Encore Bancshares (EBTX) 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

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

Commission file number: 001-33598

Encore Bancshares, Inc.

(Exact name of registrant as specified in its charter)

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

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

(713) 787-3100

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of July 31, 2009, there were 10.3 million shares of common stock, $1.00 par value, issued and outstanding.

ENCORE BANCSHARES, INC.

TABLE OF CONTENTS

		Page
Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets – June 30, 2009 (unaudited) and December 31, 2008	3
	Consolidated Statements of Operations – Three months and six months ended June 30, 2009 and 2008 (unaudited)	4
	Consolidated Statement of Changes in Shareholders’ Equity – Six months ended June 30, 2009 (unaudited)	5
	Consolidated Statements of Cash Flows – Six months ended June 30, 2009 and 2008 (unaudited)	6
	Notes to Interim Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
Part II. OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Submission of Matters to a Vote of Security Holders	35
Item 5.	Other Information	36
Item 6.	Exhibits	36
Signatures		37

2

Part I – Financial Information

Item 1. Financial Statements

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

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

	June 30, 2009			December 31, 2008
ASSETS
Cash and due from banks	$	17,891		$	23,044
Interest-bearing deposits in banks		124,959			91,459
Federal funds sold and other temporary investments		3,263			3,549
Cash and cash equivalents		146,113			118,052
Securities available-for-sale, at estimated fair value		132,437			78,816
Securities held-to-maturity, at amortized cost		108,594			95,875
Mortgages held-for-sale		1,168			150
Loans receivable		1,148,820			1,218,404
Allowance for loan losses		(25,214	)		(25,105	)
Net loans receivable		1,123,606			1,193,299
Federal Home Loan Bank of Dallas stock, at cost		9,561			9,534
Investment in real estate		8,032			2,781
Premises and equipment, net		16,435			17,362
Goodwill		27,873			27,873
Other intangible assets, net		5,691			6,031
Cash surrender value of life insurance policies		15,019			14,686
Accrued interest receivable and other assets		22,189			23,385
	$	1,616,718		$	1,587,844
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	146,373		$	131,709
Interest-bearing		1,030,134			969,088
Total deposits		1,176,507			1,100,797
Borrowings and repurchase agreements		223,218			272,026
Junior subordinated debentures		20,619			20,619
Accrued interest payable and other liabilities		8,565			8,660
Total liabilities		1,428,909			1,402,102
Commitments and contingencies		—			—
Shareholders’ equity:
Preferred stock, $1 par value, 20,000 shares authorized; 34 shares issued at June 30, 2009 and December 31, 2008; aggregate liquidation preference of $34,222 and $34,127		28,718			28,461
Common stock, $1 par value, 50,000 shares authorized; 10,346 shares at June 30, 2009 and 10,247 shares at December 31, 2008 issued		10,346			10,247
Additional paid-in capital		115,698			115,489
Retained earnings		32,372			31,523
Common stock in treasury, at cost (9 shares at June 30, 2009 and 6 shares at December 31, 2008)		(123	)		(98	)
Accumulated other comprehensive income		798			120
Total shareholders’ equity		187,809			185,742
	$	1,616,718		$	1,587,844

The accompanying notes are an integral part of these statements.

3

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Interest income:
Loans, including fees	$	17,220	$	18,238	$	34,699	$	36,616
Mortgages held-for-sale		32		25		60		57
Securities		2,121		1,250		4,083		2,569
Federal funds sold and other temporary investments		156		552		312		1,355
Total interest income		19,529		20,065		39,154		40,597
Interest expense:
Deposits		5,643		7,123		11,375		15,665
Borrowings and repurchase agreements		2,119		1,767		4,235		3,522
Junior subordinated debentures		309		330		625		686
Total interest expense		8,071		9,220		16,235		19,873
Net interest income		11,458		10,845		22,919		20,724
Provision for loan losses		2,927		3,777		5,966		5,278
Net interest income after provision for loan losses		8,531		7,068		16,953		15,446
Noninterest income:
Trust and investment management fees		4,087		4,660		7,836		9,067
Mortgage banking		351		135		502		189
Insurance commissions and fees		1,404		1,385		3,014		3,112
Other		485		455		1,079		916
Total noninterest income		6,327		6,635		12,431		13,284
Noninterest expense:
Compensation		7,231		7,467		14,745		15,545
Occupancy		1,554		1,485		3,008		2,923
Equipment		449		487		882		1,018
Advertising and promotion		200		219		416		423
Outside data processing		783		717		1,547		1,411
Professional fees		1,043		739		1,979		1,895
Intangible amortization		169		188		340		375
FDIC assessment		746		30		798		61
Other		1,536		1,740		2,733		2,670
Total noninterest expense		13,711		13,072		26,448		26,321
Net earnings before income taxes		1,147		631		2,936		2,409
Income tax expense		326		150		980		758
Net earnings	$	821	$	481	$	1,956	$	1,651
Earnings available to common shareholders	$	267	$	481	$	849	$	1,651
Earnings per common share:
Basic	$	0.03	$	0.05	$	0.08	$	0.16
Diluted		0.02		0.04		0.08		0.15
Average common shares outstanding		10,334		10,202		10,284		10,173
Diluted average common shares outstanding		11,145		10,925		11,013		10,889

The accompanying notes are an integral part of these statements.

4

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Six Months Ended June 30, 2009

(Unaudited, amounts in thousands)

	Preferred		Common Stock					Additional Paid-in			Retained			Common Stock in			Accumulated Other Comprehensive		Total Shareholders’
	Stock		Shares		Amount			Capital			Earnings			Treasury			Income		Equity
Balance at January 1, 2009	$	28,461	10,247		$	10,247		$	115,489		$	31,523		$	(98	)	$	120	$	185,742
Stock-based compensation cost recognized in earnings		—	—			—			350			—			—			—		350
Issuance of restricted stock		—	107			107			(107	)		—			—			—		—
Forfeitures of restricted stock		—	(8	)		(8	)		8			—			—			—		—
Excess tax expense from stock-based compensation		—	—			—			(42	)		—			—			—		(42	)
Purchase of treasury stock (3 shares)		—	—			—			—			—			(25	)		—		(25	)
Comprehensive income:
Net earnings		—	—			—			—			1,956			—			—		1,956
Change in net unrealized gain on securities available-for-sale, net of deferred tax expense of $362		—	—			—			—			—			—			678		678
Total comprehensive income																				2,634
Dividends on preferred stock and amortization of preferred stock discount		257	—			—			—			(1,107	)		—			—		(850	)
Balance at June 30, 2009	$	28,718	10,346		$	10,346		$	115,698		$	32,372		$	(123	)	$	798	$	187,809

The accompanying notes are an integral part of this statement.

5

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)

	Six Months Ended June 30,
	2009			2008
Cash flows from operating activities:
Net earnings	$	1,956		$	1,651
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for loan losses		5,966			5,278
Amortization of premiums and discounts, net		402			672
Stock-based compensation		350			598
Depreciation		1,439			1,536
Gain on sale of loans		(394	)		(133	)
Loss on sale of foreclosed real estate		144			39
Increase in mortgages held-for-sale		(35,817	)		(16,775	)
Proceeds from sale of mortgage loans		35,193			18,304
Federal Home Loan Bank of Dallas stock dividends		(17	)		(118	)
Excess tax benefit from stock-based compensation		—			(81	)
(Increase) decrease in accrued interest receivable		(155	)		765
(Increase) decrease in other assets		590			(2,459	)
Increase (decrease) in accrued interest payable		(85	)		81
Increase (decrease) in other liabilities		(80	)		4,713
Net cash provided by operating activities		9,492			14,071
Cash flows from investing activities:
Purchases of available-for-sale securities		(64,249	)		(30,203	)
Principal collected on available-for-sale securities		8,480			775
Proceeds from sales of available-for-sale securities		3,026			—
Purchases of held-to-maturity securities		(32,222	)		—
Principal collected on held-to-maturity securities		19,603			26,465
Proceeds from sales of foreclosed real estate		1,224			1,739
Cash paid for acquisition		—			(33	)
Loan originations and principal collections, net		56,779			(79,608	)
Purchases of Federal Home Loan Bank stock		(10	)		(1,945	)
Purchases of premises and equipment		(183	)		(1,421	)
Net cash used by investing activities		(7,552	)		(84,231	)
Cash flows from financing activities:
Net increase in deposits		75,710			13,369
Proceeds from long term Federal Home Loan Bank of Dallas borrowings		—			77,000
Repayment of long term Federal Home Loan Bank of Dallas borrowings		(23	)		(25,000	)
Decrease in repurchase agreements		(48,723	)		(13,045	)
Payment on notes payable		(62	)		(93	)
Excess tax benefit from stock-based compensation		—			81
Proceeds from issuance of common stock, net of purchases of treasury stock		(25	)		400
Preferred dividends paid		(756	)		—
Net cash provided by financing activities		26,121			52,712
Net increase (decrease) in cash and cash equivalents		28,061			(17,448	)
Cash and cash equivalents at beginning of period		118,052			78,415
Cash and cash equivalents at end of period	$	146,113		$	60,967
Supplementary cash flows information:
Interest paid on deposits and borrowed funds	$	16,320		$	19,792
Income taxes paid		490			1,754
Noncash operating, investing and financing activities:
Real estate acquired in satisfaction of loans		6,948			3,340

The accompanying notes are an integral part of these statements.

6

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

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

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Encore Bancshares, Inc. is a holding company that was formed on March 28, 2000 as Guardian Holdings, Inc. and had no operations until it acquired GSF Holding, Inc., now known as Encore Holdings, Inc. (Encore Holdings), and its wholly-owned subsidiary, Guardian Savings and Loan Association effective September 30, 2000. Guardian Savings and Loan Association, a federally chartered savings institution, changed its name to Guardian Savings Bank effective September 28, 2000 and then to Encore Bank (the Bank) effective September 1, 2001. The Bank converted from a federal savings association to a national banking association effective March 30, 2007 and changed its name to Encore Bank, National Association. In connection with the conversion, we became a bank holding company and Encore Holdings was merged into Encore Bancshares, Inc. As part of a corporate reorganization following the conversion of the Bank to a national banking association, as of June 30, 2007, the Bank was merged with and into Encore Trust Company, N.A. (Encore Trust). The resulting bank, which was renamed Encore Bank, National Association (Encore Bank), operates as a national banking association with its main office in Houston, Texas. Since the merger, the business of Encore Trust is being conducted as a division of Encore Bank. Our election to become a financial holding company was effective July 21, 2008.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Encore Bancshares, Inc., Encore Bank, Linscomb & Williams, Inc. (Linscomb & Williams), and Town & Country Insurance Agency, Inc. (Town & Country). We have made all adjustments that, in our opinion, are necessary for a fair presentation of results of the interim periods, and all such adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements should be read in conjunction with our annual audited consolidated financial statements and related notes. The consolidated balance sheet at December 31, 2008 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (US GAAP).

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

These interim consolidated financial statements and the notes thereto should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008. Operating results for the six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009 or any other period.

Nature of Operations

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

Reclassification

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

7

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

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

Adoption of New Accounting Pronouncements

On January 1, 2009, we adopted the following new accounting pronouncements:

Financial Accounting Standards Board (FASB) Staff Position No. EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (EITF 03-6-1);

FASB Staff Position No. FAS 141(R)-1,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP 141(R)-1); and

SFAS No. 160,Noncontrolling Interest in Consolidated Financial Statements-An Amendment of ARB No. 51 (SFAS 160).

EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. We determined that our outstanding nonvested restricted stock awards are participating securities. Accordingly, earnings per common share is computed using the two-class method prescribed by Statement of Financial Accounting Standards (SFAS) 128,Earnings Per Share. In accordance with the adoption of the provisions of this standard, all previously reported earnings per common share data has been retrospectively adjusted to conform to the new computation method.

FSP 141(R)-1 provides additional guidance regarding the recognition, measurement and disclosure of assets and liabilities arising from contingencies in a business combination. FSP 141(R)-1 is effective for assets or liabilities arising from contingencies we acquire in business combinations occurring after January 1, 2009. The adoption of FSP 141(R)-1 had no effect on our consolidated financial statements; however, the future effect is dependant upon whether we make any acquisitions and the specifics of those acquisitions.

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 adoption of SFAS 160 did not have a material effect on our consolidated financial statements.

In the second quarter of 2009, we adopted the following accounting standard and FASB staff positions:

SFAS No. 165,Subsequent Events (SFAS 165). Issued in May 2009, SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The adoption of SFAS 165 did not have a material effect on our consolidated financial statements; however any future effect is dependent on the occurrence of subsequent events that fall under the scope of this standard.

FASB Staff Position No. FAS 107-1 and Accounting Principles Board (APB) 28-1,Interim Disclosures about Fair Value of Financial Instruments (FSP 107-1 and APB 28-1). FSP 107-1 and APB 28-1 amends SFAS 107,Disclosures about Fair Value of Financial Instruments, to require an entity to provide disclosures about fair value of financial instruments in interim financial information and amends APB Opinion No. 28,Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. Under FSP 107-1 and APB 28-1, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position, as required by SFAS 107. The new interim disclosures required by FSP 107-1 and APB 28-1 are included in our interim financial statements.

8

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

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

FASB Staff Position No. 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP 157-4). FSP 157-4 affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. FSP 157-4 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence.

FSP 157-4 also amended SFAS 157,Fair Value Measurements, to expand certain disclosure requirements. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively. The adoption of FSP 157-4 did not have a material effect on our consolidated financial statements.

FASB Staff Position No. FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments (FSP 115-2 and FSP 124-2). FSP 115-2 and FSP 124-2 (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under FSP 115-2 and FSP 124-2, declines in the fair value of 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 to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. The adoption of FSP 115-2 and FSP 124-2 did not have a material effect on our consolidated financial statements.

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

Comprehensive Income

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

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Unrealized holding gains (losses) on available-for-sale securities	$	(360	)	$	(140	)	$	1,040		$	4
Tax (expense) benefit		143			51			(362	)		(1	)
Net-of-tax amount	$	(217	)	$	(89	)	$	678		$	3

Subsequent Events

We have evaluated and determined that no significant subsequent events occurred through August 6, 2009.

9

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

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

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

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2009
Available-for-sale:
U.S. Government securities	$	40,258	$	4	$	(522	)	$	39,740
Securities of U.S. states and political subdivisions		1,296		—		(72	)		1,224
Mortgage-backed securities		82,412		2,205		(70	)		84,547
Other securities		4,402		—		(56	)		4,346
Total		128,368		2,209		(720	)		129,857
Marketable equity securities		2,516		64		—			2,580
Total available-for-sale securities	$	130,884	$	2,273	$	(720	)	$	132,437
Held-to-maturity:
Securities of U.S. states and political subdivisions	$	11,439	$	50	$	(465	)	$	11,024
Mortgage-backed securities		79,357		1,015		(12	)		80,360
Other securities		17,798		502		(59	)		18,241
Total held-to-maturity securities	$	108,594	$	1,567	$	(536	)	$	109,625
December 31, 2008
Available-for-sale:
Mortgage-backed securities	$	71,897	$	712	$	—		$	72,609
Other securities		4,202		—		(60	)		4,142
Total		76,099		712		(60	)		76,751
Marketable equity securities		2,016		49		—			2,065
Total available-for-sale securities	$	78,115	$	761	$	(60	)	$	78,816
Held-to-maturity:
Mortgage-backed securities	$	95,875	$	1,057	$	(4	)	$	96,928

10

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

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

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

Description of Securities	Number of Securities	Fair Value		Unrealized Losses
June 30, 2009:
Less than 12 months
Available-for-sale:
U.S. Government securities	5	$	23,646	$	(522	)
Securities of U.S. states and political subdivisions	2		1,224		(72	)
Mortgage-backed securities	1		5,019		(70	)
Other securities	2		479		(56	)
Total available-for-sale securities	10	$	30,368	$	(720	)
Held-to-maturity:
Securities of U.S. states and political subdivisions	17	$	8,704	$	(465	)
Mortgage-backed securities	1		958		(2	)
Other securities	3		2,158		(59	)
Total held-to-maturity securities	21	$	11,820	$	(526	)
More than 12 months
Held-to-maturity:
Mortgage-backed securities	5	$	806	$	(10	)
December 31, 2008:
Less than 12 months
Available-for-sale:
Other securities	1	$	310	$	(38	)
Held-to-maturity:
Mortgage-backed securities	2	$	536	$	(1	)
More than 12 months
Available-for-sale:
Other securities	1	$	165	$	(22	)
Held-to-maturity:
Mortgage-backed securities	3	$	287	$	(3	)

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

11

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

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

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

	Available-for-Sale Securities				Held-to-Maturity Securities
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	1,991	$	1,993	$	—	$	—
Over one year through five years		13,011		12,995		10,457		10,631
After five years through ten years		22,230		21,726		7,341		7,610
Over ten years		4,857		4,729		11,439		11,024
Total		42,089		41,443		29,237		29,265
Mortgage-backed and equity securities		88,795		90,994		79,357		80,360
Total securities	$	130,884	$	132,437	$	108,594	$	109,625

Mortgage-backed securities consist of federal agency pass-through securities and have a weighted average yield of 3.51% and 4.05% at June 30, 2009 and December 31, 2008. As of June 30, 2009, the mortgage-backed securities have contractual maturities from less than a year to 2039. Accrued interest receivable on mortgage-backed securities was $592 and $637 at June 30, 2009 and December 31, 2008.

At June 30, 2009 and December 31, 2008, securities with a carrying value of $42,932 and $75,698 were pledged as collateral for repurchase agreements, public funds, trust deposits, and for other purposes, as required or permitted by law.

Gross realized gains and losses on sales of available-for-sale securities were zero for the six months ended June 30, 2009 and 2008.

Mortgage-backed securities previously classified as available-for-sale were transferred to held-to-maturity during 2004. The amortized cost and fair value at the time of transfer were $127,049 and $128,782. The securities were transferred at fair value and the unrealized gain net of tax was recorded in accumulated other comprehensive income. Amortization of unrealized gain was $188 and $119 for the six months ended June 30, 2009 and 2008.

12

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

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

NOTE C – LOANS RECEIVABLE

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

	June 30, 2009		December 31, 2008
Commercial:
Commercial	$	126,079	$	135,534
Commercial real estate		308,441		311,909
Real estate construction		78,045		95,668
Total commercial		512,565		543,111
Consumer:
Residential real estate first lien		232,885		241,969
Residential real estate second lien		292,891		302,141
Home equity lines		77,793		82,555
Consumer installment - indirect		11,202		14,409
Consumer other		21,484		34,219
Total consumer		636,255		675,293
Total loans receivable	$	1,148,820	$	1,218,404

Included in loans receivable is $2,822 and $2,925 of net deferred loan origination costs at June 30, 2009 and December 31, 2008.

Changes in the allowance for loan losses were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Balance at beginning of period	$	26,664		$	11,603		$	25,105		$	11,161
Provision for loan losses		2,927			3,777			5,966			5,278
Loans charged-off		(4,583	)		(3,477	)		(6,236	)		(4,585	)
Recoveries of loans previously charged-off		206			151			379			200
Balance at end of period	$	25,214		$	12,054		$	25,214		$	12,054

13

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

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

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

	June 30, 2009		December 31, 2008
Impaired loans on nonaccrual without a valuation allowance	$	6,773	$	10,408
Impaired loans on nonaccrual with a valuation allowance		16,929		15,272
Total impaired loans (1)	$	23,702	$	25,680
Valuation allowance related to impaired loans	$	5,191	$	7,288
Total nonaccrual loans	$	28,552	$	30,531
Total accruing loans past due 90 days or more (2)	$	—	$	646

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

(2) Beginning in 2009, loans past due 90 days or more are either charged-off or included in nonaccrual loans.

NOTE D – REGULATORY MATTERS

We and Encore Bank are subject to various regulatory capital adequacy requirements administered by the Board of Governors of the Federal Reserve System (Federal Reserve) and the Office of the Comptroller of the Currency (OCC). Actual and minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as of June 30, 2009 are set forth in the following table:

	Actual				For Capital Adequacy Purposes				To Be Categorized as Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2009
Tier 1 capital (to average assets)
Tier 1 (leverage)
Encore Bancshares, Inc.	$	174,656	11.22	%	$	62,286	4.00	%		N/A	N/A
Encore Bank, N.A.		142,658	9.19			62,117	4.00		$	77,646	5.00	%
Tier 1 capital (to risk-based assets)
Encore Bancshares, Inc.	$	174,656	14.99	%	$	46,617	4.00	%		N/A	N/A
Encore Bank, N.A.		142,658	12.27			46,521	4.00		$	69,781	6.00	%
Total capital (to risk-based assets)
Encore Bancshares, Inc.	$	189,363	16.25	%	$	93,235	8.00	%		N/A	N/A
Encore Bank, N.A.		157,345	13.53			93,041	8.00		$	116,302	10.00	%

NOTE E – COMMITMENTS AND CONTINGENCIES

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

14

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

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

NOTE F – EARNINGS PER COMMON SHARE

On January 1, 2009, we adopted EITF 03-6-1, which requires that nonvested restricted stock be included in the calculation of basic average common shares outstanding for all periods presented. Prior to January 1, 2009, we had included the effect of nonvested restricted stock in the calculation of diluted average common shares outstanding.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Basic:
Earnings available to common shareholders	$	267	$	481	$	849	$	1,651
Average common shares outstanding, including nonvested restricted stock		10,334		10,202		10,284		10,173
Per Share	$	0.03	$	0.05	$	0.08	$	0.16
Diluted:
Average common shares outstanding		10,334		10,202		10,284		10,173
Add: Net effect of the assumed exercise of stock options		36		411		18		418
Contingent share-based consideration		775		312		711		298
Diluted average common shares outstanding		11,145		10,925		11,013		10,889
Per Share	$	0.02	$	0.04	$	0.08	$	0.15
Anti-dilutive stock options and warrants not included in treasury stock method computation		938		—		1,147		—

Earnings available to common shareholders are net earnings after deducting preferred dividends of $554 and $1,107 in the three months and six months ended June 30, 2009. No dividends have been declared on our common stock.

NOTE G – FAIR VALUE OF ASSETS AND LIABILITIES

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

In accordance with SFAS 157,Fair Value Measurements, we group our financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

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

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

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

15

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

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

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

Description	Total		Level 1		Level 2
Available-for-sale securities (1)	$	128,754	$	42,983	$	85,771
Total	$	128,754	$	42,983	$	85,771

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

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

Description	Total		Level 2		Losses for the Six Months Ended June 30, 2009
Loans (1)	$	21,890	$	21,890	$	1,919
Investment in real estate (2)		8,032		8,032		251
Total	$	29,922	$	29,922	$	2,170

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

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

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

	June 30, 2009				December 31, 2008
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	146,113	$	146,113	$	118,052	$	118,052
Securities available-for-sale		132,437		132,437		78,816		78,816
Securities held-to-maturity		108,594		109,625		95,875		96,928
Mortgages held-for-sale		1,168		1,168		150		150
Loans receivable, net		1,123,606		1,143,570		1,193,299		1,220,926
Federal Home Loan Bank of Dallas stock		9,561		9,561		9,534		9,534
Accrued interest receivable		5,720		5,720		5,565		5,565
Financial liabilities:
Deposits	$	1,176,507	$	1,177,289	$	1,100,797	$	1,102,255
Borrowings and repurchase agreements		223,218		229,121		272,026		277,802
Accrued interest payable		1,259		1,259		1,344		1,344
Junior subordinated debentures		20,619		20,352		20,619		21,198

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.

16

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

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

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

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

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.

17

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

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

Federal Home Loan Bank of Dallas Stock

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

Investment in Real Estate

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

Goodwill and Other Intangible Assets

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

We amortize client relationship intangibles on an accelerated basis based on useful lives of 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 noninterest-bearing checking accounts and money market accounts, is equal to the amount payable upon demand as of June 30, 2009 and December 31, 2008. The fair value of certificates of deposit is based on the lower of redemption or discounted value of contractual cash flows. Discount rates for certificates of deposit are estimated using current market rates.

Borrowings and Repurchase Agreements

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

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

Junior Subordinated Debentures

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

Accrued Interest

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

18

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

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

Unrecognized Financial Instruments

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

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

Nonfinancial Instruments

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

NOTE H – SEGMENT INFORMATION

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

The accounting policies of each line of business are the same as those described in the summary of significant accounting policies included in Note A to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. Revenues, expenses, and assets are recorded by each line of business, and we separately review financial information. In addition to direct expenses, each line of business was allocated certain general corporate expenses such as executive administration, accounting, internal audit, and human resources based on the average asset level of the operating segment. Activities that are not directly attributable to the reportable operating segments, including the elimination of intercompany transactions, are presented under “Other”.

19

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

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

Financial results by operating segment were as follows:

	Banking			Wealth Management		Insurance		Other			Consolidated
For the three months ended June 30, 2009
Net interest income (expense)	$	11,726		$	38	$	3	$	(309	)	$	11,458
Provision for loan losses		2,927			—		—		—			2,927
Noninterest income		760			4,087		1,480		—			6,327
Noninterest expense		9,614			3,040		1,057		—			13,711
Earnings (loss) before income taxes		(55	)		1,085		426		(309	)		1,147
Income tax expense (benefit)		(102	)		384		150		(106	)		326
Net earnings (loss)	$	47		$	701	$	276	$	(203	)		821
Total assets at June 30, 2009	$	1,623,467		$	49,563	$	7,625	$	(63,937	)	$	1,616,718
For the three months ended June 30, 2008
Net interest income (expense)	$	11,116		$	37	$	22	$	(330	)	$	10,845
Provision for loan losses		3,777			—		—		—			3,777
Noninterest income		541			4,660		1,458		(24	)		6,635
Noninterest expense		9,298			2,725		1,049		—			13,072
Earnings (loss) before income taxes		(1,418	)		1,972		431		(354	)		631
Income tax expense (benefit)		(586	)		709		154		(127	)		150
Net earnings (loss)	$	(832	)	$	1,263	$	277	$	(227	)	$	481
Total assets at June 30, 2008	$	1,472,045		$	48,146	$	13,188	$	(72,666	)	$	1,460,713
For the six months ended June 30, 2009
Net interest income (expense)	$	23,462		$	76	$	6	$	(625	)	$	22,919
Provision for loan losses		5,966			—		—		—			5,966
Noninterest income		1,421			7,836		3,174		—			12,431
Noninterest expense		18,220			6,138		2,090		—			26,448
Earnings (loss) before income taxes		697			1,774		1,090		(625	)		2,936
Income tax expense (benefit)		189			627		383		(219	)		980
Net earnings (loss)	$	508		$	1,147	$	707	$	(406	)	$	1,956
Total assets at June 30, 2009	$	1,623,467		$	49,563	$	7,625	$	(63,937	)	$	1,616,718
For the six months ended June 30, 2008
Net interest income (expense)	$	21,246		$	101	$	63	$	(686	)	$	20,724
Provision for loan losses		5,278			—		—		—			5,278
Noninterest income		1,032			9,067		3,190		(5	)		13,284
Noninterest expense		18,373			5,795		2,153		—			26,321
Earnings (loss) before income taxes		(1,373	)		3,373		1,100		(691	)		2,409
Income tax expense (benefit)		(601	)		1,213		394		(248	)		758
Net earnings (loss)	$	(772	)	$	2,160	$	706	$	(443	)	$	1,651
Total assets at June 30, 2008	$	1,472,045		$	48,146	$	13,188	$	(72,666	)	$	1,460,713

20

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Cautionary Note Regarding Forward-Looking Statements

Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and involve a number of risks and uncertainties, many of which are beyond our control. The words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “continue,” “would,” “could,” “hope,” “might,” “assume,” “objective,” “seek,” “plan,” “strive” and similar words, or the negatives of these words, are intended to identify forward-looking statements.

Many possible events or factors could affect our future financial results and performance and could cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements. In addition to the other factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K, 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-Q. These statements speak only as of the date of this report (or an earlier date to the extent applicable). We undertake no obligation to update publicly such forward-looking statements in light of new information or future events.

Overview

Encore Bancshares, Inc. is a bank holding company and wealth management organization that provides banking, investment management, financial planning and insurance services to professional firms, privately-owned businesses, investors and affluent individuals. We are headquartered in Houston, Texas and currently manage, through our primary subsidiary, Encore Bank, National Association (Encore Bank), eleven private client offices in the greater Houston market and six private client offices in southwest Florida. We also operate five wealth management offices and three insurance offices in Texas. As of June 30, 2009, we reported, on a consolidated basis, total assets of $1.6 billion, total loans of $1.1 billion, total deposits of $1.2 billion, shareholders’ equity of $187.8 million and $2.3 billion in assets under management.

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

Results of Operations

Net earnings for the quarter ended June 30, 2009 were $821,000, compared with $481,000 for the quarter ended June 30, 2008. Earnings per diluted common share for the second quarter of 2009 were $0.02, compared with $0.04 for the comparable period of 2008. The decrease in diluted earnings per share was due primarily to the accrual of dividends on preferred stock which was issued in the fourth quarter of 2008. Results for the second quarter of 2009 include an improvement in net interest income on a fully taxable-equivalent basis (TE) of $736,000, or 6.8%, and a decrease in the provision for loan losses of $850,000. Partially offsetting these improvements was a $639,000 increase in noninterest expense, which was due primarily to a special assessment from the FDIC.

We posted a return on average common equity of 0.67% and 1.21%, a return on average assets of 0.21% and 0.13%, and an efficiency ratio of 76.14% and 73.71% for the quarters ended June 30, 2009 and 2008. The efficiency ratio is calculated by dividing total noninterest expense (excluding amortization of intangibles) by the sum of net interest income and noninterest income (excluding gains or losses on sales of securities).

Net earnings for the six months ended June 30, 2009 were $2.0 million, compared with $1.7 million, for the same period of 2008. Earnings per diluted common share for the six months ended June 30, 2009 were $0.08 compared with $0.15 for the same period of 2008. Net interest income (TE) increased by $2.4 million, but this increase was partly offset by a $688,000 increase in the provision for loan losses and a $853,000 decrease in noninterest income. We posted a return on average common equity of 1.08% and 2.08%, a return on average assets of 0.25% and 0.23%, and an efficiency ratio of 73.86% and 76.29% for the six months ended June 30, 2009 and 2008.

Net Interest Income

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

Net interest income (TE) was $11.6 million for the three months ended June 30, 2009, an increase of $736,000, or 6.8%, compared with the second quarter of 2008. Average earning assets grew $110.4 million, or 7.9%, due primarily to growth in securities. The net interest margin (TE) decreased 4 basis points to 3.09% for the same comparison period. The margin compression was due in part to greater liquidity on the balance sheet and a shifting in the deposit mix as clients have moved to certificates of deposit in pursuit of higher yields. In addition, average noninterest-bearing deposits were $159.3 million for the second quarter of 2009, a $35.8 million, or 29.0%, increase compared with the same period of 2008.

Net interest income (TE) was $23.1 million for the six months ended June 30, 2009, an increase of $2.4 million, or 11.6%, compared with the same period of 2008. Average interest-earning assets increased $125.7 million, or 9.2%, due primarily to growth in securities and loans. For the six months ended June 30, 2009, the net interest margin (TE) was 3.11%, an increase of 8 basis points, compared with the same period of 2008. The improvement in the margin was due primarily to a falling interest rate environment and a steepening of the yield curve. Average loans were $1.2 billion for the six months ended June 30, 2009, a $42.3 million, or 3.7%, increase compared with the same period of 2008.

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The following tables set forth for the periods indicated an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts and the average rate earned or paid. The tables also set forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities and the net interest margin for the same periods. All balances are daily average balances and nonaccrual loans were included in the average loans with a zero yield for the purpose of calculating the rate earned on total loans. To give effect to our tax-exempt securities and loans, taxable-equivalent adjustments have been made with respect to these assets in 2009. Taxable-equivalent amounts in 2008 were immaterial.

	Three Months Ended June 30,
	2009							2008
	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate
	(dollars in thousands)
Assets:
Interest-earning assets:
Loans (1)	$	1,166,448		$	17,291	5.95	%	$	1,170,959		$	18,238	6.26	%
Mortgages held-for-sale		1,612			32	7.96			1,151			25	8.74
Securities (1)		215,473			2,173	4.04			139,510			1,250	3.60
Federal funds sold and other		121,328			156	0.52			82,841			552	2.68
Total interest-earning assets (1)		1,504,861			19,652	5.24			1,394,461			20,065	5.79
Less: Allowance for loan losses		(25,656	)						(11,526	)
Noninterest-earning assets		111,519							103,918
Total assets	$	1,590,724						$	1,486,853
Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Interest checking	$	177,393		$	212	0.48	%	$	194,973		$	641	1.32	%
Money market and savings		243,276			685	1.13			307,047			1,363	1.79
Time deposits		564,583			4,746	3.37			466,199			5,119	4.42
Total interest-bearing deposits		985,252			5,643	2.30			968,219			7,123	2.96
Borrowings and repurchase agreements		226,118			2,119	3.76			202,229			1,767	3.51
Junior subordinated debentures		20,619			309	6.01			20,619			330	6.44
Total interest-bearing liabilities		1,231,989			8,071	2.63			1,191,067			9,220	3.11
Noninterest-bearing liabilities:
Noninterest-bearing deposits		159,257							123,453
Other liabilities		11,366							12,015
Total liabilities		1,402,612							1,326,535
Shareholders’ equity		188,112							160,318
Total liabilities and shareholders’ equity	$	1,590,724						$	1,486,853
Net interest income (1)				$	11,581						$	10,845
Net interest spread (1)						2.61	%						2.68	%
Net interest margin (1)						3.09	%						3.13	%

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

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	Six Months Ended June 30,
	2009							2008
	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate
	(dollars in thousands)
Assets:
Interest-earning assets:
Loans (1)	$	1,187,456		$	34,835	5.92	%	$	1,145,199		$	36,616	6.43	%
Mortgages held-for-sale		1,502			60	8.06			1,308			57	8.76
Securities (1)		201,789			4,146	4.14			140,804			2,569	3.67
Federal funds sold and other		108,393			312	0.58			86,130			1,355	3.16
Total interest-earning assets (1)		1,499,140			39,353	5.29			1,373,441			40,597	5.94
Less: Allowance for loan losses		(25,420	)						(11,352	)
Noninterest-earning assets		111,270							103,092
Total assets	$	1,584,990						$	1,465,181
Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Interest checking	$	179,672		$	425	0.48	%	$	188,728		$	1,594	1.70	%
Money market and savings		235,880			1,363	1.17			320,144			3,743	2.35
Time deposits		559,821			9,587	3.45			450,398			10,328	4.61
Total interest-bearing deposits		975,373			11,375	2.35			959,270			15,665	3.28
Borrowings and repurchase agreements		240,741			4,235	3.55			198,042			3,522	3.58
Junior subordinated debentures		20,619			625	6.11			20,619			686	6.69
Total interest-bearing liabilities		1,236,733			16,235	2.65			1,177,931			19,873	3.39
Noninterest-bearing liabilities:
Noninterest-bearing deposits		150,090							115,179
Other liabilities		10,820							12,664
Total liabilities		1,397,643							1,305,774
Shareholders’ equity		187,347							159,407
Total liabilities and shareholders’ equity	$	1,584,990						$	1,465,181
Net interest income (1)				$	23,118						$	20,724
Net interest spread (1)						2.64	%						2.55	%
Net interest margin (1)						3.11	%						3.03	%

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

Provision for Loan Losses

The provision for loan losses is the amount we determine necessary to be charged against the current period’s earnings to maintain the allowance for loan losses at a level that we consider adequate in relation to the estimated losses inherent in the loan portfolio. The provision was $2.9 million and $6.0 million for the three months and six months ended June 30, 2009, compared with $3.8 million and $5.3 million for the same periods of 2008. The changes in the provision in both periods compared with the same periods of 2008 reflect the amount we considered necessary to fund estimated losses inherent in the loan portfolio primarily as a result of the recessionary economic environment, weakness in our Florida market, higher net charge-offs in 2009 and other qualitative factors.

Noninterest Income

Noninterest income represented 35.57% and 37.96% of total revenue for the three months ended June 30, 2009 and 2008.

Noninterest income decreased $308,000, or 4.6%, to $6.3 million for the three months ended June 30, 2009, compared with the same period in 2008. The decrease was due primarily to a $573,000, or 12.3%, decrease in trust and investment management fees. The decline in trust and investment management fees was due to a 16.0% decrease in assets under

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management, as a result of depreciation in values of equity markets. Partly offsetting this decline in trust and investment management fees was a gain of $222,000 on sale of approximately $9.7 million in second mortgage loans during the second quarter of 2009.

Noninterest income decreased $853,000, or 6.4%, to $12.4 million for the six months ended June 30, 2009, compared with the same period in 2008. The decrease was due primarily to a $1.2 million, or 13.6%, decrease in trust and investment management fees.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(dollars in thousands)
Trust and investment management fees	$	4,087	$	4,660	$	7,836	$	9,067
Mortgage banking		351		135		502		189
Insurance commissions and fees		1,404		1,385		3,014		3,112
Other		485		455		1,079		916
Total noninterest income	$	6,327	$	6,635	$	12,431	$	13,284

Noninterest Expense

Noninterest expense was $13.7 million for the second quarter of 2009, up $639,000, or 4.9%, compared with the second quarter of 2008, primarily due to a special FDIC assessment of $684,000, which was levied on all banks to replenish the FDIC insurance fund. In addition, we recorded higher professional fees, which were primarily related to higher legal and audit fees at Encore Bank.

Noninterest expense for the six months ended June 30, 2009 was $26.4 million, essentially flat with the same period of 2008. The special FDIC assessment was offset by lower compensation expense in 2009 primarily due to a severance charge in 2008 and no such charge in 2009.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(dollars in thousands)
Compensation	$	7,231	$	7,467	$	14,745	$	15,545
Non-staff expenses:
Occupancy		1,554		1,485		3,008		2,923
Equipment		449		487		882		1,018
Advertising and promotion		200		219		416		423
Outside data processing		783		717		1,547		1,411
Professional fees		1,043		739		1,979		1,895
Intangible amortization		169		188		340		375
FDIC assessment		746		30		798		61
Other		1,536		1,740		2,733		2,670
Total noninterest expense	$	13,711	$	13,072	$	26,448	$	26,321

Income Tax Expense

The provision for income taxes increased to $326,000 for the three months ended June 30, 2009, compared with $150,000 for the same three months of 2008. The effective tax rate for the three months ended June 30, 2009 and 2008 was 28.4% and 23.8%. The provision for income taxes increased to $980,000 for the six months ended June 30, 2009, compared with $758,000 for the same period of 2008. The effective tax rate for the six months ended June 30, 2009 and 2008 was 33.4% and 31.5%.

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Result of Segment Operations

We manage the company along three operating segments: banking, wealth management and insurance. The column identified as “Other” includes the parent company and the elimination transactions between segments. The accounting policies of the individual operating segments are the same as our accounting policies described in Note A to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.

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

	Banking			Wealth Management		Insurance		Other			Consolidated
	(dollars in thousands)
Three months ended June 30, 2009
Net interest income (expense)	$	11,726		$	38	$	3	$	(309	)	$	11,458
Provision for loan losses		2,927			—		—		—			2,927
Noninterest income		760			4,087		1,480		—			6,327
Noninterest expense		9,614			3,040		1,057		—			13,711
Earnings (loss) before income taxes		(55	)		1,085		426		(309	)		1,147
Income tax expense (benefit)		(102	)		384		150		(106	)		326
Net earnings (loss)	$	47		$	701	$	276	$	(203	)	$	821
Total assets at June 30, 2009	$	1,623,467		$	49,563	$	7,625	$	(63,937	)	$	1,616,718
Three months ended June 30, 2008
Net interest income (expense)	$	11,116		$	37	$	22	$	(330	)	$	10,845
Provision for loan losses		3,777			—		—		—			3,777
Noninterest income		541			4,660		1,458		(24	)		6,635
Noninterest expense		9,298			2,725		1,049		—			13,072
Earnings (loss) before income taxes		(1,418	)		1,972		431		(354	)		631
Income tax expense (benefit)		(586	)		709		154		(127	)		150
Net earnings (loss)	$	(832	)	$	1,263	$	277	$	(227	)	$	481
Total assets at June 30, 2008	$	1,472,045		$	48,146	$	13,188	$	(72,666	)	$	1,460,713
Six months ended June 30, 2009
Net interest income (expense)	$	23,462		$	76	$	6	$	(625	)	$	22,919
Provision for loan losses		5,966			—		—		—			5,966
Noninterest income		1,421			7,836		3,174		—			12,431
Noninterest expense		18,220			6,138		2,090		—			26,448
Earnings (loss) before income taxes		697			1,774		1,090		(625	)		2,936
Income tax expense (benefit)		189			627		383		(219	)		980
Net earnings (loss)	$	508		$	1,147	$	707	$	(406	)	$	1,956
Total assets at June 30, 2009	$	1,623,467		$	49,563	$	7,625	$	(63,937	)	$	1,616,718
Six months ended June 30, 2008
Net interest income (expense)	$	21,246		$	101	$	63	$	(686	)	$	20,724
Provision for loan losses		5,278			—		—		—			5,278
Noninterest income		1,032			9,067		3,190		(5	)		13,284
Noninterest expense		18,373			5,795		2,153		—			26,321
Earnings (loss) before income taxes		(1,373	)		3,373		1,100		(691	)		2,409
Income tax expense (benefit)		(601	)		1,213		394		(248	)		758
Net earnings (loss)	$	(772	)	$	2,160	$	706	$	(443	)	$	1,651
Total assets at June 30, 2008	$	1,472,045		$	48,146	$	13,188	$	(72,666	)	$	1,460,713

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Banking

Our banking segment had net earnings of $47,000 for the three months ended June 30, 2009, compared with a loss of $832,000 for the same period in 2008. Net interest income increased $610,000, or 5.5%, and the provision for loan losses decreased $850,000. Net earnings for the six months ended June 30, 2009 was $508,000, compared with a net loss of $772,000 for same period in 2008. Net interest income increased $2.2 million, or 10.4%, and noninterest income increased $389,000, while the provision for loan losses increased $688,000.

Net interest income for the three months ended June 30, 2009 increased $610,000, or 5.5%, compared with the same period of 2008. Net interest income for the six months ended June 30, 2009 increased $2.2 million, or 10.4%, compared with the same period of 2008. The increase in both periods resulted primarily from an increase in the volume of interest-earning assets. See the analysis of net interest income included in the section of this report captioned “—Net Interest Income.”

The provision for loan losses for the three months ended June 30, 2009 totaled $2.9 million, compared with $3.8 million for the same period of 2008. The provision for loan losses for the six months ended June 30, 2009 totaled $6.0 million, compared with $5.3 million for the same period of 2008. See analysis of the provision for loan losses included in the section of this report captioned “—Provision for Loan Losses.”

Noninterest income for the three months ended June 30, 2009 increased $219,000 compared with the same period in 2008. Noninterest income for the six months ended June 30, 2009 increased $389,000 compared with the same period of 2008. The increase in both periods was due primarily to higher mortgage banking income.

Noninterest expense for the three months ended June 30, 2009 increased $316,000, or 3.4%, primarily due to the FDIC special assessment. Noninterest expense for the six months ended June 30, 2009 was essentially flat compared with the same period of 2008, as the special FDIC assessment was offset by a lower compensation expense, resulting from a severance expense in the first quarter of 2008.

Wealth Management

Net earnings for the three months ended June 30, 2009 decreased $562,000, or 44.5%, compared with the same period in 2008. Net earnings for the six months ended June 30, 2009 decreased $1.0 million, or 46.9%, compared with the same period in 2008. The decrease in earnings in both periods was due primarily to a decrease in assets under management, resulting in a decline in fees. Assets under management decreased 16.0% from June 30, 2008 to $2.3 billion as of June 30, 2009.

Noninterest income for the three months ended June 30, 2009 decreased $573,000, or 12.3%, compared with the same period in 2008, due primarily to the aforementioned decrease in assets under management. Noninterest income for the six months ended June 30, 2009, decreased $1.2 million, or 13.6%.

Noninterest expense for the three months ended June 30, 2009 increased $315,000, or 11.6%, compared with the same period in 2008, due primarily to a credit in 2008 for a legal settlement. Noninterest expense for the six months ended June 30, 2009 increased $343,000, or 5.9%.

Insurance

Net earnings, noninterest income and noninterest expense for the three months and six months ended June 30, 2009 were flat compared with the same periods of 2008.

Other

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

Financial Condition

Our total assets increased $28.9 million, or 1.8%, to $1.6 billion as of June 30, 2009 compared with December 31, 2008. Our loan portfolio declined $69.6 million, or 5.7%, to $1.1 billion as of June 30, 2009. Our securities portfolio increased $66.3 million, or 38.0%, to $241.0 million compared with $174.7 million as of December 31, 2008. Shareholders’ equity increased $2.1 million, or 1.1%, to $187.8 million compared with $185.7 million as of December 31, 2008.

Loan Portfolio

Our primary lending focus is to professional firms, privately-owned businesses, investors and affluent individuals. To these customers, we make commercial, commercial real estate, real estate construction, residential real estate and consumer loans. Total commercial loans, which consist of commercial, commercial real estate and real estate construction loans, accounted for 44.6% of our portfolio as of June 30, 2009. Total consumer loans, which consist of residential real estate, home equity lines of credit, consumer installment-indirect and other consumer loans, made up 55.4% of our loan portfolio as of June 30, 2009.

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Total loans were $1.1 billion as of June 30, 2009, a decrease of $69.6 million, or 5.7%, compared with December 31, 2008. The decrease in the loan portfolio was due to a combination of our construction portfolio, which experienced pay downs due to a slowdown in residential real estate construction in Houston and to our consumer loan portfolios as we experienced a rise in refinancing in our first and second mortgage portfolios and pay downs in our HELOC, auto and other consumer loans. In April and June, we sold second mortgage loans totaling approximately $9.7 million. We extended approximately $100.4 million in new credit during the second quarter of 2009 to consumers and businesses.

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

	June 30, 2009				December 31, 2008
	Amount		Percent		Amount		Percent
	(dollars in thousands)
Commercial:
Commercial	$	126,079	11.0	%	$	135,534	11.1	%
Commercial real estate		308,441	26.8			311,909	25.6
Real estate construction		78,045	6.8			95,668	7.9
Total commercial		512,565	44.6			543,111	44.6
Consumer:
Residential real estate first lien		232,885	20.3			241,969	19.8
Residential real estate second lien		292,891	25.5			302,141	24.8
Home equity lines		77,793	6.8			82,555	6.8
Consumer installment - indirect		11,202	1.0			14,409	1.2
Consumer other		21,484	1.8			34,219	2.8
Total consumer		636,255	55.4			675,293	55.4
Total loans receivable	$	1,148,820	100.0	%	$	1,218,404	100.0	%

Nonperforming Assets

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

	June 30, 2009			December 31, 2008
	(dollars in thousands)
Nonaccrual loans	$	28,552		$	30,531
Accruing loans past due 90 days or more (1)		—			646
Restructured loans (2)		—			—
Total nonperforming loans		28,552			31,177
Investment in real estate		8,032			2,781
Total nonperforming assets	$	36,584		$	33,958
Nonperforming assets to total loans and investment in real estate		3.16	%		2.78	%

(1) Beginning in 2009, loans past due 90 days or more are either charged-off or included in nonaccrual loans.

(2) All troubled debt restructurings are included in nonaccrual loans.

Nonperforming assets were $36.6 million and $34.0 million as of June 30, 2009 and December 31, 2008. Our ratio of nonperforming assets to total loans and investment in real estate was 3.16% and 2.78% as of June 30, 2009 and December 31, 2008. Investment in real estate was $8.0 million at June 30, 2009 compared with $2.8 million at December 31, 2008, a $5.3 million increase due primarily to repossession of commercial real estate property in Florida and several homes under construction in Houston.

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

	June 30, 2009				December 31, 2008
	Outstanding Balance		Specific Allocation of Allowance		Outstanding Balance		Specific Allocation of Allowance
Commercial:
Commercial	$	1,831	$	1,534	$	5,643	$	4,267
Commercial real estate		14,136		2,116		11,166		1,628
Real estate construction		5,245		1,541		9,975		1,393
Total commercial		21,212		5,191		26,784		7,288
Consumer:
Residential real estate first lien (1)		5,898		—		3,601		—
Residential real estate second lien and home equity lines		1,363		—		731		—
Consumer		79		—		61		—
Total consumer		7,340		—		4,393		—
Total nonperforming loans	$	28,552	$	5,191	$	31,177	$	7,288

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

The decrease in nonaccrual commercial loans was primarily attributable to the payoff of a $3.0 million loan to a lawyer in Houston. This decrease was partially offset by the addition of several commercial real estate loans in Florida. Nonaccrual construction loans decreased primarily due to the repossession of properties securing a $2.4 million loan to a Houston residential builder. The increase in residential real estate first lien nonaccrual loans was due primarily to residential loans in Florida.

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

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

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

Net charge-offs for the first six months of 2009 were $5.9 million, or 0.99% of average total loans on an annualized basis, compared with $4.4 million, or 0.77% of average total loans on an annualized basis for the first six months of 2008. The increase was due primarily to a rise in first mortgage net charge-offs, which consisted mostly of loans in Florida. We also experienced a modest increase in second mortgage net charge-offs, which resulted from the deteriorating economy. Net charge-offs in the first six months of 2008 include a $2.1 million partial charge-off of a loan to a Houston law firm.

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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 Six Months Ended June 30, 2009			As of and for the Year Ended December 31, 2008
	(dollars in thousands)
Average loans outstanding	$	1,187,456		$	1,170,717
Total loans outstanding at end of period	$	1,148,820		$	1,218,404
Allowance for loan losses at beginning of period	$	25,105		$	11,161
Charge-offs:
Commercial:
Commercial		(1,032	)		(8,601	)
Commercial real estate		(656	)		(1,527	)
Real estate construction		(713	)		(830	)
Total commercial		(2,401	)		(10,958	)
Consumer:
Residential real estate first lien		(1,480	)		(634	)
Residential real estate second lien		(1,088	)		(1,323	)
Home equity lines		(799	)		(1,813	)
Consumer installment - indirect		(411	)		(1,016	)
Consumer other		(57	)		(80	)
Total consumer		(3,835	)		(4,866	)
Total charge-offs		(6,236	)		(15,824	)
Recoveries:
Commercial:
Commercial		84			139
Commercial real estate		—			6
Real estate construction		6			—
Total commercial		90			145
Consumer:
Residential real estate first lien		35			41
Residential real estate second lien		30			130
Home equity lines		112			9
Consumer installment - indirect		112			139
Consumer other		—			129
Total consumer		289			448
Total recoveries		379			593
Net charge-offs		(5,857	)		(15,231	)
Provision for loan losses		5,966			29,175
Allowance for loan losses at end of period	$	25,214		$	25,105
Ratio of net charge-offs to average loans		0.99	%		1.30	%
Ratio of allowance for loan losses to period end loans		2.19			2.06
Ratio of allowance for loan losses to nonperforming loans		88.31			80.52

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Securities

Total securities were $241.0 million as of June 30, 2009, an increase of $66.3 million, or 38.0%, compared with $174.7 million as of December 31, 2008. The increase was due to securities purchases which consisted of U.S. Government, municipal and corporate bonds.

Deposits

Our deposits averaged $1.1 billion for the six months ended June 30, 2009, an increase of $64.1 million, or 6.0%, over average deposits for the year ended December 31, 2008. As of June 30, 2009, core deposits (which consist of noninterest-bearing deposits, interest checking, money market and savings and time deposits less than $100,000) were $832.3 million, or 70.7%, of total deposits, while time deposits $100,000 and greater and brokered deposits made up 29.3% of total deposits. As of June 30, 2009, total deposits increased $75.7 million, or 6.9%, to $1.2 billion compared with total deposits as of December 31, 2008. The increase was due primarily to an increase in business money market accounts and certificates of deposit.

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

	Six Months Ended June 30, 2009				Year Ended December 31, 2008
	Average Balance		Average Rate		Average Balance		Average Rate
	(dollars in thousands)
Noninterest-bearing deposits	$	150,090	—	%	$	120,682	—	%
Interest checking		179,672	0.48			187,412	1.34
Money market and savings		235,880	1.17			291,749	1.97
Time deposits less than $100,000		207,255	3.60			195,321	4.39
Core deposits		772,897	1.43			795,164	2.12
Time deposits $100,000 and greater		318,523	3.44			239,696	4.25
Brokered deposits		34,043	2.64			26,458	3.15
Total deposits	$	1,125,463	2.04	%	$	1,061,318	2.63	%

Borrowings, Repurchase Agreements and Junior Subordinated Debentures

We utilize borrowings to supplement deposits in funding our lending and investing activities. These borrowings are typically advances from the Federal Home Loan Bank of Dallas (FHLB), which have terms ranging from overnight to several years. All borrowings from the FHLB are collateralized by a blanket lien on Encore Bank’s mortgage-related assets. Additionally, we borrow from customers using investment securities as collateral and have issued junior subordinated debentures to subsidiary trusts.

Our borrowings and repurchase agreements were $223.2 million as of June 30, 2009. The outstanding balance as of June 30, 2009 includes $210.0 million in long term advances and $13.3 million in repurchase agreements with clients. Included in the long term advances are $95.0 million of long term advances that have call provisions that are at the discretion of the FHLB which could shorten the maturity of the borrowings.

We decreased our borrowings and repurchase agreements $48.8 million, or 17.9%, to $223.2 million as of June 30, 2009 from $272.0 million as of December 31, 2008. The decrease was due primarily to a decrease in repurchase agreements with clients, as clients shifted into demand deposit accounts.

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

Description	Issuance and Call Dates (1)	Trust Preferred Securities Outstanding		Interest Rate as of June 30, 2009		Fixed/ Adjustable	Interest Rate Basis	Junior Subordinated Debt Owed to Trusts		Final Maturity Date
				(dollars in thousands)
Encore Statutory
Trust II	9/17/2003	$	5,000	3.56	%	Adjustable quarterly	3 month LIBOR + 2.95%	$	5,155	9/24/2033
Encore Capital
Trust III	4/19/2007		15,000	6.85	%	Fixed rate (2)	6.85%(2)		15,464	4/19/2037

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

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

Liquidity and Funding

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

Liquidity needs of a financial institution can be met from either assets or liabilities. On the asset side, our primary sources of liquidity are cash and due from banks, federal funds sold, maturities of securities and scheduled repayments and maturities of loans. On the liability side, our principal sources of liquidity are deposits, borrowed funds and the accessibility to money and capital markets. Client deposits are our largest source of funds. As of June 30, 2009, our year-to-date average deposits were $1.1 billion, or 71.0% of average total assets.

Shareholders’ Equity

Shareholders’ equity increased $2.1 million, or 1.1%, to $187.8 million as of June 30, 2009 compared with $185.7 million as of December 31, 2008, primarily due to net earnings.

Regulatory Capital

We actively manage our capital. Our potential sources of capital are earnings and common or preferred equity. From time to time, we have issued trust preferred securities through a subsidiary trust either to fund organic growth or to support an acquisition. Trust preferred securities can be eligible for treatment as Tier 1 regulatory capital provided such securities comprise less than 25% of core capital elements. Any amount above this limit can be eligible for treatment as Tier 2 capital. We currently have the capacity to issue additional trust preferred securities that would be treated as Tier 1 capital.

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

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The following table presents capital amounts and ratios for us and Encore Bank as of June 30, 2009:

	Actual				For Capital Adequacy Purposes				To Be Categorized as Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Encore Bancshares, Inc.
Leverage	$	174,656	11.22	%	$	62,286	4.00	%		N/A	N/A
Tier 1 risk-based		174,656	14.99			46,617	4.00			N/A	N/A
Total risk-based		189,363	16.25			93,235	8.00			N/A	N/A
Encore Bank, N.A.
Leverage	$	142,658	9.19	%	$	62,117	4.00	%	$	77,646	5.00	%
Tier 1 risk-based		142,658	12.27			46,521	4.00			69,781	6.00
Total risk-based		157,345	13.53			93,041	8.00			116,302	10.00

Critical Accounting Policies

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

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

(b) Changes in Internal Control over Financial Reporting

During the second quarter of 2009, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

In addition to the information contained in this report, you should consider the factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008. There have been no material changes in our Risk Factors from those disclosed in our Form 10-K.

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

The following table presents information with respect to repurchases of common stock made by us during the three months ended June 30, 2009. These shares were delivered to us by employees as payment for taxes on the vesting of restricted stock issued under our 2000 Stock Incentive Plan.

ISSUER PURCHASES OF EQUITY SECURITIES

Month in 2009	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April	1,307	$	9.02	—	—
May	219		8.04	—	—
June	—		—	—	—
Total (1)	1,526	$	8.88	—	—

(1) The 1,526 shares repurchased were not part of a publicly announced repurchase plan or program. These shares were owned and tendered by employees as payment for taxes on the vesting of restricted stock under our 2000 Stock Incentive Plan.

Item 3. Defaults Upon Senior Securities

Not applicable

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

On May 14, 2009, we held our Annual Meeting of Shareholders to consider and act upon the items listed below:

1. James S. D’Agostino, Jr., G. Walter Christopherson, Charles W. Jenness, J. Bryan King, Walter M. Mischer, Jr., Edwin E. Smith, Eugene H. Vaughan, David E. Warden and Randa Duncan Williams were elected as directors to serve on our Board of Directors until our 2010 Annual Meeting of Shareholders, and each until their successors are duly elected and qualified, or until their earlier resignation or removal. The table below contains a summary of shares voted for or withheld with respect to each nominated director:

	For	Withheld
James S. D’Agostino, Jr.	8,476,670	12,235
G. Walter Christopherson	8,444,182	44,723
Charles W. Jenness	8,440,015	48,890
J. Bryan King	8,476,342	12,563
Walter M. Mischer, Jr.	8,148,118	340,787
Edwin E. Smith	8,413,968	74,937
Eugene H. Vaughan	8,443,211	45,694
David E. Warden	8,480,525	8,380
Randa Duncan Williams	8,437,082	51,823

2. The shareholders ratified the appointment of Grant Thornton LLP as our independent registered public accounting firm for the year ending December 31, 2009. A total of 8,478,750 shares were voted in favor of the appointment and 10,155 shares were voted against the appointment.

3. The shareholders approved the advisory (non-binding) resolution approving the compensation of our named executive officers. A total of 8,417,966 shares were voted in favor of the resolution, 47,281 were voted against the resolution and 23,654 shares abstained from voting.

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Item 5. Other Information

Not applicable

Item 6. Exhibits

3.1	Amended and Restated Articles of Incorporation of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to Encore Bancshares, Inc.’s Registration Statement on Form S-1, Registration No. 333-142735 (the S-1 Registration Statement)).
3.2	Articles of Amendment to Articles of Incorporation of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 to the S-1 Registration Statement).
3.3	Statement of Designations establishing the terms of the Series A Preferred Stock of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on December 8, 2008).
3.4	Amended and Restated Bylaws of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.3 to the S-1 Registration Statement).
4.1	Form of specimen certificate representing shares of Encore Bancshares, Inc. common stock (incorporated herein by reference to Exhibit 4.1 to the S-1 Registration Statement).
4.2	Warrant, dated December 5, 2008, to purchase 364,026 shares of Encore Bancshares, Inc.’s Common Stock (incorporated herein by reference to Exhibit 4.1 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on December 8, 2008).
4.3	Form of Certificate for Encore Bancshares, Inc.’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (incorporated herein by reference to Exhibit 4.2 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on December 8, 2008).
31.1*	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1**	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed with this Quarterly Report on Form 10-Q

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

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SIGNATURES

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

	Encore Bancshares, Inc.
	(Registrant)
August 6, 2009	/s/ James S. D’Agostino, Jr.
(Date)	James S. D’Agostino, Jr., Chief Executive Officer
August 6, 2009	/s/ L. Anderson Creel
(Date)	L. Anderson Creel, Chief Financial Officer, Executive Vice President and Treasurer

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