The decrease in net interest and dividend income was largely due to a planned reduction in the size of the Bank's balance sheet. In Q2-12, total average interest-earning assets decreased by $191 million from Q2-11, reflecting a $128 million decrease in average loans and a $63 million decrease in average securities and overnight investments. At the same time, average deposits and borrowed funds decreased by $142 million and $12 million, respectively, while average stockholders' equity increased by $13 million. The net interest margin was nearly unchanged as a $37 million decrease in net average interest-earning assets (due to a higher level of cash on hand) was offset by a slight increase in the interest rate spread. The spread improved by 4 basis points due to the steady reduction in rates paid on deposits and run off of higher-cost CDs and borrowings, largely offset by payoffs of higher yielding loans and calls of security investments, coupled with the re-investment of a large portion of these cash inflows in new loans and securities at lower market interest rates. Overall, the average cost of funds decreased by 46 basis points to 2.46% in Q2-12, from 2.92% in Q2-11, while the average yield on earning assets decreased at a slower pace by 42 basis points to 4.52% in Q2-12, from 4.94% in Q2-11.
Net earnings for 6mths-12 increased by $0.9 million over 6mths-11 due to the following: a $2.1 million decrease in the total provision for loan and real estate losses; a $1.2 million increase in noninterest income; and a $0.2 million decrease in operating expenses, partially offset by a $1.6 million decrease in net interest and dividend income and a $1.0 million increase in income tax expense. The reasons for these changes were essentially the same as the factors that caused the quarterly variances.
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