HispanicBusiness

The Bank's allowance for loan losses decreased slightly from $4.31 million, or 1.77% of total loans, at December 31, 2012 to $4.27 million, or 1.75% of total loans, at March 31, 2013. The primary factor that led to the small decrease in the allowance for loan losses, despite the growth in the loan portfolio, was the charge-off during the first quarter of 2013 of a $500 thousand impaired commercial loan that had a specific reserve of $223 thousand at December 31, 2012. The borrower experienced a number of financial setbacks in recent periods, leading to the Bank's decision that the loan should no longer be carried as an asset. In April 2013, the Bank obtained a legal judgment in its favor. The Bank is now pursuing collection from the borrower. Any payments received from the borrower, up to the amount of the charge-off, would be recorded as a recovery and thereby add to the Bank's allowance for loan losses.

Non-accrual loans decreased from $1.4 million at December 31, 2012 to $0.9 million at March 31, 2013, reflective of the charge-off of the $500 thousand commercial loan described above. All of the Bank's non-accrual loans at March 31, 2013 were current or less than 30 days delinquent in their scheduled monthly payments. Loans graded Substandard decreased from $5.1 million at December 31, 2012 to $4.5 million at March 31, 2013. Loans graded as Special Mention fell from $4.2 million at December 31, 2012 to $2.2 million at March 31, 2013, primarily due to client seasonal borrowing fluctuations. The ratio of the Bank's allowance for loan losses to non-performing loans rose from 299.38% at December 31, 2012 to 468.13% at March 31, 2013. The Bank has never owned any foreclosed real estate.

Premises and equipment, net, increased from $1.3 million at December 31, 2012 to $1.4 million at March 31, 2013. The majority of this increase was due to a minor remodeling of the Salinas Branch and the purchase of new hardware in support of the Bank's technology platform.

The $16.0 million increase in total assets by the Bank during the first quarter of 2013 to a record $345.3 million better leveraged its capital, with the ratio of total equity to total assets decreasing from 10.32% at December 31, 2012 to 9.93% at March 31, 2013. Over time, the Bank generally seeks to maintain this ratio at between 9.00% and 10.00% in order to present a well-capitalized profile on the one hand, but also support return on average shareholders' equity on the other hand. Commenting in this regard, Clay Larson, the Bank's Regional President, stated: "We are aiming to increase the ratio of loans to total assets in order to support our net interest margin while also continuing the Bank's longstanding commitment to making credit available to the communities we serve. Ideally, we'd like to shift funds from excess cash equivalents and the security portfolio into high quality loans extended in support of local businesses and professionals."

Non-interest bearing demand deposits decreased from $123.4 million at December 31, 2012 to $120.8 million at March 31, 2013. This $2.6 million reduction was much less than the Bank's historical pattern, as seasonal outflows during the first quarter of 2013 were largely offset with inflows from new clients.

Interest bearing checking accounts decreased from $17.5 million at December 31, 2012 to $15.5 million at March 31, 2013. Given the historically low interest rate environment, most new consumer, sole proprietor, and non-profit organization checking accounts are being opened in the non-interest bearing products, as clients prefer the lower minimum balance requirements to the interest earnings.