PACW » Topics » Our net interest margin for the fourth quarter of 2006 was 6.52%, a decrease of 33 basis points when compared to the same period of 2005 and a decrease of 8 basis points when

This excerpt taken from the PACW 8-K filed Jan 25, 2007.

Our net interest margin for the fourth quarter of 2006 was 6.52%, a decrease of 33 basis points when compared to the same period of 2005 and a decrease of 8 basis points when

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compared to the third quarter of 2006. Yields on average earning assets were 8.44% and 7.85% for the fourth quarters of 2006 and 2005, respectively, and 8.29% for the third quarter of 2006. The yield on average loans was 8.61% and 8.35% for the fourth quarters of 2006 and 2005, and 8.59% for the third quarter of 2006.  The decrease in the net interest margin in the fourth quarter of 2006 compared to the fourth quarter of 2005 and the third quarter of 2006 is due mainly to the deposit structures of the banks we acquired and increased funding costs.  The banks we acquired in 2005 and 2006 had greater concentrations of time deposits and lower net interest margins than we have experienced.  Our funding costs increased due to competitive pressure on deposit pricing and an increased reliance on Federal Home Loan Bank advances.

The average cost of deposits was 1.33% for the fourth quarter of 2006 compared to 0.58% for the fourth quarter of 2005 and 1.09% for the third quarter of 2006. The increased deposit cost in the fourth quarter of 2006 compared to the same period of 2005 and third quarter of 2006 resulted from a combination of the higher deposit costs of the banks we acquired and upward adjustments we made in rates offered on selected money market and time deposits in response to competition.  Our relatively low cost of deposits is driven by demand deposit balances which averaged 43% of average total deposits during the fourth quarter of 2006.  The overall cost of interest-bearing liabilities increased to 3.17% for the fourth quarter of 2006 compared to 1.77% for the same period of 2005 and 2.91% for the third quarter of 2006.  The increase over both the fourth quarter of 2005 and the third quarter of 2006 is due to a combination of increased deposit costs and increased average borrowings used to fund loan growth and deposit flows.

During the fourth quarter of 2006 we took steps to both improve and maintain our net interest margin.  We sold $101.8 million of securities yielding 3.52% and used the proceeds to reduce overnight borrowings, which were costing approximately 5.35%.  In December, we retired $20.6 million of subordinated debentures that had an annual cost of 9.71%.  Also during the fourth quarter, we extended the term on $200 million of Federal Home Loan Bank borrowings for up to 2 years at rates more favorable than overnight liquidity.  We are considering the potential sale of certain loans the proceeds of which would be used to repay borrowings.

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