The efficiency ratio which measures the ratio of noninterestexpense to total revenue was 69
The efficiency ratio, which measures the ratio of noninterestexpense to total revenue, was 69.10% for the three months ended March 31, 2009,as compared to 65.07% for the three months ended March 31, 2008. In addition, higher costs wereincurred for marketing, sponsorships, broker fees, legal, and accounting andprofessional fees. This increase was due primarily to higher service charges on depositaccounts and to gains realized on the investment securities portfolio.Noninterest expenses were $10.3 million for the three months ended March 31,2009, as compared to $6.2 million for the same period in 2008, a 66% increase.The primary reason for this increase was the Fidelity acquisition whichincreased the size of the organization resulting in higher staff levels andrelated personnel costs, increased occupancy costs, higher internet and licenseagreement fees, and higher loan collection costs. At March 31, 2009, the Company held $3.3 million ofOther Real Estate Owned ("OREO") as compared to $909 thousand at December 31,2008 and no OREO at March 31, 2008.Noninterest income for the three months ended March 31, 2009 was $1.4 million ascompared to $940 thousand for the three months ended March 31, 2008, a 52%increase. The increase in non-performing loans is due to thefollowing: one loan for approximately $10.9 million which was subsequentlybrought current, fifteen loans acquired from Fidelity totaling approximately$11.7 million, five commercial real estate loans totaling approximately $5.0million which are currently experiencing delays in construction, development,and/or absorption, two commercial business loans totaling approximately $3.3million, and a number of smaller commercial business loans totalingapproximately $4.0 million. Non-performing loans at March 31,2009 increased by $34.8 million as compared to March 31, 2008's level of $11.7million, or 1.54% of loans.
This lower coverage ratio at March 31, 2009 is reflective of twoprimary factors: approximately $11.7 million, or 25% of non-performing loanswere acquired from Fidelity and are carried at fair value, without any allowanceattributable for pre-acquisition deterioration as required under AICPA Statementof Position 03-3, "Accounting for Certain Loans or Debt Securities Acquired in aTransfer", and the addition of one loan of approximately $10.9 million tonon-performing status. Inaddition to the factors noted above for the past quarter, the increase in theallowance at March 31, 2009 as compared to March 31, 2008 was attributable tothe acquisition of the loan portfolio of Fidelity whose allowance for creditlosses was approximately $7.5 million or 2.10% of loans outstanding at the dateof the acquisition on August 31, 2008.At March 31, 2009, the allowance for credit losses represented 41% ofnon-performing loans as compared to 72% at December 31, 2008 and 75% at March31, 2008. The higher provisioning in the first quarter of 2009 as compared to 2008is attributable to risk migration within the portfolio and increased reservesfor problem loans.The allowance for credit losses represented 1.50% of loans outstanding at March31, 2009, as compared to 1.45% at December 31, 2008 and 1.15% at March 31, 2008.The higher allowance percentage at March 31, 2009 as compared to December 31,2008 resulted primarily from increases in reserves for problem loans. The Company's net interest margin remains favorable to peer-bankingcompanies.The provision for credit losses was $1.6 million for the three months endedMarch 31, 2009 as compared to $720 thousand for the three months ended March 31,2008. Additionally, theCompany's issuance of $12.15 million of subordinated notes represents anadditional category of interest expense which did not exist in the first quarterof 2008. For the three months ended March 31, 2009the net interest margin was 3.76% as compared to 4.19% for the three monthsended March 31, 2008 and 3.74% for the three months ended December 31, 2008.Margin compression, reflecting declines in market interest rates on earningassets resulting from Federal Reserve activities which have not been matched bycomparable declines in rates on interest bearing liabilities, has beenchallenging the banking industry for a significant period. While a significant portion of theseincreases was due to the Fidelity acquisition, the Company increased loans byapproximately $100 million and increased deposits and customer repurchaseagreements by approximately $28 million in the two full quarters since theacquisition.Net interest income increased 57% for the three months ended March 31, 2009 over2008, as the effect of favorable growth noted above was partially offset bydeclines in the net interest margin.
The lowerratios are due principally to a decline in the net interest margin in the pasttwelve months and to substantial increases in the provisions to the allowancefor credit losses.Both lending and deposit activities showed growth for the period ended March 31,2009 as compared to the same period in 2008, as average loans increased 75% andaverage deposits increased by 77%. The annualized return on average common equity(ROACE) was 5.87%, as compared to 7.98% for the same period in 2008. Non-performing assets net of this loanamounted to $38.9 million or 2.60% of total assets.For the three months ended March 31, 2009, the Company reported an annualizedreturn on average assets (ROAA) of 0.56% as compared to 0.77% for the threemonths ended March 31, 2008. Delays incompleting the documentation on the extension caused the loan to be included innon-performing status at March 31, 2009. SinceMarch 31, 2009, one loan of approximately $10.9 million, representingapproximately 23% of total non-performing loans was brought current withadditional funds posted in an escrow account by the borrower. The Company is conservative in placing loans onnon-accrual status and believes, based on its loan portfolio risk analysis, thatits allowance for loan losses at 1.50% of total loans at March 31, 2009 isadequate to absorb any credit losses in the loan portfolio at that date. Management remains attentive to early signs of deterioration inborrower's financial conditions.