Interest expense was $4.2 million for the third quarter of 2010, a decrease of $1.5 million, or 27.0%, compared to $5.7 million for the third quarter of 2009. Interest expense decreased primarily because of the lower interest rates paid on money market accounts and certificates of deposit. The decreased rates were the result of the 400 basis point decrease in the federal funds rate that occurred in 2008. Decreases in the federal funds rate, which is the rate that banks charge other banks for short term loans, generally have a lagging effect and decrease the rates banks pay for deposits. The lagging effect of deposit rate changes is primarily due to the Bank’s deposits that are in the form of certificates of deposit, which do not re-price immediately when the federal funds rate changes. Interest expense also decreased because of a $75 million decrease in the average interest-bearing liabilities between the periods. The decrease in average interest-bearing liabilities is primarily the result of a decrease in the average outstanding brokered certificates of deposit between the periods due to the lower funding needs caused by the reduction in assets between the periods. The average interest rate paid on interest bearing liabilities was 1.93% for the third quarter of 2010, a decrease of 50 basis points from the 2.43% average rate paid in the third quarter of 2009. Net interest margin (net interest income divided by average interest earning assets) for the third quarter of 2010 was 3.37%, a decrease of 9 basis points, compared to 3.46% for the third quarter of 2009.
Provision for Loan Losses
The provision for loan losses was $11.9 million for the third quarter of 2010, an increase of $8.5 million, compared to $3.4 million for the third quarter of 2009. The provision increased primarily because of the additional reserves established on commercial real estate loans due to decreases in the estimated value of the underlying collateral supporting the loans and an increase in the general reserves required for other risk rated commercial loans as result of an internal loan portfolio analysis. Total non-performing assets were $81.6 million at September 30, 2010, an increase of $10.5 million, or 14.7%, from $71.1 million at June 30, 2010. Non-performing loans increased $3.5 million and foreclosed and repossessed assets increased $7.0 million during the third quarter.