HispanicBusiness

The overall level of nonperforming loans decreased $5,744,000 to $5,835,000 at December 31, 2012 from $11,579,000 at September 30, 2012. During the fourth quarter of 2012, the Company identified four loans totaling $777,000 as additional nonperforming loans. These additions were offset by reductions in nonperforming loans totaling $6,521,000 due primarily to the transfer to OREO of five properties totaling $4,755,000, and secondarily due to collections received on certain loans and charge-offs. Of the four loans totaling $777,000 identified as nonaccrual loans and added to nonperforming loans, one loan represented $623,000 of the total. This loan is for a commercial real estate building located in Shasta County. This loan had a charge-off of $78,000 in the fourth quarter of 2012 to write the loan down to its net realizable value. The remaining three loans in this group of nonperforming loans totaled $154,000 and no specific reserve has been established for them.

Gross loan and lease charge-offs for the fourth quarter of 2012 were $1,051,000 and recoveries totaled $82,000 resulting in net charge-offs of $969,000 compared to gross loan and lease charge-offs for the fourth quarter of 2011 of $1,151,000 and recoveries of $136,000 resulting in net charge-offs of $1,015,000. Gross charge-offs for the year ended December 31, 2012 were $4,702,000 and recoveries for the same year totaled $404,000 resulting in net charge-offs of $4,298,000, compared to gross charge-offs for the year ended December 31, 2011 of $5,525,000 and recoveries of $538,000 resulting in net charge-offs of $4,987,000.

Nonperforming assets (nonperforming loans and other real estate owned ("OREO")) totaled $28,258,000 at December 31, 2012, a decrease of $10,259,000, or 26.6%, from the December 31, 2011 balance of $38,517,000. Nonperforming assets as a percentage of total assets were 3.13% at December 31, 2012 compared to 4.26% at December 31, 2011.

The Company's OREO properties increased $734,000 to $22,423,000 at December 31, 2012 from $21,689,000 at September 30, 2012. The increase in OREO was due to the transfer of five properties totaling $4,755,000. The increase in OREO was partially offset by the sale of four properties totaling $2,475,000 with losses of $218,000 associated with those sales and the write-down of certain other OREO properties totaling $1,328,000 during the quarter ended December 31, 2012.

Operating Results

Net interest income, which represents the Company's largest component of revenues and is the difference between interest earned on loans and investments and interest paid on deposits and borrowings, increased $224,000, or 3.0%, for the three months ended December 31, 2012 compared to the same period in 2011. Interest income decreased by $603,000, or 6.8%, for the three months ended December 31, 2012, primarily due to the decrease in interest income on loans due to the decrease in yield on average loan balances. The Company had foregone interest income of $80,000 related to loans currently on nonaccrual status for the three months ended December 31, 2012 compared to $173,000 for the same period in 2011. Average loans increased $19,471,000 in the fourth quarter of 2012 compared to the fourth quarter of 2011 while the yield on the loan portfolio decreased 47 basis points to 5.44% for the fourth quarter of 2012. Offsetting this decrease in interest income for the quarter was a decrease in interest expense of $827,000, or 62.1%, primarily due to a decrease in the rates paid on deposits and secondarily a decrease in interest expense on subordinated debentures. Overall, average earning assets decreased $32,677,000 in the fourth quarter of 2012 compared to the fourth quarter of 2011. Average yields on earning assets decreased 33 basis points from the quarter ended December 31, 2011, to 3.99% for the quarter ended December 31, 2012 while the average rate paid on interest-bearing liabilities decreased by 50 basis points to 0.33%. The Company's net interest margin (tax equivalent basis) for the quarter ended December 31, 2012 was 3.74%, an increase of 6 basis points from 3.68% for the fourth quarter of 2011 and a decrease of 4 basis points from the net interest margin (tax equivalent basis) of 3.78% for the linked quarter ended September 30, 2012. Net interest income decreased $1,153,000, or 3.7%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. Total interest income decreased by $3,414,000, or 9.2%, primarily due to a decrease in income on loans as a result of both the decrease in average balance of loans and a decrease in yield on loans. Interest expense decreased $2,261,000, or 39.1%, due to a decrease in rates paid on deposits and due to a decrease in interest expense on subordinated debentures for the year ended December 31, 2012 compared to the year ended December 31, 2011. The net interest margin for the year ended December 31, 2012 decreased 17 basis points to 3.75% from the net interest margin of 3.92% for the year ended December 31, 2011.