Quarterly Results of Operations
The net loss for the quarter ended September 30, 2010, the linked quarter and the comparable quarter of the prior year was driven by the provision for loan losses recorded each period and has shown improvement over the last two quarters. Total revenue for the quarter ended September 30, 2010, which consists of net interest income before the provision for loan losses and noninterest income, remained flat at $49.9 million compared to the June 30, 2010 quarter and decreased $1.3 million from the comparable quarter one year ago.
Net interest income
– The net interest margin, on a fully tax equivalent basis, for the quarter ended September 30, 2010 was 3.91% compared to 3.94% for the linked quarter ended June 30, 2010 and 4.03% for the comparable quarter ended September 30, 2009. Net interest income for the quarter ended September 30, 2010 was $30.9 million, decreasing from $31.2 million or a decline of 1.2% for the linked quarter ended June 30, 2010 and down from $34.1 million or a decline of 9.4% from the quarter ended September 30, 2009. This decrease from the prior year is primarily attributable to the reduction in average earnings assets, down 7.0% year over year and the lower net interest margin. The impact of higher nonperforming loans has also contributed to the reduction in the margin and net interest income.
Provision for loan losses -
After determining what the Company believes is an adequate allowance for loan losses based on the risk in the portfolio, the provision for loan losses is calculated based on the net effect of the quarterly change in the allowance for loan losses and net charge-offs. The provision was $17.6 million for the quarter ended September 30, 2010, compared to $36.4 million for the quarter ended June 30, 2010 and $21.3 million for the quarter ended September 30, 2009. The decrease in the fourth quarter of fiscal 2010 from the linked quarter was due primarily to the lower level of net charge-offs between the linked quarters. In addition, there has been no increase in the total loan balances and some stabilization in the level of impaired loans requiring specific reserve between the quarters.
Noninterest income –
Noninterest income increased $354 thousand or 1.9% as compared to the linked quarter as a result of higher mortgage and other loan income which was $4.4 million for the fourth quarter of fiscal 2010, an increase of $1.9 million or 77.5% from the linked quarter ended June 30, 2010 and an increase of $1.7 million or 61.8% from the comparative quarter ended September 30, 2009. The increase over the linked and comparable quarters is the result of higher volume of loans sold and the related gain on sales of the loans. The Company continues to utilize certain economic hedging strategies to protect the value of the capitalized mortgage servicing asset from interest rate risk. These strategies produced positive results during the fourth quarter, contributing to the increase in mortgage and other loan income. Insurance revenues, another main contributor to revenues, remained flat for the quarter ended September 30, 2010 at $6.3 million for the linked quarter and decreased slightly from $6.6 million for the comparable quarter one year ago. Insurance revenues continue to be reduced as a result of current market conditions. Offsetting increases in noninterest income during the fourth quarter was lower other income. This was a result of the final settlement from the FDIC totaling $1.5 million related to the Cape Fear Acquisition, which was received in the third quarter of the fiscal year.
Noninterest expense -
Total noninterest expense increased by $1.6 million, or 4.9%, to $34.7 million for the quarter ended September 30, 2010 compared to $33.1 million for the quarter ended June 30, 2010. This increase was primarily attributable to higher real estate owned ("REO") expenses and writedowns on REO to reflect further fair-value declines for the underlying properties during the quarter ended September 30, 2010 as compared to the linked quarter. Net REO expenses were $2.7 million for the September 30, 2010 quarter as compared to $925 thousand and $631 thousand for the quarters ended June 30, 2010 and September 30, 2009, respectively. The total of all other operating expenses, exclusive of REO, decreased $184 thousand, from the linked quarter and increased $238 thousand from the comparable quarter of the prior year.
Annual Results of Operations
The pre-tax pre-provision income for the year ended September 30, 2010 declined 4.1% to $64.0 million from $66.7 million for the year ended September 30, 2009. Net interest income and noninterest income both increased year-over-year, as a result of the increase in earning assets from the Cape Fear Acquisition, increases in mortgage and other loan income related to the higher volume of loan originations and associated sales of the loans resulting from the low interest rate environment; increases in 401(k) plan administration fees related to the acquisition of American Pensions, Inc. during the latter part of fiscal 2009; and income related to the final settlement with the FDIC for the Cape Fear Acquisition. Offsetting the increases in revenue were higher levels of noninterest expenses. Noninterest expense increased $17.3 million or 14.9% to $133.7 million for fiscal 2010 as compared to the prior fiscal year. The majority of the increase, $7.7 million, was related to salaries and employee benefits due to the increase in personnel primarily associated with acquisitions and new positions added during the year. Other significant increases in expenses for the current fiscal year as compared to the prior year are related to occupancy and other costs associated with the acquisitions, higher levels of REO expenses and writedowns on REO to reflect further fair-value declines for the underlying properties, and reserves necessary in fiscal 2010 related to losses incurred at the Company's reinsurance subsidiary.