Food and Events

Investors,therefore, may not compare our Company`s performance with that of other financialservices companies based upon "Core Earnings." "Core Earnings" results are onlymeant to supplement GAAP results by providing additional information regarding theoperational and performance indicators that are most closely used by management, the Company`s board of directors, rating agencies and lenders to assessperformance.Other limitations arise from the specific adjustments that management makes to GAAP results to derive "Core Earnings" results. For thethree months ended March 31, 2009 compared with the same period in 2008, theyield on average earning assets decreased 150 basis points, and the cost ofaverage earning assets decreased 85 basis points. On a linked-quarter basis, thenet interest margin for the three months ended March 31, 2009 was down 28 basispoints compared with 3.72% for the three months ended December 31, 2008. Theyield on average earning assets decreased 40 basis points, and the cost ofaverage earning assets decreased 12 basis points.Interest income for the three months ended March 31, 2009 was $21.7 million,down $3.4 million or 13.4% compared with $25.1 million for the same period in2008. The decrease in interest income for the three months ended March 31, 2009compared to the same period in 2008 was due primarily to lower loan yields, anincrease in nonperforming assets, and the reversal of loan interest income fornonaccrual loans during the first quarter of 2009. Average earning assets grew9.8% for the first quarter of 2009 compared with the same period in 2008.Average total loans increased 10.4% to $1.34 billion in the first quarter of2009 compared with $1.22 billion for the first quarter of 2008.

The yield onaverage earning assets for the first quarter of 2009 was 5.83% compared with7.33% for the first quarter of 2008.Interest expense for the three months ended March 31, 2009 was $8.9 million,down $2.2 million or 19.5% compared with $11.1 million for the same period in2008, primarily due to lower cost of funds that was partially offset by theeffect of an increase in interest-bearing deposits. Average interest-bearingdeposits were $1.12 billion for the first quarter of 2009 compared with $980.9million for the first quarter of 2008, an increase of 14.3%. The cost ofinterest-bearing deposits for the first quarter of 2009 was 2.93% compared with3.96% for the first quarter of 2008. Average other borrowings, consistingprimarily of borrowings from the FHLB but excluding junior subordinateddebentures, were $63.8 million for the first quarter of 2009 compared with$113.6 million for the first quarter of 2008. Other borrowings decreasedprimarily due to liquidity provided by deposit growth.

The cost of otherborrowings for the first quarter of 2009 was 1.86% compared with 3.14% for thefirst quarter of 2008.Noninterest income and expenseNoninterest income for the three months ended March 31, 2009 was $1.9 million,down $199,000 or 9.3% compared with the same period in 2008. The decrease forthe three months ended March 31, 2009 was primarily due to a decline in servicefees, partially offset by an increase in other noninterest income that was theresult of rental income received on other real estate property and an increasein the cash value of bank owned life insurance.Noninterest expense for the three months ended March 31, 2009 was $10.6 million,a decrease of $392,000 or 3.6% compared with the same period in 2008. Decreasesin salaries and employee benefit expenses further described below were partiallyoffset by increases in expenses related to foreclosed assets and another-than-temporary impairment ("OTTI") charge of $240,000 realized on variousprivate label securities.Salaries and employee benefits expense for the three months ended March 31, 2009was $5.4 million, a decrease of $1.1 million compared with $6.5 million for thesame period in 2008, primarily due to a reduction in the number of employees anddecreases in amount of bonus accrual, employee health care benefits, stock-basedcompensation expense and severance expenses. The increase was primarily due to higher net charge-offs for thefirst quarter of 2009. The allowance for loan losses as a percent of total loanswas 1.81% at March 31, 2009 and 1.80% at December 31, 2008, and increasedcompared with 1.17% at March 31, 2008.Net charge-offs for the three months ended March 31, 2009 were $7.4 million or0.55% of total loans compared with net charge-offs of $121,000 or 0.01% of totalloans for the three months ended March 31, 2008. The charge-offs primarilyconsisted of $5.8 million in loans from Texas and $1.7 million in loans fromCalifornia, partially offset by recoveries of $45,000.

The increase consistsprimarily of $5.9 million in nonperforming assets from Texas partially offset bya $1.2 million decrease in nonperforming assets from California. The majority ofthe increase in Texas is composed of a $3.9 million commercial land tract loan,a $7.4 million multi-loan commercial and residential relationship, and otherloans totaling $3.1 million. These increases in Texas were partially offset bycharge-offs, sales of other real estate and payments received on nonperformingloans totaling $8.5 million. The $1.2 million decrease in nonperforming assetsin California is comprised of $2.9 million in payments received on nonperformingloans and in charge-offs, which were partially offset by the addition of a $1.2million hotel property and other loans totaling $545,000.On a linked-quarter basis, other real estate ("ORE") increased by approximately$3.7 million compared with December 31, 2008. The increase was comprised of fourloans in Texas, a single-family property, a restaurant, and two commercial landproperties.