- Quarterly Report (10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

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, 2011.

¨	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 x No ¨

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

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

As of October 31, 2011, there were 11.7 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
		Condensed Consolidated Balance Sheets – September 30, 2011 and December 31, 2010 (unaudited)	3

		Condensed Consolidated Statements of Operations – Three months and nine months ended September 30, 2011 and 2010 (unaudited)	4

		Condensed Consolidated Statement of Changes in Shareholders’ Equity – Nine months ended September 30, 2011 (unaudited)	5

		Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2011 and 2010 (unaudited)	6

		Notes to Interim Condensed 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	38

	Item 4.	Controls and Procedures	38

Part II. OTHER INFORMATION
	Item 1.	Legal Proceedings	38

	Item 1A.	Risk Factors	38

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

	Item 3.	Defaults Upon Senior Securities	39

	Item 4.	Removed and Reserved	39

	Item 5.	Other Information	39

	Item 6.	Exhibits	40

Signatures			41

Part I – Financial Information

Item 1. Financial Statements

Encore Bancshares, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

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


	September 30, 2011			December 31, 2010
ASSETS
Cash and due from banks	$	13,797		$	13,523
Interest-bearing deposits in banks		100,719			49,478
Federal funds sold and other temporary investments		1,207			1,098

Cash and cash equivalents		115,723			64,099
Securities available-for-sale, at fair value		164,735			251,784
Securities held-to-maturity, at amortized cost		102,871			107,618
Loans held-for-sale, at lower of cost or fair value		7,277			10,915

Loans receivable		978,236			920,457
Allowance for loan losses		(18,007	)		(18,639	)

Net loans receivable		960,229			901,818
Federal Home Loan Bank of Dallas stock, at cost		9,820			9,610
Other real estate owned		5,135			9,298
Premises and equipment, net		6,486			7,023
Cash surrender value of life insurance policies		16,363			15,935
Goodwill		35,799			35,799
Other intangible assets, net		4,694			4,716
Other assets		40,534			47,882

	$	1,469,666		$	1,466,497

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	281,981		$	219,756
Interest-bearing		765,715			830,688

Total deposits		1,047,696			1,050,444
Borrowings and repurchase agreements		219,424			219,777
Junior subordinated debentures		20,619			20,619
Other liabilities		9,749			9,016

Total liabilities		1,297,488			1,299,856
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $1 par value, 20,000 shares authorized; 33 shares issued at September 30, 2011 and 34 shares issued at December 31, 2010; aggregate liquidation preference of $32,914 at September 30, 2011 and $34,222 at December 31, 2010		32,914			29,500
Common stock, $1 par value, 50,000 shares authorized; 11,733 shares at September 30, 2011 and 11,479 shares at December 31, 2010 issued		11,733			11,479
Additional paid-in capital		124,250			122,678
Retained earnings		4,007			4,641
Common stock in treasury, at cost (78 shares at September 30, 2011 and 48 shares at December 31, 2010)		(823	)		(455	)
Accumulated other comprehensive income (loss)		97			(1,202	)

Total shareholders’ equity		172,178			166,641

	$	1,469,666		$	1,466,497

The accompanying notes are an integral part of these condensed consolidated financial statements.

Encore Bancshares, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Interest income:
Loans, including fees	$	13,966		$	15,408		$	41,662		$	46,543
Securities		1,714			1,276			6,044			4,848
Federal funds sold and other temporary investments		162			238			358			687

Total interest income		15,842			16,922			48,064			52,078
Interest expense:
Deposits		2,142			3,525			6,716			11,402
Borrowings and repurchase agreements		2,131			2,127			6,354			6,382
Junior subordinated debentures		298			301			893			896

Total interest expense		4,571			5,953			13,963			18,680

Net interest income		11,271			10,969			34,101			33,398
Provision for loan losses		1,265			9,599			5,354			32,572

Net interest income after provision for loan losses		10,006			1,370			28,747			826
Noninterest income:
Trust and investment management fees		4,852			4,639			15,050			13,848
Insurance commissions and fees		1,545			1,524			4,572			4,651
Net gain (loss) on sale of available-for-sale securities		—			261			(95	)		480
Gain on sale of branches		—			—			—			1,115
Other		618			604			1,888			1,790

Total noninterest income		7,015			7,028			21,415			21,884
Noninterest expense:
Compensation		8,464			8,503			25,584			25,692
Occupancy		1,200			1,395			3,615			4,327
Equipment		258			274			767			967
Advertising and promotion		107			146			419			480
Outside data processing		761			874			2,337			2,641
Professional fees		984			1,325			3,023			3,681
Intangible amortization		161			158			444			475
FDIC assessment		479			1,532			1,749			2,890
Other real estate owned expenses, net		1,293			4,458			2,042			6,984
Write down of assets held-for-sale		—			1,012			448			6,340
Other		1,151			1,051			2,897			3,910

Total noninterest expense		14,858			20,728			43,325			58,387

Net earnings (loss) before income taxes		2,163			(12,330	)		6,837			(35,677	)
Income tax expense (benefit)		262			(3,904	)		1,719			(12,347	)

Net earnings (loss)	$	1,901		$	(8,426	)	$	5,118		$	(23,330	)

Earnings (loss) available to common shareholders (1)	$	(2,735	)	$	(8,981	)	$	(634	)	$	(24,997	)

Earnings (loss) per common share:
Basic	$	(0.23	)	$	(0.79	)	$	(0.05	)	$	(2.25	)
Diluted		(0.23	)		(0.79	)		(0.05	)		(2.25	)
Average common shares outstanding		11,658			11,380			11,577			11,108
Diluted average common shares outstanding		11,658			11,380			11,577			11,108

(1)	Includes $4,102 accelerated amortization of preferred stock discount for the three months and nine months ended September 30, 2011.

The accompanying notes are an integral part of these condensed consolidated financial statements.

Encore Bancshares, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine Months Ended September 30, 2011

(Unaudited, amounts in thousands)


	Preferred Stock			Common Stock						Additional Paid-in Capital		Retained Earnings			Common Stock in Treasury			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Preferred Stock			Shares			Amount			Additional Paid-in Capital		Retained Earnings			Common Stock in Treasury			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at January 1, 2011	$	29,500			11,479		$	11,479		$	122,678	$	4,641		$	(455	)	$	(1,202	)	$	166,641
Stock-based compensation cost recognized in earnings		—			—			—			1,189		—			—			—			1,189
Issuance of preferred stock		32,914			—			—			—		—			—			—			32,914
Redemption of preferred stock		(34,000	)		—			—			—		—			—			—			(34,000	)
Issuance of common stock		—			256			256			313		—			—			—			569
Forfeiture of restricted stock		—			(2	)		(2	)		2		—			—			—			—
Purchase of treasury stock (30 shares)		—			—			—			—		—			(368	)		—			(368	)
Excess tax benefit from stock-based compensation		—			—			—			68		—			—			—			68
Comprehensive income:
Net earnings		—			—			—			—		5,118			—			—			5,118
Change in net unrealized gain (loss) on securities available-for-sale, net of deferred tax expense of $726 and reclassification adjustment		—			—			—			—		—			—			1,299			1,299

Total comprehensive income																						6,417
Dividends on preferred stock and amortization of preferred stock discount		4,500			—			—			—		(5,752	)		—			—			(1,252	)


Balance at September 30, 2011	$	32,914			11,733		$	11,733		$	124,250	$	4,007		$	(823	)	$	97		$	172,178

The accompanying notes are an integral part of this condensed consolidated financial statement.

Encore Bancshares, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)


	Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities:
Net earnings (loss)	$	5,118		$	(23,330	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Provision for loan losses		5,354			32,572
Write down of assets held-for-sale and other real estate owned		2,145			11,337
Depreciation and amortization, net		2,202			1,970
Stock-based compensation		1,189			1,016
(Gain) loss on sale of available-for-sale securities and other assets, net		99			(537	)
Loans originated for sale in the secondary market		(11,880	)		(14,187	)
Proceeds from sale of mortgage loans		13,852			15,131
Other, net		6,859			(10,316	)

Net cash provided by operating activities		24,938			13,656

Cash flows from investing activities:
Purchases of available-for-sale securities		(29,689	)		(236,839	)
Principal collected on available-for-sale securities		17,870			22,432
Proceeds from sales of available-for-sale securities		100,367			154,546
Purchases of held-to-maturity securities		(10,050	)		(3,165	)
Proceeds from prepayments and maturities of held-to-maturity securities		14,775			65,256
Proceeds from sales of other real estate owned		3,957			8,840
Net cash paid for sale of branches		—			(49,364	)
Cash paid for acquisitions		(161	)		(2,095	)
Proceeds from sale of loans		2,815			—
Net increase in loans		(66,857	)		(9,126	)
Purchase of Federal Home Loan Bank stock, net of redemption		(182	)		(6	)
Purchases of premises and equipment		(346	)		(213	)

Net cash provided by (used in) investing activities		32,499			(49,734	)

Cash flows from financing activities:
Net increase (decrease) in deposits		(2,748	)		90,079
Proceeds from long term Federal Home Loan Bank of Dallas borrowings		—			52,500
Repayment of long term Federal Home Loan Bank of Dallas borrowings		(38	)		(55,130	)
Increase (decrease) in repurchase agreements		(737	)		2,568
Proceeds from issuance of common stock, net of purchase of treasury stock		201			(156	)
Redemption of preferred stock		(34,000	)		—
Proceeds from issuance of preferred stock		32,914			—
Preferred dividend paid		(1,473	)		(1,275	)
Other, net		68			—

Net cash provided by (used in) financing activities		(5,813	)		88,586

Net increase in cash and cash equivalents		51,624			52,508
Cash and cash equivalents at beginning of period		64,099			197,176

Cash and cash equivalents at end of period	$	115,723		$	249,684

Supplementary cash flows information:
Interest paid on deposits and borrowed funds	$	14,093		$	18,720
Income taxes paid		225			—
Noncash investing and financing activities:
Real estate acquired in satisfaction of loans		1,696			9,608
Issuance of common stock for acquisition		—			5,831
Transfer of loans held-for-sale to loans receivable		7,327			—

The accompanying notes are an integral part of these condensed consolidated financial statements.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Encore Bancshares, Inc. (on a consolidated basis referred to as the Company) is a financial holding company that was formed on March 28, 2000 and acquired Guardian Savings and Loan Association effective September 30, 2000, later renamed Encore Bank. The Company’s principal subsidiary is Encore Bank, National Association (Encore Bank), which operates as a national banking association with its main office in Houston, Texas. The Company provides trust and investment management services through Linscomb & Williams, Inc. (Linscomb & Williams), a subsidiary of Encore Bank, and the Trust Division of Encore Bank (Encore Trust). The Company provides property and casualty insurance products through its subsidiary Town & Country Insurance Agency, Inc. (Town & Country).

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Encore Bancshares, Inc., Encore Bank, Linscomb & Williams and Town & Country. The Company has made all adjustments that, in the opinion of management, 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 condensed consolidated financial statements and the notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The condensed consolidated balance sheet at December 31, 2010 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).

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

Operating results for the three months and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or any other period.

Nature of Operations

The Company is 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.

The Company provides a variety of financial services through eleven private client offices located in the greater Houston area, and five wealth management offices and three insurance offices in Texas. Six private client offices in Florida were sold in 2010. The Company’s 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, 2011, the Company adopted the following updates to the FASB Codification:

FASB ASU No. 2010-28 , “Intangibles—Goodwill and Other (Topic 350)—When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASU 2010-28 did not have a significant impact on the Company’s financial statements.

FASB ASU No. 2010-29 , “Business Combinations (Topic 805)—Disclosure of Supplementary Pro Forma Information for Business Combinations.” ASU 2010-29 provides clarification regarding the acquisition date that should be used for reporting the pro forma financial information disclosures required by Topic 805 when comparative financial statements are presented. ASU 2010-29 also requires entities to provide a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination. ASU 2010-29 is effective for the Company prospectively for business combinations occurring after December 31, 2010.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

On July 1, 2011, the Company adopted FASB ASU No. 2011-02 , “Receivables (Topic 310)—A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 applies retrospectively to restructurings occurring on or after January 1, 2011 and its disclosures are presented in Note C.

Pending Accounting Pronouncements

FASB ASU No. 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in ASU 2011-03 remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 will be effective for the Company on January 1, 2012. The Company is currently evaluating the impact of ASU 2011-03 on its financial statements.

FASB ASU No. 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs.” The amendments in ASU 2011-04 generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with US GAAP and IFRSs. ASU 2011-04 will be effective for the Company on January 1, 2012 and is not expected to have a significant impact on its financial statements.

FASB ASU No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” Under ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 will be effective for the Company on January 1, 2012.

FASB ASU No. 2011-08, “Testing Goodwill for Impairment” , amends the guidance in FASB ASC 350-20. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., step 1 of the goodwill impairment test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. ASU 2011-08 is effective January 1, 2012 with early adoption permitted.

Descriptions of significant accounting policies are included in Note A to the consolidated financial statements as of and for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K. There have been no significant changes to these policies.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Unrealized holding gains (losses) on available-for-sale securities arising during period	$	(523	)	$	188		$	2,120		$	1,128
Reclassification adjustment for gains (losses) included in income		—			261			(95	)		480

Net pre-tax gain (loss) recognized in other comprehensive income		(523	)		449			2,025			1,608
Tax (expense) benefit		183			(133	)		(726	)		(558	)

Net-of-tax impact on comprehensive income (loss)	$	(340	)	$	316		$	1,299		$	1,050

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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, 2011
Available-for-sale:
U.S. Government securities	$	117,820	$	418	$	—		$	118,238
Securities of U.S. states and political subdivisions		2,099		58		—			2,157
Mortgage-backed securities		23,295		522		(21	)		23,796
Corporate debt securities		13,967		—		(1,145	)		12,822
Other securities		4,755		162		—			4,917

Total		161,936		1,160		(1,166	)		161,930
Marketable equity securities		2,587		218		—			2,805
Total available-for-sale securities	$	164,523	$	1,378	$	(1,166	)	$	164,735

Held-to-maturity:
U.S. Government securities	$	5,000	$	58	$	—		$	5,058
Securities of U.S. states and political subdivisions		21,964		1,823		—			23,787
Mortgage-backed securities		53,692		1,706		(5	)		55,393
Corporate debt securities		12,301		1,737		—			14,038
Other securities		9,914		104		—			10,018

Total held-to-maturity securities	$	102,871	$	5,428	$	(5	)	$	108,294

December 31, 2010
Available-for-sale:
U.S. Government securities	$	164,226	$	231	$	(1,802	)	$	162,655
Securities of U.S. states and political subdivisions		7,950		—		(572	)		7,378
Mortgage-backed securities		59,377		1,015		(248	)		60,144
Corporate debt securities		13,966		—		(546	)		13,420
Other securities		5,529		18		(146	)		5,401

Total		251,048		1,264		(3,314	)		248,998
Marketable equity securities		2,531		255		—			2,786

Total available-for-sale securities	$	253,579	$	1,519	$	(3,314	)	$	251,784

Held-to-maturity:
U.S. Government securities	$	5,000		—		—		$	5,000
Securities of U.S. states and political subdivisions		21,992		98		(519	)		21,571
Mortgage-backed securities		58,286		706		(5	)		58,987
Corporate debt securities		17,212		1,840		—			19,052
Other securities		5,128		—		—			5,128

Total held-to-maturity securities	$	107,618	$	2,644	$	(524	)	$	109,738

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The Company owns certain debt securities with unrealized losses as of September 30, 2011 and December 31, 2010. These securities, with unrealized losses segregated by length of impairment at period end, were as follows:


Description of Securities	Whole Number of Securities		Fair Value		Unrealized Losses
September 30, 2011
Less than 12 months
Available-for-sale:
Corporate debt securities		3	$	7,940	$	(1,027	)

More than 12 months
Available-for-sale:
Mortgage-backed securities		2	$	2,275	$	(21	)
Corporate debt securities		1		4,882		(118	)

Total available-for-sale securities		3	$	7,157	$	(139	)

Held-to-maturity:
Mortgage-backed securities		4	$	799	$	(5	)

December 31, 2010
Less than 12 months
Available-for-sale:
U.S. Government securities		9	$	42,840	$	(1,802	)
Securities of U.S. states and political subdivisions		9		7,378		(572	)
Mortgage-backed securities		5		13,517		(248	)
Corporate debt securities		4		13,420		(546	)
Other securities		1		4,818		(146	)

Total available-for-sale securities		28	$	81,973	$	(3,314	)

Held-to-maturity:
Securities of U.S. states and political subdivisions		14	$	8,898	$	(519	)
Mortgage-backed securities		1		279		(1	)

Total held-to-maturity securities		15	$	9,177	$	(520	)

More than 12 months
Held-to-maturity:
Mortgage-backed securities		3	$	540	$	(4	)

The Company does 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. The Company expects to recover the entire amortized cost of these securities since it does not intend to sell the securities. Additionally, it is not more likely than not that the Company will be required to sell these securities before recovery of its cost basis. Accordingly, as of September 30, 2011 and December 31, 2010, the Company believes the impairments detailed in the table are temporary and no impairment loss has been recorded in the accompanying condensed consolidated statements of operations.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following table shows the amortized cost and fair value of securities by contractual maturity at September 30, 2011. Contractual maturities may differ from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment schedules. Mortgage-backed securities and equity securities are shown separately since they are not due at a single maturity date.


	Available-for-Sale Securities				Held-to-Maturity Securities
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	75,213	$	75,405	$	—	$	—
Over one year through five years		35,205		35,349		7,624		8,647
After five years through ten years		18,967		17,827		14,727		15,499
Over ten years		9,018		9,309		26,828		28,755

Total		138,403		137,890		49,179		52,901
Mortgage-backed and marketable equity securities		26,120		26,845		53,692		55,393

Total securities	$	164,523	$	164,735	$	102,871	$	108,294

Mortgage-backed securities consist of federal agency pass-through securities and have a weighted average yield of 2.68% and 2.85% at September 30, 2011 and December 31, 2010. As of September 30, 2011, the mortgage-backed securities have contractual maturities from 2023 to 2040. Accrued interest receivable on mortgage-backed securities was $212 and $328 at September 30, 2011 and December 31, 2010.

At September 30, 2011 and December 31, 2010, securities with a carrying value of $78,354 and $76,865 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 $839 and $544 and gross realized losses were $934 and $64 on sales of available-for-sale securities for the nine months ended September 30, 2011 and 2010.

NOTE C – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following:


	September 30, 2011		December 31, 2010
Commercial:
Commercial	$	194,393	$	147,090
Commercial real estate		185,541		166,043
Real estate construction		52,993		46,326

Total commercial		432,927		359,459
Consumer:
Residential real estate first lien		201,485		205,531
Residential real estate second lien		258,020		269,727
Home equity lines		56,869		60,609
Consumer other		28,935		25,131

Total consumer		545,309		560,998

Loans receivable		978,236		920,457
Loans held-for-sale		7,277		10,915

Total loans	$	985,513	$	931,372

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Included in loans receivable is $1,924 and $2,484 of net deferred loan origination costs and unamortized premium and discount at September 30, 2011 and December 31, 2010. Accrued interest receivable on loans was $3,207 and $3,319 at September 30, 2011 and December 31, 2010. Consumer other loans include client overdrafts of $609 and $293 as of September 30, 2011 and December 31, 2010.

The allowance for loan losses and recorded investment in loans by loan type were as follows:


	September 30, 2011
Allowance for Loan Losses:	Commercial			Commercial Real Estate			Real Estate Construction			Residential Real Estate First Lien			Residential Real Estate Second Lien			Home Equity Lines			Consumer Other			Total			September 30, 2010
Three Months Ended
Beginning balance	$	4,480		$	2,814		$	1,840		$	3,417		$	4,417		$	1,870		$	272		$	19,110		$	26,675
Charge-offs		(1	)		(1,212	)		(64	)		(319	)		(623	)		(398	)		(14	)		(2,631	)		(15,735	)
Recoveries		76			2			1			90			27			28			39			263			428
Provision		(629	)		1,308			(70	)		67			471			163			(45	)		1,265			9,599

Ending balance	$	3,926		$	2,912		$	1,707		$	3,255		$	4,292		$	1,663		$	252		$	18,007		$	20,967

Nine Months Ended
Beginning balance	$	4,150		$	2,808		$	1,486		$	3,355		$	4,713		$	1,835		$	292		$	18,639			26,501
Charge-offs		(309	)		(2,429	)		(205	)		(846	)		(2,195	)		(1,054	)		(117	)		(7,155	)		(39,734	)
Recoveries		89			155			150			354			221			70			130			1,169			1,628
Provision		(4	)		2,378			276			392			1,553			812			(53	)		5,354			32,572

Ending balance	$	3,926		$	2,912		$	1,707		$	3,255		$	4,292		$	1,663		$	252		$	18,007		$	20,967

Individually evaluated for impairment	$	4		$	248		$	43		$	—		$	—		$	—		$	—		$	295		$	1,750
Collectively evaluated for impairment		3,922			2,664			1,664			3,255			4,292			1,663			252			17,712			19,217

Total allowance for loan losses	$	3,926		$	2,912		$	1,707		$	3,255		$	4,292		$	1,663		$	252		$	18,007		$	20,967

Loans(1):
Individually evaluated for impairment	$	2,466		$	3,170		$	2,885		$	1,860		$	—		$	—		$	—		$	10,381		$	25,250
Collectively evaluated for impairment		191,927			182,371			50,108			199,625			258,020			56,869			28,935			967,855			899,339

Total loans evaluated for impairment	$	194,393		$	185,541		$	52,993		$	201,485		$	258,020		$	56,869		$	28,935		$	978,236		$	924,589

(1)	Excludes loans held-for-sale.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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


	September 30, 2011		December 31, 2010
Impaired loans on nonaccrual without a valuation allowance	$	4,617	$	14,109
Impaired loans on nonaccrual with a valuation allowance		4,331		561
Impaired loans still accruing with a valuation allowance		1,433		507

Total impaired loans (1)	$	10,381	$	15,177

Valuation allowance related to impaired loans	$	295	$	563

Total nonaccrual loans	$	18,053	$	26,477

Total accruing loans past due 90 days or more	$	—	$	313

Restructured loans still accruing	$	1,706	$	804

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

A loan is considered impaired when, based on current information and events, it is probable that a creditor will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. The Company individually assesses and evaluates 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.

The average investment in impaired loans was $10,924 and $29,163 for the nine months ended September 30, 2011 and 2010. Interest income recognized after a loan is impaired is not material. No additional funds are committed to be advanced in connection with impaired loans.

The age analysis of loans is as follows:


	Loans Past Due and Still Accruing
September 30, 2011	30-59 Days		60-89 Days		90 Days or More		Total		Nonaccrual Loans (1)		Current Loans		Total Loans (1)
Commercial	$	464	$	45	$	—	$	509	$	1,078	$	192,806	$	194,393
Commercial real estate		—		—		—		—		3,381		182,160		185,541
Real estate construction		—		—		—		—		2,885		50,108		52,993

Total commercial		464		45		—		509		7,344		425,074		432,927

Residential real estate first lien		2,300		368		—		2,668		5,560		193,257		201,485
Residential real estate second lien		320		274		—		594		281		257,145		258,020
Home equity lines		550		—		—		550		—		56,319		56,869
Consumer other		1,028		51		—		1,079		—		27,856		28,935

Total consumer		4,198		693		—		4,891		5,841		534,577		545,309

Total	$	4,662	$	738	$	—	$	5,400	$	13,185	$	959,651	$	978,236

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	Loans Past Due and Still Accruing
December 31, 2010	30-59 Days		60-89 Days		90 Days or More		Total		Nonaccrual Loans (1)		Current Loans		Total Loans (1)
Commercial	$	7	$	338	$	313	$	658	$	741	$	145,691	$	147,090
Commercial real estate		239		1,417		—		1,656		4,484		159,903		166,043
Real estate construction		—		—		—		—		3,554		42,772		46,326

Total commercial		246		1,755		313		2,314		8,779		348,366		359,459

Residential real estate first lien		311		347		—		658		10,320		194,553		205,531
Residential real estate second lien		671		192		—		863		707		268,157		269,727
Home equity lines		306		149		—		455		—		60,154		60,609
Consumer other		742		45		—		787		—		24,344		25,131

Total consumer		2,030		733		—		2,763		11,027		547,208		560,998

Total	$	2,276	$	2,488	$	313	$	5,077	$	19,806	$	895,574	$	920,457

(1)	Excludes loans held-for-sale.

The following table presents additional information regarding individually evaluated impaired loans:


	September 30, 2011						December 31, 2010
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	800	$	855	$	—	$	551	$	574	$	—
Commercial real estate		1,957		3,264		—		4,154		5,321		—
Real estate construction		—		—		—		3,411		6,024		—
Residential real estate first lien		1,860		3,657		—		5,993		7,393		—
With an allowance recorded:
Commercial	$	1,666	$	1,701	$	4	$	189	$	189	$	189
Commercial real estate		1,213		1,229		248		—		—		—
Real estate construction		2,885		4,861		43		—		—		—
Residential real estate first lien		—		—		—		507		507		2
Residential real estate second lien		—		—		—		372		372		372
Total:
Commercial	$	8,521	$	11,910	$	295	$	8,305	$	12,108	$	189
Consumer		1,860		3,657		—		6,872		8,272		374

	$	10,381	$	15,567	$	295	$	15,177	$	20,380	$	563

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The credit risk profile of commercial loans aggregated by internally assigned grade is as follows:


	September 30, 2011						December 31, 2010
	Commercial		Commercial Real Estate		Real Estate Construction		Commercial		Commercial Real Estate		Real Estate Construction
Grade:
Pass	$	181,396	$	168,822	$	45,951	$	130,030	$	134,726	$	30,454
Watch		4,082		5,609		39		5,074		10,464		6,154
Special Mention		2,935		5,098		1,520		3,309		4,475		1,100
Substandard accruing		4,902		2,631		2,598		7,936		11,894		5,064
Substandard nonaccrual		845		3,218		2,885		552		4,484		3,554
Doubtful nonaccrual		233		163		—		189		—		—

Total	$	194,393	$	185,541	$	52,993	$	147,090	$	166,043	$	46,326

The credit risk profile of consumer loans (classified as nonaccrual when 90 days or more past due) based on payment activity is as follows:


September 30, 2011	Residential Real Estate First Lien		Residential Real Estate Second Lien		Home Equity Lines		Consumer Other
Performing	$	195,925	$	257,739	$	56,869	$	28,935
Nonaccrual		5,560		281		—		—

Total	$	201,485	$	258,020	$	56,869	$	28,935

December 31, 2010
Performing	$	195,211	$	269,020	$	60,609	$	25,131
Nonaccrual		10,320		707		—		—

Total	$	205,531	$	269,727	$	60,609	$	25,131

Troubled Debt Restructurings

As discussed in Note A, the Company adopted ASU 2011-02 as of July 1, 2011. As such, the Company reassessed all loan modifications occurring since January 1, 2011 for identification as troubled debt restructurings. Troubled debt restructurings are set forth in the following table:


	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
	Whole Number of Contracts		Amount		Whole Number of Contracts		Amount
Commercial		—	$	—		1	$	1,456
Commercial real estate		—		—		1		274
Residential real estate first lien		—		—		1		473
Residential real estate second lien		—		—		1		189
Consumer other		1		102		1		102

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The Company’s troubled debt restructurings were primarily the result of extending the maturity date of the loans. The Company did not forgive any principal or interest on any restructured loan. The restructured commercial and consumer other loans were accruing at the time of the modification and at September 30, 2011. All of the other modifications were on nonaccrual at the time of the modifications and at September 30, 2011. The modifications did not have any significant impact on the Company’s determination of the allowance for loan losses. As of September 30, 2011, there have been no defaults on any loans that were modified as troubled debt restructurings during the preceding twelve months.

NOTE D – REGULATORY MATTERS

Encore Bancshares and Encore Bank are subject to various regulatory capital adequacy requirements administered by the Board of Governors of the Federal Reserve System (Federal Reserve) and the Office of the Comptroller of the Currency (OCC). Actual and minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as of September 30, 2011, 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, 2011
Tier 1 capital (to average assets)
Tier 1 (leverage)
Encore Bancshares, Inc.	$	135,983		9.34	%	$	58,249		4.00	%		N/A		N/A
Encore Bank, N.A.		128,404		8.82			58,240		4.00		$	72,800		5.00	%
Tier 1 capital (to risk-based assets)
Encore Bancshares, Inc.	$	135,983		13.37	%	$	40,686		4.00	%		N/A		N/A
Encore Bank, N.A		128,404		12.64			40,646		4.00		$	60,969		6.00	%
Total capital (to risk-based assets)
Encore Bancshares, Inc.	$	148,773		14.63	%	$	81,373		8.00	%		N/A		N/A
Encore Bank, N.A.		141,191		13.89			81,293		8.00		$	101,616		10.00	%

NOTE E – PREFERRED STOCK

On September 27, 2011 (issuance date), the Company issued 33 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series B, par value $1.00 per share, with a liquidation value of $1,000 per share (Series B Preferred Stock) to the Secretary of the Treasury (Secretary) for $32,914 in cash. Non-cumulative dividends on the Series B Preferred Stock are paid quarterly and will accrue on the liquidation preference at a rate based on changes in the level of Qualified Small Business Lending (QSBL) of Encore Bank. The Series B Preferred Stock has no maturity date and ranks senior to common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company. The Series B Preferred Stock generally is non-voting, except in limited circumstances that could impact the rights and preferences of the Series B Preferred Stock.

Based on Encore Bank’s initial QSBL at March 31, 2011 compared with a baseline QSBL measured on July 1, 2010, the dividend rate on the Series B Preferred Stock has been set at 4.76% for September 27 through September 30, 2011. The dividend rate will be 1.97% in the fourth quarter of 2011. For the second through the tenth quarters following the issuance date, the dividend rate will fluctuate between 1% and 5% based on Encore Banks’s QSBL, and for the eleventh quarter through 4.5 years after the issuance date, the dividend rate will be fixed at between 1% and 7%. Thereafter, the dividend rate is 9%. If the Company has not declared and paid an aggregate of five dividend payments, whether or not consecutive, the holder of the Series B Preferred Stock will have the right, but not the obligation, to appoint a representative as an “observer” on the Company’s Board of Directors. If the Company has not declared and paid an aggregate of six dividend payments, whether or not consecutive, the holder of the Series B Preferred Stock will have the right, but not the obligation, to elect two directors to the Company’s Board of Directors.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The Series B Preferred Stock may be redeemed by the Company at any time, at a redemption price of $1,000 per share plus accrued but unpaid dividends to the date of redemption, subject to the approval of the Company’s federal banking regulator. The Series B Preferred Stock may be redeemed in whole or in part, subject to a minimum redemption of at least 25% of the original aggregate liquidation value, or $8,229.

The terms of the Series B Preferred Stock impose limits on the Company’s ability to pay dividends on and repurchase shares of its common stock and other securities. More specifically, if the Company fails to declare and pay dividends on the Series B Preferred Stock in a given quarter, then during such quarter and for the next three quarters following such missed dividend payment, the Company may not pay dividends on or repurchase any common stock or any other securities that are junior to (or in parity with) the Series B Preferred Stock, except in very limited circumstances. Additionally, under the terms of the Series B Preferred Stock, the Company may declare and pay dividends on its common stock or any other stock junior to the Series B Preferred Stock, or repurchase shares of any such stock, only if after payment of such dividends or repurchase of such shares, the Company’s Tier 1 Capital is 90% of the issuance date Tier 1 Capital, as adjusted. If any Series B Preferred Stock remains outstanding on the tenth anniversary of the issuance date, the Company may not pay further dividends on its common stock or any other junior stock until the Series B Preferred Stock is redeemed in full.

In connection with the issuance of the Series B Preferred Stock, the Company redeemed its Series A Preferred Stock from the United States Department of the Treasury (Treasury) on September 27, 2011 for $34,000 plus accrued dividends of $198. As a result, accelerated amortization of the discount on Series A Preferred Stock was $4,102 in the third quarter of 2011, which reduced earnings available to common shareholders. As a result of its redemption of the Series A Preferred Stock, the Company is no longer subject to the limits on executive compensation and its ability to pay dividends and repurchase shares as stipulated under the terms of the Series A Preferred Stock.

Treasury also holds a warrant to purchase 364 shares of the Company’s common stock expiring December 5, 2018 at an exercise price of $14.01 per share.

NOTE F – COMMITMENTS AND CONTINGENCIES

The Company is a defendant in legal actions arising from transactions conducted in the ordinary course of business. The Company believes, after consultation with legal counsel, that the ultimate liability, if any, arising from such actions will not have a material adverse effect on its condensed consolidated financial statements.

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

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

Commitments to extend credit were $206,061 at September 30, 2011 and $173,352 at December 31, 2010. Standby letters of credit were $4,093 at September 30, 2011 and $6,816 at December 31, 2010.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE G – EARNINGS 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,
	2011			2010			2011			2010
Basic:
Earnings (loss) available to common shareholders	$	(2,735	)	$	(8,981	)	$	(634	)	$	(24,997	)
Average common shares outstanding, including nonvested restricted stock		11,658			11,380			11,577			11,108
Per Share	$	(0.23	)	$	(0.79	)	$	(0.05	)	$	(2.25	)
Diluted:
Average common shares outstanding		11,658			11,380			11,577			11,108
Add: Net effect of the assumed exercise of stock options		—			—			—			—

Diluted average common shares outstanding		11,658			11,380			11,577			11,108
Per Share	$	(0.23	)	$	(0.79	)	$	(0.05	)	$	(2.25	)
Anti-dilutive stock options and warrants not included in treasury stock method computation		882			1,321			929			1,333
Preferred dividends deducted from net earnings (loss) (1)		4,636			555			5,752			1,667

(1)	Includes $4,102 accelerated amortization of preferred stock discount for the three months and nine months ended September 30, 2011.

No dividends have been declared on our common stock.

NOTE H – FAIR VALUE OF ASSETS AND LIABILITIES

The Company uses 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, the Company may be required to record at fair value other assets on a nonrecurring basis such as certain loans, goodwill and other intangible assets and other real estate owned. 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 , the Company groups 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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, 2011 and December 31, 2010:


	September 30, 2011
Description	Total		Level 1		Level 2
U.S. Government securities	$	118,238	$	110,754	$	7,484
Securities of U.S. states and political subdivisions		2,157		—		2,157
Mortgage-backed securities		23,796		—		23,796
Corporate debt securities		12,822		—		12,822
Other securities		7,722		3,048		4,674

Total available-for-sale securities	$	164,735	$	113,802	$	50,933


	December 31, 2010
Description	Total		Level 1		Level 2
U.S. Government securities	$	162,655	$	145,009	$	17,646
Securities of U.S. states and political subdivisions		7,378		—		7,378
Mortgage-backed securities		60,144		—		60,144
Corporate debt securities		13,420		—		13,420
Other securities		8,187		3,370		4,817

Total available-for-sale securities	$	251,784	$	148,379	$	103,405

At September 30, 2011, the fair value of investment in available-for-sale Level 2 U.S. Government securities was $7,484. The investments were comprised of $5,006 fixed-rate U.S. agency securities with a weighted average coupon rate of 2.0% and a weighted average life of 1.7 years and $2,478 variable-rate SBA pool securities with a weighted average coupon rate of 3.3% and a weighted average life of 4.9 years. To estimate their value and the value of other available-for-sale securities discussed below, the Company used a third party broker to value the securities using standard market matrix pricing for similar securities.

At September 30, 2011, the fair value of investment in available-for-sale Level 2 securities of U.S. states and political subdivisions was $2,157. The investments were comprised of fixed-rate securities issued by municipal entities in Texas, with a weighted average coupon rate of 5.7% and a weighted average life of 7.7 years.

At September 30, 2011, the fair value of investment in available-for-sale Level 2 mortgage-backed securities was $23,796. These investments were comprised of $7,453 fixed-rate GNMA and FNMA backed securities with a weighted average coupon rate of 4.0% and a weighted average life of 2.9 years and $16,343 variable-rate GNMA and FNMA backed securities with a weighted average coupon rate of 2.7% and a weighted average life of 3.5 years.

At September 30, 2011, the fair value of investment in available-for-sale Level 2 corporate debt securities was $12,822. The investments were comprised of $6,180 fixed-rate corporate bonds with a weighted average coupon rate of 5.3% and a weighted average life of 8.9 years and $6,642 variable-rate corporate bonds with a weighted average coupon rate of 6.3% and a weighted average life of 8.9 years.

At September 30, 2011, the fair value of investment in available-for-sale Level 2 other securities was $4,674. 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 3.8 years.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

For assets measured at fair value on a nonrecurring basis during 2011 that were still held on the balance sheet at September 30, 2011, 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, 2011
Loans held-for-sale	$	6,351	$	6,351	$	—	$	2,016
Loans		5,958		—		5,958		650
Other real estate owned		5,135		—		5,135		1,456

Total	$	17,444	$	6,351	$	11,093	$	4,122

Upon transfer to held-for-sale, loans were written down to their expected purchase price, resulting in an impairment charge of $2,016 against the allowance for loan losses. The Company 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 $650 against the allowance for loan losses. The Company wrote down certain other real estate owned properties to their appraised value less estimated costs to sell resulting in an impairment charge of $1,456, which was included in earnings for the period.

For assets measured at fair value on a nonrecurring basis during 2010 that were still held on the balance sheet at December 31, 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 3		Losses for the Year Ended December 31, 2010
Loans held-for-sale	$	9,615	$	9,615	$	7,738
Loans		10,042		10,042		6,782
Other real estate owned		9,298		9,298		3,479

Total	$	28,955	$	28,955	$	17,999

During the year ended December 31, 2010, loans held-for-sale as of December 31, 2010, were written down $7,738 based on third party valuations.

The Company 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 $4,459 against the allowance for loan losses. An additional $2,323 was recorded as noninterest expense related to loans reclassified from held-for-sale to loans receivable. The Company wrote down certain other real estate owned properties to their appraised value less estimated costs to sell resulting in an impairment charge of $3,479, which was included in earnings for the period.

Under FASB ASC 820, the Company bases its 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 the Company’s 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 the Company’s 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.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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


	September 30, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Securities held-to-maturity	$	102,871	$	108,294	$	107,618	$	109,738
Loans receivable, net		960,229		992,954		901,818		925,426
Accrued interest receivable		4,506		4,506		5,191		5,191

Financial liabilities:
Time deposits	$	352,925	$	355,690	$	378,342	$	380,223
Borrowings and repurchase agreements		219,424		239,207		219,777		235,220
Accrued interest payable		1,024		1,024		1,154		1,154
Junior subordinated debentures		20,619		21,000		20,619		21,305

The summary above excludes financial assets and liabilities for which the carrying amount approximates estimated fair value. For financial assets, these include cash and cash equivalents, securities available-for-sale, loans held-for-sale and Federal Home Loan Bank of Dallas stock. For financial liabilities, these include noninterest-bearing, interest checking and money market and savings deposits.

NOTE I – SEGMENT INFORMATION

The Company has 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 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.

Revenues, expenses, and assets are recorded by each line of business, and the Company separately reviews 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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, 2011
Net interest income (expense)	$	11,558		$	10	$	1	$	(298	)	$	11,271
Provision for loan losses		1,265			—		—		—			1,265
Noninterest income		574			4,884		1,557		—			7,015
Noninterest expense		9,923			3,691		1,244		—			14,858

Earnings (loss) before income taxes		944			1,203		314		(298	)		2,163
Income tax expense (benefit)		258			426		111		(533	)		262

Net earnings	$	686		$	777	$	203	$	235		$	1,901

Total assets at September 30, 2011	$	1,473,144		$	55,951	$	7,923	$	(67,352	)	$	1,469,666
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 nine months ended September 30, 2011
Net interest income (expense)	$	34,939		$	50	$	5	$	(893	)	$	34,101
Provision for loan losses		5,354			—		—		—			5,354
Noninterest income		1,638			15,105		4,672		—			21,415
Noninterest expense		28,834			10,857		3,634		—			43,325

Earnings (loss) before income taxes		2,389			4,298		1,043		(893	)		6,837
Income tax expense (benefit)		577			1,516		367		(741	)		1,719

Net earnings (loss)	$	1,812		$	2,782	$	676	$	(152	)	$	5,118

Total assets at September 30, 2011	$	1,473,144		$	55,951	$	7,923	$	(67,352	)	$	1,469,666
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

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,” “forecast,” “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, 2010, 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 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;

•

our ability to fully realize our net deferred tax asset;

•

government intervention in the U.S. financial system;

•

the continued service of key management personnel;

•

our ability to attract, motivate and retain key employees;

•

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

•

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

•

the potential payment of interest on demand deposit accounts to effectively compete for clients;

•

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;

•

potential environmental liability risk associated with lending activities;

•

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. (on a consolidated basis referred to as we, the Company or our) 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. Six private client offices in Florida were sold in 2010. We also operate five wealth management offices and three insurance offices in Texas. As of September 30, 2011, we reported, on a consolidated basis, total assets of $1.5 billion, total loans of $985.5 million, total deposits of $1.0 billion, shareholders’ equity of $172.2 million and $2.7 billion in assets under management.

Issuance of Series B Preferred Stock; Redemption of Series A Preferred Stock

On September 27, 2011, we entered into a Securities Purchase Agreement (Purchase Agreement) with the Secretary of the Treasury (Secretary) under the Small Business Lending Fund program pursuant to which we issued and sold to the Secretary 32,914 shares of our Senior Non-Cumulative Perpetual Preferred Stock, Series B, par value $1.00 per share, with a liquidation value of $1,000 per share (Series B Preferred Stock), for an aggregate purchase price of $32.9 million. The Series B Preferred Stock qualifies as Tier 1 capital. Non-cumulative dividends are payable quarterly and the dividend rate will fluctuate based on changes in the level of Qualified Small Business Lending (QSBL) by Encore Bank, compared with Encore Bank’s baseline QSBL level.

Also on September 27, 2011, using the proceeds from the issuance of the Series B Preferred Stock, we redeemed all 34,000 outstanding shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation amount $1,000 per share (Series A Preferred Stock), for a redemption price of $34.0 million, plus accrued but unpaid dividends to the date of redemption of $198,000. The Series A Preferred Stock was issued to the United States Department of the Treasury (Treasury) in December 2008 in connection with our participation in the TARP Capital Purchase Program. Treasury also holds a warrant to purchase 364,025 shares of our common stock over a ten-year term at an exercise price of $14.01 per share.

Recent Developments

In October 2011, we resolved $4.1 million in Florida nonperforming commercial real estate loans. In addition, we sold a $3.2 million Texas residential property included in other real estate owned. As a result, nonperforming assets were reduced approximately $7.3 million in October 2011.

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 and Estimates 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, 2010.

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.

Results of Operations

Net earnings for the quarter ended September 30, 2011 were $1.9 million, compared with a net loss of $8.4 million for the quarter ended September 30, 2010. After deducting preferred dividends, including a $4.1 million accelerated preferred stock discount, the loss per diluted common share for the third quarter of 2011 was $0.23, compared with a loss per diluted common share of $0.79 for the comparable period of 2010. The 2010 loss was due primarily to credit costs related to the Florida market.

We posted a return on average common equity of (7.62)% and (24.02)%, a return on average assets of 0.50% and (2.01)%, and an efficiency ratio of 80.37% and 110.27% for the quarters ended September 30, 2011 and 2010. 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 earnings for the nine months ended September 30, 2011 were $5.1 million, compared with a net loss of $23.3 million for the same period of 2010. After preferred dividends, the loss per diluted common share for the nine months ended September 30, 2011 was $0.05 compared with a loss per diluted common share of $2.25 for the same period of 2010. The 2010 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 (0.61)% and (21.45)%, a return on average assets of 0.46% and (1.91)%, and an efficiency ratio of 76.30% and 96.06% for the nine months ended September 30, 2011 and 2010.

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 $11.4 million for the three months ended September 30, 2011, an increase of $293,000, or 2.6%, compared with the third quarter of 2010. Interest earning assets were $1.4 billion for the third quarter of 2011, a decrease of $147.6 million, compared with the same period of 2010, due to the sale of our Florida operations. The net interest margin (TE) increased 37 basis points to 3.20% for the same comparison period. The increase in margin was primarily due to the improvement in balance sheet mix as temporary investments decreased and higher costing deposits decreased due to the sale of our Florida operations. In addition, we have been able to further reduce our cost of deposits, which has included lower pricing as well as a shift from interest-bearing deposits to noninterest-bearing deposits. Average noninterest-bearing deposits (excluding held-for-sale) were $295.8 million for the third quarter of 2011, a $75.7 million, or 34.4%, increase compared with the same period of 2010.

Net interest income (TE) was $34.4 million for the nine months ended September 30, 2011, an increase of $673,000, or 2.0%, compared with the same period of 2010. Interest earning assets were $1.4 billion for the nine months ended September 30, 2011, a decrease of $164.5 million, compared with the same period of 2010. For the nine months ended September 30, 2011, the net interest margin (TE) was 3.37%, an increase of 42 basis points, compared with the same period of 2010. The increase in margin was due primarily to the improved balance sheet mix and an interest recovery of $418,000 during 2011 for a lending relationship in Texas that had been on nonaccrual. Average noninterest-bearing deposits (excluding held-for-sale) were $241.8 million for the nine months ended September 30, 2011, a $63.2 million, or 35.4%, increase compared with the same period of 2010.

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,
	2011								2010
	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)	$	973,060		$	14,012		5.71	%	$	1,056,657		$	15,466		5.81	%
Securities - TE yield (1)		275,900			1,778		2.56			209,365			1,337		2.53
Federal funds sold and other		160,000			162		0.40			290,541			238		0.32

Total interest-earning assets - TE yield (1)		1,408,960			15,952		4.49			1,556,563			17,041		4.34
Less: Allowance for loan losses		(19,429	)							(27,144	)
Noninterest-earning assets		122,940								128,197
Noninterest-earning assets held-for-sale		—								4,196

Total assets	$	1,512,471							$	1,661,812

Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Interest checking	$	170,534		$	66		0.15	%	$	139,820		$	90		0.26	%
Money market and savings		257,040			179		0.28			279,084			442		0.63
Time deposits		364,946			1,897		2.06			410,318			2,295		2.22
Interest-bearing deposits held-for-sale		—			—					171,805			698		1.61

Total interest-bearing deposits		792,520			2,142		1.07			1,001,027			3,525		1.40
Borrowings and repurchase agreements		223,258			2,131		3.79			220,068			2,127		3.83
Junior subordinated debentures		20,619			298		5.73			20,619			301		5.79

Total interest-bearing liabilities		1,036,397			4,571		1.75			1,241,714			5,953		1.90

Noninterest-bearing liabilities:
Noninterest-bearing deposits		295,823								220,166
Noninterest-bearing deposits held-for-sale		—								14,983
Other liabilities		7,975								7,132
Other liabilities held-for-sale		—								216

Total liabilities		1,340,195								1,484,211
Shareholders’ equity		172,276								177,601

Total liabilities and shareholders’ equity	$	1,512,471							$	1,661,812

Net interest income TE (1)				$	11,381							$	11,088

Net interest spread TE (1)							2.74	%							2.44	%
Net interest margin TE (1)							3.20	%							2.83	%
Net interest income				$	11,271							$	10,969
Taxable-equivalent adjustment					110								119

Net interest income on taxable-equivalent basis				$	11,381							$	11,088

(1)	Non-GAAP measure. On 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,
	2011								2010
	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)	$	953,959		$	41,811		5.86	%	$	1,060,214		$	46,731		5.89	%
Securities - TE yield (1)		314,990			6,234		2.65			208,767			5,029		3.22
Federal funds sold and other		97,697			358		0.49			262,161			687		0.35

Total interest-earning assets - TE yield (1)		1,366,646			48,403		4.74			1,531,142			52,447		4.58
Less: Allowance for loan losses		(19,087	)							(26,206	)
Noninterest-earning assets		127,205								125,579
Noninterest-earning assets held-for-sale (2)		—								5,340

Total assets	$	1,474,764							$	1,635,855

Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Interest checking	$	165,708		$	238		0.19	%	$	146,185		$	325		0.30	%
Money market and savings		271,054			762		0.38			252,601			1,395		0.74
Time deposits		374,551			5,716		2.04			408,831			7,111		2.33
Interest-bearing deposits held-for-sale (2)		—			—					197,668			2,571		1.74

Total interest-bearing deposits		811,313			6,716		1.11			1,005,285			11,402		1.52
Borrowings and repurchase agreements		223,726			6,354		3.80			219,871			6,382		3.88
Junior subordinated debentures		20,619			893		5.79			20,619			896		5.81

Total interest-bearing liabilities		1,055,658			13,963		1.77			1,245,775			18,680		2.00

Noninterest-bearing liabilities:
Noninterest-bearing deposits		241,755								178,591
Noninterest-bearing deposits held-for-sale (2)		—								16,667
Other liabilities		7,847								9,612
Other liabilities held-for-sale (2)		—								257

Total liabilities		1,305,260								1,450,902
Shareholders’ equity		169,504								184,953

Total liabilities and shareholders’ equity	$	1,474,764							$	1,635,855

Net interest income TE (1)				$	34,440							$	33,767

Net interest spread TE (1)							2.97	%							2.58	%
Net interest margin TE (1)							3.37	%							2.95	%
Net interest income				$	34,101							$	33,398
Taxable-equivalent adjustment					339								369

Net interest income on taxable-equivalent basis				$	34,440							$	33,767

(1)	Non-GAAP measure. On 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 $1.3 million and $5.4 million for the three months and nine months ended September 30, 2011, compared with $9.6 million and $32.6 million for the same periods of 2010. The change in the provision primarily reflects the amount we considered necessary to absorb estimated losses incurred in the loan portfolio. The provision for loan losses in the first nine months of 2011 includes the impact of the sale of our Florida operations and the reduced concentration of loans in Florida, as well as the lower level of nonaccrual loans in 2011 compared with 2010.

Noninterest Income

Noninterest income represented 38.57% and 39.59% of total revenue for the nine months ended September 30, 2011 and 2010.

Noninterest income was approximately the same for the three months ended September 30, 2011, compared with the same period in 2010. Trust and investment management fees increased $213,000, or 4.6%, in 2011. Security gains decreased $261,000 from 2010 to 2011.

Noninterest income decreased $469,000, or 2.1%, to $21.4 million for the nine months ended September 30, 2011, compared with the same period in 2010. The decrease was due primarily to a nonrecurring $1.1 million gain on the sale of two Florida branches and $480,000 in securities gains in 2010. However, trust and investment management fees increased $1.2 million, or 8.7%, in 2011.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011			2010
	(dollars in thousands)
Trust and investment management fees	$	4,852	$	4,639	$	15,050		$	13,848
Insurance commissions and fees		1,545		1,524		4,572			4,651
Net gain (loss) on sale of available-for-sale securities		—		261		(95	)		480
Gain on sale of branches		—		—		—			1,115
Other		618		604		1,888			1,790

Total noninterest income	$	7,015	$	7,028	$	21,415		$	21,884

Noninterest Expense

Noninterest expense was $14.9 million for the three months ended September 30, 2011, a decrease of $5.9 million, compared with the same period of 2010. The decrease in noninterest expense was due to a combination of lower occupancy, professional fees, other real estate owned expenses and write down of assets held-for-sale. These decreases were largely a result of the sale of our Florida operations in 2010, which resulted in lower operating expense and improvements in credit costs. In addition, the FDIC assessment was lower due to combination of a lower rate imposed by the FDIC and lower deposit balances as a result of the sale of our Florida operations.

Noninterest expense was $43.3 million for the first nine months of 2011, a decrease of $15.1 million, compared with the same period of 2010. Significant decreases included occupancy, other real estate owned expenses and write down of assets held-for-sale. Most of these decreases were related to the sale of our Florida operations. In addition, other expense decreased due in part to a lower provision for unfunded loan commitments.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(dollars in thousands)
Compensation	$	8,464	$	8,503	$	25,584	$	25,692
Non-staff expenses:
Occupancy		1,200		1,395		3,615		4,327
Equipment		258		274		767		967
Advertising and promotion		107		146		419		480
Outside data processing		761		874		2,337		2,641
Professional fees		984		1,325		3,023		3,681
Intangible amortization		161		158		444		475
FDIC assessment		479		1,532		1,749		2,890
Other real estate owned expenses, net		1,293		4,458		2,042		6,984
Write down of assets held-for-sale		—		1,012		448		6,340
Other		1,151		1,051		2,897		3,910

Total noninterest expense	$	14,858	$	20,728	$	43,325	$	58,387

Income Tax Expense

The income tax provision was $262,000 for the three months ended September 30, 2011, compared with a benefit of $3.9 million for the same three months of 2010. The effective tax rate for the three months ended September 30, 2011 and 2010 was 12.1% and 31.7%. The income tax provision was $1.7 million for the nine months ended September 30, 2011, compared with a benefit of $12.3 million for the same period of 2010. The effective tax rate for the nine months ended September 30, 2011 and 2010 was 25.1% and 34.6%. The change in the effective tax rate is primarily attributable to a discrete income tax benefit related to a prior acquisition recorded in the third quarter of 2011.

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, 2010.

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, 2011
Net interest income (expense)	$	11,558		$	10	$	1	$	(298	)	$	11,271
Provision for loan losses		1,265			—		—		—			1,265
Noninterest income		574			4,884		1,557		—			7,015
Noninterest expense		9,923			3,691		1,244		—			14,858

Earnings (loss) before income taxes		944			1,203		314		(298	)		2,163
Income tax expense (benefit)		258			426		111		(533	)		262

Net earnings	$	686		$	777	$	203	$	235		$	1,901

Total assets at September 30, 2011	$	1,473,144		$	55,951	$	7,923	$	(67,352	)	$	1,469,666
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
Nine months ended September 30, 2011
Net interest income (expense)	$	34,939		$	50	$	5	$	(893	)	$	34,101
Provision for loan losses		5,354			—		—		—			5,354
Noninterest income		1,638			15,105		4,672		—			21,415
Noninterest expense		28,834			10,857		3,634		—			43,325

Earnings (loss) before income taxes		2,389			4,298		1,043		(893	)		6,837
Income tax expense (benefit)		577			1,516		367		(741	)		1,719

Net earnings (loss)	$	1,812		$	2,782	$	676	$	(152	)	$	5,118

Total assets at September 30, 2011	$	1,473,144		$	55,951	$	7,923	$	(67,352	)	$	1,469,666
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

Banking

Our banking segment had net earnings of $686,000 for the three months ended September 30, 2011, compared with a net loss of $9.3 million for the same period in 2010. Net earnings for the nine months ended September 30, 2011 were $1.8 million, compared with a net loss of $25.9 million for the same period in 2010.

Net interest income for the three months ended September 30, 2011 increased $327,000, or 2.9%, compared with the same period of 2010. Net interest income for the nine months ended September 30, 2011 increased $775,000, or 2.3%, compared with the same period of 2010. Net interest income for the banking segment does not include interest expense on the subordinated debentures, which is not allocated to a business segment. 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, 2011 totaled $1.3 million, compared with $9.6 million for the same period of 2010. The provision for loan losses for the nine months ended September 30, 2011 totaled $5.4 million, compared with $32.6 million for the same period of 2010. 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, 2011 decreased $283,000 compared with the same period in 2010 primarily due to securities gains in 2010. Noninterest income for the nine months ended September 30, 2011 decreased $1.7 million compared with the same period of 2010. The decrease was due primarily to the gain on sale of two Florida branches and securities gains in 2010.

Noninterest expense for the three months ended September 30, 2011 decreased $6.2 million primarily due to a 2010 write down on assets held-for-sale and other real estate owned expenses. Noninterest expense for the nine months ended September 30, 2011 decreased $15.7 million compared with the same period of 2010, due to the aforementioned factors.

Wealth Management

Net earnings for the three months ended September 30, 2011 was essentially flat compared with the same period in 2010. Net earnings for the nine months ended September 30, 2011 increased $580,000, or 26.3%, compared with the same period in 2010. The increase in year-to-date earnings was due primarily to an increase in asset management fees.

Noninterest income for the three months ended September 30, 2011 increased $246,000, or 5.3%, compared with the same period in 2010. Noninterest income for the nine months ended September 30, 2011 increased $1.3 million, or 9.1%.

Noninterest expense for the three months and nine months ended September 30, 2011 compared with the same periods in 2010 increased $249,000, or 7.2%, and $306,000, or 2.9%. The increase was primarily due to increased compensation expense.

Insurance

Net earnings for the three months ended September 30, 2011 decreased $48,000 compared with the same period of 2010. Net earnings for the nine months ended September 30, 2011 decreased $276,000 compared with the same period of 2010 primarily due to the $353,000 increase in noninterest expense, which was the result of the addition of new producers.

Other

“Other” consists of interest expense on our junior subordinated debentures, which is not allocated to the business segments. Interest expense on these borrowings was unchanged. A discrete tax benefit of $428,000 related to a prior acquisition was recorded in the third quarter of 2011.

Financial Condition

Our total assets were unchanged at $1.5 billion as of September 30, 2011 compared with December 31, 2010. Our loan portfolio increased $54.1 million, or 5.8%, to $985.5 million as of September 30, 2011. Our securities portfolio decreased $91.8 million, or 25.5%, to $267.6 million compared with $359.4 million as of December 31, 2010. Shareholders’ equity increased $5.5 million, or 3.3%, to $172.2 million compared with $166.6 million as of December 31, 2010.

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 43.9% of our portfolio as of September 30, 2011. Total consumer loans, which consist of residential real estate, home equity lines of credit, consumer installment-indirect and other consumer loans, made up 55.4% of our loan portfolio as of September 30, 2011. Loans held-for-sale composed 0.7% of our portfolio.

Total loans were $985.5 million as of September 30, 2011, an increase of $54.1 million, or 5.8%, compared with December 31, 2010. The increase in loans was mainly in commercial loans.

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


	September 30, 2011					December 31, 2010
	Amount		Percent			Amount		Percent
	(dollars in thousands)
Commercial:
Commercial	$	194,393		19.7	%	$	147,090		15.8	%
Commercial real estate		185,541		18.8			166,043		17.8
Real estate construction		52,993		5.4			46,326		5.0

Total commercial		432,927		43.9			359,459		38.6
Consumer:
Residential real estate first lien		201,485		20.5			205,531		22.1
Residential real estate second lien		258,020		26.2			269,727		28.9
Home equity lines		56,869		5.8			60,609		6.5
Consumer other		28,935		2.9			25,131		2.7

Total consumer		545,309		55.4			560,998		60.2

Loans receivable		978,236		99.3			920,457		98.8
Loans held-for-sale		7,277		0.7			10,915		1.2

Total loans	$	985,513		100.0	%		931,372		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, 2011			December 31, 2010
	(dollars in thousands)
Nonaccrual loans – Texas (1)	$	9,203		$	15,167
Nonaccrual loans – Florida (1)		8,850			11,310

Total nonaccrual loans (1)		18,053			26,477
Other real estate owned – Texas		3,589			4,783
Other real estate owned – Florida		1,546			4,515

Total other real estate owned		5,135			9,298

Total nonperforming assets	$	23,188		$	35,775

Accruing loans past due 90 days or more	$	—		$	313

Restructured loans still accruing	$	1,706		$	804

Nonperforming assets to total loans and other real estate owned		2.34	%		3.80	%

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

Nonperforming assets were $23.2 million and $35.8 million as of September 30, 2011 and December 31, 2010, a decrease of $12.6 million, or 35.2%. Our ratio of nonperforming assets to total loans and other real estate owned was 2.34% and 3.80% as of September 30, 2011 and December 31, 2010. At September 30, 2011, nonaccrual loans were $18.1 million, compared with $26.5 million at December 31, 2010, a decrease of $8.4 million, or 31.8%. Nonaccrual commercial loans consisted of 5 relationships which were primarily in Houston. Commercial real estate nonaccrual loans consisted of 10 loans that are mostly in Florida. Construction and land nonaccrual loans consist of 3 relationships which are primarily in Texas. Other real estate owned was $5.1 million at September 30, 2011 compared with $9.3 million at December 31, 2010, a decrease of $4.2 million, or 44.8%. The decrease was due mainly to the sale of repossessed land in Florida. Restructured loans still accruing were $1.7 million as of September 30, 2011, compared with $804,000 as of December 31, 2010. Restructured loans still accruing consisted primarily of a commercial loan in Texas.

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


	September 30, 2011				December 31, 2010
	Outstanding Balance		Specific Allocation of Allowance		Outstanding Balance		Specific Allocation of Allowance
			(dollars in thousands)
Commercial:
Commercial	$	1,078	$	4	$	741	$	189
Commercial real estate		3,381		248		4,484		—
Real estate construction		2,885		43		3,554		—

Total commercial		7,344		295		8,779		189
Consumer:
Residential real estate first lien (1)		5,560		—		10,320		2
Residential real estate second lien and home equity lines		281		—		707		372
Consumer		—		—		—		—

Total consumer		5,841		—		11,027		374
Loans held-for-sale		4,868		—		6,671		—

Total nonaccrual loans	$	18,053	$	295	$	26,477	$	563

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

The decrease in first mortgage loans resulted primarily from the payoff of a $4.3 million loan in Texas. The decrease in commercial real estate loans was due to the resolution of several loans mostly in Florida. The decrease in loans held-for-sale was due to the sale of a $2.3 million commercial real estate loan in Florida and the resolution of a $2.1 million commercial real estate loan in Florida. These decreases were offset by the classification of a $2.6 million Florida commercial real estate loan to held-for-sale, which was subsequently sold in October 2011.

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 the areas of Florida in which we hold loans. 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 2011 were $6.0 million, or 0.84% of average total loans on an annualized basis, compared with $38.1 million, or 4.81% of average total loans on an annualized basis for the first nine months of 2010. Net charge-offs for the nine months ended September 30, 2010 included significant charge-offs in the Florida loan portfolio.

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, 2011			As of and for the Year Ended December 31, 2010
	(dollars in thousands)
Average total loans outstanding	$	953,959		$	1,046,164

Loans receivable at end of period (excluding loans held-for-sale)	$	978,236		$	920,457

Allowance for loan losses at beginning of period	$	18,639		$	26,501
Charge-offs:
Commercial:
Commercial		(309	)		(965	)
Commercial real estate		(2,429	)		(24,527	)
Real estate construction		(205	)		(9,159	)

Total commercial		(2,943	)		(34,651	)

Consumer:
Residential real estate first lien		(846	)		(4,089	)
Residential real estate second lien		(2,195	)		(3,720	)
Home equity lines		(1,054	)		(2,030	)
Consumer other		(117	)		(414	)

Total consumer		(4,212	)		(10,253	)

Total charge-offs		(7,155	)		(44,904	)

Recoveries:
Commercial:
Commercial		89			883
Commercial real estate		155			17
Real estate construction		150			104

Total commercial		394			1,004

Consumer:
Residential real estate first lien		354			304
Residential real estate second lien		221			226
Home equity lines		70			180
Consumer other		130			159

Total consumer		775			869

Total recoveries		1,169			1,873

Net charge-offs		(5,986	)		(43,031	)

Provision for loan losses		5,354			35,169

Allowance for loan losses at end of period	$	18,007		$	18,639

Ratio of net charge-offs to average loans		0.84	%		4.11	%
Ratio of allowance for loan losses to period end loans (excluding loans held-for-sale)		1.84			2.02
Ratio of allowance for loan losses to nonaccrual loans (excluding nonaccrual loans held-for-sale of $4,868 and $6,671)		136.57			94.11

Securities

Total securities were $267.6 million as of September 30, 2011, a decrease of $91.8 million, or 25.5%, compared with $359.4 million as of December 31, 2010. The decrease was due to pay downs in the securities portfolio as well as strategic sales to shorten the duration.

Deposits

Our deposits averaged $1.1 billion for the nine months ended September 30, 2011, an increase of $49.7 million, or 5.0%, over average deposits (excluding held-for-sale) for the year ended December 31, 2010. As of September 30, 2011, core deposits (which consist of noninterest-bearing deposits, interest checking, money market and savings and time deposits less than $100,000) were $802.3 million, or 76.6%, of total deposits, while time deposits $100,000 and greater and brokered deposits made up 23.4% of total deposits. As of September 30, 2011, total deposits decreased $2.7 million, or 0.3%, to $1.0 billion compared with total deposits as of December 31, 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, 2011					Year Ended December 31, 2010
	Average Balance		Average Rate			Average Balance		Average Rate
	(dollars in thousands)
Noninterest-bearing deposits	$	241,755		—	%	$	189,071		—	%
Interest checking		165,708		0.19			146,863		0.28
Money market and savings		271,054		0.38			264,227		0.67
Time deposits less than $100,000		110,093		2.27			129,365		2.40

Core deposits		788,610		0.49			729,526		0.72

Time deposits $100,000 and greater		241,067		1.90			250,035		2.20
Brokered deposits		23,391		2.34			23,836		2.58

Subtotal		1,053,068		0.85			1,003,397		1.14
Noninterest-bearing deposits held-for-sale		—		—			16,188		—
Interest-bearing deposits held-for-sale		—		—			190,157		1.69

Total deposits	$	1,053,068		0.85	%	$	1,209,742		1.21	%

Borrowings, Repurchase Agreements and Junior Subordinated Debentures

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

Our borrowings and repurchase agreements were $219.4 million as of September 30, 2011, essentially unchanged from December 31, 2010. The outstanding balance as of September 30, 2011 includes $208.1 million in long term advances and $11.3 million in repurchase agreements with clients. Included in the long term advances are $95.0 million of long term advances that have call provisions that are at the discretion of the FHLB which could shorten the maturity of the borrowings.

The following table summarizes our two issues of junior subordinated debentures outstanding as of September 30, 2011:

Description

Issuance
and Call
Dates (1)

Trust
Preferred
Securities
Outstanding

Interest
Rate as of
September 30,
2011

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

3.30

Adjustable quarterly

3 month

5,155

9/24/2033

LIBOR + 2.95%

Encore Capital

Trust III

4/19/2007

15,000

6.85

Fixed rate (2)

6.85%(2)

15,464

4/19/2037

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

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

Liquidity and Funding

Our liquidity represents our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan 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, 2011, our year-to-date average deposits were $1.1 billion, or 71.4% of average total assets.

Shareholders’ Equity

Shareholders’ equity increased $5.5 million, or 3.3%, to $172.2 million as of September 30, 2011 compared with $166.6 million as of December 31, 2010, primarily due to our net earnings.

On September 27, 2011, we issued $32.9 million in Series B Preferred Stock to the Secretary of the Treasury in connection with the Small Business Lending Fund (SBLF). As a part of the same transaction, we redeemed $34.0 million in Series A Preferred Stock issued to the United States Department of the Treasury in connection with our participation in the TARP Capital Purchase Program. Upon redemption of the Series A Preferred Stock, we incurred a one-time accelerated preferred stock discount of $4.1 million.

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 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, 2011:


	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	$	135,983		9.34	%	$	58,249		4.00	%		N/A		N/A
Tier 1 risk-based		135,983		13.37			40,686		4.00			N/A		N/A
Total risk-based		148,773		14.63			81,373		8.00			N/A		N/A
Encore Bank, N.A.
Leverage	$	128,404		8.82	%	$	58,240		4.00	%	$	72,800		5.00	%
Tier 1 risk-based		128,404		12.64			40,646		4.00			60,969		6.00
Total risk-based		141,191		13.89			81,293		8.00			101,616		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, 2010.

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 2011, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

In addition to the information contained in this report, you should consider the factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010. 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, 2011:

ISSUER PURCHASES OF EQUITY SECURITIES

Month in 2011

Total Number of
Shares Purchased (1)

Average Price Paid
per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs (2)

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs (2)

July

—

N/A

August

7,659

11.46

N/A

September

—

N/A

Total

7,659

11.46

N/A

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

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

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. [Removed and 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		Statement of Designations establishing the terms of the Series B 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 September 29, 2011).

3.5		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 Senior Non-Cumulative Perpetual Preferred Stock, Series B, par value $1.00 per share (incorporated herein by reference to Exhibit 4.1 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on September 29, 2011).

10.1		Securities Purchase Agreement, dated September 27, 2011, between the Secretary of the Treasury and Encore Bancshares, Inc., with respect to the issuance and sale of the Series B Preferred Stock (incorporated herein by reference to Exhibit 10.1 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on September 29, 2011).

10.2		Repurchase Agreement, dated September 27, 2011, between the United States Department of the Treasury and Encore Bancshares, Inc., with respect to the repurchase of the Series A Preferred Stock (incorporated herein by reference to Exhibit 10.2 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on September 29, 2011).

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.

101*		Interactive Data File.

*	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 7, 2011				/s/ James S. D’Agostino, Jr.
(Date)				James S. D’Agostino, Jr., Chief Executive Officer

November 7, 2011				/s/ L. Anderson Creel
(Date)				L. Anderson Creel, Chief Financial Officer, Executive Vice President and Treasurer