Interest expense declined 25.1% to $2.2 million in the fourth quarter of 2010, compared with $2.9 million in the fourth quarter of 2009. The decline in interest expense was due primarily to lower average rates paid on interest bearing deposits. Average deposits increased 1.2% to $507.0 million, compared with $502.1 million in the fourth quarter of 2009.

Net interest income was down 0.7% to $8.8 million in the fourth quarter of 2010, compared with $8.9 million in the fourth quarter of the prior year. The decrease in net interest income was due to a decrease in average loans, partially offset by a 41 basis point increase in the net interest margin, compared with the fourth quarter of 2009. Net interest margin improved by 11 basis points to 6.12% in the fourth quarter of 2010 from the third quarter of 2010.

Provision for loan losses was $3.8 million in the fourth quarter of 2010, or 3.8% annualized of average loans, compared with $4.2 million, or 4.1% annualized of average loans, in the fourth quarter of 2009. Net charge-offs totaled $1.2 million in the fourth quarter of 2010, compared with $2.2 million in the fourth quarter of 2009. Core operations remain solid, as evidenced by our growth in net interest margin and growth in net interest income after provision for loan losses.

Total non-interest income declined $821,000 to $563,000 in the fourth quarter of 2010, compared with $1.4 million in the fourth quarter of the prior year. The decline in non-interest income was due primarily to a $582,000 other loss that included a realized $1.1 million loss on sale of OREO.

Non-interest expense increased 10.6% to $7.8 million in the fourth quarter of 2010, compared with $7.0 million in the fourth quarter of 2009. The increase was due primarily to an increase in impairment in OREO that totaled $1.7 million in the fourth quarter of 2010. These higher costs were partially offset in 2010 by a 6.3% decrease in salary and employee benefits expense to $3.2 million and a $670,000 decline in other expense to $1.9 million, both compared with 2009.

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