This excerpt taken from the PFED 10-K filed Mar 31, 2009.
Net loss was $2.4 million for the year ended December 31, 2008, compared to a $117,000 net loss for the same period in 2007. The change is primarily due to an increase in noninterest expense of $2.6 million, which was the result of a $1.7 million loss on security impairment and a $1.0 million impairment on the carrying value of other real estate owned properties.
Net Interest Income
Interest income in 2008 was $11.5 million, compared to $12.0 million in 2007. Average yield on interest-earning assets decreased to 5.76% in 2008, compared to 6.03% in 2007, while average interest-earning assets decreased $247,000 during 2008 from 2007. The decreases were due to a declining interest rate environment in 2008 that led to increased loan repayments during that period.
Interest expense in 2008 was $6.0 million compared to $6.5 million in 2007. The change in interest expense is due to a 21 basis point decrease in the average cost of interestbearing liabilities and a decrease of $934,000 in average interest-bearing liabilities from 2007.
Net interest income in 2008 was $5.4 million compared to $5.5 million in 2007. The net interest rate spread and net interest margin was 2.49% and 2.72% in 2008 compared to 2.55% and 2.78% in 2007, respectively.
Provision for Loan Losses
Management establishes provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral, peer group information, and prevailing economic conditions. Management increased the factor relating to economic conditions due to the weakening economy throughout the year and the increased unemployment level in the latter half of 2008. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision, as more information becomes available or as future events change. The provision for loan losses was $184,000 and $75,000 in 2008 and 2007, respectively.
Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of December 31, 2008 is maintained at a level that represents managements best estimate of inherent losses in the loan portfolio, and such losses were both probable and reasonably estimable.
Noninterest income in 2008 was $563,000 compared to $793,000 in 2007. The change was primarily due to a $74,000 gain on the sales of securities and a gain on the sale of real estate owned of $162,000 realized in 2007 with no similar gains occurring in 2008. The Company does not expect significant gains on the sales of securities or sales of real estate owned in 2009, as significant securities sales are not a planned strategy of the Company, and real estate owned is carried at the estimated market value as of December 31, 2008.
Noninterest expense in 2008 was $9.2 million, an increase of $2.6 million from 2007. The change was primarily due to a loss on security impairment of $1.7 million and a writedown on the carrying value of other real estate owned of $1.0 million during 2008. The Company recognized a $1.5 million other-than-temporary impairment loss on its mutual fund investment and a $211,000 other-than-temporary impairment loss on its equity securities portfolio in 2008. Management believed it could no longer forecast a recovery within a reasonable holding period for these investments, and according to accounting literature in FASB Staff Position 115, the losses were recognized through earnings. Advertising expense increased $121,000 for the year ended December 31, 2008 from the same period in 2007 due to the opening of the branch location on 47th Street in Chicago. Professional fees were $439,000 for the year ended 2008 compared to $302,000 in 2007. This increase was due to additional legal and accounting fees related to the Companys supervisory agreement with the OTS and the replacement of the Companys Chief Financial Officer.
The mutual fund investment and equity securities portfolio is carried at market value as of December 31, 2008. Subsequent to December 31, 2008, the market value of the investments has continued to deteriorate. If the market value declines are determined to be other-than-temporary, additional noninterest expense will be recognized in future periods. Similarly, real estate owned is carried at the estimated market value as of December 31, 2008. If the estimated value of real estate continues to decline, additional noninterest expense will be recognized in future periods. Management monitors the market value of the mutual fund investment by periodically reviewing the published net asset value of the mutual fund. Management monitors the estimated value of the Companys real estate owned by periodically reviewing comparable property sales, and obtaining updated real estate appraisals.
An income tax benefit of $1.0 million was recognized in 2008 compared to the income tax benefit of $234,000 recognized in 2007. The increase in income tax benefit was due to a larger pre-tax loss in 2008 compared to 2007, partially offset by a deferred tax asset valuation allowance of $339,000 recorded in 2008. The Company recognized a deferred tax asset valuation allowance in 2008 due to uncertainty that deferred tax assets may not be fully realized. Factors that the Company considered when recording the valuation allowance included that the Company reported a net loss in the previous two years, FDIC assessments are expected to increase noninterest expense in future periods, and the uncertainty regarding further other-than-temporary impairment as a result of further declines in the fair value of securities available for sale. If the Company determines that the deferred tax assets will more likely than not be realized in future periods, the Company will make an adjustment to the valuation allowance by reducing the provision for income taxes.