Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1999 Commission file number 0-7275
Cullen/Frost Bankers, Inc.
(Exact name of registrant as specified in its charter)
Texas 74-1751768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 W. Houston Street, San Antonio, Texas 78205
(Address of principal executive offices) (Zip code)
(210) 220-4011
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X. No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At May 10, 1999, there were
26,777,449 shares of Common Stock, $.01 par value, outstanding.
<PAGE>
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands, except per share amounts)
Three Months Ended
March 31
--------------------
1999 1998
------- -------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $77,295 $72,143
Securities:
Taxable 29,976 29,527
Tax-exempt 1,561 385
------- -------
Total Securities 31,537 29,912
Federal funds sold 332 2,017
Time deposits 3
------- -------
Total Interest Income 109,167 104,072
INTEREST EXPENSE
Deposits 31,399 34,783
Federal funds purchased and securities
sold under repurchase agreements 4,007 2,747
Guaranteed preferred beneficial interest in the
Corporation's junior subordinated deferrable
interest debentures 2,119 2,119
Long-term notes payable and other borrowings 202 365
------- -------
Total Interest Expense 37,727 40,014
------- -------
Net Interest Income 71,440 64,058
Provision for possible loan losses 3,000 2,579
------- -------
Net Interest Income After Provision
For Possible Loan Losses 68,440 61,479
NON-INTEREST INCOME
Trust fees 11,383 12,036
Service charges on deposit accounts 13,988 12,455
Other service charges, collection and
exchange charges, commissions and fees 4,006 3,585
Net (loss) gain on securities transactions (68) 73
Other 9,052 5,313
------- -------
Total Non-Interest Income 38,361 33,462
NON-INTEREST EXPENSE
Salaries and wages 29,713 27,207
Pension and other employee benefits 6,515 5,598
Net occupancy of banking premises 6,701 6,108
Furniture and equipment 4,575 4,441
Intangible amortization 3,337 3,348
Other 19,235 18,151
------- -------
Total Non-Interest Expense 70,076 64,853
------- -------
Income Before Income Taxes 36,725 30,088
Income Taxes 12,430 10,675
------- -------
Net Income $24,295 $19,413
======= =======
Net income per common share:
Basic $ .91 $ .73
Diluted .89 .71
Dividends per common share .30 .25
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands, except per share amounts)
March 31 December 31 March 31
1999 1998 1998
---------- ----------- ----------
<S> <C> <C> <C>
Assets
Cash and due from banks $ 644,566 $ 684,941 $ 777,343
Time deposits 823
Securities held to maturity 103,693 111,439 251,533
Securities available for sale 1,770,647 1,979,555 1,639,435
Securities trading 472 709 96
Federal funds sold 37,250 102,900 143,893
Loans, net of unearned discount of $3,762 at
March 31, 1999; $3,357 at December 31, 1998
and $3,160 at March 31, 1998 3,806,889 3,646,603 3,337,177
Less: Allowance for possible loan losses (55,857) (53,616) (49,698)
---------- ---------- ----------
Net Loans 3,751,032 3,592,987 3,287,479
Banking premises and equipment 135,817 137,290 135,223
Accrued interest and other assets 270,149 259,784 262,664
---------- ---------- ----------
Total Assets $6,714,449 $6,869,605 $6,497,666
========== ========== ==========
Liabilities
Demand Deposits:
Commercial and individual $1,533,116 $1,585,891 $1,404,702
Correspondent banks 219,961 201,355 322,783
Public funds 38,540 56,253 40,893
---------- ---------- ----------
Total demand deposits 1,791,617 1,843,499 1,768,378
Time Deposits:
Savings and Interest-on-Checking 944,326 961,597 912,363
Money market deposit accounts 1,566,829 1,493,778 1,334,441
Time accounts 1,253,648 1,264,121 1,277,416
Public funds 226,029 282,492 268,124
---------- ---------- ----------
Total time deposits 3,990,832 4,001,988 3,792,344
---------- ---------- ----------
Total deposits 5,782,449 5,845,487 5,560,722
Federal funds purchased and securities
sold under repurchase agreements 208,507 305,564 252,472
Accrued interest and other liabilities 101,215 107,177 111,465
Guaranteed preferred beneficial interest in the
Corporation's junior subordinated deferrable
interest debentures 98,472 98,458 98,417
---------- ---------- ----------
Total Liabilities 6,190,643 6,356,686 6,023,076
Shareholders' Equity
Common stock, par value per share: $.01; $.01; $5 268 267 133,795
Shares authorized:90,000,000;90,000,000;60,000,000
Shares issued: 26,768,796;
26,712,648; and 26,480,051
Surplus 184,846 183,151 54,244
Retained earnings 338,424 321,754 291,185
Accumulated other comprehensive income,
net of tax 667 7,747 8,315
Treasury Stock (8,052 shares; 0; 277,903 shares) (399) (12,949)
---------- ---------- ----------
Total Shareholders' Equity 523,806 512,919 474,590
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity $6,714,449 $6,869,605 $6,497,666
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands)
Accumulated
Other
Comprehensive
Common Retained Income Treasury
Stock Surplus Earnings net of tax Stock Total
-------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $133,775 $53,647 $278,994 $8,917 $(12,404) $462,929
Net income for the twelve months
ended December 31, 1998 75,645 75,645
Unrealized loss on securities
available for sale of $937,
net of tax and reclassification
adjustment for after-tax gains
included in net income of $233 (1,170) (1,170)
--------
Total comprehensive income 74,475
--------
Proceeds from employee stock
purchase plan and options 390 (2,014) 2,802 1,178
Tax benefit related to
exercise of stock options 1,771 1,771
Purchase of treasury stock (3,495) (3,495)
Issuance of restricted stock 1 1,889 126 2,016
Restricted stock plan deferred
compensation, net (514) (514)
Cash dividend (29,567) (29,567)
ESOP shares released 2,820 658 3,478
Constructive retirement of treasury
stock issued in connection with
a business combination (1,382) (11,023) 12,883 478
Change in par value (132,974) 132,974
Pre-merger transactions of
pooled company:
Proceeds from employee stock
purchase plan and options 847 683 (539) 88 1,079
Cash dividend (909) (909)
-------- -------- -------- ------- ------- --------
Balance at December 31, 1998 $ 267 $183,151 $321,754 $ 7,747 $ ---- $512,919
Net income for the three
months ended March 31, 1999 24,295 24,295
Unrealized loss on securities
available for sale of $7,124,
net of tax and reclassification
adjustment for after-tax losses
included in net income of $44 (7,080) (7,080)
--------
Total comprehensive income 17,215
--------
Proceeds from employee stock
purchase plan and options 1 913 (34) 89 969
Tax benefit related to exercise
of stock options 782 782
Purchase of treasury stock (488) (488)
Restricted stock plan deferred
compensation, net 429 429
Cash dividend (8,020) (8,020)
-------- -------- -------- ------- ------- --------
Balance at March 31, 1999 $ 268 $184,846 $338,424 $ 667 $ (399) $523,806
======== ======== ======== ======= ======= ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands)
Three Months Ended
March 31
-------------------
1999 1998
-------- -------
<S> <C> <C>
Operating Activities
Net income $ 24,295 $ 19,413
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 3,000 2,579
Provision for real estate losses 28
Provision for deferred taxes (1,291) (1,286)
Accretion of discounts on loans (800) (1,148)
Accretion of securities' discounts (563) (646)
Amortization of securities' premiums 1,604 1,493
Net decrease in trading securities 237 1,844
Net loss (gain) on securities transactions 68 (73)
Net gain on sale of assets (1,985) (77)
Depreciation and amortization 7,592 7,410
(Increase)in interest receivable (4,184) (1,370)
Increase(decrease) increase in interest payable 1,870 (3,070)
Originations of mortgages held-for-sale (37,876) (34,351)
Proceeds from sales of mortgages held-for-sale 40,548 30,292
Net change in other assets and liabilities 52,431 21,084
---------- --------
Net cash provided by operating activities 84,974 42,094
Investing Activities
Proceeds from maturities of securities held to maturity 7,768 8,820
Purchases of investment securities held to maturity (99) (5,556)
Proceeds from sales of securities available for sale 193,702 98,479
Proceeds from maturities of securities available for sale 239,683 206,589
Purchases of securities available for sale (218,015) (348,250)
Net increase in loans (126,879) (94,332)
Proceeds from sales of equipment 2,408 4
Net increase in bank premises and equipment (2,802) (4,034)
Proceeds from sales of repossessed properties 376 533
Net cash and cash equivalents received (paid) from acquisitions 4,501 (8,899)
--------- ---------
Net cash provided (used) by investing activities 100,643 (146,646)
Financing Activities
Net(decrease)/increase in demand deposits,
IOC accounts, and savings accounts (68,822) 268,076
Net decrease in certificates of deposits (56,199) (98,646)
Net increase (decrease) in short-term borrowings (159,041) 36,269
Net proceeds from issuance of common stock 1,751 743
Purchase of treasury stock (488) (1,794)
Dividends paid (8,020) (6,473)
--------- --------
Net cash provided (used) by financing activities (290,819) 198,175
--------- --------
Decrease in cash and cash equivalents (105,202) 93,623
Cash and cash equivalents at beginning of year 787,841 827,613
--------- --------
Cash and cash equivalents at the end of the period $ 682,639 $921,236
========= ========
Supplemental information:
Interest Paid $ 38,857 $ 43,084
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Cullen/Frost Bankers, Inc. and Subsidiaries
(tables in thousands)
Basis of Presentation
The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
consolidated financial statements have not been audited by independent
accountants, but in the opinion of management, reflect all adjustments
necessary for a fair presentation of the financial position and results of
operations. All such adjustments were of a normal and recurring nature. Prior
period financial information has been restated for the merger with Overton
Bancshares, Inc. ("Overton") which was consummated in the second quarter of
1998 and accounted for as a "pooling-of-interests" transaction. Certain
reclassifications have been made to make prior periods comparable. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Corporation's annual report on Form 10-K for the year
ended December 31, 1998. The balance sheet at December 31, 1998 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
Allowance for Possible Loan Losses
An analysis of the transactions in the allowance for possible loan losses
is presented below. The amount charged to operating expense is based on
management's assessment of the adequacy of the allowance to absorb future
possible loan losses.
Three Months Ended
March 31
-------------------
(in thousands) 1999 1998
- ----------------------------------------------------------------------
Balance at beginning of the period $53,616 $48,073
Provision for possible loan losses 3,000 2,579
Loan loss reserve of acquired institutions 300 1,250
Net charge-offs:
Losses charged to the allowance (2,020) (3,315)
Recoveries 961 1,111
------- -------
Net (charge-offs) (1,059) (2,204)
------- -------
Balance at the end of period $55,857 $49,698
======= =======
Impaired Loans
A loan within the scope of SFAS No. 114 is considered impaired when, based
on current information and events, it is probable that the Corporation will be
unable to collect all amounts due according to the contractual terms of the
loan agreement, including scheduled principal and interest payments. All
impaired loans are included in non-performing assets. At March 31, 1999, the
majority of the impaired loans were real estate loans and collectibility was
measured based on the fair value of the collateral. Interest payments on
impaired loans are typically applied to principal unless collectibility of the
principal amount is fully assured, in which case interest is recognized on the
cash basis. Interest revenue recognized on impaired loans as of March 31, 1999
and 1998 was $58,000 and $7,000, respectively. The total allowance for
possible loan losses includes activity related to allowances calculated in
accordance with SFAS No. 114 and activity related to other loan loss allowances
determined in accordance with SFAS No. 5.
<PAGE>
The following is a summary of loans considered to be impaired:
March 31
-------------------
(in thousands) 1999 1998
- --------------------------------------------------------------------------
Impaired loans with no valuation reserve $1,904 $2,851
Impaired loans with a valuation reserve 3,832 2,483
------ ------
Total recorded investment in impaired loans $5,736 $5,334
====== ======
Average recorded investment in impaired loans $5,220 $5,270
Valuation reserve 2,199 1,708
Common Stock and Earnings Per Common Share
In accordance with SFAS 128, the reconciliation of earnings per share
follows:
Three Months Ended
March 31
--------------------
(in thousands, except per share amounts) 1999 1998
- -------------------------------------------------------------------
Numerators for both basic and diluted
earnings per share, net income $24,295 $19,413
======= =======
Denominators:
Denominators for basic earnings per share,
average outstanding common shares 26,734 26,420
Dilutive effect of stock options 666 963
------- -------
Denominator for diluted earnings per share 27,400 27,383
======= =======
Earnings per share:
Basic $ .91 $ .73
Diluted .89 .71
On April 27, the Corporation announced a two-for-one stock split. The
impact of the announced stock split has not been reflected in the first quarter
of 1999, but will be reflected when effective, in the second quarter of 1999.
The effect of the stock split as reflected in the second quarter of 1999 will
increase outstanding common stock and reduce earnings per share and dividends
per share for all periods presented.
Capital
The table below reflects various measures of regulatory capital at March
31, 1999 and 1998.
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
------------------- -------------------
Capital Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-Based
Tier 1 Capital $ 521,208 12.18% $ 463,975 11.79%
Tier 1 Capital Minimum requirement 171,098 4.00 157,382 4.00
Total Capital $ 574,707 13.44% $ 513,157 13.04%
Total Capital Minimum requirement 342,197 8.00 314,764 8.00
Risk-adjusted assets, net of goodwill $4,277,459 $3,934,550
Leverage ratio 7.72% 7.64%
Average equity as a percentage
of average assets 7.65 7.49
</TABLE>
At March 31, 1999 and 1998, the Corporation's subsidiary banks were
considered "well capitalized" as defined by FDIC Improvement Act of 1991, the
highest rating, and the
<PAGE>
Corporation's capital ratios were in excess of "well capitalized" levels. A
financial institution is deemed to be well capitalized if the institution has a
total risk-based capital ratio of 10.0 percent or greater, a Tier 1 risk-based
capital ratio of 6.0 percent or greater, and a Tier 1 leverage ratio of 5.0
percent or greater, and the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure. The Corporation and
its subsidiary banks currently exceed all minimum capital requirements.
The Corporation is subject to the regulatory capital requirements
administered by the Federal Reserve Bank. Regulators can initiate certain
mandatory actions, if the Corporation fails to meet the minimum requirements,
that could have a direct material effect on the Corporation's financial
statements.
During the second quarter of 1998, the shareholders of the Corporation
voted to increase authorized common shares to 90 million from 60 million and to
reduce the par value of the Corporation's common stock from $5 to $.01 per
share.
Income Taxes
The tax expense for the first quarter of 1999 was $12.4 million. This
amount consisted of current tax expense of $13.7 million and deferred tax
benefit of $1.3 million. As of March 31, 1999, net deferred tax assets were
$17.3 million with no valuation allowance. The deferred tax assets were
supported by taxes paid in prior years. The tax expense for the first quarter
of 1998 was $10.7 million consisting of a current tax expense of $12.0 million
and a deferred tax benefit of $1.3 million. Income tax payments for the first
three months of 1999 and 1998 were $932,000 and $1.6 million, respectively.
Merger and Acquisitions
On January 15, 1999, the Corporation paid approximately $18.7 million to
acquire Keller State Bank with three locations in Tarrant County, Texas. The
total cash consideration was funded through internal sources. The purchase
method of accounting has been used to record the transaction and as such the
purchase price has been allocated to the underlying assets and liabilities
based on estimated fair values at the date of acquisition. Such estimates may
be subsequently revised. The Corporation acquired loans of approximately $38
million and deposits of approximately $62 million. The intangibles associated
with the acquisition amounted to approximately $11.8 million. This acquisition
is not expected to have a material impact on the Corporation's 1999 net income.
On May 29, 1998, the Corporation completed the merger of Overton
Bancshares, Inc., in Fort Worth, Texas, and its wholly-owned subsidiary Overton
Bank & Trust, N. A. The merger, which was accounted for as a "pooling-of-
interests" transaction, is the Corporation's first entry into the Fort Worth
market. With the merger, the Corporation acquired twelve locations in Fort
Worth/Arlington and two in Dallas. The Corporation issued approximately 4.38
million common shares as part of this transaction.
On January 2, 1998, the Corporation paid approximately $55.3 million to
acquire Harrisburg Bancshares, Inc., including its subsidiary Harrisburg Bank
in Houston, Texas. This transaction was accounted for as a purchase with total
cash consideration being funded through currently available funds. The
purchase price has been allocated to the underlying assets and liabilities
based on estimated fair value at the date of acquisition. The Corporation
acquired loans of approximately $125 million and deposits of approximately $222
million. Total intangibles associated with the acquisition amounted to
approximately $34.2 million.
Pending Acquisitions
On May 1, 1999, Frost Insurance Agency, a subsidiary of The Frost National
Bank, entered into a definitive agreement to acquire Professional Insurance
Agents, Inc. (PIA), a mid-sized independent insurance agency based in Victoria,
Texas, with additional locations in San Antonio, New Braunfels and Refugio.
PIA offers corporate and personal property and casualty insurance as well as
group, health and life insurance products to individuals and businesses. The
transaction closed in the second quarter of 1999. The purchase method of
accounting was used to record the transaction.
On February 17, 1999, the Corporation entered into a definitive agreement
to acquire Commerce Financial Corporation of Fort Worth, Texas which had
deposits of $174 million and loans of $76 million at December 31, 1998. The
Corporation agreed to pay approximately $42.25 million. The acquisition is
expected to be completed in the second quarter of 1999
<PAGE>
following shareholder and regulatory approval. This acquisition will be
accounted for as a purchase transaction with total cash consideration being
funded through internal sources.
Investment Banking Subsidiary
On January 26, 1999 the Corporation announced its intent to seek Federal
Reserve Bank approval to form a Section 20 investment banking subsidiary to be
based in Dallas, Texas. The new subsidiary, to be named Frost Securities, Inc.
is expected to be operational in July, and will offer a full range of services
including equity research, institutional sales, trading and investment banking
services to institutional investors and corporate customers who need access to
the capital markets.
Accounting Changes
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all
derivatives be marked-to-market on an on-going basis. The statement continues
to allow derivatives to be used to hedge various risks and provides for
specific criteria to be used to determine when hedge accounting can be used.
It also provides for offsetting changes in fair value or cash flows of both the
derivatives and the hedged asset or liability to be recognized in earnings in
the same period. In addition, any changes in fair value or cash flow that
represent the ineffective portion of a hedge are required to be recognized in
earnings and cannot be deferred. For derivatives not accounted for as hedges,
changes in fair value are required to be recognized in earnings. SFAS No. 133
is effective for fiscal years beginning after June 15, 1999. Even though early
adoption is allowed, the Corporation has no plans to adopt this statement prior
to the effective date. The impact on future results will depend on the
financial position of the Corporation and the nature and purpose of the
derivatives in use by the Corporation at that time.
Operating Segments
The Corporation has two reportable operating segments: Banking and the
Financial Management Group. Banking includes both commercial and consumer
banking services. Commercial services are provided to corporations and other
business clients and include a wide array of lending and cash management
products. Consumer banking services include direct and indirect lending,
mortgage lending and depository services. The Financial Management Group
includes fee based services within private trust, retirement services, and
financial management services including personal wealth management and
brokerage services. These business units were identified through the products
and services that are offered within each unit.
The accounting policies of the individual business units are the same as
the Corporation except for the following items. The Corporation uses a match-
funded transfer pricing process to assess operating segment performance.
Expenses for consolidated back-office operations are allocated to operating
segments based on estimated uses of those services. General overhead type
expenses such as executive administration, accounting, internal audit, and
personnel are allocated based on the direct expense level of the operating
segment. Income tax expense for the individual segments is calculated
basically at the statutory rate. Parent Company records the tax expense or
benefit necessary to reconcile to the consolidated total.
<TABLE>
<CAPTION>
Financial
Management Consolidated
(in thousands) Banking Group Non-Banks Total
===============================================================================================================
<S> <C> <C> <C> <C>
March 31, 1999
Revenues from (expenses to) external customers...... $ 97,269 $ 14,644 $ (2,111) $109,801
-------------------------------------------------------
Net income (loss)................................... $ 21,776 $ 4,720 $ (2,201) $ 24,295
=======================================================
================================================================================================================
March 31, 1998
Revenues from (expenses to) external customers...... $ 84,796 $ 14,894 $ (2,170) $ 97,520
-------------------------------------------------------
Net income (loss)................................... $ 16,522 $ 4,948 $ (2,057) $ 19,413
=======================================================
</TABLE>
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Review
Cullen/Frost Bankers, Inc. and Subsidiaries
(taxable-equivalent basis - tables in thousands)
Results of Operations
The results of operations are included in the material that follows.
During the second quarter of 1998 the Corporation completed the merger with
Overton Bancshares, Inc., ("Overton") which was accounted for using the
"pooling-of-interests" accounting method. Historical amounts for 1998 have
been restated to reflect the merger. In addition, the Corporation completed an
acquisition during the first quarter of 1999 and one in the first quarter of
1998. These acquisitions were accounted for as purchase transactions, and as
such, their related results of operations are included in the financial
information that follows from the date of acquisition. The merger and
acquisitions are outlined in the footnotes to the financial statements on page
eight. All balance sheet figures are presented in averages unless otherwise
noted.
Cullen/Frost Bankers, Inc. reported net income of $24.3 million or $.89
per diluted common share for the quarter ended March 31, 1999 compared to $22.8
million or $.83 per diluted common share and $19.4 million or $ .71 per diluted
common share for the fourth and first quarters of 1998, respectively. Return on
average equity and average assets were 18.79 percent and 1.44 percent,
respectively, for the first quarter of 1999 compared to return on average
equity and average assets of 16.71 percent and 1.25 percent, respectively, for
the first quarter of 1998.
<TABLE>
<CAPTION>
Summary of Operations
-------------------------------------
Three Months Ended
-------------------------------------
1999 1998
----------- -----------------------
March 31 December 31 March 31
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Taxable-equivalent net interest income $72,607 $70,970 $64,503
Taxable-equivalent adjustment 1,167 947 445
------- ------- -------
Net interest income 71,440 70,023 64,058
Provision for possible loan losses 3,000 2,659 2,579
Non-Interest income:
Net (loss)gain on securities transactions (68) 148 73
Other 38,429 34,043 33,389
------- ------- -------
Total non-interest income 38,361 34,191 33,462
Non-Interest expense:
Intangible amortization 3,337 3,286 3,348
Other 66,739 63,941 61,505
------- ------- -------
Total non-interest expense 70,076 67,227 64,853
------- ------- -------
Income before income taxes 36,725 34,328 30,088
Income Taxes 12,430 11,550 10,675
------- ------- -------
Net Income $24,295 $22,778 $19,413
======= ======= =======
Net income per diluted common share: $ .89 $ .83 $ .71
Return on Average Assets 1.44% 1.34% 1.25%
Return on Average Equity 18.79 17.64 16.71
</TABLE>
<PAGE>
Results of Segment Operations
The Corporation's operations are managed along two major Operating
Segments: Banking and the Financial Management Group. The following table
summarizes net income by Operating Segment for the quarters ending March 31,
1999 and 1998:
Three Months Ended March 31
----------------------------
1999 1998
====================================================================
Banking............................... $21,776 $16,521
Financial Management Group............ 4,720 4,948
Non-Banks............................. (2,201) (2,056)
----------------------------
Consolidated net income............... $24,295 $19,413
============================
The increase in Banking net income from the first quarter of 1998 was due
primarily to higher net interest income due to loan growth and higher service
charge income coupled with the impact of a $2 million non-recurring gain.
Net Interest Income
Net interest margin was 4.98 percent for the first quarter of 1999
compared to 4.87 percent and 4.89 percent for the fourth and first quarter of
1998, respectively. The net interest spread of 4.19 percent increased 18 basis
point from the fourth quarter of 1998 and 17 basis points from the first
quarter of 1998. The increases in net interest margin and spread from the
fourth and the first quarter of 1998 were primarily due to strong loan growth
resulting in an improved earning asset mix, as well as, decreased deposit
costs.
Change in (Taxable Equivalent)
Net Interest Income
------------------------------------
First Quarter First Quarter
1999 1999
vs. vs.
First Quarter Fourth Quarter
1998 1998
------------------------------------
Amount Amount
- ----------------------------------------------------------------
Due to volume $ 9,153 $ 1,945
Due to interest rate spread (1,049) (309)
------- -------
$ 8,104 $ 1,636
======= =======
<PAGE>
Non-Interest Income
Growth in non-interest income from the fourth and first quarters of 1998
was favorably impacted by the acquisition of Keller State Bank in the first
quarter of 1999, as well as a $2 million non-recurring gain in the first
quarter of 1999.
Three Months Ended
--------------------------------
1999 1998
-------- ---------------------
Non-Interest Income March 31 December 31 March 31
- ----------------------------------------------------------------------------
Trust fees $11,383 $11,443 $12,036
Service charges on deposit accounts 13,988 13,810 12,455
Other service charges, collection
and exchange charges, commissions
and fees 4,006 3,861 3,585
Net (loss) gain on securities transactions (68) 148 73
Other 9,052 4,929 5,313
------- ------- -------
Total $38,361 $34,191 $33,462
======= ======= =======
Total non-interest income was up $4.2 million, an increase of 12.2
percent, compared to the fourth quarter of 1998 and up $4.9 million, an
increase of 14.6 percent compared to the first quarter of 1998.
Trust fee income was down slightly compared to last quarter and decreased
$653,000 or 5.4 percent from the first quarter of 1998. Trust fees have
decreased primarily as a result of lower management fees associated with small
cap value funds, as well as trust oil and gas fees, which have offset growth in
other areas of the Financial Management Group. The market value of trust assets
at the end of the first quarter of 1999 was $12.2 billion compared to $11.7
billion at the end of the fourth quarter and $11.9 billion a year ago.
Service charges on deposit accounts for the first quarter of 1999
increased $178,000 or 1.3 percent from the fourth quarter of 1998 and $1.5
million or 12.3 percent from the first quarter of 1998. Most of these increases
occurred as the result of some fee increases and broad based deposit growth
that generated increases in overdraft charges, cash management fees on
commercial and individual deposits, as well as increases in ATM income. Other
service charges were up $145,000 or 3.8 percent for the first quarter of 1999
compared to the fourth quarter of 1998 and $421,000 or 11.7 percent from the
same quarter a year ago. This increase continues to be primarily due to higher
fees in accounts receivable factoring and mutual fund fees.
Other non-interest income increased $4.1 million from the fourth quarter of
1998 and increased $3.7 million or 70.4 percent from the first quarter a year
ago. The increase was primarily due to a $2 million non-recurring gain from
the sale of a piece of property in connection with a branch restructuring,
higher Visa check card income, and sundry income and recoveries.
Non-Interest Expense
The acquisitions of Keller State Bank and new business initiatives in the
first quarter of 1999 impacted the growth in expenses.
Three Months Ended
-------------------------------
1999 1998
-------- ---------------------
Non-Interest Expense March 31 December 31 March 31
- -----------------------------------------------------------------------------
Salaries and wages $29,713 $28,814 $27,207
Pension and other employee benefits 6,515 4,890 5,598
Net occupancy of banking premises 6,701 6,726 6,108
Furniture and equipment 4,575 4,965 4,441
Intangible amortization 3,337 3,286 3,348
Other 19,235 18,546 18,151
------- ------- -------
Total $70,076 $67,227 $64,853
======= ======= =======
<PAGE>
Salaries and wages increased $899,000 compared with the fourth quarter of 1998
and were up $2.5 million or 9.2 percent from the first quarter of 1998 due
to the Keller State Bank acquisition, as well as new business initiatives and
merit increases. Pension and other employee benefits increased by $1.6 million
from the fourth quarter of 1998 and increased $917,000 or 16.4 percent from the
first quarter of 1998 mainly due to higher retirement plan expense and the
impact of the acquisition on bank contributions to the 401(k) stock plan and
payroll taxes. Net occupancy of banking premises expense decreased slightly
from the fourth quarter of 1998 and increased $593,000 or 9.7 percent from the
first quarter of 1998. This increase from the same quarter in 1998 is
primarily attributable to higher property taxes and building maintenance
influenced by the acquisition and de novo branches opened in 1998.
Furniture and equipment expense decreased $390,000 or 7.9 percent compared
to the fourth quarter of 1998 due to lower service contracts expense and
increased $134,000 or 3.0 percent from the same quarter last year. Intangible
amortization remained relatively flat during the periods.
Other non-interest expenses increased $689,000 or 3.7 percent and $1.1
million or 6.0 percent from the fourth and first quarter of 1998, respectively,
mainly due to travel expense, outside computer services and stationery printing
and supplies influenced by conversion costs of the acquisitions.
Income Taxes
The Corporation's effective tax rate for the first quarter of 1999 and the
fourth quarter of 1998 approximates 34 percent. The effective rate for the
first quarter of 1998 approximates the statutory rate of 35 percent. The
decrease in the effective tax rate to 34 percent is primarily the result of
higher tax exempt interest.
Cash Earnings
Historically, excluding the merger with Overton, the Corporation has paid
cash and used the purchase method of accounting for its acquisitions which has
resulted in the creation of intangible assets. These intangible assets are
deducted from capital in the determination of regulatory capital. Thus, "cash"
or "tangible" earnings represent regulatory capital generated during the year
and can be viewed as net income excluding intangible amortization, net of tax.
While the definition of "cash" or "tangible" earnings may vary by company, we
believe this definition is appropriate as it measures the per share growth of
regulatory capital, which impacts the amount available for dividends and
acquisitions.
<PAGE>
The following table reconciles reported earnings to net income excluding
intangible amortization ("cash" earnings):
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------
March 1999 December 1998
- -------------------------------------------------------------------------------------------
Reported Intangible "Cash" Reported Intangible "Cash"
Earnings Amortization Earnings Earnings Amortization Earnings
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before income
taxes $36,725 $ 3,337 $40,062 $34,328 $3,286 $37,614
Income taxes 12,430 786 13,216 11,550 790 12,340
------- ------ ------- ------- ------ -------
Net income $24,295 $ 2,551 $26,846 $22,778 $2,496 $25,274
======= ====== ======= ======= ====== =======
Net income per diluted
common share $ .89 $ .09 $ .98 $ .83 $ .09 $ .92
Return on assets 1.44% 1.59%* 1.34% 1.49%*
Return on equity 18.79 20.77** 17.64 19.57**
* Calculated as A(annualized)/B
** Calculated as A(annualized)/C March 1999 December 1998
----------------- ---------- -------------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 26,846 $ 25,274
(B) Total average assets 6,852,825 6,737,593
(C) Average shareholders' equity 524,257 512,429
</TABLE>
Three Months Ended
--------------------------------
March 1998
- --------------------------------------------------------------
Reported Intangible "Cash"
Earnings Amortization Earnings
- --------------------------------------------------------------
Income before income taxes $30,088 $3,348 $33,436
Income taxes 10,675 844 11,519
------- ------ -------
Net income $19,413 $2,504 $21,917
======= ====== =======
Net income per diluted
common share $ .71 $ .09 $ .80
Return on assets 1.25% 1.41%*
Return on equity 16.71 18.86**
* Calculated as A(annualized)/B
** Calculated as A(annualized)/C March 1998
----------------------------- ----------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 21,917
(B) Total average assets 6,290,734
(C) Average shareholders' equity 471,281
<PAGE>
Balance Sheet
Average assets of $6.9 billion were up $115 million or 6.8 percent on an
annualized basis from the fourth quarter of 1998 and up $562 million or 8.9
percent from the first quarter of 1998. The increase from the first quarter of
1998 was primarily due to the Keller acquisition. Total deposits averaged $5.7
billion for the current quarter, up $83 million or 5.8 percent on an annualized
basis from the previous quarter and up $377 million or 7.0 percent when
compared to the first quarter of 1998. Average loans for the first quarter of
1999 were $3.8 billion. This represents an increase in average loans of 17.5
percent on an annualized basis from the fourth quarter of 1998 and 14.6 percent
from the first quarter of last year.
Loans
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Loan Portfolio Percentage
Period-End Balances March 31 of Total December 31 March 31
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial $1,250,616 32.9% $1,211,180 $1,068,412
Consumer 606,573 15.9 625,018 701,451
Real estate 1,845,657 48.5 1,719,404 1,484,986
Other 107,805 2.8 94,358 85,488
Unearned discount (3,762) (.1) (3,357) (3,160)
---------- ------ ---------- ----------
Total Loans $3,806,889 100.0% $3,646,603 $3,337,177
========== ====== ========== ==========
</TABLE>
At March 31, 1999 period-end loans totaled $3.8 billion up 17.6 percent
annualized from the previous quarter and up 14.1 percent from the same period
last year. Approximately 76 percent of the increase in loans from a year ago
resulted from internally generated growth.
Real Estate Loans
Real estate loans at March 31, 1999, were $1.8 billion or 48.5 percent of
period-end loans compared to 44.5 percent a year ago. Residential permanent
mortgage loans at March 31, 1999, were $652 million compared to $655 million at
December 31, 1998, and $542 million at March 31, 1998. Real estate loans
classified as "other" are essentially amortizing commercial and industrial
loans with maturities of less than five years secured by real property. The
majority of all commercial real estate loans are owner occupied or have a major
tenant (National or Regional company). Historically these type of loans have
resulted in lower risk, provided financial stability and are less susceptible
to economic swings.
At March 31, 1999, real estate loans 90 days past due (excluding non-
accrual loans) were $4,081,000, compared with $7,898,000 at December 31, 1998,
and $3,239,000 at March 31, 1998.
<TABLE>
<CAPTION>
1999 1998
------------------------ --------
Real Estate Loans Percentage
Period-End Balances March 31 of Total March 31
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Construction $ 329,379 17.9% $ 234,577
Land 109,694 5.9 62,408
Permanent mortgages:
Commercial 390,594 21.2 271,129
Residential 652,222 35.3 541,513
Other 363,768 19.7 375,359
---------- ------ ----------
$1,845,657 100.0% $1,484,986
========== ====== ==========
Non-accrual $ 6,164 .3% $ 7,666
</TABLE>
<PAGE>
Mexico
The Corporation's cross border outstandings to Mexico, excluding $18.2
million in loans secured by assets held in the United States, totaled $50.4
million at March 31, 1999, or 1.3 percent of total loans, up from $25.4 million
at December 31, 1998 and down compared to $51.8 million last year. The
increase from the fourth quarter represents the additional usage of lines of
credit extended to Mexican firms to support trade related transactions. As of
March 31, 1999, none of the Mexican related loans were on non-performing
status.
MEXICAN LOANS
------------------------
Percentage of
March 31, 1999 Amount Total Loans
- -----------------------------------------------------------------------
Loans to financial institutions $46,423 1.2%
Loans to private firms or individuals 4,014 .1
------- ----
$50,437 1.3%
======= ====
Non-Performing Assets
NON-PERFORMING ASSETS
--------------------------
Real
March 31, 1999 Estate Other Total
--------------------------------------------------------------------------
Non-accrual $6,164 $8,106 $14,270
Foreclosed assets 3,538 604 4,142
------ ------ -------
Total $9,702 $8,710 $18,412
====== ====== =======
As a percentage of total
non-performing assets 52.7% 47.3% 100.0%
Non-performing assets totaled $18.4 million at March 31, 1999 up 7.7
percent from $17,104,000 at December 31, 1998 and down 7.2 percent from $19.8
million at March 31, 1998. Non-performing assets as a percentage of total
loans and foreclosed assets decreased to .48 percent at March 31, 1999 from .59
percent one year ago.
Foreclosed assets consist of property which has been formally repossessed.
Foreclosed assets are valued at the lower of the loan balance or estimated fair
value, less estimated selling costs, at the time of foreclosure. Write-downs
occurring at foreclosure are charged against the allowance for possible loan
losses. On an ongoing basis, properties are appraised as required by market
indications and applicable regulations. Write-downs are provided for
subsequent declines in value. Expenses related to maintaining foreclosed
properties are included in other non-interest expense.
The after-tax impact (assuming a 35 percent marginal tax rate) of lost
interest from non-performing assets was $250,000 or $.01 per common share for
the first quarter of 1999, compared to approximately $229,000 or $.01 per
common share for the fourth quarter of 1998 and $276,000 or $.01 per common
share for the first quarter of 1998. Total loans 90 days past due (excluding
non-accrual loans) were $7,886,000 at March 31, 1999, compared to $10,781,000
at December 31, 1998, and $6,662,000 at March 31, 1998.
Allowance for Possible Loan Losses
The allowance for possible loan losses was $55.9 million or 1.47 percent
of period-end loans at March 31, 1999, compared to $53.6 million or 1.47
percent for the fourth quarter of 1998 and $49.7 million or 1.49 percent at
March 31, 1998. The allowance for possible loan losses as a percentage of non-
accrual loans was 391.4 percent at March 31, 1999, compared to 412.5 percent
and 356.3 percent at the end of the fourth and first quarters of 1998,
respectively.
The Corporation recorded a $3 million provision for possible loan losses
during the first quarter of 1999, compared to $2.7 million and $2.6 million
recorded during the fourth and first quarters of 1998. The provision is
reflective of the continued growth in the loan portfolio. Net charge-offs in
the first quarter of 1999 totaled $1.1 million, compared to
<PAGE>
net charge-offs of $1.0 million and $2.2 million for the fourth and first
quarters of 1998, respectively.
NET CHARGE-OFFS (RECOVERIES)
-------------------------------
1999 1998
------- ------------------
First Fourth First
Quarter Quarter Quarter
- ---------------------------------------------------------------------------
Real Estate $ (243) $ (415) $ 29
Commercial and industrial 170 99 660
Consumer 1,150 1,288 1,514
Other, including foreign (18) 64 1
------- ------- -------
$ 1,059 $ 1,036 $ 2,204
======= ======= =======
Provision for possible loan losses $ 3,000 $ 2,659 $ 2,579
Allowance for possible loan losses 55,857 53,616 49,698
Capital and Liquidity
At March 31, 1999, shareholders' equity was $523.8 million compared to
$512.9 million at December 31, 1998 and $474.6 million at March 31, 1998. The
Corporation had an unrealized gain on securities available for sale, net of
deferred taxes, of $667,000 as of March 31, 1999, compared to a $7.7 million
net unrealized gain as of December 31, 1998, reflecting a change of $7.1
million. This decrease is primarily due to the increase in market interest
rates. Under regulatory requirements, the unrealized gain or loss on
securities available for sale is not included in the calculation of risk-based
capital and leverage ratios. See page seven for a discussion of the
Corporation's regulatory capital ratios.
The Corporation paid a cash dividend of $.30 per common share for the
first quarter of 1999 and fourth quarter of 1998 compared to $.25 per common
share in the first quarter of 1998. This equates to a dividend payout ratio of
33.0 percent, 35.2 percent and 28.7 percent for the first quarter of 1999 and
the fourth and first quarters of 1998, respectively.
Funding sources available at the holding company level include a $7.5
million short-term line of credit. There were no borrowings outstanding from
this source at March 31, 1999.
Asset liquidity is provided by cash and assets which are readily
marketable, pledgeable or which will mature in the near future. These include
cash, short-term time deposits in banks, securities available for sale,
maturities and cash flow from securities held to maturity, and Federal funds
sold and securities purchased under resale agreements. Liability liquidity is
provided by access to funding sources which include core depositors and
correspondent banks in the Corporation's natural trade area which maintain
accounts with and sell Federal funds to subsidiary banks of the Corporation, as
well as Federal funds purchased and securities sold under repurchase agreements
from upstream banks. The liquidity position of the Corporation is continuously
monitored and adjustments are made to the balance between sources and uses of
funds as deemed appropriate.
Year 2000
The Corporation has an extensive program in place to address the
internal and external risks associated with the century date change to the Year
2000. Currently, the Corporation estimates that the dollar amount to be spent
on incremental costs will be approximately $4.6 million over the three year
period beginning in 1997, funded out of its earnings, with approximately $3.97
million spent through the first quarter of 1999. These costs are being expensed
as incurred. Additionally, the Corporation is spending about 30% of its annual
technology budget to facilitate progress on the Year 2000 program. The cost of
compliance and completion dates is based upon management's best estimates,
which were
<PAGE>
derived utilizing assumptions of future events, including the continued
availability of resources.
The Corporation has systematically inventoried and assessed the importance
of application software and system hardware and software during the now
completed awareness and assessment phase of its information technology. The
Corporation has also completed the renovation of mission critical systems and
has implemented 99 percent of the renovated mission critical systems. The
Corporation has completed the renovation, testing and installation of 100
percent of technology systems in its owned facilities, including vault doors,
elevators, climate control systems, and security systems. In addition, the
Corporation has completed 100 percent of the testing of mission critical
systems. The Corporation expects to be completed with the non-mission critical
applications by the end of the second quarter of 1999. The Corporation has
commenced, and will continue into 1999, integration testing to assure that
logically related systems can interact and process information correctly.
During 1998, the Corporation reviewed the Year 2000 preparedness of its
vendors and suppliers, and recently completed on-site due diligence visits with
key service providers. The great majority of these suppliers appear to be
making adequate progress. The Corporation will continue to monitor vendor and
supplier progress and develop contingency plans where necessary and feasible.
The Corporation is testing for key dates in the new century with critical third
party service providers, although it may be necessary to rely on proxy testing
in some cases. The majority of this work is expected to be done in the first
half of 1999. The Corporation will make available testing documentation, known
as proxy tests, to clients utilizing certain products and services. The
Corporation also relies on entities such as the Federal Reserve System,
Depository Trust Company, Participants Trust Company, Society for Worldwide
Interbank Financial Telecommunications (SWIFT), and the Clearing House
Interbank Payment Systems (CHIPS) in its securities processing and banking
businesses, as do other financial services providers in similar businesses.
Testing of data exchanges with organizations such as these is underway and is
expected to be completed during by the second quarter of 1999.
Although the Corporation is attempting to monitor and validate the efforts
of other parties, it cannot control the success of these efforts. The
Corporation is developing contingency plans where practical to provide
alternatives in situations where a third party furnishing a critical product or
service experiences significant Year 2000 issues. The Corporation is also
updating existing business continuity plans for the date change. This process
is well underway and will continue through the third quarter, 1999, as plans
are reviewed and validated.
As part of its credit analysis process, the Corporation has developed a
project plan for assessing the Year 2000 readiness of its significant credit
customers. An initial assessment of Year 2000 readiness has been completed for
the customers who have responded to the Corporation's inquiries about their
progress, which make up the majority of its credit customers and represent most
of its credit exposure. The Corporation will continue to monitor the progress
of these customers.
The Financial Management Group's (FMG) mission critical systems, such as
the trust and brokerage accounting and trading systems, are and have been,
included in the Corporation's evaluation and testing of systems. FMG is also
updating current contingency plans to include possible Year 2000 circumstances.
In addition to the systems aspect, the FMG recognizes that there could be other
types of risks and is in the process of reviewing the managed assets comprising
the investment portfolios of FMG clients. The review process includes
obtaining public information provided by companies/issuers to regulatory
bodies, such as the Securities and Exchange Commission. Other public
information that may be relied upon for evaluating a company's/issuer's Year
2000 readiness are analysts' reports and/or official statements from
companies/issuers.
Although the FMG is attempting to review and monitor the efforts of other
parties, it cannot warrant the facts, circumstances, or the outcome of such
efforts. Where the Corporation does not serve in a fiduciary capacity for a
customer's assets it cannot provide any assurances on factors outside its
control such as the quality of assets, potential economic uncertainties and
other service providers. The Corporation also does not accept responsibility
for ensuring that its clients' own systems are Year 2000 compliant. In
addition, the Corporation does not guarantee that there will not be any
disruptions on receipt or disbursements of income. There may be disruptions
that are beyond the control of
<PAGE>
the Corporation. An example of this would be if an issuer/company or its
paying agent does not pay income as scheduled.
The Corporation's Year 2000 program is regularly reviewed by examiners
from various external agencies such as the Comptroller of the Currency and the
Federal Reserve Bank.
The Corporation expects to successfully complete its Year 2000 effort as
planned. However, it is subject to unique risks and uncertainties due to the
interdependencies in business and financial markets, and the numerous
activities and events outside of its control. Since the Corporation is still
conducting external testing and monitoring of third parties, it is unable to
make assumptions as to the extent of Year 2000 failures that could result, nor
quantify the potential adverse effect that such failures could have on the
Corporation's operations, liquidity, and financial condition. Year 2000 risks
will be continually evaluated and contingency plans revised throughout 1999.
Forward-Looking Statements
The Corporation may from time to time make forward-looking statements
(within the meaning of the Private Securities Litigation Reform Act of 1995)
with respect to earnings per share, credit quality, expected Year 2000
compliance program, corporate objectives and other financial and business
matters. The Corporation cautions the reader that these forward-looking
statements are subject to numerous assumptions, risks and uncertainties,
including economic conditions; actions taken by the Federal Reserve Board;
legislative and regulatory actions and reforms; competition; as well as other
reasons, all of which change over time. Actual results may differ materially
from forward-looking statements.
Recent Announcements
On April 27, 1999, the Corporation announced an increase in its quarterly
cash dividend to $.35 per common share and a two-for-one stock split, payable
on June 15 and June 22, respectively, to shareholders of record as of June 1,
1999. In addition, the Board also approved a stock repurchase program in which
up to $100 million of its outstanding common stock may be repurchased over a
two-year period.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands - taxable-equivalent basis*)
March 31, 1999 December 31, 1998
---------------------------- ------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
---------- ------- ----- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Time deposits $ 432 $ 3 3.47%
Securities:
U.S. Treasury 206,795 2,565 5.03 $ 252,567 $ 3,204 5.03%
U.S. Government agencies
and corporations 1,694,151 26,620 6.29 1,687,422 26,508 6.28
States and political subdivisions 135,183 2,401 7.10 107,122 1,912 7.14
Other 54,141 792 5.86 50,937 772 6.06
---------- ------- ---------- -------
Total securities 2,090,270 32,378 6.20 2,098,048 32,396 6.17
Federal funds sold 28,439 332 4.67 106,523 1,431 5.26
Loans, net of unearned discount 3,760,734 77,621 8.37 3,602,690 76,980 8.48
---------- ------- ---------- -------
Total Earning Assets and
Average Rate Earned 5,879,875 110,334 7.58 5,807,261 110,807 7.59
Cash and due from banks 618,369 588,053
Allowance for possible loan losses (54,534) (52,837)
Banking premises and equipment 136,918 137,121
Accrued interest and other assets 272,197 257,995
---------- ----------
Total Assets $6,852,825 $6,737,593
========== ==========
LIABILITIES
Demand deposits:
Commercial and individual $1,482,579 $1,471,437
Correspondent banks 217,173 176,041
Public funds 41,071 55,965
---------- ----------
Total demand deposits 1,740,823 1,703,443
Time deposits:
Savings and Interest-on-Checking 935,709 1,656 0.72 906,111 2,066 0.90
Money market deposit accounts 1,541,395 13,695 3.60 1,509,580 14,238 3.74
Time accounts 1,268,283 13,757 4.40 1,281,352 15,170 4.70
Public funds 263,754 2,291 3.52 266,688 2,310 3.44
---------- ------- ---------- -------
Total time deposits 4,009,141 31,399 3.18 3,963,731 33,784 3.38
---------- ------- ---------- -------
Total Deposits 5,749,964 5,667,174
Federal funds purchased and securities
sold under resale agreements 376,357 4,007 4.26 328,794 3,554 4.23
Guaranteed preferred beneficial
interests in Corporation's
subordinated debentures 98,464 2,119 8.61 98,450 2,119 8.61
Other borrowings 13,204 202 6.21 24,185 379 6.22
---------- ------- ---------- -------
Total Interest-Bearing Funds
and Average Rate Paid 4,497,166 37,727 3.39 4,415,160 39,836 3.58
---------- ------- ----- ---------- ------- ----
Accrued interest and other liabilities 90,579 106,561
---------- ----------
Total Liabilities 6,328,568 6,225,164
SHAREHOLDERS' EQUITY 524,257 512,429
---------- ----------
Total Liabilities and
Shareholders' Equity $6,852,825 $6,737,593
========== ==========
Net interest income $72,607 $70,971
======= =======
Net interest spread 4.19% 4.01%
==== ====
Net interest income to total average earning assets 4.98% 4.87%
==== ====
*Taxable-equivalent basis assuming a 35% tax rate.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter Cullen/Frost
Bankers, Inc. and Subsidiaries (dollars in thousands - taxable-equivalent basis*)
September 30, 1998 June 30, 1998
---------------------------- ------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
---------- ------- ----- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury $ 205,209 $ 2,867 5.54% $ 256,937 $ 3,620 5.65%
U.S. Government agencies
and corporations 1,515,663 24,286 6.41 1,523,283 24,766 6.50
States and political subdivisions 72,949 1,367 7.49 48,762 1,034 8.48
Other 51,667 753 5.83 48,000 783 6.53
---------- ------- ---------- -------
Total securities 1,845,488 29,273 6.34 1,876,982 30,203 6.44
Federal funds sold 123,572 1,800 5.70 136,194 1,863 5.41
Loans, net of unearned discount 3,470,656 77,607 8.87 3,389,805 74,821 8.85
---------- ------- ---------- -------
Total Earning Assets and
Average Rate Earned 5,439,716 108,680 7.94 5,402,981 106,887 7.93
Cash and due from banks 536,988 573,970
Allowance for possible loan losses (52,273) (50,307)
Banking premises and equipment 135,322 134,842
Accrued interest and other assets 250,163 257,418
---------- ----------
Total Assets $6,309,916 $6,318,904
========== ==========
LIABILITIES
Demand deposits:
Commercial and individual $1,383,898 $1,369,084
Correspondent banks 190,975 195,762
Public funds 38,856 38,059
---------- ----------
Total demand deposits 1,613,729 1,602,905
Time deposits:
Savings and Interest-on-Checking 891,341 2,942 1.31 916,899 2,921 1.28
Money market deposit accounts 1,406,293 14,088 3.97 1,337,586 13,259 3.98
Time accounts 1,299,045 16,138 4.93 1,291,537 16,278 5.06
Public funds 191,118 1,894 3.93 224,173 2,194 3.93
---------- ------- ---------- -------
Total time deposits 3,787,797 35,062 3.67 3,770,195 34,652 3.69
---------- ------- ---------- -------
Total Deposits 5,401,526 5,373,100
Federal funds purchased and securities
sold under resale agreements 204,480 2,478 4.74 243,033 2,827 4.60
Guaranteed preferred beneficial
interests in Corporation's
subordinated debentures 98,436 2,118 8.61 98,422 2,119 8.61
Other borrowings 37,969 592 6.17 33,929 420 4.96
---------- ------- ---------- -------
Total Interest-Bearing Funds
and Average Rate Paid 4,128,682 40,250 3.87 4,145,579 40,018 3.87
---------- ------- ----- ---------- ------- ----
Accrued interest and other liabilities 76,058 87,086
---------- ----------
Total Liabilities 5,818,469 5,835,570
SHAREHOLDERS' EQUITY 491,447 483,334
---------- ----------
Total Liabilities and
Shareholders' Equity $6,309,916 $6,318,904
========== ==========
Net interest income $68,430 $66,869
======= =======
Net interest spread 4.07% 4.06%
==== ====
Net interest income to total average earning assets 5.01% 4.96%
==== ====
*Taxable-equivalent basis assuming a 35% tax rate.
</TABLE>
<PAGE>
Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands - taxable-equivalent basis*)
March 31, 1998
----------------------------
Interest
Average Income/ Yield/
Balance Expense Cost
ASSETS ----------- -------- -----
Securities:
U.S. Treasury $ 335,210 $ 4,649 5.62%
U.S. Government agencies
and corporations 1,502,010 24,410 6.50
States and political subdivisions 44,459 789 7.10
Other 17,017 271 6.38
---------- ------
Total securities 1,898,696 30,119 6.36
Federal funds sold 143,248 2,017 5.63
Loans, net of unearned discount 3,283,016 72,381 8.94
---------- ------
Total Earning Assets and
Average Rate Earned 5,324,960 104,517 7.93
Cash and due from banks 611,648
Allowance for possible loan losses (49,457)
Banking premises and equipment 135,002
Accrued interest and other assets 268,581
----------
Total Assets $6,290,734
==========
LIABILITIES
Demand deposits:
Commercial and individual $1,325,315
Correspondent banks 219,975
Public funds 41,036
----------
Total demand deposits 1,586,326
Time deposits:
Savings and Interest-on-Checking 893,466 2,750 1.25
Money market deposit accounts 1,295,973 12,742 3.99
Time accounts 1,271,962 16,034 5.11
Public funds 325,613 3,258 4.06
---------- ------
Total time Deposits 3,787,014 34,784 3.73
---------- ------
Total Deposits 5,373,340
Federal funds purchased and securities
sold under repurchase agreements 235,104 2,746 4.67
Guaranteed preferred beneficial
interests in Corporation's
subordinated debentures 98,409 2,119 8.61
Other borrowings 26,527 365 5.58
---------- ------
Total Interest-Bearing Funds
and Average Rate Paid 4,147,054 40,014 3.91
---------- ------ ----
Accrued interest and other liabilities 86,073
----------
Total Liabilities 5,819,453
SHAREHOLDERS' EQUITY 471,281
----------
Total Liabilities and
Shareholders' Equity $6,290,734
==========
Net interest income $64,503
=======
Net interest spread 4.02%
=====
Net interest income to total average earning assets 4.89%
=====
* Taxable-equivalent basis assuming a 35% tax rate.
<PAGE>
Item 3.
Quantitative and Qualitative Disclosures About Market Risks
There has been no material change in the market risks faced by the Company
since December 31, 1998. For information regarding the Company's market risk,
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
<PAGE>
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Statement regarding Financial Data Schedule (EDGAR Version)
(b) Reports on Form 8-K
During the quarter ended March 31, 1999, a Current Report on Form 8-K,
dated January 26, 1999, was filed with the Commission by the
Corporation.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cullen/Frost Bankers, Inc.
(Registrant)
Date: May 14, 1999 By:/s/ Phillip D. Green
---------------------------------
Phillip D. Green
Senior Executive Vice President
and Chief Financial Officer
(Duly Authorized Officer and
Principal Accounting Officer)
<PAGE>
Cullen/Frost Bankers, Inc.
Form 10-Q
Exhibit Index
Exhibit Description
- ------- -----------
27 Statement re: Financial Data Schedule 3-31-99
(EDGAR VERSION)
27.1 Statement re: Financial Data Schedule 3-31-98
restated for the merger of Overton
Bancshares, Inc. (EDGAR VERSION)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CURRENT
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND ACCOMPANYING DISCLOSURES.
</LEGEND>
<CIK> 0000039263
<NAME> CULLEN/FROST BANKERS, INC.
<MULTIPLIER> 1000
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 644,566
<INT-BEARING-DEPOSITS> 823
<FED-FUNDS-SOLD> 37,250
<TRADING-ASSETS> 472
<INVESTMENTS-HELD-FOR-SALE> 1,770,647
<INVESTMENTS-CARRYING> 103,693
<INVESTMENTS-MARKET> 106,162
<LOANS> 3,806,889
<ALLOWANCE> 55,857
<TOTAL-ASSETS> 6,714,449
<DEPOSITS> 5,782,449
<SHORT-TERM> 208,507
<LIABILITIES-OTHER> 101,215
<LONG-TERM> 98,472
0
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<COMMON> 268
<OTHER-SE> 523,538
<TOTAL-LIABILITIES-AND-EQUITY> 6,714,449
<INTEREST-LOAN> 77,295
<INTEREST-INVEST> 31,537
<INTEREST-OTHER> 335
<INTEREST-TOTAL> 109,167
<INTEREST-DEPOSIT> 31,399
<INTEREST-EXPENSE> 37,727
<INTEREST-INCOME-NET> 71,440
<LOAN-LOSSES> 3,000
<SECURITIES-GAINS> (68)
<EXPENSE-OTHER> 70,076
<INCOME-PRETAX> 36,725
<INCOME-PRE-EXTRAORDINARY> 36,725
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<NET-INCOME> 24,295
<EPS-PRIMARY> .91
<EPS-DILUTED> .89
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<LOANS-NON> 14,270
<LOANS-PAST> 7,886
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<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CURRENT
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND ACCOMPANYING DISCLOSURES.
</LEGEND>
<CIK> 0000039263
<NAME> CULLEN/FROST BANKERS, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 777,343
<INT-BEARING-DEPOSITS> 0
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<INVESTMENTS-MARKET> 256,483
<LOANS> 3,337,177
<ALLOWANCE> 49,698
<TOTAL-ASSETS> 6,497,666
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<SHORT-TERM> 111,465
<LIABILITIES-OTHER> 252,472
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0
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<COMMON> 133,795
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<TOTAL-LIABILITIES-AND-EQUITY> 6,497,666
<INTEREST-LOAN> 72,143
<INTEREST-INVEST> 29,912
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<INTEREST-DEPOSIT> 34,783
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<SECURITIES-GAINS> 73
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<INCOME-PRETAX> 30,088
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<NET-INCOME> 19,413
<EPS-PRIMARY> .73
<EPS-DILUTED> .71
<YIELD-ACTUAL> 7.93
<LOANS-NON> 13,947
<LOANS-PAST> 6,662
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<CHARGE-OFFS> (3,315)
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<ALLOWANCE-DOMESTIC> 44,911
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<ALLOWANCE-UNALLOCATED> 4,581
</TABLE>
