Credit Quality

Nonperforming assets (NPAs) declined to $107.2 million, or 4.5% of total assets, as of March 31, 2012, from $115.1 million, or 5.1% of total assets, at December 31, 2011. Net charge-offs in the quarter declined to $7.4 million, down from $10.6 million in the fourth quarter of 2011. At March 31, 2012, OREO balances totaled $31.6 million, a decline of 18.0% from December 31, 2011. As of April 27, 2012, approximately 65.0% of the March 31, 2012 OREO balance was under contract for sale or had been sold since quarter end.

No provision for loan losses was recorded for the first quarter of 2012, consistent with the fourth quarter of 2011, as expected losses inherent within the loans held for investment portfolio continue to decline consistent with the recovery of the economy as a whole.

In April 2012, bankruptcy courts affirmed the Company’s settlement of collection litigation related to two nonperforming construction/land development loans with aggregate carrying values of $26.6 million. The settlement was recognized as a subsequent event as of March 31, 2012. Consequently, the Company has charged-off the carrying value of $4.8 million for one loan and reduced the specific reserves (included in the allowance for loan losses) associated with these loans by $7.1 million as of March 31, 2012.

Deposits

Deposits totaled $2.00 billion at March 31, 2012, down $9.1 million, or 0.5%, from $2.01 billion at December 31, 2011. Certificates of deposit decreased $143.1 million, or 13.8%, since year-end 2011 as we manage the reduction of these higher-cost deposits and replace them with lower cost transaction, savings and money market accounts. Deposits other than certificates of deposit increased $134.0 million, or 13.7%, from year-end 2011. The increase in deposits other than certificates of deposit reflects a focused effort on attracting core deposit balances through our branch network and converting customers with maturing certificates of deposit to money market and savings accounts.

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