T |
able
1 shows a comparison of net interest income and average volumes, together with effective
yields earned |
on such assets and rates paid on such funds. The results shown
reflect the excess of interest earned on assets over the interest paid for funds.
Interest income is the
primary source of revenue for the Company. It comprised 92.1% of the Company's
total revenues in 1998, 92.4% in 1997 and 90.7% in 1996.
Net interest income is
the difference between interest income earned on average interest earning assets, such as
loans and securities, and interest expense on average interest bearing liabilities, such
as deposits and other borrowings. In Table 1, interest income on non- taxable securities
and loans has been adjusted to be fully tax equivalent so as to be comparable with rates
earned and paid elsewhere. In addition, rates earned on securities are calculated based
upon the average amortized cost of the related securities.
Several factors affect
net interest income, of which one factor is changes in interest rates, which are generally
indicated by the changes in the prime lending rate. The prime rate was stable at 8.50%
during the first three quarters of 1998 and declined during the fourth quarter to 7.75%.
The average weighted prime lending rate in 1998 was 8.36%, a decrease of 8 basis points
from 8.44% in 1997, and was 8.27% in 1996. Average rates earned on taxable
securities in 1998 declined 18 basis points to 6.16% from 1997 levels after
increasing 22 basis points in 1997 from 1996. Rates on federal funds sold in 1998 declined
17 basis points from 1997 after increasing 17 basis points in 1997 from 1996.
Another major factor
affecting the net interest margin is rates earned on loans. Table 1 shows that rates
earned on average loans in 1998 decreased to 9.05% in 1998 from 9.27% in 1997
after declining in 1997 from 9.56% in 1996. The yields on loans during 1998
decreased 22 basis points from 1997 in part as a consequence of the 8 basis points decline
of the average prime lending rate in 1998. Another factor impacting the overall decline in
loan rates was competitive pressures, which have caused our loan rates to decline and
increased the Company's portfolio of fixed rate loan., It is expected that competitive
pressures will continue to affect loan pricing in 1999. Loan rates in 1997 declined 29
basis points from 1996, primarily as a result of competition.
The average earning
asset ratio is another important factor affecting net interest income. The average earning
asset ratio is the percentage of average assets that earn interest income to total average
assets and an increase in this ratio has a positive effect on net interest income. This
percentage has increased for the Company during 1998 to 95.58% compared to 94.86% in 1997
and 93.85% in 1996. |
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As indicated in Table 1, the Company's net interest income rose in
1998 to $17,973,000. Net interest income increased $93,000 in 1998 from 1997. During 1997
net interest income increased $160,000 from 1996. A significant reason for the 1998
increase was that interest earning assets increased $37.8 million while interest bearing
liabilities only increased $29.4 million. This is further evidenced in Table 2, which
shows that the 1998 increase in net interest income is primarily attributable to changes
due to volume.
Another factor that
influenced net interest income in 1998 was the decrease in the interest rate spread. The
interest rate spread is the yield earned on assets less the rates paid on liabilities. The
interest rate spread decreased to 3.06% in 1998 as compared to 3.39% in 1997 and 3.64% in
1996.
The Company's average
deposit and other borrowing rates were 4.70% in 1998, a slight decrease from 4.73% in
1997, which had increased from 4.61% in 1996. The rates earned on average earning assets
during 1998 decreased to 7.76% from 8.12% in 1997, which had declined from 8.25% in 1996.
The rates on average earning assets decreased during both years primarily due to
competitive pressures on loan rates.
Another factor
influencing net interest income is the "interest bearing liabilities to earning
assets ratio", as shown in Table 1, which indicates how many cents of each dollar of
earning assets are funded by an interest bearing liability. As Table 1 indicates, this
relationship has declined to 79.89% in 1998 from 80.07% in 1997, which was lower than
1996's percentage of 81.40%. The decline in this ratio has a positive impact on net
interest income.
The mix of assets and
liabilities also affects net interest income. Average loans as a percentage of average
earning assets declined to 53.8% in 1998 as compared to 58.4% in 1997 and 59.2% in 1996.
As loans as a percentage of earning assets declines a larger percentage of earning assets
consists of securities, which normally earn lower yields than loans.
In 1998, total average
interest bearing deposits increased $18.9 million from 1997 levels while average other
borrowings, which consists primarily of repurchase agreement products and term advances
from the Federal Home Loan Bank, in creased $10.5 million. The 1998 increase in average
interest bearing deposits was primarily in time deposits, which increased $17.2 million,
while lower cost savings, NOW and money market deposits increased only $1.7 million. The
growth in higher costing interest bearing liabilities, such as time deposits and other
borrowings, during both 1998 and 1997 has impacted net interest income negatively.
Interest rates paid on
deposits and charged for loans during 1998 remained comparable with other local financial
institutions. Management has lowered time deposits rates during 1998 |