Decreases in net interest margin ratio during the three and nine months ended September 30, 2012, as compared to the same periods in 2011, were due to lower outstanding loan balances and lower yields earned on the Company's loan and investment portfolios, which were partially offset by reductions in the cost of interest bearing liabilities combined with a shift from higher-costing savings and time deposits to lower-costing demand deposits.

Non-interest Income

Non-interest income increased during the three and nine months ended September 30, 2012, as compared to the same periods in 2011 and the three months ended June 30, 2012, primarily due to increases in income from the origination and sale of residential mortgage loans. The dollar amount of the Company's residential loan originations increased 93% during the first nine months of 2012, as compared to the same period in 2011. While refinancing activity represented 62% of the Company's residential loan origination dollars during third quarter 2012, new loans for home purchases were 2% higher than in the prior quarter and 35% higher than in third quarter 2011.

NON-INTEREST EXPENSE

(Unaudited; $ in thousands)
     
For the Three Months Ended Sequential Quarter

% Change
Year Over Year

% Change
    September 30,2012   June 30,2012   September 30,2011        
Non-interest expense:    
Salaries and wages $ 23,341 $ 21,640 $ 20,801 7.9 % 12.2 %
Employee benefits 7,447 6,819 6,087 9.2 % 22.3 %
Occupancy, net 3,793 4,037 4,180

-6.0

%

-9.3

%
Furniture and equipment 3,231 3,189 3,018 1.3 % 7.1 %
Outsourced technology services 2,182 2,179 2,235 0.1 %

-2.4

%
Other real estate owned ("OREO") expense, net of income 2,612 1,806 2,878 44.6 %

-9.2

%
FDIC insurance premiums 1,622 1,601 1,631 1.3 %

-0.6

%
Professional fees 1,050 1,002 995 4.8 % 5.5 %
Mortgage servicing rights amortization 879 817 807 7.6 % 8.9 %
Mortgage servicing rights impairment 55 52 1,168 5.8 %

-95.3

%
Core deposit intangibles amortization 355 355 362 0.0 %

-1.9

%
Other expenses   10,497     13,802     10,879    

-23.9

%
 

-3.5

%
Total non-interest expense   $ 57,064     $ 57,299     $ 55,041    

-0.4

%
  3.7 %
 
 
Nine Months Ended   Year Over Year% Change
    September 30,2012   September 30,2011    
Non-interest expense:
Salaries and wages $ 66,545 $ 61,557

8.1

%
Employee benefits 23,232 20,922

11.0

%
Occupancy, net 11,818 12,408

-4.8

%
Furniture and equipment 9,558 9,367

2.0

%
Outsourced technology services 6,627 6,688

-0.9

%
FDIC insurance premiums 4,818 5,726

-15.9

%
OREO expense, net of income 5,523 6,631

-16.7

%
Professional fees 2,985 2,500

19.4

%
Mortgage servicing rights amortization 2,591 2,285

13.4

%
Mortgage servicing rights impairment (recovery) (761 ) 848

-189.7

%
Core deposit intangibles amortization 1,066 1,085

-1.8

%
Other expenses   37,801     32,174    

17.5

%
Total non-interest expense   $ 171,803     $ 162,191    

5.9

%

Salaries and wages expense increased 7.9% during third quarter 2012, as compared to second quarter 2012. Approximately half of the third quarter increase was attributable to higher incentive bonus accruals reflective of the Company's improved financial performance. The remaining quarter-over-quarter increase was primarily due to one additional accrual day in third quarter 2012 and higher commissions and overtime compensation related to continuing increases in residential real estate loan activity.

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