   |               | $    | 0.02   |      | $ | 0.24   |  | $    | 0.05   |      | $ | 0.22   |  | $ | 0.12   |  | $ | 0.23  
|Diluted                                             |  |                | (1.02   | )             |      |                | 0.16   |               |      | 0.02   |      |   | 0.22   |  |      | 0.04   |      |   | 0.20   |  |   | 0.11   |  |   | 0.22  



F-40