Form 10-Q for quarterly period ended June 30, 2011

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10-Q 1 d10q.htm FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 2011 Form 10-Q for quarterly period ended June 30, 2011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarter Ended June 30, 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 July 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 – June 30, 2011 and December 31, 2010 (unaudited)		3

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

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

		Condensed Consolidated Statements of Cash Flows – Six months ended June 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		22

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36

	Item 4.	Controls and Procedures		36

Part II. OTHER INFORMATION

	Item 1.	Legal Proceedings		36

	Item 1A.	Risk Factors		36

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37

	Item 3.	Defaults Upon Senior Securities		37

	Item 4.	Removed and Reserved		37

	Item 5.	Other Information		37

	Item 6.	Exhibits		38

Signatures				39

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)


	June 30, 2011			December 31, 2010
ASSETS
Cash and due from banks	$	13,025		$	13,523
Interest-bearing deposits in banks		91,790			49,478
Federal funds sold and other temporary investments		904			1,098

Cash and cash equivalents		105,719			64,099
Securities available-for-sale, at estimated fair value		183,058			251,784
Securities held-to-maturity, at amortized cost		104,565			107,618
Loans held-for-sale, at lower of cost or fair value		863			10,915

Loans receivable		970,566			920,457
Allowance for loan losses		(19,110	)		(18,639	)

Net loans receivable		951,456			901,818
Federal Home Loan Bank of Dallas stock, at cost		9,810			9,610
Investment in real estate		7,200			9,298
Premises and equipment, net		6,545			7,023
Cash surrender value of life insurance policies		16,217			15,935
Goodwill		35,799			35,799
Other intangible assets, net		4,434			4,716
Other assets		40,829			47,882

	$	1,466,495		$	1,466,497


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	236,873		$	219,756
Interest-bearing		806,627			830,688

Total deposits		1,043,500			1,050,444
Borrowings and repurchase agreements		222,879			219,777
Junior subordinated debentures		20,619			20,619
Other liabilities		7,783			9,016

Total liabilities		1,294,781			1,299,856
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $1 par value, 20,000 shares authorized; 34 shares issued at June 30, 2011 and December 31, 2010; aggregate liquidation preference of $34,222		29,766			29,500
Common stock, $1 par value, 50,000 shares authorized; 11,733 shares at June 30, 2011 and 11,479 shares at December 31, 2010 issued		11,733			11,479
Additional paid-in capital		123,771			122,678
Retained earnings		6,742			4,641
Common stock in treasury, at cost (71 shares at June 30, 2011 and 48 shares at December 31, 2010)		(735	)		(455	)
Accumulated other comprehensive income (loss)		437			(1,202	)

Total shareholders’ equity		171,714			166,641

	$	1,466,495		$	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 June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Interest income:
Loans, including fees	$	14,254		$	15,441		$	27,696		$	31,135
Securities		2,025			1,526			4,330			3,572
Federal funds sold and other temporary investments		104			234			196			449

Total interest income		16,383			17,201			32,222			35,156
Interest expense:
Deposits		2,234			3,825			4,574			7,877
Borrowings and repurchase agreements		2,117			2,139			4,223			4,255
Junior subordinated debentures		297			298			595			595

Total interest expense		4,648			6,262			9,392			12,727

Net interest income		11,735			10,939			22,830			22,429
Provision for loan losses		1,919			18,013			4,089			22,973

Net interest income after provision for loan losses		9,816			(7,074	)		18,741			(544	)
Noninterest income:
Trust and investment management fees		5,126			4,591			10,198			9,209
Mortgage banking		97			78			237			114
Insurance commissions and fees		1,587			1,488			3,027			3,127
Net gain (loss) on sale of available-for-sale securities		(64	)		120			(95	)		219
Gain on sale of branches		—			1,115			—			1,115
Other		588			555			1,033			1,072

Total noninterest income		7,334			7,947			14,400			14,856
Noninterest expense:
Compensation		8,414			8,638			17,120			17,189
Occupancy		1,128			1,454			2,415			2,932
Equipment		268			330			509			693
Advertising and promotion		156			153			312			334
Outside data processing		793			897			1,576			1,767
Professional fees		905			1,435			2,039			2,356
Intangible amortization		143			159			283			317
FDIC assessment		472			703			1,270			1,358
Foreclosed real estate expenses, net		666			1,402			749			2,526
Write down of assets held-for-sale		427			2,793			448			5,328
Other		740			1,431			1,746			2,859

Total noninterest expense		14,112			19,395			28,467			37,659

Net earnings (loss) before income taxes		3,038			(18,522	)		4,674			(23,347	)
Income tax expense (benefit)		973			(5,869	)		1,457			(8,443	)

Net earnings (loss)	$	2,065		$	(12,653	)	$	3,217		$	(14,904	)

Earnings (loss) available to common shareholders	$	1,507		$	(13,209	)	$	2,101		$	(16,016	)

Earnings (loss) per common share:
Basic	$	0.13		$	(1.16	)	$	0.18		$	(1.46	)
Diluted		0.13			(1.16	)		0.18			(1.46	)
Average common shares outstanding		11,582			11,375			11,537			10,969
Diluted average common shares outstanding		11,628			11,375			11,602			10,969

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

Six Months Ended June 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		—		—			—			752		—			—			—			752
Issuance of common stock		—		256			256			313		—			—			—			569
Forfeiture of restricted stock		—		(2	)		(2	)		2		—			—			—			—
Purchase of treasury stock (23 shares)		—		—			—			—		—			(280	)		—			(280	)
Excess tax benefit from stock-based compensation		—		—			—			26		—			—			—			26
Comprehensive income:
Net earnings		—		—			—			—		3,217			—			—			3,217
Change in net unrealized gain (loss) on securities available-for-sale, net of deferred tax expense of $909 and reclassification adjustment		—		—			—			—		—			—			1,639			1,639

Total comprehensive income																					4,856
Dividends on preferred stock and amortization of preferred stock discount		266		—			—			—		(1,116	)		—			—			(850	)

Balance at June 30, 2011	$	29,766		11,733		$	11,733		$	123,771	$	6,742		$	(735	)	$	437		$	171,714

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)


	Six Months Ended June 30,
	2011			2010
Cash flows from operating activities:
Net earnings (loss)	$	3,217		$	(14,904	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Provision for loan losses		4,089			22,973
Write down of assets held-for-sale and investment in real estate		1,153			7,125
Depreciation and amortization, net		1,478			1,240
Stock-based compensation		752			605
(Gain) loss on sale of available-for-sale securities and other assets, net		51			(1,115	)
Loans originated for sale in the secondary market		(9,067	)		(9,284	)
Proceeds from sale of mortgage loans		11,055			9,709
Other, net		4,611			(5,917	)

Net cash provided by operating activities		17,339			10,432

Cash flows from investing activities:
Purchases of available-for-sale securities		(19,583	)		(61,327	)
Principal collected on available-for-sale securities		11,746			17,966
Proceeds from sales of available-for-sale securities		78,704			109,378
Purchases of held-to-maturity securities		(5,000	)		—
Proceeds from prepayments and maturities of held-to-maturity securities		8,043			48,805
Proceeds from sales of foreclosed real estate		2,558			4,579
Net cash paid for sale of branches		—			(49,364	)
Cash paid for contingency payment related to prior acquisition		—			(2,095	)
Proceeds from sale of loans receivable		2,815			—
Net increase in loans		(50,047	)		(1,323	)
Purchase of Federal Home Loan Bank stock, net of redemption		(182	)		(6	)
Purchases of premises and equipment		(118	)		(179	)

Net cash provided by investing activities		28,936			66,434

Cash flows from financing activities:
Net increase (decrease) in deposits		(6,944	)		58,305
Proceeds from long term Federal Home Loan Bank of Dallas borrowings		—			52,500
Repayment of long term Federal Home Loan Bank of Dallas borrowings		(25	)		(55,118	)
Increase in repurchase agreements		2,849			1,478
Proceeds from issuance of common stock, net of purchase of treasury stock		289			(113	)
Preferred dividend paid		(850	)		(850	)
Other, net		26			—

Net cash provided by (used in) financing activities		(4,655	)		56,202

Net increase in cash and cash equivalents		41,620			133,068
Cash and cash equivalents at beginning of period		64,099			197,176

Cash and cash equivalents at end of period	$	105,719		$	330,244

Supplementary cash flows information:
Interest paid on deposits and borrowed funds	$	9,424		$	12,653
Income taxes paid		160			—
Noncash investing and financing activities:
Real estate acquired in satisfaction of loans		1,275			3,968
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

June 30, 2011 and 2010

(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 we, the Company or our) 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. Our principal subsidiary is Encore Bank, National Association (Encore Bank), which operates as a national banking association with its main office in Houston, Texas. We provide 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). We provide property and casualty insurance products through our 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. We have made all adjustments that, in our opinion, are necessary for a fair presentation of results of the interim periods, and all such adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated. These unaudited condensed consolidated financial statements and the notes thereto should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 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).

We must make estimates and assumptions that affect amounts reported in our 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 six months ended June 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

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

We provide a variety of financial services through our 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. Our product offerings, places of business and service delivery are positioned to best meet the needs of professional firms, privately-owned businesses, investors and affluent individuals.

Adoption of Updates to the FASB Codification

On January 1, 2011, we 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 our 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 us prospectively for business combinations occurring after December 31, 2010.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

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

Pending Accounting Pronouncements

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 will be effective for us on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. We are currently evaluating the impact of ASU 2011-02 on our financial statements.

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 us on January 1, 2012. We are currently evaluating the impact of ASU 2011-03 on our 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 us on January 1, 2012 and is not expected to have a significant impact on our 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 stockholders’ 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 us on January 1, 2012.

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

Comprehensive Income

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

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

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

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Unrealized holding gains on available-for-sale securities arising during period	$	2,873		$	492		$	2,643		$	940
Reclassification adjustment for gains (losses) included in income		(64	)		120			(95	)		219

Net pre-tax gain recognized in other comprehensive income		2,809			612			2,548			1,159
Tax expense		(983	)		(253	)		(909	)		(425	)

Net-of-tax impact on comprehensive income	$	1,826		$	359		$	1,639		$	734

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

(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
June 30, 2011
Available-for-sale:
U.S. Government securities	$	128,161	$	405	$	(558	)	$	128,008
Securities of U.S. states and political subdivisions		6,795		—		(60	)		6,735
Mortgage-backed securities		25,895		531		(24	)		26,402
Corporate securities		13,967		589		(488	)		14,068
Other securities		4,938		58		—			4,996

Total		179,756		1,583		(1,130	)		180,209
Marketable equity securities		2,567		282		—			2,849

Total available-for-sale securities	$	182,323	$	1,865	$	(1,130	)	$	183,058

Held-to-maturity:
U.S. Government securities	$	10,000	$	51	$	(3	)	$	10,048
Securities of U.S. states and political subdivisions		21,973		858		(75	)		22,756
Mortgage-backed securities		55,351		687		(314	)		55,724
Corporate securities		12,272		1,909		—			14,181
Other securities		4,969		—		(28	)		4,941

Total held-to-maturity securities	$	104,565	$	3,505	$	(420	)	$	107,650


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 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 securities		17,212		1,840		—			19,052
Other securities		5,128		—		—			5,128

Total available-for-sale securities	$	107,618	$	2,644	$	(524	)	$	109,738

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

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

We own certain debt securities with unrealized losses as of June 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	Number of Securities		Fair Value		Unrealized Losses

June 30, 2011
Less than 12 months
Available-for-sale:
U.S. Government securities		5	$	24,494	$	(558	)
Securities of U.S. states and political subdivisions		6		5,735		(60	)
Corporate securities		3		8,502		(488	)

Total available-for-sale securities		14	$	38,731	$	(1,106	)

Held-to-maturity:
U.S. Government securities		1	$	4,997	$	(3	)
Securities of U.S. states and political subdivisions		4		3,585		(75	)
Mortgage-backed securities		8		38,943		(310	)
Other securities		1		4,941		(28	)

Total held-to-maturity securities		14	$	52,466	$	(416	)

More than 12 months
Available-for-sale:
Mortgage-backed securities		2	$	2,479	$	(24	)

Held-to-maturity:
Mortgage-backed securities		4	$	806	$	(4	)


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 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	)

We do not believe any of the above securities are impaired due to credit quality. These securities have unrealized losses primarily due to changes in market interest rates. We expect to recover the entire amortized cost of these securities since we do not intend to sell the securities. Additionally, it is not more likely than not that we will be required to sell these securities before recovery of our cost basis. Accordingly, as of June 30, 2011 and December 31, 2010, we believe 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

June 30, 2011 and 2010

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

The following table shows the amortized cost and estimated fair value of securities by contractual maturity at June 30, 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	$	45,114	$	45,252	$	—	$	—
Over one year through five years		60,415		60,603		7,608		8,673
After five years through ten years		34,027		33,570		9,664		10,559
Over ten years		14,069		14,137		31,942		32,694

Total		153,625		153,562		49,214		51,926
Mortgage-backed and marketable equity securities		28,698		29,496		55,351		55,724

Total securities	$	182,323	$	183,058	$	104,565	$	107,650

Mortgage-backed securities consist of federal agency pass-through securities and have a weighted average yield of 3.16% and 2.85% at June 30, 2011 and December 31, 2010. As of June 30, 2011, the mortgage-backed securities have contractual maturities from 2018 to 2040. Accrued interest receivable on mortgage-backed securities was $227 and $328 at June 30, 2011 and December 31, 2010.

At June 30, 2011 and December 31, 2010, securities with a carrying value of $116,762 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 $591 and $283 and gross realized losses were $686 and $64 on sales of available-for-sale securities for the six months ended June 30, 2011 and 2010.

NOTE C – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following:


	June 30, 2011		December 31, 2010
Commercial:
Commercial	$	194,260	$	147,090
Commercial real estate		167,973		166,043
Real estate construction		54,769		46,326

Total commercial		417,002		359,459

Consumer:
Residential real estate first lien		205,171		205,531
Residential real estate second lien		262,958		269,727
Home equity lines		58,553		60,609
Consumer other		26,882		25,131

Total consumer		553,564		560,998

Loans receivable		970,566		920,457
Loans held-for-sale		863		10,915

Total loans	$	971,429	$	931,372

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

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

Included in loans receivable is $2,194 and $2,484 of net deferred loan origination costs and unamortized premium and discount at June 30, 2011 and December 31, 2010. Accrued interest receivable on loans was $3,281 and $3,319 at June 30, 2011 and December 31, 2010. Consumer other loans include client overdrafts of $475 and $293 as of June 30, 2011 and December 31, 2010.

In the first quarter of 2011, $7,327 of loans held-for-sale were transferred to loans receivable at fair value because we no longer had plans to sell these loans. Of this amount, $3,138 was impaired as of June 30, 2011.

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


Six Months Ended June 30, 2011	Commercial			Commercial Real Estate			Real Estate Construction			Residential Real Estate First Lien			Residential Real Estate Second Lien			Home Equity Lines			Consumer Other			Total
Allowance for Loan Losses:
Beginning balance	$	4,150		$	2,808		$	1,486		$	3,355		$	4,713		$	1,835		$	292		$	18,639
Charge-offs		(308	)		(1,217	)		(141	)		(527	)		(1,572	)		(656	)		(103	)		(4,524	)
Recoveries		13			153			149			264			194			42			91			906
Provision		625			1,070			346			325			1,082			649			(8	)		4,089

Ending balance	$	4,480		$	2,814		$	1,840		$	3,417		$	4,417		$	1,870		$	272		$	19,110

Ending balance individually evaluated for impairment	$	104		$	—		$	43		$	—		$	—		$	—		$	—		$	147

Loans (1):
Ending balance	$	194,260		$	167,973		$	54,769		$	205,171		$	262,958		$	58,553		$	26,882		$	970,566

Ending balance individually evaluated for impairment	$	1,957		$	5,862		$	3,143		$	2,081		$	—		$	—		$	—		$	13,043

Ending balance collectively evaluated for impairment	$	192,303		$	162,111		$	51,626		$	203,090		$	262,958		$	58,553		$	26,882		$	957,523


Year Ended December 31, 2010
Allowance for Loan Losses:
Beginning balance	$	4,514		$	10,580		$	2,777		$	3,061		$	3,673		$	1,577		$	319		$	26,501
Charge-offs		(965	)		(24,527	)		(9,159	)		(4,089	)		(3,720	)		(2,030	)		(414	)		(44,904	)
Recoveries		883			17			104			304			226			180			159			1,873
Provision		(282	)		16,738			7,764			4,079			4,534			2,108			228			35,169

Ending balance	$	4,150		$	2,808		$	1,486		$	3,355		$	4,713		$	1,835		$	292		$	18,639

Ending balance individually evaluated for impairment	$	189		$	—		$	—		$	2		$	372		$	—		$	—		$	563

Loans (1):
Ending balance	$	147,090		$	166,043		$	46,326		$	205,531		$	269,727		$	60,609		$	25,131		$	920,457

Ending balance individually evaluated for impairment	$	740		$	4,154		$	3,411		$	6,500		$	372		$	—		$	—		$	15,177

Ending balance collectively evaluated for impairment	$	146,350		$	161,889		$	42,915		$	199,031		$	269,355		$	60,609		$	25,131		$	905,280

(1)	Excludes loans held-for-sale.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

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

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


	June 30, 2011		December 31, 2010
Impaired loans on nonaccrual without a valuation allowance	$	8,154	$	14,109
Impaired loans on nonaccrual with a valuation allowance		3,430		561
Impaired loans still accruing with a valuation allowance		1,459		507

Total impaired loans (1)	$	13,043	$	15,177

Valuation allowance related to impaired loans	$	147	$	563

Total nonaccrual loans	$	16,552	$	26,477

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

Restructured loans still accruing	$	1,522	$	804

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

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

The average investment in impaired loans was $13,852 for the six months ended June 30, 2011 and $18,179 for the year ended December 31, 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 past due loans is as follows:


June 30, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans (1)		Recorded Investment Greater Than 90 Days and Accruing
Commercial	$	623	$	41	$	—	$	664	$	193,596	$	194,260	$	—
Commercial real estate		1,968		95		2,446		4,509		163,464		167,973		—
Real estate construction		—		900		254		1,154		53,615		54,769		—

Total commercial		2,591		1,036		2,700		6,327		410,675		417,002

Residential real estate first lien		1,436		522		4,196		6,154		199,017		205,171		—
Residential real estate second lien		292		121		402		815		262,143		262,958		—
Home equity lines		151		252		—		403		58,150		58,553		—
Consumer other		249		9		—		258		26,624		26,882		—

Total consumer		2,128		904		4,598		7,630		545,934		553,564		—

Total	$	4,719	$	1,940	$	7,298	$	13,957	$	956,609	$	970,566	$	—

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

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


December 31, 2010	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans (1)		Recorded Investment Greater Than 90 Days and Accruing
Commercial	$	196	$	338	$	313	$	847	$	146,243	$	147,090	$	313
Commercial real estate		239		1,417		1,858		3,514		162,529		166,043		—
Real estate construction		—		—		530		530		45,796		46,326		—

Total commercial		435		1,755		2,701		4,891		354,568		359,459		313

Residential real estate first lien		546		347		9,759		10,652		194,879		205,531		—
Residential real estate second lien		671		192		675		1,538		268,189		269,727		—
Home equity lines		306		149		—		455		60,154		60,609		—
Consumer other		742		45		—		787		24,344		25,131		—

Total consumer		2,265		733		10,434		13,432		547,566		560,998		—

Total	$	2,700	$	2,488	$	13,135	$	18,323	$	902,134	$	920,457	$	313

(1)	Excludes loans held-for-sale.

Impaired loans are as follows:


	June 30, 2011						December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	551	$	574	$	—
Commercial real estate		5,862		10,224		—		4,154		5,321		—
Real estate construction		211		1,299		—		3,411		6,024		—
Residential real estate first lien		2,081		3,717		—		5,993		7,393		—

With an allowance recorded:
Commercial	$	1,957	$	1,999	$	104	$	189	$	189	$	189
Real estate construction		2,932		4,861		43		—		—		—
Residential real estate first lien		—		—		—		507		507		2
Residential real estate second lien		—		—		—		372		372		372

Total:
Commercial	$	10,962	$	18,383	$	147	$	8,305	$	12,108	$	189
Consumer		2,081		3,717		—		6,872		8,272		374

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

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

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


	June 30, 2011						December 31, 2010
	Commercial		Commercial Real Estate		Real Estate Construction		Commercial		Commercial Real Estate		Real Estate Construction
Grade:
Watch	$	9,210	$	3,081	$	4,893	$	5,074	$	10,464	$	6,154
Special Mention		2,740		4,940		1,529		3,309		4,475		1,100
Substandard		6,127		16,070		5,890		8,488		16,378		8,618
Doubtful		—		—		—		189		—		—

Total	$	18,077	$	24,091	$	12,312	$	17,060	$	31,317	$	15,872

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


	Residential Real Estate First Lien		Residential Real Estate Second Lien		Home Equity Lines		Consumer Other
June 30, 2011
Performing	$	199,305	$	262,391	$	58,553	$	26,882
Nonperforming		5,866		567		—		—

Total	$	205,171	$	262,958	$	58,553	$	26,882


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

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

NOTE D – REGULATORY MATTERS

We and Encore Bank are subject to various regulatory capital adequacy requirements administered by the Board of Governors of the Federal Reserve System (Federal Reserve) and the OCC. Actual and minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as of June 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
June 30, 2011
Tier 1 capital (to average assets)
Tier 1 (leverage)
Encore Bancshares, Inc.	$	134,725		9.67	%	$	55,750		4.00	%		N/A		N/A
Encore Bank, N.A.		125,399		8.99			55,808		4.00		$	69,760		5.00	%
Tier 1 capital (to risk-based assets)
Encore Bancshares, Inc.	$	134,725		13.23	%	$	40,727		4.00	%		N/A		N/A
Encore Bank, N.A		125,399		12.34			40,641		4.00		$	60,961		6.00	%
Total capital (to risk-based assets)
Encore Bancshares, Inc.	$	147,542		14.49	%	$	81,453		8.00	%		N/A		N/A
Encore Bank, N.A.		138,199		13.60			81,281		8.00		$	101,601		10.00	%

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

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

NOTE E – COMMITMENTS AND CONTINGENCIES

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

NOTE F – EARNINGS PER COMMON SHARE

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


	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010
Basic:
Earnings (loss) available to common shareholders	$	1,507	$	(13,209	)	$	2,101	$	(16,016	)
Average common shares outstanding, including nonvested restricted stock		11,582		11,375			11,537		10,969
Per Share	$	0.13	$	(1.16	)	$	0.18	$	(1.46	)
Diluted:
Average common shares outstanding		11,582		11,375			11,537		10,969
Add: Net effect of the assumed exercise of stock options		46		—			65		—

Diluted average common shares outstanding		11,628		11,375			11,602		10,969
Per Share	$	0.13	$	(1.16	)	$	0.18	$	(1.46	)
Anti-dilutive stock options and warrants not included in treasury stock method computation		700		1,335			707		1,339
Preferred dividends deducted from net earnings (loss)		558		556			1,116		1,112

No dividends have been declared on our common stock.

NOTE G – FAIR VALUE OF ASSETS AND LIABILITIES

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

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

•

Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

•

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

•

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

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

(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 June 30, 2011 and December 31, 2010:


	June 30, 2011
Description	Total		Level 1		Level 2
U.S. Government securities	$	128,008	$	115,533	$	12,475
Securities of U.S. states and political subdivisions		6,735		—		6,735
Mortgage-backed securities		26,402		—		26,402
Corporate securities		14,068		—		14,068
Other securities		7,845		3,094		4,751

Total available-for-sale securities	$	183,058	$	118,627	$	64,431


	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 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 June 30, 2011, the fair value of our investment in available-for-sale Level 2 U.S. Government securities was $12,475. The investments were comprised of $9,824 fixed-rate U.S. agency securities with a weighted average coupon rate of 2.4% and a weighted average life of 5.4 years and $2,651 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, we used a third party broker to value the securities using standard market matrix pricing for similar securities.

At June 30, 2011, the fair value of our investment in available-for-sale Level 2 securities of U.S. states and political subdivisions was $6,735. The investments were comprised of fixed-rate securities issued by municipal entities in Texas, with a weighted average coupon rate of 5.2% and a weighted average life of 11.2 years.

At June 30, 2011, the fair value of our investment in available-for-sale Level 2 mortgage-backed securities was $26,402. These investments were comprised of $9,473 fixed-rate GNMA and FNMA backed securities with a weighted average coupon rate of 4.2% and a weighted average life of 3.4 years and $16,929 variable-rate GNMA and FNMA backed securities with a weighted average coupon rate of 3.0% and a weighted average life of 4.0 years.

At June 30, 2011, the fair value of our investment in available-for-sale Level 2 corporate securities was $14,068. The investments were comprised of $9,516 fixed-rate corporate bonds with a weighted average coupon rate of 5.7% and a weighted average life of 9.2 years and $4,552 variable-rate corporate bonds with a weighted average coupon rate of 6.0% and a weighted average life of 9.2 years.

At June 30, 2011, the fair value of our investment in available-for-sale Level 2 other securities was $4,751. The investments were comprised of fixed-rate collateralized mortgage obligations with a weighted average coupon rate of 2.0% and a weighted average life of 4.1 years.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

(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 June 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 3		Losses for the Six Months Ended June 30, 2011
Loans	$	6,708	$	6,708	$	985
Investment in real estate		7,200		7,200		462

Total	$	13,908	$	13,908	$	1,447

We wrote down certain loans receivable that are collateralized by real estate to their appraised value less estimated costs to sell resulting in an impairment charge of $985 against the allowance for loan losses. We wrote down certain foreclosed real estate properties to their appraised value less estimated costs to sell resulting in an impairment charge of $462, 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
Investment in real estate		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.

We wrote down certain loans receivable that are collateralized by real estate to their appraised value less estimated costs to sell resulting in an impairment charge of $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. We wrote down certain foreclosed real estate 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, we base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in FASB ASC 820.

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

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

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

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


	June 30, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	105,719	$	105,719	$	64,099	$	64,099
Securities available-for-sale		183,058		183,058		251,784		251,784
Securities held-to-maturity		104,565		107,650		107,618		109,738
Loans held-for-sale		863		863		10,915		10,915
Loans receivable, net		951,456		981,804		901,818		925,426
Federal Home Loan Bank of Dallas stock		9,810		9,810		9,610		9,610
Accrued interest receivable		4,826		4,826		5,191		5,191

Financial liabilities:
Deposits	$	1,043,500	$	1,047,052	$	1,050,444	$	1,052,325
Borrowings and repurchase agreements		222,879		239,269		219,777		235,220
Accrued interest payable		1,122		1,122		1,154		1,154
Junior subordinated debentures		20,619		21,195		20,619		21,305

NOTE H – SEGMENT INFORMATION

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

Revenues, expenses, and assets are recorded by each line of business, and we separately review financial information. In addition to direct expenses, each line of business was allocated certain general corporate expenses such as executive administration, accounting, internal audit, and human resources based on the average asset level of the operating segment. Activities that are not directly attributable to the reportable operating segments, including the elimination of intercompany transactions, are presented under “Other”.

Encore Bancshares, Inc. and Subsidiaries

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

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

Financial results by operating segment were as follows:


	Banking			Wealth Management		Insurance		Other			Consolidated

For the three months ended June 30, 2011
Net interest income (expense)	$	12,014		$	16	$	2	$	(297	)	$	11,735
Provision for loan losses		1,919			—		—		—			1,919
Noninterest income		535			5,132		1,667		—			7,334
Noninterest expense		9,348			3,523		1,241		—			14,112

Earnings (loss) before income taxes		1,282			1,625		428		(297	)		3,038
Income tax expense (benefit)		353			574		150		(104	)		973

Net earnings (loss)	$	929		$	1,051	$	278	$	(193	)	$	2,065

Total assets at June 30, 2011	$	1,469,429		$	56,105	$	7,370	$	(66,409	)	$	1,466,495
For the three months ended June 30, 2010
Net interest income (expense)	$	11,191		$	41	$	5	$	(298	)	$	10,939
Provision for loan losses		18,013			—		—		—			18,013
Noninterest income		1,800			4,593		1,554		—			7,947
Noninterest expense		14,747			3,547		1,101		—			19,395

Earnings (loss) before income taxes		(19,769	)		1,087		458		(298	)		(18,522	)
Income tax expense (benefit)		(6,311	)		385		161		(104	)		(5,869	)

Net earnings (loss)	$	(13,458	)	$	702	$	297	$	(194	)	$	(12,653	)

Total assets at June 30, 2010	$	1,628,706		$	62,518	$	8,714	$	(74,323	)	$	1,625,615
For the six months ended June 30, 2011
Net interest income (expense)	$	23,381		$	40	$	4	$	(595	)	$	22,830
Provision for loan losses		4,089			—		—		—			4,089
Noninterest income		1,064			10,221		3,115		—			14,400
Noninterest expense		18,911			7,166		2,390		—			28,467

Earnings (loss) before income taxes		1,445			3,095		729		(595	)		4,674
Income tax expense (benefit)		319			1,090		256		(208	)		1,457

Net earnings (loss)	$	1,126		$	2,005	$	473	$	(387	)	$	3,217

Total assets at June 30, 2011	$	1,469,429		$	56,105	$	7,370	$	(66,409	)	$	1,466,495
For the six months ended June 30, 2010
Net interest income (expense)	$	22,933		$	81	$	10	$	(595	)	$	22,429
Provision for loan losses		22,973			—		—		—			22,973
Noninterest income		2,447			9,211		3,198		—			14,856
Noninterest expense		28,422			7,109		2,128		—			37,659

Earnings (loss) before income taxes		(26,015	)		2,183		1,080		(595	)		(23,347	)
Income tax expense (benefit)		(9,387	)		773		379		(208	)		(8,443	)

Net earnings (loss)	$	(16,628	)	$	1,410	$	701	$	(387	)	$	(14,904	)

Total assets at June 30, 2010	$	1,628,706		$	62,518	$	8,714	$	(74,323	)	$	1,625,615

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. 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 June 30, 2011, we reported, on a consolidated basis, total assets of $1.5 billion, total loans of $971.4 million, total deposits of $1.0 billion, shareholders’ equity of $171.7 million and $2.9 billion in assets under management.

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 June 30, 2011 were $2.1 million, compared with a net loss of $12.7 million for the quarter ended June 30, 2010. Earnings per diluted common share for the second quarter of 2011 were $0.13, compared with a loss per diluted common share of $1.16 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 4.33% and (32.89)%, a return on average assets of 0.57% and (3.13)%, and an efficiency ratio of 70.78 % and 93.16% for the quarters ended June 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 six months ended June 30, 2011 were $3.2 million, compared with a net loss of $14.9 million for the same period of 2010. Earnings per diluted common share for the six months ended June 30, 2011 were $0.18 compared with a loss per diluted common share of $1.46 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 3.06% and (20.24)%, a return on average assets of 0.45% and (1.85)%, and an efficiency ratio of 74.31% and 89.05% for the six months ended June 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 $11.8 million for the three months ended June 30, 2011, an increase of $784,000, or 7.1%, compared with the second quarter of 2010. Interest earning assets were $1.3 billion for the second quarter of 2011, a decrease of $179.0 million, compared with the same period of 2010, which was due to the sale of our Florida operations. The net interest margin (TE) increased 62 basis points to 3.54% for the same comparison period. The increase in margin was partially 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 had an interest recovery of $418,000 during the quarter for a lending relationship in Texas that had been on nonaccrual. Average noninterest-bearing deposits (excluding held-for-sale) were $217.6 million for the second quarter of 2011, a $49.6 million, or 29.5%, increase compared with the same period of 2010.

Net interest income (TE) was $23.1 million for the six months ended June 30, 2011, an increase of $380,000, or 1.7%, compared with the same period of 2010. Interest earning assets were $1.3 billion for the six months ended June 30, 2011, a decrease of $173.1 million, compared with the same period of 2010. For the six months ended June 30, 2011, the net interest margin (TE) was 3.46%, an increase of 45 basis points, compared with the same period of 2010. The increase in margin was due primarily to the improved balance sheet mix and the aforementioned interest recovery. Average noninterest-bearing deposits (excluding held-for-sale) were $214.3 million for the six months ended June 30, 2011, a $56.8 million, or 36.1%, 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 June 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)	$	955,019		$	14,304		6.01	%	$	1,059,695		$	15,505		5.87	%
Securities - TE yield (1)		315,681			2,087		2.65			186,777			1,586		3.41
Federal funds sold and other		71,909			104		0.58			275,148			234		0.34

Total interest-earning assets - TE yield (1)		1,342,609			16,495		4.93			1,521,620			17,325		4.57
Less: Allowance for loan losses		(19,219	)							(24,796	)
Noninterest-earning assets		127,583								122,236
Noninterest-earning assets held-for-sale		—								4,481

Total assets	$	1,450,973							$	1,623,541

Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Interest checking	$	163,926		$	81		0.20	%	$	145,856		$	113		0.31	%
Money market and savings		269,422			274		0.41			238,000			447		0.75
Time deposits		379,721			1,879		1.98			415,615			2,402		2.32
Interest-bearing deposits held-for-sale		—			—					201,919			863		1.71

Total interest-bearing deposits		813,069			2,234		1.10			1,001,390			3,825		1.53
Borrowings and repurchase agreements		223,145			2,117		3.81			218,794			2,139		3.92
Junior subordinated debentures		20,619			297		5.78			20,619			298		5.80

Total interest-bearing liabilities		1,056,833			4,648		1.76			1,240,803			6,262		2.02

Noninterest-bearing liabilities:
Noninterest-bearing deposits		217,624								168,021
Noninterest-bearing deposits held-for-sale		—								17,830
Other liabilities		7,225								6,384
Other liabilities held-for-sale		—								253

Total liabilities		1,281,682								1,433,291
Shareholders’ equity		169,291								190,250

Total liabilities and shareholders’ equity	$	1,450,973							$	1,623,541

Net interest income TE (1)				$	11,847							$	11,063

Net interest spread TE (1)							3.17	%							2.55	%
Net interest margin TE (1)							3.54	%							2.92	%
Net interest income				$	11,735							$	10,939
Taxable-equivalent adjustment					112								124

Net interest income on taxable-equivalent basis				$	11,847							$	11,063

(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


	Six Months Ended June 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)	$	944,250		$	27,799		5.94	%	$	1,062,022		$	31,265		5.94	%
Securities - TE yield (1)		334,859			4,456		2.68			208,463			3,692		3.57
Federal funds sold and other		66,029			196		0.60			247,736			449		0.37

Total interest-earning assets - TE yield (1)		1,345,138			32,451		4.86			1,518,221			35,406		4.70
Less: Allowance for loan losses		(18,913	)							(25,729	)
Noninterest-earning assets		129,373								124,249
Noninterest-earning assets held-for-sale (2)		—								5,921

Total assets	$	1,455,598							$	1,622,662

Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Interest checking	$	163,255		$	172		0.21	%	$	149,420		$	235		0.32	%
Money market and savings		278,177			583		0.42			239,140			953		0.80
Time deposits		379,433			3,819		2.03			408,075			4,816		2.38
Interest-bearing deposits held-for-sale (2)		—			—					210,814			1,873		1.79

Total interest-bearing deposits		820,865			4,574		1.12			1,007,449			7,877		1.58
Borrowings and repurchase agreements		223,964			4,223		3.80			219,771			4,255		3.90
Junior subordinated debentures		20,619			595		5.82			20,619			595		5.82

Total interest-bearing liabilities		1,065,448			9,392		1.78			1,247,839			12,727		2.06

Noninterest-bearing liabilities:
Noninterest-bearing deposits		214,273								157,459
Noninterest-bearing deposits held-for-sale (2)		—								17,523
Other liabilities		7,782								10,873
Other liabilities held-for-sale (2)		—								278

Total liabilities		1,287,503								1,433,972
Shareholders’ equity		168,095								188,690

Total liabilities and shareholders’ equity	$	1,455,598							$	1,622,662

Net interest income TE (1)				$	23,059							$	22,679

Net interest spread TE (1)							3.08	%							2.64	%
Net interest margin TE (1)							3.46	%							3.01	%
Net interest income				$	22,830							$	22,429
Taxable-equivalent adjustment					229								250

Net interest income on taxable-equivalent basis				$	23,059							$	22,679

(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 $1.9 million and $4.1 million for the three months and six months ended

June 30, 2011, compared with $18.0 million and $23.0 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 six 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 nonperforming assets in 2011 compared with 2010.

Noninterest Income

Noninterest income represented 38.46% and 42.08% of total revenue for the six months ended June 30, 2011 and 2010.

Noninterest income decreased $613,000, or 7.7%, to $7.3 million for the three months ended June 30, 2011, compared with the same period in 2010. The decrease was due primarily to a $1.1 million gain in 2010 on sale of two branches in Florida, partially offset by a $535,000, or 11.7%, increase in trust and investment management fees. The rise in trust and investment management fees was primarily due to a 10.5% increase in assets under management.

Noninterest income decreased $456,000, or 3.1%, to $14.4 million for the six months ended June 30, 2011, compared with the same period in 2010. The decrease was due primarily to the aforementioned gain on sale of two Florida branches, partially offset by a $989,000, or 10.7%, increase in trust and investment management fees.

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


	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
	(dollars in thousands)
Trust and investment management fees	$	5,126		$	4,591	$	10,198		$	9,209
Mortgage banking		97			78		237			114
Insurance commissions and fees		1,587			1,488		3,027			3,127
Net gain (loss) on sale of available-for-sale securities		(64	)		120		(95	)		219
Gain on sale of branches		—			1,115		—			1,115
Other		588			555		1,033			1,072

Total noninterest income	$	7,334		$	7,947	$	14,400		$	14,856

Noninterest Expense

Noninterest expense was $14.1 million for the second quarter of 2011, a decrease of $5.3 million, compared with the same period of 2010. The decrease in noninterest expense was due to a combination of lower compensation, occupancy, professional fees, foreclosed real estate expenses and write down of assets held-for-sale. These decreases were largely a result of the sale of our Florida operations in 2010. In addition, other expense decreased due in part to a lower provision for unfunded loan commitments.

Noninterest expense was $28.5 million for the first six months of 2011, a decrease of $9.2 million, compared with the same period of 2010. Significant decreases included foreclosed real estate expenses and write down of assets held-for-sale. These decreases were related to the sale of our Florida operations.

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(dollars in thousands)
Compensation	$	8,414	$	8,638	$	17,120	$	17,189
Non-staff expenses:
Occupancy		1,128		1,454		2,415		2,932
Equipment		268		330		509		693
Advertising and promotion		156		153		312		334
Outside data processing		793		897		1,576		1,767
Professional fees		905		1,435		2,039		2,356
Intangible amortization		143		159		283		317
FDIC assessment		472		703		1,270		1,358
Foreclosed real estate expenses, net		666		1,402		749		2,526
Write down of assets held-for-sale		427		2,793		448		5,328
Other		740		1,431		1,746		2,859

Total noninterest expense	$	14,112	$	19,395	$	28,467	$	37,659

Income Tax Expense

The income tax provision was $973,000 for the three months ended June 30, 2011, compared with a benefit of $5.9 million for the same three months of 2010. The effective tax rate for the three months ended June 30, 2011 and 2010 was 32.0% and 31.7%. The income tax provision was $1.5 million for the six months ended June 30, 2011, compared with a benefit of $8.4 million for the same period of 2010. The effective tax rate for the six months ended June 30, 2011 and 2010 was 31.2% and 36.2%. The change in the effective tax rate is attributable to the favorable impact of the permanent items on the loss in 2010 as compared to income in 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 June 30, 2011
Net interest income (expense)	$	12,014		$	16	$	2	$	(297	)	$	11,735
Provision for loan losses		1,919			—		—		—			1,919
Noninterest income		535			5,132		1,667		—			7,334
Noninterest expense		9,348			3,523		1,241		—			14,112

Earnings (loss) before income taxes		1,282			1,625		428		(297	)		3,038
Income tax expense (benefit)		353			574		150		(104	)		973

Net earnings (loss)	$	929		$	1,051	$	278	$	(193	)	$	2,065

Total assets at June 30, 2011	$	1,469,429		$	56,105	$	7,370	$	(66,409	)	$	1,466,495

Three months ended June 30, 2010
Net interest income (expense)	$	11,191		$	41	$	5	$	(298	)	$	10,939
Provision for loan losses		18,013			—		—		—			18,013
Noninterest income		1,800			4,593		1,554		—			7,947
Noninterest expense		14,747			3,547		1,101		—			19,395

Earnings (loss) before income taxes		(19,769	)		1,087		458		(298	)		(18,522	)
Income tax expense (benefit)		(6,311	)		385		161		(104	)		(5,869	)

Net earnings (loss)	$	(13,458	)	$	702	$	297	$	(194	)	$	(12,653	)

Total assets at June 30, 2010	$	1,628,706		$	62,518	$	8,714	$	(74,323	)	$	1,625,615

Six months ended June 30, 2011
Net interest income (expense)	$	23,381		$	40	$	4	$	(595	)	$	22,830
Provision for loan losses		4,089			—		—		—			4,089
Noninterest income		1,064			10,221		3,115		—			14,400
Noninterest expense		18,911			7,166		2,390		—			28,467

Earnings (loss) before income taxes		1,445			3,095		729		(595	)		4,674
Income tax expense (benefit)		319			1,090		256		(208	)		1,457

Net earnings (loss)	$	1,126		$	2,005	$	473	$	(387	)	$	3,217

Total assets at June 30, 2011	$	1,469,429		$	56,105	$	7,370	$	(66,409	)	$	1,466,495

Six months ended June 30, 2010
Net interest income (expense)	$	22,933		$	81	$	10	$	(595	)	$	22,429
Provision for loan losses		22,973			—		—		—			22,973
Noninterest income		2,447			9,211		3,198		—			14,856
Noninterest expense		28,422			7,109		2,128		—			37,659

Earnings (loss) before income taxes		(26,015	)		2,183		1,080		(595	)		(23,347	)
Income tax expense (benefit)		(9,387	)		773		379		(208	)		(8,443	)

Net earnings (loss)	$	(16,628	)	$	1,410	$	701	$	(387	)	$	(14,904	)

Total assets at June 30, 2010	$	1,628,706		$	62,518	$	8,714	$	(74,323	)	$	1,625,615

Banking

Our banking segment had net earnings of $929,000 for the three months ended June 30, 2011, compared with a net loss of $13.5 million for the same period in 2010. Net earnings for the six months ended June 30, 2011 were $1.1 million, compared with a net loss of $16.6 million for the same period in 2010.

Net interest income for the three months ended June 30, 2011 increased $823,000, or 7.4%, compared with the same period of 2010. Net interest income for the six months ended June 30, 2011 increased $448,000, or 2.0%, 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 June 30, 2011 totaled $1.9 million, compared with $18.0 million for the same period of 2010. The provision for loan losses for the six months ended June 30, 2011 totaled $4.1 million, compared with $23.0 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 June 30, 2011 decreased $1.3 million compared with the same period in 2010. Noninterest income for the six months ended June 30, 2011 decreased $1.4 million compared with the same period of 2010. The decrease in both periods was due primarily to the gain on sale of two Florida branches in 2010.

Noninterest expense for the three months ended June 30, 2011 decreased $5.4 million primarily due to a 2010 write down on assets held-for-sale and foreclosed real estate expenses. Noninterest expense for the six months ended June 30, 2011 decreased $9.5 million compared with the same period of 2010, due to the aforementioned factors.

Wealth Management

Net earnings for the three months ended June 30, 2011 increased $349,000, or 49.7%, compared with the same period in 2010. Net earnings for the six months ended June 30, 2011 increased $595,000, or 42.2%, compared with the same period in 2010. The increase in earnings was due primarily to an increase in assets under management, resulting in a rise in fees. Assets under management increased 10.5% from June 30, 2010 to $2.9 billion as of June 30, 2011.

Noninterest income for the three months ended June 30, 2011 increased $539,000, or 11.7%, compared with the same period in 2010, due primarily to the aforementioned increase in assets under management. Noninterest income for the six months ended June 30, 2011 increased $1.0 million, or 11.0%.

Noninterest expense for the three months and six months ended June 30, 2011 was flat compared with the same periods in 2010.

Insurance

Net earnings for the three months ended June 30, 2011 was flat compared with the same period of 2010. Net earnings for the six months ended June 30, 2011 decreased $228,000 compared with the same period of 2010 because noninterest expense increased $262,000, reflecting growth in the Fort Worth office.

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.

Financial Condition

Our total assets were unchanged at $1.5 billion as of June 30, 2011 compared with December 31, 2010. Our loan portfolio increased $40.1 million, or 4.3%, to $971.4 million as of June 30, 2011. Our securities portfolio decreased $71.8 million, or 20.0%, to $287.6 million compared with $359.4 million as of December 31, 2010. Shareholders’ equity increased $5.1 million, or 3.0%, to $171.4 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 42.9% of our portfolio as of June 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 57.0% of our loan portfolio as of June 30, 2011. Loans held-for-sale composed 0.1% of our portfolio. During the first quarter of 2011, we transferred $7.3 million of loans from held-for-sale to the loan portfolio.

Total loans were $971.4 million as of June 30, 2011, an increase of $40.1 million, or 4.3%, 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:


	June 30, 2011					December 31, 2010
	Amount		Percent			Amount		Percent
	(dollars in thousands)
Commercial:
Commercial	$	194,260		20.0	%	$	147,090		15.8	%
Commercial real estate		167,973		17.3			166,043		17.8
Real estate construction		54,769		5.6			46,326		5.0

Total commercial		417,002		42.9			359,459		38.6

Consumer:
Residential real estate first lien		205,171		21.1			205,531		22.1
Residential real estate second lien		262,958		27.1			269,727		28.9
Home equity lines		58,553		6.0			60,609		6.5
Consumer other		26,882		2.8			25,131		2.7

Total consumer		553,564		57.0			560,998		60.2

Loans receivable		970,566		99.9			920,457		98.8
Loans held-for-sale		863		0.1			10,915		1.2

Total loans	$	971,429		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:


	June 30, 2011			December 31, 2010
	(dollars in thousands)
Nonaccrual loans – Texas (1)	$	7,655		$	15,167
Nonaccrual loans – Florida (1)		8,897			11,310

Total nonaccrual loans (1)		16,552			26,477
Investment in real estate – Texas		4,155			4,783
Investment in real estate – Florida		3,045			4,515

Total investment in real estate		7,200			9,298

Total nonperforming assets	$	23,752		$	35,775


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

Restructured loans still accruing	$	1,522		$	804

Nonperforming assets to total loans and investment in real estate		2.43	%		3.80	%

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

Nonperforming assets were $23.8 million and $35.8 million as of June 30, 2011 and December 31, 2010, a decrease of $12.0 million, or 33.6%. Our ratio of nonperforming assets to total loans and investment in real estate was 2.43% and 3.80% as of June 30, 2011 and December 31, 2010. At June 30, 2011, nonaccrual loans were $16.6 million, compared with $26.5 million at December 31, 2010, a decrease of $9.9 million, or 37.5%. Nonaccrual commercial loans consisted of two relationships which were primarily in Houston. Commercial real estate nonaccrual loans consisted of ten loans that are mostly in Florida. Construction and land nonaccrual loans consist of three relationships which are primarily in Texas. Investment in real estate was $7.2 million at June 30, 2011 compared with $9.3 million at December 31, 2010, a decrease of $2.1 million, or 22.6%. The decrease was due mainly to the sale of repossessed land in Florida. Restructured loans still accruing were $1.5 million as of June 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 nonperforming loans and the associated specific reserves within the allowance for loan losses for each loan category:


	June 30, 2011				December 31, 2010
	Outstanding Balance		Specific Allocation of Allowance		Outstanding Balance		Specific Allocation of Allowance
	(dollars in thousands)
Commercial:
Commercial	$	499	$	104	$	741	$	189
Commercial real estate		6,434		—		4,484		—
Real estate construction		3,186		43		3,554		—

Total commercial		10,119		147		8,779		189
Consumer:
Residential real estate first lien (1)		5,866		—		10,320		2
Residential real estate second lien and home equity lines		567		—		707		372
Consumer		—		—		—		—

Total consumer		6,433		—		11,027		374
Loans held-for-sale		—		—		6,671		—

Total nonperforming loans	$	16,552	$	147	$	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 loans held-for-sale was due to the sale of a $2.3 million commercial real estate loan in Florida, the resolution of a $2.1 million commercial real estate loan in Florida, and the reclassification of several loans that were classified as held-for-sale to the loan portfolio.

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

Allowance for Loan Losses

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

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

Net charge-offs for the first six months of 2011 were $3.6 million, or 0.77% of average total loans on an annualized basis, compared with $22.8 million, or 4.33% of average total loans on an annualized basis for the first six months of 2010. Net charge-offs for the six months ended June 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 Six Months Ended June 30, 2011			As of and for the Year Ended December 31, 2010
	(dollars in thousands)
Average total loans outstanding	$	944,250		$	1,046,164

Loans receivable at end of period (excluding loans held-for-sale)	$	970,566		$	920,457

Allowance for loan losses at beginning of period	$	18,639		$	26,501
Charge-offs:
Commercial:
Commercial		(308	)		(965	)
Commercial real estate		(1,217	)		(24,527	)
Real estate construction		(141	)		(9,159	)

Total commercial		(1,666	)		(34,651	)

Consumer:
Residential real estate first lien		(527	)		(4,089	)
Residential real estate second lien		(1,572	)		(3,720	)
Home equity lines		(656	)		(2,030	)
Consumer other		(103	)		(414	)

Total consumer		(2,858	)		(10,253	)

Total charge-offs		(4,524	)		(44,904	)

Recoveries:
Commercial:
Commercial		13			883
Commercial real estate		153			17
Real estate construction		149			104

Total commercial		315			1,004

Consumer:
Residential real estate first lien		264			304
Residential real estate second lien		194			226
Home equity lines		42			180
Consumer other		91			159

Total consumer		591			869

Total recoveries		906			1,873

Net charge-offs		(3,618	)		(43,031	)

Provision for loan losses		4,089			35,169

Allowance for loan losses at end of period	$	19,110		$	18,639


Ratio of net charge-offs to average loans		0.77	%		4.11	%
Ratio of allowance for loan losses to period end loans (excluding loans held-for-sale)		1.97			2.02
Ratio of allowance for loan losses to nonperforming loans (excluding loans held-for-sale)		115.45			94.11

Securities

Total securities were $287.6 million as of June 30, 2011, a decrease of $71.8 million, or 20.0%, 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 $1.0 billion for the six months ended June 30, 2011, an increase of $31.7 million, or 3.2%, over average deposits (excluding held-for-sale) for the year ended December 31, 2010. As of June 30, 2011, core deposits (which consist of noninterest-bearing deposits, interest checking, money market and savings and time deposits less than $100,000) were $781.2 million, or 74.9%, of total deposits, while time deposits $100,000 and greater and brokered deposits made up 25.1% of total deposits. As of June 30, 2010, total deposits decreased $6.9 million, or 0.7%, 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:


	Six Months Ended June 30, 2011					Year Ended December 31, 2010
	Average Balance		Average Rate			Average Balance		Average Rate
	(dollars in thousands)
Noninterest-bearing deposits .	$	214,273		—	%	$	189,071		—	%
Interest checking		163,255		0.21			146,863		0.28
Money market and savings		278,177		0.42			264,227		0.67
Time deposits less than $100,000		109,829		2.20			129,365		2.40

Core deposits		765,534		0.51			729,526		0.72

Time deposits $100,000 and greater		244,973		1.93			250,035		2.20
Brokered deposits		24,631		2.26			23,836		2.58

Subtotal		1,035,138		0.89			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	$	1,035,138		0.89	%	$	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 $222.9 million as of June 30, 2011. The outstanding balance as of June 30, 2011 includes $208.0 million in long term advances and $14.9 million in repurchase agreements with clients. Included in the long term advances are $95.0 million of long term advances that have call provisions that are at the discretion of the FHLB which could shorten the maturity of the borrowings.

We increased our borrowings and repurchase agreements $3.1 million, or 1.4%, to $222.9 million as of June 30, 2011 from $219.8 million as of December 31, 2010.

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

Description

Issuance
and Call
Dates (1)

Trust
Preferred
Securities
Outstanding

Interest
Rate as of
June 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

3.20

Adjustable quarterly

3 month
LIBOR + 2.95%

5,155

9/24/2033

Encore Capital Trust III

4/19/2007

15,000

6.85

Fixed rate (2)

6.85%(2)

15,464

4/19/2037

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

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

Liquidity and Funding

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

Liquidity needs of a financial institution can be met from either assets or liabilities. On the asset side, our primary sources of liquidity are cash and due from banks, federal funds sold, maturities of securities and scheduled repayments and maturities of loans. On the liability side, our principal sources of liquidity are deposits, borrowed funds and the accessibility to money and capital markets. Client deposits are our largest source of funds. For the six months ended June 30, 2011, our year-to-date average deposits were $1.0 billion, or 71.1% of average total assets.

Shareholders’ Equity

Shareholders’ equity increased $5.1 million, or 3.0%, to $171.4 million as of June 30, 2011 compared with $166.6 million as of December 31, 2010, primarily due to our net earnings.

Regulatory Capital

We actively manage our capital. Our potential sources of capital are earnings and common or preferred equity. From time to time, we have issued trust preferred securities through a subsidiary trust either to fund organic growth or to support an acquisition. Trust preferred securities 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 June 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	$	134,725		9.67	%	$	55,750		4.00	%		N/A		N/A
Tier 1 risk-based		134,725		13.23			40,727		4.00			N/A		N/A
Total risk-based		147,542		14.49			81,453		8.00			N/A		N/A

Encore Bank, N.A.
Leverage	$	125,399		8.99	%	$	55,808		4.00	%	$	69,760		5.00	%
Tier 1 risk-based		125,399		12.34			40,641		4.00			60,961		6.00
Total risk-based		138,199		13.60			81,281		8.00			101,601		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 second 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

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 June 30, 2011. These shares were delivered to us by employees as payment for taxes on the vesting of restricted stock or exercise of stock options.

ISSUER PURCHASES OF EQUITY SECURITIES


Month in 2011	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April		18,909	$	12.25		—		—
May		575		12.10		—		—
June		—		—		—		—

Total (1)		19,484	$	12.25		—		—

(1)	The 19,484 shares repurchased were not part of a publicly announced repurchase plan or program. These shares were owned and tendered by employees as payment for taxes on the vesting of restricted stock or exercise of stock options.

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		Amended and Restated Bylaws of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.3 to the S-1 Registration Statement).

4.1		Form of specimen certificate representing shares of Encore Bancshares, Inc. common stock (incorporated herein by reference to Exhibit 4.1 to the S-1 Registration Statement).

4.2		Warrant, dated December 5, 2008, to purchase 364,026 shares of Encore Bancshares, Inc.’s Common Stock (incorporated herein by reference to Exhibit 4.1 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on December 8, 2008).

4.3		Form of Certificate for Encore Bancshares, Inc.’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (incorporated herein by reference to Exhibit 4.2 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on December 8, 2008).

31.1*		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1**		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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)

August 4, 2011				/s/ James S. D’Agostino, Jr.
(Date)				James S. D’Agostino, Jr., Chief Executive Officer

August 4, 2011				/s/ L. Anderson Creel
(Date)				L. Anderson Creel, Chief Financial Officer, Executive Vice President and Treasurer

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