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 September 30, 2000 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 October 24, 2000, there
were 51,787,658 shares of Common Stock, $.01 par value, outstanding.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
<TABLE>
<CAPTION>
Consolidated Statements of Income
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $101,684 $ 84,057 $290,206 $241,103
Securities:
Taxable 24,783 25,316 75,886 82,273
Tax-exempt 1,859 1,644 5,511 4,683
-------- -------- -------- --------
Total Securities 26,642 26,960 81,397 86,956
Time deposits 114 45 384 70
Federal funds sold and securities purchased
Under resale agreements 3,052 1,404 5,152 2,567
-------- -------- -------- --------
Total Interest Income 131,492 112,466 377,139 330,696
INTEREST EXPENSE
Deposits 41,529 32,345 114,846 94,852
Federal funds purchased and securities
sold under repurchase agreements 4,770 2,635 12,684 9,373
Guaranteed preferred beneficial interest in the
Corporation's junior subordinated deferrable
interest debentures 2,118 2,118 6,356 6,356
Long-term notes payable and other borrowings 1,111 199 3,755 599
-------- -------- -------- --------
Total Interest Expense 49,528 37,297 137,641 111,180
-------- -------- -------- --------
Net Interest Income 81,964 75,169 239,498 219,516
Provision for possible loan losses 3,436 2,976 8,985 8,951
-------- -------- -------- --------
Net Interest Income After Provision
For Possible Loan Losses 78,528 72,193 230,513 210,565
NON-INTEREST INCOME
Trust fees 12,488 11,787 36,620 34,586
Service charges on deposit accounts 15,212 15,179 44,376 43,663
Other service charges, collection and
exchange charges, commissions and fees 9,087 5,074 21,738 12,438
Net gain (loss) on securities transactions 2 (6) (68)
Other 5,618 5,514 22,170 21,583
-------- -------- -------- --------
Total Non-Interest Income 42,407 37,554 124,898 112,202
NON-INTEREST EXPENSE
Salaries and wages 35,460 30,998 103,128 89,834
Pension and other employee benefits 7,338 6,300 22,559 19,391
Net occupancy of banking premises 7,050 6,776 20,666 20,295
Furniture and equipment 5,150 5,087 15,435 14,646
Intangible amortization 3,891 4,058 11,665 10,949
Other 19,584 19,227 58,849 56,979
-------- -------- -------- --------
Total Non-Interest Expense 78,473 72,446 232,302 212,094
-------- -------- -------- --------
Income Before Income Taxes 42,462 37,301 123,109 110,673
Income Taxes 14,704 12,928 42,565 37,917
-------- -------- -------- --------
Net Income $ 27,758 $ 24,373 $ 80,544 $ 72,756
======== ======== ======== ========
Net income per common share:
Basic $ .53 $ .46 $ 1.54 $ 1.36
Diluted .52 .45 1.50 1.33
Dividends per common share .195 .175 .565 .50
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands, except per share amounts)
September 30 December 31 September 30
2000 1999 1999
------------ ----------- ------------
<S> <C> <C> <C>
Assets
Cash and due from banks $ 685,383 $ 760,612 $ 645,308
Time deposits 5,410 6,546 4,048
Securities held to maturity 74,612 85,045 89,457
Securities available for sale 1,400,936 1,544,865 1,567,171
Securities trading 230 1 1,025
Federal funds sold and securities purchased under
resale agreements 248,825 34,950 3,125
Loans, net of unearned discount of $6,787 at
September 30, 2000; $6,217 at December 31, 1999
and $9,949 at September 30, 1999 4,468,818 4,166,728 4,062,833
Less: Allowance for possible loan losses (59,965) (58,345) (59,319)
---------- ---------- ----------
Net Loans 4,408,853 4,108,383 4,003,514
Banking premises and equipment 146,454 142,984 143,962
Accrued interest and other assets 384,110 313,294 312,110
---------- ---------- ----------
Total Assets $7,354,813 $6,996,680 $6,769,720
========== ========== ==========
Liabilities
Demand Deposits:
Commercial and individual $1,722,117 $1,601,977 $1,529,397
Correspondent banks 229,624 212,942 188,460
Public funds 48,300 48,341 31,288
---------- ---------- ----------
Total demand deposits 2,000,041 1,863,260 1,749,145
Time Deposits:
Savings and Interest-on-Checking 951,350 984,438 924,401
Money market deposit accounts 1,759,809 1,635,524 1,706,240
Time accounts 1,245,304 1,234,894 1,245,094
Public funds 248,449 235,716 195,791
---------- ---------- ----------
Total time deposits 4,204,912 4,090,572 4,071,526
---------- ---------- ----------
Total deposits 6,204,953 5,953,832 5,820,671
Federal funds purchased and securities
sold under repurchase agreements 367,372 333,459 258,283
Accrued interest and other liabilities 136,758 101,565 74,821
Guaranteed preferred beneficial interest in the
Corporation's junior subordinated deferrable
interest debentures 98,554 98,513 98,499
---------- ---------- ----------
Total Liabilities 6,807,637 6,487,369 6,252,274
Shareholders' Equity
Common stock, par value $.01 per share 536 536 536
Shares authorized:90,000,000
Shares issued: 53,561,616
Surplus 186,827 185,437 184,807
Retained earnings 430,115 382,168 368,114
Accumulated other comprehensive loss, net of tax (23,322) (39,110) (25,766)
Treasury Stock (1,771,353; 738,463; 404,899 shares) (46,980) (19,720) (10,245)
---------- ---------- ----------
Total Shareholders' Equity 547,176 509,311 517,446
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity $7,354,813 $6,996,680 $6,769,720
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands)
Accumulated
Other
Comprehensive
Common Retained Income/(Loss) Treasury
Stock Surplus Earnings net of tax Stock Total
------ -------- -------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $267 $183,151 $321,754 $ 7,747 $512,919
Net income for the twelve months
ended December 31, 1999 97,642 97,642
Unrealized loss on securities
available for sale of $46,913,
net of tax and reclassification
adjustment for after-tax gains
included in net income of $56 (46,857) (46,857)
--------
Total comprehensive income 50,785
--------
Proceeds from employee stock
purchase plan and options 1 856 (1,816) $3,315 2,356
Tax benefit related to exercise
of stock options 1,698 1,698
Purchase of treasury stock (24,318) (24,318)
Issuance of restricted stock (23) 1,283 1,260
Restricted stock plan deferred
compensation, net 624 624
Cash dividend (36,013) (36,013)
Two-for-one-stock-split 268 (268)
---- -------- -------- -------- -------- --------
Balance at December 31, 1999 $536 $185,437 $382,168 $(39,110) $(19,720) $509,311
Net income for the nine
months ended September 30, 2000 80,544 80,544
Unrealized gain on securities
available for sale of $15,784
net of tax and reclassification
adjustment for after-tax losses
included in net income of $4 15,788 15,788
--------
Total comprehensive income 96,332
--------
Proceeds from employee stock
purchase plan and options 28 (2,735) 4,652 1,945
Tax benefit related to exercise
of stock options 1,081 1,081
Purchase of treasury stock (33,420) (33,420)
Issuance of restricted stock 281 (5) 1,508 1,784
Restricted stock plan deferred
compensation, net (331) (331)
Cash dividend (29,526) (29,526)
---- -------- -------- -------- -------- --------
Balance at September 30, 2000 $536 $186,827 $430,115 $(23,322) $(46,980) $547,176
==== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands)
Nine Months Ended
September 30
---------------------
2000 1999
---------- --------
<S> <C> <C>
Operating Activities
Net income $ 80,544 $ 72,756
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 8,985 8,951
Provision for deferred taxes (2,366) (5,346)
Accretion of discounts on loans (659) (3,564)
Accretion of securities' discounts (2,131) (1,507)
Amortization of securities' premiums 1,148 3,933
Net increase in trading securities (229) (316)
Net loss on securities transactions 6 68
Net gain on sale of assets (2,279) (2,898)
Depreciation and amortization 25,112 23,946
(Increase) decrease in interest receivable (7,584) 65
Increase in interest payable 873 237
Originations of mortgages held-for-sale (52,313) (113,251)
Proceeds from sales of mortgages held-for-sale 60,566 118,175
Tax benefit from exercise of employee stock option 1,081 1,018
Net change in other assets and liabilities 21,342 (34,229)
---------- -------
Net cash provided by operating activities 132,096 68,038
Investing Activities
Proceeds from maturities of securities held to maturity 10,533 22,030
Purchases of investment securities held to maturity (95) (99)
Proceeds from sales of securities available for sale 965,746 265,414
Proceeds from maturities of securities available for sale 218,021 878,194
Purchases of securities available for sale (1,083,331) (691,168)
Net increase in loans (317,149) (308,963)
Net increase in bank premises and equipment (14,764) (12,833)
Proceeds from sales of repossessed properties 1,360 2,336
Net cash and cash equivalents paid for acquisitions (724) (23,788)
---------- --------
Net cash (used) provided by investing activities (220,403) 131,123
Financing Activities
Net increase (decrease) in demand deposits,
IOC accounts, and savings accounts 240,711 (65,860)
Net increase (decrease) in certificates of deposits 10,410 (184,831)
Net increase (decrease) increase in short-term borrowings 33,913 (47,281)
Net proceeds from issuance of common stock 3,729 1,706
Purchase of treasury stock (33,420) (11,523)
Dividends paid (29,526) (26,732)
---------- --------
Net cash provided (used) by financing activities 225,817 (334,521)
---------- --------
Increase (decrease) in cash and cash equivalents 137,510 (135,360)
Cash and cash equivalents at beginning of year 802,108 787,841
---------- --------
Cash and cash equivalents at the end of the period $ 939,618 $652,481
========== ========
Supplemental information:
Interest Paid $ 136,768 $110,943
Loans originated to facilitate the sale
of repossessed properties 151 278
See notes to consolidated financial statements.
</TABLE>
Notes to Consolidated Financial Statements
Cullen/Frost Bankers, Inc. and Subsidiaries
Note A - Basis of Presentation
The consolidated financial statements include the accounts of Cullen/Frost
Bankers, Inc. ("Cullen/Frost" or 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. For further information, refer to the consolidated financial
statements and footnotes thereto included in Cullen/Frost's Annual Report on
Form 10-K for the year ended December 31, 1999. The balance sheet at December
31, 1999 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. Certain
reclassifications have been made to make prior periods comparable.
Note B - 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 based on estimated
probable losses in the loan portfolio.
Nine Months Ended
September 30
--------------------
(in thousands) 2000 1999
-----------------------------------------------------------------------
Balance at beginning of the period $58,345 $53,616
Provision for possible loan losses 8,985 8,951
Loan loss reserve of acquired institutions 1,066
Net charge-offs:
Losses charged to the allowance (9,931) (8,014)
Recoveries 2,566 3,700
------- -------
Net charge-offs (7,365) (4,314)
------- -------
Balance at the end of period $59,965 $59,319
======= =======
Note C - 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 Cullen/Frost 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 September 30, 2000,
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. No interest revenue was recognized on impaired loans during the
first nine months of 2000 and 1999. 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.
The following is a summary of loans considered to be impaired:
September 30
-------------------
(in thousands) 2000 1999
--------------------------------------------------------------------------
Impaired loans with no valuation reserve $1,490 $1,753
Impaired loans with a valuation reserve 4,545 5,232
------ ------
Total recorded investment in impaired loans $6,035 $6,985
====== ======
Average recorded investment in impaired loans $5,118 $5,633
Valuation reserve 1,932 2,952
Note D - Earnings Per Common Share
The reconciliation of earnings per share follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
-------------------- --------------------
(in thousands, except per share amounts) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerators for both basic and diluted
earnings per share, net income $80,544 $72,756 $27,758 $24,373
======= ======= ======= =======
Denominators:
Denominators for basic earnings per share,
average outstanding common shares 52,296 53,481 51,976 53,422
Dilutive effect of stock options 1,351 1,355 1,715 1,326
------- ------- ------- -------
Denominator for diluted earnings per share 53,647 54,836 53,691 54,748
======= ======= ======= =======
Earnings per share:
Basic $ 1.54 $ 1.36 $ .53 $ .46
Diluted 1.50 1.33 .52 .45
</TABLE>
Note E - Capital
The table below reflects various measures of regulatory capital at
September 30, 2000 and 1999.
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
--------------------- ---------------------
(in thousands) Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-Based Capital
Tier 1 Capital $ 540,564 10.16% $ 510,899 11.20%
Tier 1 Capital Minimum requirement 212,728 4.00 182,440 4.00
Total Capital $ 600,529 11.29% $ 567,940 12.45%
Total Capital Minimum requirement 425,456 8.00 364,881 8.00
Risk-adjusted assets, net of goodwill $5,318,197 $4,561,012
Leverage ratio 7.58% 7.59%
Average equity as a percentage
of average assets 7.44 7.57
</TABLE>
At September 30, 2000 and 1999, Cullen/Frost's subsidiary banks were
considered "well capitalized" as defined by the FDIC Improvement Act of 1991,
the highest rating, and Cullen/Frost'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. Cullen/Frost and its subsidiary bank currently exceed all minimum
capital requirements. Management is not aware of any conditions or events that
would have changed the Corporation's capital rating since September 30, 2000.
Cullen/Frost is subject to the regulatory capital requirements
administered by the Federal Reserve Bank. Regulators can initiate certain
mandatory actions, if Cullen/Frost fails to meet the minimum requirements, that
could have a direct material effect on Cullen/Frost's financial statements.
Note F - Income Taxes
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
---------------------- ----------------------
(in thousands) 2000 1999 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current Tax Expense $44,931 $43,264 $14,382 $14,805
Deferred Tax Expense (Benefit) (2,366) (5,347) 322 (1,877)
------- ------- ------- -------
Income Taxes $42,565 $37,917 $14,704 $12,928
======= ======= ======= =======
Income Tax Payments $39,665 $44,242 $14,388 $17,423
</TABLE>
Net deferred tax assets at September 30, 2000, were $33.9 million with no
valuation allowance. The deferred tax assets were supported by taxes paid in
prior years.
Note G - Merger and Acquisitions
On July 1, 2000 Frost Insurance Agency ("FIA"), a subsidiary of The Frost
National Bank, acquired Nieman Hanks Puryear Partners and Nieman Hanks Puryear
Benefits ("Nieman Hanks"), an Austin based independent insurance agency.
Nieman Hanks offers property and casualty insurance, professional and umbrella
liability, homeowners and auto insurance, group health, life and disability
policies and 401(k) retirement plans and executive planning. Nieman Hanks is
the third acquisition made by Frost Insurance Agency, following the additions
of Professional Insurance Agents and Wayland Hancock mentioned below. The
purchase method of accounting was used to record the transaction and as such,
the results of operations are included from the date of acquisition.
On April 1, 2000, FIA acquired Wayland Hancock Insurance Agency, Inc.
("Wayland Hancock"), a Houston-based independent insurance agency. Wayland
Hancock offers a full range of life and health insurance, as well as retirement
and financial planning, to individuals and businesses. Wayland Hancock was
Frost Insurance Agency's second acquisition, following the 1999 acquisition of
Victoria-based Professional Insurance Agents, Inc. The purchase method of
accounting was used to record both transactions. These acquisitions are not
expected to have a material impact on Cullen/Frost's 2000 net income.
On May 6, 2000, United States National Bank of Galveston merged its
charter into The Frost National Bank. The Galveston-based bank has been a
member bank of Cullen/Frost since 1982. Merging of the two bank charters had
no material impact on Cullen/Frost's 2000 net income.
Note H - Accounting Changes
In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an amendment of FASB
Statement No. 133." SFAS No. 138 amends the accounting and reporting standards
of SFAS No. 133 for certain derivative instruments and certain hedging
activities. During 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133" which deferred the required adoption date of SFAS No.
133 to fiscal years beginning after June 15, 2000. SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities" will require the recognition
of all derivatives on the balance sheet at fair value. Derivatives that are
not hedges must be adjusted to fair value through income. If the derivative is
a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Even though early adoption is allowed,
Cullen/Frost has no plans to adopt this statement prior to the effective date
for the Corporation of January 1, 2001. At adoption, based on our projected
interest rate environment, it is not expected that the cumulative effect of the
accounting change will have a material impact on Cullen/Frost's consolidated
financial statements.
Note I - Operating Segments
Cullen/Frost has two reportable operating segments: Banking and the
Financial Management Group. Banking includes both commercial and consumer
banking services as well as Frost Insurance Agency results. Commercial
services are provided to corporations and other business clients and include a
wide array of lending and cash management products. Consumer banking includes
direct and indirect loans, mortgage loans and depository services. The
Financial Management Group includes fee based services within private trust,
retirement services, and financial management services including personal
wealth management, annuity sales 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>
Nine Months Ended: Financial
Management Consolidated
(in thousands) Banking Group Non-Banks Total
============================================================================================================
<S> <C> <C> <C> <C>
September 30, 2000
Revenues from external customers $315,783 $ 50,482 $ (1,869) $364,396
------------------------------------------------------
Net income (loss) $ 78,264 $ 12,155 $ (9,875) $ 80,544
======================================================
============================================================================================================
September 30, 1999
Revenues from external customers $292,462 $ 45,457 $ (6,201) $331,718
------------------------------------------------------
Net Income (loss) $ 69,525 $ 11,203 $ (7,972) $ 72,756
======================================================
Three Months Ended: Financial
Management Consolidated
(in thousands) Banking Group Non-Banks Total
============================================================================================================
September 30, 2000
Revenues from external customers $108,037 $ 17,074 $ (740) $124,371
------------------------------------------------------
Net income (loss) $ 27,240 $ 4,081 $ (3,563) $ 27,758
======================================================
============================================================================================================
September 30, 1999
Revenues from external customers $ 99,167 $ 15,475 $ (1,919) $112,723
------------------------------------------------------
Net income (loss) $ 23,673 $ 3,904 $ (3,204) $ 24,373
======================================================
</TABLE>
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)
Results of Operations
The results of operations are included in the material that follows. All
balance sheet amounts are presented in averages unless otherwise noted. Certain
reclassifications have been made to make prior quarters comparable. Taxable-
equivalent adjustments assume a 35 percent federal income tax rate. Dollar
amounts in tables are stated in thousands, except for per share amounts.
Cullen/Frost reported net income of $27.8 million or $.52 per diluted
common share for the quarter ended September 30, 2000 compared to $27.6 million
or $.52 per diluted common share for the second quarter of 2000 and net income
of $24.4 million or $.45 per diluted common share for the third quarter of
1999. Operating earnings for the second quarter of 2000, which exclude the
after-tax net impact from the sale of mortgage servicing rights, were $26.7
million or $.50 per diluted common share. Net income for the nine months ended
September 30, 2000 was $80.5 million or $1.50 per diluted common share compared
to $72.8 million or $1.33 per diluted common share for the same period of 1999.
Return on average equity and average assets were 20.50 percent and 1.53
percent, respectively for the third quarter of 2000 compared to 21.31 percent
and 1.56 percent, respectively for the previous quarter. This compares to
18.68 percent and 1.41 percent for the third quarter of 1999. Operating return
on average equity and average assets were 20.58 percent and 1.51 percent,
respectively for the second quarter of 2000. Return on average equity and
average assets for the nine months ended September 30, 2000 increased to 20.52
percent and 1.52 percent from 18.57 percent and 1.42 percent, respectively for
the same period in 1999.
<TABLE>
<CAPTION>
Summary of Operations
------------------------------------------------
Three Months Ended
Nine Months Ended ---------------------------
September 30 2000 1999
------------------ ------------------ -------
(in thousands) 2000 1999 Sept 30 June 30 Sept 30
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Taxable-equivalent net
interest income $242,870 $222,870 $83,063 $81,095 $76,240
Taxable-equivalent adjustment 3,372 3,354 1,099 1,113 1,071
-------- -------- ------- ------- -------
Net interest income 239,498 219,516 81,964 79,982 75,169
Provision for possible loan losses 8,985 8,951 3,436 2,867 2,976
Non-Interest income:
Net (loss) gain on securities
transactions (6) (68) 2
Other 124,904 112,270 42,405 42,874 37,554
-------- -------- ------- ------- -------
Total non-interest income 124,898 112,202 42,407 42,874 37,554
Non-Interest expense:
Intangible amortization 11,665 10,949 3,891 3,818 4,058
Other 220,637 201,145 74,582 73,938 68,388
-------- -------- ------- ------- -------
Total non-interest expense 232,302 212,094 78,473 77,756 72,446
-------- -------- ------- ------- -------
Income before income taxes 123,109 110,673 42,462 42,233 37,301
Income Taxes 42,565 37,917 14,704 14,603 12,928
-------- -------- ------- ------- -------
Net Income $ 80,544 $ 72,756 $27,758 $27,630 $24,373
======== ======== ======= ======= =======
Net income per diluted common share:$ 1.50 $ 1.33 $ .52 $ .52 $ .45
Return on Average Assets 1.52% 1.42% 1.53% 1.56% 1.41%
Return on Average Equity 20.52 18.57 20.50 21.31 18.68
</TABLE>
Results of Segment Operations
Cullen/Frost's operations are managed along two major Operating Segments:
Banking and the Financial Management Group. The following table summarizes net
income/(loss) by Operating Segment for the nine months and three months ended
September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
(in thousands) 2000 1999 2000 1999
=========================================================================================
<S> <C> <C> <C> <C>
Banking $78,264 $69,525 $27,240 $23,673
Financial Management Group 12,155 11,203 4,081 3,904
Non-Banks (9,875) (7,972) (3,563) (3,204)
--------------------- ---------------------
Consolidated net income $80,544 $72,756 $27,758 $24,373
===================== =====================
</TABLE>
Banking net income for the year to date period increased 12.6% and
increased 15.1% for the quarter when compared to the comparable periods last
year. Increases for both time periods were driven primarily by increases in
net interest income which resulted from a 10.5% increase in average loans. The
loan to deposit ratio at September 30, 2000 was 72.0% compared to 69.8% for the
same date last year.
The Financial Management Group net income increased 8.5 percent year-to-
date from the same period last year and 4.5 percent quarter to date compared to
last year. Most of the growth in year to date net income was due to an
increase in trust related income, specifically oil and gas income which
increased $837 thousand year to date compared to the first nine months of 1999.
Additionally, on a year to date period comparison, mutual fund fees and annuity
income increased during 2000 compared to the same period last year.
For the year to date time period, the after tax net loss for Non Banks
increased by $1.9 million. The increase in net loss was driven by higher
incentive compensation of $1.1 million recorded at the Parent Company for the
benefit of Frost Bank employees. Also impacting the increase was an operating
loss for Frost Securities which increased to $2.4 million for 2000 year to date
compared to $1.7 million for the year ago period. Frost Securities, which
began operations in August of 1999, recorded a net loss of $1.2 million for
the third quarter of 2000 compared to a net loss of $1.7 million for the same
quarter last year.
Net Interest Income
Net interest margin was 5.33 percent for the third quarter of 2000
compared to 5.33 percent and 5.21 percent for the second quarter of 2000 and
third quarter of 1999, respectively. The net interest spread of 4.29 percent
decreased five basis points from the second quarter of 2000 and 11 basis points
from the third quarter of 1999. The decrease in net interest spread is due to
an increased net federal funds purchased position and increased deposit
pricing. The majority of the increase in net interest margin from the third
quarter last year was due to strong loan growth resulting in an improved
earning asset mix and growth in demand deposits.
<TABLE>
<CAPTION>
Change in Net Interest Income (Taxable Equivalent)
-------------------------------------------------------------------
Third Quarter Third Quarter Year-to-Date
2000 2000 2000
vs. vs. vs.
Third Quarter Second Quarter Year-to-Date
1999 2000 1999
-------------------------------------------------------------------
(in thousands) Amount Amount Amount
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Due to volume $5,709 $1,219 $13,485
Due to interest rate spread 1,114 749 6,515
------ ------ -------
$6,823 $1,968 $20,000
====== ====== =======
</TABLE>
Non-Interest Income
Growth in non-interest income for the nine months and quarter ended
September 30, 2000 compared to the respective period of 1999 resulted primarily
from growth in Trust fees and new fees from financial services initiatives such
as Frost Insurance Agency and Frost Securities.
<TABLE>
<CAPTION>
Three Months Ended
Nine Months Ended -----------------------------
September 30 2000 1999
------------------ ------------------- -------
(in thousands) 2000 1999 Sept 30 June 30 Sept 30
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust fees $ 36,620 $ 34,586 $12,488 $12,446 $11,787
Service charges on deposit accounts 44,376 43,663 15,212 14,765 15,179
Other service charges, collection
and exchange charges, commissions
and fees 21,738 12,438 9,087 6,595 5,074
Net (loss) gain on securities transactions (6) (68) 2
Other 22,170 21,583 5,618 9,068 5,514
-------- -------- ------- ------- -------
Total $124,898 $112,202 $42,407 $42,874 $37,554
======== ======== ======= ======= =======
</TABLE>
For the third quarter 2000...
Total non-interest income for the third quarter of 2000 was $42.4 million, a
decrease of $467 thousand or 1.1 percent when compared to the second quarter
of 2000, which included a $2 million gain on sale of mortgage servicing
rights. Excluding the mortgage servicing gain, non-interest income was up $1.6
million or 3.8 percent from last quarter and up $4.9 million, or 12.9 percent
compared to the third quarter of 1999.
Trust fees were flat when compared with the second quarter of 2000 and up
$701 thousand or 5.9 percent when compared to the third quarter of 1999. This
increase is primarily in investment and oil and gas fees offset by decreases in
management fees associated with some small cap value funds. The market value
of trust assets at the end of the third quarter of 2000 was $12.9 billion, down
by $148 million when compared to the second quarter of 2000, and up by $716
million when compared to the third quarter of last year.
Service charges on deposit accounts for the third quarter of 2000
increased $447 thousand or 3.0 percent from the second quarter of this year and
were flat when compared to the year ago quarter. The increase from the
previous quarter is a result of higher revenues associated with individual
accounts. The increase resulted from a restructuring of individual deposit
accounts to reflect more appropriate price/value differential between products.
Cash management fees on commercial accounts offset the increase. Although cash
management billable services are up, the decrease in cash management fees
reflects the impact of a higher earnings credit rate, which results in more
payment for services through keeping balances rather than through the payment
of fees.
Other service charges were up $2.5 million or 37.8 percent compared to the
previous quarter and up $4.0 million or 79.1 percent from the same period last
year. Higher insurance commission revenue is primarily responsible for the
increase from the previous quarter and was impacted by the acquisition of
Nieman Hanks. (See page eight.) The increase from a year ago is from insurance
commission revenue and revenue from Frost Securities which began operations in
the third quarter last year as well as higher mutual fund fees.
Other non-interest income decreased $3.5 million or 38.0 percent from the
second quarter this year and increased $104 thousand or 1.9 percent from the
third quarter of 1999. The lower income from last quarter resulted primarily
from the $2 million non-recurring gain from the sale of the mortgage servicing
rights in the second quarter of 2000 as well as lower gains from the sale of
student loans.
For the nine months ended September 30, 2000...
Non-interest income was up $12.7 million or 11.3 percent compared to the
same period last year. Trust income increased $2.0 million or 5.9 percent from
the same period a year ago, primarily in investment fees and oil and gas fees
offset by decreases in management fees associated with small cap value funds.
Service charges on deposits increased $713 thousand or 1.6 percent when
compared to the same period one year ago. This increase is due to higher
overdraft charges and higher revenues associated with individual accounts. The
increase in revenues from individual accounts resulted from a restructuring of
deposit accounts to reflect more appropriate price/value differential between
products. Lower NSF charges and cash management fees on commercial accounts
offset the increase. Although cash management billable services are up, the
decrease in cash management fees reflects the impact of a higher earnings
crdeit rate, which results in more payment for services through keeping
balances rather than through the payment of fees. Other service charges
increased $9.3 million or 74.8 percent from the same period last year. Primary
contributors to this growth were insurance commission income, revenues from
Frost Securities and mutual fund fees. Other income was up $587 thousand or
2.7 percent compared to the same period last year. This increase resulted from
higher Visa check card income and annuity income offset by lower gains on the
sale of student loans.
Non-Interest Expense
Higher non-interest expense for the nine months and quarter ended
September 30, 2000 compared to the respective period of 1999 resulted primarily
from higher personnel and operating expenses in response to higher volumes, new
business initiatives such as Frost Securities and acquisitions made by Frost
Insurance Agency and market increases in salaries and wages.
<TABLE>
<CAPTION>
Three Months Ended
Nine Months Ended -------------------------------
September 30 2000 1999
------------------ ------------------- --------
(in thousands) 2000 1999 Sept 30 June 30 Sept 30
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and wages $103,128 $ 89,834 $35,460 $34,439 $30,998
Pension and other employee benefits 22,559 19,391 7,338 7,171 6,300
Net occupancy of banking premises 20,666 20,295 7,050 6,850 6,776
Furniture and equipment 15,435 14,646 5,150 5,219 5,087
Intangible amortization 11,665 10,949 3,891 3,818 4,058
Other 58,849 56,979 19,584 20,259 19,227
-------- -------- ------- ------- -------
Total $232,302 $212,094 $78,473 $77,756 $72,446
======== ======== ======= ======= =======
</TABLE>
For the third quarter 2000...
Non-interest expense increased $717 thousand or .9 percent when compared
to last quarter and increased $6.0 million or 8.3 percent compared to the third
quarter of 1999.
Salaries and wages increased $1.0 million or 3.0 percent compared with the
second quarter of 2000 and were up $4.5 million or 14.4 percent from the third
quarter of 1999. These increases were primarily due to Frost Securities and
acquisitions made by Frost Insurance Agency and market increases. Included in
the second quarter of 2000 were approximately $600 thousand in severance costs
related to the sale of the mortgage servicing rights and the initiation of the
co-branding mortgage origination program with GMAC Mortgage Corporation.
Pension and employee benefits costs were up $167 thousand or 2.3 percent
compared to last quarter and up $1.0 million or 16.5 percent compared to the
third quarter of 1999. The increase from a year ago is due to the new business
initiatives as well as higher medical expenses, higher payroll taxes, employee
activities and bank contributions to the 401(k) stock plan.
Net occupancy of banking premises expenses were up $200 thousand or 2.9
percent from the previous quarter and $274 thousand or 4.0 percent from a year
ago. These increases were primarily related to higher building lease expense
and general building maintenance and utility expenses offset somewhat by lower
property tax expense. Intangible amortization increased $73 thousand or 1.9
percent from the second quarter of 2000 and decreased $167 thousand or 4.1
percent compared to the third quarter of 1999.
Other non-interest expenses decreased $675 thousand or 3.3 percent from
the second quarter of 2000 and were up $357 thousand or 1.9 percent compared
with the third quarter of 1999. The decrease from the second quarter of 2000
is due to lower stationery printing and supplies expense, professional expense
and sundry losses.
For the nine months ended September 30, 2000...
Total non-interest expense was up $20.2 million or 9.5 percent compared to
the nine months ended September 30, 1999. Salaries and wages were up $13.3
million or 14.8 percent compared to the same period a year ago primarily
because of the new business initiatives, market conditions, and merit
increases. Severance costs of almost $600 thousand impacted salaries and wages
in 2000 as a result of the sale of the mortgage servicing rights and the
initiation of a co-branding mortgage origination program with GMAC Mortgage.
Pension and employee benefits costs were up $3.2 million or 16.3 percent
compared to the same period a year ago. The increase from a year ago is due to
the new business initiatives as well as higher medical expenses, payroll taxes
and bank contributions to the 401(k) stock plan. Furniture and equipment
expense increased $789 thousand or 5.4 percent due to higher amortized software
and software maintenance. Intangible amortization increased $716 thousand or
6.5 percent from the same period a year ago due to acquisitions. Other non-
interest expenses increased $1.9 million or 3.3 percent, primarily due to
higher professional expenses, business development and sales promotion,
education and travel expenses offset by lower stationery, printing and supplies
expenses, sundry losses and property taxes on foreclosed properties.
Income Taxes
Cullen/Frost's effective tax rate for the third quarters of 2000, 1999 and
the second quarter of 2000 approximated the statutory rate of 35 percent.
Cash Earnings
Cullen/Frost has historically paid cash and used the purchase method of
accounting for the majority of 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 represents 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.
The following table reconciles reported earnings to net income excluding
intangible amortization ("cash" earnings)(All tables in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------------------------------
September 2000 September 1999
-----------------------------------------------------------------------------------------
Reported Intangible "Cash" Reported Intangible "Cash"
Earnings Amortization Earnings Earnings Amortization Earnings
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before income
taxes $123,109 $11,665 $134,774 $110,673 $10,949 $121,622
Income taxes 42,565 2,552 45,117 37,917 2,527 40,444
-------- ------- -------- -------- ------- --------
Net income $ 80,544 $ 9,113 $ 89,657 $ 72,756 $ 8,422 $ 81,178
======== ======= ======== ======== ======= ========
Net income per diluted
common share $ 1.50 $ .17 $ 1.67 $ 1.33 $ .15 $ 1.48
Return on assets 1.52% 1.69%* 1.42% 1.59%*
Return on equity 20.52 22.85** 18.57 20.72**
* Calculated as A(annualized)/B
** Calculated as A(annualized)/C Sept 2000 Sept 1999
----------------------------- ---------- -----------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 89,657 $ 81,178
(B) Total average assets 7,077,376 6,837,896
(C) Average shareholders' equity 524,202 523,905
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------
September 2000 June 2000
------------------------------------------------------------------------------------------
Reported Intangible "Cash" Reported Intangible "Cash"
Earnings Amortization Earnings Earnings Amortization Earnings
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before income
taxes $ 42,462 $ 3,891 $ 46,353 $ 42,233 $ 3,818 $46,051
Income taxes 14,704 852 15,556 14,603 827 15,430
-------- -------- -------- -------- -------- -------
Net income $ 27,758 $ 3,039 $ 30,797 $ 27,630 $ 2,991 $30,621
======== ======== ======== ======== ======== =======
Net income per diluted
common share $ .52 $ .05 $ .57 $ .52 $ .05 $ .57
Return on assets 1.53% 1.69%* 1.56% 1.73%*
Return on equity 20.50 22.74** 21.31 23.61**
* Calculated as A(annualized)/B
** Calculated as A(annualized)/C Sept 2000 June 2000
----------------------------- ---------- ----------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 30,797 $ 30,621
(B) Total average assets 7,237,904 7,111,133
(C) Average shareholders' equity 538,797 521,594
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
September 1999
----------------------------------------------------------------
Reported Intangible "Cash"
Earnings Amortization Earnings
----------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $37,301 $4,058 $41,359
Income taxes 12,928 925 13,853
------- ------ -------
Net income $24,373 $3,133 $27,506
======= ====== =======
Net income per diluted
common share $ .45 $ .05 $ .50
Return on assets 1.41% 1.60%*
Return on equity 18.68 21.08**
* Calculated as A(annualized)/B
** Calculated as A(annualized)/C Sept 1999
----------------------------- ----------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 27,506
(B) Total average assets 6,840,168
(C) Average shareholders' equity 517,614
</TABLE>
Cullen/Frost's cash earnings for the nine months and quarter ending
September 30, 2000 were $89.7 million or $1.67 per diluted common share and
$30.8 million or $.57 per diluted common share, respectively. Cash earnings
return on assets and return on equity for the third quarter of 2000 were 1.69
percent and 22.74 percent, respectively.
Balance Sheet
Average assets for the third quarter 2000 were $7.2 billion up $127
million or 7.2 percent on an annualized basis from the previous quarter and up
$398 million or 5.8 percent from the third quarter of 1999. Total deposits
averaged $6.1 billion for the current quarter, up $128 million or 8.6 percent
on an annualized basis from the previous quarter and up $217 million or 3.7
percent when compared to the third quarter of 1999. Average loans for the
third quarter of 2000 were $4.4 billion. This represents an increase in
average loans of 6.5 percent on an annualized basis from the second quarter of
2000 and 10.5 percent from the third quarter of last year.
Total Loan Portfolio
<TABLE>
<CAPTION>
2000 1999
------------------------- -------------------------
Period-End Balances Percentage
(dollars in thousands) September 30 of Total December 31 September 30
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial:
Energy $ 125,350 2.8% $ 129,394 $ 107,473
Other 1,656,109 37.1 1,458,956 1,365,286
Consumer 478,419 10.7 541,026 563,158
Real estate 2,141,082 47.9 1,980,048 1,971,780
Other 74,645 1.7 63,521 65,085
Unearned discount (6,787) (.2) (6,217) (9,949)
---------- ------ ---------- ----------
Total Loans $4,468,818 100.0% $4,166,728 $4,062,833
========== ====== ========== ==========
</TABLE>
At September 30, 2000 period-end loans totaled $4.5 billion up 10.0
percent from the same period last year. Most of the increase in loans is
attributable to real estate up $169 million and commercial and industrial up
$309 million from a year ago. This increase is partially offset by a $85
million decrease in consumer loans related to the continued run-off of indirect
auto loans as Cullen/Frost is no longer originating this type of loan.
At September 30, 2000 the Corporation had approximately $350 million of
Shared National Credits outstanding. None of these credits are non-performing
or past due. These participations are done in the normal course of business to
meet the needs of the Corporation's customers. General corporate policy
towards participations is to lend to companies either headquartered in or
having significant operations within our markets. In addition, Cullen/Frost
must have an existing banking relationship or the Corporation fully expects to
broaden the relationship with other bank products. Approximately 28 percent of
the outstanding balance is energy related with the remainder diversified
throughout various industries.
Real Estate Loans
Real estate loans at September 30, 2000, were $2.1 billion or 47.9 percent
of period-end loans compared to 48.5 percent a year ago. Residential permanent
mortgage loans at September 30, 2000, were $710 million compared to $717
million at June 30, 2000, and $684 million at September 30, 1999. 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 and provided financial stability and are
less susceptible to economic swings.
At September 30, 2000, real estate loans 90 days past due (excluding non-
accrual loans) were $2.1 million, compared with $2.4 million at June 30, 2000,
and $1.2 million at September 30, 1999.
<TABLE>
<CAPTION>
2000 1999
------------------------ --------
Period-End Balances Percentage
(dollars in thousands) Sept 30 of Total Sept 30
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Construction $ 402,961 18.8% $ 366,288
Land 148,336 6.9 119,377
Permanent mortgages:
Commercial 495,312 23.1 420,253
Residential 709,556 33.2 683,506
Other 384,917 18.0 382,356
---------- ----- ----------
$2,141,082 100.0% $1,971,780
========== ====== ==========
Non-accrual loans $ 3,539 .2% $ 3,781
</TABLE>
Mexico
Cullen/Frost had $9.0 million in loans secured by assets held in the
United States compared to $19.5 million and $13.8 million at June 30, 2000 and
September 30, 1999, respectively. There were no cross border outstandings to
Mexico at September 30, 2000 down from $8.8 million at June 30, 2000 and $13.3
million at September 30, 1999. The decrease from last quarter and the third
quarter last year represents normal fluctuations in lines of credit used by
Mexican banks to finance trade. At September 30, 2000, there were no Mexican-
related loans on non-performing status compared to $342 thousand a year ago.
Non-Performing Assets
NON-PERFORMING ASSETS
--------------------------
September 30, 2000
Real
(dollars in thousands) Estate Other Total
----------------------------------------------------------------------------
Non-accrual loans $3,539 $13,761 $17,300
Foreclosed assets 2,074 406 2,480
------ ------- -------
Total $5,613 $14,167 $19,780
====== ======= =======
As a percentage of total
non-performing assets 28.4% 71.6% 100.0%
Non-performing assets totaled $19.8 million at September 30, 2000, up 23.8
percent and 11.0 percent from $16.0 million and $17.8 million at June 30, 2000
and September 30, 1999, respectively. The increase in non-performing assets
was related to a $5.7 million commercial loan added to non-accrual in the third
quarter 2000. Non-performing assets as a percentage of total loans and
foreclosed assets at September 30, 2000 remained constant at .44 percent when
compared to a year ago. As pockets of weakness begin to develop in the
economy, additions to non-performing assets may occur.
Total loans 90 days past due (excluding non-accrual loans) were $15.9
million at September 30, 2000, compared to $5.8 million at June 30, 2000, and
$8.2 million at September 30, 1999. The increase from the previous quarter is
a result of a delay in the administration of a non-credit related issue on a
single $10 million loan that has subsequently been resolved and is no longer
past due.
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 $342 thousand for the third quarter of
2000, compared to approximately $262 thousand for the third quarter of 1999 and
$325 thousand for the second quarter of 2000. For the nine months ended
September 30, 2000, the after-tax impact (assuming a 35 percent marginal tax
rate) was approximately $938 thousand compared with approximately $729 thousand
for the comparable period last year.
Allowance for Possible Loan Losses
The allowance for possible loan losses was $60 million or 1.34 percent of
period-end loans at September 30, 2000, compared to $59.3 million or 1.46
percent at September 30, 1999 and $59 million or 1.33 percent at June 30, 2000.
The allowance for possible loan losses as a percent of non-accrual loans was
347 percent at September 30, 2000, compared to 422 percent at September 30,
1999 and 453 percent at the end of the second quarter of 2000.
Cullen/Frost recorded a $3.4 million provision for possible loan losses
during the third quarter of 2000. This compares to $3.0 million provision for
possible loan losses during the third quarter of 1999 and $2.9 million for the
second quarter of 2000. Net charge-offs in the third quarter of 2000 totaled
$2.4 million compared to net charge-offs of $2.6 million and $2.4 million for
the third quarter of 1999 and for the second quarter of 2000, respectively.
Year-to-date net charge-offs were $7.4 million or .23 percent of average loans
compared to $4.3 million or .15 percent of average loans for the same period in
1999. The net charge-offs a year ago were low on a comparative basis due to a
large recovery in the second quarter of 1999.
NET CHARGE-OFFS (RECOVERIES)
----------------------------
2000 1999
------------------ -------
Third Second Third
(in thousands) Quarter Quarter Quarter
-------------------------------------------------------------------
Real estate $ (18) $ (7) $ (73)
Commercial and industrial 1,859 1,689 1,027
Consumer 599 688 1,683
Other, including foreign (4) (3) (6)
------- ------- -------
$ 2,436 $ 2,367 $ 2,631
======= ======= =======
Provision for possible loan losses $ 3,436 $ 2,867 $ 2,976
Allowance for possible loan losses 59,965 58,965 59,319
Capital and Liquidity
At September 30, 2000, shareholders' equity was $547 million compared to
$517 million at September 30, 1999 and $525 million at June 30, 2000. Activity
in the shareholders equity account during 2000 includes $29.5 million of
dividends paid and $33.4 million paid for the repurchase of shares of
Cullen/Frost, offset by earnings growth. In addition, Cullen/Frost had an
unrealized loss on securities available for sale, net of deferred taxes, of
$23.3 million as of September 30, 2000 compared to an unrealized loss of $39.1
million as of December 31, 1999 which had the effect of increasing
shareholder's equity by $15.8 million since year end. Currently, 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.
Cullen/Frost paid a cash dividend of $.195 per common share for the third
and second quarters of 2000 compared to $.175 per common share in the second
quarter of 1999. This equates to a dividend payout ratio of 36.5 percent and
36.8 percent for the third and second quarters of 2000, respectively. The
dividend payout ratio for the third quarter of 1999 was 33.7 percent.
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 September 30, 2000 or 1999.
Asset liquidity is provided by cash and assets which are readily
marketable or pledgeable or which will mature in the near future. Liquid
assets 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 Cullen/Frost's natural trade area
which maintain accounts with and sell Federal funds to the subsidiary bank of
the Corporation, as well as Federal funds purchased and securities sold under
repurchase agreements from upstream banks. The liquidity position of
Cullen/Frost is continuously monitored and adjustments are made to the balance
between sources and uses of funds as deemed appropriate.
Financial Modernization Legislation
On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 ("Modernization
Act") was signed into law. The Modernization Act: (i) allows bank holding
companies meeting management, capital and CRA standards, and receiving the
prior approval of the Federal Reserve, to engage in a substantially broader
range of financial activities and activities incidental to financial activities
than was previously permissible, including insurance underwriting and making
merchant banking investments in commercial and financial companies; (ii) allows
insurers and other financial services companies to acquire banks; (iii) removes
various restrictions that previously applied to bank holding company ownership
of securities firms and mutual fund advisory companies; and (iv) established
the overall regulatory structure applicable to bank holding companies that also
engage in insurance and securities operations. Bank holding companies approved
for the broader range of activities are called "financial holding companies".
This part of the Modernization Act became effective on March 11, 2000.
Cullen/Frost was designated a financial holding company under the Modernization
Act effective March 15, 2000.
The Modernization Act also modified laws related to financial privacy and
community reinvestment. The new financial privacy provisions generally
prohibit financial institutions, including Cullen/Frost, from disclosing
nonpublic personal financial information to third parties unless customers have
the opportunity to "opt out" of the disclosure.
Internet/E-Commerce
Cullen/Frost is scheduled to launch its enhanced new web site and
e-commerce initiative during the fourth quarter of 2000. This site will give
the corporation an opportunity to extend its philosophy on relationship banking
into Internet banking for both individuals and businesses.
The Corporation has capitalized approximately $12.7 million related to
this project. The major components of this project will be amortized over
their respective lives, generally between three and five years.
Forward-Looking Statements
Cullen/Frost 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, 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.
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets and Interest Income Analysis-Year-to-Date
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands - taxable-equivalent basis*)
September 30, 2000 September 30, 1999
--------------------------- ---------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
---------- -------- ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Time deposits $ 6,936 $ 384 6.40% $ 2,190 $ 70 4.26%
Securities:
U.S. Treasury 129,835 5,809 5.98 188,304 7,085 5.03
U.S. Government agencies
and corporations 1,325,399 67,962 6.84 1,522,158 73,131 6.41
States and political subdivisions
Tax-exempt 150,454 8,451 7.49 138,600 7,608 7.32
Taxable 3,426 171 6.66 3,611 164 6.07
Other 35,009 2,027 7.72 39,855 1,690 5.65
---------- -------- ---------- --------
Total securities 1,644,123 84,420 6.85 1,892,528 89,678 6.32
Federal funds sold 106,658 5,152 6.35 67,557 2,567 5.01
Loans, net of unearned discount 4,317,342 290,555 8.99 3,878,003 241,735 8.33
---------- -------- ---------- --------
Total Earning Assets and
Average Rate Earned 6,075,059 380,511 8.36 5,840,278 334,050 7.64
Cash and due from banks 613,854 611,717
Allowance for possible loan losses (58,907) (57,039)
Banking premises and equipment 145,787 140,591
Accrued interest and other assets 302,175 302,349
---------- ----------
Total Assets $7,077,968 $6,837,896
========== ==========
LIABILITIES
Demand deposits:
Commercial and individual $1,622,448 $1,518,546
Correspondent banks 228,159 220,974
Public funds 31,889 38,393
---------- ----------
Total demand deposits 1,882,496 1,777,913
Time deposits:
Savings and Interest-on-Checking 965,764 4,796 .66 946,068 4,933 .70
Money market deposit accounts 1,672,797 55,412 4.42 1,613,803 43,778 3.63
Time accounts 1,232,830 46,701 5.06 1,254,943 40,170 4.28
Public funds 233,001 7,937 4.55 219,871 5,971 3.63
---------- -------- ---------- --------
Total time deposits 4,104,392 114,846 3.74 4,034,685 94,852 3.14
---------- ----------
Total Deposits 5,986,888 5,812,598
Federal funds purchased and securities
sold under resale agreements 312,473 12,684 5.33 290,186 9,373 4.26
Long-term notes payable 3,797 143 5.04 1,502 65 5.76
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures, net 98,535 6,356 8.60 98,478 6,356 8.61
Other borrowings 72,810 3,612 6.63 11,884 534 6.01
---------- -------- ---------- --------
Total Interest-Bearing Funds
and Average Rate Paid 4,592,007 137,641 4.00 4,436,735 111,180 3.34
---------- -------- ---- ---------- -------- ----
Accrued interest and other liabilities 79,272 99,343
---------- ----------
Total Liabilities 6,553,775 6,313,991
SHAREHOLDERS' EQUITY 524,193 523,905
---------- ----------
Total Liabilities and
Shareholders' Equity $7,077,968 $6,837,896
========== ==========
Net interest income $242,870 $222,870
======== ========
Net interest spread 4.36% 4.30%
==== ====
Net interest income to total average earning assets 5.34% 5.10%
==== ====
*Taxable-equivalent basis assuming a 35% tax rate.
</TABLE>
<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, 2000 June 30, 2000
--------------------------- --------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
---------- ------- ----- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Time deposits $ 6,903 $ 114 6.60% $ 7,022 $ 125 6.04%
Securities:
U.S. Treasury 133,932 2,108 6.26 123,932 1,837 5.96
U.S. Government agencies
and corporations 1,287,967 22,080 6.86 1,372,244 23,515 6.85
States and political subdivisions
Tax-exempt 154,421 2,847 7.38 148,872 2,794 7.51
Taxable 3,354 56 6.65 3,460 58 6.67
Other 35,608 569 6.39 35,067 934 10.66
---------- ------- ---------- -------
Total securities 1,615,282 27,660 6.85 1,683,575 29,138 6.93
Federal funds sold and securities
purchased under resale agreements 182,310 3,052 6.55 86,578 1,372 6.27
Loans, net of unearned discount 4,405,125 101,765 9.19 4,334,450 97,366 9.04
---------- ------- ---------- -------
Total Earning Assets and
Average Rate Earned 6,209,620 132,591 8.50 6,111,625 128,001 8.41
Cash and due from banks 632,534 607,792
Allowance for possible loan losses (59,170) (58,951)
Banking premises and equipment 147,221 146,498
Accrued interest and other assets 308,265 304,169
---------- ----------
Total Assets $7,238,470 $7,111,133
========== ==========
LIABILITIES
Demand deposits:
Commercial and individual $1,662,944 $1,636,719
Correspondent banks 242,942 217,843
Public funds 34,598 29,157
---------- ----------
Total demand deposits 1,940,484 1,883,719
Time deposits:
Savings and Interest-on-Checking 945,462 1,559 .66 974,995 1,621 .67
Money market deposit accounts 1,739,909 20,255 4.63 1,645,561 18,343 4.48
Time accounts 1,238,874 16,909 5.43 1,235,310 15,593 5.08
Public funds 234,320 2,806 4.76 231,319 2,703 4.70
---------- ------- ---------- -------
Total time deposits 4,158,565 41,529 3.97 4,087,185 38,260 3.76
---------- ------- ---------- -------
Total Deposits 6,099,049 5,970,904
Federal funds purchased and securities
sold under resale agreements 332,446 4,770 5.61 318,303 4,376 5.44
Long-term notes payable 6,270 73 4.67 2,460 31 5.04
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures, net 98,547 2,118 8.60 98,534 2,119 8.60
Other borrowings 78,701 1,038 5.25 113,074 2,120 7.54
---------- ------- ---------- -------
Total Interest-Bearing Funds
and Average Rate Paid 4,674,529 49,528 4.21 4,619,556 46,906 4.07
---------- ------- ---- ---------- ------- ----
Accrued interest and other liabilities 84,695 86,264
---------- ----------
Total Liabilities 6,699,708 6,589,539
SHAREHOLDERS' EQUITY 538,762 521,594
---------- ----------
Total Liabilities and
Shareholders' Equity $7,238,470 $7,111,133
========== ==========
Net interest income $83,063 $81,095
======= =======
Net interest spread 4.29% 4.34%
==== ====
Net interest income to total average earning assets 5.33% 5.33%
==== ====
*Taxable-equivalent basis assuming a 35% tax rate.
</TABLE>
<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, 2000 December 31, 1999
---------------------------- ---------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
---------- ------- ----- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Time deposits $ 6,883 $ 145 5.48% $ 5,810 $ 94 5.40%
Securities:
U.S. Treasury 131,598 1,864 5.70 142,335 1,891 5.27
U.S. Government agencies
and corporations 1,316,395 22,368 6.80 1,349,023 22,361 6.63
States and political subdivisions
Tax-exempt 148,024 2,810 7.59 149,009 2,775 7.45
Taxable 3,466 58 6.66 3,510 58 6.58
Other 34,346 523 6.09 35,683 513 5.75
---------- ------- ---------- -------
Total securities 1,633,829 27,623 6.77 1,679,560 27,598 6.57
Federal funds sold and securities
Purchased under resale agreements 50,256 728 5.73 122,332 1,678 5.37
Loans, net of unearned discount 4,211,488 91,423 8.73 4,101,779 88,663 8.58
---------- ------- ---------- -------
Total Earning Assets and
Average Rate Earned 5,902,456 119,919 8.16 5,909,481 118,033 7.94
Cash and due from banks 601,030 644,251
Allowance for possible loan losses (58,598) (58,795)
Banking premises and equipment 143,625 144,013
Accrued interest and other assets 311,001 319,615
---------- ----------
Total Assets $6,899,514 $6,958,565
========== ==========
LIABILITIES
Demand deposits:
Commercial and individual $1,567,238 $1,576,527
Correspondent banks 223,528 223,178
Public funds 31,882 35,118
---------- ----------
Total demand deposits 1,822,648 1,834,823
Time deposits:
Savings and Interest-on-Checking 977,059 1,615 .66 955,664 1,624 .67
Money market deposit accounts 1,632,184 16,814 4.14 1,705,498 16,700 3.88
Time accounts 1,224,239 14,200 4.66 1,236,682 13,645 4.38
Public funds 233,349 2,428 4.19 223,733 1,998 3.54
---------- ------- ---------- -------
Total time Deposits 4,066,831 35,057 3.47 4,121,577 33,967 3.27
---------- ------- ---------- -------
Total Deposits 5,889,479 5,956,400
Federal funds purchased and securities
sold under repurchase agreements 286,449 3,538 4.89 271,477 3,128 4.51
Long-term notes payable 2,635 39 5.92 2,657 38 5.76
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures, net 98,524 2,119 8.60 98,506 2,119 8.60
Other borrowings 26,591 454 6.87 13,083 171 5.19
---------- ------- ---------- -------
Total Interest-Bearing Funds
and Average Rate Paid 4,481,030 41,207 3.69 4,507,300 39,423 3.47
---------- ------- ---- ---------- ------- ----
Accrued interest and other liabilities 83,772 97,040
---------- ----------
Total Liabilities 6,387,450 6,439,163
SHAREHOLDERS' EQUITY 521,064 519,402
---------- ----------
Total Liabilities and
Shareholders' Equity $6,899,514 $6,958,565
========== ==========
Net interest income $78,712 $78,610
======= =======
Net interest spread 4.47% 4.47%
==== ====
Net interest income to total average earning assets 5.36% 5.29%
==== ====
*Taxable-equivalent basis assuming a 35% tax rate.
</TABLE>
<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, 1999
------------------------------
Interest
Average Income/ Yield/
Balance Expense Cost
---------- -------- ----
<S> <C> <C> <C>
ASSETS
Time deposits $ 3,506 $ 45 5.10%
Securities:
U.S. Treasury 173,832 2,241 5.12
U.S. Government agencies
and corporations 1,375,186 22,524 6.55
States and political subdivisions
Tax-exempt 143,012 2,617 7.32
Taxable 3,540 58 6.55
Other 33,647 456 5.42
---------- --------
Total securities 1,729,217 27,896 6.45
Federal funds sold and securities
purchased under resale agreements 106,962 1,404 5.14
Loans, net of unearned discount 3,985,270 84,191 8.38
---------- --------
Total Earning Assets and
Average Rate Earned 5,824,955 113,536 7.75
Cash and due from banks 608,414
Allowance for possible loan losses (59,221)
Banking premises and equipment 144,092
Accrued interest and other assets 321,928
----------
Total Assets $6,840,168
==========
LIABILITIES
Demand deposits:
Commercial and individual $1,553,142
Correspondent banks 222,049
Public funds 37,006
----------
Total demand deposits 1,812,197
Time deposits:
Savings and Interest-on-Checking 943,741 1,626 .68
Money market deposit accounts 1,691,611 15,708 3.68
Time accounts 1,246,044 13,238 4.22
Public funds 188,856 1,772 3.72
---------- --------
Total time deposits 4,070,252 32,344 3.15
---------- --------
Total Deposits 5,882,449
Federal funds purchased and securities
sold under resale agreements 238,757 2,635 4.32
Long-term notes payable 2,702 39 5.71
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures, net 98,492 2,119 8.61
Other borrowings 9,896 159 6.40
---------- --------
Total Interest-Bearing Funds
and Average Rate Paid 4,420,099 37,296 3.35
---------- -------- ----
Accrued interest and other liabilities 90,258
----------
Total Liabilities 6,322,554
SHAREHOLDERS' EQUITY 517,614
----------
Total Liabilities and
Shareholders' Equity $6,840,168
==========
Net interest income $ 76,240
========
Net interest spread 4.40%
====
Net interest income to total average earning assets 5.21%
====
*Taxable-equivalent basis assuming a 35% tax rate.
</TABLE>
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, 1999. 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, 1999.
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
None
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: October 26, 2000 By:/S/ Phillip D. Green
-----------------------
Phillip D. Green
Senior Executive Vice President
and Chief Financial Officer
(Duly Authorized Officer and
Principal Accounting Officer)
Cullen/Frost Bankers, Inc. Bankers, Inc.
Form 10-Q
Exhibit Index
Exhibit Description
------- -----------
27 Statement re: Financial Data Schedule 9-30-00 (EDGAR VERSION)
