HispanicBusiness

Nominal and tangible book values were $10.36 per share at March 31, 2013, versus $10.27 per share at December 31, 2012. Commencing on January 1, 2013, director compensation was shifted to consist solely of time-based restricted share awards. This will support the Bank's regulatory capital ratios and capacity for growth; while at the same time emphasizing the directors' commitment to enhancing shareholder value. Similarly, the compensation packages for recently hired officers has included a restricted stock award component that vests over time, rather than being exclusively composed of cash compensation.

Operating Results Analysis

Net interest income before provision for loan losses increased from $2.7 million during the three months ended March 31, 2012 to $3.0 million during the three months ended March 31, 2013. This increase in net interest income was primarily generated by a rise in interest earning assets, as the Bank's net interest margin declined from 4.04% during the first quarter of 2012 to 3.82% during the first quarter of 2013. This margin compression is a general trend facing the banking industry, as funding costs have already been reduced to historically low levels while asset yields continue to fall in conjunction with:

•the Federal Reserve's continuing to implement aggressive monetary policies (including quantitative easing) in an effort to reduce the national unemployment rate;

•strong price competition among financial institutions for high quality loans; and

•older, higher yielding loans and securities maturing and amortizing and being replaced by new, lower yielding loans and securities reflective of current market interest rates.



The Bank plans to support its net interest income during 2013 via the following strategies:

•continuing to focus upon the growth the Bank's balance sheet, particularly the loan portfolio;

•seeking to allocate a greater percentage of excess on-balance sheet liquidity to securities versus cash equivalents in order to obtain incremental yield; and

•pursuing a further migration in deposit mix away from certificates of deposit and toward non-interest bearing checking accounts.



The provision for loan losses was $460 thousand during the first quarter of 2013, compared to $40 thousand during the first quarter of 2012 and $432 thousand during the fourth quarter of 2012 (the immediately preceding quarter). Factors contributing to the provision for loan losses during the first quarter of 2013 included:

•additional loan loss reserves of $277 thousand associated with the $500 thousand impaired commercial loan that was charged off during the first quarter of 2013;

•an increase in hospitality industry related loans (a primary industry in the Bank's market area), which are reserved at a higher ratio than most other types of investor real estate;

•a rise in the amount of loan loss reserves designated for the Bank's qualitative adjustment factors, which in turn primarily resulted from the Bank's recognition that new (but highly experienced) officers were recently installed into the Chief Executive Officer and Chief Credit Officer positions; and

•the quarter's increase in outstanding loan balances.



The above factors more than offset reduced reserve requirements stemming from:

•a decrease in criticized and classified loans; and

•lower specific reserve requirements for impaired loans that were paid down by borrowers during the first quarter.