During the fourth quarter of 2012, net charge-offs were $5.4 million, or 0.78% (annualized), of average gross loans, compared to $4.6 million, or 0.68% (annualized), reported in the third quarter of 2012 and $7.1 million, or 1.04% (annualized) in the fourth quarter of 2011. Net charge-offs were higher during the quarter mainly due to write-downs on two large impaired commercial loans, one previously mentioned and one already in nonperforming status.

The provision for loan losses decreased to $3.7 million in the fourth quarter of 2012 from $3.8 million in the third quarter of 2012, and $6.9 million in the fourth quarter of 2011 Overall positive risk migration in the commercial loan portfolio was offset by the impact of the previously discussed large commercial relationship and loan growth. Total credit costs (provision for loan losses, loan workout expenses, OREO expenses and other credit reserves) were $6.1 million, a slight increase from $5.9 million in the third quarter of 2012, mainly due to higher credit reserves on unfunded commitments and increased legal costs on workout loans.

The allowance for loan losses of $43.9 million at December 31, 2012 decreased from $45.6 million at September 30, 2012 and $53.1 million at December 31, 2011. The ratio of the allowance for loan losses to total gross loans was 1.58% at year-end compared to 1.69% at September 30, 2012 and 1.92% at December 31, 2011. These decreases reflect improvement in problem loans, a higher level of charge-offs taken during the period and growth in the loan portfolio. The ratio of the allowance for loan losses to nonaccruing loans decreased to 92% in the fourth quarter from 114% in the third quarter of 2012, and improved from 75% for the same period of 2011.

Noninterest income reflects continued franchise growth

During the fourth quarter of 2012, the Company earned noninterest income of $21.2 million, an increase of $1.4 million compared to $19.7 million in the third quarter of 2012. Excluding securities gains in both periods, unanticipated BOLI income during the third quarter of 2012, and the Cash Connect billing change (together "notable items"), noninterest income increased $617,000, or 4%. This increase was largely due to additional wealth management income of $336,000, including seasonal increases and record product sales during the period, and a $166,000 increase in credit/debit card and ATM fees, mainly due to seasonal increases in bailment income at Cash Connect and interchange fees during the fourth quarter of 2012.

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