For the quarter ended September 30, 2002, net income amounted to $51.0 million, an increase of $5.5 million, or 12.1%, over the third quarter of the previous year. Return on assets for this period was 1.6% and return on realized equity totaled 15.6%. The efficiency ratio amounted to 56.7%. The increase in net income was the result of an increase in net interest income, offset with slightly higher non-interest expense.
Balance Sheet Review
During the 3rd quarter of 2002, average loans grew $97.6 million, or 1.3%, compared to the 2nd quarter of 2002, and increased by $23.9 million, or .3%, when compared to the 3rd quarter of 2001. The increase over the 2nd quarter 2002 was the result of growth in average personal, home equity, credit card, and business real estate loans, but offset by lower business and personal real estate loans. While the region's economy remained sluggish, towards the end of the 3rd quarter, business and business real estate loans grew as a result of seasonal line of credit usage and new lending opportunities. Personal real estate loans decreased $19.4 million on average this quarter, continuing the trend whereby principal amortization, coupled with lower origination of variable rate loans, resulted in lower loan balances. Long-term fixed rate personal real estate loans originated by the Company are routinely sold to the secondary market. During the quarter, automobile and student loans grew by $99.0 million on average. While major incentive programs offered by the auto companies in previous quarters have slowed somewhat, the Company has been successful in attracting new auto loans even with existing incentives offered by the auto companies. Also, student loans normally show seasonal growth in the summer months.
Available for sale investment securities increased on average by $212.7 million during the quarter. This increase in average securities resulted from purchases of new securities with liquidity obtained from increases in advances from the Federal Home Loan Bank (FHLB) and overnight borrowings. The growth in investment securities occurred mainly in the areas of U. S. Treasury and asset-backed securities. The total investment securities portfolio amounted to $3.9 billion at September 30, 2002 and is comprised mainly of U.S. Government and agencies (38%), mortgage backed (35%), and other asset backed (22%) investment securities.
Total average deposits decreased $77.4 million during the 3rd quarter compared to the 2nd quarter of this year, but grew by $202.2 million or 2.1% when compared to the 3rd quarter of last year. The decrease from the 2nd quarter was due mainly to a decline in average certificates of deposit of $94.6 million and a decrease in average premium money market accounts of $23.6 million.
During the quarter, average borrowings increased by $325.3 million primarily due to increases in Federal funds purchased.
Net Interest Income
During the 3rd quarter, net interest income totaled $126.8 million, an increase of approximately $2.2 million compared to the 2nd quarter of this year. The net interest margin for the current quarter totaled 4.40% compared with 4.47% in the previous quarter and 4.22% last year.
With the Federal Reserve maintaining a stable interest rate environment, interest yields on loans declined only slightly. Market pressures, however, have allowed rates on certain money market accounts to decline thus reducing interest expense. This, coupled with higher earning asset levels, resulted in growth in net interest income. During the quarter interest income grew $710 thousand mainly as a result of higher balances in personal banking loans and investment securities, but offset by lower rates on certain investment securities and loans. Total interest expense decreased $1.5 million in the current quarter compared with the 2nd quarter of 2002 as a result of lower certificate of deposit balances and lower rates on premium money market and certificate of deposit accounts. The overall cost of interest bearing liabilities decreased 11 basis points during the quarter to 1.48%. Average rates on deposits also declined 11 basis points to 1.46% in the 3rd quarter.
Non-Interest Income
For the 3rd quarter of 2002, non-interest income totaled $69.5 million compared with $69.0 million in the same quarter of last year, an increase of .8%. Excluding gains on sales of student loans in 2001, which did not occur in the current quarter, and gains on securities transactions, non-interest income grew by 2.7%.
Trust fees for the quarter decreased $1.0 million from the previous quarter and were down 6% compared with the same quarter last year. Large non-recurring fees received last year in the 3rd quarter, in addition to lower trust asset valuations resulted in lower revenue results. Deposit account fees in the 3rd quarter grew 4.2%, or $957 thousand, over amounts recorded in the 2nd quarter of the current year and these fees also increased 11.0% over amounts recorded in the 3rd quarter of last year. The growth in fees over the 3rd quarter was mainly the result of higher income earned on overdraft and commercial cash management fees, which were up a combined $1.9 million. During the 3rd quarter 2002, bond trading revenues grew 6.3% over the previous quarter and 5.1% over the same quarter last year. Growth in these revenues resulted from strong sales to correspondent banks as a result of increased liquidity arising at these institutions.
Credit card fees grew 3.4% compared with the 2nd quarter this year and 7.7% compared with the same quarter last year. The increase over last year's 3rd quarter was mainly the result of higher cardholder transaction and debit card fees. Merchant fees for the current quarter remained at similar levels as last year mainly as a result of lower profit margins but higher transaction volumes. Debit card and credit cardholder transaction fees grew by 11.8% and 9.9%, respectively, over the same quarter in the previous year. In the 3rd quarter of 2001, other non-interest income included a gain of $2.0 million on the sale of student loans. There were no student loans sold in the current quarter. Also in the 2nd quarter 2002, other non-interest income included a $1.7 million gain on the sale of two branches in rural Kansas. There were no branches sold in the current quarter.
Net securities gains for the current quarter included gains on sales of bank investment securities of $2.6 million offset by a net write-down of venture capital investments of $1.2 million held by the Company's 53% owned affiliate.
Non-Interest Expense
Non-interest expense for the quarter amounted to $111.0 million, a decrease of $1.8 million or 1.6% from amounts recorded in the 2nd quarter 2002 and 1.1% higher than amounts recorded in the same quarter last year.
Compared to the 2nd quarter 2002, salaries and benefits expense increased 3.5%, mainly due to higher incentive pay and 401K retirement plan expenses. Compared with the 3rd quarter last year, salaries and benefits grew 6.4% mainly due to higher costs for salaries, incentives, medical insurance and retirement plan expense. Full-time equivalent employees totaled 5,017 and 5,119 at September 30, 2002 and 2001, respectively. Excluding salaries and benefits, non-interest expense declined 7.6% compared with 2nd quarter 2002 and 5.2% compared with the 3rd quarter last year. Much of this decline was the result of good cost control and lower data processing costs from the internalization of the mainframe computer operations, which was completed last quarter. Also in 2002, new accounting rules discontinued the amortization of goodwill. Had these rules been in effect during 2001, earnings per share would have increased by $.02 in the 3rd quarter and $.05 in the 1st nine months.
Income Taxes
The effective tax rate for the 3rd quarter was 33.0% compared with 32.8% in the 2nd quarter of this year and 32.2% for the 3rd quarter of 2001.
Credit Quality
Net loan charge-offs for the 3rd quarter 2002 amounted to $8.6 million compared to $6.7 million in the 2nd quarter of 2002 and $8.5 million in the 3rd quarter of last year. The ratio of net charge-offs to average loans was .44% this quarter compared with .35% in the 2nd quarter 2002 and .43% in the 3rd quarter 2001. The increase in net loan charge-offs in the current quarter compared to the 2nd quarter of this year resulted principally from the additional charge-down of $1.5 million for two commercial loans mentioned in previous quarters. Compared to 3rd quarter 2001, net loan charge-offs were up slightly due to higher business loan charge-offs but lower charge-offs of personal banking loans.
For the 3rd quarter 2002, net charge-offs on average credit card loans amounted to 3.35% compared with 3.60% in the 2nd quarter of this year and 3.42% in the 3rd quarter 2001. Personal loan charge-offs amounted to .38% of average loans this quarter compared to .37% in the 2nd quarter this year. The provision for loan losses for the quarter totaled $9.2 million, up from $6.7 million in the 2nd quarter this year. The allowance for loan losses at September 30, 2002 amounted to $130.6 million, or 1.68% of average quarterly loans, and represents 460% of total non-performing assets.
Total non-performing assets amounted to $28.4 million at September 30, 2002, and $28.9 million at June 30, 2002. Non-performing assets are comprised of non-accrual loans ($26.7 million) and foreclosed real estate ($1.7 million). Loans past due more than 90 days and still accruing interest totaled $23.4 million at September 30, 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 September 30, 2002, the Company purchased approximately 1,072,000 shares of treasury stock at an average cost of $41.30 per share.
Effective September 30, 2002 a venture capital investment previously accounted for on the equity method was reclassified as a consolidated entity. Prior periods were also reclassified. The venture investment has $10.6 million in assets, no debt, and 47% of the investment is owned by outside investors. The effect of this reclassification on the income statement for the nine months ended September 30, 2002 was to increase net interest income $448 thousand, decrease non-interest income $1.048 million and decrease other non-interest expense by $600 thousand.
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.