The increase in net interest income was due to a 37 basis point widening of the Company's net interest margin to 4.33% in 2010 from 3.96% a year ago. The decrease in the provision for loan losses in 2010 versus the comparable 2009 period was due to several factors, most notably a significant reduction in non-accrual loans in 2010.
The growth in non-interest income in 2010 resulted principally from a $2.1 million increase in net gains on sales of securities coupled with a $4.0 million decrease in non-cash other-than-temporary impairment ("OTTI") charges. Deposit service charge income declined by $281 thousand in 2010 principally due to lower return item fees.
Total operating expenses increased by $481 thousand or 2.2% to $22.2 million in 2010, primarily due to a $1.3 million increase in salaries and other employee benefits expenses resulting from increases in performance-based compensation accruals. These increases were partly offset by a $1.0 million decrease in FDIC and NYS assessment expenses in 2010 resulting primarily from the previously noted FDIC special assessment recorded in the second quarter of 2009.
The Company recorded a $2.9 million income tax expense in the first half of 2010 versus a $2.0 million income tax benefit in the comparable 2009 period.Asset Quality Non-accrual loans totaled $7 million or 0.7% of total loans outstanding at June 30, 2010 versus $35 million or 3.1% of total loans outstanding at June 30, 2009 and $6 million or 0.5% of total loans outstanding at March 31, 2010. Non-accrual loans categorized as held for sale, previously written down to estimated fair value, amounted to $319 thousand at June 30, 2010, $12 million at June 30, 2009 and $370 thousand at March 31, 2010. The decrease in non-accrual loans at June 30, 2010 compared to June 30, 2009 resulted primarily from loan sales and charge-offs during the fourth quarter of 2009. The $1 million increase in non-accrual loans at June 30, 2010 compared with March 31, 2010 was primarily due to the addition to non-accrual status of several small business credits. The allowance for loan losses as a percentage of total non-accrual loans, excluding non-accrual loans categorized as held for sale, amounted to 444% at June 30, 2010 versus 122% at June 30, 2009 and 473% at March 31, 2010.