Discussion of Operating Results

Tax equivalent net interest income for the fourth quarter of 2012 was $20.7 million compared to $21.2 million for the third quarter of 2012 and $22.6 million for the fourth quarter of 2011.  For the full year 2012, tax equivalent net interest income totaled $84.9 million compared to $92.8 million in 2011. Factors affecting net interest income relative to the third quarter of 2012 include a reduction in loan income attributable to declining loan balances and unfavorable asset repricing. Year over year, the decrease was due to reduction in loan income attributable to lower portfolio balances and unfavorable asset repricing, which was partially offset by a reduction in interest expense.  The lower interest expense is primarily attributable to certificates of deposit and reflects both lower balances and favorable repricing. 

The decline in the loan portfolio, coupled with the low rate environment continues to put pressure on our net interest income.  The loan portfolio yield is declining as the existing portfolio reprices. Lowering our cost of funds, to the extent we can, and continuing to shift the mix of our deposits will help to partially mitigate the unfavorable impact of weak loan demand and repricing, although the impact is expected to be minimal.

The net interest margin for the fourth quarter of 2012 was 3.78%, a decrease of 4 basis points from the third quarter of 2012 and a decline of 39 basis points from the fourth quarter of 2011.  For the full year 2012, the margin declined by 37 basis points to 3.81%. The decrease in the margin for all comparable periods is attributable to the shift in our earning asset mix and unfavorable asset repricing, partially offset by a lower average cost of funds.

The provision for loan losses for the fourth quarter of 2012 was $2.8 million compared to $2.9 million in the third quarter of 2012 and $7.6 million for the fourth quarter of 2011. For the full year 2012, the loan loss provision totaled $16.2 million compared to $19.0 million for 2011. Slower problem loan migration, lower loan loss experience, and improved credit metrics resulted in a lower level of loan loss provision for both the second half of 2012 and the full year 2012. Net charge-offs for the fourth quarter of 2012 totaled $3.8 million, or 1.00% of average loans, compared to $2.6 million, or 0.66%, in the third quarter of 2012, and $6.2 million, or 1.50%, in the fourth quarter of 2011. For 2012, our net charge-offs totaled $18.0 million, or 1.16%, of average loans, compared to $23.4 million, or 1.39%, for 2011. Over the last five years, we have recorded a cumulative loan loss provision totaling $131.5 million, or 6.9%, of beginning loans and have recognized cumulative net charge-offs of $120.0 million, or 6.3%. At year-end 2012, the allowance for loan losses of $29.2 million was 1.93% of outstanding loans (net of overdrafts) and provided coverage of 45% of nonperforming loans compared to 1.97% and 41%, respectively, at the end of the third quarter of 2012, and 1.91% and 41%, respectively, at year-end 2011. 

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