Balance Sheet Review
During the quarter, average loans increased $68 million or 1% compared to the same quarter in the previous year. Compared to the 1st quarter 2001, commercial loans (business, business real estate and construction) increased $39 million, but were offset by a decline in personal real estate and credit card loans of $32 million and $16 million, respectively. The growth in commercial loans occurred mainly in the business real estate and construction lending areas, but was offset by a decline in average business loans due mainly to pay-downs on several large commercial lines of credit occurring late in the quarter. The decline in personal real estate loans reflected continued principal amortization coupled with a reduction in new variable rate loan volume. Currently, demand for new personal real estate loans is centered in long-term fixed rate products, which the Company routinely sells to the secondary market.
Available-for-sale investment securities increased on average by $322 million during the quarter. The increase in these securities was mainly the result of an increase in liquidity coming from deposit growth. The growth in investment securities occurred mainly in the areas of US Treasury, Federal agency and CMO securities.
Total average deposits increased by $339 million during the 2nd quarter compared to the 1st quarter of this year. This increase was partly due to growth in both interest-bearing demand and certificate of deposit (CD) accounts. During the quarter, the Company implemented a corporate demand deposit sweep product, which for regulatory purposes, reclassified approximately $397 million in balances from corporate demand deposit accounts to money market deposit accounts.
For the quarter, other borrowings remained flat compared to the 1st quarter with Federal funds and repurchase agreement balances increasing, but offset by a pay-down of $50 million in short-term debt from the Federal Home Loan Bank. The loan to deposit ratio for the quarter declined to 83% due to growth in deposits coupled with a small decline in loans.
Net Interest Income
In the 2nd quarter, net interest income amounted to $118 million, an increase of approximately 1.0% compared to the 1st quarter of this year.
During the current quarter, the yield on earning assets declined 63 basis points compared to the 1st quarter this year, while rates on interest bearing liabilities declined 60 basis points. During this same period, both the Prime rate and the Federal funds rate declined 125 basis points, which caused a significant portion of the loan portfolio to re-price downward. To offset this effect, deposit rates were reduced in virtually all deposit product categories, which reduced interest expense and almost completely offset the decline in earning asset yields.
Adjusted for consistent days between quarters and certain non-recurring items, the quarterly net yield on earning assets totaled 4.81% at December 31, 2000, 4.58% at March 31, 2001 and 4.45% at June 30, 2001. This reflects a slowing in the rate of decline in the net interest margin during the current quarter and reflective of the Company's ability to manage its interest sensitivity position. In the normal course of business, the Company does not employ derivatives to hedge interest rate movements.
Non-Interest Income
Total non-interest income for the quarter totaled $70.7 million and was 10.4% higher than last year. Credit card fees for the quarter increased by 10.8% over the same quarter last year due mainly to strong debit card fees and somewhat higher merchant and cardholder revenues. Trust fees grew by almost 17.0% over the previous year's 2nd quarter and included one-time fees of $750 thousand. Deposit account fees grew by 19.2% mainly due to higher fees earned on cash management services and overdraft fees. Trading account commissions on sales of fixed income securities was up 53.9% over the 2nd quarter of last year as sales to banks and other corporate customers continued to remain strong.
Other non-interest income for the 2nd quarter of this year included a pre-tax gain of $1.5 million on the sale of a branch building and compares to a similar $1.0 million gain on a branch sold in the 2nd quarter of last year. Also, additional income of approximately $1.5 million from the restructuring of a venture limited partnership investment was realized, but was entirely offset by expense related to the restructuring and had no impact on net income. There were no student loans sold during the current quarter and thus no related pre-tax gains recognized. This compares with student loan sales in both the 1st quarter of this year and the 2nd quarter of last year in which pre-tax gains of $3.1 million and $3.8 million respectively, were recognized.
Net securities gains amounted to $510 thousand for the 2nd quarter 2001 compared to gains of $506 thousand in the 2nd quarter of last year.
Non-Interest Expense
Non-interest expense for the quarter increased to $111.7 million compared to $108.1 million in the 1st quarter of 2001. However, non-interest expense included certain charges totaling $1.5 million related to the restructuring of the limited venture partnership investment referred to previously. Without this restructuring expense, non-interest expense would have totaled $110.2 million, an increase of 1.9% compared to the 1st quarter of 2001 and an increase of 4.3% compared to the 2nd quarter of last year. Salaries and benefits for the current quarter increased by 6.9% over the same quarter last year, but were only 1.5% higher than in the 1st quarter of this year. Occupancy costs declined compared with the 1st quarter when higher costs for utilities and weather-related expense were incurred. When compared with the 2nd quarter of 2000, such costs grew by only 2.4%. Equipment costs also declined from the 1st quarter of this year due to lower costs for equipment repairs and maintenance. Compared to the 1st quarter of this year, higher costs for data processing (partly credit card processing fees), supplies, and postage were incurred.
Income Taxes
The effective tax rate for the Company was 33.3% for the 2nd quarter of 2001, and compares with an effective tax rate of 33.6% in the 1st quarter of 2001 and 34.1% in the 2nd quarter of last year.
Credit Quality
Net loan charge-offs for the 2nd quarter in 2001 amounted to $8.0 million compared with $9.4 million in the 1st quarter of 2001 and $8.0 million in the 2nd quarter of last year. The decrease in net loan charge-offs in the current quarter compared with the 1st quarter of this year is the result of lower business loan charge-offs of $1.6 million coupled with lower personal loan charge-offs of $591 thousand. These lower charge-offs were partially offset by higher credit card charge-offs for the current quarter of $531 thousand compared with the 1st quarter of 2001.
Net charge-offs this quarter were approximately the same as those incurred in the 2nd quarter of last year.
Net charge-offs for the 2nd quarter 2001 on average credit card loans amounted to 4.41%, compared with 3.89% in the 1st quarter of this year. Also personal loan charge-offs amounted to .43% of average loans this quarter compared with .58% in the 1st quarter this year. The provision for loan losses for the quarter totaled $8.0 million, down from $9.5 million in the 1st quarter this year. The allowance for loan losses at June 30, 2001 amounted to $131.1 million or 1.68% of total loans and represents 492% of total non-performing assets.
Total non-performing assets amounted to $26.6 million at June 30, 2001 and $29.2 million at March 31, 2001. Non-performing assets are comprised of non-accrual loans ($24.4 million) and foreclosed real estate ($2.2 million). Loans past due more than 90 days and still accruing interest totaled $20.3 million.
Other
Commerce maintains a treasury stock buyback program; and effective February 2001, was authorized by the Board of Directors to repurchase up to 3 million shares of its common stock. During the 2nd quarter ended June 30, 2001, Commerce purchased approximately 438,000 shares of treasury stock at an average cost of $34.27 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.