receiving downgrades. The major rating agencies will continue to review these residential real estate collateralized investment types and could possibly apply further downgrades to these and other investments within the Company's investment portfolio. The Asset/Liability Committee will continue to review these investments and closely monitor their performance. Reference is made to Note 3 for additional information regarding the Company's analysis and review for possible other than temporary impairment (OTTI) relating to these securities. This OTTI analysis will be performed on a quarterly basis. Considering the above described downgrades subsequent to September 30, 2008, and the sensitivity of the various assumptions used in the Company's OTTI analysis model, there is an increased risk that one or more of the Company's collateralized mortgage obligations will experience an OTTI charge in future periods.
Partially offsetting the increase in the securities held to maturity balances were decreases in real estate secured loan balances, consumer installment loan balances and securities available for sale balances of $52.7 million, $11.2 million and $31.6 million, respectively. The loan balance decreases are related to management's decision to reduce real estate secured and vehicle indirect lending due to the ongoing economic downturn in the State of Michigan. Additionally, the decrease in securities available for sale balances were due mainly to the sale of $15.4 million of investment holdings, the maturity of $5.9 million in U.S. government sponsored agency securities, a reduction in fair market value versus amortized cost of $9.3 million on whole loan collateralized mortgage obligations, and $9.1 million in principal repayments in the mortgage-backed and whole loan collateralized mortgage obligation portfolios. Also, the Company incurred a $4.8 million impairment charge on a Freddie Mac preferred security (see Note 3), which represented a $3.1 million reduction versus fair value at December 31, 2007. Partially offsetting these reductions in the available for sale securities portfolio was the purchase of a Ginnie Mae collateralized mortgage obligation totaling $13.6 million.
Total liabilities increased $238.3 million, or 14.6%, to $1.872 billion at September 30, 2008 from $1.634 billion at December 31, 2007. The primary reason for the increase was to fund the growth in the securities held to maturity portfolio through wholesale funding sources. Specifically, the Company funded net growth to date with an increase of $164.9 million in FHLB advances and an increase of $203.4 million in brokered certificates of deposit, partially offset by a decrease in federal funds purchased of $42.6 million. Total retail deposits decreased $78.8 million (discussed below).
Portfolio Loans and Asset Quality. Nonperforming loans totaled $82.3 million at September 30, 2008 compared to $61.0 million at December 31, 2007, an increase of $21.3 million, or 34.8%. In connection with the increase in nonperforming loan balances and in spite of the 11.9% increase in total assets, total nonperforming assets as a percentage of total assets increased to 5.01% at September 30, 2008 compared to 4.00% at December 31, 2007. As indicated by the table below, $7.6 million, or 21.4%, of the increase in total nonperforming assets resulted from an increase in other real estate owned and $20.9 million, or 72.3%, resulted from an increase in nonperforming real estate mortgage loans and commercial loans. Of the $7.6 million increase in real estate and other assets owned, $3.0 million of the balance represents the sale of foreclosed properties which have been sold under terms of a special loan program generally requiring no down payment and, as a result, are being recognized under the installment method of accounting. As a result, as soon as the borrowers under this financing program repay principal in the amount of 5%, to a loan-to-value balance of 95%, these financing arrangements will be transferred into loan status. The increase in these nonperforming categories is overwhelmingly due to a rise in foreclosures reflecting both weak economic conditions and soft residential real estate values in many parts of Michigan in which the Company lends to.
The following table sets forth information regarding nonperforming assets (in thousands):

                                                                   September 30,          December 31,
                                                                       2008                   2007
Nonperforming loans:
Real estate                                                       $        62,679        $       56,098
Commercial                                                                 18,928                 4,613
Consumer                                                                      656                   307

Total                                                                      82,263                61,018
Real estate and other assets owned                                         18,828                11,190

Total nonperforming assets                                        $       101,091        $       72,208

Total nonperforming loans as a percentage of total loans                     5.58 %                3.96 %
Total nonperforming assets as a percentage of total assets                   5.01 %                4.00 %

The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by provisions charged to operations and reduced by net charge-offs. The following table sets forth activity in the allowance for loan losses for the interim periods (in thousands):

                                                     Three Months                        Nine Months
                                                  ended September 30,                ended September 30,
                                                 2008              2007             2008              2007
Balance, beginning of period                  $    20,209        $ 14,327        $    21,464        $ 14,304
Provision for loan losses                          19,469           7,556             32,850           9,306
Charge-offs                                        (7,233 )        (1,177 )          (22,130 )        (3,269 )
Recoveries                                            310             167                571             532

Balance, end of period                        $    32,755        $ 20,873        $    32,755        $ 20,873


Allowance for loan losses to total loans                                                2.22 %          1.33 %
Allowance for loans losses to
nonperforming loans                                                                    39.82 %         48.92 %

Deposits. Deposits increased $124.6 million, or 10.4%, from December 31, 2007 to $1.323 billion at September 30, 2008. The increase in interest bearing deposits of $127.2 million, or 11.5%, was primarily due to a net increase of $203.4 million in brokered certificates of deposit used to partially fund the growth of the held to maturity investment portfolio. Of the $354.1 million brokered certificate of deposit balances held at September 30, 2008, $277.3 million, or 78.3%, are callable at the Company's option. The increase in brokered deposits was accompanied by an increase in money market deposit balances of $9.6 million. Partially offsetting these increases in interest bearing deposits were reductions in retail savings balances, retail certificates of deposit and public funds certificates of deposit of $3.4 million, $36.9 million and $39.6 million, respectively. The increase in total interest bearing deposits was accompanied by a decrease of $2.6 million, or 2.9%, in noninterest-bearing deposits. Deposit growth continues to be affected by general adverse economic conditions experienced in the State of Michigan.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND 2007
Summary. The Company experienced a net loss for the three months ended September 30, 2008 of $14.9 million compared to a net loss of $2.3 million during the same period in 2007. Net loss for the nine months ended September 30, 2008 totaled $17.4 million compared to net income of $2.2 million during the same period in 2007. Diluted earnings per share for the three and nine month periods ended September 30, 2008, resulted in a loss of $1.92 and $2.25, respectively, versus a loss of $0.29 and earnings of $0.28, respectively for the same periods in 2007. Annualized losses on average assets during the three and nine month periods ended September 30, 2008, were 2.89% and 1.14%, respectively, compared with a negative return of 0.50% and a positive return of 0.17%, respectively, during the same periods in 2007. Annualized losses on average equity during the three and nine month periods ended September 30, 2008, were 37.34% and 13.96%, respectively, compared with a negative return of 5.09% and a positive return of 1.67%, respectively, during the same periods in 2007.
Decreased market values in Michigan's real estate markets and resulting impact on credit and asset quality have further resulted in lower earnings to the Company. In response to the negative impact on asset quality and underlying collateral values, the Company substantially increased its allowance for loan losses as a percent of portfolio loans during the third quarter of 2008, from 1.33% to 2.22%, resulting in a significant increase in the provision for loan losses for the quarter. During third quarter 2008, the Company provisioned $19.5 million for loan losses while recording $6.9 million in net charge-offs against the allowance for loan losses account. Included in the $19.5 million provision in the third quarter was an $8.0 million provision for a large commercial loan that is part of a shared national credit and a $2.7 million charge off on a fraudulent commercial loan. Management does not believe that the fraud associated with this loan represents any systemic pattern within the total loan portfolio. For the nine month period ended September 30, 2008, the Company provisioned $32.9 million for loan losses while recording $21.6 million in net charge-offs against the allowance for loan losses account. In comparison, the Company provisioned $7.6 million and $9.3 million during the three and nine month periods ended September 30, 2007, respectively, and recorded $1.0 million and $2.7 million in net charge-offs during the three and nine month periods ended September 30, 2007, respectively. Relatedly, costs to repossess and maintain nonperforming loan collateral increased to $1.6 million during the third quarter of 2008, an increase of 351% over the $0.3 million incurred during the same period in 2007. For the nine month period ended September 30, 2008, the Company incurred $3.1 million in costs to repossess and maintain nonperforming loan collateral, an increase of 245% over the $0.9 million incurred during the same period in 2007.

Also negatively impacting earnings during the three month period ended September 30, 2008, was a non-cash-other-than temporary impairment charge of $4.8 million on a Freddie Mac preferred equity security holding (see Note 3). Under a provision of the Emergency Economic Stabilization Act (EESA), signed into law on October 3, 2008, banks that experienced losses on their investments in Fannie Mae or Freddie Mac preferred shares are allowed to deduct their losses as ordinary losses for tax purposes. The bill provides that for purposes of the Internal Revenue Code of 1986, gain or loss from the sale or exchange of any "applicable preferred stock" will be treated as ordinary income or loss. "Applicable preferred stock" means preferred stock in Fannie Mae or Freddie Mac that was held on September 6, 2008, or was sold or exchanged on or after January 1, 2008, and before September 7, 2008. The Company has held its Freddie Mac preferred security position since March 2001 and has held it continuously, without interruption, through the reporting period ending September 30, 2008. However, as EESA was not signed into law until October 3, 2008, a $1.6 million tax benefit to result from the Freddie Mac preferred security impairment charge is not reflected in the third quarter 2008 financial statements contained herein. Instead, the $1.6 million tax loss benefit will be reflected in the fourth quarter 2008 financial statements.
Partially offsetting the negative impact to earnings during the three month period ended September 30, 2008, as a result of the factors noted above, was an increase of $1.1 million in net interest income, as well as a $0.3 million decrease in noninterest expenses, excluding nonperforming asset costs. The decrease in noninterest expense during third quarter 2008 was primarily a result of lower compensation and employee benefit expenses and advertising and marketing expenses. As a partial offset to the substantial increase in the provision for loan losses and nonperforming asset costs during the nine months ended September 30, 2008, total noninterest income, excluding the Freddie Mac preferred stock impairment charge, increased $1.4 million. Also, noninterest expense, excluding nonperforming asset costs, decreased $0.7 million. The increase in noninterest income was primarily due to an increase in gain on sale of securities of $0.7 million versus the same period in 2007, while the decrease in noninterest expense was primarily a result of lower compensation and employee benefit expenses of $1.3 million.
Due to the deferral, until fourth quarter 2008, of the $1.6 million tax benefit related to the Freddie Mac preferred stock impairment charge, the Company recorded a tax benefit at an effective tax rate of 29.0% resulting in a $7.1 million benefit. Excluding the $4.8 million before tax impairment charge on the Freddie Mac preferred stock, from pre-tax loss, the effective tax rate recorded by the Company was 36.1%.
In order to preserve capital and balance sheet strength during this difficult economic period, the Board of Directors voted on August 8, 2008, to temporarily suspend the quarterly common stock cash dividend. Temporary suspension of the $0.09 per share quarterly dividend will preserve approximately $740,000 of retained earnings quarterly. Management and the Board of Directors believes this action will provide added support in navigating through the current economic downturn, optimize shareholder value and result in better long term returns to its shareholders.
Net Interest Income. Net interest income, before provision for loan losses, for the nine months ended September 30, 2008, totaled $41.3 million, an increase of 2.2%, as compared to $40.4 million for the same period in the prior year. Due to the competitive nature in attracting new deposits, market rates for deposits decreased at a slower rate than market lending rates during the nine months ended September 30, 2008, as compared to the same period last year, as evidenced by the average rate on interest bearing liabilities as noted in the tables below. The increased costs of attracting new and maintaining current deposits, an increase in the cost of borrowings to fund loan growth, and increasing non-performing asset balances compressed net interest margin, which fell 30 basis points to 2.90% for the nine months ended September 30, 2008 as compared to 3.20% for the same period last year. Positively impacting net interest income for the nine month period ended September 30, 2008, was a 294% increase, to $332.2 million, in average investment security balances compared to $84.2 million during the same period in 2007. The average yield earned on the investment securities portfolio during the nine months ended September 30, 2008, increased 278 basis points, to 7.12%, compared to a yield of 4.34% earned during the same period in 2007.

The following tables present an analysis of net interest margin for the three and nine month periods ending September 30, 2008 and 2007 (in thousands).

                                                    For the Three Months Ended September 30,
                                              2008                                             2007                                  Change in Net Interest Income
                                                             Average                                          Average
                             Average         Revenue/         Yield/          Average         Revenue/         Yield/
                             Balance           Cost            Rate           Balance           Cost            Rate           Volume           Yield/Rate          Net
Assets

Loans (1)                  $ 1,513,337       $  22,722           6.02 %     $ 1,564,724       $  27,927           7.08 %     $     (910 )      $     (4,295 )     $ (5,205 )
Certificates of
deposit                            319               4           5.03 %             319               2           2.49 %              -                   2              2
Securities (2):
Taxable                        361,347           6,595           7.32 %          69,630           1,086           6.19 %          4,514                 995          5,509
Tax-exempt                      21,743             183           3.38 %          27,746             245           3.50 %            (53 )                (9 )          (62 )
Federal funds sold               7,823              36           1.85 %           2,828              19           2.67 %             33                 (16 )           17
Federal Home Loan Bank
stock                           31,086             405           5.23 %          20,899             222           4.21 %            107                  76            183
Interest earning
deposits                           126               1           3.18 %              50               -           0.00 %              -                   1              1

Total interest-earning
assets                       1,935,781          29,946           6.20 %       1,686,196          29,501           6.94 %     $    3,691        $     (3,246 )          445

Noninterest-earning
assets                         118,755                                          119,215

Total assets               $ 2,054,536                                      $ 1,805,411


Liabilities
Deposits:
Savings                    $   121,585             349           1.15 %     $   112,544             601           2.12 %     $       48        $       (300 )         (252 )
NOW                             80,999              36           0.18 %          79,401             158           0.79 %              3                (125 )         (122 )
Money market                   243,360           1,125           1.85 %         308,253           3,069           3.95 %           (641 )            (1,303 )       (1,944 )
Certificates of
deposit                        782,695           7,789           3.99 %         573,523           6,980           4.83 %          2,526              (1,717 )          809

Total interest-bearing
deposits                     1,228,639           9,299           3.04 %       1,073,721          10,808           3.99 %          1,936              (3,445 )       (1,509 )
Short-term borrowings              191               1           2.10 %          29,224             430           5.84 %           (424 )                (5 )         (429 )
FHLB advances                  566,726           6,422           4.55 %         412,880           5,153           4.95 %          1,904                (635 )        1,269

Total interest-bearing
liabilities                  1,795,556          15,722           3.51 %       1,515,825          16,391           4.29 %     $    3,416        $     (4,085 )         (669 )

Non-interest bearing
deposits                        92,809                                           97,712
Other
Noninterest-bearing
liabilities                      6,927                                           13,435

Total liabilities            1,895,292                                        1,626,972
Stockholders' equity           159,244                                          178,439

Total liabilities and
stockholders' equity       $ 2,054,536                                      $ 1,805,411


Net interest-earning
assets                     $   140,225                                      $   170,371

Net interest income                          $  14,224                                        $  13,110                                                           $  1,114

Interest rate spread
(3)                                                              2.69 %                                           2.65 %

Net interest margin as
a percentage of
interest-earning
assets (4)                                                       2.95 %                                           3.08 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                                                    107.81 %                                         111.24 %

. . .