This excerpt taken from the WFBC 10-Q filed Nov 10, 2008.
Results of Operations
General. Net loss for the three-month period ended September 30, 2008 was $1.7 million or $(0.11) diluted earnings per share as compared to net income of $1.2 million or $0.08 diluted earnings per share for the comparable quarter in the prior year. The Companys net interest margin on a tax-equivalent basis increased 7 basis points to 3.15% for the three months ended September 30, 2008 from 3.08% for the three months ended September 30, 2007.
Interest Income. Interest income on loans decreased $816 thousand, or 4.7%, for the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007. This decrease resulted primarily from a decrease in the average yield on loans of 93 basis points to 5.69%. The decrease in the average yield of the loan portfolio is due to the decrease in short-term interest rates. Specifically, the Federal Reserve target rate decreased from 4.75% at September 30, 2007 to 2.00% at September 30, 2008. The Company does not invest in sub-prime loans or related assets, and accordingly, did not incur any significant impact to its loan yields from disruptions in the credit markets for sub-prime assets. Interest income on securities decreased $634 thousand for the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007. This was primarily due to a decrease in the average yield on securities of 55 basis points to 5.17% and a decrease in the average outstanding securities balance of $23.3 million.
Interest Expense. Interest expense on deposit accounts decreased $3.6 million, or 42.3%, for the three-month period ended September 30, 2008 compared to the comparable prior year period. The decrease resulted primarily from a decrease in the average cost of interest-bearing deposits of 141 basis points for the three-month period ended September 30, 2008 as compared to the similar prior year period. During the three-month period ended September 30, 2008, interest expense on total borrowings increased by $1.1 million, or 39.3%, over the comparable period ended September 30, 2007 due principally to an increase of $170.8 million, or 69.7%, in average total borrowings partially offset by a decrease of 84 basis points, or 17.9%, in the average rate paid on total borrowings. Additionally, the Company experienced a lag in rate decreases on its variable rate deposits at September 30, 2007. The lag in deposit rate decreases was due to the competitive market, which kept deposit rates higher during the immediate periods following Federal Reserve rate reductions. The lag subsided by the quarter ended September 30, 2008, as the deposit rates have gradually declined.
Net Interest Income. Net interest income is determined primarily from the average interest rate spread (i.e. the difference between the average yields earned on interest-earning assets and the average rates paid on interest-bearing liabilities) as well as the relative amounts of average interest-earning assets compared to interest-bearing liabilities. For the three months ended September 30, 2008 and 2007, our interest rate spread computed on a fully tax equivalent basis was 2.82% and 2.55%, respectively, which was caused by pressures existing in the market place to maintain deposit rates at a high level.
Net interest income for the three-month periods ended September 30, 2008 and 2007 was $11.3 million and $10.3 million, respectively, an increase of $1.0 million. This increase was due primarily to a decrease of 111 basis points in the average costs of interest-bearing liabilities to 2.76% for the three-month period ended September 30, 2008 from 3.87% for the three-month period ended September 30, 2007.
Provision for Loan Losses. In order to maintain the allowance for loan losses at a level that management deems adequate to absorb known and unknown losses which are both probable and can be reasonably estimated, a provision for loan losses is recorded through charges to earnings. The determination of the adequacy of the allowance is based upon the Companys regular review of credit quality and is based upon, but not limited to, the following factors: an evaluation of our loan portfolio, loss experience, current economic conditions, volume, growth, composition of the loan portfolio and other relevant factors. The balance of the allowance for loan losses is an estimate and actual losses may vary from these estimates. Management assesses the allowance for loan losses at least quarterly and makes any necessary adjustments to maintain the allowance for losses at a level deemed adequate.
A provision for loan losses of $2.4 million was made for the three months ended September 30, 2008 as compared to $242 thousand recorded during the three months ended September 30, 2007. This additional provision was due primarily to deterioration in three commercial loan relationships experienced during the three-month period, and the reduction of residential real estate loans as a percentage of total loans, which the Company sells primarily all of its residential real estate production, and the corresponding increase in commercial loans, which carry a higher level of risk, as a percentage of total loans.. The percentage of the allowance for losses to gross loans receivable, net of deferred fees, increased to 1.46% at September 30, 2008 compared to 1.14% at September 30, 2007.
Management believes the allowance for loan losses was adequate at September 30, 2008 and represents all known and inherent losses in the portfolio that are both probable and reasonably estimable. No assurance can be given as to the amount or timing of additional provisions for loan losses in the future as a result of potential increases in the amount of the Companys non-performing loans in the remainder of the Companys loan portfolio. Regulatory agencies, in the course of their regular examinations, review the allowance for loan losses and carrying value of non-performing assets. No assurance can be given that these agencies might not require
changes to the allowance for loan losses in the future.
Non-Interest Income. Non-interest income is comprised of investment services income, account service fees and charges, loan servicing fees, realized gains and losses on assets available or held for sale, increases in the cash surrender value of bank owned life insurance (BOLI) and with the acquisitions of BeneServ, insurance premiums, and Carnegie, professional investment consulting services. Non-interest income decreased $1.0 million, or 26.6%, for the three-month period ended September 30, 2008 as compared to the quarter ended September 30, 2007. This decrease was due primarily to impairment charges of $1.6 million recorded on certain available for sale investment securities. This was partially offset by an increase of $241 thousand in investment services income and an increase of $196 thousand in service charges and fees.
Non-Interest Expense. The primary components of non-interest expense are compensation and employee benefits, occupancy and equipment expenses, data processing costs, deposit account services, professional fees and a variety of other expenses. Non-Interest expense increased $2.0 million, or 16.5%, for the three-month period ended September 30, 2008 as compared to the comparable period ended September 30, 2007. The increase resulted primarily from the increases in professional fees, deposit insurance premiums, and salaries and employee benefits of $1.0 million, $464 thousand, and $315 thousand, respectively. Professional fees increased due to the utilization of consulting and legal services due to the pending merger and remediation of the Companys previously disclosed material weakness in its internal control over financial reporting. Deposit insurance premiums increased due to the Companys full utilization of its FDIC credit in the three-month period ended June 30, 2008. Salaries and employee benefits increased primarily due to increased commissions related to mortgage sales as the related volumes have increased from the prior year.
Income Tax Benefit / Expense. The income tax benefit for the three-month period ended September 30, 2008 was $858 thousand. This compares to a provision of $438 thousand for the similar prior year period. The effective tax rate for the three-month period ended September 30, 2008 was 33.8% compared to 27.4% for the three-month period ended September 30, 2007. During the quarter ended September 30, 2008, the effective tax rate was effected by an increase in the valuation allowance of $308 thousand associated with impairments recorded on equity securities.