Encore Bancshares (EBTX) 10-Q 2009 Q3 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 September 30, 2009.

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

Commission file number: 001-33598

Encore Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Texas	76-0655696
(State or other jurisdiction 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 October 31, 2009, there were 10.5 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— September 30, 2009 (unaudited) and December 31, 2008	3
		Consolidated Statements of Operations— Three months and nine months ended September  30, 2009 and 2008 (unaudited)	4
		Consolidated Statement of Changes in Shareholders’ Equity— Nine months ended September  30, 2009 (unaudited)	5
		Consolidated Statements of Cash Flows— Nine months ended September  30, 2009 and 2008 (unaudited)	6
		Notes to Interim Consolidated Financial Statements (unaudited)	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
	Item 4.	Controls and Procedures	35
Part II.	OTHER INFORMATION		36
	Item 1.	Legal Proceedings	36
	Item 1A.	Risk Factors	36
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
	Item 3.	Defaults Upon Senior Securities	36
	Item 4.	Submission of Matters to a Vote of Security Holders	36
	Item 5.	Other Information	36
	Item 6.	Exhibits	37
Signatures			38

2

Part I—Financial Information

Item 1. Financial Statements

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

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

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

The accompanying notes are an integral part of these statements.

3

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

The accompanying notes are an integral part of these statements.

4

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine Months Ended September 30, 2009

(Unaudited, amounts in thousands)

	Preferred Stock		Common Stock					Additional Paid-in Capital			Retained Earnings			Common Stock in Treasury			Accumulated Other Comprehensive Income		Total Shareholders’ Equity
			Shares		Amount
Balance at January 1, 2009	$	28,461	10,247		$	10,247		$	115,489		$	31,523		$	(98	)	$	120	$	185,742
Stock-based compensation cost recognized in earnings		—	—			—			674			—			—			—		674
Issuance of restricted stock		—	269			269			(269	)		—			—			—		—
Forfeitures of restricted stock		—	(8	)		(8	)		8			—			—			—		—
Excess tax expense from stock-based compensation		—	—			—			(42	)		—			—			—		(42	)
Purchase of treasury stock (3 shares)		—	—			—			—			—			(25	)		—		(25	)
Comprehensive income:
Net earnings		—	—			—			—			203			—			—		203
Change in net unrealized gain on securities available-for-sale, net of deferred tax expense of $634		—	—			—			—			—			—			1,182		1,182
Total comprehensive income																				1,385
Dividends on preferred stock and amortization of preferred stock discount		386	—			—			—			(1,660	)		—			—		(1,274	)
Balance at September 30, 2009	$	28,847	10,508		$	10,508		$	115,860		$	30,066		$	(123	)	$	1,302	$	186,460

The accompanying notes are an integral part of this statement.

5

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)

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

The accompanying notes are an integral part of these statements.

6

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009 and 2008

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

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Principles of Consolidation

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

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

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

Nature of Operations

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

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

Reclassification

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

7

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2009 and 2008

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

Adoption of Updates to the FASB Codification

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

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

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

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

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

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

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

8

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2009 and 2008

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

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

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

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

Comprehensive Income

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

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

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

Subsequent Events

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

9

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2009 and 2008

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

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

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

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

10

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2009 and 2008

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

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

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

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

11

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2009 and 2008

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

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

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

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

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

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

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

12

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2009 and 2008

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

NOTE C—LOANS RECEIVABLE

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

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

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

Changes in the allowance for loan losses were as follows:

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

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

13

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2009 and 2008

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

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

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

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

NOTE D—REGULATORY MATTERS

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

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

NOTE E—COMMITMENTS AND CONTINGENCIES

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

14

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2009 and 2008

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

NOTE F—EARNINGS PER COMMON SHARE

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

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

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

No dividends have been declared on our common stock.

NOTE G—FAIR VALUE OF ASSETS AND LIABILITIES

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

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

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

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

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

15

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2009 and 2008

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

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

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

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

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

Description	Total		Level 2		Losses for the Nine Months Ended September 30, 2009
Loans (1)	$	34,799	$	34,799	$	3,406
Investment in real estate (2)		6,952		6,952		285
Total	$	41,751	$	41,751	$	3,691

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

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

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

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

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

16

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2009 and 2008

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

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

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

Cash and Cash Equivalents

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

Securities

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

Loans Receivable

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

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

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

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

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

17

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2009 and 2008

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

Mortgages Held-for-Sale

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

Federal Home Loan Bank of Dallas Stock

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

Investment in Real Estate

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

Goodwill and Other Intangible Assets

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

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

Deposits

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

Borrowings and Repurchase Agreements

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

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

Junior Subordinated Debentures

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

18

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2009 and 2008

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

Accrued Interest

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

Unrecognized Financial Instruments

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

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

Nonfinancial Instruments

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

NOTE H—SEGMENT INFORMATION

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

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

19

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2009 and 2008

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

Financial results by operating segment were as follows:

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

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 for the year ended December 31, 2008, factors that could contribute to those differences include, but are not limited to:

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

• volatility and disruption in national and international financial markets;

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

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

• the concentration of our loan portfolio in loans collateralized by real estate;

• our level of commercial real estate and commercial loans;

• incorrect assumptions underlying the establishment of and provisions made to the allowance for loan losses;

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

• government intervention in the U.S. financial system;

• the continued service of key management personnel;

• our ability to attract, motivate and retain key employees;

• changes in the availability of funds resulting in increased costs or reduced liquidity;

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

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

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

• fiscal and governmental policies of the United States federal government.

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

21

Overview

Encore Bancshares, Inc. is a financial holding company and wealth management organization that provides banking, investment management, financial planning and insurance services to professional firms, privately-owned businesses, investors and affluent individuals. We are headquartered in Houston, Texas and currently manage, through our primary subsidiary, Encore Bank, National Association (Encore Bank), eleven private client offices in the greater Houston market and six private client offices in southwest Florida. We also operate five wealth management offices and three insurance offices in Texas. As of September 30, 2009, we had, on a consolidated basis, total assets of $1.6 billion, total loans of $1.1 billion, total deposits of $1.2 billion, shareholders’ equity of $186.5 million and $2.5 billion in assets under management.

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

Critical Accounting Policies

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

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

Results of Operations

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

We posted a return on average common equity of (5.72)% and 0.56%, a return on average assets of (0.43)% and 0.06%, and an efficiency ratio of 71.37% and 67.82% for the quarters ended September 30, 2009 and 2008. The efficiency ratio is calculated by dividing total noninterest expense (excluding amortization of intangibles) by the sum of net interest income and noninterest income (excluding gains or losses on sales of securities).

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

22

Net Interest Income

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

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

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

23

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

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

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

24

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

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

25

Provision for Loan Losses

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

Noninterest Income

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

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

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

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

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

Noninterest Expense

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

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

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

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

26

Income Tax Expense

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

Result of Segment Operations

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

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

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

27

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

Banking

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

Net interest income for the three months ended September 30, 2009 increased $342,000, or 2.9%, compared with the same period of 2008. Net interest income for the nine months ended September 30, 2009 increased $2.6 million, or 7.7%, compared with the same period of 2008. The increase in both periods resulted primarily from an increase in the volume of interest-earning assets. See the analysis of net interest income included in the section of this report captioned “—Net Interest Income.”

The provision for loan losses for the three months ended September 30, 2009 totaled $7.7 million, compared with $5.2 million for the same period of 2008. The provision for loan losses for the nine months ended September 30, 2009 totaled $13.7 million, compared with $10.5 million for the same period of 2008. See analysis of the provision for loan losses included in the section of this report captioned “—Provision for Loan Losses.”

Noninterest income for the three months ended September 30, 2009 increased $512,000 compared with the same period in 2008. The increase was due mainly to gain on sale of securities. Noninterest income for the nine months ended September 30, 2009 increased $901,000 compared with the same period of 2008. The increase was due primarily to higher mortgage banking income and gain on sales of securities.

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

Wealth Management

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

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

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

28

Insurance

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

Other

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

Financial Condition

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

Loan Portfolio

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

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

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

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

29

Nonperforming Assets

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

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

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

(1) Restructured loans are included in nonaccrual loans.

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

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

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

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

30

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

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

Allowance for Loan Losses

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

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

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

31

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

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

32

Securities

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

Deposits

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

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

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

Borrowings, Repurchase Agreements and Junior Subordinated Debentures

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

Our borrowings and repurchase agreements were $221.5 million as of September 30, 2009. The outstanding balance as of September 30, 2009 includes $210.0 million in long term advances and $11.5 million in repurchase agreements with clients. Included in the long term advances are $95.0 million of long term advances that have call provisions that are at the discretion of the FHLB which could shorten the maturity of the borrowings.

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

33

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

Description	Issuance and Call Dates (1)	Trust Preferred Securities Outstanding		Interest Rate as of September 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	3.24	%	Adjustable quarterly	3 month		$	5,155	9/24/2033
							LIBOR + 2.95	%
Encore Capital Trust III	4/19/2007		15,000	6.85	%	Fixed rate (2)	6.85%(2)			15,464	4/19/2037

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

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

Liquidity and Funding

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

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

Shareholders’ Equity

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

Regulatory Capital

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

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

34

The following table presents capital amounts and ratios for us and Encore Bank as of September 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	$	172,973	10.94	%	$	63,237	4.00	%		N/A	N/A
Tier 1 risk-based		172,973	15.30			45,215	4.00			N/A	N/A
Total risk-based		187,276	16.57			90,430	8.00			N/A	N/A
Encore Bank, N.A.
Leverage	$	141,426	8.96	%	$	63,138	4.00	%	$	78,923	5.00	%
Tier 1 risk-based		141,426	12.53			45,133	4.00			67,700	6.00
Total risk-based		155,713	13.80			90,267	8.00			112,833	10.00

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

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

(b) Changes in Internal Control over Financial Reporting

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

35

Part II—Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

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

Not applicable

Item 5. Other Information

Not applicable

36

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

37

SIGNATURES

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

	Encore Bancshares, Inc.
	(Registrant)
November 3, 2009	/s/    JAMES S. D’AGOSTINO, JR.
(Date)	James S. D’Agostino, Jr., Chief Executive Officer
November 3, 2009	/s/    L. ANDERSON CREEL
(Date)	L. Anderson Creel, Chief Financial Officer, Executive Vice President and Treasurer

38