UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2011.

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

For the transition period 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)
Registrant’s telephone number, including area code: (713) 787-3100

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Name of each exchange on which registered:
Common Stock, $1.00 par value	NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities

Act.     Yes   ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.     Yes  ¨    No  x

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 (§ 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

The aggregate market value as of June 30, 2011 (the last business day of registrant’s most recently completed second quarter)

of the shares of common stock held by non-affiliates of the registrant was approximately $108.9 million based on the closing price of the common stock on such date.

The number of shares outstanding of the registrant’s Common Stock, $1.00 par value, as of January 31, 2012 was 11.7 million.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Company’s Proxy Statement relating to the 2012 Annual Meeting of Shareholders, which will be filed within 120 days after December 31, 2011, are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.

ENCORE BANCSHARES, INC.

TABLE OF CONTENTS

			Page
	PART I.
ITEM	1.	Business		3
ITEM	1A.	Risk Factors		25
ITEM	1B.	Unresolved Staff Comments		38
ITEM	2.	Properties		39
ITEM	3.	Legal Proceedings		40
ITEM	4.	Mine Safety Disclosures		40
	PART II.
ITEM	5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		40
ITEM	6.	Selected Financial Data		43
ITEM	7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		45
ITEM	7A.	Quantitative and Qualitative Disclosures About Market Risk		79
ITEM	8.	Financial Statements and Supplementary Data		79
ITEM	9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures		79
ITEM	9A.	Controls and Procedures		79
ITEM	9B.	Other Information		80
	PART III.
ITEM	10.	Directors, Executive Officers and Corporate Governance		81
ITEM	11.	Executive Compensation		81
ITEM	12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		81
ITEM	13.	Certain Relationships and Related Transactions and Director Independence		81
ITEM	14.	Principal Accounting Fees and Services		81
	PART IV.
ITEM	15.	Exhibits and Financial Statement Schedules		82
SIGNATURES				86

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PART I

Item 1. Business

The disclosures set forth in this item are qualified by Item 1A. Risk Factors and by the section captioned “Special Cautionary Notice Regarding Forward-Looking Statements” in Part II, Item 7 of this Annual Report on Form 10-K and other cautionary statements set forth elsewhere in this report.

General

Encore Bancshares, Inc. (Bancshares) is a financial holding company and wealth management organization that provides banking, investment management, financial planning and insurance services to privately-owned businesses, professional firms, investors and affluent individuals. Bancshares and its subsidiaries (we, the Company or our) are headquartered in Houston, Texas and currently manage, through our primary subsidiary Encore Bank, National Association (Encore Bank), 12 private client offices in the greater Houston area. We also operate five wealth management offices and five insurance offices in Texas through Encore Trust, a division of Encore Bank, Linscomb & Williams, Inc. (Linscomb & Williams), a subsidiary of Encore Bank, and Town & Country Insurance Agency, Inc. (Town & Country), a subsidiary of Bancshares. Our principal executive office is located at Nine Greenway Plaza, Suite 1000, Houston, Texas 77046, and our telephone number is (713) 787-3100.

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

Our website address is www.encorebank.com. We make available free of charge on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K and is not part of this or any other report.

History and Franchise Transformation

Encore Bank was founded as Guardian Savings and Loan of Dallas in 1928. In September 2000, our current Chief Executive Officer, James S. D’Agostino, Jr., led a group of primarily local Houston investors in our acquisition of Guardian. The bank’s name was changed to Encore Bank in September 2001. By 2007, we had 11 private client offices in Texas and six in southwest Florida. We targeted privately-owned businesses, professional firms, investors and affluent individuals as clients, and initiated our strategy of providing them with superior service in a “private banking” environment. As part of Encore Bank’s growth strategy, we also recruited new lending officers and began changing our asset mix, replacing lower yielding investment securities and purchased mortgage loans with our own higher yielding originated loans. On the liability side, we actively solicited deposits, replacing brokered deposits with core deposits.

We continued our transformation by hiring our new President and our new Chief Lending Officer in June 2009 to focus our efforts on growing our commercial banking business in the Houston market. These two executives have extensive banking and lending experience and provide us the expertise to expand our commercial lending platform. We also added several new commercial lending officers to our team in Houston. Additionally, as part of strategy to focus on our Houston market, we sold our six private client offices in Florida in two separate transactions in 2010. At the time of sale, deposits associated with these locations totaled approximately $230 million. These transactions also included the sale of approximately $61.5 million of loans as

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well as other assets including premises and equipment. As of December 31, 2011, we had $31.1 million of loans remaining in Florida. In December 2011 we opened an additional private client office in Houston bringing our total private client offices to 12, all of which are located in the greater Houston area. As of December 31, 2011, originated loans constituted 93.7% of our loan portfolio and core deposits constituted 78.1% of our total deposits.

To provide capital for growth, we completed our initial public offering in July 2007. Our net proceeds, including the sale of the overallotment shares, were $41.4 million. On December 5, 2008, in connection with our participation in the Capital Purchase Program (CPP), we issued and sold to the U.S. Department of Treasury (U.S. Treasury) (i) 34,000 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (Series A Preferred Stock), with a liquidation value of $1,000 per share, and (ii) a warrant (Warrant) to purchase up to 364,026 shares of our common stock, at an exercise price of $14.01 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $34.0 million in cash. On September 27, 2011, we fully redeemed the CPP shares with the proceeds received from our participation in the Small Business Lending Fund program and an additional $1.3 million in cash. Under the Small Business Lending Fund program, we entered into a Securities Purchase Agreement (Purchase Agreement) with the Secretary of the Treasury (Secretary) pursuant to which we issued and sold to the Secretary 32,914 shares of our Senior Non-Cumulative Perpetual Preferred Stock, Series B, par value $1.00 per share, with a liquidation value of $1,000 per share (Series B Preferred Stock), for an aggregate purchase price of $32.9 million.

In addition to building out our core banking platform, we have also completed and integrated the following series of acquisitions to add wealth management and insurance services to our product offering:

Insurance. On April 30, 2004, we acquired Town & Country. The agency, with offices in Houston, Galveston, Fort Worth, League City and Katy and approximately 8,260 clients, sells property and casualty insurance and is one of the largest independent agencies in the Houston area with a clientele that matches our target demographic. On January 1, 2005, Town & Country purchased certain assets and assumed certain liabilities of the Bumstead Insurance Agency, further enhancing the agency’s penetration of affluent households.

Trust. On March 31, 2005, we acquired National Fiduciary Services, N.A. and renamed the entity Encore Trust Company, N.A.,which subsequently became a division of Encore Bank (Encore Trust) as of June 30, 2007. Encore Trust provides personal trust services in the greater Houston metropolitan area, Dallas and Austin, Texas. As of December 31, 2011, Encore Trust had $1.0 billion in assets under management.

Investment Management and Financial Planning. On August 31, 2005, we acquired Linscomb & Williams, an investment management and financial planning firm based in Houston. Founded in 1971, Linscomb & Williams is, in the opinion of management, one of Houston’s largest and most respected financial planning and investment management firms. As of December 31, 2011, Linscomb & Williams had $1.7 billion in assets under management and almost 3,800 accounts.

Business Strategies

We intend to use the franchise we have built and the following strategies in an effort to continue to originate loans, increase deposits and improve profitability.

Optimize our deposit mix. Increasing business and personal checking (noninterest and interest checking, or transaction deposits) is key to our strategy of decreasing our funding costs and continuing to increase our net interest margin. We have increased our business demand deposits, which has resulted largely from our continued growth in lending to privately-owned businesses and professional firms and our offering of cash management services. We have increased our transaction deposits to $518 million, or 47.1% of total deposits, as of December 31, 2011, from $286 million, or 27.5% of total deposits, as of December 31, 2007, a compounded annual growth rate of 16.0%. We believe that increasing our core deposits will help reduce our cost of deposits.

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Continue to increase loan originations. Our lending focus is to generate commercial loans in Houston because of the opportunity to add business demand deposits and the relative good performance of the Houston economy. To that end, in 2009 we hired several experienced lenders to enhance our penetration of the business and private banking sectors. During 2011, we grew commercial loans 34.8%.

Expand wealth management and insurance businesses. We believe that our ability to offer sophisticated wealth management products and services within a high-touch community bank framework gives us a competitive advantage over traditional brokerage firms. We believe that the recent recession and stock market turmoil have created confusion and lack of trust in Wall Street. For many prospective clients, the current environment highlights the distinction of holistic wealth management approaches compared with a more limited scope in investment management. This environment offers us the opportunity to market our objective wealth management services and to offer prospects a second opinion in this financial situation. However, we expect that fluctuations in market value could impact our overall levels of assets under management in the short term.

Cost containment. During 2010, we experienced increased costs related to managing problem assets, higher Federal Deposit Insurance Corporation (FDIC) assessments, and costs related to the sale of our Florida operations. Our continued goal for the next several years is to maintain a more normalized level of expenses and improve our efficiency ratio. We have invested in our commercial lending platform in Houston during the past two years, which we expect will be sufficient to sustain our growth for the next several years.

Acquire compatible banks and financial services companies. We intend to continue to explore acquisition opportunities for bank and financial service companies, but will be selective in the acquisitions we pursue. We will focus on targets within our existing footprint with significant core deposits and/or a potential client base compatible with our operating philosophy.

Operating Philosophy

We focus on providing our banking, wealth management and insurance products and services to privately-owned businesses, professional firms, investors and affluent individuals. These clients include entrepreneurs, attorneys, doctors and other professionals, real estate developers, executives, and high net worth families and their business interests. Our business clients operate in a variety of industries and are generally small businesses with revenues of less than $50 million. Our individual clients generally have a net worth of between $500,000 and $20 million. We offer a broad array of products and services tailored to the objectives of our target clients, ranging from checking accounts to state-of-the-art cash management to commercial loans to sophisticated financial and estate planning, all within a high-touch community bank framework.

Our clients are served by a private banker or relationship manager who understands each client’s financial needs and offers products and services designed to meet those needs. Our private bankers and relationship managers are able to offer traditional banking services and to collaborate with investment management, financial planning, trust and insurance specialists in our subsidiaries to meet our clients’ financial needs.

Banking Services

Lending Activities

We specialize in lending to privately-owned businesses, professional firms, investors and affluent individuals. The types of loans we make to businesses include commercial loans, commercial real estate loans, real estate construction loans, revolving lines of credit, working capital loans, equipment financing and letters of credit. We intend to focus our lending efforts on commercial-related loans, because they are generally more profitable and often generate a deposit relationship. These loans are primarily originated in Houston. The types of loans we make to individuals include residential mortgage loans and mortgage loans on investment and vacation properties, unsecured and secured personal lines of credit, home equity lines of credit and overdraft protection.

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The following is a discussion of our major types of lending:

Commercial Loans

Our commercial loans are primarily made within our market area and are underwritten on the basis of the borrower’s ability to service the debt from cash flow. We make both secured and unsecured commercial loans. For secured commercial loans, we generally take as collateral a lien on accounts receivable, inventory, equipment, or other assets owned by the borrower and obtain the personal guaranty of the business owner. Underwriting commercial loans focuses on an analysis of cash flow, including primary and secondary sources of repayment, and the stability of the underlying business which provides the cash flow stream for debt service. Coupled with this analysis is an assessment of the financial strength of the guarantor, the borrower’s liquidity and leverage, management experience of the owners or principals, economic conditions, industry trends and the collateral securing the loan. We require a first lien position in all collateral, and the loan to value ratio of commercial loans varies based on the collateral securing the loan. Generally, loans collateralized by accounts receivable are financed at 50% to 80% of accounts receivable less than 90 days past due. Loans collateralized by inventory will be made at 25% to 50% of the inventory value. We offer a broad range of short- to medium-term commercial loans that generally have floating interest rates. As of December 31, 2011, we had $215 million in commercial loans, which represented 21.0% of our total loans.

Commercial Real Estate Loans

In addition to commercial loans, we originate commercial real estate mortgage loans to both owner-occupied businesses and real estate investors and developers. At December 31, 2011, approximately 33.1% of our commercial real estate loans were owner-occupied. Commercial real estate lending involves large loan principal amounts, and the repayment of these loans is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. As a general practice, we require our commercial real estate loans to be secured by well-managed income producing property with adequate margins and to be guaranteed by responsible parties. We look for opportunities where cash flow from the collateral provides adequate debt service coverage and the guarantor’s net worth is centered in assets other than the project we are financing.

Our commercial real estate loans are generally secured by first liens on real estate and, if rental property, an assignment of the lease, have fixed or floating interest rates and amortize over a 10- to 25-year period with balloon payments due at the end of one to ten years. Payments on loans secured by such properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy.

In underwriting commercial real estate loans, we seek to minimize the risks in a variety of ways, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition. Our underwriting analysis also includes credit checks, reviews of appraisals and environmental hazards or EPA reports, the borrower’s liquidity and leverage, management experience of the owners or principals, economic conditions and industry trends. Our policies require us to visit properties on an annual basis, but our practice is to conduct more frequent visits of properties if possible. Generally, we will originate commercial real estate loans in an amount up to 80% of the value of improved property. As of December 31, 2011, we had $210 million in commercial real estate loans, which represented 20.5% of our total loans.

Residential Real Estate Loans

Our lending activities also include the origination of first and second lien residential real estate loans that we consider to be predominately prime, collateralized by residential real estate that is located primarily in our market area. We offer a variety of mortgage loan products which generally are amortized over 15 to 30 years. We originate second mortgage loans through a network of brokers, primarily in the Houston, Dallas and Austin, Texas markets.

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Our first lien residential real estate loans are collateralized by 1-4 family residential real estate and generally have been originated in amounts of no more than 90% of appraised value, with most being jumbo adjustable rate mortgages. We sell many of our first lien residential real estate loans, although we generally elect to keep for our own account loans that are nonconforming with an adjustable rate that adjusts within a period of not more than seven years and made to a client who has a relationship with us or the potential for a relationship. We retain a valid lien on real estate and obtain a title insurance policy that insures that the property is free of encumbrances. We also require hazard insurance in the amount of the loan and, if the property is in a flood plain as designated by the Department of Housing and Urban Development, we require flood insurance. We offer the option to borrowers to advance funds on a monthly basis from which we make disbursements for items such as real estate taxes, private mortgage insurance and hazard insurance.

Our second lien residential real estate loans are collateralized by 1-4 family residential real estate, located primarily in the Texas markets of Houston, Dallas and Austin. These loans are predominantly prime (FICO score of 700 or greater) and used as supplemental funding in the purchase of a home. Though these loans represent a second lien position on the collateral, we generally underwrite these loans with full documentation and an average combined loan to value of less than 90%. Historically, until the third quarter of 2007, we sold most of our second mortgage loans into the secondary market within 60 days of production, but as a result of the disruption in the mortgage market beginning in 2007 and continuing through 2011, have elected to retain them in our loan portfolio. Although we have no current plans to resume the ongoing sale of our second mortgage loans, as opportunities occur, we have sold some second mortgage loans into the secondary market.

At December 31, 2011, we had $64.3 million in purchased residential real estate loans, which represented 14.1% of our residential real estate loans. In the past, we purchased residential mortgage loans serviced by others in order to build our loan portfolio and leverage our capital. We have not purchased any loans with evidence of deterioration of credit quality for which it was probable, at acquisition date, that we would be unable to collect all contractually required payments. We do not intend to purchase such loans in the future, as it is inconsistent with our goal of developing client relationships.

As of December 31, 2011, our residential real estate loan portfolio was $456 million, which represented 44.4% of our total loans. Of this amount, $63.1 million is repriceable in one year or less and an additional $72.6 million is repriceable in greater than one year to five years. As of December 31, 2011, our home equity lines of credit totaled $55.2 million, or 5.4% of total loans.

Real Estate Construction Loans

We make loans to finance the construction of residential properties to clients with a relationship with us or the potential of a relationship. We also make construction loans to custom high-end home builders who operate in the markets where our clients are located, and to a limited extent, to finance commercial properties. Substantially all of our residential construction loans are originated in our Houston market. In addition, we make loans on raw land. Real estate construction loans generally are secured by first liens on real estate and have floating interest rates. We employ a third party construction inspector to make regular inspections prior to approval of periodic draws on these loans. Underwriting guidelines similar to those described above under Commercial Real Estate Loans are also used in our construction lending activities. In the case of raw land, we will originate real estate construction loans in an amount up to 65% of the value of raw land and up to 75% of the value of land to be acquired and developed. Real estate construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the value of the project is typically dependent on its successful completion. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If we are forced to foreclose on a project prior to completion, there is no assurance that we will be able to recover the entire unpaid portion of the loan. In addition, we may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time.

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As of December 31, 2011, real estate construction loans totaled $59.6 million, which represented 5.8% of our total loans. Of this total, $35.6 million in real estate construction were land loans, $3.8 million were to finance residential construction with an identified purchaser, $4.8 million were to finance residential construction with no identified purchaser and $15.4 million were to finance commercial construction.

Consumer Loans

Substantially all of our other consumer loan origination function exists to support client relationships. We provide a variety of consumer loans, including automobile loans, personal loans and lines of credit (secured and unsecured), and deposit account collateralized loans. The terms of these loans typically range from 1 to 10 years and vary based upon the nature of the collateral and size of the loan.

Generally, consumer loans entail greater risk than do real estate secured loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans. As of December 31, 2011, we had $27.9 million in other consumer loans which represented 2.7% of our total loans.

Underwriting Strategy

While Encore Bank’s legal lending limit for loans to one borrower as of December 31, 2011, was $19.8 million, we generally operate within an internal lending guideline equal to slightly more than half of our legal lending limit. Lending officers are assigned various levels of loan approval authority based upon their respective levels of experience and expertise. Loans with relationships over the lending authority of the account officer must be approved by the loan committee, which includes Encore Bank’s Chairman of the Board, President and Chief Executive Officer, and loans with a total relationship exceeding $7.5 million must be approved by the board of directors of Encore Bank.

Loan decisions are documented as to the borrower’s business, purpose of the loan, evaluation of the repayment source and the associated risks, evaluation of collateral, covenants and monitoring requirements, and the risk rating rationale. When making consumer loans, we use standard credit scoring systems to assess the credit risk of consumers. Our loan committee meets bi-weekly to evaluate applications for new and renewed loans, or modifications to loans, in which the loan relationship is above an individual loan officer’s approval authority. Our strategy for approving or disapproving loans is to follow conservative loan policies and prudent underwriting practices which include:

• knowing our clients;

• granting loans on sound and collectible basis;

• ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan;

• developing and maintaining our targeted levels of diversification for our loan portfolio as a whole and for loans within each category; and

• ensuring that each loan is properly documented and that any insurance coverage requirements are satisfied.

Managing credit risk is a company-wide process. Our strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review

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processes for all commercial and consumer credit exposures. The strategy also emphasizes regular credit examinations and management reviews of loans exhibiting deterioration in credit quality. In addition, a third party loan review of commercial loans is performed approximately quarterly to identify problem assets. We strive to identify potential problem loans early in an effort to aggressively seek resolution of these situations before the loans become a loss, record any necessary charge-offs promptly and maintain adequate allowance levels for probable loan losses inherent in the loan portfolio. A quarterly review of potential problem loans and the allowance for loan losses is conducted by Encore Bank’s asset classification committee, which reviews credit concerns and reports to the board of directors.

Deposit Products and Other Sources of Funds

Our primary sources of funds for use in our lending and investing activities consist of deposits, maturities and principal and interest payments on loans and securities and other borrowings. We closely monitor rates and terms of competing sources of funds and utilize those sources we believe to be most cost effective and consistent with our asset and liability management policies.

Deposits

Deposits are our principal source of funds for use in lending and for other general business purposes. We provide checking, savings, money market accounts, time deposits ranging from 7 days to five years, and individual retirement accounts. For businesses, we provide a range of cash management products and services. As of December 31, 2011, core deposits (which consist of noninterest-bearing deposits, interest checking, money market savings and time deposits less than $100,000) were $859 million, or 78.1% of total deposits, while time deposits $100,000 and greater and brokered deposits made up 20.4% and 1.5% of total deposits. We attempt to price our deposit products in order to promote core deposit growth and maintain our liquidity requirements in order to satisfy client needs.

Borrowings, Repurchase Agreements and Junior Subordinated Debentures

We borrow from the Federal Home Loan Bank of Dallas (FHLB) pursuant to a blanket lien based on the value of our loans and securities. These borrowings provide term funding at a competitive cost and are primarily used to fund loans with longer durations. As of December 31, 2011, we had $208 million in long-term borrowings from the FHLB with remaining maturity of greater than one year, $95.0 million of which have various call dates prior to the maturity date.

We also obtain other overnight borrowed funds under arrangements with certain clients and investment banks whereby investment securities are sold under an agreement to repurchase the next business day. These borrowing arrangements are collateralized by pledging applicable investment securities. As of December 31, 2011, we had $10.5 million in repurchase agreements.

In addition, we have raised additional regulatory capital through the issuance of junior subordinated debentures in connection with trust preferred securities issuances by separate non-consolidated statutory trust subsidiaries in September 2003 and April 2007.

Wealth Management Services

We provide a wide variety of wealth management services to our clients through our subsidiary, Linscomb & Williams, and the trust division of Encore Bank, Encore Trust, which we manage as one segment. As of December 31, 2011, we had $2.8 billion in assets under management in our wealth management group.

Linscomb & Williams

Linscomb & Williams is an investment management and financial planning firm that operates primarily in the Houston market. Linscomb & Williams provides fee-based financial planning services for clients and

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investment management services for a quarterly management fee based on the value of assets in the account. The majority of Linscomb & Williams’ fees originate from investment management services. Linscomb & Williams has been in Houston since 1971 and all of the senior staff from the firm have remained with our company since we acquired it in August 2005. As of December 31, 2011, Linscomb & Williams had $1.7 billion in assets under management and almost 3,800 accounts.

Through Linscomb & Williams, we offer personal financial planning based on a comprehensive review and coordination of a client’s financial situation and objectives that may include asset preservation/protection, employee benefits, estate planning, investments and asset allocation, retirement planning, risk management and insurance and tax planning. We also assist our clients in preparing for special situations by offering financial planning tailored to specific events such as charitable giving, death of a spouse, divorce, education funding, executive benefits/stock options, inheritance, legal settlements, long-term care, retirement plan distributions and wealth transfer. Additionally, we provide financial services for businesses through financial counseling for employees, financial planning for executives and financial workshops for employees.

Our investment management services include comprehensive investment planning and implementation for individual and business clients including understanding client objectives and risk tolerance, developing appropriate asset allocation, selecting and implementing specific investments, regular reviewing and monitoring of client portfolios and providing regular market comments, comprehensive quarterly reports and attentive servicing of each client’s needs. For discretionary investment management services, we charge a quarterly management fee in arrears, which is generally determined on a sliding scale based on the portfolio value. Our services are independent, and a key point of differentiation to our clients is that we do not have proprietary funds to sell them, and all client assets are held in custody with a third party.

We also provide investment consulting services to individuals, companies and qualified retirement plans, which may include assistance in developing a written statement of investment policy to provide guidance on asset allocation, asset allocation studies, assistance with money manager searches and/or mutual fund selection, manager and/or mutual fund performance measurement and/or portfolio monitoring, review of portfolio allocation and construction and assistance with programs of employee investment education for firms sponsoring participant-directed retirement plans.

Encore Bank’s Trust Division

Encore Trust became a division of Encore Bank as of June 30, 2007, in connection with the merger of Encore Bank with Encore Trust Company, N.A. Prior to this merger, Encore Trust Company, N.A. was a subsidiary of Encore Bank. Encore Trust provides trust services primarily to individuals in Houston, Austin and Dallas. The personal trust business focuses primarily on the Houston market to service the needs of individuals. We also administer court-appointed trusts on behalf of individuals in Houston, Austin and Dallas who receive monetary awards. As of December 31, 2011, Encore Trust had $1.0 billion in assets under management.

We deliver trust services to individuals under the supervision of trust professionals. Our level of involvement—from full management to specific assistance—is based on our client’s needs, the type of trust established and the responsibilities assigned in the trust agreement. Our trust officers possess an average of 25 years of trust experience, which enables them to provide prudent and efficient management of trust assets in administering complex financial holdings. We administer personal trusts, assist with estate trust administration, handle charitable trust and foundation needs and manage employee retirement assets in retirement programs, such as profit sharing plans, defined benefit plans, money purchase plans, individual retirement plans and non-qualified retirement trusts for employee benefit trusts.

We also provide management of judgment or settlement awards for minors or incapacitated persons. We handle Section 142 Trusts, Section 867 Trusts, Special Needs Trusts, 468b Qualified Settlement Fund Trusts and U.S. Government Periodic Payment Trusts, which offer alternatives to registries of the court, annuities and

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guardianships. While the company we acquired and made a division of Encore Bank known as Encore Trust has been in business for over 50 years, approximately ten years ago the company created a special team to focus specifically on court trust business. Court-created trusts benefit clients by providing the flexibility to adapt the administration of the trust to the needs of our clients, as those needs change, protecting assets to balance near- and long-term needs, allowing distributions without court expense, providing professional money management, creating a competitive return on investment, safeguarding against inflation, providing accurate trust accounting, allowing the ability to adjust to market conditions, avoiding liability and malpractice issues and having the balance of principal returned at the trust end, unlike the payout system of annuities.

Insurance

We offer a wide variety of personal and commercial property and casualty insurance products through our insurance agency, Town & Country. With offices in Houston, Galveston, Fort Worth, League City and Katy, Town & Country has been providing personal and commercial insurance for over 40 years. As of December 31, 2011, we had approximately 8,260 insurance clients and were one of the largest independent insurance agencies in the Houston metropolitan area. Town & Country provides commercial, personal, and life and health insurance for businesses and individuals through a staff of 39 licensed and experienced insurance professionals. Our independent insurance professionals can help clients select the coverage and price best suited to their particular needs. In addition to home, auto, business and life insurance, we also offer condominium and renters insurance, fine art coverage, personal umbrella policies and boat insurance. Our commercial coverages include general liability, auto liability, workers compensation, property, professional liability, directors and officers liability and accounts receivable coverage. Our insurance partners include Chubb Group, Fidelity National Financial, America First, Liberty Mutual, ACE, Hanover Insurance, Progressive, Texas Mutual Insurance Company, Travelers, The Hartford, Republic, Safeco, Utica National, Zurich Insurance, Lloyds and others.

Competition

The banking, wealth management and insurance businesses are highly competitive, and our profitability depends principally on our ability to compete in the market area in which we are located. In our banking business, we experience substantial competition in attracting and retaining deposits and in originating loans. The primary factors we encounter in competing for deposits are convenient office locations and rates offered. Direct competition for deposits comes from other commercial banks and thrift institutions, money market mutual funds and corporate and government securities which may offer more attractive rates than insured depository institutions are willing to pay. The primary factors we encounter in competing for loans include, among other things, the interest rate, loan origination fees and the range of services offered. Competition for loans normally comes from other commercial banks, thrift institutions, mortgage bankers and mortgage brokers, and insurance companies. We believe that we have been able to compete effectively with other financial institutions by emphasizing client service, by establishing long-term relationships and building client loyalty, and by providing products and services designed to address the specific needs of our clients.

Our senior management reviews rate surveys weekly to ensure that we are consistently offering competitive rates. The financial institutions included in the surveys are located in our market areas and were selected based on their asset size, branch network and their consistent advertisement of similar products. We also survey the top ten mortgage lenders in each market to ensure that our rates are competitive.

Our loan and deposit rates are set by market area, which enables us to respond timely to the local market conditions. We closely monitor competitor responses regarding our rates and product types to ensure that we are emphasizing the most effective products and utilizing the most efficient rates in each market. Ultimately, we seek to balance the rate levels in each region to achieve the appropriate overall target cost of funds.

In providing wealth management services, we compete with a wide variety of firms including national and regional investment management and financial planning firms, broker-dealers, accounting firms, trust companies,

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and law firms. Many of these companies have greater resources and may already have relationships with our clients in related product areas. We believe that our ability to compete effectively with other firms is dependent upon the quality and level of service, personal relationships, price, and investment performance. These factors are also the basis for competition in the insurance industry. With respect to our insurance business, some of Town & Country’s competitors are larger and have greater resources than we do and operate on an international scale. We are also in competition with insurance providers that write insurance directly for their customers as well as companies that provide self-insurance and other employer-sponsored programs.

Supervision and Regulation

The following is a summary description of the relevant laws, rules and regulations governing banks and bank holding companies and our wealth management and insurance subsidiaries. The descriptions of, and references to, the statutes and regulations below are brief summaries and do not purport to be complete. The descriptions are qualified in their entirety by reference to the specific statutes and regulations discussed.

General

The supervision and regulation of bank holding companies and their subsidiaries is intended primarily for the protection of depositors, the Deposit Insurance Fund (DIF) of the FDIC and the banking system as a whole, and not for the protection of the bank holding company, shareholders or creditors. The banking agencies have broad enforcement power over bank holding companies and banks, including the power to impose substantial fines and other penalties for violations of laws and regulations.

Various legislation and proposals to overhaul the bank regulatory system and limit the investments that a depository institution may make with insured funds are introduced in Congress from time to time. Such legislation may change banking statutes and our operating environment and that of our banking subsidiary in substantial and unpredictable ways. In addition, the Texas state legislature from time to time considers legislation affecting insurance agencies operating in the state. Bancshares cannot determine the ultimate effect that any potential legislation, if enacted, or implemented regulations with respect thereto, would have upon the financial condition or results of operations of us or our subsidiaries.

Encore Bancshares, Inc.

On March 30, 2007, Bancshares converted from a thrift holding company to a bank holding company and registered with the Board of Governors of the Federal Reserve System (Federal Reserve) under the Bank Holding Company Act of 1956, as amended (BHCA). Bancshares’s conversion was accomplished in connection with the conversion of Encore Bank from a federal savings association to a national bank. On July 21, 2008, Bancshares became a financial holding company. Accordingly, Bancshares is subject to supervision, regulation and examination by the Federal Reserve. The Gramm-Leach-Bliley Act (GLBA), the BHCA and other federal laws subject financial and bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.

Regulatory Restrictions on Dividends; Source of Strength. Bancshares is regarded as a legal entity separate and distinct from Encore Bank. The principal source of our revenue is dividends received from Encore Bank and Town & Country. As described in more detail below, federal law places limitations on the amount that national banks may pay in dividends, which Encore Bank must adhere to when paying dividends to us. It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a

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source of strength to its banking subsidiaries. In addition, it is Federal Reserve policy that Bancshares inform and consult with them prior to declaring and paying a dividend that could raise safety and soundness concerns, including interest on the subordinated debentures underlying our trust preferred securities.

Under Federal Reserve policy, a bank holding company has historically been required to act as a source of financial strength to each of its banking subsidiaries. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) codified this policy as a statutory requirement. Under this requirement, Bancshares is expected to commit resources to support Encore Bank, including at times when we may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. As discussed below, a bank holding company in certain circumstances could be required to guarantee the capital plan of an undercapitalized banking subsidiary.

In the event of a bank holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and to cure immediately any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of an insured depository institution. Any claim for breach of such obligation will generally have priority over most other unsecured claims.

Scope of Permissible Activities. Under the BHCA, bank holding companies generally may not acquire a direct or indirect interest in or control of more than 5% of the voting shares of any company that is not a bank or bank holding company or from engaging in activities other than those of banking, managing or controlling banks or furnishing services to or performing services for its subsidiaries, except that it may engage in, directly or indirectly, certain activities that the Federal Reserve has determined to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. These activities include, among other things, numerous services and functions performed in connection with lending, investing and financial counseling and tax planning. In approving acquisitions or the addition of activities, the Federal Reserve considers, among other things, whether the acquisition or the additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.

The GLBA, effective March 11, 2000, eliminated many of the historical barriers to affiliations among banks, securities firms, insurance companies and other financial service providers and permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature.

A bank holding company may become a financial holding company by filing a declaration with the Federal Reserve if each of its subsidiary banks is well capitalized under the prompt-corrective-action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), is well managed, and has at least a satisfactory rating under the Community Reinvestment Act of 1977. Bancshares became a financial holding company on July 21, 2008.

Since July 2011, Bancshares’s financial holding company status also depends upon maintaining its status as “well capitalized” and “well managed” under applicable Federal Reserve regulations. If a financial holding company ceases to meet these requirements, the Federal Reserve may impose corrective capital and/or managerial requirements on the financial holding company and place limitations on its ability to conduct the broader financial activities permissible for financial holding companies. In addition, the Federal Reserve may require divestiture of the holding company’s depository institutions and/or its non-bank subsidiaries if the deficiencies persist.

While the Federal Reserve is the “umbrella” regulator for financial holding companies and has the power to examine banking organizations engaged in new activities, regulation and supervision of activities which are

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financial in nature or determined to be incidental to such financial activities will be handled along functional lines. Accordingly, activities of subsidiaries of a financial holding company will be regulated by the agency or authorities with the most experience regulating that activity as it is conducted in a financial holding company.

Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve’s Regulation Y, for example, generally requires a holding company to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the holding company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

The Federal Reserve has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1.0 million for each day the activity continues.

Anti-Tying Restrictions. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by a holding company or its affiliates.

Capital Adequacy Requirements. The Federal Reserve has adopted a system using risk-based capital guidelines under a two-tier capital framework to evaluate the capital adequacy of bank holding companies. Tier 1 capital generally consists of common shareholders’ equity, retained earnings, a limited amount of qualifying perpetual preferred stock, qualifying trust preferred securities and noncontrolling interests in the equity accounts of consolidated subsidiaries, less goodwill and certain intangibles. Tier 2 capital generally consists of certain hybrid capital instruments and perpetual debt, mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock, loan loss allowance and unrealized holding gains on certain equity securities.

Under the guidelines, specific categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset base. The guidelines require a minimum total risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2 capital. As of December 31, 2011, our ratio of Tier 1 capital to total risk-weighted assets was 13.22% and our ratio of total capital to total risk-weighted assets was 14.48%.

In addition to the risk-based capital guidelines, the Federal Reserve uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. Certain highly rated bank holding companies may maintain a minimum leverage ratio of 3.0%, but other bank holding companies are required to maintain a leverage ratio of 4.0%. As of December 31, 2011, our leverage ratio was 9.73%.

The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

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Proposed Revisions to Capital Adequacy Requirements. The Dodd-Frank Act requires the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the FDIC to adopt regulations imposing a continuing “floor” of the 1988 capital accord (Basel I) of the Basel Committee on Banking Supervision (Basel Committee) capital requirements in cases where the 2004 Basel Committee capital accord (Basel II) capital requirements and any changes in capital regulations resulting from Basel III (defined below) otherwise would permit lower requirements. In December 2010, the Federal Reserve, the OCC and the FDIC issued a joint notice of proposed rulemaking that would implement this requirement.

On December 16, 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation (Basel III). Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.

The timing for the U.S. banking agencies’ publication of proposed rules to implement the Basel III capital framework and the implementation schedule for banks is uncertain, but the U.S. banking agencies have indicated informally that regulations implementing the Basel III capital framework will be published for comment during the first half of 2012. Notwithstanding its release of the Basel III framework, the Basel Committee is considering further amendments to Basel III, including the imposition of additional capital surcharges on globally and systemically important financial institutions. In addition to Basel III, the Dodd-Frank Act requires or permits the U.S. banking agencies to adopt regulations affecting banking institutions’ capital requirements in a number of respects, including potentially more stringent capital requirements for systemically important financial institutions. Accordingly, the regulations ultimately adopted and made applicable to us may be substantially different from the Basel III final framework as published in December 2010. Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact our net income and return on equity.

The Basel III final capital framework, among other things, (i) introduces as a new capital measure “Common Equity Tier 1” (CET1), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations.

When fully phased in on January 1, 2019, Basel III will require banks to maintain (i) as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter). Basel III also provides for a “countercyclical capital buffer” that would be added to the capital conservation buffer generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk.

Proposed Liquidity Requirements. Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III final framework will require banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward will be required by regulation. One test,

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referred to as the liquidity coverage ratio (LCR), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other, referred to as the net stable funding ratio (NSFR), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incentivize banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. The Basel III liquidity framework contemplates that the LCR and NSFR will be subject to observation periods continuing through mid-2013 and mid-2016, respectively, and subject to any revisions resulting from the analyses conducted and data collected during the observation period, the LCR and NSFR will be implemented as minimum standards on January 1, 2015 and by January 1, 2018, respectively. The proposed liquidity requirements will likely apply to bank holding companies with total assets of $50 billion or greater. These new standards are subject to further rulemaking and their terms could change before implementation.

Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators are required to take prompt corrective action to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.

The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be “adequately capitalized.” The bank regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.

Acquisitions by Bank Holding Companies. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve is required to consider, among other things, the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and various competitive factors.

Control Acquisitions. The Change in Bank Control Act (CBCA) prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (Exchange Act), such as us, under the circumstances set forth in the presumption, constitutes acquisition of control of our company.

In addition, the CBCA prohibits any entity from acquiring 25% (5% in the case of an acquiror that is a bank holding company) or more of a bank holding company’s or bank’s voting securities, or otherwise obtaining control or a controlling influence over a bank holding company or bank without the prior approval of the Federal Reserve. In most circumstances, an entity that owns 25% or more of the voting securities of a banking organization owns enough of the capital resources to have a controlling influence over such banking organization for purposes of the CBCA. On September 22, 2008, the Federal Reserve issued a policy statement on equity investments in bank holding companies and banks, which allows the Federal Reserve to generally be able to conclude that an entity’s investment is not “controlling” if the entity does not own in excess of 15% of the voting

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power and 33% of the total equity of the bank holding company or bank. Depending on the nature of the overall investment and the capital structure of the banking organization, based on the policy statement, the Federal Reserve will permit noncontrolling investments in the form of voting and nonvoting shares that represent in the aggregate (i) less than one-third of the total equity of the banking organization (and less than one-third of any class of voting securities, assuming conversion of all convertible nonvoting securities held by the entity) and (ii) less than 15% of any class of voting securities of the banking organization.

Encore Bank

On March 30, 2007, Encore Bank converted from a federal savings association to a national bank. As a national banking association, the deposits of Encore Bank are insured by the DIF of the FDIC. Encore Bank’s primary regulator is the OCC. By virtue of the insurance of its deposits, however, Encore Bank is also subject to supervision and regulation by the FDIC. In addition, because Encore Bank is also a member of the Federal Reserve System, it is subject to regulation pursuant to the Federal Reserve Act. Such supervision and regulation subjects Encore Bank to special restrictions, requirements, potential enforcement actions and periodic examination by the OCC. Because the Federal Reserve regulates us as a holding company parent of Encore Bank, the Federal Reserve’s supervisory authority over us directly affects Encore Bank.

Financial Modernization. Under the GLBA, a national bank may establish a financial subsidiary and engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development, real estate investment, annuity issuance and merchant banking activities. To do so, a bank must be well capitalized, well managed and have a Community Reinvestment Act (CRA) rating of satisfactory or better. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must remain well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a CRA rating of satisfactory or better. Currently, Encore Bank has a CRA rating of satisfactory.

Branching. The establishment of a branch must be approved by the OCC, which considers a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community and consistency with corporate powers.

Restrictions on Transactions with Affiliates and Insiders. Transactions between Encore Bank and its non-banking affiliates, including us, are subject to Section 23A of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by, or is under common control with that bank. In general, Section 23A imposes limits on the amount of such transactions to 10% of Encore Bank’s capital stock and surplus and requires that such transactions be secured by designated amounts of specified collateral. It also limits the amount of advances to third parties which are collateralized by our securities or obligations of our non-banking subsidiaries. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking organization. For example, it requires that the 10% of capital limit on covered transactions begin to apply to financial subsidiaries. “Covered transactions” are defined by statute to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve) from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.

Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that certain transactions between the bank and its affiliates be on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with or involving other

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nonaffiliated persons. The Federal Reserve has also issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act, and interpretive guidance with respect to affiliate transactions.

The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to herein as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all insured depository institutions and their subsidiaries. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution’s total unimpaired capital and surplus, and the OCC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions.

Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Capital adequacy requirements serve to limit the amount of dividends that may be paid by Encore Bank to us as its parent company. Until capital surplus equals or exceeds capital stock, a national bank must transfer to surplus 10% of its net income for the preceding four quarters in the case of an annual dividend or 10% of its net income for the preceding two quarters in the case of a quarterly or semiannual dividend. As of December 31, 2011, Encore Bank’s capital surplus exceeded its capital stock. Without prior approval, a national bank may not declare a dividend if the total amount of all dividends declared by that bank in any calendar year exceeds the total of that bank’s retained net income for the current year and retained net income for the preceding two years. Under federal law, Encore Bank cannot pay a dividend if, after paying the dividend, it will be “undercapitalized.” The OCC may declare a dividend payment to be unsafe and unsound even though Encore Bank would continue to meet its capital requirements after the dividend.

Because we are a legal entity separate and distinct from our subsidiaries, our right to participate in the distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors. In the event of a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, arising as a result of their status as shareholders, including any depository institution holding company (such as us) or any shareholder or creditor thereof.

Examinations. The OCC periodically examines and evaluates insured banks. Based upon such an evaluation, the OCC may revalue the assets of the institution and require that it establish specific reserves to compensate for the difference between the OCC-determined value and the book value of such assets.

Audit Reports. Insured institutions with total assets of $500 million or more must submit annual audit reports prepared by independent auditors to federal regulators. In some instances, the audit report of the institution’s holding company can be used to satisfy this requirement. Auditors must receive examination reports, supervisory agreements, and reports of enforcement actions. For institutions with total assets of $1 billion or more, financial statements prepared in accordance with accounting principles generally accepted in the U.S., management’s certifications concerning responsibility for the financial statements, internal controls and compliance with legal requirements designated by the OCC, and an attestation by the auditor regarding the statements of management relating to the internal controls must be submitted. For institutions with total assets of $3 billion or more, independent auditors may be required to review quarterly financial statements. FDICIA requires that independent audit committees, consisting of outside directors only, be formed. The committees of such institutions must include members with experience in banking or financial management, must have access to outside counsel, and must not include representatives of large clients.

Capital Adequacy Requirements. Similar to the Federal Reserve’s requirements for bank holding companies, the OCC has adopted regulations establishing minimum requirements for the capital adequacy of national banks. The OCC may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk.

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The OCC’s risk-based capital guidelines generally require national banks to have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0% and a ratio of total capital to total risk-weighted assets of 8.0%. As of December 31, 2011, Encore Bank’s ratio of Tier 1 capital to total risk-weighted assets was 12.48% and its ratio of total capital to total risk-weighted assets was 13.74%.

The OCC’s leverage guidelines require national banks to maintain Tier 1 capital of no less than 4.0% of average total assets, except in the case of certain highly rated banks for which the requirement is 3.0% of average total assets unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. As of December 31, 2011, Encore Bank’s ratio of Tier 1 capital to average total assets (leverage ratio) was 9.17%.

Corrective Measures for Capital Deficiencies. The federal banking regulators are required to take prompt corrective action with respect to capital-deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are “well capitalized,” “adequately capitalized,” “under capitalized,” “significantly under capitalized” and “critically under capitalized.” A “well capitalized” bank has a total risk-based capital ratio of 10.0% or higher; a Tier 1 risk-based capital ratio of 6.0% or higher; a leverage ratio of 5.0% or higher; and is not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure. An “adequately capitalized” bank has a total risk-based capital ratio of 8.0% or higher; a Tier 1 risk-based capital ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or higher if that bank was rated a composite 1 in its most recent examination report and is not experiencing significant growth); and does not meet the criteria for a well capitalized bank. A bank is “under capitalized” if it fails to meet any one of the ratios required to be adequately capitalized.

In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations authorize broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions, branch establishment, and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.

As an institution’s capital decreases, the OCC’s enforcement powers increase. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management, and other restrictions. The OCC has only limited discretion in dealing with a critically undercapitalized institution and is required to undertake stringent measures to protect the interests of depositors and the DIF, which depending on the circumstances, could include the appointment of a receiver or conservator.

Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.

Deposit Insurance Assessments. Substantially all of the deposits of Encore Bank are insured up to applicable limits by the DIF of the FDIC and Encore Bank must pay deposit insurance assessments to the FDIC for such deposit insurance protection. The FDIC maintains the DIF by designating a required reserve ratio. If the reserve ratio falls below the designated level, the FDIC must adopt a restoration plan that provides that the DIF will return to an acceptable level generally within 5 years. The designated reserve ratio is currently set at 2.00%. The FDIC has the discretion to price deposit insurance according to the risk for all insured institutions regardless of the level of the reserve ratio.

The DIF reserve ratio is maintained by assessing depository institutions an insurance premium based upon statutory factors. Under its current regulations, the FDIC imposes assessments for deposit insurance according to a depository institution’s ranking in one of four risk categories based upon supervisory and capital evaluations.

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The assessment rate for an individual institution is determined according to a formula based on a combination of weighted average CAMELS component ratings, financial ratios and, for institutions that have long-term debt ratings, the average ratings of its long-term debt. Well-capitalized institutions (generally those with CAMELS composite ratings of 1 or 2) are grouped in Risk Category I and the initial base assessment rate for deposit insurance is set at an annual rate of between 12 and 16 basis points. The initial base assessment rate for institutions in Risk Categories II, III and IV is set at annual rates of 22, 32 and 50 basis points, respectively. These initial base assessment rates are adjusted to determine an institution’s final assessment rate based on its brokered deposits, secured liabilities and unsecured debt. Total base assessment rates after adjustments range from 7 to 24 basis points for Risk Category I, 17 to 43 basis points for Risk Category II, 27 to 58 basis points for Risk Category III, and 40 to 77.5 basis points for Risk Category IV.

In November 2009, the FDIC adopted a rule that required all insured institutions with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The assessment, which totaled $7.5 million for us, was calculated by taking the institution’s actual September 30, 2009, assessment base and adjusting it quarterly by an estimated 5% annual growth rate through the end of 2012. Each institution recorded the entire amount of its prepaid assessment as a prepaid expense, an asset on its balance sheet, as of December 31, 2009. As of December 31, 2009, and each quarter thereafter, each institution records an expense, or a charge to earnings, for its quarterly assessment invoiced on its quarterly statement and an offsetting credit to the prepaid assessment until the asset is exhausted. As of December 31, 2011, $2.4 million in prepaid assessments is included in other assets in the accompanying consolidated balance sheet.

On February 7, 2011, the FDIC approved a final rule that amended the DIF restoration plan and implemented certain provisions of the Dodd-Frank Act. As of April 1, 2011, the assessment base is determined using average consolidated total assets minus average tangible equity rather than the current assessment base of adjusted domestic deposits. Since the change resulted in a much larger assessment base, the final rule also lowers the assessment rates in order to keep the total amount collected from financial institutions relatively unchanged from the amounts currently being collected. The new assessment rates, calculated on the revised assessment base, generally range from 2.5 to 9 basis points for Risk Category I institutions, 9 to 24 basis points for Risk Category II institutions, 18 to 33 basis points for Risk Category III institutions, and 30 to 45 basis points for Risk Category IV institutions. The new assessment rates were calculated for the quarter beginning April 1, 2011 and reflected in invoices for assessments due September 30, 2011.

Enforcement Powers. The FDIC and the other federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject us or our banking subsidiary, as well as officers, directors and other institution-affiliated parties of these organizations, to administrative sanctions and potentially substantial civil money penalties. The appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized, fails to become adequately capitalized when required to do so, fails to submit a timely and acceptable capital restoration plan or materially fails to implement an accepted capital restoration plan.

Brokered Deposit Restrictions. Adequately capitalized institutions (as defined for purposes of the prompt corrective action rules described above) cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew, or roll over brokered deposits.

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Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) contains a cross-guarantee provision which generally makes commonly controlled insured depository institutions liable to the FDIC for any losses incurred in connection with the failure of a commonly controlled depository institution.

Community Reinvestment Act. Under the Community Reinvestment Act (CRA) as implemented by Congress in 1977, a financial institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires federal examiners, in connection with the examination of a financial institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA also requires all institutions to make public disclosure of their CRA ratings. In February 2009, Encore Bank received a satisfactory rating in meeting community credit needs under the CRA in our most recent examination for CRA performance.

Consumer Laws and Regulations. In addition to the laws and regulations discussed herein, Encore Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act and the Fair Housing Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with clients when taking deposits or making loans to such clients. Encore Bank must comply with all applicable provisions of these consumer protection laws and regulations as part of its ongoing compliance and client relations programs.

Privacy. In addition to expanding the activities in which banks and bank holding companies may engage, the GLBA imposes new requirements on financial institutions with respect to client privacy. The GLBA generally prohibits disclosure of client information to non-affiliated third parties unless the client has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to clients annually. Financial institutions, however, will be required to comply with state law if it is more protective of client privacy than the GLBA. The privacy provisions became effective on July 1, 2002. The GLBA contains a variety of other provisions including a prohibition against ATM surcharges unless the client has first been provided notice of the imposition and amount of the fee.

Anti-Money Laundering and Anti-Terrorism Legislation. A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (USA Patriot Act) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Treasury has issued and, in some cases, proposed a number of regulations that apply various requirements of the USA Patriot Act to financial institutions. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Certain of those regulations impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury’s Office of Foreign Assets Control (OFAC). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or

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more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.

Concentrated Commercial Real Estate Lending Regulations. The federal banking agencies, including the FDIC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (1) total reported loans for construction, land development, and other land represent 100% or more of total capital or (2) total reported loans secured by multifamily and non-farm residential properties and loans for construction, land development, and other land represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and increasing capital requirements.

Regulation of Nonbanking Subsidiaries

Linscomb & Williams. Linscomb & Williams is a Texas corporation and an investment adviser that is registered with the SEC under the Investment Advisers Act of 1940. Under the Investment Advisers Act, an investment adviser is subject to supervision and inspection by the SEC. A significant element of supervision under the Investment Advisers Act is the requirement to make significant disclosures to the public under Part II of Form ADV of the adviser’s services and fees, the qualifications of its associated persons, financial difficulties and potential conflicts of interests. An investment adviser must keep extensive books and records, including all customer agreements, communications with clients, orders placed and proprietary trading by the adviser or any advisory representative.

Town & Country. Town & Country is a Texas corporation licensed to sell insurance policies in the State of Texas by the Texas Department of Insurance. The Texas Insurance Code provides that licensed agents are subject to regulation requirements of the Texas Department of Insurance. The requirements include maintaining books and records and continuing education. In addition, Town & Country is licensed to sell insurance in a number of other states and accordingly, is subject to regulation in those states.

Expanding Enforcement Authority

One of the major additional burdens imposed on the banking industry by FDICIA is the increased ability of banking regulators to monitor the activities of banks and their holding companies. In addition, the Federal Reserve and FDIC possess extensive authority to police unsafe or unsound practices and violations of applicable laws and regulations by depository institutions and their holding companies. For example, the FDIC may terminate the deposit insurance of any institution which it determines has engaged in an unsafe or unsound practice. The agencies can also assess civil money penalties, issue cease and desist or removal orders, seek injunctions, and publicly disclose such actions. FDICIA, FIRREA and other laws have expanded the agencies’ authority in recent years, and the agencies have not yet fully tested the limits of their powers.

Effect on Economic Environment

The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means

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available to the Federal Reserve to affect the money supply are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits.

Federal Reserve monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on our business and operations of us and those of our subsidiaries cannot be predicted.

Legislative Initiatives

In light of current conditions and the continuing weak economic outlook, regulators have increased their focus on the regulation of financial institutions. A number of government initiatives designed to respond to the current conditions have been introduced recently and proposals for legislation that could substantially intensify the regulation of financial institutions have been adopted by Congress and state legislatures. Such initiatives may change banking statutes and the operating environment for us and Encore Bank in substantial and unpredictable ways. We cannot determine the ultimate effect that any potential legislation, if enacted, or implementing regulations with respect thereto, would have, upon the financial condition or results of our operations or the operations of Encore Bank. A change in statutes, regulations or regulatory policies applicable to us or Encore Bank could have a material effect on the financial condition, results of operations or business of our company and Encore Bank.

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

• Create a new agency, the Consumer Financial Protection Bureau (CFPB), responsible for implementing, examining and enforcing compliance with federal consumer protection laws;

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

• Broaden the base for FDIC insurance assessments from the amount of insured deposits to average total consolidated assets less average tangible equity during the assessment period;

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

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

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

• Require financial holding companies, such as the Company, to be well capitalized and well managed as of July 21, 2011. Bank holding companies and banks must also be both well capitalized and well managed in order to acquire banks located outside their home state;

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• Eliminate the ceiling on the size of the DIF and increase the floor of the size of the DIF;

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

• Amend the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer through regulations adopted by the Federal Reserve in June 2011, which set a maximum permissible interchange fee; and

• Increase the authority of the Federal Reserve to examine us and our non-bank subsidiaries.

The Dodd-Frank Act established the CFPB, which has supervisory authority over depository institutions with total assets of $10 billion or greater, which did not include the Company and Encore Bank as of December 31, 2011. The CFPB will focus their supervision and regulatory efforts on (i) risks to consumers and compliance with the federal consumer financial laws, when it evaluates the policies and practices of a financial institution; (ii) the markets in which firms operate and risks to consumers posed by activities in those markets; (iii) depository institutions that offer a wide variety of consumer financial products and services; depository institutions with a more specialized focus; and (iv) non-depository companies that offer one or more consumer financial products or services.

Our management continues to review actively the provisions of the Dodd–Frank Act and assess its probable impact on our business, financial condition and results of operations. Provisions in the legislation that affect deposit insurance assessments and payment of interest on demand deposits could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Provisions in the legislation that revoke the Tier 1 capital treatment of newly issued trust preferred securities could require us to seek other sources of capital in the future. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us, our customers or the financial industry more generally.

Incentive Compensation. In June 2010, the Federal Reserve, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Also, on April 14, 2011, the FDIC published a proposed interagency rule to implement certain incentive compensation requirements of the Dodd-Frank Act. Under the proposed rule, financial institutions must prohibit incentive-based compensation arrangements that encourage inappropriate risk taking that are deemed excessive or that may lead to material losses.

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as us, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

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U.S. Treasury Small Business Lending Fund. Enacted into law as part of the Small Business Jobs Act of 2010 (Jobs Act), the SBLF was created to be a dedicated investment fund that provided capital to qualified community banks and bank holding companies to encourage lending to small businesses. The SBLF provided over $4.0 billion to 332 community banks, bank holding companies and community development loan funds. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including certain provisions related to stock repurchases and declaration of dividends. The SBLF provided for the purchase by the Secretary of the Treasury of senior non-cumulative perpetual preferred stock in an aggregate amounts up to 5% or 3% if a participant’s consolidated risk-weighted assets are $1.0 billion or less or between $1.0 billion and $10.0 billion, respectively. We elected to participate in the SBLF, and on September 27, 2011, we issued and sold to the Secretary of the Treasury 32,914 shares of Series B Preferred Stock for an aggregate purchase price of $32.9 million in cash. We used this aggregate purchase price plus an additional $1.3 million in cash to repurchase the Series A Preferred Stock that had been issued to the U.S. Treasury in connection with the CPP.

Employees

As of December 31, 2011, we had 293 full-time employees. Management considers our relations with employees to be good. Neither we nor Encore Bank or any of its subsidiaries are a party to any collective bargaining agreement.

Item 1A. Risk Factors

An investment in our common stock involves risks. The following is a description of the material risks and uncertainties that we believe affect our business and an investment in our common stock. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us and our business. If any of the risks described in this Annual Report on Form 10-K were to occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly and you could lose all or part of your investment.

Risks Associated With Our Business

Difficult market conditions and economic trends have adversely affected the banking industry and could adversely affect our business, financial condition and results of operations.

We are operating in a challenging and uncertain economic environment, including generally uncertain conditions nationally and locally in our markets. Financial institutions continue to be affected by declines in the real estate market that have negatively impacted the credit performance of residential real estate, construction and commercial real estate loans and resulted in significant write downs of assets by many financial institutions. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other. We retain direct exposure to the residential and commercial real estate markets, and we are affected by these events.

Our ability to assess the creditworthiness of customers and to estimate the losses as they are incurred in our loan portfolio is made more complex by these difficult market and economic conditions. A prolonged national economic recession or further deterioration of these conditions in our markets could drive the rate of losses beyond that which has been provided for in our recent quarterly provisions for loan losses and result in the following consequences:

• increases in loan delinquencies;

• increases in nonperforming assets and foreclosures;

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• decreases in demand for our products and services, which could adversely affect our liquidity position; and

• decreases in the value of the collateral securing our loans, especially real estate, which could reduce customers’ borrowing power.

While economic conditions in Texas and the U.S., are showing signs of recovery, there can be no assurance that these difficult conditions will continue to improve. Continued declines in real estate values, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment, including job losses, could have an adverse affect on our borrowers or their customers, which could adversely affect our business, financial condition and results of operations.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds at an acceptable cost through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.

Future growth or operating results may require us to raise additional capital, but that capital may not be available or it may be dilutive.

We and Encore Bank are each required by the Federal Reserve and the OCC, respectively, to maintain adequate levels of capital to support our operations. In the event that our future operating results erode capital, if Encore Bank is required to maintain capital in excess of well-capitalized standards, or if we elect to expand through loan growth or acquisitions, we may be required to raise additional capital. Our ability to raise capital will depend on conditions in the capital markets, which are outside our control, and on our financial performance. Accordingly, we cannot be assured of our ability to raise capital on favorable terms when needed, or at all. If we cannot raise additional capital when needed, we will be subject to increased regulatory supervision and the imposition of restrictions on our growth and business. These outcomes could negatively impact our ability to operate or further expand our operations through acquisitions or the establishment of additional private client offices and may result in increases in operating expenses and reductions in revenues that could have a material adverse effect on our financial condition and results of operations. In addition, in order to raise additional capital, we may need to issue shares of our common stock that would dilute the book value of our common stock and reduce our current shareholders’ percentage ownership interest to the extent they do not participate in future offerings.

If we are unable to continue to transform our balance sheet by originating loans and growing core deposits and if our strategic decision to offer wealth management services and insurance products does not continue to generate new business, our business and results of operations may be negatively affected.

We have transformed our balance sheet by replacing lower yielding investment securities and purchased mortgage loans with our own higher yielding originated loans. We continue to focus on generating commercial lending relationships and transforming our balance sheet from one with a concentration in mortgages to a commercial lending specialization. We have also rolled out a full line of deposit and cash management products, which has enabled us to replace brokered deposits with core deposits. In connection with this transformation, we

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have disposed of our out-of-market locations and expanded the number of private client offices we operate in our target market of Texas. Additionally, we have made strategic acquisitions enabling us to offer wealth management services and insurance products to our clients. Our ability to continue the growth of originated loans and core deposits depends, in part, upon our ability to leverage our Texas offices and infrastructure, successfully attract core deposits, identify attractive commercial lending opportunities and retain experienced lending officers. Our ability to continue to successfully execute our business plan requires effective planning and management implementation, which may be affected by factors outside of our control. If we are not able to attract significant business from our target markets, our business and results of operations may be negatively affected.

Our dependence on loans secured by real estate subjects us to risks relating to fluctuations in the real estate market and related interest rates and legislation that could result in significant additional costs and capital requirements that could adversely affect our financial condition and results of operations.

Approximately 76.2% of our loan portfolio as of December 31, 2011 was comprised of loans collateralized by real estate, with 85.1% of the real estate located in Texas. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. The real estate markets in Texas deteriorated in the last several years. A continued weakening of the real estate market in our primary market areas could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing the loans and the value of real estate owned by us. As real estate values decline, it is also more likely that we would be required to make provisions for additional loan losses, which could adversely affect our financial condition and results of operations.

Current market conditions include an over-supply of land, lots and finished homes in many markets, including those where we do business. As of December 31, 2011, we had $59.6 million, or 5.8%, of our total loans in real estate construction loans. Of this amount, $35.6 million were land loans, $3.8 million were made to finance residential construction with an identified purchaser and $4.8 million were made to finance residential construction with no identified purchaser. Substantially all of these loans are located in the Houston area. Further, $15.4 million of real estate construction loans were made to finance commercial construction. Construction loans are subject to risks during the construction phase that are not present in standard residential real estate and commercial real estate loans. These risks include:

• the viability of the contractor;

• the value of the project being subject to successful completion;

• the contractor’s ability to complete the project, to meet deadlines and time schedules and to stay within cost estimates; and

• concentrations of such loans with a single contractor and its affiliates.

Real estate construction loans also present risks of default in the event of declines in property values or volatility in the real estate market during the construction phase. If we are forced to foreclose on a project prior to completion, we may not be able to recover the entire unpaid portion of the loan, may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate amount of time. If any of these risks were to occur, it could adversely affect our financial condition, results of operations and cash flows.

The federal banking agencies have issued guidance regarding high concentrations of commercial real estate loans within bank loan portfolios. The guidance requires financial institutions that exceed certain levels of commercial real estate lending compared with their total capital to maintain heightened risk management practices that address the following key elements: including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of

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commercial real estate lending. If there is any deterioration in our commercial real estate or real estate construction portfolios or if our regulators conclude that we have not implemented appropriate risk management practices, it could adversely affect our business and result in a requirement of increased capital levels, and such capital may not be available at that time.

Our commercial real estate and commercial loans expose us to increased credit risks, and these risks will increase if we succeed in increasing these types of loans.

We focus our lending efforts on commercial-related loans and intend to grow commercial real estate and commercial loans further as a proportion of our portfolio. As of December 31, 2011, commercial real estate and commercial loans totaled $425 million. In general, commercial real estate loans and commercial loans yield higher returns and often generate a deposit relationship, but also pose greater credit risks than do owner-occupied residential real estate loans. As our various commercial loan portfolios increase, the corresponding risks and potential for losses from these loans will also increase.

We make both secured and some unsecured commercial loans. Unsecured loans generally involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’ businesses. Secured commercial loans are generally collateralized by accounts receivable, inventory, equipment or other assets owned by the borrower and include a personal guaranty of the business owner. Compared to real estate, that type of collateral is more difficult to monitor, its value is harder to ascertain, it may depreciate more rapidly and it may not be as readily saleable if repossessed. Further, commercial loans generally will be serviced primarily from the operation of the business, which may not be successful, and commercial real estate loans generally will be serviced from income on the properties securing the loans.

If our allowance for loan losses is not adequate to cover actual loan losses, our results of operations will be negatively affected.

The allowance for loan losses is an estimate of losses incurred through year end. As the losses are confirmed, it is possible that additional loss provisions may be needed in future periods to refine that estimate, which will be made in addition to the regular provision for estimated losses in those periods. As a lender, we are exposed to the risk that our loan clients may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of the borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses to cover an estimate of loan losses incurred in the loan portfolio at the balance sheet date. In determining the size of the allowance, we rely, among other factors, on a periodic analysis of our loan portfolio, our historical loss experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover actual loan losses and adjustments may be necessary in future loss provisions. A material addition to the allowance for loan losses to correct for a material change in the estimate could cause our results of operations to be negatively affected.

In addition, federal regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further charge-offs, based on judgments different than those of our management. Any significant increase in our allowance for loan losses or charge-offs required by these regulatory agencies could have a material adverse effect on our results of operations and financial condition.

Our profitability depends significantly on local economic conditions in the areas where our operations and loans are concentrated.

Our profitability depends on the general economic conditions in our primary market in Texas where we have loans. Unlike larger banks that are more geographically diversified, we provide banking and financial services to clients primarily in the greater Houston area, including Harris, Ft. Bend and Montgomery counties. As of December 31, 2011, $636 million, or 87.7%, of our commercial real estate, real estate construction and

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residential real estate loans were made to borrowers in Texas. The local economic conditions in these areas have a significant impact on our commercial, real estate and construction and consumer loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. In addition, if the population or income growth in either of these regions slows, stops or declines, income levels, deposits and housing starts could be adversely affected and could result in the curtailment of our expansion, growth and profitability. In the last several years, economic conditions in Texas declined and if this region experiences a downturn or a recession for a prolonged period of time, we would likely experience significant increases in nonperforming loans, which could lead to operating losses, impaired liquidity and eroding capital.

Moreover, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could impact these local economic conditions and could negatively affect the financial results of our operations.

We may be required to pay significantly higher FDIC deposit insurance premiums and assessments in the future.

Recent insured depository institution failures, as well as deterioration in banking and economic conditions generally, have significantly increased the loss provisions of the FDIC, resulting in a decline in the designated reserve ratio of the FDIC to historical lows. The FDIC experienced a higher rate of insured depository institution failures in the last few years compared to historical trends which caused the reserve ratio to decline. In addition, the deposit insurance limit on FDIC deposit insurance coverage has been permanently increased to $250,000. These developments have caused the premiums assessed on us by the FDIC to increase and materially increase our noninterest expense.

On February 7, 2011, the FDIC approved a final rule that amended the DIF restoration plan and implemented certain provisions of the Dodd-Frank Act. Effective April 1, 2011, the assessment base is determined using average consolidated total assets minus average tangible equity rather than the prior assessment base of adjusted domestic deposits. The new assessment rates, calculated on the revised assessment base, generally range from 2.5 to 9 basis points for Risk Category I institutions, 9 to 24 basis points for Risk Category II institutions, 18 to 33 basis points for Risk Category III institutions, and 30 to 45 basis points for Risk Category IV institutions. The new assessment rates were effective for the quarter beginning April 1, 2011.

It is possible that our FDIC assessments could increase under these final regulations and could have an adverse impact on our results of operations. For the year ended December 31, 2011, our FDIC insurance related costs were $2.1 million compared with $3.7 million and $2.1 million for the years ended December 31, 2010 and 2009.

If the goodwill that we recorded in connection with business acquisitions becomes impaired, it could have a negative impact on our profitability.

Goodwill represents the amount by which the acquisition cost exceeds the fair value of net assets we acquired in the purchase of another entity including our trust function, investment management and insurance subsidiaries. We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate the carrying value of the asset might be impaired. Examples of those events or circumstances include the following:

• significant adverse change in business climate;

• significant unanticipated loss of clients/assets under management;

• unanticipated loss of key personnel; or

• significant reductions in profitability.

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We determine impairment by comparing the fair value of the reporting unit with the carrying amount of that reporting unit. If the carrying amount of the reporting unit exceeds the fair value of that reporting unit, an impairment loss is recognized based upon our calculation of the implied fair value of goodwill. Any such adjustments are reflected in our results of operations in the periods in which they become known. At December 31, 2011, our goodwill totaled $35.8 million. While we have recorded no such impairment charges since we initially recorded the goodwill, there can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write downs, which may have a material adverse effect on our financial condition and results of operations.

Future losses or insufficient core earnings may result in our inability to fully realize our net deferred tax asset, which could have a material adverse effect on our earnings and capital.

As of December 31, 2011, we had a net deferred tax asset of $19.9 million. We regularly assess the realization of our deferred tax asset and are required to record a valuation allowance if it is more likely than not that we will not realize all or a portion of the deferred tax asset. Our assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to our core earnings (earnings that exclude non-recurring income items) capacity and our prospects to generate core earnings in the future. Projections of core earnings and taxable income require us to apply significant judgment and are inherently speculative because they require estimates that cannot be made with certainty.

We did not establish a valuation allowance against the net deferred tax asset as of December 31, 2011, as management believes that it is more likely than not that we will have sufficient future earnings to utilize this asset to offset future income tax liabilities. If we were to determine at some point in the future that we will not achieve sufficient future taxable income to realize our net deferred tax asset, we would be required under generally accepted accounting principles to establish a full or partial valuation allowance. If we determine that a valuation allowance is necessary, we would incur a charge to operations that could have a material adverse effect on our earnings and capital.

The properties that we own and our foreclosed real estate assets could subject us to environmental risks and associated costs.

There is a risk that hazardous substances or wastes, contaminants, pollutants or other environmentally restricted substances could be discovered on our properties or our foreclosed assets (particularly in the case of real estate loans). In this event, we might be required to remove the substances from the affected properties or to engage in abatement procedures at our sole cost and expense. Besides being liable under applicable federal and state statutes for our own conduct, we may also be held liable under certain circumstances for actions of borrowers or other third parties with respect to property that collateralizes one or more of our loans or property that we own. Potential environmental liability could include the cost of remediation and also damages for any injuries caused to third parties. We cannot assure you that the cost of removal or abatement will not substantially exceed the value of the affected properties or the loans secured by those properties, that we would have adequate remedies against prior owners or other responsible parties or that we would be able to resell the affected properties either prior to or following completion of any such removal or abatement procedures. If material environmental problems are discovered prior to foreclosure, we generally will not foreclose on the related collateral.

The small- to medium-sized businesses we lend to may have fewer resources to weather a downturn in the economy, which may impair a borrower’s ability to repay a loan to us, and such impairment could materially harm our operating results.

We make loans to professional firms and privately-owned businesses that are considered to be small- to medium-sized businesses. Small- to medium-sized businesses frequently have smaller market shares than their

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competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small- to medium-sized business often depends on the management talents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay our loan. A continued economic downturn and other events that negatively impact our target market could cause us to incur substantial credit losses that could materially harm our operating results.

Our banking business is subject to interest rate risk and fluctuations in interest rates may adversely affect our results of operations and financial condition.

The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates, which are neither predictable nor controllable. Like most financial institutions, our results of operations are significantly dependent on our net interest income, which is the difference between interest earned from interest-earning assets, such as loans and investment securities, and interest paid on interest-bearing liabilities, such as deposits and borrowings. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will negatively impact our results of operations. Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply, and international disorder and instability in domestic and foreign financial markets.

As of December 31, 2011, we were asset sensitive, meaning that our interest-bearing assets reprice more quickly than our interest-earning liabilities, so in the event of an increase in interest rates, our net interest income will be affected positively. Although our asset liability management strategy is designed to control our risk from changes in market interest rates, it may not be able to prevent changes in interest rates from having a material adverse effect on our results of operations and financial condition.

The recent repeal of federal prohibitions on payment of interest on demand deposits could increase our interest expense.

All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, beginning on July 21, 2011, some financial institutions have commenced offering interest on demand deposits to compete for clients. Our interest expense will increase and our net interest margin will decrease if we begin offering interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition and results of operations.

The wealth management fees we receive may decrease as a result of poor investment performance, in either relative or absolute terms, which could decrease our revenues and results of operations.

For the year ended December 31, 2011, we received $20.1 million in fees from our wealth management business, which represented 70.2% of our total noninterest income. We derive our revenues from this business primarily from investment management fees based on assets under management and, to a lesser extent, fee-based financial planning services. Our ability to maintain or increase assets under management is subject to a number of factors, including investors’ perception of our past performance, in either relative or absolute terms, market and economic conditions, and competition from investment management companies.

Financial markets are affected by many factors, all of which are beyond our control, including general economic conditions; securities market conditions; the level and volatility of interest rates and equity prices; competitive conditions; liquidity of global markets; international and regional political conditions; regulatory and legislative developments; monetary and fiscal policy; investor sentiment; availability and cost of capital;

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technological changes and events; outcome of legal proceedings; changes in currency values; inflation; credit ratings; and the size, volume and timing of transactions. A decline in the fair value of the assets under management caused by a decline in general economic conditions would decrease our wealth management fee income.

Investment performance is one of the most important factors in retaining existing clients and competing for new wealth management clients. Poor investment performance could reduce our revenues and impair our growth in the following ways:

• existing clients may withdraw funds from our wealth management business in favor of better performing products;

• asset-based management fees could decline from a decrease in assets under management;

• our ability to attract funds from existing and new clients might diminish; and

• our wealth managers and investment advisors may depart, to join a competitor or otherwise.

Even when market conditions are generally favorable, our investment performance may be adversely affected by the investment style of our wealth management and investment advisors and the particular investments that they make. To the extent our future investment performance is perceived to be poor in either relative or absolute terms, the revenues and profitability of our wealth management business will likely be reduced and our ability to attract new clients will likely be impaired. As such, fluctuations in the equity and debt markets can have a direct impact upon our results of operations.

Linscomb & Williams’ investment advisory contracts are subject to termination on short notice, and termination of a significant number of investment advisory contracts could have a material adverse impact on our revenues.

Linscomb & Williams derived 97.8% of its revenue for the year ended December 31, 2011 from investment advisory contracts with its clients. These contracts are typically terminable by clients without penalty upon relatively short notice (generally not more than 60 days). Our wealth management clients can terminate their relationships with us, reduce their aggregate assets under management, or shift their funds to other types of accounts with different rate structures for any number of reasons, including investment performance, changes in prevailing interest rates, inflation, changes in investment preferences of clients, changes in our reputation in the marketplace, changes in management or control of clients, loss of key investment management personnel and financial market performance. We cannot be certain that Linscomb & Williams’ management will be able to retain all of their clients. If its clients terminate their investment advisory contracts, Linscomb & Williams, and consequently we, could lose a significant portion of our revenues.

Our insurance agency’s commission revenues are based on premiums set by insurers and any decreases in these premium rates could adversely affect our operations and revenues.

Our insurance agency subsidiary, Town & Country, is engaged in insurance agency and brokerage activities. For the year ended December 31, 2011, Town & Country received $5.8 million in commissions and fees, which represented 20.4% of our total noninterest income. Town & Country derives revenues primarily from commissions paid by the insurance underwriters on the sale of insurance products to clients. These commissions are highly dependent on the premiums charged by insurance underwriters, which historically have been cyclical in nature, vary by region and display a high degree of volatility based on the prevailing economic and competitive factors that affect insurance underwriters. These factors, which are not within Town & Country’s control, include the capacity of insurance underwriters to place new business, non-underwriting profits of insurance underwriters, consumer demand for insurance products, the availability of comparable products from other insurance underwriters at a lower cost and the availability to consumers of alternative insurance products, such as government benefits and self-insurance plans.

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Town & Country also receives contingent commissions, which are commissions paid by insurance underwriters based on profitability of the business, premium growth, total premium volume, or some combination of these factors. Town & Country generally receives these contingent commissions in the first and second quarters of each year. Due to the nature of these commissions, it is difficult for us to predict their payment. Increases in loss ratios experienced by insurance underwriters will result in a decreased profit to them and may result in decreases in the payment of contingent commissions to us.

Town & Country cannot predict the timing or extent of future changes in premiums and thus commissions. As a result, we cannot predict the effect that future premium rates will have on our operations. While increases in premium rates may result in revenue increases, decreases in premium rates may result in revenue decreases. These decreases may adversely affect our operations and revenues for the periods in which they occur.

Our business would be harmed if we lost the services of any of our senior management team and senior relationship bankers and are unable to recruit or retain suitable replacements.

We believe that our success to date and our prospects for future success in our banking, wealth management and insurance businesses depend significantly on the continued services and performance of our Chief Executive Officer, James S. D’Agostino, Jr., our President, Preston Moore, and the other members of our senior management team. While we have granted restricted stock to, and have change in control agreements with, certain key officers, our ability to retain such officers may be hindered by the fact that we have not entered into employment or non-competition agreements with most of them. Therefore, they may terminate their employment with us at any time, and we could have difficulty replacing such officers with persons who are experienced in the specialized aspects of our business or who have ties to the communities within our primary market areas. The unexpected loss of services of any of these key officers could materially harm our business.

Our growth could be hindered unless we are able to recruit and retain qualified employees.

Competition for highly qualified employees in a number of industries, including the financial services industry, is intense in our market areas. Our business plan includes, and is dependent upon, our hiring and retaining highly qualified and motivated executives and employees at every level and, in particular, experienced loan officers and relationship managers. We expect to experience substantial competition in our endeavor to identify, hire and retain the top-quality employees that we believe are key to our future success. If we are unable to hire and retain qualified employees, we may not be able to grow our banking, wealth management and insurance franchise and successfully execute our business plan.

We operate in a highly regulated environment and, as a result, are subject to extensive regulation and supervision and changes in federal and local laws and regulations that could adversely affect our financial performance.

We and Encore Bank are subject to extensive federal regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not the Company’s shareholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Any change in applicable regulations or federal legislation could have a substantial impact on us, Encore Bank and our respective operations.

The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. Additional legislation and regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could significantly affect our powers, authority and operations, or the powers, authority and operations of Encore Bank in substantial and unpredictable ways. Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement

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duties. The exercise of this regulatory discretion and power could have a negative impact on us. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations.

Our wealth management subsidiary, Linscomb & Williams, is registered with the SEC under the Investment Advisers Act of 1940. The Investment Advisers Act imposes numerous obligations and fiduciary duties on registered investment advisers including record-keeping, operating and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The failure of Linscomb & Williams to comply with the Investment Advisers Act and regulations promulgated thereunder could cause the SEC to institute proceedings and impose sanctions for violations of this act, including censure, termination of an investment adviser’s registration, or prohibition to serve as adviser to funds registered with the SEC and could lead to litigation by investors in those funds or harm to our reputation, any of which could adversely affect our financial performance.

In addition, our insurance subsidiary, Town & Country, is subject to regulation by the Texas Department of Insurance. State insurance regulators and the National Association of Insurance Commissioners continually re-examine existing laws and regulations, and such re-examination may result in the enactment of insurance-related laws and regulations, or the issuance of interpretations thereof, that adversely affect the financial performance of Town & Country, and hence, us.

As a regulated entity, we and Encore Bank must maintain certain required levels of regulatory capital that may limit our operations and potential growth.

We and Encore Bank are subject to various regulatory capital requirements administered by the Federal Reserve and the OCC, respectively. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Encore Bank’s and our company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Encore Bank must meet specific capital guidelines that involve quantitative measures of Encore Bank’s assets, liabilities and certain off-balance sheet commitments as calculated under these regulations.

Quantitative measures established by regulation to ensure capital adequacy require Encore Bank to maintain minimum amounts and defined ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to adjusted total assets, also known as the leverage ratio. As of December 31, 2011, Encore Bank exceeded the amounts required to be well capitalized with respect to all three required capital ratios. To be well capitalized, a bank must generally maintain a leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6% and a total risk-based capital ratio of at least 10%. However, the OCC could require Encore Bank to increase its capital levels. For example, regulators have recently required certain banking companies to maintain a leverage ratio of at least 8% and a total risk-based capital ratio of at least 12%. As of December 31, 2011, Encore Bank’s leverage, Tier 1 risk-based capital and total risk-based capital ratios were 9.17%, 12.48% and 13.74%.

Many factors affect the calculation of Encore Bank’s risk-based assets and its ability to maintain the level of capital required to achieve acceptable capital ratios. For example, changes in risk weightings of assets relative to capital and other factors may combine to increase the amount of risk-weighted assets in the Tier 1 risk-based capital ratio and the total risk-based capital ratio. Any increases in its risk-weighted assets will require a corresponding increase in its capital to maintain the applicable ratios. In addition, recognized loan losses in excess of amounts reserved for such losses, loan impairments, impairment losses on securities and other factors will decrease Encore Bank’s capital, thereby reducing the level of the applicable ratios.

In addition, as discussed above in “Supervision and Regulation – Encore Bancshares, Inc. – Proposed Revisions to Capital Adequacy Requirements,” the possible future implementation of Basel III could require us to maintain substantially more capital with a greater emphasis on common equity.

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Encore Bank’s failure to remain well capitalized for bank regulatory purposes could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on our capital stock, our ability to make acquisitions, and on our business, results of operations and financial condition. Under regulatory rules, if Encore Bank ceases to be a well capitalized institution for bank regulatory purposes, the interest rates that it pays on deposits and its ability to accept, renew or rollover brokered deposits may be restricted.

We face strong competition with other financial institutions and financial service companies, which could adversely affect our results of operations and financial condition.

The banking, wealth management and insurance businesses are highly competitive, and our profitability depends heavily on our ability to compete in our markets with other financial institutions and financial service companies offering products and services at prices similar to those offered by us. In our banking business, we face vigorous competition from banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions. A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems and a wider array of banking services. We also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations which may offer more favorable financing than we can offer. Some of our nonbank competitors are not subject to the same extensive regulations that govern us. To the extent that we are forced to compete on the basis of price, we may not be able to maintain our current fee structure.

In our wealth management and insurance businesses, we compete with national and regional investment management and financial planning firms, broker-dealers, accounting firms, trust companies and law firms. Many of these companies are more geographically diversified and have greater resources than we do. This competition in all of our businesses may reduce or limit our margins on banking services, reduce our market share, reduce our noninterest income and adversely affect our results of operations and financial condition.

We may be adversely affected by the soundness of other financial institutions.

Our ability to engage in routine funding transactions could be adversely affected by the actions and potential failures of other financial institutions. Financial institutions are interrelated as a result of trading, clearing, counterparty and other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with a variety of counterparties in the financial services industry. As a result, defaults by, or even rumors or concerns about, one or more financial institutions with whom we do business, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral we hold cannot be sold at prices that are sufficient for us to recover the full amount of our exposure. Any such losses could materially and adversely affect our financial condition and results of operations.

We are subject to losses resulting from fraudulent and negligent acts on the part of loan applicants, correspondents or other third parties.

We rely heavily upon information supplied by third parties, including the information contained in loan applications, property appraisals, title information, equipment pricing and valuation and employment and income documentation, in deciding which loans we will originate, as well as the terms of those loans. If any of the information upon which we rely is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to asset funding, the value of the asset may be significantly lower than expected, or we may fund a loan that we would not have funded or on terms we would not have extended. Whether a misrepresentation is made by the applicant or another third party, we generally bear the risk of loss associated with the misrepresentation. A loan subject to a material misrepresentation is typically unsellable or subject to repurchase if it is sold prior to detection of the misrepresentation. The sources of the misrepresentations are often difficult to locate, and it is often difficult to recover any of the monetary losses we may suffer.

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An interruption in or breach in security of our information systems may result in a loss of client business and have an adverse effect on our results of operations and financial condition.

We rely heavily on communications and information systems to conduct our business. Any failure or interruption or breach in security of these systems could result in failures or disruptions in our client relationship management, general ledger, deposits, servicing or loan origination systems. We cannot assure you that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us. The occurrence of any failures or interruptions could result in a loss of client business and have an adverse effect on our results of operations and financial condition.

Risks Associated With an Investment in Our Capital Stock

Our directors and executive officers own a significant number of shares of our common stock, allowing management further control over our corporate affairs.

As of January 31, 2012, our directors and executive officers beneficially own 23.0% of the outstanding shares of our common stock. Accordingly, these directors and executive officers are able to control, to a significant extent, the outcome of all matters required to be submitted to our shareholders for approval, including decisions relating to the election of directors, the determination of our day-to-day corporate and management policies and other significant corporate transactions.

Our corporate organizational documents and the provisions of Texas law to which we are subject may delay or prevent a change in control of our company that you may favor.

Our amended and restated articles of incorporation and amended and restated bylaws contain certain provisions which may delay, discourage or prevent an attempted acquisition or change of control of our company. These provisions include:

• a provision that any special meeting of our shareholders may be called only by a majority of the board of directors, the Chairman of the Board, the President or the holders of at least 50% of our total number of shares of common stock entitled to vote at the meeting;

• a provision establishing certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered at an annual or special meeting of shareholders; and

• a provision that denies shareholders the right to amend our bylaws.

Our amended and restated articles of incorporation provide for noncumulative voting for directors and authorize our board of directors to issue shares of preferred stock, $1.00 par value per share, without shareholder approval and upon such terms as our board of directors may determine. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions, financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a controlling interest in us. In addition, certain provisions of Texas law, including a provision which restricts certain business combinations between a Texas corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control of our company.

We currently do not intend to pay dividends on our common stock. In addition, our future ability to pay dividends is subject to restrictions.

We have not paid any dividends to our holders of common stock in the past and we currently do not intend to pay any dividends on our common stock in the foreseeable future. In the event that we decide to pay dividends, there are a number of restrictions on our ability to pay dividends. It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of income available

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over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries. If we fail to pay dividends on our Series B Preferred Stock or interest on our junior subordinated debentures, we will be prohibited from paying dividends on our common stock.

Our principal source of funds to pay dividends on our common stock will be cash dividends that we receive from Encore Bank. The payment of dividends by Encore Bank to us is subject to certain restrictions imposed by federal banking laws, regulations and authorities. The federal banking statutes prohibit federally insured banks from making any capital distributions (including a dividend payment) if, after making the distribution, the institution would be “under capitalized” as defined by statute. In addition, the relevant federal regulatory agencies have authority to prohibit an insured bank from engaging in an unsafe or unsound practice, as determined by the agency, in conducting an activity. The payment of dividends could be deemed to constitute such an unsafe or unsound practice, depending on the financial condition of Encore Bank. Regulatory authorities could impose administratively stricter limitations on the ability of Encore Bank to pay dividends to us if such limits were deemed appropriate to preserve certain capital adequacy requirements.

The dividend rate on the Series B Preferred Stock we issued in connection with the SBFL will fluctuate initially from 1% to 5% based on our level of “Qualified Small Business Lending,” or “QSBL,” as compared to our “baseline” level. The cost of the capital we received from the Series B Preferred Stock will increase significantly if the level of our “QSBL” as of September 30, 2013 does not represent an increase from our “baseline” level. This cost also will increase significantly if we have not redeemed the Series B Preferred Stock within 4.5 years of the closing of the SBLF transaction.

The per annum dividend rate on the Series B Preferred Stock can fluctuate on a quarterly basis during the first ten quarters during which the Series B Preferred Stock is outstanding, based upon changes in the amount of qualified small business lending (QSBL), as defined in the Supplemental Reports related to the SBLF Transaction, from a “baseline” level (QSBL Baseline). The dividend rate for the initial dividend period was 4.76% per annum. For the second dividend period through the tenth dividend period, the annual dividend rate may be adjusted to between 1% and 5%, to reflect the amount of percentage change in Encore Bank’s level of QSBL from the QSBL Baseline to the level as of the end of the second quarter preceding the dividend period in question. For the eleventh dividend period through 4.5 years after the closing of the SBLF transaction, the annual dividend rate will be fixed at between 1% and 5%, based upon the percentage increase in QSBL from the QSBL Baseline to the level as of the end of the ninth dividend period (i.e., as of September 30, 2013); however, if there is no increase in QSBL from the QSBL Baseline to the level as of the end of the ninth dividend period (or if QSBL has decreased during that time period), the dividend rate will be fixed at 7%. Further, the potential dividend rate reduction in any period is limited, such that the reduction will not apply to any Series B Preferred Stock proceeds that exceed the dollar amount of the increase in QSBL for that period as compared to the QSBL Baseline.

In addition, if our QSBL is not above the QSBL Baseline at the end of the ninth dividend period, because of our participation in the CPP, we must also pay a lending incentive fee of 2% per annum (payable quarterly), calculated based on the liquidation value of the outstanding Series B Preferred Stock as of the end of that quarter, beginning with dividend payment dates on or after April 1, 2014 and ending on April 1, 2016. After 4.5 years from the closing of the SBLF transaction, the annual dividend rate will be fixed at 9%, regardless of the level of QSBL. Depending on our financial condition at the time, any such increases in the dividend rate could have a material negative effect on our liquidity.

Future dividend payments and common stock repurchases are subject to certain restrictions by the terms of the Secretary of the Treasury’s equity investment in us.

Under the terms of the SBLF, for so long as any preferred stock issued under the SBLF remains outstanding, we are prohibited from making a dividend payment or share repurchase if, after the payment or repurchase, our

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Tier 1 capital would not be at least 90% of the amount existing at the time immediately after September 27, 2011, excluding any subsequent net charge-offs and partial repayments of the SBLF funding. This 90% limitation will decrease by a dollar amount equal to 10% of the SBLF funding for every 1% increase in QSBL that we have achieved over the QSBL Baseline. These restrictions will no longer apply to us after we have repaid the SBLF funding in full.

Failure to pay dividends on our Series B Preferred Stock may have negative consequences, including external involvement in the Company’s board of directors.

If dividends on the Series B Preferred Stock are not paid in full for six quarterly dividend periods, whether or not consecutive, and if the aggregate liquidation preference amount of the then-outstanding shares of Series B Preferred Stock is at least $25.0 million, the total number of positions on our board of directors will automatically increase by two and the holders of the Series B Preferred Stock, acting as a single class, will have the right to elect two individuals to serve in the new director positions. This right and the terms of such directors will end when we have paid full dividends for at least four consecutive quarterly dividend periods. If full dividends have not been paid on the Series B Preferred Stock for five or more quarterly dividend periods, whether or not consecutive, we must invite a representative selected by the holders of a majority of the outstanding shares of Series B Preferred Stock, voting as a single class, to attend all meetings of our board of directors in a nonvoting observer capacity. Any such representative would not be obligated to attend any board meeting to which he or she is invited, and this right will end when we have paid full dividends for at least four consecutive dividend periods.

The holders of our junior subordinated debentures have rights that are senior to those of our common and preferred shareholders.

We have two issues of junior subordinated debentures outstanding, with an aggregate liquidation amount totaling $20.6 million related to the issuance of trust preferred securities by our non-consolidated subsidiary trusts, which are treated as capital for regulatory ratio compliance purposes. Although these securities are viewed as capital for regulatory purposes, they are debt securities and have provisions which, in the event of noncompliance, could have an adverse effect on our operations. For example, these securities permit us to defer the periodic payment of interest for various periods, but if such payments are deferred, we would be prohibited from paying cash dividends on our common stock and Series B Preferred Stock during deferral periods and until deferred interest is paid. Future payment of interest depends upon the earnings of Encore Bank and its subsidiaries and dividends from Encore Bank to us, which may be inadequate to service the obligations.

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

We operate 12 private client offices through Encore Bank. We also operate four offices of Encore Trust, five offices of Town & Country and one office of Linscomb & Williams. We lease all of our locations, except with respect to our private client offices located in the Houston area at 5815 Kirby, 3754 Westheimer and 5548 FM 1960 West, where in each location we own the building and lease the underlying land. We own the building and underlying land at 6330 San Felipe and our Town & Country League City office. Our principal office is located at Nine Greenway Plaza, Suite 1000, Houston, Texas, 77046. The following table sets forth our banking, wealth management and insurance office locations, the date we opened or acquired them, and, with respect to our private client offices, the amount of deposits:

Type of Office	Date Opened/ Acquired		Deposits as of December 31, 2011
			(dollars in thousands)
Private Client Offices
Houston, Texas
12520 Memorial Drive		11/01/2000	$	139,771
2049 West Gray		8/01/2002		88,332
6330 San Felipe		3/17/2003		79,548
909 Fannin, Suite 1350		8/04/2003		117,002
6400 Fannin, Suite 222		2/15/2007		31,527
5815 Kirby		1/20/2004		76,289
3754 Westheimer		1/05/2004		49,094
5548 FM 1960 West		7/14/2003		71,702
845 N. Eldridge Parkway		12/19/2011		1,861
Nine Greenway Plaza, Suite 110		3/21/2005		352,159
Sugar Land, Texas
4647 Sweetwater Blvd., Suite A.		5/30/2006		34,096
The Woodlands, Texas
9595 Six Pines Drive, Suite 1500		9/07/2004		58,856
Encore Trust Offices
Houston, Texas
11000 Richmond, Suite 215		3/31/2005		N/A
Nine Greenway Plaza, Suite 1000		3/31/2005		N/A
Dallas, Texas
5950 Sherry Lane, Suite 540		3/31/2005		N/A
Austin, Texas
100 Congress Ave., Suite 2100		3/31/2005		N/A
Town & Country Offices
Houston, Texas
10575 Katy Freeway, Suite 150		4/30/2004		N/A
Galveston, Texas
1605 Tremont		4/30/2004		N/A
Ft. Worth, Texas
3417 Hulen Street, Suite 201		4/01/2006		N/A
League City, Texas
112 Magnolia Estates Dr.		2/01/2012		N/A
Katy, Texas
920 South Fry Road		2/01/2012		N/A
Linscomb & Williams Office
Houston, Texas
1400 Post Oak Blvd., Suite 1000		8/31/2005		N/A

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Item 3. Legal Proceedings

We and Encore Bank and its subsidiaries from time to time will be party to or otherwise involved in legal proceedings arising in the normal course of business. Management does not believe that there are any pending or threatened legal proceedings against us or Encore Bank or its subsidiaries which, if determined adversely, would have a material effect on our or Encore Bank’s financial condition, results of operations or cash flows.

Item 4. Mine Safety Disclosures

None.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Market Prices

Our common stock is listed on the NASDAQ Global Market under the ticker symbol “EBTX”. The following table presents the high and low intra-day sales prices for our common stock reported on the NASDAQ Global Market for the periods indicated:

	2011				2010
	High		Low		High		Low
First Quarter	$	12.67	$	10.32	$	10.88	$	7.94
Second Quarter		12.48		10.06		11.44		8.84
Third Quarter		12.69		10.25		10.75		5.90
Fourth Quarter		14.00		10.32		10.40		6.59

As of January 31, 2012, we had 11.7 million shares outstanding and 148 shareholders of record. The number of beneficial owners is unknown to us at this time.

Dividend Policy

Holders of our common stock are entitled to receive dividends when, as and if declared by our board of directors out of funds legally available for that purpose. We have not paid any dividends to our holders of common stock in the past and we currently do not intend to pay dividends on our common stock in the foreseeable future. In the event that we decide to pay dividends, there are a number of restrictions on our ability to do so. It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries. If we fail to pay dividends on our Series B Preferred Stock or interest on our junior subordinated debentures, we will be prohibited from paying dividends on our common stock.

For a foreseeable period of time, Bancshares’s principal source of cash revenues will be dividends paid by its subsidiaries Encore Bank and Town & Country. There are certain restrictions on the payment of these dividends imposed by federal banking laws, regulations and authorities. The declaration and payment of dividends on our common stock will depend upon our results of operations and financial condition, liquidity and capital requirements, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to the common stock and other factors deemed relevant by our board of directors. Regulatory authorities could impose administratively stricter limitations on the ability of Encore Bank to pay dividends to us if such limits were deemed appropriate to preserve certain capital adequacy requirements.

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In addition, the terms of our junior subordinated debentures may limit our ability to pay dividends on our common stock and the Series B Preferred Stock.

Recent Sales of Unregistered Securities

None.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 31, 2011, with respect to equity compensation plans approved by shareholders under which our common stock is authorized for issuance. All outstanding stock options have been issued under plans approved by shareholders.

Plan Category	Number of Common Shares to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a)		Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b)		Number of Securities Available for Future Issuance Under Equity  Compensation Plans (Excluding Securities Reflected in Column  (a)) (c)
Equity compensation plans approved by security holders		491,750	$	11.17		163,739
Equity compensation plans not approved by security holders		—		—		—
Total		491,750	$	11.17		163,739

Issuer Purchases of Equity Securities

The following table sets forth information regarding repurchases of our common stock made by us during the fourth quarter of 2011:

Month in 2011	Total Number of Shares Purchased (1)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)
October		—	$	—		N/A		N/A
November		1,731		11.04		N/A		N/A
December		662		11.40		N/A		N/A
Total		2,393	$	11.14		N/A		N/A

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

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

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Performance Graph

The following Stock Performance Graph compares the cumulative total shareholder return on our common stock for the period since our shares of common stock were registered under Section 12 of the Exchange Act on July 17, 2007 to December 31, 2011, with the cumulative total return of the Russell 2000 Index and KBW Bank Index for the same period. This presentation assumes that the value of the investment in our common stock and each index on July 17, 2007 was $100.00 and that subsequent cash dividends were reinvested. The historical stock price performance of our common stock shown on the graph below is not necessarily indicative of future stock price performance.

	Period Ending
Index	7/17/07		12/31/07		12/31/08		12/31/09		12/31/10		12/31/11
Encore Bancshares, Inc.	$	100.00	$	95.19	$	52.38	$	38.19	$	48.86	$	64.38
KBW Bank Index		100.00		78.27		39.15		37.73		46.12		34.79
Russell 2000		100.00		90.13		58.77		73.58		92.21		87.18

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Item 6. Selected Financial Data

The following table summarizes our historical consolidated financial data for the periods and at the dates indicated. You should read this information in conjunction with our audited consolidated financial statements and related notes included in this Form 10-K. You should not assume the results of operations for past periods indicate results for any future period.

	As of and for the Years Ended December 31,
	2011			2010			2009			2008			2007
	(amounts in thousands, except per share data)
Operations Statement Data:
Interest income	$	63,979		$	68,803		$	77,226		$	81,271		$	81,427
Interest expense		18,192			24,304			30,731			36,997			47,252
Net interest income		45,787			44,499			46,495			44,274			34,175
Provision for loan losses		7,252			35,169			16,660			29,175			4,029
Net interest income after provision for loan losses		38,535			9,330			29,835			15,099			30,146
Noninterest income		28,663			31,743			27,337			22,945			30,903
Noninterest expense		57,249			78,600			54,424			51,006			50,544
Income (loss) before income taxes		9,949			(37,527	)		2,748			(12,962	)		10,505
Income tax expense (benefit)		2,709			(13,297	)		962			(4,888	)		3,121
Net income (loss)	$	7,240		$	(24,230	)	$	1,786		$	(8,074	)	$	7,384
Income (loss) available to common shareholders (1)	$	1,309		$	(26,454	)	$	(428	)	$	(8,240	)	$	7,384
Common Share Data:
Basic earnings (loss) per share	$	0.11		$	(2.37	)	$	(0.04	)	$	(0.81	)	$	0.83
Diluted earnings (loss) per share		0.11			(2.37	)		(0.04	)		(0.81	)		0.78
Book value per share		12.05			12.00			15.01			15.36			15.56
Tangible book value per share (2)		8.59			8.45			11.10			12.05			12.13
Average common shares outstanding		11,597			11,179			10,381			10,205			8,888
Diluted average common shares outstanding		11,651			11,179			10,381			10,205			9,471
Shares outstanding at end of period		11,657			11,431			10,504			10,241			10,124
Period End Balance Sheet Data:
Total assets	$	1,522,583		$	1,466,497		$	1,635,355		$	1,587,844		$	1,401,197
Investment securities		270,431			359,402			257,822			174,691			146,263
Total loans (3)		1,025,264			931,372			1,079,263			1,218,554			1,098,664
Allowance for loan losses		17,968			18,639			26,501			25,105			11,161
Goodwill and other intangible assets, net		40,332			40,515			41,150			33,904			34,722
Deposits		1,100,237			1,050,444			1,191,836			1,100,797			1,041,374
Shareholders’ equity		173,389			166,641			186,668			185,742			157,479
Junior subordinated debentures		20,619			20,619			20,619			20,619			20,619
Average Balance Sheet Data:
Total assets	$	1,479,632		$	1,640,894		$	1,600,675		$	1,483,021		$	1,341,105
Investment securities		303,299			229,807			220,317			150,096			179,767
Total loans (3)		966,120			1,046,164			1,146,839			1,171,619			1,015,139
Deposits		1,058,005			1,209,742			1,150,464			1,061,318			1,011,563
Shareholders’ equity		170,289			181,167			187,610			162,929			129,316
Selected Performance Ratios:
Return on average assets		0.49	%		(1.48	)%		0.11	%		(0.54	)%		0.55	%
Return on average common equity (4)		0.94			(17.41	)		(0.27	)		(5.13	)		5.71
Return on average tangible common equity (2)(4)		1.32			(23.81	)		(0.34	)		(6.53	)		7.84
Net interest margin (TE)(5)		3.37			2.93			3.10			3.18			2.74
Efficiency ratio (6)		75.03			91.45			75.16			72.62			76.17
Noninterest income to total revenue		38.50			41.63			37.03			34.13			47.49

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	As of and for the Years Ended December 31,
	2011			2010			2009			2008			2007
	(amounts in thousands, except per share data)
Asset Quality Ratios:
Nonperforming assets to total loans and other real estate owned (3)		1.25	%		3.80	%		4.63	%		2.73	%		1.10	%
Net charge-offs to average total loans (3)		0.82			4.11			1.33			1.30			0.19
Allowance for loan losses to year end loans (excluding loans held-for-sale)		1.76			2.02			2.46			2.06			1.02
Allowance for loan losses to nonaccrual loans (excluding loans held-for-sale)		166.54			94.11			73.64			82.23			99.58
Capital Ratios:
Leverage ratio		9.73	%		8.10	%		10.55	%		11.61	%		10.47	%
Tier 1 risk-based capital ratio		13.22			12.83			14.80			14.58			13.59
Total risk-based capital ratio		14.48			14.09			16.07			15.84			14.65
Tangible common equity to tangible assets (2)		6.76			6.78			7.31			7.94			8.98

(1) Includes $4,102 accelerated amortization of preferred stock discount in 2011.

(2) Non-GAAP measure. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures.” Tangible common equity and tangible assets are calculated as follows:

	December 31,
	2011		2010		2009		2008		2007
	(dollars in thousands)
Shareholders’ equity (GAAP)	$	173,389	$	166,641	$	186,668	$	185,742	$	157,479
Less: Preferred stock		32,914		29,500		28,976		28,461		—
Goodwill and other intangible assets, net		40,332		40,515		41,150		33,904		34,722
Tangible common equity	$	100,143	$	96,626	$	116,542	$	123,377	$	122,757
Total assets (GAAP)	$	1,522,583	$	1,466,497	$	1,635,355	$	1,587,844	$	1,401,197
Less: Goodwill and other intangible assets, net		40,332		40,515		41,150		33,904		34,722
Tangible assets	$	1,482,251	$	1,425,982	$	1,594,205	$	1,553,940	$	1,366,475

(3) Loans held-for-sale are included in total loans for all periods.

(4) Return based on income (loss) available to common shareholders.

(5) Net interest margin is calculated by dividing net interest income by average earning assets and was calculated on a taxable-equivalent basis in 2011, 2010 and 2009. Taxable-equivalent amounts in prior years were immaterial. Taxable-equivalent measures are considered non-GAAP measures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures.” Taxable-equivalent measures are calculated as follows:

	Years Ended December 31,
	2011		2010		2009		2008		2007
	(dollars in thousands)
Net interest income (GAAP)	$	45,787	$	44,499	$	46,495	$	44,274	$	34,175
Taxable-equivalent adjustment		438		488		454		—		—
Net interest income on taxable-equivalent basis	$	46,225	$	44,987	$	46,949	$	44,274	$	34,175

(6) Calculated by dividing total noninterest expense, less amortization of intangibles and write down of assets held-for-sale, by the sum of net interest income plus noninterest income, excluding gains and losses on sales of securities, impairment write down on securities and gain on sale of branches.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Statements and financial discussion and analysis contained in this Annual Report on Form 10-K 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 this Form 10-K, 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;

45

• 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-K. 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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our consolidated balance sheets and consolidated statements of operations. This section should be read in conjunction with our audited consolidated financial statements and related notes as of December 31, 2011 and 2010, and for each of the three years ended December 31, 2011, which are included in this Form 10-K.

General

We generate our revenue from net interest income and noninterest income. Net interest income is the difference between interest income on interest-earning assets such as loans and securities and interest expense on interest-bearing liabilities such as client deposits and other borrowings that are used to fund those assets. Net interest income is a significant contributor to results of operations. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income.

During the past three years we have generated the largest portion of our noninterest income through trust and investment management fees. We also have an insurance agency that generates commissions on sales of insurance. Trust and investment management fees, insurance commissions and gain or loss on the sale of securities are reported in our consolidated statement of operations under “noninterest income.” Offsetting these earnings are operating expenses referred to as “noninterest expense.” Because banking is a labor intensive business, our largest operating expense is employee compensation.

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

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

46

Also on September 27, 2011, using the proceeds from the issuance of the Series B Preferred Stock and an additional $1.3 million in cash, we redeemed all 34,000 outstanding shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation amount $1,000 per share (Series A Preferred Stock), for a redemption price of $34.0 million, plus accrued but unpaid dividends to the date of redemption of $0.2 million. The Series A Preferred Stock was issued to the United States Department of the Treasury (Treasury) in December 2008 in connection with our participation in the U.S Treasury Capital Purchase Program (CPP). Treasury has sold to a third party a warrant to purchase 364,026 shares of our common stock expiring December 5, 2018, at an exercise price of $14.01 per share.

Sale of Florida Operations

In 2010, we made the strategic decision to exit the Florida market because we believed the Houston market represented a better investment of our capital and a better risk profile. Through two separate transactions, we sold our six Florida private client offices. At the date of sale, deposits associated with these locations totaled approximately $230 million. These transactions also included the sale of approximately $61.5 million of loans as well as other assets including premises and equipment. We recorded a $3.5 million write down of premises and equipment, a charge-off of $1.3 million related to the loans and a gain on sale of branches of $3.7 million.

In October 2010, Encore Bank sold $25.3 million of Florida loans in a bulk sale. These loans were classified as held-for-sale as of September 30, 2010, and were marked to market in the third quarter of 2010, resulting in a charge of $8.5 million, primarily to the allowance for loan losses. This pool of loans included $19.8 million of nonaccrual loans. As of December 31, 2011, we had $31.1 million of loans remaining in Florida.

Payment of Contingent Consideration

Pursuant to the terms of the agreement for our acquisition of Linscomb & Williams in 2005, we were obligated to make a contingency payment to the former Linscomb & Williams shareholders. The accrued liability related to this transaction as of December 31, 2009, was $7.9 million and was extinguished by the issuance of 696,000 shares of common stock and the payment of $2.1 million in cash in the first quarter of 2010.

Critical Accounting Policies and Estimates

The accounting principles we follow and the methods of applying these principles conform with generally accepted accounting principles in the United States of America (US GAAP) and with general practices within the banking industry. Our critical accounting policies relate to (1) the allowance for loan losses, (2) income taxes, (3) goodwill and other intangible assets and (4) fair values of financial instruments. These critical accounting policies require the use of estimates, assumptions and judgments which are based on information available as of the date of the relevant financial statement. Accordingly, as this information changes, future financial statements could reflect the use of different estimates, assumptions and judgments. Certain determinations inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported.

Allowance for Loan Losses. We maintain an allowance for loan losses sufficient to absorb estimated losses incurred in the loan portfolio through the balance sheet date. The determination of the appropriate level of the allowance is based on periodic evaluations of our loan portfolio. These evaluations are inherently subjective and require us to make numerous assumptions, estimates and judgments.

In analyzing the adequacy of the allowance for loan losses, we utilize a loan grading system for commercial loans to determine the risk potential in the portfolio and also consider the results of independent internal credit reviews. Consumer loans, including residential real estate, are evaluated periodically based on their repayment status. To determine the adequacy of the allowance, we segment our loan portfolio into loan types. The allowance consists of general and specific components. The general component is based on, among other things,

47

the historical loan loss experience for each loan type, the growth, composition and diversification of our loan portfolio, delinquency and loan classification trends, estimated value of the underlying collateral, and the results of recent regulatory examinations. Also, new credit products and policies, economic conditions, concentrations of credit risk, and the experience and abilities of lending personnel are also taken into consideration.

The Company individually assesses and evaluates for impairment certain commercial loans over $100,000 and commercial loans collateralized by real estate over $250,000 as well as certain consumer loans collateralized by real estate. Additionally, loans restructured in a troubled debt restructuring are considered impaired. If an individually evaluated loan is considered impaired, a specific valuation allowance is allocated through an increase to the allowance for loan losses, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of the collateral.

As a final step to the evaluation process, we perform an additional review of the adequacy of the allowance based on the loan portfolio in its entirety. This enables us to mitigate, but not eliminate, the imprecision inherent in loan- and segment-level estimates of expected loan losses. This review of the allowance includes our judgmental consideration of any adjustments necessary for subjective factors such as economic uncertainties and concentration risks.

There are numerous factors that enter into the evaluation of the allowance for loan losses. Some are quantitative while others require us to make qualitative judgments. Although we believe that our processes for determining an appropriate level for the allowance adequately address the various factors that could potentially result in loan losses, the processes and their elements include features that may be susceptible to significant change. Any unfavorable differences between the actual outcome of credit-related events and our estimates and projections could require an additional provision for loan losses, which would negatively impact our results of operations in future periods. We believe that, given the procedures we follow in estimating incurred losses in the loan portfolio, the various components used in the current estimation processes are appropriate.

Income Taxes. The calculation of our income tax provision is complex and requires the use of estimates and judgment in its determination. We are subject to the income tax laws of the various jurisdictions where we conduct business, and we estimate income tax expense based on amounts expected to be owed to these various tax jurisdictions. We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information, and we maintain tax accruals consistent with our evaluation. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by the taxing authorities, and newly enacted statutory, judicial, and regulatory guidance that could impact the relative merits of the tax positions. These changes, when they occur, impact accrued taxes and can materially affect our operating results. As of December 31, 2011, our net deferred tax asset was $19.9 million. We have determined that a valuation allowance is not required to be recorded against the deferred tax asset since it is more likely than not that it will be realized because it is supported by future reversals of existing temporary differences and anticipated future taxable income and tax planning strategies.

Goodwill and Other Intangible Assets. Goodwill and other intangible assets that have indefinite useful lives are subject to an impairment test at least annually and more frequently if circumstances indicate their value may not be recoverable. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of each of our reporting units compared to its carrying value. If a reporting unit’s carrying value exceeds its fair value, a second test is completed comparing the implied fair value of the reporting unit’s goodwill to its carrying value to measure the amount of impairment. Other identifiable intangible assets that are subject to amortization are amortized on an accelerated basis over their estimated useful lives, ranging from 8 to 20 years. These amortizable intangible assets are reviewed for impairment if circumstances indicate their value may not be recoverable. Based on our goodwill impairment test as of October 1, 2011, we do not believe any of our goodwill is impaired. In addition, as of December 31, 2011, we assessed the useful lives of our other intangible assets and determined that there has not been any significant change in the original estimated useful lives.

48

Fair Values of Financial Instruments. We determine the fair market values of our financial instruments based on the fair value hierarchy established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value. Level 1 inputs include quoted market prices, where available. If such quoted market prices are not available Level 2 inputs are used. These inputs are based upon internally developed models that primarily use observable market-based parameters. Level 3 inputs are unobservable inputs which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Pending Accounting Pronouncements

Recently issued accounting pronouncements are disclosed in Note A, “Summary of Significant Accounting Policies,” to our consolidated financial statements included in this Form 10-K. Pending accounting pronouncements include:

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 was effective on January 1, 2012 and is not expected to have a significant impact 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 was effective 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 shareholders’ equity. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 was effective on January 1, 2012 and will be implemented in 2012 financial statements.

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

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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, as well as tangible book value per share, return on average tangible common equity and tangible common equity to tangible assets. 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 reconciliations, provides a complete understanding of factors and trends affecting our business and allows investors to view performance in a manner similar to management, the entire financial services sector, bank stock analysts and bank regulators. These non-GAAP measures should not be considered a substitute for operating results determined in accordance with US 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.

Key Financial Measures

Net income for 2011 was $7.2 million, or $0.11 per diluted common share after deducting $5.9 million or $0.51 per diluted share of preferred dividends and accretion of preferred stock discount from income available to common shareholders. In the third quarter of 2011, we recorded $4.1 million of accelerated amortization of preferred stock discount related to the preferred stock issued and redeemed under the CPP. We recorded a net loss of $24.2 million, or $2.37 per diluted common share for 2010 and net income of $1.8 million for 2009. Our net loss was $0.04 per diluted common share in 2009 after deducting preferred dividends of $2.2 million from income available to common shareholders. During 2010, income was negatively impacted by significant credit costs and write downs of assets related to the sale of our Florida operations.

Our return on average assets was 0.49% for 2011 compared with (1.48)% for 2010 and 0.11% for 2009. Our return on average common equity, after deducting preferred dividends from net earnings, was 0.94% for 2011 compared with (17.41)% for 2010 and (0.27)% for 2009.

Net interest income was $45.8 million, $44.5 million and $46.5 million for 2011, 2010 and 2009, respectively. Taxable-equivalent (TE) net interest margin was 3.37% for 2011 compared with 2.93% for 2010 and 3.10% in 2009. Our net interest income and margin for these periods have been impacted by increased liquidity and historically low interest rates.

Results of Operations

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 revenue. Interest rate fluctuations, as well as changes in the amount and type of interest-earning assets and interest-bearing liabilities, combine to affect net interest income. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.”

2011 vs 2010. Net interest income (TE) was $46.2 million for 2011, an increase of $1.2 million, or 2.8%, compared with 2010. Interest earning assets were $1.4 billion for 2011, a decrease of $160 million, compared with 2010. This decrease was primarily due to a decrease in average loans of $80.0 million and a $153 million

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decrease in federal funds and other deposits. Federal funds and other deposits include interest-bearing cash on deposit with the Federal Reserve Bank which earns interest at approximately 25 basis points. The net interest margin (TE) was 3.37% in 2011, an increase of 44 basis points, compared with 2010. The increase in margin was due primarily to the improved balance sheet mix. At the end of 2010, we sold our Florida operations which allowed us to reduce higher interest-bearing deposits and lower yielding interest-earning cash. Average Florida interest-bearing deposits were $190 million in 2010 with an average rate of 1.69%. We partially offset the reduction in interest-bearing deposits with average lower-costing non-interest bearing deposit growth of $69.9 million for 2011 compared to 2010.

2010 vs 2009. Net interest income (TE) was $45.0 million for 2010, a decrease of $2.0 million, or 4.2%, compared with 2009. The net interest margin (TE) for 2010 was 2.93%, a decrease of 17 basis points, compared with 2009. The decrease in margin was due primarily to a decrease in loans which was partially offset by an increase in short term lower yielding investments. We held a significant balance of temporary investments in anticipation of the sale of our Florida operations on December 31, 2010. In addition, our net interest margin was negatively impacted by a rise in nonaccrual loans during 2010, which reduced interest income. The dilution in asset yields was partially offset by lower rates paid on deposits.

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The following table sets 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 table also sets 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 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.

	Years Ended December 31,
	2011								2010								2009
	Average Outstanding Balance			Interest Income/ Expense		Average Yield/ Rate			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)	$	966,120		$	56,039		5.80	%	$	1,046,164		$	61,433		5.87	%	$	1,146,839		$	68,280		5.95	%
Securities - TE yield (1)		303,299			7,863		2.59			229,807			6,964		3.03			220,317			8,698		3.95
Federal funds sold and other		104,255			515		0.49			257,408			894		0.35			148,059			702		0.47
Total interest-earning assets - TE yield (1)		1,373,674			64,417		4.69			1,533,379			69,291		4.52			1,515,215			77,680		5.13
Less: Allowance for loan losses		(18,770	)							(24,751	)							(25,503	)
Noninterest-earning assets		124,728								127,162								110,963
Noninterest-earning assets held-for-sale		—								5,104								—
Total assets	$	1,479,632							$	1,640,894							$	1,600,675
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Interest checking	$	167,566		$	280		0.17	%	$	146,863		$	415		0.28	%	$	186,440		$	888		0.48	%
Money market and savings		264,233			870		0.33			264,227			1,763		0.67			273,188			2,976		1.09
Time deposits		367,270			7,364		2.01			403,236			9,215		2.29			537,963			17,149		3.19
Interest-bearing deposits held-for- sale		—			—					190,157			3,207		1.69			—			—
Total interest-bearing deposits		799,069			8,514		1.07			1,004,483			14,600		1.45			997,591			21,013		2.11
Borrowings and repurchase agreements		222,711			8,485		3.81			219,914			8,510		3.87			231,648			8,493		3.67
Junior subordinated debentures		20,619			1,193		5.79			20,619			1,194		5.79			20,619			1,225		5.94
Total interest-bearing liabilities		1,042,399			18,192		1.75			1,245,016			24,304		1.95			1,249,858			30,731		2.46
Noninterest-bearing liabilities:
Noninterest-bearing deposits		258,936								189,071								152,873
Noninterest-bearing deposits held-for-sale		—								16,188								—
Other liabilities		8,008								9,210								10,334
Other liabilities held-for-sale		—								242								—
Total liabilities		1,309,343								1,459,727								1,413,065
Shareholders’ equity		170,289								181,167								187,610
Total liabilities and shareholders’ equity	$	1,479,632							$	1,640,894							$	1,600,675
Net interest income TE (1)				$	46,225							$	44,987							$	46,949
Net interest spread TE (1) (2)							2.94	%							2.57	%							2.67	%
Net interest margin TE (1) (3)							3.37	%							2.93	%							3.10	%
Net interest income (GAAP)				$	45,787							$	44,499							$	46,495
Taxable-equivalent adjustment					438								488								454
Net interest income on taxable-equivalent basis				$	46,225							$	44,987							$	46,949

(1) Non-GAAP measure. On taxable-equivalent basis to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal tax rate in 2011 and 34% in 2010 and 2009.

(2) Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(3) Represents net interest income as a percentage of average interest-earning assets.

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The following table presents information regarding changes in taxable-equivalent interest income and interest expense for the periods indicated for each major category of interest-earning assets and interest-bearing liabilities, which distinguishes between the changes attributable to (1) changes in volume (changes in volume multiplied by old rate), (2) changes in rates (changes in rates multiplied by old volume) and (3) changes in rate-volume (changes in rate multiplied by change in volume). Changes in rate-volume are proportionately allocated between rate and volume variances.

	Years Ended December 31,
	2011 vs. 2010									2010 vs. 2009
	Increase (Decrease) Due to Change In						Total			Increase (Decrease) Due to Change In						Total
	Volume			Rate						Volume			Rate
	(dollars in thousands)
Interest-earning assets:
Loans (net of unearned income)	$	(4,651	)	$	(743	)	$	(5,394	)	$	(5,923	)	$	(924	)	$	(6,847	)
Securities		2,005			(1,106	)		899			361			(2,095	)		(1,734	)
Federal funds sold and other		(663	)		284			(379	)		417			(225	)		192
Total decrease in interest income		(3,309	)		(1,565	)		(4,874	)		(5,145	)		(3,244	)		(8,389	)
Interest-bearing liabilities:
Interest checking		52			(187	)		(135	)		(162	)		(311	)		(473	)
Money market and savings		—			(893	)		(893	)		(95	)		(1,118	)		(1,213	)
Time deposits		(779	)		(1,072	)		(1,851	)		(3,724	)		(4,210	)		(7,934	)
Deposits held-for-sale		(3,207	)		—			(3,207	)		3,207			—			3,207
Borrowings and repurchase agreements		107			(132	)		(25	)		(442	)		459			17
Junior subordinated debentures		—			(1	)		(1	)		—			(31	)		(31	)
Total decrease in interest expense		(3,827	)		(2,285	)		(6,112	)		(1,216	)		(5,211	)		(6,427	)
Total increase (decrease) in net interest income	$	518		$	720		$	1,238		$	(3,929	)	$	1,967		$	(1,962	)

Provision for Loan Losses

The provision for loan losses represents our determination of the amount necessary to be charged against the current period’s earnings to maintain the allowance for loan losses at a level that is considered adequate in relation to the estimated losses incurred in the loan portfolio through the balance sheet date. We determine specific allocations for loans considered to be impaired and assign loss factors to the remainder of the loan portfolio to determine an appropriate level of allowance for loan losses. The allowance is increased, as necessary, by making a provision for loan losses. The specific allocations for impaired loans are assigned based on an estimated net realizable value after a thorough review of the credit relationship. The potential loss factors associated with the remainder of the loan portfolio are based on our internal net loss experience, as well as other qualitative risk factors.

Generally, commercial, commercial real estate and real estate construction loans are assigned a risk grade at origination. These loans are then reviewed on a regular basis. The periodic reviews generally include loan payment and collateral status, the borrower’s financial data, and key ratios such as cash flows, operating income, liquidity and leverage. A material change in the borrower’s credit risk profile can result in an increase or decrease in the loan’s assigned risk grade. Aggregate dollar volume by risk grade is monitored on an ongoing basis. Consumer loans, including residential real estate, are evaluated periodically based on their repayment status.

The provision was $7.3 million, $35.2 million and $16.7 million for 2011, 2010 and 2009, respectively. The decrease in the provision for loan losses for 2011 compared to 2010 was due to improvements in our credit

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quality including a reduction in nonaccrual and classified loans resulting primarily from the sale of our Florida operations. The provision in 2010 was elevated due to the recessionary economic environment, weakness in our Florida market which included write downs related to the sale of our Florida operations, higher net charge-offs, changes in historical loss factors and the rise in nonaccrual loans which has impacted both the specific reserves we hold as well as our general allowance and qualitative factors.

Noninterest Income

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

	Years Ended December 31,
	2011			2010		2009
	(dollars in thousands)
Trust and investment management fees	$	20,116		$	18,970	$	16,894
Insurance commissions and fees		5,838			5,771		5,477
Net gain (loss) on sale of available-for-sale securities		(96	)		518		2,324
Gain on sale of branches		—			3,682		—
Other		2,805			2,802		2,642
Total noninterest income	$	28,663		$	31,743	$	27,337

Noninterest income represented 38.50%, 41.63% and 37.03% of total revenue for 2011, 2010 and 2009, respectively. Details of the various components of noninterest income are discussed below.

Trust and investment management fees are primarily based on the level of assets under management, as well as other investment services provided. Fluctuations in the market value of assets under management have a direct impact on these revenues. Trust and investment management fees increased $1.1 million or 6.0% for 2011 compared to 2010, and $2.1 million or 12.3% for 2010 compared to 2009. The increase in 2011 was due in part to a change in our customer mix and fees charged. The increase for 2010 was due primarily to an increase in assets under management to $2.9 billion resulting from improved market conditions. Assets under management were $2.8 billion at December 31, 2011 and $2.9 billion at December 31, 2010, up from $2.7 billion at December 31, 2009.

Insurance commissions were flat for 2011 compared to 2010 and increased $0.3 million for 2010 compared to 2009. The increase for 2010 was due to higher insurance commissions associated with new commercial customers.

The gain on sale of branches in 2010 of $3.7 million was the result of the sale of our six Florida private client offices.

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Noninterest Expense

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

	Years Ended December 31,
	2011		2010		2009
	(dollars in thousands)
Compensation	$	34,097	$	34,161	$	30,163
Non-staff expenses:
Occupancy		4,885		5,666		6,050
Equipment		1,045		1,228		1,695
Advertising and promotion		551		617		807
Outside data processing		3,112		3,551		3,173
Professional fees		4,252		4,846		4,017
Intangible amortization		604		635		681
FDIC assessment		2,058		3,680		2,115
Other real estate owned expenses, net		2,011		7,103		1,503
Write down of assets held-for-sale		713		12,084		—
Other		3,921		5,029		4,220
Total noninterest expense	$	57,249	$	78,600	$	54,424

Noninterest expense was $57.2 million for 2011, a decrease of $21.4 million, compared with 2010. Noninterest expense increased $24.2 million for 2010 compared to 2009. Details of the various components of other noninterest expense are discussed below.

Compensation expense was $34.1 million for 2011, essentially flat compared to 2010 and increased $4.0 million for 2010 compared to 2009. During 2010, compensation expense rose due in part to the addition of new lenders to grow the bank’s commercial lending platform in Houston, and the addition of loan collection personnel.

Occupancy and equipment costs decreased $0.8 million or 13.8% and $0.2 million or 14.9%, respectively for 2011 compared to 2010 and $0.4 million or 6.3% and $0.5 million or 27.6%, respectively for 2010 compared to 2009. The decrease in these categories for both periods was due primarily to the sale of our Florida operations.

Professional fees were $4.3 million, $4.8 million and $4.0 million for 2011, 2010 and 2009, respectively. The higher professional fees in 2010 reflected increased legal expenses related to loan collection, as well as fees in connection with the sale of our Florida operations.

FDIC assessments decreased $1.6 million or 44.1% for 2011 compared to 2010. The decrease in FDIC assessments was due to lower deposits during the first part of 2011 resulting from the sale of our Florida operations. Additionally, beginning in the third quarter of 2011, the FDIC assessment base was changed from adjusted domestic deposits to average consolidated total assets minus average tangible equity (defined as average end-of-month Tier 1 capital) and lower assessed rates. FDIC assessments increased $1.6 million or 74.0% for 2010 compared to 2009. This increase in FDIC assessments reflected deposit growth and a higher assessment rate.

Other real estate owned expenses were $2.0 million, $7.1 million and $1.5 million for 2011, 2010 and 2009, respective. Other real estate expenses reflects write-downs, net gains (losses) on sales and carrying costs related primarily to foreclosed property. The rise in foreclosed real estate expense during 2010 reflected approximately $4.8 million in write downs of primarily Florida real estate.

Write downs on assets held-for-sale relate to the execution of our strategy to exit the Florida market. In 2010 we incurred $12.1 million in write downs of assets held-for-sale, including $8.6 million related to loans in Florida and $3.5 million related to premises and equipment in Florida that was sold. We incurred $0.7 million in losses during 2011 due to the sale of additional Florida loans.

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Other noninterest expense decreased $1.1 million or 22.0% for 2011 compared to 2010 and increased $0.8 million or 19.2% for 2010 compared to 2009. The change for both periods was due primarily to a higher provision for unfunded loan commitments recorded in 2010.

Income Taxes

The income tax provision was $2.7 million in 2011, compared with a tax benefit was $13.3 million in 2010 and a provision of $1.0 million in 2009. The effective tax rate for the years 2011, 2010 and 2009 was 27.2%, 35.4 % and 35.0%. The amount of income taxes and corresponding effective tax rate are influenced by the amount of taxable income as well as nontaxable income and expense. The effective tax rate in 2011 was lower due to a $0.4 million discrete income tax benefit related to a prior acquisition.

As of December 31, 2011, we had a net deferred tax asset of $19.9 million. We regularly assess the realization of our deferred tax asset and are required to record a valuation allowance if it is more likely than not that we will not realize all or a portion of the deferred tax asset. Our assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to our core earnings (earnings that exclude non-recurring income items) capacity and our prospects to generate core earnings in the future. Because of losses that were recorded by us in 2010 and if we are not able to generate sufficient future taxable income to realize our net deferred tax asset, we would be required under US GAAP to establish a full or partial valuation allowance and recognize a corresponding income tax expense equal to the portion of the deferred tax asset that may not be realized. Based on our assessment we determined that no valuation allowance was required to be recorded against the deferred tax asset at December 31, 2011.

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Results 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 of transactions between segments. The accounting policies of the individual operating segments are the same as our accounting policies described in Note A “Summary of Significant Accounting Policies” to our consolidated financial statements included in this Form 10-K. The following table presents the results of operations 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)
Years Ended December 31,
2011
Net interest income (expense)	$	46,913		$	61	$	6	$	(1,193	)	$	45,787
Provision for loan losses		7,252			—		—		—			7,252
Noninterest income		2,530			20,175		5,958		—			28,663
Noninterest expense		38,010			14,440		4,799		—			57,249
Income (loss) before income taxes		4,181			5,796		1,165		(1,193	)		9,949
Income tax expense (benefit)		1,098			2,047		410		(846	)		2,709
Net income (loss)	$	3,083		$	3,749	$	755	$	(347	)	$	7,240
Total assets as of December 31,	$	1,527,207		$	57,031	$	8,281	$	(69,936	)	$	1,522,583
2010
Net interest income (expense)	$	45,525		$	149	$	19	$	(1,194	)	$	44,499
Provision for loan losses		35,169			—		—		—			35,169
Noninterest income		6,906			18,979		5,858		—			31,743
Noninterest expense		60,031			14,163		4,406		—			78,600
Income (loss) before income taxes		(42,769	)		4,965		1,471		(1,194	)		(37,527	)
Income tax expense (benefit)		(15,066	)		1,686		501		(418	)		(13,297	)
Net income (loss)	$	(27,703	)	$	3,279	$	970	$	(776	)	$	(24,230	)
Total assets as of December 31,	$	1,473,837		$	63,254	$	9,095	$	(79,689	)	$	1,466,497
2009
Net interest income (expense)	$	47,548		$	155	$	17	$	(1,225	)	$	46,495
Provision for loan losses		16,660			—		—		—			16,660
Noninterest income		4,781			16,907		5,649		—			27,337
Noninterest expense		37,901			12,248		4,275		—			54,424
Income (loss) before income taxes		(2,232	)		4,814		1,391		(1,225	)		2,748
Income tax expense (benefit)		(896	)		1,788		498		(428	)		962
Net income (loss)	$	(1,336	)	$	3,026	$	893	$	(797	)	$	1,786
Total assets as of December 31,	$	1,644,083		$	59,618	$	7,962	$	(76,308	)	$	1,635,355

Banking. Net income for 2011 was $3.1 million, compared with a net loss of $27.7 million in 2010 and $1.3 million in 2009.

Net interest income for 2011 increased $1.4 million, or 3.0%, compared with 2010, while net interest income for 2010 decreased $2.0 million, or 4.3%, compared with 2009. The increase in 2011 was due to an improvement in the balance sheet mix of interest-earning assets. The 2010 decrease was due primarily to a lower net interest margin, which resulted from an increase in low yielding temporary investments, which were held in anticipation of the sale of the Florida operations. See the analysis of net interest income included in the section of this Form 10-K captioned “—Net Interest Income.”

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The provision for loan losses for 2011 totaled $7.3 million compared with $35.2 million in 2010 and $16.7 million in 2009. See the analysis of the provision for loan losses included in the section of this Form 10-K captioned “—Provision for Loan Losses.”

Noninterest income for 2011 decreased $4.4 million compared with 2010, while noninterest income increased $2.1 million for 2010 compared to 2009. Noninterest income for 2010 included a gain on sale of branches of $3.7 million and gain on sales of securities.

Noninterest expense for 2011 decreased $22.0 million, compared with 2010 and was $22.1 million higher for 2010 compared with 2009. Higher expenses in 2010 were due to a combination of factors, which included write downs on assets held-for-sale, higher foreclosed real estate expenses and an increase in FDIC assessment. The write down of assets held-for-sale were Florida loans, which were marked to market in anticipation of sale. Compensation expense increased due to the addition of commercial lenders to build the Houston commercial lending platform, as well as the addition of loan review and workout personnel. The increase in FDIC assessment reflected the growth in deposits as well as higher assessment rates during 2010.

Wealth Management. Net income for 2011 increased $0.5 million, or 14.3%, compared with 2010. Net income for 2010 increased $0.3 million, or 8.4%, compared with 2009. The rise in net income was due primarily to an increase in assets under management, resulting in a rise in fees. Assets under management were $2.8 billion at December 31, 2011, $2.9 billion at December 31, 2010 and $2.7 billion as of December 31, 2009.

Noninterest income for 2011 increased $1.2 million, or 6.3%, compared with 2010 and $2.1 million, or 12.3%, for 2010 compared with 2009. The primary factor was the increase in assets under management and fees discussed above.

Noninterest expense for 2011 increased $0.3 million, or 2.0%, compared with 2010, due primarily to higher incentive compensation. Noninterest expense for 2010 increased $1.9 million, or 15.6%, compared with 2009, due primarily to higher compensation expense.

Insurance. Net earnings declined $0.2 million for 2011 compared with 2010 due primarily to higher noninterest expense. Net income for 2010 increased $0.1 million, or 8.6%, compared with 2009 due primarily to higher insurance commissions associated with new commercial customers.

Noninterest income for 2011 was essentially flat compared with 2010. Noninterest income for 2010 increased $0.2 million, or 3.7%, compared with 2009. The increase was due primarily to higher insurance commissions associated with new commercial customers.

Noninterest expense for 2011 increased $0.4 million, or 8.9%, compared with 2010 as a result of the addition of new producers. Noninterest expense for 2010 increased $0.1 million, or 3.1%, compared with 2009.

Other. Other consists primarily of interest expense on our junior subordinated debentures, which is not allocated to the business segments. Interest expense on the floating rate portion of these borrowings reflected interest rate changes from 2009 through 2011. Interest expense on these borrowings decreased in 2010 due to the refinancing of $15.5 million of the debentures in 2007. A discrete tax benefit of $0.4 million related to a prior acquisition was recorded in 2011.

Financial Condition

Total assets increased $56.1 million, or 3.8%, to $1.5 billion as of December 31, 2011, compared with December 31, 2010. Our loan portfolio (excluding loans held-for-sale) increased $103 million, or 11.2%, to $1.0

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billion as of December 31, 2011, compared with $920 million as of December 31, 2010. Our securities portfolio decreased $89.0 million, or 24.8%, to $270 million as of December 31, 2011, compared with $359 million as of December 31, 2010. Shareholders’ equity increased $6.7 million, or 4.0%, to $173 million as of December 31, 2011.

Loan Portfolio

Our primary lending focus is to privately-owned businesses, professional firms, investors and affluent individuals. To these clients we make commercial, commercial real estate, real estate construction, residential real estate and consumer loans. Total commercial loans, which consists of commercial, commercial real estate and real estate construction loans, accounted for 47.3% of our loan portfolio as of December 31, 2011. Total consumer loans, which consist of residential real estate, home equity lines of credit and other consumer loans, made up 52.5% of our loan portfolio as of December 31, 2011. Loans held-for-sale comprised 0.2% of our portfolio as of December 31, 2011.

Loans held-for-sale totaled $1.8 million at December 31, 2011, down from $10.9 million at December 31, 2010. Loans held-for-sale at December 31, 2011, consisted of residential mortgage loans that we originated. Loans held-for-sale at December 31, 2010, included approximately $9.6 million of Florida loans.

Loans held-for-investment were $1.0 billion as of December 31, 2011, an increase of $103 million, or 11.2%, compared with December 31, 2010. This increase was mainly in commercial loans and was the result of efforts over the last two years to grow our Houston-based lending by adding commercial bankers. As of December 31, 2011 and 2010, loans comprised 67.2% and 62.8%, respectively of total assets.

The following tables summarize our loan portfolio by type of loan as of the dates indicated:

	December 31,
	2011					2010
	Amount		Percent			Amount		Percent
	(dollars in thousands)
Commercial:
Commercial	$	214,575		21.0	%	$	147,090		15.8	%
Commercial real estate		210,437		20.5			166,043		17.8
Real estate construction		59,589		5.8			46,326		5.0
Total commercial		484,601		47.3			359,459		38.6
Consumer:
Residential real estate first lien (1)		202,968		19.8			205,531		22.1
Residential real estate second lien (2)		252,825		24.6			269,727		28.9
Home equity lines		55,191		5.4			60,609		6.5
Consumer other		27,901		2.7			25,131		2.7
Total consumer		538,885		52.5			560,998		60.2
Loans receivable		1,023,486		99.8			920,457		98.8
Loans held-for-sale		1,778		0.2			10,915		1.2
Total loans	$	1,025,264		100.0	%	$	931,372		100.0	%

(1) Includes $50.3 million and $57.3 million of purchased loans as of December 31, 2011 and 2010.

(2) Includes $14.1 million and $16.8 million of purchased loans as of December 31, 2011 and 2010.

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	December 31,
	2009					2008					2007
	Amount		Percent			Amount		Percent			Amount		Percent
	(dollars in thousands)
Commercial:
Commercial	$	115,431		10.7	%	$	135,534		11.1	%	$	127,583		11.6	%
Commercial real estate		259,480		24.0			228,732		18.8			190,904		17.4
Real estate construction		87,008		8.1			178,845		14.7			187,118		17.0
Total commercial		461,919		42.8			543,111		44.6			505,605		46.0
Consumer:
Residential real estate first lien (1)		222,337		20.6			241,969		19.8			271,346		24.7
Residential real estate second lien (2)		291,433		27.0			302,141		24.8			195,583		17.8
Home equity lines		74,356		6.9			82,555		6.8			79,023		7.2
Consumer other		28,160		2.6			48,628		4.0			45,711		4.2
Total consumer		616,286		57.1			675,293		55.4			591,663		53.9
Loans receivable		1,078,205		99.9			1,218,404		100.0			1,097,268		99.9
Loans held-for-sale		1,058		0.1			150		—			1,396		0.1
Total loans	$	1,079,263		100.0	%	$	1,218,554		100.0	%	$	1,098,664		100.0	%

(1) Includes $69.5 million, $83.1 million and $116 million of purchased loans as of December 31, 2009, 2008 and 2007.

(2) Includes $19.3 million, $22.5 million and $26.2 million of purchased loans as of December 31, 2009, 2008 and 2007.

The contractual maturity ranges of our commercial and consumer loan portfolios (excluding loans held-for-sale) and the amount of such loans with predetermined and adjustable interest rates in each maturity range as of the dates indicated are summarized in the following table:

	December 31, 2011
	One Year or Less		After One Through Five Years		After Five Years		Total
	(dollars in thousands)
Commercial:
Commercial	$	117,202	$	74,917	$	22,456	$	214,575
Commercial real estate		22,673		164,403		23,361		210,437
Real estate construction		20,219		31,318		8,052		59,589
Total commercial		160,094		270,638		53,869		484,601
Consumer:
Residential real estate first lien		7,681		11,136		184,151		202,968
Residential real estate second lien		618		887		251,320		252,825
Home equity lines		—		—		55,191		55,191
Consumer other		21,451		4,736		1,714		27,901
Total consumer		29,750		16,759		492,376		538,885
Total loans receivable	$	189,844	$	287,397	$	546,245	$	1,023,486
Loans with a predetermined interest rate	$	51,528	$	122,557	$	319,294	$	493,379
Loans with an adjustable interest rate		138,316		164,840		226,951		530,107
Total loans receivable	$	189,844	$	287,397	$	546,245	$	1,023,486

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As of December 31, 2011, 48.2% of our loan portfolio carried fixed interest rates and 51.8% of our loan portfolio had adjustable interest rates. Scheduled contractual principal repayments do not reflect the actual payments of loans. As of December 31, 2011, there was no concentration of loans to any one type of industry exceeding 10% of total loans. As of December 31, 2011, approximately 88.2% of our loans are located in Texas. Our largest lending concentration is in the energy sector. At December 31, 2011, our energy lending portfolio totaled $67.3 million, which represents 6.6% of total loans.

Our commercial loan portfolio also includes participations in shared national credits which are defined by banking regulators as credits of more than $20.0 million and with three or more non-affiliated banks as participants. Shared national credits totaled approximately $27.3 million at December 31, 2011.

Real Estate Loan Portfolio Concentrations

Loan concentrations may exist when there are borrowers engaged in similar activities or types of loans extended to a diverse group of borrowers that could cause those borrowers or loans to be similarly impacted by economic or other conditions. Our primary geographic concentration for our residential real estate and home equity lines portfolio is Texas.

As of December 31, 2011, the geographic concentrations of residential mortgage and home equity lines of credit by state were as follows:

	December 31, 2011
	Residential Mortgage First Lien (2)		Residential Mortgage Second Lien (2)		Home Equity Lines		Total		Percent of Total Loans
	(dollars in thousands)
Texas	$	140,268	$	239,113	$	28,184	$	407,565		39.8	%
Colorado		4,892		3,752		20,782		29,426		2.8
Florida		19,057		750		3,737		23,544		2.3
California		10,117		1,306		1,400		12,823		1.2
Other (1)		28,634		7,904		1,088		37,626		3.7
Total	$	202,968	$	252,825	$	55,191	$	510,984		49.8	%

(1) Loans in any other individual state do not exceed 0.8% of total loans.

(2) Includes $64.3 million of purchased loans with $11.3 million located in Texas, $2.2 million in Colorado, $19.1 million in Florida, and $9.5 million in California.

Changes in real estate values and underlying economic or market conditions for these areas are monitored regularly. Subprime loans, defined as loans in which the borrower has a FICO score of less than 620 at origination, amounted to $12.4 million at December 31, 2011. As of December 31, 2011, approximately 7.7% of our total loans consisted of residential real estate loans and home equity lines of credit that include an interest only feature as a part of the loan terms. All of these loans are considered to be prime or near prime.

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We originate commercial real estate and real estate construction loans primarily to clients in our market areas in Texas, and a significant portion of the property collateralizing our commercial real estate and real estate construction loans is located in these areas. Approximately 29.5% of commercial real estate loans and real estate construction loans are loans to owner occupants. In certain circumstances, these loans may be collateralized by property outside of Texas.

	December 31, 2011
	Commercial Real Estate		Real Estate Construction		Total		Percent of Total Loans
	(dollars in thousands)
Retail	$	110,510	$	8,136	$	118,646		11.6	%
Industrial and warehouse		34,873		—		34,873		3.4
Multi-family		24,020		2,969		26,989		2.6
Office building		20,273		788		21,061		2.0
Land		748		19,358		20,106		2.0
1-4 family land		—		16,251		16,251		1.6
1-4 family structures		—		8,640		8,640		0.8
Other		20,013		3,447		23,460		2.3
Total	$	210,437	$	59,589	$	270,026		26.3	%

Asset Quality

We have several procedures in place to assist in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our management and delinquency levels are monitored by Encore Bank’s asset classification committee and reviewed by Encore Bank’s board of directors for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

Trends in delinquency ratios represent an indicator, among other considerations, of credit risk within the loan portfolio. The entire balance of an account is considered delinquent if the minimum payment contractually required to be made is not received by the specified date. Nonaccrual loans and loans past due 90 days or more and still accruing totaled $10.8 million as of December 31, 2011, compared with $26.8 million as of December 31, 2010. The ratio of nonaccrual loans and loans 90 days past due and still accruing to total loans was 1.05% as of December 31, 2011, compared with 2.88% as of December 31, 2010.

Loans are generally placed on nonaccrual status when management determines that full collection of principal or interest is unlikely or when principal or interest payments are 90 days past due, unless the loan is fully collateralized and in the process of collection. Residential mortgage and home equity loans are generally charged off to current appraised values, less costs to sell, no later than 180 days past due. Other consumer loans are generally charged off at no later than 120 days past due, earlier if deemed uncollectible. Cash payments received while a loan is classified as nonaccrual are recorded as a reduction of principal as long as doubt exists as to collection. If interest on nonaccrual loans as of December 31, 2011, had been accrued under the original loan terms, approximately $0.8 million would have been recorded as income during 2011, compared with interest payments of $0.3 million actually recorded during 2011. We sometimes revise the interest rate or repayment terms resulting in a troubled debt restructuring. All troubled debt restructurings are included in nonperforming assets unless interest is still being accrued.

We generally obtain updated appraisals on collateral secured loans categorized as nonaccrual loans and potential problem loans on an annual basis. In instances where updated appraisals reflect reduced collateral values, an evaluation of the borrower’s overall financial condition is made to determine the need, if any, for possible write downs or appropriate additions to the allowance for loan losses. We record real estate acquired through foreclosure at fair value at the time of acquisition, less estimated costs to sell the property, establishing a new cost basis.

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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:

	December 31,
	2011			2010			2009			2008			2007
	(dollars in thousands)
Nonaccrual loans – Texas (1)	$	7,514		$	15,167		$	9,908		$	17,371		$	9,556
Nonaccrual loans – Florida (1)		3,275			11,310			26,080			13,160			1,652
Total nonaccrual loans (1)		10,789			26,477			35,988			30,531			11,208
Other real estate owned– Texas		377			4,783			9,494			1,779			835
Other real estate owned– Florida		1,713			4,515			5,145			1,002			—
Total other real estate owned		2,090			9,298			14,639			2,781			835
Total nonperforming assets	$	12,879		$	35,775		$	50,627		$	33,312		$	12,043
Accruing loans past due 90 days or more	$	—		$	313		$	1,489		$	646		$	2,183
Restructured loans still accruing	$	4,122		$	804		$	530		$	—		$	—
Nonperforming assets to total loans and other real estate owned		1.25	%		3.80	%		4.63	%		2.73	%		1.10	%

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

Nonperforming assets were $12.9 million and $35.8 million as of December 31, 2011 and 2010, respectively. Our ratio of nonperforming assets to total loans and other real estate owned was 1.25% and 3.80% as of December 31, 2011 and 2010, respectively.

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

	December 31, 2011				December 31, 2010
	Outstanding Balance		Specific Allocation  of Allowance		Outstanding Balance		Specific Allocation of Allowance
Commercial:
Commercial	$	774	$	5	$	741	$	189
Commercial real estate		2,223		161		4,484		—
Real estate construction		2,839		43		3,554		—
Total commercial		5,836		209		8,779		189
Consumer:
Residential real estate first lien (1)		4,778		—		10,320		2
Residential real estate second lien and home equity lines		175		—		707		372
Consumer		—		—		—		—
Total consumer		4,953		—		11,027		374
Loans held-for-sale		—		—		6,671		—
Total nonaccrual loans	$	10,789	$	209	$	26,477	$	563

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

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Nonaccrual loans aggregated $10.8 million as of December 31, 2011, compared with $26.5 million as of December 31, 2010. The decrease in first mortgage loans resulted primarily from the payoff of a $4.3 million loan in Texas. The decrease in commercial real estate loans was due to the resolution of several loans mostly in Florida. The decrease in loans held-for-sale was due to the sale of a $2.3 million commercial real estate loan in Florida and the resolution of a $2.1 million commercial real estate loan in Florida.

Loans 90 days past due or more and still accruing were zero at December 31, 2011, compared with $0.3 million at December 31, 2010. Restructured loans still accruing totaled $4.1 million at year end 2011 compared with $0.8 million at year end 2010.

Other real estate owned was $2.1 million at December 31, 2011, compared with $9.3 million at December 31, 2010, a $7.2 million decrease due primarily to the sale of several residential properties in Houston and the continued resolution of our Florida operations. Other real estate owned is comprised primarily of real estate acquired in settlement of loans.

As discussed under “—Allowance for Loan Losses”, 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.

We follow a loan review program designed to evaluate the credit risk in our loan portfolio. Through this loan review process, we maintain an internally classified watch list which helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans included on the watch list that are not otherwise classified show warning elements where the present status portrays one or more deficiencies that require attention in the short term or where pertinent ratios of the loan account have weakened to a point where more frequent monitoring is warranted. These loans do not have all of the characteristics of a classified loan (substandard or doubtful) but do show weakened elements compared with those of a satisfactory credit.

In establishing the appropriate classification for specific assets, we consider, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s repayment history and the current delinquent status. As a result of this process, loans are classified as substandard, doubtful or loss.

Loans classified as “substandard” are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that we will sustain some losses if the deficiencies are not corrected. Loans classified as “doubtful” are those loans which have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable. Loans classified as “loss” are those loans that are in the process of being charged off. Once a loan is deemed uncollectible as contractually agreed, the loan is charged off either partially or in full against the allowance for loan losses.

Potential problem loans were $15.4 million and $32.8 million as of December 31, 2011 and 2010, respectively. Potential problem loans are those loans classified as substandard still accruing.

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Allowance for Loan Losses

Our allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The allowance for loan losses is maintained at a level which we believe is adequate to absorb all estimated losses incurred in the loan portfolio through the balance sheet date. 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 economic conditions. If actual losses exceed the amount of the allowance for loan losses, our results of operations could be adversely affected.

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.

The allowance for loan losses is comprised of two components: specific reserves and general reserves. Generally, all loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a specific reserve is required. A loan is considered impaired when, based on current information, it is probable that we will not receive all amounts due in accordance with the contractual terms of the loan agreement. Once a loan has been identified as impaired, we measure the amount of impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price, or based on the fair value of the collateral if the loan is collateral-dependent. When management’s measured value of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve. These specific reserves are determined on an individual loan basis based on our current evaluation of our loss exposure for each credit, given the payment status, financial condition of the borrower and value of any underlying collateral. Loans for which specific reserves are provided are excluded from the general reserve described below. Changes in specific reserves from period to period are the result of changes in the circumstances of individual loans such as charge-offs, pay-offs, changes in collateral values or other factors.

We also maintain a general reserve for each loan type in the loan portfolio. In determining the amount of the general reserve portion of our allowance for loan losses, we consider factors such as our historical loan loss experience, the experience, ability and effectiveness of our lending management and staff, the effectiveness of our loan policies, procedures and internal controls, strategic initiatives, the composition and concentrations of credit, changes in underlying collateral values, nonaccrual and loan classification trends, the effectiveness of the internal loan review function and general economic conditions. Based on these factors, we apply estimated percentages to the various categories of loans, not including any loan that has a specific reserve allocated to it, based on our historical experience, portfolio trends and economic and industry trends. We use this information to estimate the general reserve portion of the allowance for loan losses at a level that reflects our estimate of incurred losses.

Based on an evaluation of the loan portfolio, we present a quarterly review of the allowance for loan losses to Encore Bank’s asset classification committee and our board of directors, indicating any change in the allowance for loan losses since the last review and any recommendations as to adjustments in the allowance for loan losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as events change. The allowance for loan losses was $18.0 million, or 1.76% of total loans, excluding loans held-for-sale, as of December 31, 2011, compared with $18.6 million, or 2.02% of total loans as of December 31, 2010.

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

	As of and for the Years Ended December 31,
	2011			2010			2009			2008			2007
	(dollars in thousands)
Average total loans outstanding	$	966,120		$	1,046,164		$	1,146,839		$	1,171,619		$	1,015,139
Loans receivable at end of year (excluding loans held-for-sale)	$	1,023,486		$	920,457		$	1,078,205		$	1,218,404		$	1,097,268
Allowance for loan losses at beginning of year	$	18,639		$	26,501		$	25,105		$	11,161		$	9,056
Charge-offs:
Commercial:
Commercial		(321	)		(965	)		(2,833	)		(8,601	)		(62	)
Commercial real estate		(2,693	)		(24,527	)		(1,175	)		(629	)		—
Real estate construction		(205	)		(9,159	)		(6,780	)		(1,728	)		(79	)
Total commercial		(3,219	)		(34,651	)		(10,788	)		(10,958	)		(141	)
Consumer:
Residential real estate first lien		(1,140	)		(4,089	)		(2,767	)		(634	)		(191	)
Residential real estate second lien		(2,802	)		(3,720	)		(2,543	)		(1,323	)		(759	)
Home equity lines		(1,992	)		(2,030	)		(1,820	)		(1,813	)		(334	)
Consumer other		(165	)		(414	)		(734	)		(1,096	)		(1,188	)
Total consumer		(6,099	)		(10,253	)		(7,864	)		(4,866	)		(2,472	)
Total charge-offs		(9,318	)		(44,904	)		(18,652	)		(15,824	)		(2,613	)
Recoveries:
Commercial:
Commercial		140			883			2,917			139			46
Commercial real estate		163			17			—			6			—
Real estate construction		151			104			6			—			—
Total commercial		454			1,004			2,923			145			46
Consumer:
Residential real estate first lien		389			304			110			41			34
Residential real estate second lien		318			226			70			130			178
Home equity lines		91			180			131			9			43
Consumer other		143			159			154			268			388
Total consumer		941			869			465			448			643
Total recoveries		1,395			1,873			3,388			593			689
Net charge-offs		(7,923	)		(43,031	)		(15,264	)		(15,231	)		(1,924	)
Provision for loan losses		7,252			35,169			16,660			29,175			4,029
Allowance for loan losses at end of year	$	17,968		$	18,639		$	26,501		$	25,105		$	11,161
Ratio of net charge-offs to average total loans		0.82	%		4.11	%		1.33	%		1.30	%		0.19	%
Ratio of allowance for loan losses to year end loans (excluding loans held-for-sale)		1.76	%		2.02	%		2.46	%		2.06	%		1.02	%
Ratio of allowance for loan losses to nonaccrual loans (excluding nonaccrual loans held-for-sale of $6,671 in 2010)		166.54	%		94.11	%		73.64	%		82.23	%		99.58	%

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Net charge-offs for 2011 were $7.9 million, or 0.82% of average total loans, $43.0 million, or 4.11% of average total loans for 2010 and $15.3 million, or 1.33% of average total loans in 2009. During 2011 we experienced an overall decrease in charge-offs which was reflective of overall credit quality improvements and our decision in 2010 to exit the Florida market. Charge-offs were elevated in 2010 due in part to approximately $32.0 million in charge-offs related to our Florida loan portfolio, most of which resulted from the transfer of loans to held-for-sale during the year as we exited the Florida market. When we move a loan to held-for-sale, we charge the allowance for loan losses for any mark to market prior to transferring the loan. These Florida loans were mostly commercial real estate or land loans and had experienced significant decreases in collateral values. Additionally, first mortgage residential loan charge-offs were higher in 2010 and consisted mostly of loans in Florida that were purchased to comply with certain regulatory requirements. We also experienced an increase in second mortgage residential loan charge-offs, which resulted from the deteriorating economy and higher unemployment.

Commercial charge-offs in 2009 consisted mainly of several loans to professionals or entrepreneurs. These charge-offs were offset by several recoveries, the most significant of which was a $2.0 million partial recovery of a private banking loan that was charged-off in 2008. Commercial real estate charge-offs consisted mainly of loans in Florida. Construction charge-offs consisted of a combination of a $2.2 million commercial construction loan in Florida, two land loans in Florida totaling $1.6 million as well as a residential construction loan in Houston.

Allocated Allowance for Loan Losses. The following tables describe the allocation of the allowance for loan losses among various categories of loans and certain other information for the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of loans except loans held-for-sale. Loans held-for-sale are carried at lower of cost or estimated fair value.

	December 31,
	2011					2010
	Amount		Percent of Loans to Total Loans (1)			Amount		Percent of Loans to Total Loans (1)
	(dollars in thousands)
Commercial:
Commercial	$	2,888		21.0	%	$	4,150		15.8	%
Commercial real estate		3,553		20.5			2,808		17.8
Real estate construction		1,919		5.8			1,486		5.0
Total commercial		8,360		47.3			8,444		38.6
Consumer:
Residential real estate first lien		3,335		19.8			3,355		22.1
Residential real estate second lien		4,284		24.6			4,713		28.9
Home equity lines		1,772		5.4			1,835		6.5
Consumer other		217		2.7			292		2.7
Total consumer		9,608		52.5			10,195		60.2
Loans held-for-sale		—		0.2			—		1.2
Total allowance for loan losses	$	17,968		100.0	%	$	18,639		100.0	%

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	December 31,
	2009					2008					2007
	Amount		Percent of Loans to Total Loans (1)			Amount		Percent of Loans to Total Loans (1)			Amount		Percent of Loans to Total Loans (1)
	(dollars in thousands)
Commercial:
Commercial	$	4,514		10.7	%	$	8,652		11.1	%	$	4,107		11.6	%
Commercial real estate		10,580		24.0			4,687		18.8			2,099		17.4
Real estate construction		2,777		8.1			5,955		14.7			2,181		17.0
Total commercial		17,871		42.8			19,294		44.6			8,387		46.0
Consumer:
Residential real estate first lien		3,061		20.6			1,397		19.8			1,086		24.7
Residential real estate second lien		3,673		27.0			2,757		24.8			782		17.8
Home equity lines		1,577		6.9			1,153		6.8			308		7.2
Consumer other		319		2.6			504		4.0			598		4.2
Total consumer		8,630		57.1			5,811		55.4			2,774		53.9
Loans held-for-sale		—		0.1			—		—			—		0.1
Total allowance for loan losses	$	26,501		100.0	%	$	25,105		100.0	%	$	11,161		100.0	%

(1) Loans held-for-sale are included in total loans for all periods.

We believe that the allowance for loan losses as of December 31, 2011, is adequate to cover estimated losses incurred in the portfolio as of that date. The estimate of losses represented by the allowance is subject to change as more information becomes known. Future losses, which could vary greatly in amount, will be recognized through future loan loss provisions in the period in which such losses are determined.

Investment Securities

Securities within the securities portfolio are classified as held-to-maturity, available-for-sale or trading based on the intent and objective of the investment and the ability to hold to maturity. As of December 31, 2011, we had no securities classified as trading. Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities or are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows.

Securities available-for-sale are carried at fair value with unrealized holding gains and losses, other than credit impairment, reported as a separate component of shareholders’ equity called other comprehensive income. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities may be sold in response to interest rate changes, changes in prepayment risk or changes to underlying bank funding. Available-for-sale securities were $171 million as of December 31, 2011, compared with $252 million as of December 31, 2010.

Securities held-to-maturity are carried at amortized historical cost. Securities that we have the intent and ability to hold until maturity are classified as held-to-maturity. Held-to-maturity securities decreased to $99.6 million as of December 31, 2011, compared with $108 million as of December 31, 2010.

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The following table summarizes the amortized cost of securities classified as available-for-sale and held-to-maturity and their approximate fair values as of the dates shown:

	December 31, 2011				December 31, 2010				December 31, 2009
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands)
Available-for-sale:
U.S. Government securities	$	107,665	$	108,020	$	164,226	$	162,655	$	87,258	$	86,821
Securities of U.S. states and political subdivisions		2,096		2,183		7,950		7,378		646		615
Mortgage-backed securities		41,664		42,179		59,377		60,144		45,275		46,137
Corporate debt securities		13,967		10,938		13,966		13,420		—		—
Other securities		4,481		4,621		5,529		5,401		4,410		4,386
Total		169,873		167,941		251,048		248,998		137,589		137,959
Marketable equity securities		2,592		2,860		2,531		2,786		2,523		2,692
Total available-for-sale securities	$	172,465	$	170,801	$	253,579	$	251,784	$	140,112	$	140,651
Held-to-maturity:
U.S. Government securities	$	5,000	$	5,044	$	5,000	$	5,000	$	29,918	$	29,959
Securities of U.S. states and political subdivisions		21,955		24,207		21,992		21,571		11,436		11,643
Mortgage-backed securities		50,642		52,025		58,286		58,987		57,868		58,614
Corporate debt securities		12,330		13,280		17,212		19,052		17,949		19,674
Other securities		9,703		9,901		5,128		5,128		—		—
Total held-to-maturity securities	$	99,630	$	104,457	$	107,618	$	109,738	$	117,171	$	119,890

Certain investment securities are valued at less than their historical cost. We believe these decreases in market valuation are related to interest rate fluctuations. We have the ability and intent to hold these securities until there is a recovery in fair value and management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in results of operations in the period the other-than-temporary impairment is identified.

As of December 31, 2011, we had net unrealized gains of $3.2 million in the securities portfolio compared with net unrealized gains of $0.3 million as of December 31, 2010. The $2.8 million increase in net unrealized gains was primarily attributable to changes in market interest rates from December 31, 2010 to December 31, 2011.

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The following table summarizes the contractual maturities of investment securities on an amortized cost basis and their weighted average yields as of December 31, 2011. This table shows the contractual maturities of the related investment securities and not the estimated average lives of the securities. The contractual maturity of a mortgage-backed security (MBS) is the date at which the last underlying mortgage matures. In the case of a 15-year pool of loans or a 30-year pool of loans, the maturity date of the security will be the date the last payment is due on the underlying mortgages.

	December 31, 2011
	Due Within One Year					After One Year but Within Five Years					After Five Years but Within Ten Years					After Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(dollars in thousands)
Available-for-sale:
U.S. Government securities	$	90,289		0.57	%	$	10,005		0.40	%	$	5,000		3.63	%	$	2,371		2.61	%	$	107,665		0.74	%
Securities of U.S. states and political subdivisions		—		—			—		—			—		—			2,096		5.27			2,096		5.27
Mortgage-backed securities		—		—			—		—			—		—			41,664		2.29			41,664		2.29
Corporate debt securities		—		—			—		—			13,967		5.21			—		—			13,967		5.21
Other securities		—		—			—		—			—		—			4,236		2.77			4,236		2.77
Held-to-maturity:
U.S. Government securities		—		—			—		—			5,000		4.42			—		—			5,000		4.42
Securities of U.S. states and political subdivisions		—		—			—		—			—		—			21,955		6.39			21,955		6.39
Mortgage-backed securities		—		—			—		—			—		—			50,642		2.78			50,642		2.78
Corporate debt securities		327		4.40			9,229		6.76			2,774		7.45			—		—			12,330		6.85
Other securities		—		—			—		—			5,050		2.43			4,653		2.43			9,703		2.43
Total	$	90,616		0.58	%	$	19,234		3.45	%	$	31,791		4.59	%	$	127,617		3.27	%		269,258		2.53
Equity and other securities																						2,837		—
Total securities																					$	272,095		2.51	%

Contractual maturity of an MBS is not a reliable indicator of its expected life because borrowers have the right to prepay their obligations at any time. An analysis of our MBSs as of December 31, 2011, shows the estimated average life to be 3.27 years. The estimated average life will change if interest rates change. The estimated average life of the total securities portfolio was 2.92 years as of December 31, 2011.

We did not own the securities of any one issuer (other than the U.S. government and its agencies) of which the aggregate adjusted cost exceeded 10% of consolidated shareholders’ equity at December 31, 2011.

Deposits

Deposits are our primary source of funds and we rely on our private client offices to attract and retain those deposits. We offer a variety of products, which consist of noninterest-bearing and interest-bearing checking

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accounts, money market and savings accounts and certificates of deposit. Deposits are gathered from individuals, partnerships and corporations in our market areas. From time to time, we also purchase brokered deposits, either through a broker to increase the duration of the deposit portfolio, or through the Certificate of Deposit Account Registry Service (CDARS), which we do as a service for our clients. Our deposits averaged $1.1 billion for 2011, $1.2 billion for 2010 and $1.2 billion for 2009.

The interest rates we pay are based on the competitive environments. We manage our interest expense through weekly deposit pricing reviews that compare our deposit rates with the competition and wholesale alternatives. The change in cost of our deposits reflects the impact of the increase or decrease in short term rates, such as the Federal Funds rate or the London Inter Bank Offered Rate. Because of the competitive nature of the market for deposits, our rates tend to follow these benchmarks closely. In addition, during periods of rapid loan growth, we have at times offered special deposit products or attractive rates to fund this loan growth. The average cost of deposits, including noninterest-bearing deposits, for 2011 was 0.80% compared with 1.21% for 2010. The decrease in average cost of deposits was primarily due to falling interest rates.

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

	Years Ended December 31,
	2011					2010					2009
	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
	(dollars in thousands)
Noninterest-bearing deposits	$	258,936		—	%	$	189,071		—	%	$	152,873		—	%
Interest checking		167,566		0.17			146,863		0.28			186,440		0.48
Money market and savings		264,233		0.33			264,227		0.67			273,188		1.09
Time deposits less than $100,000		108,408		2.20			129,365		2.40			200,493		3.33
Core deposits		799,143		0.44			729,526		0.72			812,994		1.30
Time deposits $100,000 and greater		237,051		1.88			250,035		2.20			308,546		3.14
Brokered deposits		21,811		2.47			23,836		2.58			28,924		2.69
Noninterest-bearing deposits held-for-sale		—		—			16,188		—			—		—
Interest-bearing deposits held-for-sale		—		—			190,157		1.69			—		—
Total deposits	$	1,058,005		0.80	%	$	1,209,742		1.21	%	$	1,150,464		1.83	%

As of December 31, 2011, core deposits (which consist of noninterest-bearing deposits, interest checking, money market and savings and time deposits less than $100,000) were $859 million, or 78.1%, of total deposits, while time deposits $100,000 and greater and brokered deposits made up 21.9% of total deposits. As of December 31, 2011, total deposits increased $49.8 million, or 4.7%, to $1.1 billion compared with total deposits as of December 31, 2010.

As of December 31, 2010, core deposits were $790 million, or 75.2% of total deposits, while time deposits $100,000 and greater and brokered deposits made up 24.8% of total deposits. As of December 31, 2010, total deposits decreased to $1.1 billion from year end 2009, a decrease of $141 million, or 11.9%. However, deposits increased $89.8 million compared with their level at December 31, 2009, excluding the $231 million of Florida deposits sold in 2010.

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The following table sets forth the period-end amount of our time deposits as of December 31, 2011, that are $100,000 and greater by time remaining until maturity:

	December 31, 2011
	(dollars in thousands)
Three months or less	$	54,387
Over three months through six months		30,829
Over six months through one year		67,300
Over one year		71,694
Total	$	224,210

While a majority of the time deposits in amounts of $100,000 and greater will mature within one year, we expect that a significant portion of these deposits will be renewed as the rates we offer on time deposits are competitive in the market. If a significant portion of the time deposits are not renewed, it could have an adverse effect on our liquidity. We monitor maturities and have other available funding sources such as FHLB advances to mitigate this effect.

Borrowings and 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 FHLB, which have terms ranging from overnight to several years. All borrowings from the FHLB are collateralized by a blanket lien on Encore Bank’s mortgage-related assets. Additionally, we borrow from customers using investment securities as collateral and have issued junior subordinated debentures to subsidiary trusts.

Our borrowings and repurchase agreements were $219 million as of December 31, 2011. The outstanding balance as of December 31, 2011, includes $208 million in long term FHLB advances ($95.0 million of which have various call dates prior to the maturity date) and $10.5 million in repurchase agreements with clients.

We decreased our borrowings and repurchase agreements $1.1 million, or 0.5%, to $219 million as of December 31, 2011, from $220 million as of December 31, 2010. During 2010, we refinanced approximately $52.5 million of FHLB advances which were treated as exchanges of debt. As part of those transactions, we incurred prepayment penalties of $2.6 million, which were capitalized as part of the new advances and are being amortized over the life of the new advances.

The following table summarizes our outstanding borrowings and repurchase agreements at the dates indicated:

	As of and for the Years Ended December 31,
	2011			2010			2009
	(dollars in thousands)
Ending balance	$	218,702		$	219,777		$	220,612
Average balance for the year		222,711			219,914			231,648
Maximum month end balance during the year		235,275			221,472			257,514
Average interest rate for the year		3.81	%		3.87	%		3.67	%
Weighted average interest rate at the end of the year		3.57	%		3.55	%		3.82	%

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As of December 31, 2011, we had two issues of junior subordinated debentures outstanding totaling $20.6 million as follows:

Description

Issuance and Call Dates (1)

Trust Preferred Securities Outstanding

Interest Rate as of December 31, 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

3.50

%

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 the 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%.

Each of the trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in our junior subordinated debentures. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payments of the junior subordinated debentures held by the trust. The common securities of each trust are wholly-owned by us. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon our making payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of our present and future senior indebtedness. We have fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by each trust, provided that such trust has funds available for such obligations.

Under the provisions of each issue of the junior subordinated debentures, we have the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the junior subordinated debentures are deferred, the distributions on the applicable trust preferred securities will also be deferred. However, the interest due would continue to accrue during any such interest payment deferral period.

The trust preferred securities issued by the trusts are currently included in our Tier 1 capital for regulatory purposes pursuant to Federal Reserve guidance. Under the Dodd-Frank Act, all trust preferred securities issued on or after May 19, 2010, must be deducted from Tier 1 capital, except for existing trust preferred securities issued prior to May 19, 2010, if the bank holding company has less than $15.0 billion in total consolidated assets as of December 31, 2009.

Liquidity

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

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scheduled repayments and maturities of loans. On the liability side, our principal sources of liquidity are deposits and borrowed funds. Client deposits are our largest source of funds. For the years ended December 31, 2011 and 2010, our average deposits were $1.1 billion, or 71.5% of average total assets, and $1.2 billion, or 73.7% of average total assets.

At December 31, 2011, we had approximately $116 million in short term investments and $171 million in securities available-for-sale, which together represented 18.8% of total assets. Funds are also available from borrowings from the FHLB pursuant to an existing commitment based on the value of the collateral pledged (either loans or securities) and repurchase agreements. As of December 31, 2011, we had $228 million in available credit from the FHLB. We monitor our liquidity closely through balance sheet analysis as well as cash flow projections to ensure that we have adequate liquidity to meet our obligations.

We develop and maintain a contingency funding plan for our liquidity position. This plan provides an operating framework to manage our liquidity position under various operating circumstances and allows us to ensure that we would be able to operate through a period of stress when access to normal sources of funding is constrained. The plan outlines sources and quantity of liquidity, highlights actions and procedures for managing through a problem period and defines roles and responsibilities. This plan is reviewed and approved annually by our Asset Liability Committee (ALCO) and the board of directors.

The primary source of Bancshares’s funding has been dividends from its subsidiaries Encore Bank, the payment of which is subject to bank regulatory limitations, and Town & Country. Accordingly, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately available to Bancshares. However, Bancshares maintains excess liquidity that would be sufficient to fully fund it and its nonbank affiliate operations for an extended period should funding from Encore Bank be interrupted.

Shareholders’ Equity

Shareholders’ equity increased $6.7 million, or 4.0%, to $173 million as of December 31, 2011 compared with $167 million as of December 31, 2010, primarily due to net earnings. Our ratio of average shareholders’ equity to average assets increased to 11.51% for 2011 compared with 11.04% for 2010.

Shareholders’ equity decreased $20.0 million, or 10.7%, to $167 million as of December 31, 2010, compared with $187 million as of December 31, 2009. Our ratio of average shareholders’ equity to average assets decreased to 11.04% for 2010 compared with 11.72% for 2009. The decrease was due primarily to our net loss. In addition, our shareholders’ equity and our capital ratios were impacted by the completion of a contingency payment obligation incurred in connection with our acquisition of Linscomb & Williams. The accrued liability related to this transaction as of December 31, 2009 was $7.9 million and was extinguished by the issuance of 696,000 shares of common stock and the payment of $2.1 million in cash in the first quarter of 2010. The recording of this transaction resulted in approximately $7.9 million in additional goodwill.

On December 5, 2008, in connection with our participation in the CPP, we issued and sold to the U.S. Treasury (i) 34,000 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share, with a liquidation value of $1,000 per share, and (ii) a Warrant to purchase up to 364,026 shares of our common stock for a ten-year term, at an exercise price of $14.01 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $34.0 million in cash. On September 27, 2011, we issued $32.9 million in Series B Preferred Stock to the Secretary of the Treasury in connection with the Small Business Lending Fund (SBLF). With these proceeds and an additional $1.3 million in cash, we redeemed $34.0 million of the Series A Preferred Stock and incurred a one-time non-cash accelerated preferred stock discount of $4.1 million. In November 2011, Treasury sold the Warrant to a third party.

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

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organic growth or to support an acquisition. Trust preferred securities issued by us prior to May 19, 2010, can be eligible for treatment as Tier 1 regulatory capital provided such securities comprise less than 25% of core capital elements. Any amount above this limit or issued on or after May 19, 2010, can be eligible for treatment as Tier 2 capital.

Each of the federal bank regulatory agencies has established minimum capital adequacy and leverage capital requirements for banking organizations. Encore Bank is subject to the capital adequacy requirements of the 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 capital, 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 December 31, 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	$	140,203		9.73	%	$	57,660		4.00	%		N/A		N/A
Tier 1 risk-based		140,203		13.22			42,416		4.00			N/A		N/A
Total risk-based		153,513		14.48			84,833		8.00			N/A		N/A
Encore Bank, N.A.
Leverage	$	132,088		9.17	%	$	57,639		4.00	%	$	72,048		5.00	%
Tier 1 risk-based		132,088		12.48			42,341		4.00			63,511		6.00
Total risk-based		145,398		13.74			84,682		8.00			105,852		10.00

The risk-based capital requirements of the Federal Reserve and the OCC define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

The risk-based capital standards issued by the Federal Reserve require all bank holding companies to have Tier 1 capital of at least 4.0% to be “adequately capitalized” and at least 6.0% to be “well capitalized” and total risk-based capital (Tier 1 and Tier 2) of at least 8.0% of total risk-weighted assets to be “adequately capitalized” and at least 10.0% to be “well capitalized.” Tier 1 capital generally includes common shareholders’ equity and qualifying perpetual preferred stock together with related surpluses and retained earnings, less deductions for goodwill and various other intangibles. Tier 2 capital may consist of a limited amount of intermediate-term preferred stock, a limited amount of term subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock not qualifying as Tier 1 capital, and a limited amount of the general valuation allowance for loan losses. The sum of Tier 1 capital and Tier 2 capital is total risk-based capital.

The Federal Reserve has also adopted guidelines which supplement the risk-based capital standards with a minimum ratio of Tier 1 capital to average total consolidated assets (leverage ratio) of 3.0% for institutions with well diversified risk, including no undue interest rate exposure; excellent asset quality; high liquidity; good

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earnings; and that are generally considered to be strong banking organizations, rated composite 1 under applicable federal guidelines, and that are not experiencing or anticipating significant growth. Other banking organizations are required to maintain a leverage ratio of at least 4.0% in order to be categorized as “adequately capitalized” and at least 5.0% to be categorized as “well capitalized.” These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets.

Encore Bank is subject to capital adequacy guidelines of the OCC that are substantially similar to the Federal Reserve’s guidelines.

Asset/Liability Management

Our asset/liability and funds management policy provides us with the necessary guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We seek to maintain a sensitivity position within established guidelines.

As a financial institution, the primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of the assets and liabilities, other than those which have a short term to maturity. Because of the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

Interest rate risk is the potential of economic loss due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. We recognize that certain risks are inherent, and that the goal is to identify and understand the risks.

We actively manage our exposure to adverse changes in interest rates through asset and liability management activities within guidelines established by our ALCO. The ALCO, which is composed primarily of senior officers of Encore Bank, has the responsibility for ensuring compliance with asset/liability management policies. Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates. On a regular basis, the ALCO monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies.

We utilize a net interest income simulation model to analyze net interest income sensitivity. Potential changes in market interest rates and their subsequent effects on net interest income are then evaluated. The model projects the effect of instantaneous movements in interest rates of both 100 and 200 basis points. Assumptions based on the historical behavior of our deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

Our interest sensitivity profile was asset sensitive as of December 31, 2011. Given an instantaneous 100 basis point increase in rates that was sustained for 12 months, our base net interest income would increase by an estimated 1.8% for the year ended December 31, 2011. Given an instantaneous 200 basis point increase in interest rates for the same period, our base net interest income would increase by an estimated 2.5% for the year ended December 31, 2011. Given that short-term interest rates are near zero, we did not run an instantaneous downward shock.

We also manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. An important measure of interest rate risk is the relationship of the repricing period of interest-earning

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assets and interest-bearing liabilities. The more closely the repricing periods are correlated, the less interest rate risk we have. From time to time, we may use instruments such as leveraged derivatives, structured notes, interest rate swaps, caps, floors, financial options, financial futures contracts, or forward delivery contracts to reduce interest rate risk. As of December 31, 2011, we had no hedging instruments.

An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. A measurement of interest rate risk is performed by analyzing the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time (gap). Interest rate sensitivity reflects the potential effect on net interest income of a movement in interest rates. An institution is considered to be asset sensitive, or having a positive gap, when the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, an institution is considered to be liability sensitive, or having a negative gap, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative gap would tend to affect net interest income adversely, while a positive gap would tend to increase net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely.

The following table sets forth our interest rate sensitivity analysis as of December 31, 2011:

	Volumes Subject to Repricing Within
	0-30 Days			31-90 Days			91-180 Days			181-365 Days			1-2 Years			2-5 Years			Over 5 Years			Total Balance
	(dollars in thousands)
Interest-earning assets:
Loans	$	250,332		$	81,654		$	99,093		$	157,228		$	179,663		$	219,290		$	38,004		$	1,025,264
Securities		18,888			22,432			46,049			84,155			31,961			16,714			50,232			270,431
Other interest-earning assets		125,426			75			—			—			—			—			—			125,501
Total interest-earning assets		394,646			104,161			145,142			241,383			211,624			236,004			88,236			1,421,196
Interest-bearing liabilities:
Interest checking, money market and savings		421,918			—			—			—			—			—			—			421,918
Time deposits		31,028			47,565			43,999			98,099			43,513			79,256			—			343,460
FHLB advances		—			—			—			—			59,500			65,338			83,381			208,219
Borrowings and repurchase agreements		10,483			—			—			—			—			—			—			10,483
Junior subordinated debentures		—			5,155			15,464			—			—			—			—			20,619
Total interest-bearing liabilities		463,429			52,720			59,463			98,099			103,013			144,594			83,381			1,004,699
Interest rate sensitivity gap	$	(68,783	)	$	51,441		$	85,679		$	143,284		$	108,611		$	91,410		$	4,855		$	416,497
Cumulative interest rate sensitivity gap	$	(68,783	)	$	(17,342	)	$	68,337		$	211,621		$	320,232		$	411,642		$	416,497
Cumulative interest rate sensitive assets to rate sensitive liabilities		85.2	%		96.6	%		111.9	%		131.4	%		141.2	%		144.7	%		141.5	%
Cumulative gap as a percent of total earning assets		(4.8	)%		(1.2	)%		4.8	%		14.9	%		22.5	%		29.0	%		29.3	%

Certain shortcomings are inherent in the method of analysis presented in the gap table. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates, both on a short-term basis and over the life of the asset. More importantly, changes in interest rates, prepayments and early withdrawal levels may deviate significantly from

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those assumed in the calculations in the table. As a result of these shortcomings, we focus more on a net interest income simulation model than on gap analysis. Although the gap analysis reflects a ratio of cumulative gap to total earning assets within acceptable limits, the net interest income simulation model is considered by management to be more informative in forecasting future income at risk.

We face the risk that borrowers might repay their loans sooner than the contractual maturity. If interest rates fall, our borrowers might repay their loans, forcing us to reinvest in a potentially lower yielding asset. This prepayment would have the effect of lowering the overall portfolio yield which may result in lower net interest income. We have assumed that these loans will prepay, if the borrower has sufficient incentive to do so, using prepayment tables provided by third party consultants. In addition, some of our assets, such as mortgage-backed securities or purchased loans, are held at a premium, and if these assets prepaid, we would have to write down the premium, which would temporarily reduce the yield.

Contractual Obligations

The following table presents the payments due by period for our contractual obligations (other than deposit obligations) as of December 31, 2011:

	Payments Due in Years Ended:
	2012		2013-2014		2015-2016		Thereafter		Total
	(dollars in thousands)
Operating leases	$	2,486	$	4,654	$	2,309	$	4,368	$	13,817
FHLB advances		—		88,617		34,602		85,000		208,219
Other borrowed funds		10,483		—		—		—		10,483
Junior subordinated debentures		—		—		—		20,619		20,619
Total	$	12,969	$	93,271	$	36,911	$	109,987	$	253,138

FHLB advances totaling $95.0 million have various call dates prior to the maturity date.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various transactions to meet the financing needs of our clients which, in accordance with US GAAP, are not included in our consolidated balance sheet. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

Our commitments associated with outstanding letters of credit and commitments to extend credit as of December 31, 2011 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

	Payments Due in Years Ended:
	2012		2013-2014		2015-2016		Thereafter		Total
	(dollars in thousands)
Standby letters of credit	$	2,981	$	763	$	615	$	—	$	4,359
Commitments to extend credit		117,689		26,056		13,636		17,737		175,118
Total	$	120,670	$	26,819	$	14,251	$	17,737	$	179,477

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Standby Letters of Credit. Standby letters of credit are written conditional commitments we issue to guarantee the performance of a client to a third party. In the event the client does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the client.

Commitments to Extend Credit. We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon clients maintaining specific credit standards at the time of funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

Impact of Inflation and Changing Prices

Our financial statements and related notes included in this Form 10-K have been prepared in accordance with US GAAP. These require the measurement of financial position and operating results in historical dollars without considering changes in the relative purchasing power of money over time due to inflation. We have an asset and liability structure that is essentially monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Periods of high inflation are often accompanied by relatively higher interest rates, and periods of low inflation are accompanied by relatively lower interest rates. As market interest rates rise or fall in relation to the rates earned on our loans and investments, the value of these assets decreases or increases.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

For information regarding the market risk of our financial instruments, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation—Financial Condition—Asset/Liability Management. Our principal market risk exposure is to changes in interest rates.

Item 8. Financial Statements and Supplementary Data

The financial statements, the report thereon, the notes thereto and supplementary data commence on page F-1 of this Annual Report on Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including 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, as amended (the Exchange Act)) that are designed to ensure that required information is recorded, processed, summarized and reported within the required time frame, as specified in rules set forth by the Securities and Exchange Commission. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2011.

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the Exchange Act).Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management (with the participation of our Chief Executive Officer and Chief Financial Officer) conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This assessment included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2011.

Deloitte & Touche LLP, an independent registered public accounting firm, have audited the consolidated financial statements prepared by the Company and have issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, which is included in this Annual Report on Form 10-K.

Item 9B. Other Information

On March 1, 2012, the Company entered into a change in control agreement with each of Patrick Oakes and Stephanie Pollock. The agreements have an initial term of five years or until the executive reaches his or her normal retirement date (as defined in the agreement) and provide for, among other things, a lump sum payment to each executive officer equal to the sum of two times such officer’s base salary plus two times the average of all performance bonus payments received by such officer for the last two fiscal years to be made upon termination of employment within two years following a change in control. In addition, upon a change in control, all outstanding stock options and nonvested restricted stock awarded to each of the executive officers pursuant to a stock incentive plan of the Company will become vested and immediately exercisable. The change in control agreements will automatically renew for subsequent one-year periods unless notice of termination is properly given by the Company or the executive officer. While each of the change in control agreements contains a post-employment confidentiality provision, neither executive officer is bound by a post-employment non-competition provision.

The above summary of the change in control agreements is qualified in its entirety by reference to the full text of each agreement filed as an exhibit to this Annual Report on Form 10-K and incorporated by reference herein.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item is incorporated herein by reference under the captions “Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance—Committees of the Board of Directors—Audit Committee,” “Corporate Governance—Director Nominations Process” and “Corporate Governance—Code of Ethics” in our definitive Proxy Statement for our 2012 Annual Meeting of Shareholders (the 2012 Proxy Statement) to be filed with the Commission pursuant to Regulation 14A under the Exchange Act within 120 days of our fiscal year end.

Item 11. Executive Compensation

The information required by this Item is incorporated herein by reference under the captions “Executive Compensation and Other Matters” and “Director Compensation” in the 2012 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Certain information required by this Item 12 is included under “Securities Authorized for Issuance Under Equity Compensation Plans” in Part II, Item 5 of this Annual Report on Form 10-K. The information required by this Item is incorporated herein by reference under the caption “Beneficial Ownership of Common Stock by Management of the Company and Principal Shareholders” in the 2012 Proxy Statement.

Item 13. Certain Relationships and Related Transactions and Director Independence

The information required by this Item is incorporated herein by reference under the captions “Corporate Governance—Director Independence” and “Certain Relationships and Related Transactions” in the 2012 Proxy Statement.

Item 14. Principal Accounting Fees and Services

The information required by this Item 14 is incorporated herein by reference under the caption “Fees and Services of Independent Registered Public Accounting Firm” in the 2012 Proxy Statement.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this Annual Report on Form 10-K:

1. Consolidated Financial Statements. Reference is made to Part II, Item 8, of this Annual Report on Form 10-K.

2. Financial Statement Schedules. These schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.

3. The exhibits to this Annual Report on Form 10-K listed below have been included only with the copy of this report filed with the Securities and Exchange Commission. We will furnish a copy of any exhibit to shareholders upon written request to Encore Bancshares, Inc. and payment of a reasonable fee.

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Each exhibit marked with an asterisk is filed or furnished with this Annual Report on Form 10-K as noted below.

Exhibit (1)	Description
2.1	Agreement and Plan of Reorganization, dated as of August 29, 2005, by and between Encore Bancshares, Inc. and Linscomb & Williams, Inc. (incorporated herein by reference to Exhibit 2.4 to Encore Bancshares, Inc.’s Registration Statement on Form S-1, Registration No. 333-142735 (the S-1 Registration Statement))
2.2	First Amendment to Agreement and Plan of Reorganization, dated July 28, 2006, by and between Encore Bancshares, Inc. and Linscomb & Williams, Inc. (incorporated herein by reference to Exhibit 2.5 to the S-1 Registration Statement)
2.3	Second Amendment to Agreement and Plan of Reorganization, dated March 30, 2007, by and between Encore Bancshares, Inc. and Linscomb & Williams, Inc. (incorporated herein by reference to Exhibit 2.6 to the S-1 Registration Statement)
2.4	Third Amendment to Agreement and Plan of Reorganization, dated March 13, 2010, by and between Encore Bancshares, Inc. and Linscomb & Williams, Inc. (incorporated herein by reference to Exhibit 2.6 to Encore Bancshares, Inc.’s Annual Report on Form 10-K filed on March 16, 2010)
2.5	Purchase and Assumption Agreement dated March 15, 2010 by and among Encore Bank, N.A., Ovation Holdings, Inc. and National Bank of Southwest Florida (incorporated herein by reference to Exhibit 2.1 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on March 19, 2010)
2.6	Securities Purchase Agreement, dated September 27, 2011, between the Secretary of the Treasury and Encore Bancshares, Inc., with respect to the issuance and sale of the Series B Preferred Stock (incorporated herein by reference to Exhibit 10.1 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on September 29, 2011).
3.1	Amended and Restated Articles of Incorporation of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to the S-1 Registration Statement)
3.2	Articles of Amendment to Articles of Incorporation of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 to the S-1 Registration Statement)
3.3	Statement of Designations establishing the terms of the Series A Preferred Stock of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on December 8, 2008)
3.4	Statement of Designations establishing the terms of the Series B Preferred Stock of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on September 29, 2011).
3.5	Amended and Restated Bylaws of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 3.3 to the S-1 Registration Statement)
4.1	Form of specimen certificate representing shares of Encore Bancshares, Inc. common stock (incorporated herein by reference to Exhibit 4.1 to the S-1 Registration Statement)
4.2	Form of Series B Preferred Stock Certificate (incorporated herein by reference to Exhibit 4.1 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on September 29, 2011).
4.3	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)
10.1†	Encore Bancshares, Inc. 2000 Stock Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the S-1 Registration Statement)

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Exhibit (1)	Description
10.2†	Form of Encore Bancshares, Inc. Stock Option Award Terms and Conditions and corresponding notice (incorporated herein by reference to Exhibit 10.2 to the S-1 Registration Statement)
10.3†	Form of Encore Bancshares, Inc. Restricted Stock Award Agreement and corresponding notice (incorporated herein by reference to Exhibit 10.3 to Encore Bancshares, Inc.’s Annual Report on Form 10-K filed on March 16, 2010)
10.4†	Encore Bancshares, Inc. 2008 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.2 to Encore Bancshares, Inc.’s Registration Statement on Form S-8, Registration No. 333-150996 (the S-8 Registration Statement))
10.5†	Form of Encore Bancshares, Inc. Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 4.3 to the S-8 Registration Statement)
10.6†	Form of Encore Bancshares, Inc. Nonqualified Stock Option Agreement (incorporated herein by reference to Exhibit 4.4 to the S-8 Registration Statement)
10.7†	Form of Encore Bancshares, Inc. Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.7 to Encore Bancshares, Inc.’s Annual Report on Form 10-K filed on March 16, 2010)
10.8†	Form of Encore Bancshares, Inc. Long-Term Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.8 to Encore Bancshares, Inc.’s Annual Report on Form 10-K filed on March 16, 2010)
10.9†*	Executive Employment Agreement effective January 1, 2012 between William Reed Moraw and Town & Country Insurance Agency, Inc.
10.10†	Amended and Restated Letter Change-in-Control Agreement dated March 15, 2010 between James S. D’Agostino, Jr. and Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.10 to Encore Bancshares, Inc.’s Annual Report on Form 10-K filed on March 16, 2010)
10.11†	Letter Employment Agreement dated January 29, 2010 between J. Harold Williams and Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.1 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on February 3, 2010)
10.12†	Letter Employment Agreement dated January 29, 2010 between G. Walter Christopherson and Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.2 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on February 3, 2010)
10.13†*	Letter Change-in-Control Agreement dated March 1, 2012 between Patrick Oakes and Encore Bancshares, Inc.
10.14†	Letter Change-in-Control Agreement dated March 15, 2010 between Preston Moore and Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.14 to Encore Bancshares, Inc.’s Annual Report on Form 10-K filed on March 16, 2010)
10.15†	Letter Change-in-Control Agreement dated March 15, 2010 between Carmen A. Jordan and Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.15 to Encore Bancshares, Inc.’s Annual Report on Form 10-K filed on March 16, 2010)
10.16†	Letter Change-in-Control Agreement dated March 15, 2010 between Charles W. Jenness and Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.16 to Encore Bancshares, Inc.’s Annual Report on Form 10-K filed on March 16, 2010)
10.17†*	Letter Change-in-Control Agreement dated March 1, 2012 between Stephanie Pollock and Encore Bancshares, Inc.

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Exhibit (1)	Description
10.18†	Form of Indemnity Agreement with directors of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.1 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on December 7, 2007)
10.19†	Form of Indemnity Agreement with directors of Encore Bank, N.A. (incorporated herein by reference to Exhibit 10.2 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on December 7, 2007)
10.20†	Form of Executive Compensation Letter Agreement with senior executive officers of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 10.3 to Encore Bancshares, Inc.’s Current Report on Form 8-K filed on December 8, 2008)
21.1	List of Subsidiaries of Encore Bancshares, Inc. (incorporated herein by reference to Exhibit 21.1 to Encore Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008)
23.1*	Consent of Deloitte & Touche LLP, independent registered public accounting firm.
23.2*	Consent of Grant Thornton LLP, independent registered public accounting firm.
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.

† Management contract or compensatory plan arrangement.

* Filed with this Annual Report on Form 10-K.

** Furnished with this Annual Report on Form 10-K.

(1) Encore Bancshares, Inc. has other long term debt agreements that meet the exclusion set forth in Section 601(b)(4)(iii)(A) of Regulation S-K. We hereby agree to furnish a copy of such agreements to the Commission upon request.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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)
Dated: March 1, 2012	By:	/s/    James S. D’Agostino, Jr.
		James S. D’Agostino, Jr. Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/    James S. D’Agostino, Jr. James S. D’Agostino, Jr.	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	March 1, 2012
/s/    Patrick Oakes Patrick Oakes	Executive Vice President and Chief Financial Officer (Principal Financial Officer)	March 1, 2012
/s/    Stephanie Pollock Stephanie Pollock	Senior Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer)	March 1, 2012
/s/    Preston Moore Preston Moore	Director and President	March 1, 2012
/s/    Carin M. Barth Carin M. Barth	Director	March 1, 2012
/s/    Charles W. Jenness Charles W. Jenness	Director	March 1, 2012
/s/    John Bryan King John Bryan King	Director	March 1, 2012
/s/    Walter M. Mischer, Jr. Walter M. Mischer, Jr.	Director	March 1, 2012
/s/    Edwin E. Smith Edwin E. Smith	Director	March 1, 2012
/s/    Eugene H. Vaughan Eugene H. Vaughan	Director	March 1, 2012
/s/    David E. Warden David E. Warden	Director	March 1, 2012
/s/    J. Harold Williams J. Harold Williams	Director	March 1, 2012
/s/    Randa Duncan Williams Randa Duncan Williams	Director	March 1, 2012

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ENCORE BANCSHARES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms	F-2
Consolidated Balance Sheets as of December 31, 2011 and 2010	F-5
Consolidated Statements of Operations for the Years Ended December 31, 2011, 2010 and 2009	F-6
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December  31, 2009, 2010 and 2011	F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009	F-8
Notes to Consolidated Financial Statements	F-9

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

Encore Bancshares, Inc.

We have audited the consolidated balance sheets of Encore Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of the Company for the year ended December 31, 2009 were audited by other auditors whose report, dated March 16, 2010, expressed an unqualified opinion on those statements.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Encore Bancshares, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/    Deloitte & Touche LLP

Houston, Texas

March 1, 2012

F-2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

Encore Bancshares, Inc.

We have audited the consolidated statements of operations, changes in shareholders’ equity and cash flows of Encore Bancshares, Inc. (a Texas corporation) and subsidiaries (the Company) for the year ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Encore Bancshares, Inc. and subsidiaries for the year ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

/s/    Grant Thornton LLP

Houston, Texas

March 16, 2010

F-3

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

Encore Bancshares, Inc.

We have audited the internal control over financial reporting of Encore Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Encore Bancshares, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because management’s assessment and our audit were conducted to also meet reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of the Company’s internal control over financial reporting included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Encore Bancshares, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2011, and our report dated March 1, 2012 expressed an unqualified opinion on those consolidated financial statements.

/s/    Deloitte & Touche LLP

Houston, Texas

March 1, 2012

F-4

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share amounts)

	December 31,
	2011			2010
ASSETS
Cash and due from banks	$	13,397		$	13,523
Interest-bearing deposits in banks		114,403			49,478
Federal funds sold and other temporary investments		1,269			1,098
Cash and cash equivalents		129,069			64,099
Securities available-for-sale, at fair value		170,801			251,784
Securities held-to-maturity, at amortized cost		99,630			107,618
Loans held-for-sale, at lower of cost or fair value		1,778			10,915
Loans receivable		1,023,486			920,457
Allowance for loan losses		(17,968	)		(18,639	)
Net loans receivable		1,005,518			901,818
Federal Home Loan Bank of Dallas stock, at cost		9,829			9,610
Other real estate owned		2,090			9,298
Premises and equipment, net		6,537			7,023
Cash surrender value of life insurance policies		16,508			15,935
Goodwill		35,799			35,799
Other intangible assets, net		4,533			4,716
Other assets		40,491			47,882
Total Assets	$	1,522,583		$	1,466,497
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	334,859		$	219,756
Interest-bearing		765,378			830,688
Total deposits		1,100,237			1,050,444
Borrowings and repurchase agreements		218,702			219,777
Junior subordinated debentures		20,619			20,619
Other liabilities		9,636			9,016
Total liabilities		1,349,194			1,299,856
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $1 par value, 20,000 shares authorized; 33 shares in 2011 issued and 34 shares in 2010 issued; aggregate liquidation preference of $33,093 in 2011 and $34,222 in 2010		32,914			29,500
Common stock, $1 par value, 50,000 shares authorized; 11,739 shares in 2011 issued and 11,479 shares in 2010 issued		11,739			11,479
Additional paid-in capital		124,762			122,678
Retained earnings		5,950			4,641
Common stock in treasury, at cost (81 shares in 2011 and 48 shares in 2010)		(854	)		(455	)
Accumulated other comprehensive loss		(1,122	)		(1,202	)
Total shareholders’ equity		173,389			166,641
Total Liabilities and Shareholders’ Equity	$	1,522,583		$	1,466,497

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

F-5

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share amounts)

	Years Ended December 31,
	2011			2010			2009
Interest income:
Loans, including fees	$	55,851		$	61,189		$	68,006
Securities		7,613			6,720			8,518
Federal funds sold and other temporary investments		515			894			702
Total interest income		63,979			68,803			77,226
Interest expense:
Deposits		8,514			14,600			21,013
Borrowings and repurchase agreements		8,485			8,510			8,493
Junior subordinated debentures		1,193			1,194			1,225
Total interest expense		18,192			24,304			30,731
Net interest income		45,787			44,499			46,495
Provision for loan losses		7,252			35,169			16,660
Net interest income after provision for loan losses		38,535			9,330			29,835
Noninterest income:
Trust and investment management fees		20,116			18,970			16,894
Insurance commissions and fees		5,838			5,771			5,477
Net gain (loss) on sale of available-for-sale securities		(96	)		518			2,324
Gain on sale of branches		—			3,682			—
Other		2,805			2,802			2,642
Total noninterest income		28,663			31,743			27,337
Noninterest expense:
Compensation		34,097			34,161			30,163
Occupancy		4,885			5,666			6,050
Equipment		1,045			1,228			1,695
Advertising and promotion		551			617			807
Outside data processing		3,112			3,551			3,173
Professional fees		4,252			4,846			4,017
Intangible amortization		604			635			681
FDIC assessment		2,058			3,680			2,115
Other real estate owned expenses, net		2,011			7,103			1,503
Write down of assets held-for-sale		713			12,084			—
Other		3,921			5,029			4,220
Total noninterest expense		57,249			78,600			54,424
Net income (loss) before income taxes		9,949			(37,527	)		2,748
Income tax expense (benefit)		2,709			(13,297	)		962
Net income (loss)	$	7,240		$	(24,230	)	$	1,786
Income (loss) available to common shareholders (1)	$	1,309		$	(26,454	)	$	(428	)
Income (loss) per common share:
Basic	$	0.11		$	(2.37	)	$	(0.04	)
Diluted		0.11			(2.37	)		(0.04	)
Average common shares outstanding		11,597			11,179			10,381
Diluted average common shares outstanding		11,651			11,179			10,381

(1) Includes $4,102 accelerated amortization of preferred stock discount in 2011.

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

F-6

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2009, 2010 and 2011

(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
				Shares			Amount
Balance at January 1, 2009	$	28,461			10,247		$	10,247		$	115,489		$	31,523		$	(98	)	$	120		$	185,742
Stock-based compensation cost recognized in earnings		—			—			—			1,018			—			—			—			1,018
Issuance of restricted stock		—			297			297			(297	)		—			—			—			—
Forfeitures of restricted stock		—			(17	)		(17	)		17			—			—			—			—
Excess tax expense from stock-based compensation		—			—			—			(143	)		—			—			—			(143	)
Purchase of treasury stock (17 shares)		—			—			—			—			—			(135	)		—			(135	)
Comprehensive income:
Net income		—			—			—			—			1,786			—			—			1,786
Change in net unrealized gain on securities available-for-sale, net of deferred tax expense of $115 and reclassification adjustment		—			—			—			—			—			—			99			99
Total comprehensive income																							1,885
Dividends on preferred stock and amortization of preferred stock discount		515			—			—			—			(2,214	)		—			—			(1,699	)
Balance at December 31, 2009		28,976			10,527			10,527			116,084			31,095			(233	)		219			186,668
Stock-based compensation cost recognized in earnings		—			—			—			1,349			—			—			—			1,349
Issuance of common shares		—			696			696			5,135			—			—			—			5,831
Issuance of restricted stock		—			241			241			(241	)		—			—			—			—
Cancellation and forfeiture of restricted stock		—			(60	)		(60	)		60			—			—			—			—
Exercise of stock options		—			75			75			349			—			—			—			424
Purchase of treasury stock (25 shares)		—			—			—			—			—			(222	)		—			(222	)
Excess tax expense from stock-based compensation		—			—			—			(58	)		—			—			—			(58	)
Comprehensive loss:
Net loss		—			—			—			—			(24,230	)		—			—			(24,230	)
Change in net unrealized gain (loss) on securities available-for-sale, net of deferred tax benefit of $792 and reclassification adjustment		—			—			—			—			—			—			(1,421	)		(1,421	)
Total comprehensive loss																							(25,651	)
Dividends on preferred stock and amortization of preferred stock discount		524			—			—			—			(2,224	)		—			—			(1,700	)
Balance at December 31, 2010		29,500			11,479			11,479			122,678			4,641			(455	)		(1,202	)		166,641
Stock-based compensation cost recognized in earnings		—			—			—			1,618			—			—			—			1,618
Issuance of preferred stock		32,914			—			—			—			—			—			—			32,914
Redemption of preferred stock		(34,000	)		—			—			—			—			—			—			(34,000	)
Issuance of common stock		—			266			266			331			—			—			—			597
Forfeiture of restricted stock		—			(6	)		(6	)		6			—			—			—			—
Purchase of treasury stock (33 shares)		—			—			—			—			—			(399	)		—			(399	)
Excess tax benefit from stock-based compensation		—			—			—			129			—			—			—			129
Comprehensive income:
Net income		—			—			—			—			7,240			—			—			7,240
Change in net unrealized gain (loss) on securities available-for-sale, net of deferred tax expense of $69 and reclassification adjustment		—			—			—			—			—			—			80			80
Total comprehensive income																							7,320
Dividends on preferred stock and amortization of preferred stock discount		4,500			—			—			—			(5,931	)		—			—			(1,431	)
Balance at December 31, 2011	$	32,914			11,739		$	11,739		$	124,762		$	5,950		$	(854	)	$	(1,122	)	$	173,389

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

F-7

Encore Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

	Years Ended December 31,
	2011			2010			2009
Cash flows from operating activities:
Net income (loss)	$	7,240		$	(24,230	)	$	1,786
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		7,252			35,169			16,660
Write down of assets held-for-sale and other real estate owned		2,541			16,914			695
Depreciation and amortization, net		2,997			2,692			2,979
Stock-based compensation		1,618			1,349			1,018
Gain on sale of available-for-sale securities and other assets, net		(135	)		(3,655	)		(2,486	)
Loans originated for sale in the secondary market		(19,338	)		(37,318	)		(48,913	)
Proceeds from sale of mortgage loans		20,539			36,297			48,523
Increase in value of life insurance policies		(573	)		(596	)		(653	)
Deferred income tax provision (benefit)		2,169			(9,979	)		(1,361	)
Other assets, net		5,116			(2,197	)		(6,536	)
Other liabilities, net		429			1,440			(1,059	)
Net cash provided by operating activities		29,855			15,886			10,653
Cash flows from investing activities:
Purchases of available-for-sale securities		(148,902	)		(303,386	)		(258,494	)
Principal collected on available-for-sale securities		73,993			26,733			21,941
Proceeds from sales of available-for-sale securities		155,344			159,612			176,855
Purchases of held-to-maturity securities		(10,050	)		(61,291	)		(62,137	)
Proceeds from prepayments and maturities of held-to-maturity securities		17,980			71,250			41,118
Acquisition of other real estate owned		—			—			(1,917	)
Proceeds from sales of other real estate owned		7,255			11,349			4,796
Net cash paid for sales of branches		—			(225,293	)		—
Cash paid for acquisitions		(188	)		(2,095	)		—
Proceeds from sales of loans		9,636			85,491			—
Net (increase) decrease in loans		(115,009	)		1,880			108,732
Purchases of Federal Home Loan Bank stock, net of redemption		(182	)		(6	)		(10	)
Purchases of premises and equipment		(681	)		(282	)		(297	)
Net cash provided by (used in) investing activities		(10,804	)		(236,038	)		30,587
Cash flows from financing activities:
Net increase in deposits		49,793			89,815			91,039
Proceeds from long term Federal Home Loan Bank of Dallas borrowings		—			52,500			—
Repayment of long term Federal Home Loan Bank of Dallas borrowings		(51	)		(55,142	)		(47	)
Increase (decrease) in repurchase agreements		(1,591	)		1,400			(51,305	)
Proceeds from issuance of common stock, net of purchase of treasury stock		198			202			(135	)
Redemption of preferred stock		(34,000	)		—			—
Proceeds from issuance of preferred stock		32,914			—			—
Preferred dividends paid		(1,473	)		(1,700	)		(1,606	)
Other, net		129			—			(62	)
Net cash provided by financing activities		45,919			87,075			37,884
Net increase (decrease) in cash and cash equivalents		64,970			(133,077	)		79,124
Cash and cash equivalents at beginning of year		64,099			197,176			118,052
Cash and cash equivalents at end of year	$	129,069		$	64,099		$	197,176
Supplementary cash flows information:
Interest paid on deposits and borrowed funds	$	18,215		$	24,259		$	30,848
Income taxes paid		275			196			1,035
Noncash investing and financing activities:
Real estate acquired in satisfaction of loans		1,926			10,500			15,788
Issuance of common stock for acquisition		—			5,831			—
Accrual of contingent consideration		—			—			7,926
Transfer of loans held-for-sale to loans receivable		7,327			—			—
Financing sales of other real estate owned		—			440			—

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

F-8

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows. The accounting principles and the methods of applying them are in conformity with both accounting principles generally accepted in the United States of America (US GAAP) and prevailing practices of the banking industry.

Basis of Presentation

Encore Bancshares, Inc. (on a consolidated basis referred to as the Company), headquartered in Houston, Texas, is a financial holding company. The Company’s business segments are Banking, Wealth Management and Insurance. For further discussion of each business segment, refer to Note T. The Company’s principal subsidiary is Encore Bank, National Association (Encore Bank), which operates as a national banking association. The Company provides wealth management services through Linscomb & Williams, Inc. (Linscomb & Williams), a subsidiary of Encore Bank, and the Trust Division of Encore Bank (Encore Trust). The Company provides property and casualty insurance products through its subsidiary Town & Country Insurance Agency, Inc. (Town & Country).

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Encore Bancshares, Inc., Encore Bank, Linscomb & Williams and Town & Country. All intercompany balances and transactions have been eliminated.

Nature of Operations

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

The Company provides a variety of financial services through twelve private client offices located in the greater Houston area, and five wealth management offices and five insurance offices in Texas. Six private client offices in Florida were sold in 2010. The Company’s product offerings, places of business and service delivery are positioned to best meet the needs of privately-owned businesses, professional firms, investors and affluent individuals.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results could differ from those estimates. Material estimates that are considered particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of loans held-for-sale, the valuation of deferred tax assets, and the valuation of goodwill and other intangible assets.

Cash and Cash Equivalents

Cash and cash equivalents include cash, demand deposits at other financial institutions, federal funds sold and certificates of deposit that have an initial maturity when purchased of three months or less.

F-9

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

Securities

Securities are classified among two categories at the time the securities are purchased: held-to-maturity and available-for-sale. These classifications are reassessed periodically. The Company does not hold trading securities.

Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Debt securities that might not be held until maturity and marketable equity securities are classified as available-for-sale and recorded at fair value, with unrealized gains and losses, after applicable taxes, excluded from earnings and reported in other comprehensive income. Marketable equity securities without a readily determinable market value are classified as available-for-sale and recorded at cost.

The Company recognizes purchase premiums and discounts on securities in interest income using the interest method over the contractual lives, adjusted for actual prepayments. Declines in the fair value of cost basis, held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other than temporary impairment losses, the Company considers, if applicable (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the Company intends to sell the security, and (4) if there no intention to sell the security, whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Loans Held-for-Sale

Loans held-for-sale are carried at the lower of cost or estimated fair value. Fair value of commercial loans held-for-sale is primarily based on third party valuations. Fair value for consumer mortgages held-for-sale is based on commitments on hand from investors or prevailing market prices. Consumer mortgage loan gains and losses on sales are recorded in noninterest income and determined on a specific identification basis. Losses on other loans held-for-sale are recorded in noninterest expense.

Loans Receivable

Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, and any deferred fees or costs on originated loans. The Company accrues interest income on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Discounts and premiums on loans purchased are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for prepayments.

The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. When the interest accrual is discontinued, all unpaid interest is charged off against interest income. Subsequently, the Company recognizes income only to the extent cash payments are received until, in its judgment, the borrower’s ability to make periodic interest and principal payments are reasonably assured, in which case the loan is returned to accrual status.

F-10

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for losses incurred on loans. The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses and is reduced by net charge-offs. All losses are charged to the allowance when the loss actually occurs or when a determination is made that a loss is probable. Consumer loans are generally charged-off when the loan principal and interest is deemed not collectible and no later than 120 days past due unless the loan is well secured and in the process of collection. Recoveries are credited to the allowance at the time of recovery. The Company’s allowance for loan losses consists of two components including a specific reserve on individual loans that are considered impaired and a general component based upon probable but unidentified losses inherent in the loan portfolio.

The Company considers a loan impaired when, based on current information and events, it is probable that it will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The Company generally considers a period of delay in payment to include delinquency up to 90 days. The identification of commercial loans that may be impaired is based on a loan review process whereby the Company maintains an internally classified loan list. Loans on this listing are classified as substandard, doubtful or loss based on probability of repayment, collateral valuation and related collectability. The Company individually assesses and evaluates for impairment certain commercial loans over $100,000 and commercial loans collateralized by real estate over $250,000 as well as certain consumer loans collateralized by real estate. Additionally, loans restructured in a troubled debt restructuring are considered impaired. If an individually evaluated loan is considered impaired, a specific valuation allowance is allocated through an increase to the allowance for loan losses, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of the collateral. Impaired loans or portions thereof, are charged-off when deemed uncollectible.

The general component of the reserve is based on, among other things, the historical loan loss experience for each loan type, the growth, composition and diversification of the loan portfolio, delinquency and loan classification trends, estimated value of the underlying collateral, and the results of recent regulatory examinations. Also, new credit products and policies, economic conditions, concentrations of credit risk, and the experience and abilities of lending personnel are also taken into consideration. In analyzing the adequacy of the allowance for loan losses, the Company utilizes a loan grading system for commercial loans, which include commercial, commercial real estate and real estate construction loans, to determine the risk potential in the portfolio and also consider the results of independent internal credit reviews. Consumer loans, which include residential real estate first and second lien, home equity lines and consumer other loans, are evaluated periodically based on their repayment status.

As a final step to the evaluation process, the Company performs an additional review of the adequacy of the allowance based on the loan portfolio in its entirety. This enables the Company to mitigate, but not eliminate, the imprecision inherent in loan- and segment-level estimates of expected loan losses. This review of the allowance includes judgmental consideration of any adjustments necessary for subjective factors such as economic uncertainties and concentration risks.

There are numerous factors that enter into the evaluation of the allowance for loan losses. Some are quantitative while others require qualitative judgments. Although the Company believes that the processes for determining an appropriate level for the allowance adequately address the various factors that could potentially result in loan losses, the processes and their elements include features that may be susceptible to significant change. Any unfavorable differences between the actual outcome of credit-related events and the Company’s estimates and projections could require an additional provision for loan losses, which would negatively impact

F-11

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

results of operations in future periods. Management believes that, given the procedures followed in estimating incurred losses in the loan portfolio, the various components used in the current estimation processes are appropriate.

Insurance Commissions and Fees

Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later. The Company also receives contingent commissions from insurance companies as additional incentive for achieving specified premium volume goals and/or the loss experience of the insurance placed by it. The Company recognizes contingent commissions from insurance companies when determinable, which is generally when such commissions are received or when data is received from the insurance companies that allows the reasonable estimation of these amounts. Commission adjustments are recorded, including policy cancellations and override commissions, when the adjustments become reasonably estimable, which is generally in the period in which they occur.

Assets Under Administration and Asset Management Fees

The Company does not include assets held in fiduciary or agency capacities in the consolidated balance sheets, since such items are not assets of the Company.

Fees from asset management activities are recorded on the accrual basis, over the period in which the service is provided. Fees are a function of the market value of assets administered and managed, the volume of transactions, and fees for other services rendered, as set forth in the underlying client agreement. This revenue recognition involves the use of estimates and assumptions, including components that are calculated based on estimated asset valuations and transaction volumes.

Off-Balance-Sheet Credit Related Financial Instruments

In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under commercial lines of credit and letters of credit. These financial instruments are recorded when they are funded. The Company maintains a reserve that covers estimated credit losses on these commitments which is generally based on the historical loss factors for each type of loan commitment. This reserve is included in other liabilities, with any increases or decreases to the reserve included in noninterest expense.

Other Real Estate Owned

The Company initially records real estate acquired in settlement of loans at fair value less estimated costs to sell at the date of foreclosure, establishing a new cost basis. Fair value is defined as the amount of cash or cash equivalent value of other consideration that a real estate parcel would yield in a current sale between a willing buyer and a willing seller—that is, in other than a forced or liquidation sale. At the time of foreclosure, any excess of the related loan balance over fair value (less estimated costs to sell) of the property acquired is charged to the allowance for loan losses. Subsequent declines in value below the new cost basis are recorded through the use of a valuation allowance with a charge to noninterest expense. Subsequent increases in value up to the amount of the valuation allowance are included in noninterest expense. Required development costs associated with foreclosed property under construction are capitalized. Operating expenses, net of related income, and gains and losses on disposition are included in noninterest expense. Recognition of gain on sale of real estate is

F-12

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

dependent upon the transaction meeting certain criteria relating to the nature of the property sold and the terms of the sale. Under certain circumstances, the gain, or a portion thereof, is deferred until the necessary criteria are met. At December 31, 2011 and 2010, other real estate owned consisted of real estate acquired in settlement of loans of $2.1 million and $9.3 million.

Federal Home Loan Bank of Dallas Stock

Federal Home Loan Bank of Dallas (FHLB) stock is a restricted investment security, carried at cost, and evaluated for impairment. Both cash and stock dividends received on FHLB stock are reported as income.

Premises and Equipment

The Company records leasehold improvements and equipment at cost, which are depreciated using the straight-line method over the estimated useful lives of the assets ranging from 1.5 to 20 years. Leasehold improvements are depreciated over the shorter of the estimated life of the asset or the lease term including option periods where failure to renew results in an economic penalty. Capitalized costs, including interest, related to the construction of facilities are depreciated over the shorter of the estimated life of the asset or the lease term of the facility. Maintenance and repairs are charged to appropriate expense accounts in the period incurred. Material improvements are capitalized and depreciated over their estimated useful lives. The cost and accumulated depreciation relating to assets retired or otherwise disposed of are eliminated from the accounts, and any resulting gains or losses are credited or charged to income.

The Company records premises and equipment to be disposed of at the lower of the carrying amount or estimated fair value less selling costs. Any loss due to the write down of assets is recognized currently in the consolidated statements of operations.

Bank Owned Life Insurance

Encore Bank has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Goodwill

Goodwill is recorded when the purchase price is higher than the fair value of net assets acquired in a business combination. Goodwill is not amortized, but is tested for impairment at least annually. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of each of the Company’s reporting units compared to its carrying value. If a reporting unit’s carrying value exceeds its fair value, a second test is completed comparing the implied fair value of the reporting unit’s goodwill to its carrying value to measure the amount of impairment.

Other Intangible Assets

Other intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. The Company’s intangible assets

F-13

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

relate to client relationships. Other intangibles are amortized using accelerated methods over their estimated useful lives, ranging from 8 to 20 years. These intangibles are reviewed for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable.

Income Taxes

Deferred income tax assets and liabilities are determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

Encore Bank is included in the Company’s consolidated federal income tax return. Under a tax sharing policy, federal income tax expense is allocated to individual subsidiaries as if the tax was calculated on a separate return basis. Federal income tax benefits are allocated to individual subsidiaries to the extent the deductions are utilized in the consolidated return.

Stock-Based Compensation

Compensation expense for all stock-based payments is measured and recognized at fair value. Compensation expense for restricted stock is based on the market price of the Company’s common stock on the date of grant and is recognized ratably over the vesting period.

Comprehensive Income

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

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

	2011			2010			2009
Unrealized holding gains (losses) on available-for-sale securities arising during period	$	245		$	(2,731	)	$	(2,110	)
Reclassification adjustment for gains (losses) included in income		(96	)		518			2,324
Net pre-tax gain (loss) recognized in other comprehensive income		149			(2,213	)		214
Tax (expense) benefit		(69	)		792			(115	)
Net-of-tax impact on comprehensive income (loss)	$	80		$	(1,421	)	$	99

Fair Values of Financial Instruments

The Company estimates the fair value of financial instruments based on the fair value hierarchy. Fair value estimates involve uncertainties and matters of judgment regarding interest rates, credit risk, prepayments, and

F-14

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

other factors, especially in the absence of bench marks for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. For more information on the fair value of our financial instruments, see Note Q – Fair Value of Assets and Liabilities.

Basic and Diluted Income (Loss) Per Common Share

Basic income (loss) per common share is calculated using income (loss) available to common shareholders (income (loss) after deducting preferred dividends) divided by the weighted average of common shares outstanding during the period, including nonvested restricted stock. Diluted income per common share includes the dilutive effect of stock options granted, using the treasury stock method.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and the amount or range of loss can be reasonably estimated.

Adoption of Updates to the Financial Accounting Standards Board (FASB) Codification

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

Pending Accounting Pronouncements

FASB ASU No. 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in ASU 2011-03 remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 was effective for the Company on January 1, 2012 and is not expected to have a significant impact on its financial statements.

FASB ASU No. 2011-04, “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 was effective for the Company on January 1, 2012 and is not expected to have a significant impact on its financial statements.

FASB ASU No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” Under ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of

F-15

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 was effective for the Company on January 1, 2012 and will be implemented in 2012 financial statements.

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

Sale of Florida Operations

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

On December 31, 2010, NBSWF assumed approximately $181 million of deposits associated with four private client offices located in Naples, Ft. Myers and Sun City Center, Florida. NBSWF also purchased approximately $61.5 million of loans as well as other assets, including premises and equipment. The Company recorded a $3.5 million write down of premises and equipment, a charge-off of $1.3 million related to the loans and a gain on sale of branches of $2.6 million.

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

In October 2010, Encore Bank sold $25.3 million of Florida loans in a bulk sale. These loans were classified as held-for-sale as of September 30, 2010, and were marked to market in the third quarter of 2010, resulting in a charge of $8.5 million, primarily to the allowance for loan losses. This pool of loans included $19.8 million of nonaccrual loans.

F-16

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

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

Securities available-for-sale and held-to-maturity consisted of the following (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2011
Available-for-sale:
U.S. Government securities	$	107,665	$	355	$	—		$	108,020
Securities of U.S. states and political subdivisions		2,096		87		—			2,183
Mortgage-backed securities		41,664		533		(18	)		42,179
Corporate debt securities		13,967		—		(3,029	)		10,938
Other securities		4,481		140		—			4,621
Total		169,873		1,115		(3,047	)		167,941
Marketable equity securities		2,592		268		—			2,860
Total available-for-sale securities	$	172,465	$	1,383	$	(3,047	)	$	170,801
Held-to-maturity:
U.S. Government securities	$	5,000	$	44	$	—		$	5,044
Securities of U.S. states and political subdivisions		21,955		2,258		(6	)		24,207
Mortgage-backed securities		50,642		1,388		(5	)		52,025
Corporate debt securities		12,330		950		—			13,280
Other securities		9,703		198		—			9,901
Total held-to-maturity securities	$	99,630	$	4,838	$	(11	)	$	104,457
December 31, 2010
Available-for-sale:
U.S. Government securities	$	164,226	$	231	$	(1,802	)	$	162,655
Securities of U.S. states and political subdivisions		7,950		—		(572	)		7,378
Mortgage-backed securities		59,377		1,015		(248	)		60,144
Corporate debt securities		13,966		—		(546	)		13,420
Other securities		5,529		18		(146	)		5,401
Total		251,048		1,264		(3,314	)		248,998
Marketable equity securities		2,531		255		—			2,786
Total available-for-sale securities	$	253,579	$	1,519	$	(3,314	)	$	251,784
Held-to-maturity:
U.S. Government securities	$	5,000	$	—	$	—		$	5,000
Securities of U.S. states and political subdivisions		21,992		98		(519	)		21,571
Mortgage-backed securities		58,286		706		(5	)		58,987
Corporate debt securities		17,212		1,840		—			19,052
Other securities		5,128		—		—			5,128
Total held-to-maturity securities	$	107,618	$	2,644	$	(524	)	$	109,738

F-17

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

The Company owns certain debt securities with unrealized losses as of December 31, 2011 and 2010. These securities, with unrealized losses segregated by length of impairment at year end, were as follows (dollars in thousands):

Description of Securities	Fair Value		Unrealized Losses
December 31, 2011
Less than 12 months
Available-for-sale:
Corporate debt securities	$	5,555	$	(1,412	)
Held-to-maturity:
Securities of U.S. states and political subdivisions	$	1,009	$	(6	)
More than 12 months
Available-for-sale:
Mortgage-backed securities	$	2,170	$	(18	)
Corporate debt securities		5,383		(1,617	)
Total available-for-sale securities	$	7,553	$	(1,635	)
Held-to-maturity:
Mortgage-backed securities	$	791	$	(5	)
December 31, 2010
Less than 12 months
Available-for-sale:
U.S. Government securities	$	42,840	$	(1,802	)
Securities of U.S. states and political subdivisions		7,378		(572	)
Mortgage-backed securities		13,517		(248	)
Corporate debt securities		13,420		(546	)
Other securities		4,818		(146	)
Total available-for-sale securities	$	81,973	$	(3,314	)
Held-to-maturity:
Securities of U.S. states and political subdivisions	$	8,898	$	(519	)
Mortgage–backed securities		279		(1	)
Total held-to-maturity securities	$	9,177	$	(520	)
More than 12 months
Held-to-maturity:
Mortgage-backed securities	$	540	$	(4	)

At December 31, 2011, the Company had two corporate debt securities that had been in an unrealized loss position for greater than 12 months. As of December 31, 2011, the Company’s corporate debt securities were all rated BBB or better. Unrealized losses on debt securities were primarily due to changes in market interest rates and not due to credit quality. The Company expects to recover the entire amortized cost of these securities since it does not intend to sell the securities. Additionally, it is not more likely than not that the Company will be required to sell these securities before recovery of its cost basis. Accordingly, as of December 31, 2011 and 2010, the Company believes the impairments detailed in the table are temporary and no impairment loss has been recorded in the accompanying consolidated statements of operations.

F-18

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

The following table (dollars in thousands) shows the amortized cost and fair value of securities by contractual maturity at December 31, 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	$	90,289	$	90,523	$	327	$	336
Over one year through five years		10,005		10,035		9,229		9,986
After five years through ten years		18,967		15,952		12,824		13,160
Over ten years		8,703		9,003		26,608		28,950
Total		127,964		125,513		48,988		52,432
Mortgage-backed, marketable equity and other securities		44,501		45,288		50,642		52,025
Total securities	$	172,465	$	170,801	$	99,630	$	104,457

At December 31, 2011 and 2010, securities with a carrying value of $74.5 million and $76.9 million, respectively, were pledged as collateral for repurchase agreements, public funds, trust deposits, and for other purposes, as required or permitted by law.

Gross realized gains on sales of available-for-sale securities were $0.8 million, $0.6 million and $2.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. Gross realized losses on sales of available-for-sale securities were $0.9 million, $0.1 million and $0.2 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Mortgage-backed securities previously classified as available-for-sale were transferred to held-to-maturity during 2004. The amortized cost and fair value at the time of transfer were $127 million and $129 million. The securities were transferred at fair value and the unrealized gain net of tax was recorded in accumulated other comprehensive income. Amortization of unrealized gain was zero, $0.1 million and $0.4 million for the years ended December 31, 2011, 2010 and 2009, respectively.

F-19

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

NOTE C – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans at December 31 consisted of the following (dollars in thousands):

	2011		2010
Commercial:
Commercial	$	214,575	$	147,090
Commercial real estate		210,437		166,043
Real estate construction		59,589		46,326
Total commercial		484,601		359,459
Consumer:
Residential real estate first lien		202,968		205,531
Residential real estate second lien		252,825		269,727
Home equity lines		55,191		60,609
Consumer other		27,901		25,131
Total consumer		538,885		560,998
Loans receivable		1,023,486		920,457
Loans held-for-sale		1,778		10,915
Total loans	$	1,025,264	$	931,372

Included in loans receivable was $1.9 million and $2.5 million of net deferred loan origination costs and unamortized premium and discount at December 31, 2011 and 2010, respectively. Accrued interest receivable on loans was $3.7 million and $3.3 million at December 31, 2011 and 2010. Consumer other loans include client overdrafts of $0.3 million as of December 31, 2011 and 2010.

The loan portfolio consists of various types of loans with approximately 88.2% outstanding to borrowers located in Texas.

As of December 31, 2011, there were no concentrations of loans to any one type of industry exceeding 10% of total loans.

Loans held-for-sale were valued at the lower of cost or estimated fair value. During 2010, the Company recorded a write down of $8.6 million, included in write down of assets held-for-sale, related to loans sold during the year or loans held-for-sale at December 31, 2010.

F-20

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

Allowance for Loan Losses

The allowance for loan losses and recorded investment in loans by loan type for the years ended December 31, 2010 and 2011 was as follows (dollars in thousands):

	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:
Balance January 1, 2010	$	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
Balance December 31, 2010		4,150			2,808			1,486			3,355			4,713			1,835			292			18,639
Charge-offs		(321	)		(2,693	)		(205	)		(1,140	)		(2,802	)		(1,992	)		(165	)		(9,318	)
Recoveries		140			163			151			389			318			91			143			1,395
Provision		(1,081	)		3,275			487			731			2,055			1,838			(53	)		7,252
Balance December 31, 2011	$	2,888		$	3,553		$	1,919		$	3,335		$	4,284		$	1,772		$	217		$	17,968
Ending balance individually evaluated for impairment: December 31, 2010	$	189		$	—		$	—		$	2		$	372		$	—		$	—		$	563
December 31, 2011	$	5		$	161		$	43		$	—		$	—		$	—		$	—		$	209
Loans (1):
December 31, 2010
Individually evaluated for impairment	$	740		$	4,154		$	3,411		$	6,500		$	372		$	—		$	—		$	15,177
Collectively evaluated for impairment		146,350			161,889			42,915			199,031			269,355			60,609			25,131			905,280
Total loans evaluated for impairment	$	147,090		$	166,043		$	46,326		$	205,531		$	269,727		$	60,609		$	25,131		$	920,457
December 31, 2011
Individually evaluated for impairment	$	4,178		$	2,223		$	2,839		$	1,949		$	—		$	—		$	—		$	11,189
Collectively evaluated for impairment		210,397			208,214			56,750			201,019			252,825			55,191			27,901			1,012,297
Total loans evaluated for impairment	$	214,575		$	210,437		$	59,589		$	202,968		$	252,825		$	55,191		$	27,901		$	1,023,486

(1) Excludes loans held-for-sale.

F-21

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

Activity in the allowance for loan losses for 2009 is as follows (dollars in thousands):

	2009
Balance at beginning of year	$	25,105
Loans charged-off		(18,652	)
Recoveries of loans previously charged-off		3,388
Provision for loan losses		16,660
Balance at December 31	$	26,501

The following is a summary of information pertaining to impaired, nonaccrual and restructured loans at December 31 (dollars in thousands):

	2011		2010		2009
Impaired loans on nonaccrual without a valuation allowance	$	3,980	$	14,109	$	20,032
Impaired loans on nonaccrual with a valuation allowance		3,804		561		14,591
Impaired loans still accruing with a valuation allowance		3,405		507		530
Total impaired loans (1)	$	11,189	$	15,177	$	35,153
Valuation allowance related to impaired loans	$	209	$	563	$	6,264
Total nonaccrual loans	$	10,789	$	26,477	$	35,988
Total accruing loans past due 90 days or more	$	—	$	313	$	1,489
Restructured loans still accruing	$	4,122	$	804	$	530
Average investment in impaired loans for the years ended December 31	$	14,388	$	18,179	$	34,888

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

Interest income recognized after a loan is impaired is not material. No additional funds are committed to be advanced in connection with impaired loans.

The age analysis of loans is as follows (dollars in thousands):

	Loans Past Due and Still Accruing
	30-59 Days		60-89 Days		90 Days or More		Total		Nonaccrual Loans (1)		Current Loans		Total Loans (1)
December 31, 2011
Commercial	$	35	$	11	$	—	$	46	$	774	$	213,755	$	214,575
Commercial real estate		—		—		—		—		2,223		208,214		210,437
Real estate construction		—		—		—		—		2,839		56,750		59,589
Total commercial		35		11		—		46		5,836		478,719		484,601
Residential real estate first lien		—		736		—		736		4,778		197,454		202,968
Residential real estate second lien		818		105		—		923		175		251,727		252,825
Home equity lines		301		—		—		301		—		54,890		55,191
Consumer other		103		60		—		163		—		27,738		27,901
Total consumer		1,222		901		—		2,123		4,953		531,809		538,885
Total	$	1,257	$	912	$	—	$	2,169	$	10,789	$	1,010,528	$	1,023,486

F-22

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

	Loans Past Due and Still Accruing
	30-59 Days		60-89 Days		90 Days or More		Total		Nonaccrual Loans (1)		Current Loans		Total Loans (1)
December 31, 2010
Commercial	$	7	$	338	$	313	$	658	$	741	$	145,691	$	147,090
Commercial real estate		239		1,417		—		1,656		4,484		159,903		166,043
Real estate construction		—		—		—		—		3,554		42,772		46,326
Total commercial		246		1,755		313		2,314		8,779		348,366		359,459
Residential real estate first lien		311		347		—		658		10,320		194,553		205,531
Residential real estate second lien		671		192		—		863		707		268,157		269,727
Home equity lines		306		149		—		455		—		60,154		60,609
Consumer other		742		45		—		787		—		24,344		25,131
Total consumer		2,030		733		—		2,763		11,027		547,208		560,998
Total	$	2,276	$	2,488	$	313	$	5,077	$	19,806	$	895,574	$	920,457

(1) Excludes loans held-for-sale

The following table presents additional information regarding individually evaluated impaired loans (dollars in thousands):

	December 31, 2011						December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial	$	773	$	838	$	—	$	551	$	574	$	—
Commercial real estate		1,258		1,523		—		4,154		5,321		—
Real estate construction		—		—		—		3,411		6,024		—
Residential real estate first lien		1,949		3,935		—		5,993		7,393		—
With an allowance recorded:
Commercial	$	3,405	$	3,405	$	5	$	189	$	189	$	189
Commercial real estate		965		1,244		161		—		—		—
Real estate construction		2,839		4,861		43		—		—		—
Residential real estate first lien		—		—		—		507		507		2
Residential real estate second lien		—		—		—		372		372		372
Total:
Commercial	$	9,240	$	11,871	$	209	$	8,305	$	12,108	$	189
Consumer		1,949		3,935		—		6,872		8,272		374
	$	11,189	$	15,806	$	209	$	15,177	$	20,380	$	563

F-23

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

Internally assigned risk grades for commercial loans are as follows:

Pass

While there is no formal regulatory definition for Pass credits, credits not otherwise rated Watch, Special Mention, Substandard, Doubtful or Loss are considered to be Pass credits. The Company utilizes a granular approach in assigning Pass risk grades to account for, among other things, the financial strength and capacity of the borrower and/or guarantors, and the nature, quality, liquidity and quantity of the collateral held.

Watch

Watch is not a recognized regulatory category, but it is extensively used by banks in their credit risk rating activities. An example of a Watch credit would be an asset in which all of the financial trends and indicators of the borrower, and the historical and projected financial performance, is acceptable, but the borrower may be in an industry or a geographical locale that is under some degree of stress. A Watch credit is reviewed more closely than a Pass credit, but is otherwise treated similarly to a Pass credit.

Special Mention

A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard

A Substandard asset is inadequately protected by the current sound worth and capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Substandard loans are placed on nonaccrual when management doubts a borrower’s ability to meet payment obligations, which typically occurs when principal or interest payments are more than 90 days past due.

Doubtful

An asset classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss

Assets classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

F-24

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

The credit risk profile of commercial loans aggregated by internally assigned grade was as follows (dollars in thousands):

	December 31, 2011						December 31, 2010
	Commercial		Commercial Real Estate		Real Estate Construction		Commercial		Commercial Real Estate		Real Estate Construction
Grade:
Pass	$	202,161	$	188,448	$	52,151	$	130,030	$	134,726	$	30,454
Watch		4,656		10,514		732		5,074		10,464		6,154
Special Mention		821		4,851		1,282		3,309		4,475		1,100
Substandard accruing		6,163		4,401		2,585		7,936		11,894		5,064
Substandard nonaccrual		774		2,223		2,839		552		4,484		3,554
Doubtful nonaccrual		—		—		—		189		—		—
Total	$	214,575	$	210,437	$	59,589	$	147,090	$	166,043	$	46,326

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

	Residential Real Estate First Lien		Residential Real Estate Second Lien		Home Equity Lines		Consumer Other
December 31, 2011
Performing	$	198,190	$	252,650	$	55,191	$	27,901
Nonaccrual		4,778		175		—		—
Total	$	202,968	$	252,825	$	55,191	$	27,901
December 31, 2010
Performing	$	195,211	$	269,020	$	60,609	$	25,131
Nonaccrual		10,320		707		—		—
Total	$	205,531	$	269,727	$	60,609	$	25,131

Troubled Debt Restructurings

As discussed in Note A, the Company adopted ASU 2011-02 as of July 1, 2011. As such, the Company reassessed all loan modifications occurring since January 1, 2011, for identification as troubled debt restructurings. Troubled debt restructurings for the year ended December 31, 2011, are set forth in the following table (dollars in thousands):

	Whole Number of Contracts		Amount
Commercial		2	$	3,467
Commercial real estate		1		274
Residential real estate first lien		1		473
Residential real estate second lien		1		189
Consumer other		1		102

F-25

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

The Company’s troubled debt restructurings were primarily the result of extending the maturity date of the loans. The Company did not forgive any principal or interest on any restructured loan. The restructured commercial and consumer other loans were accruing at the time of the modification and at December 31, 2011. All of the other modifications were on nonaccrual at the time of the modifications and at December 31, 2011. The modifications did not have any significant impact on the Company’s determination of the allowance for loan losses. As of December 31, 2011, there have been no defaults on any loans that were modified as troubled debt restructurings during the preceding twelve months and $0.6 million of loans in the preceding table were paid in full during 2011.

NOTE D – PREMISES AND EQUIPMENT

Premises and equipment at December 31 was comprised of the following (dollars in thousands):

	Life in Years	2011			2010
Furniture and equipment	3-10 years	$	7,020		$	6,690
Leasehold improvements	1.5-20 years		10,834			10,793
Construction in progress—facilities			260			—
			18,114			17,483
Accumulated depreciation			(11,577	)		(10,460	)
		$	6,537		$	7,023

A write down, included in write down of assets held-for-sale, of $3.5 million was recorded in 2010 related to premises and equipment sold in Florida.

During 2005, the Company moved corporate headquarters and entered into a sublease, classified as an operating lease from February 2007 and ending December 2014. There is no option to renew the sublease at the end of the lease term. Certain other offices and branch locations are operated as leased premises. The Company has the option to renew certain of these leases upon the completion of the non-cancelable lease term. The cost of lease extensions is not included below. Rental expense under operating lease agreements in 2011, 2010 and 2009 was approximately $2.5 million, $2.7 million and $2.8 million. Lease cost is recognized on a straight-line basis over the lease term. Future minimum rental commitments associated with these leases are as follows (dollars in thousands):

Years Ended December 31,	Amount
2012	$	2,486
2013		2,389
2014		2,265
2015		1,259
2016		1,050
Thereafter		4,368
	$	13,817

NOTE E – GOODWILL AND OTHER INTANGIBLE ASSETS

The Company has three reporting units with goodwill, which are Town & Country (insurance) in the amount of $3.1 million, Encore Trust with $11.0 million and Linscomb & Williams with $21.7 million. There were no changes in goodwill in 2010 and 2011. During the year ended December 31, 2009, goodwill increased $7.9

F-26

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

million due to the accrual of contingent consideration for Linscomb & Williams. In the first quarter of 2010, $2.1 million cash was paid and 696,000 shares of common stock were issued to settle this accrued consideration.

Each reporting unit is tested for impairment at least annually. The fair value of each of the reporting units is established using appropriate weighted market and income approaches. Impairment tests indicate that the Company passed step one of the impairment test and therefore, step two and an impairment charge were not required.

In 2011, Town & Country purchased customer accounts of an insurance company for $0.4 million. Other intangible assets as of December 31, 2011 and 2010 are detailed in the following table (dollars in thousands):

	2011							2010
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortizing intangible assets:
Client relationships	$	9,840	$	(5,307	)	$	4,533	$	9,419	$	(4,703	)	$	4,716

Estimated amortization expense for the following years ended December 31 is as follows (dollars in thousands):

2012	$	596
2013		549
2014		508
2015		471
2016		437

NOTE F – DEPOSITS

Interest-bearing deposits at December 31 were as follows (dollars in thousands):

	2011		2010
Interest checking	$	183,339	$	173,839
Money market and savings		238,579		278,507
Time deposits less than $100,000		102,207		117,974
Time deposits $100,000 and greater		224,210		239,129
Brokered deposits		17,043		21,239
Total interest-bearing deposits	$	765,378	$	830,688

At December 31, 2011, the scheduled maturities of time and brokered deposits are as follows (dollars in thousands):

2012	$	222,046
2013		42,925
2014		26,642
2015		42,298
2016		9,549
Thereafter		—
	$	343,460

F-27

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

Interest expense by type of deposit for the years ended December 31 is as follows (dollars in thousands):

	2011		2010		2009
Interest checking	$	280	$	752	$	888
Money market and savings		870		2,232		2,976
Time deposits		6,826		11,002		16,370
Brokered deposits		538		614		779
	$	8,514	$	14,600	$	21,013

Encore Bank is required to maintain average cash balances on hand or with the Federal Reserve Bank. At December 31, 2011 and 2010, these reserve balances amounted to $4.1 million and $3.5 million.

NOTE G – BORROWINGS AND REPURCHASE AGREEMENTS

Subject to certain limitations, the Company may borrow funds from the FHLB in the form of advances. Credit availability from the FHLB is based on the Company’s financial and operating condition and the amount of collateral available to the FHLB. These borrowings were collateralized by a blanket lien on mortgage-related assets. Following is a summary of outstanding borrowings from the FHLB at December 31, 2011 (dollars in thousands):

Amount		Interest Rate Range			Maturity Date Range	Call Date
	$ 59,500		3.54 – 4.37	%	01/11/13 – 11/26/13		None
	29,117		2.43 – 2.75		01/08/14 – 05/19/14		None
	22,668		2.84 – 4.79		01/08/15 – 08/03/15		None
	1,934		3.54		01/08/16		None
	10,000		4.14		12/07/16		06/07/12
	10,000		4.23		04/05/17		04/05/12
	15,000		4.17		04/05/17		04/05/12
	10,000		4.52		05/09/17		05/09/12
	50,000		4.15		08/01/17		05/02/12
	$ 208,219

Each advance is payable per terms of the agreement. The Company is eligible to borrow up to an additional $228 million at December 31, 2011. There can be significant penalties for the early pay-off of FHLB borrowings. During 2010, the Company prepaid $52.5 million of fixed-rate FHLB advances with a weighted average interest rate of 3.78% and a weighted average remaining term to maturity of 1.72 years. The prepaid FHLB advances were replaced with $52.5 million of fixed-rate FHLB advances, with a weighted average contractual interest rate of 2.73% and an average term of 4.47 years. The Company paid a $2.6 million penalty to the FHLB as a result of prepaying the FHLB advances. The prepayment penalty was deferred as an adjustment to the carrying value of the new advances as the new FHLB advances were not substantially different from the prepaid FHLB advances. The present value of the cash flows under the terms of the new FHLB advances was not more than 10% different from the present value of the cash flows under the terms of the prepaid FHLB advances (including the prepayment penalty) and there were no embedded conversion options in the prepaid FHLB advances or in the new FHLB advances. The prepayment penalty effectively increased the interest rate on the new advances 121 basis points at the time of the transaction. The deferred prepayment penalty will be recognized in interest expense

F-28

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

over the life of the new FHLB advances. The benefit of prepaying the advances was an immediate decrease in interest expense, and a decrease in interest rate sensitivity, as the maturities of the refinanced advances were extended at a lower rate. There were no early debt extinguishments related to these borrowings during 2011 and 2009.

The Company has also borrowed funds from clients in the form of repurchase agreements. As of December 31, 2011, $10.5 million was outstanding at an interest rate of 0.01% maturing January 3, 2012. During 2011, the maximum amount of repurchase agreements outstanding at any month end and the daily average amount outstanding were $18.5 million and $13.4 million, respectively.

NOTE H – INCOME TAXES

Allocation of federal and state income taxes between current and deferred portions for the years ended December 31 is as follows (dollars in thousands):

	2011		2010			2009
Current tax provision (benefit)
Federal	$	118	$	(3,374	)	$	1,940
State		422		56			379
		540		(3,318	)		2,319
Deferred tax provision (benefit)
Federal		1,600		(9,764	)		(1,319	)
State		569		(215	)		(38	)
		2,169		(9,979	)		(1,357	)
	$	2,709	$	(13,297	)	$	962

The reasons for the differences between the amounts computed by applying the statutory federal income tax rate of 35% in 2011 and 34% in 2010 and 2009 and the reported income tax expense (benefit) for the years ended December 31 are summarized below (dollars in thousands):

	2011			2010			2009
Income tax expense (benefit) computed at federal statutory rate	$	3,482		$	(12,759	)	$	934
State income tax expense (benefit), net of federal effect		495			(105	)		234
Tax exempt interest income		(333	)		(386	)		(400	)
Increase in cash surrender value		(200	)		(203	)		(222	)
Adjustment to prior period		(383	)		—			263
Tax benefit related to prior acquisition		(448	)		—			—
Other		96			156			153
Income tax expense (benefit), as reported	$	2,709		$	(13,297	)	$	962

F-29

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

The components of net deferred tax assets and liabilities included in other assets are as follows at December 31 (dollars in thousands):

	2011		2010
Deferred tax assets:
Allowance for loan losses	$	6,560	$	10,146
Net operating loss		9,898		8,046
Premises and equipment		1,225		815
Deferred revenues		405		442
Stock-based compensation		797		1,171
Nonaccrual interest		56		556
Net unrealized loss on available-for-sale securities		542		612
Investment in real estate reserves		756		868
Other		880		690
Total deferred tax assets		21,119		23,346
Deferred tax liabilities:
Other intangible assets		754		850
Gain on sale of assets		152		227
Federal Home Loan Bank of Dallas stock		160		158
Other		178		—
Total deferred tax liabilities		1,244		1,235
Net deferred tax assets	$	19,875	$	22,111

At December 31, 2011, the Company reported a net deferred tax asset of $19.9 million. On an ongoing basis, management evaluates the deferred tax asset to determine if a valuation allowance is required. Assessing the need for a valuation allowance requires that management evaluate all available evidence, both negative and positive, to determine whether a valuation allowance for the deferred tax asset is needed. Based on analysis of the evidence, the Company determined that no valuation allowance was required to be recorded against the deferred tax asset at December 31, 2011.

The Company is in a 3-year cumulative loss position at December 31, 2011. This was considered to be negative evidence. The cumulative losses were attributable primarily to significantly higher credit losses associated with operations in Florida and losses incurred as a result of the sale of those operations in 2010. When negative evidence exists (the 3-year cumulative pre-tax loss), more positive evidence is necessary. A valuation allowance is needed when, based on the evidence, it is more likely than not (more than 50%) that some portion or all of a deferred tax asset will not be realized.

The Company was greatly affected by the economic recession and continuing slow economic growth that began in late 2008. A substantial portion of the losses incurred over the last three years was the result of the recession’s effect on property values and resulting loan losses, primarily in Florida. The sale of Florida operations was completed on December 31, 2010. Besides the negative evidence of 3-year loss history, the Company considered the following positive evidence.

The Company has had a history of steady earnings through 2007 before the recession began. The high level of loan losses incurred during 2010 and 2009 has substantially declined beginning in 2011 as the sale of Florida operations was completed as of December 31, 2010. The Company sold a significant portion of Florida loans

F-30

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

which have accounted for most of the losses. The Company has invested in an expanded Texas commercial lending capability with the addition of several new lenders that it believes will enable the Company to increase net interest income. Encore Bancshares and Encore Bank continue to be well capitalized and can carry forward approximately $1.8 million of the net operating loss for 20 years and the remaining $8.1 million for 19 years. The Company forecasts that it will generate sufficient taxable income to utilize the remaining net operating loss. Since forecasting earnings is subjective, the Company performed a sensitivity analysis to determine the impact on pre-tax income over the forecast period if the projections were short by various percentages each year. Based on this analysis, the deferred tax asset and the net operating loss would be fully recovered well before expiration.

The realization of the deferred tax asset can be subjective and could be significantly reduced in the near term if estimates of future taxable income are significantly lower than currently forecasted.

The Company had no penalties or interest accrued at December 31, 2011. The effective tax rate for the year ended December 31, 2011, was 27.2% as compared to 35.4% in 2010.

The Company had no unrecognized tax benefits for the years ended December 31, 2011, 2010 and 2009. It has elected to recognize both interest and penalties as a component of income tax expense.

The Company files income tax returns in U.S. federal and various state and local taxing jurisdictions. In general, it is no longer subject to income tax examinations for years prior to 2008.

F-31

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

NOTE I – REGULATORY MATTERS AND DIVIDENDS FROM SUBSIDIARIES

Regulatory Capital Compliance

Encore Bancshares and Encore Bank are subject to various regulatory capital adequacy requirements administered by the Board of Governors of the Federal Reserve System (Federal Reserve) and the Office of the Comptroller of the Currency (OCC). Actual and minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as of December 31, 2011 and 2010, are set forth in the following table (dollars in thousands):

	Actual					For Capital Adequacy Purposes					To Be Categorized as  Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2011
Tier 1 capital (to average assets)
Tier 1 (leverage)
Encore Bancshares, Inc.	$	140,203		9.73	%	$	57,660		4.00	%		N/A		N/A
Encore Bank, N.A.		132,088		9.17			57,639		4.00		$	72,048		5.00	%
Tier 1 capital (to risk-based assets)
Encore Bancshares, Inc.	$	140,203		13.22	%	$	42,416		4.00	%		N/A		N/A
Encore Bank, N.A.		132,088		12.48			42,341		4.00		$	63,511		6.00	%
Total capital (to risk-based assets)
Encore Bancshares, Inc.	$	153,513		14.48	%	$	84,833		8.00	%		N/A		N/A
Encore Bank, N.A.		145,398		13.74			84,682		8.00		$	105,852		10.00	%
December 31, 2010
Tier 1 capital (to average assets)
Tier 1 (leverage)
Encore Bancshares, Inc.	$	129,485		8.10	%	$	63,972		4.00	%		N/A		N/A
Encore Bank, N.A.		118,603		7.41			63,984		4.00		$	79,980		5.00	%
Tier 1 capital (to risk-based assets)
Encore Bancshares, Inc.	$	129,485		12.83	%	$	40,362		4.00	%		N/A		N/A
Encore Bank, N.A.		118,603		11.78			40,277		4.00		$	60,415		6.00	%
Total capital (to risk-based assets)
Encore Bancshares, Inc.	$	142,185		14.09	%	$	80,724		8.00	%		N/A		N/A
Encore Bank, N.A.		131,277		13.04			80,553		8.00		$	100,692		10.00	%

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 capital, and total risk-based capital ratios as set forth in the above table.

Dividend Policy

Federal law places limitations on the amount that national banks may pay in dividends, which Encore Bank must adhere to when paying dividends to Encore Bancshares. Encore Bank’s current practice is not to pay any dividends, except to cover expenses of Encore Bancshares. If the Company fails to pay dividends on Series B Preferred Stock or interest on junior subordinated debentures, it will be prohibited from paying dividends on common stock. See Note K for further restrictions on dividends.

F-32

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

NOTE J – STOCK-BASED COMPENSATION

Shareholders approved a stock awards and incentive plan in 2008 (2008 Stock Awards and Incentive Plan), an amendment to that plan in 2011, and a stock incentive plan in 2000 that has expired (2000 Stock Incentive Plan) which authorize the issuance of up to 2.4 million shares of common stock under “incentive stock” and “nonqualified stock” options, stock appreciation rights, restricted stock awards, performance awards and phantom stock awards. The general terms of awards under the 2008 Stock Awards and Incentive Plan shall be specified by the Compensation Committee of the Board of Directors at the date of grant. At December 31, 2011, all options granted under the 2000 Stock Incentive Plan have a maximum term of 10 years, and vest on the third anniversary of the grant date. No options have been granted under the 2008 Stock Awards and Incentive Plan.

Stock Options

The fair value of options granted is estimated on the date of grant using the Black-Scholes option-pricing model. This model requires input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but not considered by the model. No options were granted in 2011, 2010 or 2009.

There was no compensation expense associated with employee stock options recorded in the accompanying consolidated statements of operations during 2011, 2010 or 2009.

A summary of employee option activity as of December 31, 2011, and changes during the year then ended is as follows (amounts in thousands, except per share amounts):

Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2011		575		$	10.77
Exercised		(92	)		8.74
Forfeited		(9	)		12.00
Outstanding at December 31, 2011		474		$	11.14		1.33 years	$	1,172
Vested		474		$	11.14		1.33 years	$	1,172
Exercisable at December 31, 2011		474		$	11.14		1.33 years	$	1,172

In addition, the Company has issued stock options under the 2000 Stock Incentive Plan to non-employees for various services rendered. The cost of these services was measured based on the estimated fair value of the award at date of grant. The estimated cost was recognized over the period the service was required to be rendered.

F-33

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

A summary of non-employee option activity as of December 31, 2011, and changes during the year then ended is as follows (amounts in thousands, except per share amounts):

Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2011		244		$	8.33
Exercised		(211	)		8.05
Forfeited		(15	)		8.00
Outstanding at December 31, 2011		18		$	12.00		1.70 years	$	27
Vested		18		$	12.00		1.70 years	$	27
Exercisable at December 31, 2011		18		$	12.00		1.70 years	$	27

The Company recognized no compensation cost for non-employee stock options, net of forfeitures, in the accompanying consolidated statements of operations in 2011, 2010 and 2009. The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $1.0 million, $0.3 million and $0. Cash received from option exercises for 2011 and 2010 was $0.6 million and $0.4 million, respectively. There was no cash received from option exercises during 2009.

Share Awards

The Company also grants shares of restricted stock pursuant to the 2008 Stock Awards and Incentive Plan. These shares of restricted stock vest over a period of one to five years. The Company accounts for restricted stock grants by recording the fair value of the grant as compensation expense over the vesting period. Compensation expense related to restricted stock was $1.6 million, $1.3 million and $1.0 million for the years ended December 31, 2011, 2010 and 2009.

A summary of the status of nonvested shares of restricted stock as of December 31, 2011, and changes during the year then ended is as follows (shares in thousands):

Nonvested Shares	Shares			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2011		583		$	10.22
Granted		125			11.10
Vested		(175	)		11.08
Forfeited		(6	)		11.64
Outstanding at December 31, 2011		527		$	10.10

As of December 31, 2011, unrecognized compensation cost for all nonvested share-based compensation arrangements expected to vest, totaled $3.1 million which is expected to be recognized over a weighted average remaining period of 2.21 years.

F-34

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

NOTE K – PREFERRED STOCK

The Company is authorized to issue 20.0 million shares of preferred stock. The preferred stock (or other securities convertible in whole or in part into preferred stock) is available for issuance from time to time for various purposes, including, without limitation, making future acquisitions, raising additional equity capital and financing. Subject to certain limits set by the Company’s Articles of Incorporation, the preferred stock (or such convertible securities) may be issued on such terms and conditions, and at such times and in such situations, as the Board of Directors in its sole discretion determines to be appropriate, without any further approval or action by the shareholders (unless otherwise required by laws, rules, regulations or agreements applicable to the Company).

On September 27, 2011 (Issuance Date), the Company issued 32,914 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series B, par value $1.00 per share, with a liquidation value of $1,000 per share (Series B Preferred Stock) to the Secretary of the Treasury (Secretary) for $32.9 million in cash. Non-cumulative dividends on the Series B Preferred Stock are paid quarterly and will accrue on the liquidation preference at a rate based on changes in the level of Qualified Small Business Lending (QSBL) of Encore Bank. The Series B Preferred Stock has no maturity date and ranks senior to common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company. The Series B Preferred Stock generally is non-voting, except in limited circumstances that could impact the rights and preferences of the Series B Preferred Stock.

Based on Encore Bank’s QSBL, the dividend rate on the Series B Preferred Stock was 4.76% for September 27 through September 30, 2011, was 1.97% in the fourth quarter of 2011 and will be 1.00% in the first quarter of 2012. For the second through the tenth quarters following the Issuance Date, the dividend rate will fluctuate between 1% and 5% based on Encore Banks’s QSBL, and for the eleventh quarter through 4.5 years after the Issuance Date, the dividend rate will be fixed at between 1% and 7%. Thereafter, the dividend rate is 9%. If the Company has not declared and paid an aggregate of five dividend payments, whether or not consecutive, the holder of the Series B Preferred Stock will have the right, but not the obligation, to appoint a representative as an “observer” on the Company’s Board of Directors. If the Company has not declared and paid an aggregate of six dividend payments, whether or not consecutive, the holder of the Series B Preferred Stock will have the right, but not the obligation, to elect two directors to the Company’s Board of Directors.

The Series B Preferred Stock may be redeemed by the Company at any time, at a redemption price of $1,000 per share plus accrued but unpaid dividends to the date of redemption, subject to the approval of the Company’s federal banking regulator. The Series B Preferred Stock may be redeemed in whole or in part, subject to a minimum redemption of at least 25% of the original aggregate liquidation value, or $8.2 million.

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

F-35

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

In connection with the issuance of the Series B Preferred Stock, the Company redeemed its Series A Preferred Stock from the United States Department of the Treasury (Treasury) on September 27, 2011, for $34.0 million plus accrued dividends of $0.2 million. As a result, accelerated amortization of the discount on Series A Preferred Stock was $4.1 million in the third quarter of 2011, which reduced earnings available to common shareholders. As a result of its redemption of the Series A Preferred Stock, the Company is no longer subject to the limits on executive compensation and its ability to pay dividends and repurchase shares as stipulated under the terms of the Series A Preferred Stock.

Treasury sold to a third party a warrant to purchase 364,026 shares of the Company’s common stock expiring December 5, 2018, at an exercise price of $14.01 per share. The number of shares of common stock underlying the warrant and the exercise price are subject to adjustment for certain dilutive events.

NOTE L – OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

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

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

Principal commitments as of December 31 are as follows (dollars in thousands):

	2011		2010
Commitments to extend credit	$	175,118	$	173,352
Standby letters of credit		4,359		6,816

Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the contract and have fixed expiration dates or other termination clauses. Some of the commitments are expected to expire without being drawn upon, so that the total commitment amounts do not necessarily represent future cash requirements. Letters of credit are commitments issued by the Company to guarantee the performance of a client to a third party, primarily borrowing arrangements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The extension of credit is based on a credit evaluation of the client. Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Included in unfunded commitments in 2011 are residential mortgages totaling $9.9 million. The fair value of these commitments is not material.

NOTE M – CONCENTRATION OF CREDIT RISK

The Company’s primary market area is Houston, Texas and it originates loans to clients located primarily within this geographical area. Although the Company has a diversified loan portfolio, a substantial portion of a client’s ability to honor its contracts is dependent upon the economic stability of the geographic area. The Company evaluates each client’s creditworthiness on a case-by-case basis.

F-36

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

NOTE N – COMMITMENTS AND CONTINGENCIES

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

NOTE O – RELATED PARTY TRANSACTIONS

Loans to executive officers, significant shareholders, directors and their related interests (related parties) for the years ended December 31 were as follows (dollars in thousands):

	2011			2010
Balance at January 1	$	11,978		$	14,984
New loans		1,706			1,349
Repayments		(1,076	)		(4,355	)
Loans no longer classified as related party		(8,564	)		—
Balance at December 31	$	4,044		$	11,978

As of December 31, 2011, the Company is paying monthly rent of $12 thousand to lease one private client office from a related party. Lease expense was $148 thousand in 2011.

NOTE P – JUNIOR SUBORDINATED DEBENTURES

In September 2003, the Company formed Encore Statutory Trust II (the Statutory Trust), a statutory business trust, and purchased all the common securities of the Statutory Trust for $0.2 million. The Statutory Trust issued $5.0 million of preferred securities. The sole assets of the Statutory Trust are junior subordinated debentures with an aggregate principal amount of $5.2 million, which are due September 24, 2033. The interest payable on the junior subordinated debentures is payable at a per annum rate equal to LIBOR plus 2.95%, reset quarterly. Cash distributions on the common and preferred securities are made in the same amount and to the extent interest on the junior subordinated debentures is received by the Statutory Trust. The securities are redeemable in whole at any time on any March 17, June 17, September 17 or December 17.

In April 2007, the Company formed Encore Capital Trust III (Trust III), a statutory business trust, and purchased all the common securities of Trust III for $0.5 million. Trust III issued $15.0 million of preferred securities. The sole assets of Trust III are junior subordinated debentures with an aggregate principal amount of $15.5 million, which are due April 19, 2037. The junior subordinated debentures bear a fixed rate of 6.85% until April 19, 2012, at which date the Company may call the debentures, and a floating rate equal to 3 month LIBOR + 1.75% thereafter. Cash distributions on the common and preferred securities are made in the same amount and to the extent interest on the junior subordinated debentures is received by Trust III.

Each trust is considered a variable interest entity. Although the Company owns all of the outstanding common stock of the Statutory Trust and Trust III, it is not required to include them in the consolidated financial statements.

The Company has fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by each trust, provided that such trust has funds available for such obligations.

F-37

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

NOTE Q – FAIR VALUE OF ASSETS AND LIABILITIES

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

The Company groups financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1—Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2—Inputs other than those quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 2 assets and liabilities include available-for-sale securities with quoted prices that are traded less frequently than exchange-traded instruments. Available-for-sale and held-to-maturity securities are valued using observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, prepayment speeds, credit information and the bond’s terms and conditions, among other things. Valuations may be obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3—Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. Level 3 values include impaired loans and other real estate owned.

F-38

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

The tables below present the balances of assets measured at fair value on a recurring basis as of December 31, 2011 and 2010 (dollars in thousands):

	December 31, 2011
Description	Total		Level 1		Level 2
U.S. Government securities	$	108,020	$	100,558	$	7,462
Securities of U.S. states and political subdivisions		2,183		—		2,183
Mortgage-backed securities		42,179		—		42,179
Corporate debt securities		10,938		—		10,938
Other securities		7,481		3,109		4,372
Total available-for-sale securities	$	170,801	$	103,667	$	67,134
	December 31, 2010
Description	Total		Level 1		Level 2
U.S. Government securities	$	162,655	$	145,009	$	17,646
Securities of U.S. states and political subdivisions		7,378		—		7,378
Mortgage-backed securities		60,144		—		60,144
Corporate debt securities		13,420		—		13,420
Other securities		8,187		3,370		4,817
Total available-for-sale securities	$	251,784	$	148,379	$	103,405

For assets measured at fair value on a nonrecurring basis during 2011 that were still held on the balance sheet at December 31, 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 (dollars in thousands):

Description	Total		Level 3		Losses for the Year Ended December 31, 2011
Loans	$	8,949	$	8,949	$	837
Other real estate owned		2,090		2,090		1,098
Total	$	11,039	$	11,039	$	1,935

During the year ended December 31, 2011, the Company wrote down certain loans receivable that are collateralized by real estate to their appraised value less estimated costs to sell resulting in an impairment charge of $0.8 million against the allowance for loan losses. The Company wrote down certain other real estate owned properties to their appraised value less estimated costs to sell resulting in an impairment charge of $1.1 million, which was included in earnings for the period.

F-39

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

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 (dollars in thousands):

Description	Total		Level 3		Losses for the Year Ended December 31,2010
Loans held-for-sale	$	9,615	$	9,615	$	7,738
Loans		10,042		10,042		6,782
Other real estate owned		9,298		9,298		3,479
Total	$	28,955	$	28,955	$	17,999

During the year ended December 31, 2010, loans held-for-sale as of December 31, 2010, were written down $7.7 million based on third party valuations. The Company wrote down certain loans receivable that are collateralized by real estate to their appraised value less estimated costs to sell resulting in an impairment charge of $4.5 million against the allowance for loan losses. An additional $2.3 million was recorded as noninterest expense related to loans reclassified from held-for-sale to loans receivable. The Company wrote down certain other real estate owned properties to their appraised value less estimated costs to sell resulting in an impairment charge of $3.5 million, which was included in earnings for the period.

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

The following table summarizes the carrying values and estimated fair values of certain financial instruments not recorded at fair value on a regular basis as of December 31 (dollars in thousands):

	2011				2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated  Fair Value
Financial assets:
Securities held-to-maturity	$	99,630	$	104,457	$	107,618	$	109,738
Loans receivable, net		1,005,518		1,043,714		901,818		925,426
Accrued interest receivable		5,133		5,133		5,191		5,191
Financial liabilities:
Time deposits	$	343,460	$	344,461	$	378,342	$	380,223
Borrowings and repurchase agreements		218,702		237,856		219,777		235,220
Accrued interest payable		1,131		1,131		1,154		1,154
Junior subordinated debentures		20,619		20,807		20,619		21,305

F-40

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

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

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

Cash and Cash Equivalents

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

Securities

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

Loans Receivable

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

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

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

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

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

F-41

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

Loans Held-for-Sale

Loans held-for-sale are carried at the lower of cost or estimated fair value. Fair value of commercial loans held-for-sale is primarily based on third party valuations. Fair value for consumer mortgages held-for-sale is based on commitments on hand from investors or prevailing market prices. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 3.

Federal Home Loan Bank of Dallas Stock

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

Other Real Estate Owned

Other real estate owned is primarily foreclosed properties securing residential loans and commercial real estate. Foreclosed assets are adjusted to fair value less estimated costs to sell upon transfer of the loans to other real estate owned. Subsequently, these assets are carried at the lower of carrying value or fair value less estimated costs to sell. Fair value is generally based upon independent market prices or appraised values of the property and, accordingly, the Company classifies foreclosed assets as Level 3.

Deposits

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

Borrowings and Repurchase Agreements

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

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

Junior Subordinated Debentures

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

Accrued Interest

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

F-42

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

Unrecognized Financial Instruments

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

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

Nonfinancial Instruments

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

NOTE R – EMPLOYEE BENEFIT PLAN

The Company has implemented a defined contribution plan (Plan) covering all eligible personnel. Contribution expense related to the Plan was $0.6 million for each of the years ended December 31, 2011, 2010 and 2009.

NOTE S – INCOME (LOSS) PER COMMON SHARE

The factors used in the income (loss) per common share computation follow (amounts in thousands, except per share amounts):

	2011		2010			2009
Basic:
Income (loss) available to common shareholders (1)	$	1,309	$	(26,454	)	$	(428	)
Average common shares outstanding, including nonvested restricted stock		11,597		11,179			10,381
Per Share	$	0.11	$	(2.37	)	$	(0.04	)
Diluted:
Average common shares outstanding		11,597		11,179			10,381
Net effect of the assumed exercise of stock options		54		—			—
Diluted average common shares outstanding		11,651		11,179			10,381
Per Share	$	0.11	$	(2.37	)	$	(0.04	)
Anti-dilutive stock options and warrants not included in treasury stock method computation		703		1,325			1,351
Preferred dividends deducted from net income (loss)(1)		5,931		2,224			2,214

(1) Includes $4,102 accelerated amortization of preferred stock discount in 2011.

F-43

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

No dividends have been declared on common stock.

NOTE T – SEGMENT INFORMATION

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

The accounting policies of each line of business are the same as those described in the summary of significant accounting policies. Revenues, expenses, and assets are recorded by each line of business, and the Company separately reviews financial information. In addition to direct expenses, each line of business was allocated certain general corporate expenses such as executive administration, accounting, internal audit, and human resources based on the average asset level of the operating segment.

Activities that are not directly attributable to the reportable operating segments, including the elimination of inter-company transactions, are presented under “Other”.

F-44

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

Financial results by operating segment were as follows (dollars in thousands):

	Banking			Wealth Management		Insurance		Other			Consolidated
2011
Net interest income (expense)	$	46,913		$	61	$	6	$	(1,193	)	$	45,787
Provision for loan losses		7,252			—		—		—			7,252
Noninterest income		2,530			20,175		5,958		—			28,663
Noninterest expense		38,010			14,440		4,799		—			57,249
Income (loss) before income taxes		4,181			5,796		1,165		(1,193	)		9,949
Income tax expense (benefit)		1,098			2,047		410		(846	)		2,709
Net income (loss)	$	3,083		$	3,749	$	755	$	(347	)	$	7,240
Total assets at December 31,	$	1,527,207		$	57,031	$	8,281	$	(69,936	)	$	1,522,583
2010
Net interest income (expense)	$	45,525		$	149	$	19	$	(1,194	)	$	44,499
Provision for loan losses		35,169			—		—		—			35,169
Noninterest income		6,906			18,979		5,858		—			31,743
Noninterest expense		60,031			14,163		4,406		—			78,600
Income (loss) before income taxes		(42,769	)		4,965		1,471		(1,194	)		(37,527	)
Income tax expense (benefit)		(15,066	)		1,686		501		(418	)		(13,297	)
Net income (loss)	$	(27,703	)	$	3,279	$	970	$	(776	)	$	(24,230	)
Total assets at December 31,	$	1,473,837		$	63,254	$	9,095	$	(79,689	)	$	1,466,497
2009
Net interest income (expense)	$	47,548		$	155	$	17	$	(1,225	)	$	46,495
Provision for loan losses		16,660			—		—		—			16,660
Noninterest income		4,781			16,907		5,649		—			27,337
Noninterest expense		37,901			12,248		4,275		—			54,424
Income (loss) before income taxes		(2,232	)		4,814		1,391		(1,225	)		2,748
Income tax expense (benefit)		(896	)		1,788		498		(428	)		962
Net income (loss)	$	(1,336	)	$	3,026	$	893	$	(797	)	$	1,786
Total assets at December 31,	$	1,644,083		$	59,618	$	7,962	$	(76,308	)	$	1,635,355

F-45

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

NOTE U – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial statements pertaining only to Encore Bancshares, Inc. are presented below. Investments in subsidiaries are stated using the equity method of accounting. Dollar amounts are in thousands.

Condensed Balance Sheets

	December 31,
	2011		2010
Assets:
Cash and due from banks	$	4,545	$	7,030
Investment in subsidiaries		186,866		179,082
Other assets		3,095		1,783
	$	194,506	$	187,895
Liabilities:
Junior subordinated debentures	$	20,619	$	20,619
Accrued interest payable and other liabilities		498		635
Total liabilities		21,117		21,254
Shareholders’ equity		173,389		166,641
	$	194,506	$	187,895

Condensed Statements of Operations

	Years Ended December 31,
	2011		2010			2009
Dividend from subsidiary	$	2,000	$	—		$	—
Expense:
Interest expense		1,193		1,194			1,225
Other		718		707			626
Total expense		1,911		1,901			1,851
Income (loss) before income taxes and equity in undistributed earnings (losses) of subsidiaries		89		(1,901	)		(1,851	)
Income tax benefit		1,111		1,087			634
Equity in undistributed earnings (losses) of subsidiaries		6,040		(23,416	)		3,003
Net income (loss)	$	7,240	$	(24,230	)	$	1,786

F-46

Encore Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

Condensed Statements of Cash Flows

	Years Ended December 31,
	2011			2010			2009
Operating Activities:
Net income (loss)	$	7,240		$	(24,230	)	$	1,786
Adjustments to reconcile net income (loss) to net cash from operating activities:
Equity in undistributed (earnings) losses of subsidiaries		(6,040	)		23,416			(3,003	)
Change in prepaid expenses and other assets		(1,358	)		(114	)		704
Change in accrued interest payable and other liabilities		(95	)		3			278
Net cash from operating activities		(253	)		(925	)		(235	)
Investing Activities:
Capital contributions to subsidiaries		—			(16,000	)		(20,000	)
Cash paid for acquisitions		—			(2,095	)		—
Net cash from investing activities		—			(18,095	)		(20,000	)
Financing Activities:
Proceeds from issuance of common stock, net of purchase of treasury stock		198			202			(135	)
Redemption of preferred stock		(34,000	)		—			—
Proceeds from issuance of preferred stock		32,914			—			—
Preferred dividends paid		(1,473	)		(1,700	)		(1,606	)
Other, net		129			(58	)		(143	)
Net cash from financing activities		(2,232	)		(1,556	)		(1,884	)
Net change in cash and cash equivalents		(2,485	)		(20,576	)		(22,119	)
Cash and cash equivalents at beginning of year		7,030			27,606			49,725
Cash and cash equivalents at end of year	$	4,545		$	7,030		$	27,606

NOTE V – QUARTERLY FINANCIAL DATA (UNAUDITED)

Dollar amounts are in thousands, except per share amounts.

	Fourth Quarter					Third Quarter						Second Quarter					First Quarter
	2011		2010			2011			2010			2011		2010			2011		2010
Interest income	$	15,915	$	16,725		$	15,842		$	16,922		$	16,383	$	17,201		$	15,839	$	17,955
Interest expense		4,229		5,624			4,571			5,953			4,648		6,262			4,744		6,465
Net interest income		11,686		11,101			11,271			10,969			11,735		10,939			11,095		11,490
Provision for loan losses		1,898		2,597			1,265			9,599			1,919		18,013			2,170		4,960
Net interest income after provision for loan losses		9,788		8,504			10,006			1,370			9,816		(7,074	)		8,925		6,530
Noninterest income		7,248		9,859			7,015			7,028			7,334		7,947			7,066		6,909
Noninterest expense		13,924		20,213			14,858			20,728			14,112		19,395			14,355		18,264
Net income (loss) before income taxes		3,112		(1,850	)		2,163			(12,330	)		3,038		(18,522	)		1,636		(4,825	)
Income tax expense (benefit)		990		(950	)		262			(3,904	)		973		(5,869	)		484		(2,574	)
Net income (loss)	$	2,122	$	(900	)	$	1,901		$	(8,426	)	$	2,065	$	(12,653	)	$	1,152	$	(2,251	)
Income (loss) available to common shareholders (1)	$	1,943	$	(1,457	)	$	(2,735	)	$	(8,981	)	$	1,507	$	(13,209	)	$	594	$	(2,807	)
Income (loss) per common share:
Basic	$	0.17	$	(0.13	)	$	(0.23	)	$	(0.79	)	$	0.13	$	(1.16	)	$	0.05	$	(0.27	)
Diluted		0.17		(0.13	)		(0.23	)		(0.79	)		0.13		(1.16	)		0.05		(0.27	)

(1) Includes $4,102 accelerated amortization of preferred stock discount in the third quarter of 2011.

F-47