Noninterest Expense

Noninterest expense increased $3.71 million, or 21.77%, to $20.77 million for the fourth quarter of 2012 compared with the fourth quarter of 2011, due largely to the Peoples and Waccamaw acquisitions. Salaries and employee benefits increased $2.79 million, or 35.30%, to $10.69 million for the fourth quarter of 2012 compared with the fourth quarter of 2011. The Peoples and Waccamaw acquisitions accounted for an increase in salaries and employee benefits of $665 thousand and $1.22 million, respectively, during the fourth quarter of 2012. Occupancy, furniture, and equipment expense increased $949 thousand, or 39.66%, to $3.34 million for the fourth quarter of 2012 compared with the fourth quarter of 2011. During the fourth quarter of 2012, the Company incurred merger related expenses of $857 thousand in connection with the acquisition of Peoples and Waccamaw. Other operating expense increased $446 thousand, or 9.06%, to $5.37 million for the fourth quarter of 2012 compared with the fourth quarter of 2011. Other operating expense included a net loss on sales and expenses associated with other real estate owned of $312 thousand for the fourth quarter of 2012 compared to $455 thousand for the fourth quarter of 2011. The efficiency ratio for the fourth quarter of 2012 was 56.38% compared to 56.73% for the fourth quarter of 2011.

Allowance for Loan Losses and Credit Quality on Non-covered Loans

Non-covered loans and other real estate owned are those assets not covered by the loss share agreement between the FDIC and the Bank in relation to the acquisition of Waccamaw. The allowance for loan losses on non-covered loans decreased to $25.77 million at December 31, 2012, compared with $26.21 million at December 31, 2011. The allowance for loan losses for non-covered loans as a percentage of non-covered loans decreased to 1.70% at December 31, 2012, compared with 1.88% at December 31, 2011. The decrease in the ratio of allowance for loan losses for non-covered loans as a percentage of non-covered loans for the fourth quarter of 2012 was impacted by loans marked to fair value as part of the Peoples' acquisition. For the fourth quarter of 2012, net charge-offs decreased $1.35 million, or 51.29%, compared with the fourth quarter of 2011. Annualized net charge-offs as a percentage of average non-covered loans were 0.33% for the fourth quarter of 2012, which represents a decrease compared with 0.76% for the fourth quarter of 2011.

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