During the fourth quarter of 2012, the Company’s tax equivalent net interest income increased $0.6 million, or 2.6%, from $25.1 million during the third quarter of 2012 to $25.7 million. This increase is due to an increase in the accretion related to the accounting fair value adjustments recorded as a result of the acquisition of Virginia Savings Bancorp. The Company’s reported net interest margin increased from 3.95% for the third quarter of 2012 to 3.99% for the fourth quarter of 2012. Excluding the favorable impact of the accretion from the fair value adjustments ($1.7 million for the quarter ended December 31, 2012 and $0.9 million for the quarter ended September 30, 2012), the net interest margin would have been 3.73% for the quarter ended December 31, 2012 and 3.80% for the quarter ended September 30, 2012.
As a result of the Company’s quarterly analysis of the adequacy of the ALLL, the Company recorded a provision for loan losses of $1.8 million in the fourth quarter of 2012 and $6.4 million for the year ended December 31, 2012 compared to $2.2 million and $4.6 million of the comparable periods in 2011. During the fourth quarter of 2012 the Company’s loan portfolio increased $61.1 million from September 30, 2012 which resulted in a $0.5 million addition to the ALLL. The provision for loan losses recorded during 2012 reflects difficulties encountered by certain commercial borrowers of the Company during the year, the downgrade of their related credits and management’s assessment of the impact of these difficulties on the ultimate collectability of the loans. In addition, the Company received life insurance proceeds as the beneficiary of a life insurance policy carried by a commercial borrower during the third quarter of 2012 that enabled the Company to reduce the ALLL by approximately $0.6 million for amounts previously included in the ALLL. Changes in the amount of the provision and related allowance are based on the Company’s detailed systematic methodology and are directionally consistent with changes in the composition and quality of the Company’s loan portfolio. The Company believes its methodology for determining the adequacy of its ALLL adequately provides for probable losses inherent in the loan portfolio and produces a provision and allowance for loan losses that is directionally consistent with changes in asset quality and loss experience.
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