The increase of $22,000 in interest and fees from loans was due primarily to an increase in average loan balances outstanding for the three months ended September 30, 2016 of $5.8 million as compared to the three months ended September 30, 2015. Partially offsetting the positive impact on interest income due to a higher average loan balance, the interest yield from the loan portfolio decreased 0.16% to 4.78% for the third quarter of 2016 from 4.94% for the third quarter of 2015.The $31,000 decrease in non-interest expense was due primarily to a $32,000 decrease in compensation expense due to a reduction in salary and medical expenses. In addition, expenses related to the amortization of leasehold improvements, equipment licensing fees, marketing, and other real estate owned decreased by $12,000, $11,000, $11,000, and $8,000, respectively, which contributed to lower non-interest expense. Also, legal expenses, primarily relating to the Bank's non-performing assets, decreased $11,000. Partially offsetting these positive variances, data processing expenses increased $22,000 as the Bank outsourced data processing functions, director fees increased $15,000, and other professional fees increased $12,000. Net interest margin for the third quarter of 2016 was 3.42%, a decrease of 0.11% from the 3.53% net interest margin for the third quarter of 2015. The decline in the net interest margin resulted from a reduction of 0.12% in the yield from earning assets, primarily the loan portfolio. The $34,000 net income improvement for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 can be primarily attributed to an increase in gains from the sale of investment securities of $72,000, an increase in fees from loans of $96,000, a $39,000 reduction in the Bank's loss from the sale of other real estate and a $35,000 decline in other expenses. A decline in net interest income of $64,000, an increase in the provision for loan losses of $15,000, a decline in other non-interest income of $108,000 and an increase in the provision for income taxes of $21,000 partially reduced the impact of the favorable variances. The decline in other non-interest income was due primarily to the receipt in the third quarter of 2015 of $103,000 of other non-interest income associated with the sale of other real estate owned compared to no such proceeds in the third quarter of 2016.
The $64,000 decrease in net interest income was mainly due to a $45,000 increase in interest expense, as well as a $115,000 decrease in interest earned from investment securities partially offset by an increase of $44,000 in interest from cash and cash equivalents and a $52,000 increase in interest and fees from loans. The increase in interest expense was primarily due an increase in the average rate paid on deposits from 0.64% in last year's first nine months to 0.68% this year-to-date caused by an increase in the rate of interest paid on money market deposit accounts and certificates of deposit. In addition, the average balance in interest-bearing accounts increased $2.2 million to $117.6 for the nine months ended September 30, 2016.The decrease of $115,000 in interest earned from investment securities was due primarily to a $4.7 million decrease in the average investment balance outstanding, as the bank sold securities primarily to fund the growth in loans and to monetize gains in the portfolio. In addition, the interest yield from the investment securities portfolio decreased 43 basis points from 1.93% to 1.50%. The $44,000 increase in interest earned from interest-bearing cash deposits, primarily at the Federal Reserve Bank, was due to an increase of $6.4 million in average balances outstanding. The increase of $52,000 in interest and fees from loans was due primarily to a $4.1 million increase in average loan balances outstanding for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. Partially offsetting the impact of an increase in average loan balances outstanding, the interest yield for the loan portfolio decreased 13 basis points from 4.96% to 4.83%. The $35,000 decrease in other expenses for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 was due primarily to a $97,000 decrease in compensation related expenses due to a reduction in staffing and lower medical insurance expense, a $60,000 decrease in equipment expenses due to data processing outsourcing, a $51,000 decrease in expenses related to other real estate owned, a $31,000 decrease in occupancy expenses due to lower amortization of leasehold improvement expense, a $20,000 decrease in marketing expense, and a $20,000 decrease in legal expense related to the positive results from Bank's ongoing troubled asset reduction plan. Partially offsetting these positive variances, data processing expenses increased by $138,000 as the Bank outsourced data processing functions, director fees increased by $51,000, other professional fees increased by $29,000 and miscellaneous expenses increased by $36,000.
Net interest margin for the nine months ended September 30, 2016 was 3.33%, a decrease of 0.21% from the 3.54% net interest margin for the nine months ended September 30, 2015. The decrease in the net interest margin resulted from a decrease of 0.20% in the yield generated from interest-earning assets coupled with an increase of 0.03% in the rate paid for interest bearing deposits and borrowingsTotal assets at September 30, 2016 were $145.1 million, representing a decrease of $6.3 million from $151.4 million at December 31, 2015. The decrease was due primarily to a $6.0 million reduction in investment securities, a $3.9 million decrease in cash and cash equivalents primarily in an interest-bearing account at the Federal Reserve Bank, a $759,000 decrease in other real estate and a $258,000 decrease in other assets. Partially offsetting these negative variances, loans increased $4.6 million. Total deposits decreased by $6.3 million to $131.8 million at September 30, 2016 from $138.1 million at December 31, 2015. This was primarily due to an $8.1 million decrease in interest bearing accounts, offset by a $1.8 million increase in non-interest bearing accounts. The decrease in interest-bearing deposit accounts of $8.1 million was due primarily to money market deposit accounts which decreased $9.9 million. Savings accounts, however, increased $1.1 million and interest bearing checking accounts increased $663,000. Attracting and maintaining money market deposits has become increasingly competitive. The Bank has been successful in replacing the decrease in money market accounts with certificates of deposits from its local marketplace. At September 30, 2016, our adversely classified loans totaled $4.5 million which represents a decrease of $926,000 since December 31, 2015. Other real estate owned totaled $1.9 million at September 30, 2016, a decrease of $759,000 from December 31, 2015. The Bank's Texas Ratio was 39.20% at September 30, 2016 as compared to 44.91% at December 31, 2015.
The Bank's President and Chief Executive Officer, Benjamin Watts indicated, "We continue to see improvement in our adversely classified assets including other real estate which have been a drain on the earnings of the Bank for the last several years. We look forward to continued reduction in the level of our adversely classified assets which will increase the Bank's earnings potential and reduce the overall risk profile of the Bank. The Chairman of the Board of Directors of the Bank, William Dunkelberg added, "Management and the Board have worked aggressively to eliminate the problems remaining from the Great Recession while continuing to improve the operation of the Bank. Their success has produced seven straight quarters of profitability and we look forward to even more success in 2017."Set forth below is certain selected balance sheet and income statement data at September 30, 2016 and December 31, 2015 and for the three and nine months ended September 30, 2016 and 2015.
|SELECTED BALANCE SHEET DATA|
|(Unaudited, in thousands)||September 30,||December 31,|
|Cash and cash equivalents||$||13,096||$||17,050|
|Net loans receivable||115,362||110,711|
|Common Equity Tier 1 Capital to Risk Weighted Assets||9.40||%||8.85||%|
|Tier 1 Capital to Risk Weighted Assets||9.40||%||8.85||%|
|Total risk based capital||10.65||%||10.10||%|
|SELECTED INCOME STATEMENT DATA|
|(Unaudited, in thousands except per share data)|
|Quarter ended September 30,||Nine months ended September 30,|
|Net interest income||$||1,194||$||1,209||$||3,564||$||3,628|
|Provision for loan losses||25||30||55||40|
|Gain (Loss) on sale of securities||0||0||72||0|
|Other Non-interest income||167||245||540||552|
|Loss on write-down or sale of ORE||4||43||4||43|
|Provision for income taxes||3||0||23||2|
|Earnings per share:|
The Bank may from time to time make written or oral "forward-looking statements", including statements contained in this release. Such statements are not historical facts and include expressions about management's confidence and strategies and management's current views and expectations about new and existing programs and products, relationships, opportunities, taxation, technology and market conditions. Actual results may differ materially from such forward-looking statements, and no undue reliance should be placed on any forward-looking statement. Factors that may cause results to differ materially from such forward-looking statements include, but are not limited to, unanticipated changes in the financial markets and the direction of interest rates; volatility in earnings due to certain financial assets and liabilities held at fair value; stronger competition from banks, other financial institutions and other companies; insufficient allowance for credit losses; a higher level of net loan charge-offs and delinquencies than anticipated; material adverse changes in the Bank's operations or earnings; a decline in the economy in our primary market areas; changes in relationships with major customers; changes in effective income tax rates; higher or lower cash flow levels than anticipated; inability to hire or retain qualified employees; a decline in the levels of deposits or loss of alternate funding sources; the inability to increase our loan portfolio; the inability to increase our capital to sustain our growth and meet regulatory requirements; changes in laws and regulations, including issues related to compliance with anti-money laundering and the bank secrecy act laws; adoption, interpretation and implementation of new or pre-existing accounting pronouncements; operational risks, including the risk of fraud by employees and customers; the inability to successfully implement our strategic plan as well as new lines of business or new products and services and other factors, many of which are beyond the Bank's control. The words "may", "could", "should", "would", "will", "project", "continue", "believe", "anticipate", "expect", "intend", "plan", and similar expressions are intended to identify forward-looking statements. All such statements are made in good faith by the Bank pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The Bank does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Bank.