Balance Sheet Review
During the 1st quarter 2002, average loans declined $81.7 million or 1.1%, compared to the 4th quarter of 2001. This decline was due mainly to lower average business, consumer auto, and personal real estate loans, but offset by growth in business real estate and construction loans. The continued slow economy, and reductions on certain commercial lines of credit, resulted in declining business loan totals for the quarter although growth in this category did occur during the second half of the quarter. Business real estate loans increased in the first part of the quarter, but declined towards the end of the quarter. The decline in personal real estate loans this quarter continues the trend whereby principal amortization coupled with lower origination of variable rate loans resulted in lower loan balances. Customer demand for long-term fixed rate real estate loans remains good, and the Company routinely sells these loans to the secondary market. Strong financing incentives offered by the captive auto companies last quarter has continued this quarter, limiting growth of new consumer auto loans.
Available-for-sale investment securities increased on average by $330.9 million during the quarter. This increase in average securities resulted from purchases of new securities with liquidity obtained from increases in both interest bearing and non-interest bearing deposits, growth in borrowings, and declines in loans. The growth in investment securities occurred mainly in the areas of agency-backed CMO's and asset-backed securities.
Total average deposits increased by $26.3 million during the 1st quarter compared to the 4th quarter of last year and grew by $633.8 million, or 7% when compared to the same period last year. The increase over the 4th quarter was due mainly to growth in money market and interest checking accounts offset by lower certificate of deposit totals.
During the quarter, average borrowings increased by $26.6 million primarily due to growth in Federal funds purchased on an overnight basis.
The loan to deposit ratio for the quarter declined to 78.1%, down from 79.2% in the 4th quarter of 2001. The reduction in this ratio is the result of continued growth in deposits and lower lending totals.
Net Interest Income
In the 1st quarter, net interest income was $120.6 million; an increase of approximately $3.2 million (11% annualized) compared to the 4th quarter of the previous year. The net interest margin for the current quarter improved to 4.34% compared with 4.16% in the fourth quarter of last year.
Stable interest rates this quarter, and continued re-pricing of certificates of deposit, resulted in lower deposit costs and; therefore, improvement in net interest income. Rates on non-maturity deposits remained consistent during the quarter and approximated those rates in effect at year-end 2001. While deposit balances increased somewhat resulting in higher interest costs, the overall impact of the lower certificate of deposit rates resulted in lower total interest expense for the quarter of $12.0 million.
Also, while lower loan balances and the trailing effects of rate changes from previous quarters caused total interest income to decline $8.8 million during the quarter, the growth in the Company's investment securities portfolio contributed an additional $2.1 million in net interest income.
Overall, the effective tax equivalent yield on earning assets declined slightly to 5.89% from 6.11% in the 4th quarter of last year, while rates paid on interest bearing liabilities declined to 1.77% compared with 2.23% in the previous quarter.
Non-Interest Income
For the first quarter, 2002 non-interest income totaled $69.2 million compared with $66.9 million in the same quarter of last year, or an increase of 3.4%. Trust fees for the quarter increased 1.6% over the 1st quarter of 2001 and 2.5% over amounts recorded in the 4th quarter of last year. Lower asset valuations continue to restrain growth in total trust fees. Deposit account fees in the 1st quarter grew by 9.7%, or $1.9 million over amounts recorded in the 1st quarter of last year as a result of higher income earned on commercial cash management fees. However, overdraft fees were lower than in the 4th quarter of last year, due in part to seasonal effects impacting overdraft volumes. Bond trading revenues, which grew strongly last year, have remained consistent with amounts recorded in the 4th quarter of last year; and 5% greater than in the 1st quarter 2001. Credit card fees for the quarter increased only slightly from the same period last year, primarily resulting from lower merchant fees, flat credit cardholder fees, but higher debit card fees. Merchant fees were constrained by a combination of lower retail sales and lower profit margins, while growth in debit card fees remained strong and increased 21% over fees recorded in the same period last year. Mortgage banking revenues were down $1.1 million from amounts recorded in the 1st quarter of last year. This change is mainly the result of slightly lower servicing fees and gains on loan sales in the current quarter, and higher fair value adjustments on mortgage commitments and related contracts in the 1st quarter of 2001. Other non-interest income for the quarter included a pre-tax gain of $3.4 million on the sale of student loans and compares with similar student loan gains of $3.1 million recorded last year in the same period. Also, the Company sold a minority interest in a community bank for a pre-tax gain of $1.5 million in the 1st quarter of 2002.
Net securities gains amounted to $36 thousand in the 1st quarter 2002 compared to net gains of $1.2 million in the 1st quarter of last year.
Non-Interest Expense
Non-interest expense for the quarter amounted to $114.0 million, an increase of $5.9 million or 5.4% over amounts recorded in the 1st quarter 2001. Included in non-interest expense was the contribution of appreciated securities of $2.1 million for which the Company received a tax benefit. Excluding this transaction, total non-interest expense would have increased 3.5% over amounts recorded in the 1st quarter of last year.
Compared with 1st quarter 2001, salary and benefits expense increased 9.9%, mainly due to higher medical and pension plan costs coupled with normal merit increases and higher incentives. The number of employees totaled 5,261 and 5,332 at March 31, 2002 and 2001, respectively. Occupancy, supplies and communications, and equipment costs all showed solid control with amounts this quarter less than 1st quarter last year. Also, while data processing costs were up 4.6% when comparing 1st quarter this year to the same period last year, these costs were down compared with the 4th quarter of last year. As mentioned above, other expense includes the contribution of appreciated securities, otherwise other miscellaneous costs were consistent with the 4th quarter results.
During the quarter, the Company substantially completed its conversion to an in-house mainframe computer environment. After finalizing outsource termination payments of approximately $1.7 million to be recorded in the 2nd quarter of 2002, the Company expects significant improvements to its data processing cost structure thereafter.
Income Taxes
The effective tax rate for the 1st quarter was 31.4% compared with 33.6% in the 1st quarter of last year and 30.7% for the 4th quarter of 2001. The lower effective tax rate was impacted not only by the elimination of non-deductible goodwill amortization this year, but also the result of the additional accrual of state and Federal rehabilitation credits to be received on the renovation of a downtown Kansas City office building.
Credit Quality
Net loan charge-offs for the 1st quarter 2002 amounted to $7.4 million compared with $11.6 million in the 4th quarter of 2001 and $9.4 million in the 1st quarter of last year. The ratio of net charge-offs to average loans was .39% this year compared with .48% in the first quarter 2001. The decrease in net loan charge-offs in the current quarter compared with the 4th quarter of last year is the result of lower business loan net charge-offs of $2.5 million coupled with decreases in credit card and personal loan charge-offs of $361 thousand and $808 thousand, respectively. Lower delinquency rates and improved underwriting controls on personal loans are responsible for lower credit losses on personal loans, while credit card losses are down this year due to fewer bankruptcies.
For the 1st quarter 2002, net charge-offs on average credit card loans amounted to 3.58% compared with 3.80% in the 4th quarter of last year and 3.89% in the 1st quarter 2001. Also, personal loan charge-offs amounted to .43% of average loans this quarter compared with .61% in the 4th quarter last year. The provision for loan losses for the quarter totaled $7.4 million, down from $10.6 million in the 4th quarter last year. The allowance for loan losses at March 31, 2002 amounted to $130.0 million or 1.71% of total loans and represents 457% of total non-performing assets.
Total non-performing assets amounted to $28.5 million at March 31, 2002, and $30.8 million at December 31, 2001. Non-performing assets are comprised of non-accrual loans ($26.2 million) and foreclosed real estate ($2.3 million). Loans past due more than 90 days and still accruing interest totaled $20.3 million at March 31, 2002.
Other
Commerce maintains a treasury stock buyback program; and effective February 2002, was re-authorized by the Board of Directors to repurchase up to 3 million shares of its common stock. During the quarter ended March 31, 2002, the Company purchased approximately 118,000 shares of treasury stock at an average cost of $42.26 per share.
Forward Looking Information
This information contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include future financial and operating results, expectations, intentions and other statements that are not historical facts. Such statements are based on current beliefs and expectations of Commerce's management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements.