Operating Results Analysis
Net interest income before provision for loan losses increased from $2.7 million and $10.2 million during the three and twelve months ended December 31, 2011 to $3.1 million and $11.8 million during the three and twelve months ended December 31, 2012. The increases in net interest income were primarily generated by a rise in interest earning assets, as the Bank's net interest margin was lower during the three and twelve months ended December 31, 2012 than during the comparable periods during the prior year. This margin compression is a general trend facing the banking industry, as funding costs have already been reduced to historically low levels while asset yields continue to fall in conjunction with:
•the Federal Reserve's implementing aggressive monetary policies (including quantitative easing) in an effort to reduce the stubbornly high national unemployment rate;
•strong price competition for high quality loans; and
•older, higher yielding securities maturing and amortizing and being replaced by new, lower yielding securities reflective of current market interest rates.
The Bank plans to support its net interest income during 2013 via the following strategies:
•continuing to grow the Bank's balance sheet, particularly the loan portfolio; and
•allocating a greater percentage of excess on-balance sheet liquidity to securities versus cash equivalents in order to obtain incremental yield.
The provision for loan losses was $432 thousand during the fourth quarter of 2012, compared to $196 thousand during the fourth quarter of 2011 and $98 thousand during the third quarter of 2012 (the immediately preceding quarter). The provision for loan losses for 2012 totaled $994 thousand, compared to $665 thousand for 2011. Most of the provision for loan losses during 2012 was associated with loan portfolio growth, with a lesser amount stemming from increased reserves for a relatively small number of loans downgraded to a criticized (i.e. Special Mention) or classified (i.e. Substandard) credit rating.
Non-interest income increased from $42 thousand and $144 thousand during the three and twelve months ended December 31, 2011 to $786 thousand and $909 thousand during the three and twelve months ended December 31, 2012. The vast majority of this increase was due to the death benefit and dividend income received on the BOLI assets purchased during the third quarter of 2012. In regards to fee income, Jayme Fields, the Bank's Chief Financial Officer, stated: "We appreciate the importance of augmenting non-interest income during a period of historically low interest rates accompanied by pressure on net interest margins. We are currently reviewing our operations and fees and charges to identify opportunities for additional sources of non-interest income, with the objective of implementing changes during the second quarter of 2013."
Non-interest expense increased from $2.1 million and $7.4 million during the three and twelve months ended December 31, 2011 to $2.3 million and $8.7 million during the three and twelve months ended December 31, 2012. These increases stemmed from the Bank's investment in additional personnel and enhanced facilities; and from various costs that have risen in conjunction with the increase in the Bank's balance sheet and related higher volume of loan and deposit accounts. The Bank redesigned its health and welfare benefits effective January 1, 2013 to both provide good relative value to its employees and control related expenses. The Bank's efficiency ratio (operating costs compared to income from operations) improved to 68.74% for the full year of 2012 from 71.81% for the full year of 2011.
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