The increase in net interest and dividend income over Q3-10 reflected a 15 basis point improvement in the net interest margin, partially offset by a planned decrease in the Bank's assets and liabilities as well as decreased lending opportunities. In Q3-11 total average interest-earning assets decreased by $82 million from Q3-10, reflecting a $155 million decrease in loans, partially offset by an $81 million increase in security investments. At the same time, average deposits and borrowed funds decreased by $103 million and $15 million, respectively, while average stockholders' equity increased by $28 million (primarily from a common stock offering completed in October 2010). The decrease in average assets positively impacted the Bank's regulatory capital ratios.

The higher net interest margin was attributable to lower rates paid on deposits (particularly CDs) and the ongoing repayment of maturing higher-cost brokered CDs and FHLB borrowings, largely offset by the negative impact from the net decrease in the loan portfolio. Overall, the yield on average earning assets decreased by 22 basis points to 4.74% in Q3-11, from 4.96% in Q3-10, due to the impact of payoffs of higher yielding loans and calls of security investments due to declining interest rates, coupled with the re-investment of a large portion of these cash inflows into securities at lower interest rates. The average cost of funds decreased at a faster pace by 34 basis points to 2.81% in Q3-11, from 3.15% in Q3-10, due to the factors noted above.

Net earnings for the first nine months of 2011 amounted to $6.8 million, or $0.32 per diluted common share, compared to a net loss of $55.4 million, or $6.39 per share for the same 2010 period. The improvement resulted from a $105.3 million decrease in the total provision for loan and real estate losses, a $2.7 million decrease in real estate expenses, a $2.3 million increase in noninterest income and a $2.1 million decrease in noninterest expenses, the total of which was partially offset by a $2.3 million decrease in net interest and dividend income and a $47.9 million increase in income tax expense. The net loss in the 2010 period was primarily driven by a bulk sale in May of nonperforming and underperforming assets as discussed in prior releases. The assets sold aggregated to $207 million and consisted of $192 million of loans and $15 million of REO. The assets were sold at a substantial discount to their net carrying values. As a result of this transaction, a $79 million combined provision for loan and real estate losses was recorded, which after taxes contributed approximately $44 million, or 79%, to the reported loss. The reasons for the changes in the other factors noted are similar to those described earlier regarding the quarterly variances. At September 30, 2011, the Company had a net deferred tax asset totaling $41.1 million, which included unused net operating loss carryforwards (NOLs) of $40 million for Federal purposes and $72 million for state and local purposes. The NOLs, which arose from the bulk sale, are available to reduce taxes payable on future taxable income.

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