Encore Bancshares 10Q 2010 Q3 Quarterly report

Encore Bancshares (EBTX) Inactive 10-Q2010 Q3 Quarterly report

Content analysis

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, 2010.

¨	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):

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 29, 2010, there were 11.4 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, 2010 and December 31, 2009 (unaudited)		3

		Consolidated Statements of Operations – Three months and nine months ended September 30, 2010 and 2009 (unaudited)		4

		Consolidated Statement of Changes in Shareholders’ Equity – Nine months ended September 30, 2010 (unaudited)		5

		Consolidated Statements of Cash Flows – Nine months ended September 30, 2010 and 2009 (unaudited)		6

		Notes to Interim Consolidated Financial Statements (unaudited)		7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		40

	Item 4.	Controls and Procedures		40

Part II. OTHER INFORMATION

	Item 1.	Legal Proceedings		40

	Item 1A.	Risk Factors		40

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		40

	Item 3.	Defaults Upon Senior Securities		41

	Item 4.	Reserved		41

	Item 5.	Other Information		41

	Item 6.	Exhibits		41

Signatures				42

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, 2010			December 31, 2009
ASSETS
Cash and due from banks	$	16,825		$	16,796
Interest-bearing deposits in banks		231,866			172,984
Federal funds sold and other temporary investments		993			7,396

Cash and cash equivalents		249,684			197,176
Securities available-for-sale, at estimated fair value		198,530			140,651
Securities held-to-maturity, at amortized cost		55,436			117,171
Loans held-for-sale		111,505			1,058
Loans receivable		924,589			1,078,205
Allowance for loan losses		(20,967	)		(26,501	)

Net loans receivable		903,622			1,051,704
Federal Home Loan Bank of Dallas stock, at cost		9,602			9,569
Investment in real estate		10,852			14,639
Premises and equipment, net		7,284			15,484
Cash surrender value of life insurance policies		15,786			15,339
Goodwill		35,799			35,799
Other intangible assets, net		4,876			5,351
Accrued interest receivable and other assets		44,430			31,414
Other assets held-for-sale		3,256			—

	$	1,650,662		$	1,635,355


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	205,927		$	174,102
Interest-bearing		838,125			1,017,734
Deposits held-for-sale		187,433			—

Total deposits		1,231,485			1,191,836
Borrowings and repurchase agreements		220,818			220,612
Junior subordinated debentures		20,619			20,619
Accrued interest payable and other liabilities		8,028			15,620
Other liabilities held-for-sale		6			—

Total liabilities		1,480,956			1,448,687
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $1 par value, 20,000 shares authorized; 34 shares issued at September 30, 2010 and December 31, 2009; aggregate liquidation preference of $34,222		29,368			28,976
Common stock, $1 par value, 50,000 shares authorized; 11,421 shares at September 30, 2010 and 10,527 shares at December 31, 2009 issued		11,421			10,527
Additional paid-in capital		121,939			116,084
Retained earnings		6,098			31,095
Common stock in treasury, at cost (41 shares at September 30, 2010 and 23 shares at December 31, 2009)		(389	)		(233	)
Accumulated other comprehensive income		1,269			219

Total shareholders’ equity		169,706			186,668

	$	1,650,662		$	1,635,355

The accompanying notes are an integral part of these statements.

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,
	2010			2009			2010			2009
Interest income:
Loans, including fees	$	15,408		$	17,079		$	46,543		$	51,838
Securities		1,276			2,258			4,848			6,341
Federal funds sold and other temporary investments		238			180			687			492

Total interest income		16,922			19,517			52,078			58,671
Interest expense:
Deposits		3,525			5,131			11,402			16,506
Borrowings and repurchase agreements		2,127			2,129			6,382			6,364
Junior subordinated debentures		301			302			896			927

Total interest expense		5,953			7,562			18,680			23,797

Net interest income		10,969			11,955			33,398			34,874
Provision for loan losses		9,599			7,685			32,572			13,651

Net interest income after provision for loan losses		1,370			4,270			826			21,223
Noninterest income:
Trust and investment management fees		4,639			4,501			13,848			12,337
Mortgage banking		150			110			264			612
Insurance commissions and fees		1,524			1,365			4,651			4,379
Net gain on sale of available-for-sale securities		261			387			480			387
Gain on sale of branches		—			—			1,115			—
Other		454			450			1,526			1,529

Total noninterest income		7,028			6,813			21,884			19,244
Noninterest expense:
Compensation		8,503			7,761			25,692			22,506
Occupancy		1,395			1,496			4,327			4,504
Equipment		274			430			967			1,312
Advertising and promotion		146			214			480			630
Outside data processing		874			797			2,641			2,344
Professional fees		1,325			912			3,681			2,891
Intangible amortization		158			171			475			511
FDIC assessment		1,532			270			2,890			1,068
Foreclosed real estate expenses, net		4,458			183			6,984			828
Write down of assets held-for-sale		1,012			—			6,340			—
Other		1,051			1,055			3,910			3,143

Total noninterest expense		20,728			13,289			58,387			39,737

Net earnings (loss) before income taxes		(12,330	)		(2,206	)		(35,677	)		730
Income tax expense (benefit)		(3,904	)		(453	)		(12,347	)		527

Net earnings (loss)	$	(8,426	)	$	(1,753	)	$	(23,330	)	$	203

Earnings (loss) available to common shareholders	$	(8,981	)	$	(2,306	)	$	(24,997	)	$	(1,457	)

Earnings (loss) per common share:
Basic	$	(0.79	)	$	(0.22	)	$	(2.25	)	$	(0.14	)
Diluted		(0.79	)		(0.22	)		(2.25	)		(0.14	)
Average common shares outstanding		11,380			10,441			11,108			10,337
Diluted average common shares outstanding		11,380			10,441			11,108			10,337

The accompanying notes are an integral part of these statements.

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine Months Ended September 30, 2010

(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
	Preferred Stock		Shares			Amount			Additional Paid-in Capital			Retained Earnings			Common Stock in Treasury			Accumulated Other Comprehensive Income		Total Shareholders’ Equity
Balance at January 1, 2010	$	28,976		10,527		$	10,527		$	116,084		$	31,095		$	(233	)	$	219	$	186,668
Stock-based compensation cost recognized in earnings		—		—			—			1,016			—			—			—		1,016
Issuance of common shares		—		696			696			5,135			—			—			—		5,831
Issuance of restricted stock		—		241			241			(241	)		—			—			—		—
Cancellation of restricted stock		—		(48	)		(48	)		48			—			—			—		—
Exercise of stock options		—		5			5			(5	)		—			—			—		—
Purchase of treasury stock (18 shares)		—		—			—			—			—			(156	)		—		(156	)
Excess tax expense from stock-based compensation		—		—			—			(98	)		—			—			—		(98	)
Comprehensive income (loss):
Net loss		—		—			—			—			(23,330	)		—			—		(23,330	)
Change in net unrealized gain on securities available-for-sale, net of deferred tax expense of $558 and reclassification adjustment		—		—			—			—			—			—			1,050		1,050

Total comprehensive loss																					(22,280	)
Dividends on preferred stock and amortization of preferred stock discount		392		—			—			—			(1,667	)		—			—		(1,275	)

Balance at September 30, 2010	$	29,368		11,421		$	11,421		$	121,939		$	6,098		$	(389	)	$	1,269	$	169,706

The accompanying notes are an integral part of this statement.

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)


	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net earnings (loss)	$	(23,330	)	$	203
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Provision for loan losses		32,572			13,651
Write down of assets held-for-sale		6,340			—
Amortization of premiums and discounts, net		786			605
Stock-based compensation		1,016			674
Depreciation		1,184			1,649
Write down of investment in real estate		4,830			363
Gain on sale of branches		(1,115	)		—
Gain on sale of loans		(168	)		(487	)
Loss on sale of foreclosed real estate		1,226			227
Write off of premises and equipment		167			—
Realized gain on sale of available-for-sale securities, net		(480	)		(387	)
Increase in mortgages held-for-sale		(14,187	)		(44,177	)
Proceeds from sale of mortgage loans		15,131			44,814
Federal Home Loan Bank of Dallas stock dividends		(27	)		(21	)
(Increase) decrease in accrued interest receivable		222			(171	)
Increase in other assets		(11,407	)		(914	)
Decrease in accrued interest payable		(40	)		(155	)
Increase (decrease) in other liabilities		936			(1,578	)

Net cash provided by operating activities		13,656			14,296

Cash flows from investing activities:
Purchases of available-for-sale securities		(236,839	)		(120,497	)
Principal collected on available-for-sale securities		22,432			15,355
Proceeds from sales of available-for-sale securities		154,546			51,808
Purchases of held-to-maturity securities		(3,165	)		(52,187	)
Principal collected on held-to-maturity securities		39,256			30,925
Proceeds from calls of held-to-maturity securities		26,000			—
Proceeds from sales of foreclosed real estate		8,840			3,324
Net cash paid to HomeBanc from sale of branches		(49,364	)		—
Cash paid for contingency payment related to prior acquisition		(2,095	)		—
Net (increase) decrease in loans receivable		(9,126	)		92,969
Purchases of Federal Home Loan Bank stock		(6	)		(10	)
Purchases of premises and equipment		(213	)		(240	)

Net cash provided (used) by investing activities		(49,734	)		21,447

Cash flows from financing activities:
Net increase in deposits		90,079			64,036
Proceeds from long term Federal Home Loan Bank of Dallas borrowings		52,500			—
Repayment of long term Federal Home Loan Bank of Dallas borrowings		(55,130	)		(35	)
Increase (decrease) in repurchase agreements		2,568			(50,437	)
Payment on notes payable		—			(62	)
Purchase of treasury stock		(156	)		(25	)
Preferred dividends paid		(1,275	)		(1,181	)

Net cash provided by financing activities		88,586			12,296

Net increase in cash and cash equivalents		52,508			48,039
Cash and cash equivalents at beginning of period		197,176			118,052

Cash and cash equivalents at end of period	$	249,684		$	166,091

Supplementary cash flows information:
Interest paid on deposits and borrowed funds	$	18,720		$	23,952
Income taxes paid		—			1,030
Noncash investing and financing activities:
Real estate acquired in satisfaction of loans		9,608			8,085
Issuance of common stock for acquisition		5,831			—

The accompanying notes are an integral part of these statements.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Encore Bancshares, Inc. (we, the Company or our) 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., later 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. These unaudited 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, 2009. The consolidated balance sheet at December 31, 2009 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.

Operating results for the nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 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 fifteen private client offices located in the greater Houston area and southwest Florida, and five wealth management offices and three insurance offices in Texas. Two private client offices in Florida were sold in the second quarter of 2010 and the remaining four client offices are expected to be sold in the fourth quarter of 2010. Our product offerings, places of business and service delivery are positioned to best meet the needs of professional firms, privately-owned businesses, investors and affluent individuals.

Adoption of Updates to the FASB Codification

On January 1, 2010, we adopted the following updates to the FASB Codification:

FASB Accounting Standard Update (ASU) 2010-06,Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for certain disclosures related to activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The adoption of ASU 2010-06 did not have a material effect on our consolidated financial statements.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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

FASB ASU 2009-16,Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets, which formally codifies FASB Statement No. 166,Accounting for Transfers of Financial Assets, into the FASB ASC. ASU 2009-16 represents a revision to the provisions of former FASB Statement No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application was not permitted. The adoption of ASU 2009-16 did not have a material effect on our consolidated financial statements.

FASB ASC 810,Consolidation, improves financial reporting by enterprises involved with variable interest entities and any significant changes in risk exposure due to that involvement as well as its effect on the entity’s financial statements. FASB ASC 810 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter, with earlier adoption not permitted. The adoption of FASB ASC 810 did not have a material effect on our consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements.ASU 2010-09 provides amendments to ASC 855-10 requiring an entity to evaluate subsequent events through the date that the financial statements are issued. In addition, ASU 2010-09 no longer requires a public entity to disclose the date through which subsequent events have been evaluated. ASC 855Subsequent Eventsaddressed events which occur after the balance sheet date but before the issuance of financial statements. Under ASC 855, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. The Company adopted ASU 2010-09 and ASC 855 and has included the required disclosures.

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, 2009. There have been no significant changes to these policies.

Pending Accounting Pronouncements

FASB ASU 2010-20,Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires additional disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses and the changes and reasons for those changes in the allowance for credit losses. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables, the aging of past due financing receivables at the end of the reporting period by class of financing receivables, and the nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses. These disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. We do not expect ASU 2010-20 to have a material effect on our consolidated financial statements other than the new disclosures required by the ASU.

Comprehensive Income

US GAAP generally requires 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.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Unrealized holding gains on available-for-sale securities arising during period	$	188		$	389		$	1,128		$	1,429
Reclassification adjustment for gains included in income		261			387			480			387

Net pre-tax gain recognized in other comprehensive income		449			776			1,608			1,816
Tax expense		(133	)		(272	)		(558	)		(634	)

Net-of-tax impact on comprehensive income	$	316		$	504		$	1,050		$	1,182

Florida Branch Transactions

On March 15, 2010, Encore Bank executed two separate purchase and assumption agreements to sell certain assets and transfer certain liabilities of its Florida operations. The first agreement is with Ovation Holdings, Inc. (Ovation Holdings) and its proposed subsidiary bank, National Bank of Southwest Florida (NBSWF), headquartered in Port Charlotte, Florida. Ovation Holdings has entered into a definitive agreement to purchase NBSWF.

Under the terms of the first agreement, based on data as of September 30, 2010, NBSWF is to assume approximately $187.4 million of deposits associated with our four private client offices located in Naples, Ft. Myers and Sun City Center, Florida. NBSWF is also expected to purchase approximately $66.3 million of loans as well as other assets, including premises and equipment. The amount of loans to be purchased is subject to decrease by the amount of any such loans that become adversely classified or downgraded to substandard or below. The purchase and assumption is subject to regulatory approval, the closing of the purchase of NBSWF by Ovation Holdings, customary closing conditions and is expected to close during the fourth quarter 2010, although delays may occur.

The second agreement was with HomeBanc National Association (HomeBanc), headquartered in Lake Mary, Florida. Pursuant to this agreement, in May 2010, HomeBanc assumed approximately $50.5 million of deposits and certain assets associated with our two private client offices in Clearwater and Belleair Bluffs, Florida. We recorded a gain on sale of branches of $1.1 million.

The deposits and loans expected to be acquired by NBSWF represent approximately 15.2% and 6.4% of our total deposits and loans at September 30, 2010, and are reflected on our consolidated balance sheet as assets and liabilities held-for-sale as of September 30, 2010. We recorded a write down of $4.3 million ($1.8 million charge to the allowance for loan losses and $2.5 million write down of assets held-for-sale) in the first quarter of 2010 to adjust the assets held-for-sale to their agreed purchase price. The gain on the sale of the deposits with respect to NBSWF will be recognized when the transaction is completed.

Subsequent Event

In October 2010, Encore Bank sold $25,314 of Florida nonperforming and problem loans. These loans were written down to their purchase price in the third quarter of 2010, resulting in a charge of $8,509, and are reflected on our September 30, 2010 consolidated balance sheet as loans held-for-sale.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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

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

Securities available-for-sale and held-to-maturity were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2010
Available-for-sale:
U.S. Government securities	$	116,614	$	379	$	—		$	116,993
Securities of U.S. states and political subdivisions		5,901		23		(13	)		5,911
Mortgage-backed securities		51,878		1,430		(41	)		53,267
Corporate securities		13,965		—		(38	)		13,927
Other securities		5,633		26		—			5,659

Total		193,991		1,858		(92	)		195,757
Marketable equity securities		2,531		242		—			2,773

Total available-for-sale securities	$	196,522	$	2,100	$	(92	)	$	198,530

Held-to-maturity:
U.S. Government securities	$	5,000	$	15	$	—		$	5,015
Securities of U.S. states and political subdivisions		14,596		621		(25	)		15,192
Mortgage-backed securities		18,684		765		(5	)		19,444
Corporate securities		17,156		2,115		—			19,271

Total held-to-maturity securities	$	55,436	$	3,516	$	(30	)	$	58,922


December 31, 2009
Available-for-sale:
U.S. Government securities	$	87,258	$	117	$	(554	)	$	86,821
Securities of U.S. states and political subdivisions		646		—		(31	)		615
Mortgage-backed securities		45,275		926		(64	)		46,137
Other securities		4,410		12		(36	)		4,386

Total		137,589		1,055		(685	)		137,959
Marketable equity securities		2,523		169		—			2,692

Total available-for-sale securities	$	140,112	$	1,224	$	(685	)	$	140,651

Held-to-maturity:
U.S. Government securities	$	29,918	$	57	$	(16	)	$	29,959
Securities of U.S. states and political subdivisions		11,436		289		(82	)		11,643
Mortgage-backed securities		57,868		759		(13	)		58,614
Corporate securities		17,949		1,725		—			19,674

Total held-to-maturity securities	$	117,171	$	2,830	$	(111	)	$	119,890

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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

We own certain debt securities with unrealized losses as of September 30, 2010 and December 31, 2009. These securities, with unrealized losses segregated by length of impairment at period end, were as follows:


Description of Securities	Number of Securities		Fair Value		Unrealized Losses

September 30, 2010
Less than 12 months
Available-for-sale:
Securities of U.S. states and political subdivisions		1	$	1,074	$	(13	)
Mortgage-backed securities		2		2,831		(41	)
Corporate securities		3		8,927		(38	)

Total available-for-sale securities		6	$	12,832	$	(92	)


Held-to-maturity:
Securities of U.S. states and political subdivisions		1	$	1,070	$	(25	)
Mortgage-backed securities		3		387		(2	)

Total held-to-maturity securities		4	$	1,457	$	(27	)


More than 12 months
Held-to-maturity:
Mortgage-backed securities		3	$	545	$	(3	)


December 31, 2009
Less than 12 months
Available-for-sale:
U.S. Government securities		6	$	29,054	$	(554	)
Securities of U.S. states and political subdivisions		1		615		(31	)
Mortgage-backed securities		2		8,353		(64	)

Total available-for-sale securities		9	$	38,022	$	(649	)


Held-to-maturity:
U.S. Government securities		1	$	4,966	$	(16	)
Securities of U.S. states and political subdivisions		5		1,910		(82	)

Total held-to-maturity securities		6	$	6,876	$	(98	)


More than 12 months
Available-for-sale:
Other securities		2	$	498	$	(36	)


Held-to-maturity:
Mortgage-backed securities		5	$	789	$	(13	)

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 the securities. Additionally, it is not more likely than not that we will be required to sell these securities before recovery of our cost basis. Accordingly, as of September 30, 2010 and December 31, 2009, we believe the impairments detailed in the table are temporary and no impairment loss has been recorded in the accompanying consolidated statements of operations.

The following table shows the amortized cost and estimated fair value of securities by contractual maturity at September 30, 2010. 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.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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


	Available-for-Sale Securities				Held-to-Maturity Securities
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	3,000	$	3,007	$	4,953	$	5,056
Over one year through five years		105,909		106,203		12,566		13,852
After five years through ten years		19,001		18,977		4,637		5,378
Over ten years		8,917		8,996		14,596		15,192

Total		136,827		137,183		36,752		39,478
Mortgage-backed and equity securities		59,695		61,347		18,684		19,444

Total securities	$	196,522	$	198,530	$	55,436	$	58,922

Mortgage-backed securities consist of federal agency pass-through securities and have a weighted average yield of 2.66% and 3.31% at September 30, 2010 and December 31, 2009. As of September 30, 2010, the mortgage-backed securities have contractual maturities from less than a year to 2040. Accrued interest receivable on mortgage-backed securities was $199 and $350 at September 30, 2010 and December 31, 2009.

At September 30, 2010 and December 31, 2009, securities with a carrying value of $79,372 and $47,954 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 $544 and $577 and gross realized losses were $64 and $190 on sales of available-for-sale securities for the nine months ended September 30, 2010 and 2009.

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 $138 and $286 for the nine months ended September 30, 2010 and 2009.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

(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, 2010		December 31, 2009
Commercial:
Commercial	$	138,594	$	115,431
Commercial real estate		154,476		259,480
Real estate construction		54,140		87,008

Total commercial		347,210		461,919

Consumer:
Residential real estate first lien		207,386		222,337
Residential real estate second lien		280,245		291,433
Home equity lines		63,983		74,356
Consumer installment - indirect		5,520		8,372
Consumer other		20,245		19,788

Total consumer		577,379		616,286

Loans receivable		924,589		1,078,205
Loans held-for-sale		111,505		1,058

Total loans	$	1,036,094	$	1,079,263

Included in total loans is $2,691 and $3,123 of net deferred loan origination costs and unamortized premium and discount at September 30, 2010 and December 31, 2009.

Changes in the allowance for loan losses were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Balance at beginning of period	$	26,675		$	25,214		$	26,501		$	25,105
Provision for loan losses		9,599			7,685			32,572			13,651
Loans charged-off		(15,735	)		(6,028	)		(39,734	)		(12,264	)
Recoveries of loans previously charged-off		428			704			1,628			1,083

Balance at end of period	$	20,967		$	27,575		$	20,967		$	27,575

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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

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


	September 30, 2010		December 31, 2009
Impaired loans on nonaccrual without a valuation allowance	$	19,476	$	20,032
Impaired loans on nonaccrual with a valuation allowance		5,265		14,591
Impaired loans still accruing with a valuation allowance		509		530

Total impaired loans (1)	$	25,250	$	35,153

Valuation allowance related to impaired loans	$	1,750	$	6,264

Total nonaccrual loans	$	51,696	$	35,988

Total accruing loans past due 90 days or more	$	—	$	1,489

Restructured loans still accruing	$	2,570	$	530

(1)	Does not include loans in the total of nonaccrual loans which are not evaluated separately for impairment and loans held-for-sale.

We consider a loan to be impaired under the accounting guidance for loan impairment provisions when, based on current information and events, we determine that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. We individually assess and evaluate for impairment certain nonaccrual commercial loans over $100 and commercial loans collateralized by real estate over $250 as well as certain consumer loans collateralized by real estate. The impairment measurement is based primarily on the collateral value method.

In October 2010, we sold $19,803 of Florida nonaccrual loans, which are included in total nonaccrual loans above. These loans are not included in impaired loans as they were recorded at fair value as of September 30, 2010.

NOTE D – BORROWINGS

Subject to certain limitations, we may borrow funds from the FHLB in the form of advances. During the nine months ended September 30, 2010, we refinanced approximately $52,500 of FHLB advances which were treated as exchanges of debt. As part of those transactions, we incurred prepayment penalties of $2,594, which were capitalized as part of the new advances and are being amortized over the life of the new advances.

Our credit availability from the FHLB is based on our financial and operating condition and the amount of collateral available to the FHLB. These borrowings were collateralized by a blanket lien on our mortgage-related assets. Following is a summary of outstanding borrowings from the FHLB at September 30, 2010:


Amount		Interest Rate Range			Maturity Date Range	Call Date
$	59,500		3.54 – 4.37	%	01/11/13 – 11/26/13	None
	28,666		2.43 – 2.75		01/08/14 – 05/19/14	None
	19,593		2.84 – 3.18		01/08/15 – 05/18/15	None
	2,902		4.79		08/03/15	None
	1,915		3.54		01/08/16	None
	10,000		4.14		12/07/16	12/07/10
	10,000		4.23		04/05/17	01/05/11
	15,000		4.17		04/05/17	01/05/11
	10,000		4.52		05/09/17	11/09/10
	50,000		4.15		08/01/17	02/01/11

$	207,576

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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

Each advance is payable per terms of the agreement. We were eligible to borrow up to an additional $203,941 at September 30, 2010.

NOTE E – 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 Tier 1 leverage, Tier 1 risk-based and total risk-based ratios as of September 30, 2010 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, 2010
Tier 1 capital (to average assets)
Tier 1 (leverage)
Encore Bancshares, Inc.	$	148,743		9.18	%	$	64,807		4.00	%		N/A		N/A
Encore Bank, N.A.		137,517		8.49			64,791		4.00		$	80,989		5.00	%
Tier 1 capital (to risk-based assets)
Encore Bancshares, Inc.	$	148,743		13.53	%	$	43,984		4.00	%		N/A		N/A
Encore Bank, N.A.		137,517		12.53			43,886		4.00		$	65,829		6.00	%
Total capital (to risk-based assets)
Encore Bancshares, Inc.	$	162,589		14.79	%	$	87,968		8.00	%		N/A		N/A
Encore Bank, N.A.		151,342		13.79			87,771		8.00		$	109,714		10.00	%

NOTE F – COMMON STOCK

In the first quarter of 2010, $2,095 in cash was paid and 696 shares of common stock were issued to settle contingent consideration for the Linscomb & Williams acquisition.

NOTE G – 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.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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

NOTE H – EARNINGS (LOSS) PER COMMON SHARE

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Basic:
Earnings (loss) available to common shareholders	$	(8,981	)	$	(2,306	)	$	(24,997	)	$	(1,457	)
Average common shares outstanding, including nonvested restricted stock		11,380			10,441			11,108			10,337
Per Share	$	(0.79	)	$	(0.22	)	$	(2.25	)	$	(0.14	)
Diluted:
Average common shares outstanding		11,380			10,441			11,108			10,337
Add: Net effect of the assumed exercise of stock options		—			—			—			—

Diluted average common shares outstanding		11,380			10,441			11,108			10,337
Per Share	$	(0.79	)	$	(0.22	)	$	(2.25	)	$	(0.14	)
Anti-dilutive stock options and warrants not included in treasury stock method computation		1,321			1,347			1,333			1,353
Preferred dividends deducted from net earnings (loss)		555			553			1,667			1,660

No dividends have been declared on our common stock.

NOTE I – 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,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. 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.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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

The tables below present the balances of assets measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009:


	September 30, 2010
Description	Total		Level 1		Level 2
U.S. Government securities	$	116,993	$	109,259	$	7,734
Securities of U.S. states and political subdivisions		5,911		—		5,911
Mortgage-backed securities		53,267		—		53,267
Corporate securities		13,927		—		13,927
Other securities		8,432		3,364		5,068

Total available-for-sale securities	$	198,530	$	112,623	$	85,907


	December 31, 2009
Description	Total		Level 1		Level 2
U.S. Government securities (1)	$	86,821	$	86,821	$	—
Securities of U.S. states and political subdivisions		615		—		615
Mortgage-backed securities		46,137		—		46,137
Other securities (2)		3,395		3,395		—

Total available-for-sale securities	$	136,968	$	90,216	$	46,752

(1)

In the first quarter of 2010, we determined that $52,930 of U.S. Government securities had been misclassified as Level 1 as of December 31, 2009 and should have been reported as Level 2 since these securities were priced based on similar securities in an inactive market. We had originally reported these securities in Level 1 with Treasury securities which trade in more active markets. Therefore, we have corrected the classifications as of September 30, 2010.

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

At September 30, 2010, the fair value of our investment in available-for-sale Level 2 U.S. Government securities was $7,734. The investments were comprised of $5,000 fixed-rate U.S. agency securities with a weighted average coupon rate of 0.7% and a weighted average life of 1.9 years and $2,734 variable-rate U.S. agency securities with a weighted average coupon rate of 3.3% and a weighted average life of 5.1 years. To estimate their value, we used a third party broker to value the securities using standard market matrix pricing for similar securities.

At September 30, 2010, the fair value of our investment in available-for-sale Level 2 securities of U.S. states and political subdivisions was $5,911. The investments were comprised of securities issued by municipal entities in Texas, with a weighted average coupon rate of 5.1% and a weighted average life of 14.2 years. To estimate their value, we used a third party broker to value the securities using standard market matrix pricing for similar securities.

At September 30, 2010, the fair value of our investment in available-for-sale Level 2 mortgage-backed securities was $53,267. These investments were comprised of $20,250 fixed-rate GNMA and FNMA backed securities with a weighted average coupon rate of 4.3% and a weighted average life of 2.8 years and $33,017 variable-rate GNMA and FNMA backed securities with a weighted average coupon rate of 2.7% and a weighted average life of 3.9 years. The underlying loans for these securities are residential mortgages located in various states across the country, with no significant concentration in any particular state. To estimate their value, we used a third party broker to value the securities using standard market matrix pricing for similar securities.

At September 30, 2010, the fair value of our investment in available-for-sale Level 2 corporate securities was $13,927. The investments were comprised of $8,927 fixed-rate corporate bonds with a weighted average coupon rate of 5.7% and a weighted average life of 9.9 years and $5,000 variable-rate corporate bonds with a weighted average coupon rate of 6.0% and a weighted average life of 9.9 years. To estimate their value, we used a third party broker to value the securities using standard market matrix pricing for similar securities.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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

At September 30, 2010, the fair value of our investment in available-for-sale Level 2 other securities was $5,068. The investments were comprised of fixed-rate collateralized mortgage obligations with a weighted average coupon rate of 2.0% and a weighted average life of 4.5 years. To estimate their value, we used a third party broker to value the securities using standard market matrix pricing for similar securities.

For assets measured at fair value on a nonrecurring basis during 2010 that were still held on the balance sheet at September 30, 2010, the following table provides the level of valuation assumptions used to determine the amount of adjustment and the carrying value of the related individual assets at period end:


Description	Total		Level 2		Level 3		Losses for the Nine Months Ended September 30, 2010
Loans held-for-sale	$	103,292	$	91,569	$	11,723	$	15,486
Loans		16,949		—		16,949		7,141
Investment in real estate		10,852		—		10,852		4,692
Long-lived assets held-for-sale		3,010		—		3,010		2,535

Total	$	134,103	$	91,569	$	42,534	$	29,854

During the nine months ended September 30, 2010, we reclassified certain loans as held-for-sale in connection with the anticipated sale of our banking operations in Florida. The loans were written down to their expected purchase price of $66,255, resulting in an impairment charge of $1,792 against the allowance for loan losses. Loans held-for-sale were written down an additional $5,034 subsequent to the transfer based on a third party valuation. We sold $25,314 of Florida problem loans in October 2010, which had a write down of $9,011. In connection with the anticipated Florida transactions, we wrote down certain branch facilities to their purchase price, resulting in an impairment charge of $2,535, which was included in earnings for the period.

We wrote down certain loans receivable that are collateralized by real estate to their appraised value less estimated costs to sell resulting in an impairment charge of $7,141 against the allowance for loan losses. We wrote down certain foreclosed real estate properties to their appraised value less estimated costs to sell resulting in an impairment charge of $4,692, which was included in earnings for the period.

For assets measured at fair value on a nonrecurring basis during 2009 that were still held on the balance sheet at December 31, 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 Year Ended December 31, 2009
Loans (1)(2)	$	33,362	$	33,362	$	3,572
Investment in real estate (1)(3)		14,639		14,639		271

Total	$	48,001	$	48,001	$	3,843

(1)

In the first quarter of 2010, we determined that as of December 31, 2009, certain loans totaling $10,128 whose collateral values exceeded the carrying value of the loan, although evaluated for impairment, should not have been included in loans carried at fair value. The remaining $23,234 loans should have been reported in Level 3 instead of Level 2. In addition, as of December 31, 2009, investment in real estate totaling $14,639 should have been reported in Level 3 instead of Level 2. These loans and investment in real estate were appraised with methods other than the market sales approach (i.e. the income or cost approach which may use significant unobservable inputs), the appraiser made significant adjustments to comparable sales, or management may have applied a significant adjustment to the value. Therefore, we have corrected the classifications as of September 30, 2010.

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

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

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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

Under FASB ASC 820, 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.

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


	September 30, 2010				December 31, 2009
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	249,684	$	249,684	$	197,176	$	197,176
Securities available-for-sale		198,530		198,530		140,651		140,651
Securities held-to-maturity		55,436		58,922		117,171		119,890
Loans held-for-sale		111,505		111,505		1,058		1,058
Loans receivable, net		903,622		930,695		1,051,704		1,073,467
Federal Home Loan Bank of Dallas stock		9,602		9,602		9,569		9,569
Accrued interest receivable		5,268		5,268		5,490		5,490

Financial liabilities:
Deposits	$	1,044,052	$	1,047,382	$	1,191,836	$	1,192,584
Deposits held-for-sale		187,433		188,031		—		—
Borrowings and repurchase agreements		220,818		229,715		220,612		226,775
Accrued interest payable		1,074		1,074		1,227		1,227
Junior subordinated debentures		20,619		21,755		20,619		21,400
Accrued contingent consideration		—		—		7,926		7,926

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value, non-financial assets and non-financial liabilities, and for estimating fair value for financial instruments not recorded at fair value (FASB ASC 820 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 disclosure purposes. However, from time to time, we record

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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

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 second 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, credit quality, 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.

Loans Held-for-Sale

Loans held-for-sale are carried at the lower of cost or fair 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 subject to nonrecurring fair value adjustments as Level 2 or Level 3.

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 and commercial real estate. Foreclosed assets are adjusted to fair value less estimated 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 estimated costs to sell. Fair value is generally based upon independent market prices or appraised values of the property and, accordingly, we classify foreclosed assets as Level 3.

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.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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

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, 2010 and December 31, 2009. The fair value of certificates of deposit is based on the lower of redemption or discounted value of contractual cash flows. Discount rates for certificates of deposit are estimated using current market rates.

Borrowings and Repurchase Agreements

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

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

Junior Subordinated Debentures

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

Accrued Interest

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

Accrued Contingent Consideration

The fair value of the accrued contingent consideration is estimated to be equal to its carrying amount as reported in the accompanying balance sheet, as the amount of the liability is fixed and was paid in the first quarter of 2010.

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 J – 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.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

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

The accounting policies of each line of business are the same as those described in the summary of significant accounting policies included in Note A to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. 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”.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010 and 2009

(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, 2010
Net interest income (expense)	$	11,231		$	34	$	5	$	(301	)	$	10,969
Provision for loan losses		9,599			—		—		—			9,599
Noninterest income		857			4,638		1,533		—			7,028
Noninterest expense		16,133			3,442		1,153		—			20,728

Earnings (loss) before income taxes		(13,644	)		1,230		385		(301	)		(12,330	)
Income tax expense (benefit)		(4,370	)		438		134		(106	)		(3,904	)

Net earnings (loss)	$	(9,274	)	$	792	$	251	$	(195	)	$	(8,426	)

Total assets at September 30, 2010	$	1,650,297		$	63,933	$	9,063	$	(72,631	)	$	1,650,662

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 nine months ended September 30, 2010
Net interest income (expense)	$	34,164		$	115	$	15	$	(896	)	$	33,398
Provision for loan losses		32,572			—		—		—			32,572
Noninterest income		3,304			13,849		4,731		—			21,884
Noninterest expense		44,555			10,551		3,281		—			58,387

Earnings (loss) before income taxes		(39,659	)		3,413		1,465		(896	)		(35,677	)
Income tax expense (benefit)		(13,757	)		1,211		513		(314	)		(12,347	)

Net earnings (loss)	$	(25,902	)	$	2,202	$	952	$	(582	)	$	(23,330	)

Total assets at September 30, 2010	$	1,650,297		$	63,933	$	9,063	$	(72,631	)	$	1,650,662

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

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, 2009, 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;

•

our ability to raise capital when needed or on terms favorable to us;

•

the failure to complete the pending transaction for the sale of our Florida operations;

•

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;

•

increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios;

•

our ability to continue to originate loans and grow core deposits;

•

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

•

increased FDIC assessments or the imposition of special assessments;

•

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;

•

risks associated with our investment in Linscomb & Williams;

•

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

•

regulatory restrictions on Encore Bank’s ability to pay dividends to us and on our ability to make payments on our obligations;

•

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

•

fiscal and governmental policies of the United States federal government.

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

Overview

Encore Bancshares, Inc. is a financial holding company and wealth management organization that provides banking, investment management, financial planning and insurance services to professional firms, privately-owned businesses, investors and affluent individuals. We are headquartered in Houston, Texas and currently manage, through our primary subsidiary, Encore Bank, National Association (Encore Bank), eleven private client offices in the greater Houston market and four private client offices in southwest Florida. We also operate five wealth management offices and three insurance offices in Texas. As of September 30, 2010, we reported, on a consolidated basis, total assets of $1.7 billion, total loans of $1.0 billion, total deposits of $1.2 billion, shareholders’ equity of $169.7 million and $2.7 billion in assets under management.

Recent Developments

In October 2010, Encore Bank sold $25.3 million of Florida loans in a bulk sale. These loans were classified as held-for-sale as of September 30, 2010 and were marked to market in the third quarter of 2010, resulting in a charge of $8.5 million. This pool of loans included $19.8 million of nonaccrual loans. The following table sets forth proforma nonperforming asset data as of September 30, 2010, giving effect to the loan sale as of such date (dollars in thousands):


Total nonperforming assets before sale	$	62,548
Sale of Florida nonaccrual loans		(19,803	)


Total nonperforming assets after sale	$	42,745


Nonperforming assets to total loans and investment in real estate after sale		4.18	%

Florida Branch Transactions

The deposits and loans expected to be acquired by NBSWF represent approximately 15.2% and 6.4% of our total deposits and loans at September 30, 2010, and are reflected on our consolidated balance sheet as loans and deposits held-for-sale as of September 30, 2010. We recorded a write down of $4.3 million ($1.8 million charge to the allowance for loan losses and $2.5 million write down of assets held-for-sale) in the first quarter of 2010 to adjust the assets held-for-sale to their agreed purchase price. The gain on the sale of the deposits with respect to NBSWF will be recognized when the transaction is completed.

Dodd-Frank Act

In July 2010, Congress enacted regulatory reform legislation known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which the President signed into law on July 21, 2010. Many aspects of the Dodd-Frank Act are subject to further rulemaking and will take effect over several years, making it difficult for us to anticipate the overall financial impact to us, Encore Bank or across the industry. This new law broadly affects the financial services industry by implementing changes to the financial regulatory landscape aimed at strengthening the sound operation of the financial services sector, including provisions that, among other things, will:

•

Create a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer financial laws;

•

Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies, which, among other things, will require us to deduct all trust preferred securities issued on or after May 19, 2010 from our Tier 1 capital (existing trust preferred securities issued prior to May 19, 2010 for all bank holding companies with less than $15.0 billion in total consolidated assets as of December 31, 2009 are exempt from this requirement);

•

Require us to be well-capitalized and well-managed in order to acquire banks located outside our home state;

•

Broaden the base for FDIC insurance assessments from the amount of insured deposits to average total consolidated assets less average tangible equity during the assessment period, which generally is expected to result in an increase in the level of assessments;

•

Permanently increase FDIC deposit insurance to $250,000 and provide unlimited FDIC deposit insurance beginning December 31, 2010 until January 1, 2013 for noninterest bearing demand transaction accounts at all insured depository institutions;

•

Permit Encore Bank to engage in de novo interstate branching if the laws of the state where the new branch is to be established would permit the establishment of the branch if Encore Bank were chartered by such state;

•

Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions; and

•

Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

Our management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial condition, and results of operations. Provisions in the legislation that affect deposit insurance assessments and payment of interest on demand deposits could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Provisions in the legislation that revoke the Tier 1 capital treatment of newly issued trust preferred securities could require us to seek other sources of capital in the future.

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, 2009.

Non-GAAP Financial Measures

This report contains certain financial information determined by methods other than in accordance with US GAAP. These measures include net interest income, net interest spread and net interest margin on a taxable-equivalent basis, which is common practice in the banking industry. We have included in this report information related 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 reconciliation, 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.

Pending Accounting Pronouncements

Results of Operations

Net loss for the quarter ended September 30, 2010 was $8.4 million, compared with $1.8 million for the quarter ended September 30, 2009. Loss per diluted common share (after deducting preferred dividends) for the third quarter of 2010 was $0.79, compared with $0.22 for the comparable period of 2009. The loss for the quarter was due primarily to mark-to-market write downs of certain Florida loans, including those we sold in October, and repossessed real estate.

We posted a return on average common equity of (24.02)% and (5.72)%, a return on average assets of (2.01)% and (0.43)%, and an efficiency ratio of 110.27% and 71.37% for the quarters ended September 30, 2010 and 2009. The efficiency ratio is calculated by dividing total noninterest expense (excluding amortization of intangibles and write down of assets held-for-sale) by the sum of net interest income and noninterest income (excluding gains or losses on sales of securities and gain on sale of branches).

Net loss for the nine months ended September 30, 2010 was $23.3 million, compared with net earnings of $203,000, for the same period of 2009. Loss per diluted common share for the nine months ended September 30, 2010 was $2.25 compared with $0.14 for the same period of 2009. The loss was due primarily to credit costs and write downs of assets held-for-sale in Florida. We posted a return on average common equity of (21.45)% and (1.22)%, a return on average assets of (1.91)% and 0.02%, and an efficiency ratio of 96.06% and 73.00% for the nine months ended September 30, 2010 and 2009.

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 on a taxable-equivalent basis (TE) was $11.1 million for the three months ended September 30, 2010, a decrease of $993,000, or 8.2%, compared with the third quarter of 2009. The net interest margin (TE) decreased 30 basis points to 2.83% for the same comparison period. The decrease in margin was due primarily to the decrease in loans and an offsetting increase in short term lower yielding investments. In addition, we are maintaining a large temporary investment balance in anticipation of the sale of the Florida branches.

Net interest income (TE) was $33.8 million for the nine months ended September 30, 2010, a decrease of $1.4 million, or 4.1%, compared with the same period of 2009. For the nine months ended September 30, 2010, the net interest margin (TE) was 2.95%, a decrease of 17 basis points, compared with the same period of 2009. The decrease in margin was due primarily to the decrease in loans and an offsetting increase in short term lower yielding investments.

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 and their yields are presented on a non-GAAP TE basis.

Taxable-Equivalent Yield Analysis


	Three Months Ended September 30,
	2010								2009
	Average Outstanding Balance			Interest Income/ Expense		Average Yield/ Rate			Average Outstanding Balance			Interest Income/ Expense		Average Yield/ Rate
	(dollars in thousands)
Assets:
Interest-earning assets:
Loans - TE yield (1)	$	983,011		$	14,254		5.75	%	$	1,123,482		$	17,114		6.04	%
Loans held-for-sale		73,646			1,212		6.53			1,716			34		7.86

Total loans - TE yield (1)		1,056,657			15,466		5.81			1,125,198			17,148		6.05
Securities - TE yield (1)		209,365			1,337		2.53			235,819			2,315		3.89
Federal funds sold and other		290,541			238		0.32			168,213			180		0.42

Total interest-earning assets - TE yield (1)		1,556,563			17,041		4.34			1,529,230			19,643		5.10
Less: Allowance for loan losses		(27,144	)							(23,972	)
Noninterest-earning assets		128,197								109,852
Noninterest-earning assets held-for-sale		4,196								—

Total assets	$	1,661,812							$	1,615,110

Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Interest checking	$	139,820		$	90		0.26	%	$	191,553		$	227		0.47	%
Money market and savings		279,084			442		0.63			306,789			833		1.08
Time deposits		410,318			2,295		2.22			525,821			4,071		3.07
Interest-bearing deposits held-for-sale		171,805			698		1.61			—			—

Total interest-bearing deposits		1,001,027			3,525		1.40			1,024,163			5,131		1.99
Borrowings and repurchase agreements		220,068			2,127		3.83			222,978			2,129		3.79
Junior subordinated debentures		20,619			301		5.79			20,619			302		5.81

Total interest-bearing liabilities		1,241,714			5,953		1.90			1,267,760			7,562		2.37
													��
Noninterest-bearing liabilities:
Noninterest-bearing deposits		220,166								147,888
Noninterest-bearing deposits held-for-sale		14,983								—
Other liabilities		7,132								10,792
Other liabilities held-for-sale		216								—

Total liabilities		1,484,211								1,426,440
Shareholders’ equity		177,601								188,670

Total liabilities and shareholders’ equity	$	1,661,812							$	1,615,110

Net interest income TE (1)				$	11,088							$	12,081

Net interest spread TE (1)							2.44	%							2.73	%
Net interest margin TE (1)							2.83	%							3.13	%
Net interest income				$	10,969							$	11,955
Taxable-equivalent adjustment					119								126

Net interest income on a taxable-equivalent basis				$	11,088							$	12,081

(1)	Non-GAAP measure. On a taxable-equivalent basis to consistently reflect income from taxable and tax-exempt loans and securities based on a 34% federal tax rate.

Taxable-Equivalent Yield Analysis


	Nine Months Ended September 30,
	2010								2009
	Average Outstanding Balance			Interest Income/ Expense		Average Yield/ Rate			Average Outstanding Balance			Interest Income/ Expense		Average Yield/ Rate
	(dollars in thousands)
Assets:
Interest-earning assets:
Loans - TE yield (1)	$	980,257		$	42,811		5.84	%	$	1,165,897		$	51,949		5.96	%
Loans held-for-sale (2)		79,957			3,920		6.55			1,574			94		7.98

Total loans - TE yield (1)		1,060,214			46,731		5.89			1,167,471			52,043		5.96
Securities - TE yield (1)		208,767			5,029		3.22			213,257			6,461		4.05
Federal funds sold and other		262,161			687		0.35			128,552			492		0.51

Total interest-earning assets - TE yield (1)		1,531,142			52,447		4.58			1,509,280			58,996		5.23
Less: Allowance for loan losses		(26,206	)							(24,932	)
Noninterest-earning assets		125,579								110,792
Noninterest-earning assets held-for-sale (2)		5,340								—

Total assets	$	1,635,855							$	1,595,140

Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Interest checking	$	146,185		$	325		0.30	%	$	183,676		$	652		0.47	%
Money market and savings		252,601			1,395		0.74			259,776			2,196		1.13
Time deposits		408,831			7,111		2.33			548,363			13,658		3.33
Interest-bearing deposits held-for-sale (2)		197,668			2,571		1.74			—			—

Total interest-bearing deposits		1,005,285			11,402		1.52			991,815			16,506		2.23
Borrowings and repurchase agreements		219,871			6,382		3.88			234,755			6,364		3.62
Junior subordinated debentures		20,619			896		5.81			20,619			927		6.01

Total interest-bearing liabilities		1,245,775			18,680		2.00			1,247,189			23,797		2.55

Noninterest-bearing liabilities:
Noninterest-bearing deposits		178,591								149,348
Noninterest-bearing deposits held-for-sale (2)		16,667								—
Other liabilities		9,612								10,810
Other liabilities held-for-sale (2)		257								—

Total liabilities		1,450,902								1,407,347
Shareholders’ equity		184,953								187,793

Total liabilities and shareholders’ equity	$	1,635,855							$	1,595,140

Net interest income TE (1)				$	33,767							$	35,199

Net interest spread TE (1)							2.58	%							2.68	%
Net interest margin TE (1)							2.95	%							3.12	%

Net interest income				$	33,398							$	34,874
Taxable-equivalent adjustment					369								325

Net interest income on a taxable-equivalent basis				$	33,767							$	35,199

(1)	Non-GAAP measure. On a taxable-equivalent basis to consistently reflect income from taxable and tax-exempt loans and securities based on a 34% federal tax rate.

(2)	In the first quarter of 2010, assets and liabilities held-for-sale are assumed to be outstanding for the entire quarter.

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 $9.6 million and $32.6 million for the three months and nine months ended September 30, 2010, compared with $7.7 million and $13.7 million for the same periods of 2009. The increase in the provision in both periods compared with the same periods of 2009 reflects the amount we considered necessary to fund estimated losses inherent in the loan portfolio primarily as a result of the recessionary economic environment, declining collateral values in Florida, higher net charge-offs in 2010, due in part to the $11.3 million mark-to-market of Florida loans reclassified to held-for-sale, and other qualitative factors, including our historical loan loss experience, the experience, ability and effectiveness of our lending management and staff, the effectiveness of our loan policies, procedures and internal controls, strategic initiatives, the composition and concentrations of credit, changes in underlying collateral values, nonperforming and loan classification trends, the effectiveness of the internal loan review function and general economic conditions.

Noninterest Income

Noninterest income represented 39.05% and 36.30% of total revenue for the three months ended September 30, 2010 and 2009.

Noninterest income increased $215,000, or 3.2%, to $7.0 million for the three months ended September 30, 2010, compared with the same period in 2009. The increase was due primarily to a $138,000, or 3.1%, increase in trust and investment management fees and a $159,000, or 11.6%, increase in insurance commissions because of new commercial business. The rise in trust and investment management fees was due to an 8.5% increase in assets under management.

Noninterest income increased $2.6 million, or 13.7%, to $21.9 million for the nine months ended September 30, 2010, compared with the same period in 2009. The increase was due primarily to a $1.1 million gain on the sale of two Florida branches and a $1.5 million, or 12.2%, increase in trust and investment management fees.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(dollars in thousands)
Trust and investment management fees	$	4,639	$	4,501	$	13,848	$	12,337
Mortgage banking		150		110		264		612
Insurance commissions and fees		1,524		1,365		4,651		4,379
Net gain on sale of available-for-sale securities		261		387		480		387
Gain on sale of branches		—		—		1,115		—
Other		454		450		1,526		1,529

Total noninterest income	$	7,028	$	6,813	$	21,884	$	19,244

Noninterest Expense

Noninterest expense was $20.7 million for the third quarter of 2010, an increase of $7.4 million, compared with the same period of 2009. The increase was due primarily to a combination of higher compensation expense, foreclosed real estate expense, FDIC assessment and write down of loans held for sale. Compensation expense rose in part due to the addition of new lenders added earlier in the year to grow the bank’s commercial lending platform in Houston. The increase in FDIC assessment reflects a higher assessment rate and a more rapid amortization of the prepaid FDIC assessment. The rise in foreclosed real estate expense reflected $3.2 million in write downs of primarily Florida real estate. In addition, we incurred $1.0 million in write downs of loans held for sale.

Noninterest expense was $58.4 million for the first nine months of 2010, an increase of $18.7 million, compared with the same period of 2009. The increase was due primarily to the same factors discussed above.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(dollars in thousands)
Compensation	$	8,503	$	7,761	$	25,692	$	22,506
Non-staff expenses:
Occupancy		1,395		1,496		4,327		4,504
Equipment		274		430		967		1,312
Advertising and promotion		146		214		480		630
Outside data processing		874		797		2,641		2,344
Professional fees		1,325		912		3,681		2,891
Intangible amortization		158		171		475		511
FDIC assessment		1,532		270		2,890		1,068
Foreclosed real estate expenses, net		4,458		183		6,984		828
Write down of assets held-for-sale		1,012		—		6,340		—
Other		1,051		1,055		3,910		3,143

Total noninterest expense	$	20,728	$	13,289	$	58,387	$	39,737

Income Tax Expense

The income tax benefit was $3.9 million for the three months ended September 30, 2010, compared with $453,000 for the same three months of 2009. The effective tax rate for the three months ended September 30, 2010 and 2009 was 31.7% and 20.5%. The income tax benefit was $12.3 million for the nine months ended September 30, 2010, compared with a provision of $527,000 for the same period of 2009. The effective tax rate for the nine months ended September 30, 2010 and 2009 was 34.6% and 72.2%. The higher than normal year-to-date effective tax rate in 2009 was affected by lower income levels and immaterial return-to-accrual reconciliation differences.

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, 2009.

The following table presents the net earnings (loss) 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, 2010
Net interest income (expense)	$	11,231		$	34	$	5	$	(301	)	$	10,969
Provision for loan losses		9,599			—		—		—			9,599
Noninterest income		857			4,638		1,533		—			7,028
Noninterest expense		16,133			3,442		1,153		—			20,728

Earnings (loss) before income taxes		(13,644	)		1,230		385		(301	)		(12,330	)
Income tax expense (benefit)		(4,370	)		438		134		(106	)		(3,904	)

Net earnings (loss)	$	(9,274	)	$	792	$	251	$	(195	)	$	(8,426	)

Total assets at September 30, 2010	$	1,650,297		$	63,933	$	9,063	$	(72,631	)	$	1,650,662

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

Nine months ended September 30, 2010
Net interest income (expense)	$	34,164		$	115	$	15	$	(896	)	$	33,398
Provision for loan losses		32,572			—		—		—			32,572
Noninterest income		3,304			13,849		4,731		—			21,884
Noninterest expense		44,555			10,551		3,281		—			58,387

Earnings (loss) before income taxes		(39,659	)		3,413		1,465		(896	)		(35,677	)
Income tax expense (benefit)		(13,757	)		1,211		513		(314	)		(12,347	)

Net earnings (loss)	$	(25,902	)	$	2,202	$	952	$	(582	)	$	(23,330	)

Total assets at September 30, 2010	$	1,650,297		$	63,933	$	9,063	$	(72,631	)	$	1,650,662

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

Banking

Our banking segment had a net loss of $9.3 million for the three months ended September 30, 2010, compared with $2.6 million for the same period in 2009. Net loss for the nine months ended September 30, 2010 was $25.9 million, compared with $2.1 million for the same period in 2009.

Net interest income for the three months ended September 30, 2010 decreased $982,000, or 8.0%, compared with the same period of 2009. Net interest income for the nine months ended September 30, 2010 decreased $1.5 million, or 4.2%, compared with the same period of 2009. The decrease in both periods resulted primarily from a decrease in loans and an increase in short term lower yielding investments. 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, 2010 totaled $9.6 million, compared with $7.7 million for the same period of 2009. The provision for loan losses for the nine months ended September 30, 2010 totaled $32.6 million, compared with $13.7 million for the same period of 2009. 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, 2010 was essentially flat compared with the same period in 2009. Noninterest income for the nine months ended September 30, 2010 increased $946,000 compared with the same period of 2009. The increase in the year-to-date period was due primarily to the gain on sale of two Florida branches.

Noninterest expense for the three months ended September 30, 2010 increased $7.0 million primarily due to a write down on assets held-for-sale and higher compensation, foreclosed real estate expenses and FDIC assessment. Noninterest expense for the nine months ended September 30, 2010 increased $17.2 million compared with the same period of 2009, due to the aforementioned factors.

Wealth Management

Net earnings for the three months ended September 30, 2010 were essentially flat compared with the same period in 2009. Net earnings for the nine months ended September 30, 2010 increased $189,000, or 9.4%, compared with the same period in 2009. The increase in earnings in the year-to-date period was due primarily to an increase in assets under management, resulting in a rise in fees. Assets under management increased 8.5% from September 30, 2009 to $2.7 billion as of September 30, 2010.

Noninterest income for the three months ended September 30, 2010 increased $137,000, or 3.0%, compared with the same period in 2009, due primarily to the aforementioned increase in assets under management. Noninterest income for the nine months ended September 30, 2010, increased $1.5 million, or 12.3%.

Noninterest expense for the three months ended September 30, 2010 increased $354,000, or 11.5%, compared with the same period in 2009. Noninterest expense for the nine months ended September 30, 2010 increased $1.3 million, or 14.4%. The increase in both periods was primarily due to an increase in compensation expense.

Insurance

Net earnings increased $76,000 for the three months and $70,000, or 7.9%, for the nine months ended September 30, 2010, as compared to 2009. The increases were due to higher insurance commissions associated with new commercial customers.

Noninterest income increased $158,000, or 11.5%, for the three months and $182,000, or 4.0%, for the nine months ended September 30, 2010, as compared to 2009. Noninterest expense was essentially flat for the three months and nine months ended September 30, 2010, as compared to 2009.

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 in the year-to-date period due to falling interest rates.

Financial Condition

Our total assets increased $15.3 million, or 0.9%, to $1.7 billion as of September 30, 2010 compared with December 31, 2009. Our loan portfolio declined $43.2 million, or 4.0%, to $1.0 billion as of September 30, 2010. Our securities portfolio decreased $3.9 million, or 1.5%, to $254.0 million compared with $257.8 million as of December 31, 2009. Shareholders’ equity decreased $17.0 million, or 9.1%, to $169.7 million compared with $186.7 million as of December 31, 2009.

Loan Portfolio

Our primary lending focus is to professional firms, privately-owned businesses, investors and affluent individuals. To these customers, we make commercial, commercial real estate, real estate construction, residential real estate and consumer loans. Total commercial loans, which consist of commercial, commercial real estate and real estate construction loans, accounted

for 33.5% of our portfolio as of September 30, 2010. Total consumer loans, which consist of residential real estate, home equity lines of credit, consumer installment-indirect and other consumer loans, made up 55.7% of our loan portfolio as of September 30, 2010. Loans held-for-sale, including $103.3 million related to our Florida operations, composed 10.8% of our portfolio.

Total loans were $1.0 billion as of September 30, 2010, a decrease of $43.2 million, or 4.0%, compared with December 31, 2009. The decrease was due primarily to lower construction, land loans and commercial real estate loans. Commercial loans in Texas grew 8.9% in the same comparison period.

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


	September 30, 2010					December 31, 2009
	Amount		Percent			Amount		Percent
	(dollars in thousands)
Commercial:
Commercial	$	138,594		13.4	%	$	115,431		10.7	%
Commercial real estate		154,476		14.9			259,480		24.0
Real estate construction		54,140		5.2			87,008		8.1

Total commercial		347,210		33.5			461,919		42.8

Consumer:
Residential real estate first lien		207,386		20.0			222,337		20.6
Residential real estate second lien		280,245		27.0			291,433		27.0
Home equity lines		63,983		6.2			74,356		6.9
Consumer installment – indirect		5,520		0.5			8,372		0.8
Consumer other		20,245		2.0			19,788		1.8

Total consumer		577,379		55.7			616,286		57.1

Loans receivable		924,589		89.2			1,078,205		99.9
Loans held-for-sale		111,505		10.8			1,058		0.1

Total loans	$	1,036,094		100.0	%	$	1,079,263		100.0	%

Nonperforming Assets

The following table presents information regarding nonperforming assets, accruing loans past due 90 days or more and restructured loans still accruing as of the dates indicated:


	September 30, 2010			December 31, 2009
	(dollars in thousands)
Nonaccrual loans – Texas (1)	$	17,445		$	9,908
Nonaccrual loans – Florida (1)		34,251			26,080

Total nonaccrual loans (1)		51,696			35,988
Investment in real estate – Texas		5,762			9,494
Investment in real estate – Florida		5,090			5,145

Total investment in real estate		10,852			14,639

Total nonperforming assets	$	62,548		$	50,627


Accruing loans past due 90 days or more	$	—		$	1,489

Restructured loans still accruing	$	2,570		$	530

Nonperforming assets to total loans and investment in real estate		5.97	%		4.63	%

(1)	Nonaccrual troubled debt restructurings are included in nonaccrual loans.

Nonperforming assets were $62.5 million and $50.6 million as of September 30, 2010 and December 31, 2009. Our ratio of nonperforming assets to total loans and investment in real estate was 5.97% and 4.63% as of September 30, 2010 and December 31, 2009. At September 30, 2010, nonaccrual loans were $51.7 million, compared with $36.0 million at December 31, 2009, an increase of $15.7 million. In October 2010, we sold $19.8 million of Florida nonaccrual loans, which were classified as held-for-sale at September 30, 2010. Nonaccrual commercial loans consisted primarily of one relationship in Houston. In Texas, commercial real estate nonaccrual loans consisted of two relationships totaling $2.7 million. Construction and land nonaccrual loans consisted primarily of a $4.8 million land loan in Houston. The remainder of the loans in this category are land loans, mainly in Florida, none of which has a balance greater than $1.0 million.

Nonaccrual loans held-for-sale were $28.1 million at September 30, 2010. In October 2010, we sold $19.8 million of these loans. The remainder of the nonaccrual loans which are classified as held-for-sale consist of seven relationships totaling approximately $8.3 million. These loans are primarily commercial real estate loans in Florida.

Investment in real estate was $10.9 million at September 30, 2010 compared with $14.6 million at December 31, 2009, a decrease of $3.8 million, or 25.9%. The decrease was due primarily to write downs of the Florida real estate held for investment to market value. Loans 90 days or more past due and still accruing, which are not included as nonperforming loans or assets, were reduced to zero at September 30, 2010 from $1.5 million at December 31, 2009. This category consisted of one commercial real estate loan in Florida, which is now classified as nonaccrual. Restructured loans still accruing were $2.6 million as of September 30, 2010, compared with $530,000 as of December 31, 2009. Restructured loans still accruing consisted primarily of a land loan in Florida and four residential loans 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, 2010				December 31, 2009
	Outstanding Balance		Specific Allocation of Allowance		Outstanding Balance		Specific Allocation of Allowance
			(dollars in thousands)
Commercial:
Commercial	$	605	$	—	$	1,829	$	1,147
Commercial real estate		4,523		—		13,129		4,694
Real estate construction		6,400		1,747		12,773		142

Total commercial		11,528		1,747		27,731		5,983
Consumer:
Residential real estate first lien (1)		11,478		3		7,466		281
Residential real estate second lien and home equity lines		581		—		791		—
Consumer		—		—		—		—

Total consumer		12,059		3		8,257		281
Loans held-for-sale		28,109		—		—		—

Total nonperforming loans	$	51,696	$	1,750	$	35,988	$	6,264

(1)	Written down to fair value of collateral after becoming 180 days past due.

The decrease in nonaccrual commercial real estate loans resulted mainly from loans being reclassified as held-for-sale, some of which were subsequently sold in the bulk sale of loans that closed in October. Nonaccrual construction and land loans decreased $6.4 million, due primarily to the sale of a $3.2 million land loan in Florida and reclassification to held-for-sale. Residential nonaccrual loans increased due mainly to a $4.1 million mortgage loan in Texas.

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

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

Net charge-offs for the first nine months of 2010 were $38.1 million, or 4.81% of average total loans on an annualized basis, compared with $11.2 million, or 1.28% of average total loans on an annualized basis for the first nine months of 2009.

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, 2010			As of and for the Year Ended December 31, 2009
	(dollars in thousands)
Average loans outstanding	$	1,060,214		$	1,146,839

Total loans outstanding at end of period	$	1,036,094		$	1,079,263

Allowance for loan losses at beginning of period	$	26,501		$	25,105
Charge-offs:
Commercial:
Commercial		(944	)		(2,833	)
Commercial real estate		(24,513	)		(1,175	)
Real estate construction		(6,830	)		(6,780	)

Total commercial		(32,287	)		(10,788	)

Consumer:
Residential real estate first lien		(2,828	)		(2,767	)
Residential real estate second lien		(2,614	)		(2,543	)
Home equity lines		(1,600	)		(1,820	)
Consumer installment - indirect		(198	)		(656	)
Consumer other		(207	)		(78	)

Total consumer		(7,447	)		(7,864	)

Total charge-offs		(39,734	)		(18,652	)

Recoveries:
Commercial:
Commercial		831			2,917
Commercial real estate		17			—
Real estate construction		50			6

Total commercial		898			2,923

Consumer:
Residential real estate first lien		304			110
Residential real estate second lien		195			70
Home equity lines		100			131
Consumer installment - indirect		100			152
Consumer other		31			2

Total consumer		730			465

Total recoveries		1,628			3,388

Net charge-offs		(38,106	)		(15,264	)

Provision for loan losses		32,572			16,660

Allowance for loan losses at end of period	$	20,967		$	26,501


Ratio of net charge-offs to average loans		4.81	%		1.33	%
Ratio of allowance for loan losses to period end loans (excluding loans held-for-sale)		2.27			2.46
Ratio of allowance for loan losses to nonperforming loans (excluding loans held-for-sale)		88.89			73.64

Securities

Total securities were $254.0 million as of September 30, 2010, a decrease of $3.9 million, or 1.5%, compared with $257.8 million as of December 31, 2009. The decrease was due to a combination of calls or pay downs in the securities portfolio.

Deposits

Our deposits averaged $1.2 billion for the nine months ended September 30, 2010, an increase of $50.1 million, or 4.4%, over average deposits for the year ended December 31, 2009. As of September 30, 2010, core deposits (which consist of noninterest-bearing deposits, interest checking, money market and savings and time deposits less than $100,000) were $768.7 million, or 62.4%, of total deposits, while time deposits $100,000 and greater and brokered deposits made up 22.4% of total deposits and deposits held-for-sale comprised 15.2%. As of September 30, 2010, total deposits increased $39.6 million, or 3.3%, to $1.2 billion compared with total deposits as of December 31, 2009. The increase was due primarily to an increase in noninterest-bearing demand deposits and occurred notwithstanding the sale of $50.5 million of deposits in the second quarter of 2010.

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


	Nine Months Ended September 30, 2010					Year Ended December 31, 2009
	Average Balance		Average Rate			Average Balance		Average Rate
	(dollars in thousands)
Noninterest-bearing deposits	$	178,591		—	%	$	152,873		—	%
Interest checking		146,185		0.30			186,440		0.48
Money market and savings		252,601		0.74			273,188		1.09
Time deposits less than $100,000		129,793		2.45			200,493		3.33

Core deposits		707,170		0.78			812,994		1.30

Time deposits $100,000 and greater		254,514		2.24			308,546		3.14
Brokered deposits		24,524		2.59			28,924		2.69
Noninterest-bearing deposits held-for-sale		16,667		—			—		—
Interest-bearing deposits held-for-sale		197,668		1.74			—		—

Total deposits	$	1,200,543		1.27	%	$	1,150,464		1.83	%

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. At September 30, 2010, our available borrowing capacity with the FHLB was $203.9 million. 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 $220.8 million as of September 30, 2010. The outstanding balance as of September 30, 2010 includes $207.6 million in long term advances and $13.2 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.

Borrowings and repurchase agreements were $220.8 million as of September 30, 2010 compared to $220.6 million as of December 31, 2009. During the nine months ended September 30, 2010, we refinanced approximately $52.5 million of FHLB advances which were treated as exchanges of debt. As part of those transactions, we incurred prepayment penalties of $2.6 million, which were capitalized as part of the new advances and are being amortized over the life of the new advances.

The following table summarizes our two issues of junior subordinated debentures outstanding as of September 30, 2010:

Description

Issuance
and Call
Dates (1)

Trust
Preferred
Securities
Outstanding

Interest
Rate as of
September 30,
2010

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 LIBOR + 2.95%

5,155

9/24/2033

Encore Capital Trust III

4/19/2007

15,000

6.85

Fixed rate (2)

6.85%(2)

15,464

4/19/2037

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

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

Liquidity and Funding

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

Liquidity needs of a financial institution can be met from either assets or liabilities. On the asset side, our primary sources of liquidity are cash and due from banks, federal funds sold, maturities of securities and scheduled repayments and maturities of loans. On the liability side, our principal sources of liquidity are deposits, borrowed funds and the accessibility to money and capital markets. Client deposits are our largest source of funds. For the nine months ended September 30, 2010, our year-to-date average deposits were $1.2 billion, or 73.4% of average total assets.

Shareholders’ Equity

Shareholders’ equity decreased $17.0 million, or 9.1%, to $169.7 million as of September 30, 2010 compared with $186.7 million as of December 31, 2009, primarily due to our net loss.

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 issued by us prior to May 19, 2010 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 or issued on or after May 19, 2010 can be eligible for treatment as Tier 2 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.

The following table presents capital amounts and ratios for us and Encore Bank as of September 30, 2010:


	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	$	148,743		9.18	%	$	64,807		4.00	%		N/A		N/A
Tier 1 risk-based		148,743		13.53			43,984		4.00			N/A		N/A
Total risk-based		162,589		14.79			87,968		8.00			N/A		N/A

Encore Bank, N.A.
Leverage	$	137,517		8.49	%	$	64,791		4.00	%	$	80,989		5.00	%
Tier 1 risk-based		137,517		12.53			43,886		4.00			65,829		6.00
Total risk-based		151,342		13.79			87,771		8.00			109,714		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, 2009.

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 2010, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – Other Information

Item 1.

Legal Proceedings

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, 2009. There have been no material changes in our Risk Factors from those disclosed in our Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information with respect to repurchases of common stock made by us during the three months ended September 30, 2010. These shares were delivered to us by employees as payment for taxes on the vesting of restricted stock issued under our 2000 Stock Incentive Plan and 2008 Stock Awards and Incentive Plan.


Month in 2010	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July		530	$	9.90		—		—
August		3,968		8.71		—		—
September		430		6.22		—		—

Total (1)		4,928	$	8.62		—		—

(1)	The 4,928 shares repurchased were not part of a publicly announced repurchase plan or program. These shares were owned and tendered by employees as payment for taxes on the vesting of restricted stock under our 2000 Stock Incentive Plan and 2008 Stock Awards and Incentive Plan.

Item 3.

Defaults Upon Senior Securities

Not applicable

Item 4.

Reserved

Item 5.

Other Information

Not applicable

Item 6.

Exhibits


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

*	Filed with this Quarterly Report on Form 10-Q

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

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 5, 2010				/s/ James S. D’Agostino, Jr.
(Date)				James S. D’Agostino, Jr., Chief Executive Officer

November 5, 2010				/s/ L. Anderson Creel
(Date)				L. Anderson Creel, Chief Financial Officer, Executive Vice President and Treasurer

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