For the quarter ended September 30, 2001, net income amounted to $45.5 million. Return on assets for this period remained strong at 1.52%. While net interest income declined from the amounts recorded in the 3rd quarter last year, the decline was offset by growth in non-interest revenues, stable credit costs, and only slightly higher non-interest expense.
Balance Sheet Review
During the quarter, average loans declined $127.7 million or 1.6% compared to the 2nd quarter of 2001. This decline was due mainly to lower business and personal real estate loans, but offset by growth in business real estate and personal banking loans. The effects of a slower economy, coupled with reductions on some larger commercial lines of credit, have resulted in a decline in business loan totals. Business real estate loans continued to show moderate growth in the quarter, reflective of the demand that has existed in many of our markets. The decline in personal real estate loans this quarter is the result of continued principal amortization and lower origination of variable rate loans. The current lower interest rate environment has created strong demand for long-term fixed rate real estate loans, which the Company routinely sells to the secondary market. The growth in personal banking loans is the result of seasonal demand for student loans coupled with growth in home equity loans, which currently offer attractive rates.
Available-for-sale investment securities increased on average by $299.7 million during the quarter. The increase in these securities was mainly the result of an increase in liquidity coming from all categories of interest-bearing liabilities coupled with a decline in loans mentioned above. The growth in investment securities occurred mainly in the areas of agency- backed CMO's, Federal agency and asset-backed securities.
Total average deposits increased by $100.9 million during the 3rd quarter compared to the 2nd quarter of this year. This amounts to an annualized growth rate of 4%. The increase was due mainly to growth in money market, premium money market and certificate of deposit accounts. Core non-interest demand accounts also showed growth during the quarter, however, a corporate demand deposit sweep product implemented late in the 2nd quarter reduced average balance comparisons between quarters. This new product, for regulatory purposes, reclassified balances from corporate demand deposits to money market deposits by $274.6 million at September 30, 2001.
During the quarter, average borrowings increased by $155.4 million as a result of growth in both Federal funds and repurchase agreement balances and other debt. During the quarter the Company obtained an additional $250 million in new debt from the Federal Home Loan Bank. This debt, which matures in 2 years, carries a variable interest rate and the proceeds were used to purchase fixed rate investment securities.
The loan to deposit ratio for the quarter declined to 81%, down from 83% in the 2nd quarter of 2001. This reduction in the ratio is the result of continued strong growth in deposits coupled with lower lending totals.
Net Interest Income
In the 3rd quarter, net interest income amounted to $116.0 million, a decrease of approximately $1.6 million compared to the 2nd quarter of this year. The net interest margin for the current quarter totaled 4.22% compared with 4.44% in the previous quarter.
During the current quarter, the Company's net interest income continued to be negatively impacted by the slowing economy coupled with a much lower interest rate environment. The continuation of significant reductions in both the Federal funds and prime rates during the quarter resulted in reduced interest earnings in large sections of the Company's business, business real estate, home equity and credit card portfolios, which are tied to variable rates. Also, declines in loan balances coupled with recent purchases of investment securities at lower rates, reduced total interest income for the quarter. As a result, overall earning asset yields declined from 7.06% in June to 6.52% in September.
Offsetting this effect, deposit rates continued to decline, especially late in the quarter. The effective rate paid on interest bearing deposits declined from 3.47% in June to 3.13% in September, a change of 34 basis points. Additionally, proceeds from the growth in deposits and borrowings, previously mentioned, increased earning asset balances which in turn increased net interest income.
Non-Interest Income
Non-interest income for the quarter totaled $69.5 million compared to $64.2 million in the same quarter last year, an increase of 8.3%. Excluding non-recurring pre-tax gains of $3.0 million on the sales of 2 branches recorded in the 3rd quarter last year, non-interest income this quarter would have grown by 13.7%. Deposit account fees grew by 19.1%, or $3.4 million, due mainly to higher fees earned on overdraft charges and commercial cash management fees. Trust fees were up 8.6% mainly due to higher revenues on personal trust accounts, and trading revenues grew by $2.1 million, or 115.3%. Growth in bond trading revenues has been strong all year as a result of high demand by correspondent bank customers for fixed income investments. Bankcard fees for the quarter increased by 6.0% over the same quarter last year due mainly to continued strong debit card fees but lower merchant and cardholder revenues. Other non-interest income for the quarter included a pre-tax gain of $2.0 million on the sale of $59.5 million of student loans. Year to date through September such gains totaled $5.0 million compared with total gains of $5.1 million recorded during the entire year of 2000.
Net securities gains amounted to $1.3 million for the 3rd quarter 2001 compared to gains of $305 thousand in the 3rd quarter of last year.
Non-Interest Expense
Non-interest expense for the quarter amounted to $110.1 million, a decrease of $1.6 million compared with $111.7 million recorded in the 2nd quarter of this year and consistent with expense levels recorded in the 3rd quarter last year. Year to date total non-interest expense amounted to $329.9 million compared with $320.6 million last year, an increase of 2.9%. The increase in non-interest expense for the current quarter compared with the same period last year was the result of higher costs for salaries and benefits, offset by lower costs for data processing and supplies and communication. Occupancy and marketing costs showed modest increases, while equipment expense remained stable. Compared with 3rd quarter 2000, salaries and benefits grew 7.8%, or $4.3 million, mainly as a result of higher costs for full-time employees. Data processing costs were lower especially as the result of lower fees to process credit cards, while costs for supplies and communication declined mainly due to lower costs for postage.
Income Taxes
The effective tax rate for the Company was 32.2% for the 3rd quarter of 2001, and compares with an effective tax rate of 33.3% in the 2nd quarter of 2001 and 31.7% in the 3rd quarter of last year.
Credit Quality
Net loan charge-offs for the 3rd quarter 2001 amounted to $8.5 million compared with $8.0 million in the 2nd quarter of 2001 and $6.8 million in the 3rd quarter of last year. The increase in net loan charge-offs in the current quarter compared with the 2nd quarter of this year is the result of higher business loan charge-offs of $1.0 million coupled with an increase in personal banking loan charge-offs of $608 thousand. These higher charge-offs, however, were partially offset by a decline in credit card charge-offs of $1.2 million as a result of lower bankruptcy filings and improving delinquencies.
For the 3rd quarter 2001 net charge-offs on average credit card loans amounted to 3.42%, compared with 4.41% in the 2nd quarter of this year. On a year to date basis, such net charge-offs amounted to 3.91%. Also personal loan charge-offs amounted to .56% of average loans this quarter compared with .43% in the 2nd quarter this year. The provision for loan losses for the quarter totaled $8.3 million, up from $8.0 million in the 2nd quarter this year. The allowance for loan losses at September 30, 2001, amounted to $131.0 million, or 1.68% of total loans, and represents 531% of total non-performing assets.
Total non-performing assets amounted to $24.7 million at September 30, 2001, and $26.6 million at June 30, 2001. Non-performing assets are comprised of non-accrual loans ($22.6 million) and foreclosed real estate ($2.1 million). Loans past due more than 90 days and still accruing interest totaled $23.2 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 quarter ended September 30, 2001, the Company purchased approximately 385,000 shares of treasury stock at an average cost of $38.92 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.