Non-Performing Assets

Non-performing assets totaled $1.9 million and $7.6 million at December 31, 2012 and 2011, respectively. Non-accrual loans totaled $1.9 million and $7.6 million at December 31, 2012 and 2011, respectively. At December 31, 2012, non-accrual loans consisted of three commercial loans totaling $1.5 million and one consumer related loan totaling $345,000. At December 31, 2011, non-accrual loans consisted of four commercial loans totaling $2.2 million, two commercial real estate loans totaling $3.8 million, one commercial land loan totaling $1.3 million and one consumer related loan totaling $345,000. At December 31, 2012, other real estate owned ("OREO") consisted of one undeveloped land property totaling $90,000. There was no OREO outstanding at December 31, 2011. As a percentage of total assets, the amount of non-performing assets was 0.39% and 1.88% at December 31, 2012 and 2011, respectively. 

Refer to "Subsequent Events" discussion below for further details regarding the pay-off of a substandard non-accrual loan in February 2013. 

Net Interest Income and Margin

During the quarter and year ended December 31, 2012, net interest income was $4.0 million and $14.1 million, respectively, compared to $3.0 million and $11.3 million for the same periods last year. These increases were primarily attributable to additional interest earned in connection with our loan and investment portfolios as compared to the same periods last year, and were the result of increases in the average balances of these portfolios during the current periods, partially offset by a decline in yields earned. In addition, during the quarter ended December 31, 2012, the Company recognized $396,000 of interest income in connection with the pay-off of a non-accrual loan. 

The Company's net interest margin (net interest income divided by average interest earning assets) was 3.24% for the quarter ended December 31, 2012, compared to 3.07% for the same period last year. This 17 basis point improvement in net interest margin is primarily due to the interest income recognized as a part of the pay-off of the non-accrual loan discussed above, and to a lesser extent, the decline in the cost of interest bearing deposits and borrowings. Excluding the impact of the pay-off of this non-accrual loan, the yield on earning assets is decreasing due to a decline in interest rates earned on these assets during the quarter ended December 31, 2012, as compared to the same period last year. These declines were caused by a general downward trend in interest rates, as well as competitive loan pricing conditions in our market, which have continued to compress loan yields. During the quarter ended December 31, 2012 as compared to the same period last year, the decline in our cost of interest bearing deposits and borrowings is primarily attributable to a decrease in interest rates paid on these accounts. The average cost of interest bearing deposits and borrowings was 0.35% during the quarter ended December 31, 2012 compared to 0.41% for the same period last year.

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