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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-7275
CULLEN/FROST BANKERS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1751768
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 W. HOUSTON STREET
SAN ANTONIO, TEXAS 78205
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (210) 220-4011
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(WITH ATTACHED RIGHTS)
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(Title of Class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE.
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $1,250,981,038 based on the closing price of such stock as of
March 17, 2000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Outstanding at
Class March 17, 2000
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COMMON STOCK, $.01 PAR VALUE 52,440,633
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for Annual Meeting of Shareholders to be held May 31, 2000
(Part III)
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TABLE OF CONTENTS
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PAGE
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PART I
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ITEM 1. BUSINESS.................................................... 3
ITEM 2. PROPERTIES.................................................. 11
ITEM 3. LEGAL PROCEEDINGS........................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... *
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS..................................................... 12
ITEM 6. SELECTED FINANCIAL DATA..................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... *
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 68
ITEM 11. EXECUTIVE COMPENSATION...................................... 68
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 68
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 68
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 69
</TABLE>
* Not Applicable
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PART I
ITEM 1. BUSINESS
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GENERAL
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Cullen/Frost Bankers, Inc. ("Cullen/Frost" or the "Corporation"), a Texas
business corporation incorporated in 1977 and headquartered in San Antonio,
Texas, is a bank holding company within the meaning of the Bank Holding Company
Act of 1956 ("the BHC Act") and as such is registered with the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). The New
Galveston Company, incorporated under the laws of Delaware, is a wholly owned
second tier bank holding company subsidiary which owns all banking and
non-banking subsidiaries with the exception of Cullen/Frost Capital Trust, a
Delaware statutory business trust and wholly-owned subsidiary of the
Corporation. At December 31, 1999, Cullen/Frost's principal assets consisted of
all of the capital stock of two national banks which had 80 financial centers
across Texas with 17 locations in the San Antonio area, 21 in the
Houston/Galveston area, 20 in the Fort Worth/Dallas area, 5 in Austin, 9 in the
Corpus Christi area, 3 in San Marcos, 2 in McAllen, 2 in the Boerne/Fair Oaks
area, and 1 in New Braunfels. At December 31, 1999, Cullen/Frost had
consolidated total assets of $7.0 billion and total deposits of $6.0 billion.
Based on information from the Federal Reserve Board, at September 30, 1999,
Cullen/Frost was the largest of the 109 unaffiliated bank holding companies
headquartered in Texas.
Cullen/Frost provides policy direction to the Cullen/Frost subsidiary banks
in, among others, the following areas: (i) asset and liability management; (ii)
accounting, budgeting, planning, insurance and investment banking; (iii)
capitalization; and (iv) regulatory compliance.
CULLEN/FROST SUBSIDIARY BANKS
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Each of the Cullen/Frost subsidiary banks is a separate entity which
operates under the day-to-day management of its own board of directors and
officers. The largest of these banks is The Frost National Bank ("Frost Bank"),
the origin of which can be traced to a mercantile partnership organized in 1868.
Frost Bank was chartered as a national banking association in 1899. At December
31, 1999, Frost Bank, which accounted for approximately 98 percent of
consolidated assets, loans and deposits of Cullen/Frost, was the largest bank
headquartered in San Antonio and South Texas. The Corporation's other subsidiary
bank is United States National Bank of Galveston which had $134 million in
assets at December 31, 1999. Cullen/Frost announced on February 17, 2000 that it
plans to merge United States National Bank of Galveston into Frost Bank. The
merger is expected to be effective in the second quarter of 2000.
SERVICES OFFERED BY THE CULLEN/FROST SUBSIDIARY BANKS
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Commercial Banking
The subsidiary banks provide commercial services for corporations and other
business clients. Loans are made for a wide variety of general corporate
purposes, including interim construction financing on industrial and commercial
properties and financing on equipment, inventories, accounts receivable, and
recapitalization for turnaround situations, as well as commercial leasing. Frost
Bank provides financial services to business clients on both a national and
international basis.
Consumer Services
The subsidiary banks provide a full range of consumer banking services,
including checking accounts, savings programs, automated teller machines,
installment and real estate loans, home equity loans, drive-in and night deposit
services, safe deposit facilities, and discount brokerage services.
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International Banking
Frost Bank provides international banking services to customers residing in
or dealing with businesses located in Mexico. Such services consist of accepting
deposits (in United States dollars only), making loans (in United States dollars
only), issuing letters of credit, handling foreign collections, transmitting
funds and, to a limited extent, dealing in foreign exchange. Reference is made
to pages 25 and 32 of this document.
Correspondent Banking
Frost Bank acts as correspondent for approximately 328 financial
institutions, primarily banks in Texas. These banks maintain deposits with Frost
Bank, which offers to the correspondents a full range of services including
check clearing, transfer of funds, loan participations, fixed income security
services, and securities custody and clearance.
Insurance
Frost Insurance Agency, Inc., is a wholly-owned subsidiary of Frost Bank
and offers corporate and personal property and casualty insurance as well as
group health and life insurance products to individuals and businesses.
Trust Services
The subsidiary banks provide a wide range of trust, investment, agency and
custodial services for individual and corporate clients. These services include
the administration of estates and personal trusts and the management of
investment accounts for individuals, employee benefit plans and charitable
foundations. At December 31, 1999, trust assets with a market value of
approximately $12.8 billion were being administered by the subsidiary banks.
These assets were comprised of discretionary assets of $5.6 billion and non-
discretionary assets of $7.2 billion.
Discount Brokerage
Frost Brokerage Services was formed in March 1986 to provide discount
brokerage services and perform other transactions or operations related to the
sale and purchase of securities of all types. Frost Brokerage Services is a
subsidiary of Frost Bank.
SERVICES OFFERED BY THE CULLEN/FROST NON-BANKING SUBSIDIARIES
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Frost Securities, Inc., a Section 20 investment banking subsidiary, began
operations on August 2, 1999 in Dallas, Texas. The new subsidiary offers 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.
Main Plaza Corporation ("Main Plaza") is a wholly-owned non-banking
subsidiary. Main Plaza occasionally makes loans to qualified borrowers. Loans
are funded with borrowings against Cullen/Frost's current cash or borrowings
against credit lines.
Daltex General Agency, Inc. ("Daltex"), a wholly-owned non-banking
subsidiary, is a managing general insurance agency. Daltex provides vendor's
single interest insurance.
COMPETITION
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The subsidiary banks encounter intense competition in their commercial
banking businesses, primarily from other banks located in their respective
service areas. The subsidiary banks also compete with insurance, finance and
mortgage companies, savings and loan institutions, credit unions, money market
funds, investment banks and other financial institutions. In the case of some
larger customers, competition exists with
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institutions in other major metropolitan areas in Texas and in the remainder of
the United States, some of which are larger than the Cullen/Frost subsidiary
banks in terms of capital, resources and personnel.
SUPERVISION AND REGULATION
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Cullen/Frost
Cullen/Frost is a legal entity separate and distinct from its bank
subsidiaries and is a registered bank holding company under the BHC Act. The BHC
Act generally prohibits Cullen/Frost from engaging in any business activity
other than banking, managing and controlling banks, furnishing services to a
bank which it owns and controls or engaging in non-banking activities closely
related to banking. The recently enacted Gramm-Leach-Bliley Act, discussed
below, broadens the range of permissible activities to activities that are
deemed financial in nature.
As a bank holding company, Cullen/Frost is primarily regulated by the
Federal Reserve Board which has established guidelines with respect to the
maintenance of appropriate levels of capital and payment of dividends by bank
holding companies. Cullen/Frost is required to obtain prior approval of the
Federal Reserve Board for the acquisition of more than five percent of the
voting shares or certain assets of any company (including a bank) or to merge or
consolidate with another bank holding company.
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) establishes 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 the Corporation, from disclosing nonpublic
personal financial information to third parties unless customers have the
opportunity to "opt out" of the disclosure.
The Federal Reserve Act and the Federal Deposit Insurance Act ("FDIA")
impose restrictions on loans by the subsidiary banks to Cullen/Frost and certain
of its subsidiaries, on investments in securities thereof and on the taking of
such securities as collateral for loans. Such restrictions generally prevent
Cullen/Frost from borrowing from the subsidiary banks unless the loans are
secured by marketable obligations. Further, such secured loans, other
transactions, and investments by each of such bank subsidiaries are limited in
amount as to Cullen/Frost or to certain other subsidiaries to ten percent of the
lending bank subsidiary's capital and surplus and as to Cullen/Frost and all
such subsidiaries to an aggregate of 20 percent of the lending bank subsidiary's
capital and surplus.
Under Federal Reserve Board policy, Cullen/Frost is expected to act as a
source of financial strength to its banks and to commit resources to support
such banks in circumstances where it might not do so absent such policy. In
addition, any loans by Cullen/Frost to its banks would be subordinate in right
of payment to deposits and to certain other indebtedness of its banks. In the
event of a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a
priority of payment.
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Subsidiary Banks
The two subsidiary national banks are organized as national banking
associations under the National Bank Act and are subject to regulation and
examination by the Office of the Comptroller of the Currency (the "Comptroller
of the Currency").
Federal and state laws and regulations of general application to banks have
the effect, among others, of regulating the scope of the business of the
subsidiary banks, their investments, cash reserves, the purpose and nature of
loans, collateral for loans, the maximum interest rates chargeable on loans, the
amount of dividends that may be declared and required capitalization ratios.
Federal law imposes restrictions on extensions of credit to, and certain other
transactions with, Cullen/Frost and other subsidiaries, on investments in stock
or other securities thereof and on the taking of such securities as collateral
for loans to other borrowers.
The Comptroller of the Currency with respect to Cullen/Frost's bank
subsidiaries has authority to prohibit a bank from engaging in what, in such
agency's opinion, constitutes an unsafe or unsound practice in conducting its
business. It is possible, depending upon the financial condition of the bank in
question and other factors, that such agency could claim that the payment of
dividends or other payments might, under some circumstances, be such an unsafe
or unsound practice.
The principal source of Cullen/Frost's cash revenues is dividends from its
bank subsidiaries, and there are certain limitations on the payment of dividends
to Cullen/Frost by such bank subsidiaries. The prior approval of the Comptroller
of the Currency is required if the total of all dividends declared by a national
bank in any calendar year would exceed the bank's net profits, as defined, for
that year combined with its retained net profits for the preceding two calendar
years less any required transfers to surplus. In addition, a national bank may
not pay dividends in an amount in excess of its undivided profits less certain
bad debts. Although not necessarily indicative of amounts available to be paid
in future periods, Cullen/Frost's subsidiary banks had approximately $78.5
million available for the payment of dividends, without prior regulatory
approval, at December 31, 1999.
Capital Adequacy
Bank regulators have adopted risk-based capital guidelines for bank holding
companies and banks. The minimum ratio of qualifying total capital to
risk-weighted assets (including certain off-balance sheet items) is eight
percent. At least half of the total capital is to be comprised of common stock,
retained earnings, perpetual preferred stocks, minority interests and for bank
holding companies, a limited amount of qualifying cumulative perpetual preferred
stock, less certain intangibles including goodwill ("Tier 1 capital"). The
remainder ("Tier 2 capital") may consist of other preferred stock, certain other
instruments, and limited amounts of subordinated debt and the allowance for loan
and lease losses.
In addition, bank regulators have established minimum leverage ratio (Tier
1 capital to average total assets) guidelines for bank holding companies and
banks. These guidelines provide for a minimum leverage ratio of three percent
for bank holding companies and banks that meet certain specified criteria,
including that they have the highest regulatory rating. All other banking
organizations will be required to maintain a leverage ratio of at least four
percent plus an additional cushion where warranted. The guidelines also provide
that banking organizations experiencing internal growth or making acquisitions
will be expected to maintain strong capital positions substantially above the
minimum supervisory levels, without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals
for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the ratio
of Tier 1 capital, less intangibles not deducted from Tier 1 capital, to average
total assets. The bank regulators have not advised Cullen/Frost or any bank
subsidiary of any specific minimum leverage ratio applicable to it. For
information concerning Cullen/Frost's capital ratios, see the discussion under
the caption "Capital" on page 33 and Note L "Capital" on page 50.
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FDICIA
The Federal Deposit Insurance Corporation Improvements Act of 1991
("FDICIA"), among other things, requires the Federal banking agencies to take
"prompt corrective action" in respect to depository institutions that do not
meet minimum capital requirements. FDICIA established five capital tiers: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized". Under the final rules
adopted by the Federal banking regulators relating to these capital tiers, an
institution is deemed to be: well capitalized if the institution has a total
risk-based capital ratio of ten percent or greater, a Tier 1 risk-based capital
ratio of six percent or greater, and a leverage ratio of five 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; adequately capitalized if the
institution has a total risk-based capital ratio of eight percent or greater, a
Tier 1 risk-based capital ratio of four percent or greater, and a leverage ratio
of four percent or greater (or a leverage ratio of three percent for bank
holding companies which meet certain specified criteria, including having the
highest regulatory rating); undercapitalized if the institution has a total
risk-based capital ratio that is less than eight percent, a Tier 1 risk-based
capital ratio less than four percent or a leverage ratio less than four percent
(or a leverage ratio less than three percent if the institution is rated
composite one in its most recent report of examination, subject to appropriate
Federal banking agency guidelines); significantly undercapitalized if the
institution has a total risk-based capital ratio less than six percent, a Tier 1
risk-based capital ratio less than three percent, or a leverage ratio less than
three percent; and critically undercapitalized if the institution has a ratio of
tangible equity to total assets equal to or less than two percent.
At December 31, 1999, the two subsidiaries of Cullen/Frost that are insured
depository institutions -- Frost Bank and U.S. National Bank of
Galveston -- were considered "well capitalized".
FDICIA generally prohibits a depository institution from making any capital
distributions (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized institutions are subject to growth
limitations and are required to submit a capital restoration plan. The agencies
may not accept such a plan without determining, among other things, that the
plan is based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. In addition, for a capital restoration plan to
be acceptable, the depository institution's parent holding company must
guarantee that the institution will comply with such capital restoration plan.
The aggregate liability of the parent holding company is limited to the lesser
of (i) an amount equal to five percent of the depository institution's total
assets at the time it became undercapitalized and (ii) the amount which is
necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized.
"Significantly undercapitalized" depository institutions may be subject to
a number of requirements and restrictions, including orders to sell sufficient
voting stock to become "adequately capitalized," requirements to reduce total
assets, and cessation of receipt of deposits from correspondent banks.
"Critically undercapitalized" institutions are subject to the appointment of a
receiver or conservator.
FDICIA also contains a variety of other provisions that affect the
operations of Cullen/Frost, including reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, and the
requirement that a depository institution give 90 days prior notice to customers
and regulatory authorities before closing any branch. The Federal regulatory
agencies have issued standards establishing loan-to-value limitations on real
estate lending. These standards have not had a significant effect on
Cullen/Frost and are not expected to have a significant effect in the future.
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DEPOSIT INSURANCE
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Cullen/Frost's subsidiary banks are subject to Federal Deposit Insurance
Corporation ("FDIC") deposit insurance assessments and to certain other
statutory and regulatory provisions applicable to FDIC-insured depository
institutions. The risk-based assessment system imposes insurance premiums based
upon a matrix that takes into account a bank's capital level and supervisory
rating.
A depository institution insured by the FDIC can be held liable for any
loss incurred by, or reasonably expected to be incurred by, the FDIC, in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly
controlled, FDIC-insured depository institution in danger of default. "Default"
is defined generally as the appointment of a conservator or receiver, and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance.
DEPOSITOR PREFERENCE
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Deposits and certain claims for administrative expenses and employee
compensation against an insured depository institution are afforded priority
over other general unsecured claims against such an institution, including
federal funds and letters of credit, in the "liquidation or other resolution" of
such an institution by any receiver.
ACQUISITIONS
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The BHC Act generally limits acquisitions by bank holding companies that
are not financial holding companies to commercial banks and companies engaged in
activities that the Federal Reserve Board has determined to be so closely
related to banking as to be a proper incident thereto and requires the prior
approval of the Federal Reserve Board to consummate such acquisitions. Financial
holding companies may acquire non-banking entities under the Modernization Act
by providing a notice to the Federal Reserve Board after consummation of such an
acquisition.
The BHC Act, the Federal Bank Merger Act, and the Texas Banking Code
regulate the acquisition of commercial banks. The BHC Act requires the prior
approval of the Federal Reserve Board for the direct or indirect acquisition of
more than five percent of the voting shares of a commercial bank or bank holding
company. With respect to Cullen/Frost's subsidiary banks, the approval of the
Comptroller of the Currency is required for branching, purchasing the assets of
other banks and bank mergers in which the continuing bank is a national bank.
In reviewing bank acquisition and merger applications, the bank regulatory
authorities will consider, among other things, the competitive effect and public
benefits of the transactions, the capital position of the combined organization,
and the applicant's record under the Community Reinvestment Act and fair housing
laws.
Cullen/Frost regularly evaluates acquisition opportunities and conducts due
diligence activities in connection with possible acquisitions. As a result,
acquisition discussions and, in some cases negotiations, regularly take place
and future acquisitions could occur.
INTERSTATE BANKING AND BRANCHING LEGISLATION
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The Riegle-Neal Interstate Branching Efficiency Act of 1994 ("IBBEA"),
authorizes interstate acquisitions of banks and bank holding companies without
geographic limitation beginning one year after enactment. In addition, as of
June 1, 1997, IBBEA authorized a bank to merge with a bank in another state as
long as neither of the states has opted out of interstate branching between the
date of enactment of IBBEA and May 31, 1997. IBBEA further provided that states
may enact laws permitting interstate bank merger transactions prior to June 1,
1997. A bank may establish a de novo branch in a state in which the bank does
not maintain a branch if the state expressly permits de novo branching. Once a
bank has established branches
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in a state through an interstate merger transaction, the bank may establish and
acquire additional branches at any location in the state where any bank involved
in the merger transaction could have established or acquired branches under
applicable federal or state law. A bank that has established a branch in a state
through de novo branching may establish and acquire additional branches in such
state in the same manner and to the same extent as a bank having a branch in
such state as a result of an interstate merger. If a state opts out of
interstate branching within the specified time period, no bank in any other
state may establish a branch in the opting out state, whether through an
acquisition or de novo. On August 28, 1995, Texas enacted legislation opting out
of interstate branching; however, in the second quarter of 1998, the OCC
approved a series of merger transactions requested by a non-Texas based
institution that ultimately resulted in the merger of its Texas based bank into
the non-Texas based institution. Although challenged in the courts, the final
legal ruling allowed the merger to proceed. In addition, on May 13, 1998, the
Texas Banking Commissioner began accepting applications filed by state banks to
engage in interstate mergers and branching.
REGULATORY ECONOMIC POLICIES
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The earnings of the subsidiary banks are affected not only by general
economic conditions but also by the policies of various governmental regulatory
authorities. The Federal Reserve Board regulates the supply of credit in order
to influence general economic conditions, primarily through open market
operations in United States government obligations, varying the discount rate on
financial institution borrowings, varying reserve requirements against financial
institution deposits and restricting certain borrowings by such financial
institutions and their subsidiaries. The deregulation of interest rates has had
and is expected to continue to have an impact on the competitive environment in
which the subsidiary banks operate.
Governmental policies have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future. However, Cullen/Frost cannot accurately predict the nature or extent
of any effect such policies may have on its future business and earnings.
EMPLOYEES
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At December 31, 1999, Cullen/Frost employed 3,336 full-time equivalent
employees. Employees of Cullen/Frost enjoy a variety of employee benefit
programs, including a retirement plan, 401(k) stock purchase plans, various
comprehensive medical, accident and group life insurance plans and paid
vacations. Cullen/Frost considers its employee relations to be good.
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EXECUTIVE OFFICERS OF THE REGISTRANT
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The names, ages, recent business experience and positions or offices held
by each of the executive officers during 1999 of Cullen/Frost are as follows:
<TABLE>
<CAPTION>
AGE AS OF
NAME AND POSITIONS OR OFFICES 12/31/99 RECENT BUSINESS EXPERIENCE
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T.C. Frost 72 Officer and Director of Frost Bank since 1950.
Senior Chairman of the Board Chairman of the Board of Cullen/Frost from 1973
and Director to October 1995. Member of the Executive
Committee of Cullen/Frost 1973 to present. Chief
Executive Officer of Cullen/Frost from July 1977
to October 1997. Senior Chairman of Cullen/Frost
from October 1995 to present.
Richard W. Evans, Jr. 53 Officer of Frost Bank since 1973. Executive Vice
Chairman of the Board, President of Frost Bank from 1978 to April 1985.
Chief Executive Officer and Director President of Frost Bank from April 1985 to
August 1993. Chairman of the Board and Chief
Executive Officer of Frost Bank from August 1993
to present. Director and Member of the Executive
Committee of Cullen/Frost from August 1993 to
present. Chairman of the Board and Chief
Operating Officer of Cullen/Frost from October
1995 to October 1997. Chairman of the Board and
Chief Executive Officer of Cullen/Frost from
October 1997 to present.
Patrick B. Frost 39 Officer of Frost Bank since 1985. President of
President of Frost Bank Frost Bank from August 1993 to present. Director
and Director of Cullen/ Frost from May 1997 to present.
Member of the Executive Committee of
Cullen/Frost from July 1997 to present.
Phillip D. Green 45 Officer of Frost Bank since July 1980. Vice
Senior Executive Vice President President and Controller of Frost Bank from
and Chief Financial Officer January 1981 to January 1983. Senior Vice
President and Controller of Frost Bank from
January 1983 to July 1985. Senior Vice President
and Treasurer of Cullen/Frost from July 1985 to
April 1989. Executive Vice President and
Treasurer of Cullen/Frost from May 1989 to
October 1995. Executive Vice President and Chief
Financial Officer of Cullen/Frost from October
1995 to July 1998. Senior Executive Vice
President and Chief Financial Officer from July
1998 to present.
</TABLE>
Stan McCormick, age 54, has been an officer of Frost Bank since 1994 and
Secretary of Cullen/Frost from June 1999 to present.
There are no arrangements or understandings between any executive officer
of Cullen/Frost and any other person pursuant to which he was or is to be
selected as an officer.
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ITEM 2. PROPERTIES
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The executive offices of Cullen/Frost, as well as the principal banking
quarters of Frost Bank, are housed in both a 21-story office tower and a
nine-story office building located on approximately 3.5 acres of land in
downtown San Antonio. Cullen/Frost and Frost Bank lease approximately 50 percent
of the office tower. The nine-story office building was purchased in April 1994.
Frost Bank also leases space in a seven-story parking garage adjacent to the
banking quarters. In June 1987, Frost Bank consummated the sale of its office
tower and leased back a portion of the premises under a 13-year primary lease
term with options allowing for occupancy up to 50 years. The Bank also sold its
related parking garage facility and leased back space in that structure under a
12-year primary lease term with options allowing for occupancy up to 50 years.
Both leases allow for purchase of the related asset under specific terms. Frost
Bank has agreed to repurchase the office tower and related parking garage
facility. Closing of the transaction is expected to take place in the second
quarter of 2002.
The subsidiary bank located in Galveston is housed in facilities which,
together with tracts of adjacent land used for parking and drive-in facilities,
are either owned or leased by the subsidiary bank.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
Certain subsidiaries of Cullen/Frost are defendants in various matters of
litigation which have arisen in the normal course of conducting a commercial
banking business. In the opinion of management, the disposition of such pending
litigation will not have a material effect on Cullen/Frost's consolidated
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
- ----------------------------------------------------------------------
MATTERS
--------
Common Stock Market Prices and Dividends
The tables below sets forth for each quarter the high and low sales prices
for Cullen/Frost's common stock and the dividends per share paid for each
quarter. The Company's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol: CFR. High and low sales prices are as reported by the
NYSE.
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
MARKET PRICE (PER SHARE) HIGH LOW HIGH LOW
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter.............................................. $27.94 $22.69 $30.60 $25.38
Second Quarter............................................. 28.94 23.19 30.35 24.75
Third Quarter.............................................. 28.94 22.81 29.00 20.44
Fourth Quarter............................................. 30.38 23.88 28.47 21.82
</TABLE>
The number of record holders of common stock at February 18, 2000 was 2,413.
<TABLE>
<CAPTION>
CASH DIVIDENDS (PER SHARE) 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
First Quarter............................................... $.150 $.125
Second Quarter.............................................. .175 .150
Third Quarter............................................... .175 .150
Fourth Quarter.............................................. .175 .150
--------------
Total.................................................. $.675 $.575
==============
</TABLE>
The Corporation's management is committed to the continuation of the
payment of regular cash dividends, however there is no assurance as to future
dividends because they are dependent on future earnings, capital requirements
and financial conditions. See "Capital" section on page 33 for further
discussion and Note K "Dividends" on page 50.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees............... $329,610 $300,721 $261,607 $219,279 $180,696 $125,571
Securities.......................... 113,561 120,259 110,070 112,921 109,593 104,986
Time deposits....................... 164
Federal funds sold and securities
purchased under resale
agreements........................ 4,245 7,111 12,423 7,506 7,154 4,337
---------------------------------------------------------------
TOTAL INTEREST INCOME.......... 447,580 428,091 384,100 339,706 297,443 234,894
INTEREST EXPENSE:
Deposits............................ 128,819 138,283 131,140 117,179 100,785 69,154
Federal funds purchased and
securities sold under repurchase
agreements........................ 12,500 11,606 8,739 9,773 15,347 8,336
Guaranteed preferred beneficial
interests in the Corporation's
junior subordinated deferrable
interest debentures............... 8,475 8,475 7,652
Other borrowings.................... 808 1,754 1,434 1,037 739 8
---------------------------------------------------------------
TOTAL INTEREST EXPENSE......... 150,602 160,118 148,965 127,989 116,871 77,498
---------------------------------------------------------------
NET INTEREST INCOME............ 296,978 267,973 235,135 211,717 180,572 157,396
Provision for possible loan losses...... 12,427 10,393 9,174 8,494 7,605 473
---------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN
LOSSES....................... 284,551 257,580 225,961 203,223 172,967 156,923
NON-INTEREST INCOME:
Trust fees.......................... 46,411 46,863 43,275 36,898 34,342 31,767
Service charges on deposit
accounts.......................... 58,787 53,601 47,627 41,570 33,364 30,848
Other service charges, collection
and exchange charges, commissions
and fees.......................... 23,503 15,482 11,349 9,199 11,456 9,668
Net (loss) gain on securities
transactions...................... (86) 359 498 (892) (1,382) (4,767)
Other............................... 28,470 22,361 18,953 17,403 18,241 15,628
---------------------------------------------------------------
TOTAL NON-INTEREST INCOME...... 157,085 138,666 121,702 104,178 96,021 83,144
NON-INTEREST EXPENSE:
Salaries and wages.................. 126,471 111,423 98,874 85,646 70,104 62,412
Pension and other employee
benefits.......................... 26,096 21,295 19,874 18,224 13,313 11,720
Net occupancy of banking premises... 27,149 25,486 22,812 21,486 20,238 17,779
Furniture and equipment............. 19,958 18,921 16,147 14,697 13,276 12,631
Intangible amortization............. 15,000 13,293 11,920 11,306 8,124 7,627
Other............................... 78,341 75,844 65,514 58,695 62,333 64,019
Merger related charges.............. 12,244
---------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE..... 293,015 278,506 235,141 210,054 187,388 176,188
---------------------------------------------------------------
INCOME BEFORE INCOME TAXES..... 148,621 117,740 112,522 97,347 81,600 63,879
Income taxes............................ 50,979 42,095 39,555 34,409 28,213 22,100
---------------------------------------------------------------
NET INCOME..................... $ 97,642 $ 75,645 $ 72,967 $ 62,938 $ 53,387 $ 41,779
===============================================================
Net income per common share:
Basic............................... $ 1.83 $ 1.42 $ 1.38 $ 1.18 $ 1.01 $ .79
Diluted............................. 1.78 1.38 1.33 1.16 .99 .78
Return on Average Assets................ 1.42% 1.18% 1.28% 1.23% 1.20% 1.02%
Return on Average Equity................ 18.68 15.44 16.38 15.63 14.84 13.17
</TABLE>
Historical amounts have been restated for stock splits and to reflect the merger
with Overton Bancshares, Inc.
13
<PAGE> 14
SELECTED FINANCIAL DATA
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
===========================================================================
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets......................... $6,996,680 $6,869,605 $6,045,573 $5,599,248 $4,774,750 $4,260,076
Guaranteed preferred beneficial
interest in the Corporation's
junior subordinated deferrable
interest debentures, net........... 98,513 98,458 98,403
Shareholders' equity................. 509,311 512,919 462,929 424,786 382,003 326,569
Average shareholders' equity to
average total assets............... 7.60% 7.63% 7.83% 7.87% 8.10% 7.76%
Tier 1 risk based capital ratio...... 11.04 12.23 13.21 11.39 12.73 14.17
Total risk based capital ratio....... 12.28 13.48 14.46 12.64 13.98 15.42
PER COMMON SHARE DATA
Net income-basic..................... $ 1.83 $ 1.42* $ 1.38 $ 1.18 $ 1.01 $ .79
Net income-diluted................... 1.78 1.38* 1.33 1.16 .99 .78
Cash dividends paid-CFR.............. .675 .575 .480 .403 .285 .17
Shareholders' equity................. 9.64 9.60 8.74 7.96 7.18 6.17
LOAN PERFORMANCE INDICATORS
Non-performing assets................ $ 18,837 $ 17,104 $ 18,088 $ 14,069 $ 18,681 $ 22,114
Non-performing assets to:
Total loans plus foreclosed
assets.......................... .45% .47% .58% .53% .87% 1.27%
Total assets....................... .27 .25 .30 .25 .39 .52
Allowance for possible loan losses... $ 58,345 $ 53,616 $ 48,073 $ 42,821 $ 36,525 $ 29,017
Allowance for possible loan losses to
period-end loans................... 1.40% 1.47% 1.54% 1.60% 1.71% 1.67%
Net loan charge-offs (recoveries).... $ 8,764 $ 6,100 $ 6,027 $ 2,825 $ 527 $ (1,894)
Net loan charge-offs (recoveries) to
average loans...................... .22% .18% .21% .12% .03% (.12)%
COMMON STOCK DATA
Common shares outstanding at
period end......................... 52,823 53,425 52,940 53,365 53,224 52,918
Weighted average common shares....... 53,368 53,150 52,999 53,195 53,043 52,659
Dilutive effect of stock options..... 1,378 1,529 1,753 1,257 945 866
Dividends as a percentage of net
income**........................... 36.88% 35.79% 30.50% 29.80% 24.47% 18.29%
NON-FINANCIAL DATA
Number of employees.................. 3,336 3,095 3,045 2,743 2,399 2,198
Shareholders of record............... 2,442 2,624 2,358 2,336 2,463 2,553
</TABLE>
* 1998 basic and diluted earnings per share before the after-tax merger related
charge were $1.60 and $1.56, respectively.
** Includes dividends paid by Overton and excludes the after-tax impact of the
$12.2 million merger related charge in 1998.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
FINANCIAL REVIEW
Discussed below are the operating results for Cullen/Frost Bankers, Inc.
and Subsidiaries ("Cullen/ Frost" or the "Corporation") for the years 1997
through 1999. Cullen/Frost completed bank acquisitions during the first and
second quarters of 1999 and one each in the first quarters of 1998 and 1997. The
Corporation also acquired an independent insurance agency in the second quarter
of 1999. These acquisitions, as described below, were all accounted for as
purchase transactions, and as such, their related results of operations are
included from the date of acquisition. During the second quarter of 1998,
Cullen/Frost also completed the merger with Overton Bancshares, Inc., as
described below. The merger was accounted for as a "pooling-of-interests"
transaction, and as such, historical amounts were restated to reflect the
merger.
All balance sheet amounts presented in the following financial review are
averages unless otherwise indicated. Certain reclassifications have been made to
make prior periods comparable. Taxable-equivalent adjustments assume a 35
percent federal tax rate. Dollar amounts in tables are stated in thousands,
except for per share amounts. The number of shares and related earnings per
share amounts have been restated to retroactively give effect for the
two-for-one stock split declared and paid by Cullen/Frost during the second
quarter of 1999.
MERGER AND ACQUISITIONS
- -----------------------
On May 20, 1999, Cullen/Frost paid approximately $42.3 million to acquire
Commerce Financial Corporation and its four-location subsidiary, Bank of
Commerce, in Fort Worth, Texas. The Corporation acquired loans of approximately
$76 million and deposits of approximately $164 million. The intangible assets
associated with the acquisition amounted to approximately $30.5 million. This
acquisition did not have a material impact on Cullen/Frost's 1999 net income.
On May 1, 1999, Frost Insurance Agency, a subsidiary of The Frost National
Bank, acquired 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 as agent, corporate and
personal property and casualty insurance as well as group health and life
insurance products to individuals and businesses. This acquisition did not have
a material impact on Cullen/Frost's 1999 net income.
On January 15, 1999, Cullen/Frost paid approximately $18.7 million to
acquire Keller State Bank with three locations in Tarrant County, Texas. The
Corporation acquired loans of approximately $38 million and deposits of
approximately $62 million. This acquisition did not have a material impact on
Cullen/Frost's 1999 net income.
On May 29, 1998, Cullen/Frost completed the merger of Overton Bancshares,
Inc., ("Overton") in Fort Worth, Texas, and its wholly-owned subsidiary, Overton
Bank & Trust, N.A. The merger was 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. As a result of the
transaction, the Corporation recorded a merger related charge of $12.2 million
primarily consisting of severance payments and other employee benefits, and
investment banking fees.
On January 2, 1998, the Corporation paid approximately $55.3 million to
acquire Harrisburg Bancshares, Inc., including its subsidiary Harrisburg Bank in
Houston, Texas. The Corporation acquired loans of approximately $125 million and
deposits of approximately $222 million. This acquisition did not have a material
impact on the Corporation's 1998 net income.
On March 7, 1997, the Corporation paid approximately $32.2 million to
acquire Corpus Christi Bancshares, Inc., including its subsidiary Citizens State
Bank, based in Corpus Christi, Texas. The
15
<PAGE> 16
Corporation acquired loans of approximately $108 million and deposits of
approximately $184 million. This acquisition did not have a material impact on
the Corporation's 1997 net income.
Investment Banking Subsidiary
On August 2, 1999 Cullen/Frost began operations of its Section 20
investment banking subsidiary in Dallas, Texas. The new subsidiary, Frost
Securities, Inc., offers a full range of services including equity research,
institutional sales, trading and investment banking services to institutional
investors and corporate customers.
RESULTS OF OPERATIONS
- ---------------------
For the year ended December 31, 1999, Cullen/Frost reported net income of
$97.6 million or $1.78 per diluted common share, an all-time earnings high.
Operating earnings for the year ended December 31, 1998 were $85.2 million or
$1.56 per diluted common share. Operating earnings exclude the after-tax impact
of the merger related charge of $12.2 million associated with the merger of
Overton. Net income for 1997 was $73.0 million or $1.33 per diluted common share
for 1997. Return on average assets for 1999 was 1.42 percent compared with 1.33
percent in 1998 (excluding the merger related charge), and 1.28 percent in 1997,
while return on average equity was 18.68 percent in 1999 compared with 17.38
percent in 1998 (excluding the merger related charge), and 16.38 percent in
1997.
<TABLE>
<CAPTION>
1999 Change 1998 Change
EARNINGS SUMMARY 1999 FROM 1998 1998 FROM 1997 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Taxable-equivalent net interest
income............................. $301,480 $ 30,708 $270,772 $33,686 $237,086
Taxable-equivalent adjustment........ 4,502 1,703 2,799 848 1,951
----------------------------------------------------------
Net interest income.................. 296,978 29,005 267,973 32,838 235,135
Provision for possible loan losses... 12,427 2,034 10,393 1,219 9,174
Non-interest income:
Net (loss) gain on securities
transactions.................. (86) (445) 359 (139) 498
Other........................... 157,171 18,864 138,307 17,103 121,204
----------------------------------------------------------
Total non-interest
income................... 157,085 18,419 138,666 16,964 121,702
Non-interest expense:
Intangible amortization......... 15,000 1,707 13,293 1,373 11,920
Merger related charge........... (12,244) 12,244 12,244
Other operating expenses........ 278,015 25,046 252,969 29,748 223,221
----------------------------------------------------------
Total non-interest
expense.................. 293,015 14,509 278,506 43,365 235,141
----------------------------------------------------------
Income before income taxes........... 148,621 30,881 117,740 5,218 112,522
Income taxes......................... 50,979 8,884 42,095 2,540 39,555
----------------------------------------------------------
Net income........................... $ 97,642 $ 21,997 $ 75,645 $ 2,678 $ 72,967
==========================================================
Per common share:
Net income-basic................ $ 1.83 $ .41 $ 1.42* $ .04 $ 1.38
Net income-diluted.............. 1.78 .40 1.38* .05 1.33
Return on Average Assets............. 1.42% .24% 1.18%* (.10)% 1.28%
Return on Average Equity............. 18.68 3.24 15.44* (.94) 16.38
</TABLE>
* Operating basic and diluted earnings per share for 1998 were $1.60 and $1.56,
respectively. Operating ROA and ROE for 1998 were 1.33 percent and 17.38
percent, respectively.
16
<PAGE> 17
RESULTS OF SEGMENT OPERATIONS
- -----------------------------
The Corporation's operations are managed along two major Operating
Segments: Banking and the Financial Management Group. A description of each
business and the methodologies used to measure financial performance are
described in Note V to the Consolidated Financial Statements on page 61. The
following table summarizes operating earnings and net income by Operating
Segment for each of the last three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Banking..................................................... $ 93,427 $78,826 $68,312
Financial Management Group.................................. 15,262 14,497 12,878
Non-Banks................................................... (11,047) (8,167) (8,223)
----------------------------
Consolidated operating earnings............................. $ 97,642 $85,156* $72,967
Consolidated net income..................................... $ 97,642 $75,645 $72,967
============================
</TABLE>
* Excludes the after-tax impact of the $12.2 million Overton merger related
charge. See discussion on page 15.
Banking net income was $93.4 million for 1999 up from $78.8 million for
1998 and $68.3 million for 1997. The increase in net income in 1999 versus 1998
and 1997 was due primarily to loan growth. Acquisitions did occur in each of the
three years, however, most of the loan growth was internally generated. Higher
service charge income also contributed to the increases in 1999 and 1998 but
were offset by increases in non-interest expenses, primarily from increased
salaries and wages.
The Financial Management Group net income for 1999 was $15.3 million
compared to $14.5 million and $12.9 million for 1998 and 1997, respectively.
Most of the growth between years was due to Frost Investment Services, which
includes brokerage services as well as personal wealth management.
Most of the increase in the operating loss for non-banks in 1999 was
impacted by an increase in expenses relating to Frost Securities Inc., a section
20 investment banking subsidiary that began operations in August of 1999.
NET INTEREST INCOME
- -------------------
Net interest income on a tax equivalent basis for 1999 was $301.5 million,
an increase from $270.8 million recorded in 1998 and the $237.1 million recorded
in 1997. The primary reason for the increase has been the growth in loans,
generated both internally and through acquisitions. See "Consolidated Average
Balance Sheets" on pages 64 and 65 and "Rate Volume Analysis" on page 66. The
net interest margin, was 5.15 percent for the year ended December 31, 1999,
compared to 4.93 percent and 4.87 percent for the years 1998 and 1997,
respectively. The increase in the net interest margin from a year ago is due to
strong loan growth resulting in an improved earning asset mix. Net interest
spread for 1999 increased 30 basis points to 4.34 percent. The increase in net
interest spread for 1999 is primarily due to Cullen/Frost's ability to improve
loan spreads through lower funding costs. Net interest spread was 4.04 percent
and 3.99 percent for 1998 and 1997, respectively.
The net interest spread as well as the net interest margin could be
impacted by future changes in short-and long-term interest rate levels.
17
<PAGE> 18
MARKET RISK DISCLOSURE -- INTEREST RATE SENSITIVITY
- --------------------------------------------------
Market risk is the potential loss arising from adverse changes in the fair
value of a financial instrument due to the changes in market rates and prices.
In the ordinary course of business, Cullen/Frost's market risk is primarily that
of interest rate risk. The Corporation's interest rate sensitivity and liquidity
are monitored by its Asset/Liability Management Committee on an ongoing basis.
The Committee seeks to avoid fluctuating net interest margins and to maintain
consistent growth of net interest income through periods of changing interest
rates. A variety of measures are used to provide for a comprehensive view of the
magnitude of interest rate risk, the distribution of risk, level of risk over
time and exposure to changes in certain interest rate relationships.
Cullen/Frost utilizes an earnings simulation model as the primary
quantitative tool in measuring the amount of interest rate risk associated with
changing market rates. The model quantifies the effects of various interest rate
scenarios on the projected net interest income and net income over the ensuing
12 month period. The model was used to measure the impact on net interest income
relative to a base case scenario, of rates increasing or decreasing ratably 200
basis points over the next 12 months. These simulations incorporate assumptions
regarding balance sheet growth and mix, pricing and the repricing and maturity
characteristics of the existing and projected balance sheet. All off-balance
sheet financial instruments such as derivatives are included in the model. Other
interest rate-related risks such as prepayment, basis and option risk are also
considered. The resulting model simulations show that a 200 basis point increase
in rates will result in a positive variance in net interest income of 0.3
percent relative to the base case over the next 12 months; while a decrease of
200 basis points will result in a negative variance in net interest income of
0.8 percent. This compares to last year when a 200 basis points increase in
rates resulted in a positive variance in net interest income of 0.7 percent
relative to the base case over the next 12 months while a decrease of 200 basis
points resulted in a negative variance in net interest income of 0.7 percent.
The Corporation's trading portfolio is immaterial and as such separate
quantitative disclosure is not presented.
As the accompanying table indicates, the Corporation is
liability-sensitive, on a cumulative basis, at time periods of one year or less
(assuming non-maturity deposits are immediately rate sensitive). This gap
analysis is based on a point in time and may not be meaningful because assets
and liabilities must be categorized according to contractual maturities and
repricing periods rather than estimating more realistic behaviors as is done in
the sensitivity model discussed above. Also, the gap analysis does not consider
subsequent changes in interest rate levels or spreads between asset and
liability categories.
Cullen/Frost continuously monitors and manages the balance between interest
rate-sensitive assets and liabilities. The Corporation's objective is to manage
the impact of fluctuating market rates on net interest income within acceptable
levels. In order to meet this objective, the Corporation may lengthen or shorten
the duration of assets or liabilities or enter into derivative contracts to
mitigate potential market risk.
18
<PAGE> 19
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------------------
Immediately
Rate Non-Rate
Sensitive Rate Sensitive Within Sensitive
CUMULATIVE INTEREST RATE SENSITIVITY ----------- ------------------------------------- -----------
(PERIOD-END BALANCES) 0-30 Days 90 Days One Year Five Years >Five Years Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans....................... $2,155,604 $ 2,316,977 $2,751,734 $3,648,046 $ 518,682 $4,166,728
Securities.................. 75,697 198,396 533,999 947,614 682,297 1,629,911
Federal funds sold & other
short-term investments.... 41,496 41,496 41,496 41,496 41,496
------------------------------------------------------------------------------
Total earning assets... $2,272,797 $ 2,556,869 $3,327,229 $4,637,156 $1,200,979 $5,838,135
==============================================================================
Interest -- Bearing Liabilities:
Savings and Interest-on-
Checking.................. $ 984,438 $ 984,438 $ 984,438 $ 984,438 $ 984,438
Money market deposit accounts... 1,635,524 1,635,524 1,635,524 1,635,524 1,635,524
Certificates of deposit and
other time accounts....... 277,749 631,050 1,259,107 1,340,465 $ 130,145 1,470,610
Federal funds purchased and
other borrowings.......... 356,979 356,979 356,979 356,979 98,513 455,492
------------------------------------------------------------------------------
Total interest-bearing
liabilities.......... $3,254,690 $ 3,607,991 $4,236,048 $4,317,406 $ 228,658 $4,546,064
==============================================================================
Interest sensitivity gap........ $ (981,893) $(1,051,122) $ (908,819) $ 319,750 $ 972,321 $1,292,071
==============================================================================
Ratio of earning assets to
interest-bearing liabilities... .70 .71 .79 1.07
===================================================
</TABLE>
In developing the classifications used for this analysis, it was necessary to
make certain assumptions and approximations in assigning assets and liabilities
to different maturity categories. For example, savings and Interest-on-Checking
are subject to immediate withdrawal and as such are presented as repricing
within the earliest period presented even though their balances have
historically not shown significant sensitivity to changes in interest rates.
Loans are included net of unearned discount of $6.2 million. Consumer loans are
distributed in the immediately rate-sensitive category for those tied to market
rates or to other categories according to the repayment schedule.
The above table does not reflect interest rate swaps further discussed on page
31.
19
<PAGE> 20
LIQUIDITY
- ---------
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 subsidiary banks 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.
NON-INTEREST INCOME
- -------------------
Non-interest income of $157.1 million was reported for 1999, compared with
$138.7 million for 1998 and $121.7 million for 1997. Excluding securities
transactions, total non-interest income increased 13.6 percent from 1998. In
addition to core growth, non-interest income was favorably impacted in 1999 by
the first quarter acquisition of Keller State Bank and the second quarter
acquisitions of Commerce Financial Corporation and Professional Insurance
Agency, Inc. ("PIA"). The non-interest income growth in 1998 and 1997 also
included the impact of the acquisition of Harrisburg Bancshares, Inc. and Corpus
Christi Bancshares, Inc., in the first quarter of 1998 and 1997, respectively.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
PERCENT Percent Percent
NON-INTEREST INCOME AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Trust fees........................ $ 46,411 - 1.0% $ 46,863 + 8.3% $ 43,275 + 17.3%
Service charges on deposit
accounts........................ 58,787 + 9.7 53,601 + 12.5 47,627 + 14.6
Other service charges, collection
and exchange charges,
commissions and fees............ 23,503 + 51.8 15,482 + 36.4 11,349 + 23.4
Net (loss)gain on securities
transactions.................... (86) -124.0 359 - 27.9 498 N/M
Other............................. 28,470 + 27.3 22,361 + 18.0 18,953 + 8.9
-------- -------- --------
Total........................ $157,085 + 13.3 $138,666 + 13.9 $121,702 + 16.8
======== ======== ========
</TABLE>
20
<PAGE> 21
Trust income was down $452 thousand or 1.0 percent during 1999, mainly due
to decreases in management fees associated with some small cap value funds
partially offset by increases in investment fees and custody fees. The market
value of trust assets grew $1.1 billion to $12.8 billion in 1999 with 82 percent
of the growth occurring in non-discretionary assets. In 1998 trust income was up
$3.6 million or 8.3 percent from 1997 due mainly to the growth in market value
of trust assets and the addition of new accounts through internal growth.
Deposit service charges increased $5.2 million or 9.7 percent from 1998.
The increase occurred as the result of deposit growth that generated increases
in overdraft charges, cash management fees on commercial and individual deposits
partially offset by lower NSF charges. In 1998, deposit service charges
increased $6.0 million or 12.5 percent from 1997. The increase from 1997 to 1998
was attributed to some fee increases and 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 and fees
increased $8.0 million or 51.8 percent when compared to 1998. Insurance
commission revenues from PIA acquired in the second quarter of 1999, and mutual
fund fees were the main contributors to the increase in other service charges
from last year. Other service charges and fees increased $4.1 million or 36.4
percent from 1997 to 1998 due to higher fees in accounts receivable factoring
and mutual fund fees.
During 1999 Cullen/Frost sold portions of its available for sale investment
portfolio resulting in a net loss of $86 thousand. In 1998 and 1997 the
Corporation sold portions of its available for sale investment portfolio
resulting in net gains of $359 thousand and $498 thousand, respectively.
Other non-interest income increased $6.1 million or 27.3 percent to $28.5
million in 1999 compared to $22.4 million in 1998. Growth in other non-interest
income for 1999 can primarily be attributed to increases in the gain on sale of
student loans, check card income, and a non-recurring $2 million gain on the
sale of a piece of property in connection with a branch restructuring. The
increase in 1998 from 1997 is primarily due to growth in VISA check card income,
gains on the sale of student and mortgage loans and gains on the disposition of
foreclosed assets.
NON-INTEREST EXPENSE
- --------------------
The acquisitions of Keller State Bank, Commerce Financial Corporation, and
PIA, as well as the formation of Frost Securities, Inc. impacted the growth in
expenses. Excluding the merger-related charge of $12.2 million during the second
quarter of 1998 which was associated with the merger of Overton, non-interest
expenses increased by 10.0 percent in 1999 to $293.0 million from $266.3 million
in 1998.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
PERCENT Percent Percent
NON-INTEREST EXPENSE AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and wages................... $126,471 +13.5% $111,423 +12.7% $ 98,874 +15.4%
Pension and other employee
benefits........................... 26,096 +22.5 21,295 + 7.2 19,874 + 9.1
Net occupancy of banking premises.... 27,149 + 6.5 25,486 +11.7 22,812 + 6.2
Furniture and equipment.............. 19,958 + 5.5 18,921 +17.2 16,147 + 9.9
Intangible amortization.............. 15,000 +12.8 13,293 +11.5 11,920 + 5.4
Merger related charge................ 12,244
Other................................ 78,341 + 3.3 75,844 +15.8 65,514 +11.6
-------- -------- --------
Total........................... $293,015 + 5.2 $278,506 +18.4 $235,141 +11.9
======== ======== ========
</TABLE>
Salaries and wages increased by $15.0 million in 1999 and $12.5 million in
1998 or 13.5 percent and 12.7 percent, respectively. Salaries and wages in both
years have experienced increases related to new business initiatives,
acquisitions, and market increases. Pension and other employee benefits
increased by $4.8 million or 22.5 percent during 1999 as a result of new
business initiatives, retirement plan expense and the impact of the acquisitions
on payroll taxes and medical insurance. For 1998 pension and other employee
benefits increased 7.2 percent or $1.4 million as a result of retirement plan
expense and the impact of the acquisitions on payroll taxes and medical
insurance.
21
<PAGE> 22
Net occupancy of banking premises increased $1.7 million or 6.5 percent
during 1999 primarily attributable to costs associated with branch activity and
building maintenance and higher property taxes impacted by the acquisitions. In
1998, net occupancy of banking premises increased $2.7 million or 11.7 percent
due to higher property taxes, depreciation and lease expenses as impacted by the
acquisition and de novo branches opened in 1998. Furniture and equipment costs
increased $1.0 million or 5.5 percent in 1999 primarily due to upgrades and
maintenance on software. In 1998, furniture and equipment costs increased $2.8
million or 17.2 percent primarily due to the continued expansion of the
Corporation, as well as, technology initiatives and upgrades. Intangible
amortization increased during 1999 and 1998 due to acquisitions accounted for
under the purchase method.
In 1998 non-interest expense included a $12.2 million merger related charge
associated with the merger of Overton. The majority of the $12.2 million charge
was related to severance payments and other employee benefits, and investment
banking fees.
Other non-interest expense increased $2.5 million or 3.3 percent during
1999 as a result of higher conversion costs related to the acquisitions, as well
as increases in armored motor service expenses, appraisal, telephone, and data
communication expenses. Other non-interest expense was up 15.8 percent in 1998
mostly due to outside computer services related to the Year 2000 compliance
program as well as an increase in the volume of VISA checkcards issued after its
initial introduction in late 1997.
YEAR 2000
- ---------
Cullen/Frost Bankers, Inc. conducted an extensive program to address the
internal and external risks associated with the century date change to the Year
2000. The Corporation spent approximately $5.2 million on incremental costs over
the three-year period beginning in 1997, funded out of its earnings and expensed
as incurred. Additionally, the Corporation spent about 30 percent of its annual
technology budget to facilitate progress on the Year 2000 program. All costs
associated with the Year 2000 program were based upon management's best
estimates and in line with forecasts.
Cullen/Frost systematically inventoried and assessed the importance of
application software and system hardware and software. The Corporation completed
the renovation of mission critical systems and implemented 100 percent of the
renovated mission critical systems. The Corporation 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.
During 1998 and 1999, Cullen/Frost reviewed the Year 2000 preparedness of
its vendors and suppliers, and completed on-site due diligence visits with key
service providers. The Corporation continued to monitor vendor and supplier
progress and developed contingency plans where necessary and feasible. The
Corporation tested for key dates in the new century with critical third party
service providers, and relied on proxy testing in some cases. Cullen/Frost made
available testing documentation, known as proxy tests, to clients utilizing
certain products and services. Cullen/Frost also relied 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 did other financial service providers in similar
businesses.
Cullen/Frost developed contingency plans to provide alternatives in
situations where a third party furnishing a critical product or service
experienced significant Year 2000 issues. Cullen/Frost also updated existing
business continuity plans for the date change. As part of its credit analysis
process, the Corporation developed a project plan for assessing the Year 2000
readiness of its significant credit customers.
22
<PAGE> 23
The Financial Management Group's (FMG) mission critical systems, such as
the trust and brokerage accounting and trading systems were included in
Cullen/Frost's evaluation and testing of systems. FMG also updated contingency
plans to include possible Year 2000 circumstances. FMG obtained and relied upon
for the purpose of evaluating a company's/issuer's Year 2000 readiness, public
information provided by companies/issuers to regulatory bodies, such as the
Securities and Exchange Commission, analysts' reports and/or official statements
from companies/issuers.
Cullen/Frost's Year 2000 program was regularly reviewed by examiners from
various external agencies such as the Comptroller of the Currency and the
Federal Reserve Bank.
Cullen/Frost completed its Year 2000 effort as planned and had no
significant disruptions resulting from the century date change. The Corporation
is currently not aware of any ongoing implications related to the Year 2000.
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.
INCOME TAXES
- ------------
The Corporation recognized income tax expense of $51.0 million in 1999,
compared to $42.1 million in 1998, and $39.6 million in 1997. The effective tax
rate in 1999 was 34.30 percent compared to 35.75 percent in 1998 and 35.15
percent in 1997. The effective tax rate is lower in 1999 due to an increase in
tax-exempt interest. For a detailed analysis of the Corporation's income taxes
see Note O "Income Taxes" on page 56.
CASH EARNINGS
- -------------
Historically, excluding the merger with Overton, the Corporation's
acquisitions have been accounted for using the purchase method of accounting
which results 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 the 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) for each of the three most
recent year periods:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
REPORTED INTANGIBLE "CASH" REPORTED INTANGIBLE "CASH"
EARNINGS AMORTIZATION EARNINGS EARNINGS AMORTIZATION EARNINGS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before income
taxes................... $148,621 $15,000 $163,621 $117,740 $13,293 $131,033
Income taxes............. 50,979 3,434 54,413 42,095 3,242 45,337
-----------------------------------------------------------------------
Net income............... $ 97,642 $11,566 $109,208 $ 75,645 $10,051 $ 85,696
=======================================================================
Net income per diluted
common share(1)......... $ 1.78 $ .21 $ 1.99 $ 1.38 $ .19 $ 1.57
Return on assets(1)...... 1.42% 1.59%* 1.18% 1.34%*
Return on equity(1)...... 18.68 20.89** 15.44 17.49**
<CAPTION>
Year Ended December 31
--------------------------------
1997
--------------------------------
REPORTED INTANGIBLE "CASH"
EARNINGS AMORTIZATION EARNINGS
- ------------------------------------------------------------
<S> <C> <C> <C>
Income before income
taxes................... $112,522 $11,920 $124,442
Income taxes............. 39,555 3,145 42,700
----------------------------------
Net income............... $ 72,967 $ 8,775 $ 81,742
==================================
Net income per diluted
common share(1)......... $ 1.33 $ .16 $ 1.49
Return on assets(1)...... 1.28% 1.44%*
Return on equity(1)...... 16.38 18.35**
</TABLE>
(1) 1998 diluted operating earnings per share and diluted operating cash
earnings per share were $1.56 and $1.74, respectively. Operating cash ROA
and cash ROE for 1998 were 1.48 percent and 19.43 percent, respectively.
Operating earnings exclude the after-tax impact of the $12.2 million merger
related charge associated with the merger with Overton.
* CALCULATED AS A/B
** CALCULATED AS A/C
- ---------------------
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C> <C> <C>
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax).......... $ 109,208 $ 85,696 $ 81,742
(B) Total average assets........................................ 6,875,436 6,417,569 5,687,577
(C) Average shareholders' equity................................ 522,770 489,958 445,450
</TABLE>
23
<PAGE> 24
SOURCES AND USES OF FUNDS
- -------------------------
Average assets for 1999 of $6.9 billion increased by 7.1 percent from 1998
levels and increased 12.8 percent between 1997 and 1998. Funding sources in 1999
reflected an increase in demand deposits and Federal funds purchased. The
Corporation's uses of funds continued a trend which started in 1995 of replacing
securities with loans as the largest component of earning assets. This reflects
the increases in loan volumes from a year ago.
<TABLE>
<CAPTION>
Percentage of Total Average Assets
------------------------------------
SOURCES AND USES OF FUNDS 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sources of Funds:
Deposits:
Demand............................................ 26.1% 25.4% 24.3%
Time.............................................. 59.0 59.7 61.4
Federal funds purchased................................ 4.2 3.9 3.3
Equity capital......................................... 7.6 7.6 7.8
Borrowed funds......................................... 1.6 2.0 2.0
Other liabilities...................................... 1.5 1.4 1.2
------------------------------------
Total............................................. 100.0% 100.0% 100.0%
====================================
Uses of Funds:
Loans.................................................. 57.2% 53.5% 51.3%
Securities............................................. 26.8 30.1 30.4
Federal funds sold..................................... 1.2 2.0 4.0
Non-earning assets..................................... 14.8 14.4 14.3
------------------------------------
Total............................................. 100.0% 100.0% 100.0%
====================================
</TABLE>
LOANS
- -----
Average loans for 1999 were $3.9 billion, an increase of 14.5 percent from
1998. This increase was driven by continued improved economic conditions in the
Texas markets the Corporation serves and the 1999 acquisitions.
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------
1999
--------------------------
LOAN PORTFOLIO ANALYSIS PERCENTAGE OF
(PERIOD-END BALANCES) AMOUNT TOTAL LOANS 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Construction........ $ 379,559 9.1% $ 292,789 $ 179,201 $ 125,054 $ 89,704
Land................ 128,765 3.1 75,397 60,339 53,742 40,005
Permanent Mortgages:
Commercial........ 422,022 10.1 346,479 259,320 230,205 203,659
Residential....... 684,827 16.5 655,484 516,345 472,878 375,365
Other............... 364,875 8.8 349,255 355,475 355,712 282,467
------------------------------------------------------------------------------
Total real estate... 1,980,048 47.6 1,719,404 1,370,680 1,237,591 991,200
Commercial and
industrial:
Energy.............. 129,394 3.1 67,187 41,293 45,305 37,918
Other............... 1,458,956 35.0 1,143,993 948,062 786,536 599,796
Consumer................. 541,026 13.0 625,018 645,988 526,778 431,223
Financial institutions... 7,416 3,767 12,749 10,409
Foreign.................. 20,298 .5 45,187 72,911 45,562 43,847
Other.................... 43,223 1.0 41,755 37,388 20,891 22,380
Unearned discount........ (6,217) (0.2) (3,357) (3,194) (2,098) (2,063)
------------------------------------------------------------------------------
Total............... $4,166,728 100.0% $3,646,603 $3,116,895 $2,673,314 $2,134,710
==============================================================================
Percent change from
previous year.......... +14.3% +17.0% +16.6% +25.2% +22.9%
</TABLE>
24
<PAGE> 25
Loans increased to $4.2 billion at year-end 1999, up 14.3 percent from the
previous year-end. Most of the increase in period-end loans is attributable to
commercial and industrial loans up $377 million from 1998. Construction loans as
well as commercial real estate loans also increased by $87 million and $76
million, respectively. Approximately 80 percent of the increase in loans from a
year ago resulted from internally generated growth.
The total for real estate loans at December 31, 1999 was $2.0 billion, up
15.2 percent from year-end 1998. Amortizing permanent mortgages represented 55.9
percent of the total real estate loan portfolio at year end. Residential
mortgages increased $29 million or four percent. Real estate loans categorized
as "other" are primarily amortizing commercial and industrial loans with
maturities of less than five years. Approximately 55 percent of all commercial
real estate loans are owner occupied or have a major tenant (National or
Regional company), which historically has resulted in a lower risk, provides
financial stability and is less susceptible to economic swings. See page 28 for
further discussion of the loan portfolio and "Loan Maturity and Sensitivity" on
page 66.
MEXICAN LOANS
- -------------
At December 31, 1999, Cullen/Frost's cross-border outstandings to Mexico,
excluding $17.9 million in loans secured by liquid U.S. assets, totaled $2.4
million. The decrease from a year ago represents normal fluctuations in lines of
credit used by Mexican banks to finance trade. At December 31, 1999, $342
thousand of the Mexican-related loans were on non-performing status compared to
none for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
MEXICAN LOANS AMOUNT LOANS ASSETS AMOUNT LOANS ASSETS AMOUNT LOANS ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Financial
institutions....... $2,394 .1% N/M $21,346 .6% .3% $35,563 1.2% .6%
Commercial and
industrial......... 9 N/M 4,016 .1 .1 13,034 .4 .2
--------------------------------------------------------------------------------------------------------
Total............ $2,403 .1% N/M $25,362 .7% .4% $48,597 1.6% .8%
========================================================================================================
</TABLE>
The above table excludes $17.9 million, $19.8 million and $24.3 million in loans
secured by liquid assets held in the United States in 1999, 1998 and 1997,
respectively.
25
<PAGE> 26
NON-PERFORMING ASSETS
- ---------------------
Non-performing assets were $18.8 million at December 31, 1999, compared
with $17.1 million at December 31, 1998 and $18.1 million at December 31, 1997.
Non-performing assets as a percentage of total loans and foreclosed assets were
.45 percent at December 31, 1999, flat when compared to .47 percent one year
ago.
<TABLE>
<CAPTION>
December 31
---------------------------------------------------
NON-PERFORMING ASSETS 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual................................................. $14,854 $12,997 $13,077 $10,733 $15,372
Foreclosed assets........................................... 3,983 4,107 5,011 3,336 3,309
---------------------------------------------------
Total................................................... $18,837 $17,104 $18,088 $14,069 $18,681
===================================================
As a percentage of total assets............................. .27% .25% .30% .25% .39%
As a percentage of total loans plus foreclosed assets....... .45 .47 .58 .53 .87
After-tax impact of lost interest per common share.......... $ .02 $ .02 $ .02 $ .02 $ .03
Accruing loans 90 days past due:
Consumer.................................................. $ 733 $ 1,347 $ 3,410 $ 1,841 $ 1,294
All other................................................. 6,177 9,434 3,412 4,108 4,378
---------------------------------------------------
Total................................................... $ 6,910 $10,781 $ 6,822 $ 5,949 $ 5,672
===================================================
</TABLE>
Cullen/Frost did not have any restructured loans for the years ended December
31, 1999-1995.
Interest income that would have been recorded in 1999 on non-performing assets,
had such assets performed in accordance with their original contract terms, was
$1.3 million on non-accrual loans and $263 thousand on foreclosed assets. During
1999, the amount of interest income actually recorded on non-accrual loans was
$1.1 million.
There were no foreign loans 90 days past due as of December 31, 1999.
Loans to a customer whose financial condition has deteriorated are
considered for non-accrual status whether or not the loan is 90 days or more
past due. All non-consumer loans 90 days or more past due are classified as
non-accrual unless the loan is well secured and in the process of collection.
When a loan is placed on non-accrual status, interest income is not recognized
until collected, and any previously accrued but uncollected interest is
reversed. A loan is considered to be restructured if it has been modified as to
original terms, resulting in a reduction or deferral of principal and/or
interest as a concession to the debtor. Classification of an asset in the
non-performing category does not preclude ultimate collection of loan principal
or interest.
At December 31, 1999, Cullen/Frost had $2.8 million in loans to borrowers
experiencing financial difficulties which had not been included in either of the
non-accrual or 90 days past due loan categories. Management monitors such loans
closely and reviews their performance on a regular basis.
26
<PAGE> 27
ALLOWANCE FOR POSSIBLE LOAN LOSSES
- ----------------------------------
The allowance for possible loan losses was $58.3 million or 1.40 percent of
period-end loans at December 31, 1999, compared to $53.6 million or 1.47 percent
of period-end loans at year-end 1998. The allowance for possible loan losses as
a percentage of non-accrual loans was 392.8 percent at December 31, 1999,
compared with 412.5 percent at December 31, 1998.
Cullen/Frost recorded a $12.4 million provision for possible loan losses
during 1999, compared to $10.4 million and $9.2 million recorded during 1998 and
1997, respectively. The allowance for loan losses is maintained at a level
considered appropriate by management, based on estimated probable losses in the
loan portfolio. The allowance consists of three elements: (i) allowances
established on specific loans, (ii) allowances based on historical loan loss
experience and trends, and (iii) unallocated allowances based on general
economic conditions and other internal and external risk factors in the
Corporation's individual markets.
The specific allowances are based on a regular analysis and evaluation of
criticized loans. The quality of loans are determined based on an internal
credit risk grading process that evaluates: the obligor's ability to repay, the
underlying collateral, if any, and the economic environment and industry in
which the obligor operates. This analysis is performed at the relationship
manager level for all commercial loans. Obligors whose calculated grade is below
a predetermined grade are viewed as criticized. Once criticized, a loan is
analyzed (at least quarterly) by a special assets officer to determine if a
specific allowance is needed. Specific allocations are based on an obligor's
inability or unwillingness to repay, collateral deficiencies and/or the state of
the borrower's industry. If a specific allowance is not assigned to a criticized
loan, and it is not deemed impaired, it is included in the historical allowance
portion of the process for loans with similar characteristics.
Historical allowances are determined statistically using a loss analysis
that examines loss experience of the portfolio in total, by specific loan types
and the related internal gradings of loans charged off. This loss analysis is
periodically updated based on actual experience. This analysis is performed on
several groups of loans. As a result, several historical allowance pools result.
Specifically, historical allowance pools exist for commercial real estate loans,
commercial and industrial loans, consumer loans and one-to-four family
residential mortgages.
Unallocated allowances based on general economic conditions and other
internal and external risk factors are determined by evaluating the experience,
ability and effectiveness of the bank's lending management and staff,
effectiveness of lending policies and procedures and internal controls, outlook
for changes in asset quality, outlook for changes in loan portfolio volume,
composition and concentrations of credit, impact of competition on loan
structuring and pricing, effectiveness of the internal loan review, impact of
environmental risks on portfolio risks, and impact of rising interest rate on
portfolio risk. Quarterly, senior management evaluates the degree of risk that
each one of these components has on the quality of the loan portfolio. Each
component is determined to have either a high, moderate or low degree of risk.
The results are then input into a "general allocation matrix" to determine the
unallocated general allowance. While the loss analysis for the historical
allowance is performed annually, the Corporation may revise the general
allocation factors whenever necessary in order to address improving or
deteriorating credit quality trends or events; or recognize specific risks
associated with a given loan concentration or pool classification.
Cullen/Frost recorded net charge-offs of $8.8 million for the year ended
December 31, 1999, compared to net charge-offs of $6.1 million and $6.0 million
in 1998 and 1997, respectively. The Corporation's gross charge-offs in 1999
consisted primarily of consumer loans which decreased $661 thousand to $7.4
million and commercial and industrial loans which increased $1.4 million to $5.3
million. The Corporation's gross charge-offs in 1998 consisted primarily of
consumer loans which increased $872 thousand to $8.1 million and commercial and
industrial loans which increased $2.0 million to $4.0 million. The Corporation's
gross charge-offs in 1997 consisted primarily of consumer loans which increased
to $7.2 million from $3.8 million in 1996 and commercial and industrial loans
which decreased $4.5 million to $2.0 million.
27
<PAGE> 28
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------
ALLOWANCE FOR POSSIBLE LOAN LOSSES 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding during
year, net of unearned
discount....................... $3,934,406 $3,437,510 $2,917,371 $2,445,777 $1,971,681
==============================================================
Balance of allowance for possible
loan losses at beginning of
year........................... $ 53,616 $ 48,073 $ 42,821 $ 36,525 $ 29,017
Provision for possible loan
losses......................... 12,427 10,393 9,174 8,494 7,605
Loan loss reserve of acquired
institutions................... 1,066 1,250 2,105 627 430
Charge-offs:
Real estate.................... (357) (397) (650) (351) (288)
Commercial and industrial...... (5,349) (3,980) (2,028) (6,485) (739)
Consumer....................... (7,420) (8,081) (7,209) (3,776) (3,856)
Other, including foreign....... (7) (90) (40) (9) (2)
--------------------------------------------------------------
Total charge-offs........... (13,133) (12,548) (9,927) (10,621) (4,885)
--------------------------------------------------------------
Recoveries:
Real estate.................... 582 1,674 956 2,476 1,277
Commercial and industrial...... 1,799 2,176 965 3,747 1,796
Consumer....................... 1,919 2,528 1,853 1,445 1,231
Other, including foreign....... 69 70 126 128 54
--------------------------------------------------------------
Total recoveries............ 4,369 6,448 3,900 7,796 4,358
--------------------------------------------------------------
Net charge-offs.................. (8,764) (6,100) (6,027) (2,825) (527)
--------------------------------------------------------------
Balance of allowance for possible
loan losses at end of year..... $ 58,345 $ 53,616 $ 48,073 $ 42,821 $ 36,525
==============================================================
Net charge-offs as a percentage of
average loans outstanding during
year, net of unearned
discount....................... (.22)% (.18)% (.21)% (.12)% (.03)%
Allowance for possible loan losses
as a percentage of year-end
loans, net of unearned
discount....................... 1.40 1.47 1.54 1.60 1.71
</TABLE>
There were no foreign charge-offs in 1999-1995.
Cullen/Frost has certain lending policies and procedures in place which are
designed to maximize loan income within an acceptable level of risk. These
policies and procedures, some of which are described below, are reviewed
regularly by senior management. A reporting system supplements this review
process by providing management and the board of directors with frequent reports
related to loan production, loan quality, concentrations of credit, loan
delinquencies and non-performing and potential problem loans.
Commercial and industrial loans are a diverse group of loans to small,
medium and large businesses. The purpose of these loans vary from supporting
seasonal working capital needs to term financing of equipment. These loans are
underwritten focusing on evaluating and understanding that management's ability
to operate profitably and prudently expand their business. Once it is determined
management possesses sound ethics and solid business acumen, current and
projected cash flows are examined to determine the ability to repay their
obligations as agreed upon. In addition, collateral must be of good quality and
single purpose projects are avoided. Underwriting standards are designed to
promote relationship banking rather than transactional banking. While some
short-term loans may be made on an unsecured basis, most are secured by the
assets being financed with appropriate collateral margins.
Diversification in the loan portfolio is a means of managing risk
associated with fluctuations in economic conditions. At December 31, 1999,
Cullen/Frost had no concentration of commercial and industrial loans in any
single industry that exceeded 10 percent of total loans.
28
<PAGE> 29
The diversity of the commercial real estate portfolio allows Cullen/Frost
to reduce the impact of a decline in a single market or industry. In addition to
monitoring and evaluating commercial real estate loans based on collateral,
geography and risk grade criteria, management closely tracks its level of
owner-occupied commercial real estate loans versus non-owner occupied loans.
Additionally, the Corporation utilizes the knowledge of third party experts to
provide insight and guidance about the economic conditions and dynamics of the
markets served by the Corporation. Within the commercial real estate loan
category, the Corporation's primary focus has been the growth of loans secured
by owner-occupied properties. At December 31, 1999, a majority of the
Corporation's commercial real estate loans were secured by owner-occupied
properties. These loans are viewed primarily as cash flow loans and secondarily
as loans secured by real estate. Consequently, these loans must withstand the
analysis of a commercial loan and the underwriting process of a commercial real
estate loan.
Loans secured by non-owner occupied commercial real estate are made to
developers and builders who have a relationship with Cullen/Frost and who have a
proven record of success. These loans are underwritten through the use of
feasibility studies, independent appraisal reviews, sensitivity analysis of
absorption and lease rates and financial analysis of the developers and property
owners. Sources of repayment for these types of loans may be pre-committed
permanent loans from approved long-term lenders, sales of developed property or
an interim loan commitment from the Corporation. These loans are closely
monitored by on-site inspections and are considered to have higher risks than
the other real estate loans due to their ultimate repayment being sensitive to
interest rate changes, general economic conditions and the availability of
long-term financing.
The consumer loan portfolio has three distinct segments -- indirect
consumer loans, which represent 27 percent of the consumer loan portfolio,
direct non-real estate consumer loans, which represent 33 percent of the
portfolio and direct real estate consumer loans, which represent 40 percent. The
indirect segment is composed almost exclusively of new and used automobile
financing. Non-real estate direct loans include automobile loans, unsecured
revolving credit products, personal loans secured by cash and cash equivalents,
and other similar types of credit facilities. The direct real estate loans are
primarily home equity, home improvement and residential lot loans. Effective
January 1, 1998, in accordance with a constitutional amendment allowing for the
existence of home equity loans in the state of Texas, Cullen/Frost began
offering home equity loans up to 80 percent of the estimated value of the
personal residence of the borrower less the balances on existing mortgage and
home improvement loans. As of December 31, 1999, home equity loans aggregated
approximately $118 million, and were originated for a general variety of
purposes including: education, business start-ups, debt consolidation and
automobile financing. It is anticipated this product will continue to grow and
eventually represent the largest distinct segment of the consumer portfolio. To
date the primary growth of this product has been from existing customers.
Underwriting standards for this product are heavily influenced by the statute
requirements, which include but are not limited to, maximum loan-to-value
percentage, collection remedies, the number of such loans a borrower can have at
one time and documentation requirements.
A computer based credit scoring analysis is used to supplement the consumer
loan underwriting process. To monitor and manage consumer loan risk, policies
and procedures are developed and modified, as needed, jointly by line and staff
personnel. This activity, coupled with relatively small loan amounts that are
spread across many individual borrowers, minimizes the risk. Additionally, trend
and outlook reports are provided to senior management on a frequent basis to aid
in planning.
Cullen/Frost has an independent Loan Review Division that reviews and
validates the credit risk program on a periodic basis. Results of these reviews
are presented to senior management and the board of directors. Loan Review's
function complements and reinforces the risk identification and assessment
decisions made by lenders and credit personnel as well as the Corporation's
policies and procedures.
Loans identified as losses by management, internal loan review and/or bank
examiners are charged-off. Furthermore, consumer loan accounts are charged-off
automatically based on regulatory requirements.
29
<PAGE> 30
An allowance for possible loan losses in maintained in an amount which, in
management's judgment, provides an adequate reserve to absorb probable credit
losses related to specifically identified loans as well as loan losses inherent
in the remainder of the loan portfolio that have been incurred as of the balance
sheet date.
An audit committee of non-management directors reviews the adequacy of the
allowance for possible loan losses quarterly.
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996
---------------------- ---------------------- ---------------------- ----------------------
ALLOWANCE Allowance Allowance Allowance
FOR AS A FOR AS A FOR AS A FOR AS A
POSSIBLE PERCENTAGE POSSIBLE PERCENTAGE POSSIBLE PERCENTAGE POSSIBLE PERCENTAGE
ALLOCATION OF ALLOWANCE LOAN OF TOTAL LOAN OF TOTAL LOAN OF TOTAL LOAN OF TOTAL
FOR POSSIBLE LOSS LOSSES LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial................ $22,404 .54% $15,085 .41% $14,346 .46% $ 9,648 .36%
Real estate................ 9,485 .23 10,021 .28 9,460 .31 9,853 .37
Consumer................... 12,621 .30 17,130 .47 17,486 .56 13,903 .52
Purchasing or carrying
securities................ 1 85 88 6
Financial institutions..... 98 36 60 44
Other, including foreign... 215 .01 246 .01 371 .01 213 .01
Unallocated................ 13,521 .32 11,013 .30 6,262 .20 9,154 .34
-------------------------------------------------------------------------------------------------
Total................... $58,345 1.40% $53,616 1.47% $48,073 1.54% $42,821 1.60%
=================================================================================================
<CAPTION>
December 31
----------------------
1995
----------------------
Allowance
FOR AS A
POSSIBLE PERCENTAGE
ALLOCATION OF ALLOWANCE LOAN OF TOTAL
FOR POSSIBLE LOSS LOSSES LOSSES LOANS
- --------------------------- ----------------------
<S> <C> <C>
Commercial and
industrial................ $10,411 .49%
Real estate................ 11,479 .54
Consumer................... 12,201 .57
Purchasing or carrying
securities................ 6
Financial institutions..... 32
Other, including foreign... 167 .01
Unallocated................ 2,229 .10
----------------------
Total................... $36,525 1.71%
======================
</TABLE>
Allocation of a portion of the allowance does not preclude its availability
to absorb losses in other categories.
SECURITIES
- ------------
Total securities, including securities available for sale, were $1.6
billion at year-end 1999 compared to $2.1 billion a year ago. The securities
portfolio has been impacted by strong loan growth in 1999. Securities available
for sale totaled $1.5 billion at December 31, 1999, compared to $2.0 billion at
year-end 1998. These securities consist primarily of U.S. Treasury securities
and obligations of U.S. Government agencies. Securities held to maturity totaled
$85 million at December 31, 1999 compared to $111 million at December 31, 1998.
Securities classified as held to maturity are carried at amortized cost and
consist primarily of U. S. Government agency obligations. The remaining
securities, consisting primarily of municipal bonds, are classified as trading
and are carried at fair value. Trading securities were $1 thousand at December
31, 1999 compared to $709 thousand at December 31, 1998.
Debt securities are classified as held to maturity when the Corporation has
the positive intent and ability to hold the securities to maturity. Available
for sale securities are stated at fair value, with unrealized gains and losses,
net of tax, reported as a separate component of shareholders' equity. Trading
securities held primarily for sale in the near term are valued at their fair
values, with unrealized gains and losses included immediately in other income.
The average yield of the securities portfolio for the year ended December
31, 1999 was 6.38 percent compared with 6.32 percent for 1998. See page 67
"Maturity Distribution and Securities Portfolio Yields."
30
<PAGE> 31
Total securities including trading, available for sale and held to maturity
are summarized below:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
PERIOD-END PERCENTAGE PERIOD-END PERCENTAGE PERIOD-END PERCENTAGE
SECURITIES BALANCE OF TOTAL BALANCE OF TOTAL BALANCE OF TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury............ $ 118,130 7.2% $ 189,574 9.1% $ 341,681 19.3%
U.S. Government agencies
and corporations....... 1,324,440 81.3 1,719,580 82.2 1,367,500 77.2
States and political
subdivisions........... 153,319 9.4 125,939 6.0 46,171 2.6
Other.................... 34,022 2.1 56,610 2.7 16,066 .9
---------------------------------------------------------------------------
Total............... $1,629,911 100.0% $2,091,703 100.0% $1,771,418 100.0%
===========================================================================
Average yield earned
during the year
(taxable-equivalent
basis)................. 6.38% 6.32% 6.43%
</TABLE>
INTEREST RATE SWAPS/FLOORS
- --------------------------
Cullen/Frost uses off-balance sheet interest rate swaps to hedge its
interest rate risk. These swap transactions allow management to structure the
interest rate sensitivity of the asset side of the Corporation's balance sheet
to more closely match its view of the interest rate sensitivity of the
Corporation's funding sources. Cullen/Frost had 30 interest rate swaps at
December 31, 1999 compared to 22 interest rate swaps at December 31, 1998. In
1999, each swap was a hedge against a specific commercial fixed-rate loan or
against a specific pool of commercial floating-rate loans, with a notional
amount of $259 million. In 1998 each swap was a hedge against a specific
commercial fixed-rate loan or against a specific pool of consumer fixed-rate
loans with a notional amount of $75 million. For 1999 and 1998, in each case,
the amortization of the interest rate swap effectively matched the expected
amortization of the underlying loan or pool of loans with lives ranging from
approximately one and one-half to ten years. These interest rate contracts
involve the risk of dealing with counterparties and their ability to meet
contractual terms. Each counterparty to a swap transaction has a credit rating
that is investment grade. The net amount payable or receivable under interest
rate swaps/floors is accrued as an adjustment to interest income and was not
material in 1999 or 1998.
In the third quarter of 1998, Cullen/Frost terminated interest rate swaps
hedging fixed rate consumer loans. Cullen/Frost is amortizing the loss on the
transaction of $1.9 million over the remaining term of the interest swaps ending
in the second quarter of 2002. During 1998, Cullen/Frost terminated all three of
its interest rate floor agreements with a notional amount totaling $500 million
and an original term of three years. These interest rate floors were purchased
in 1997 for the purpose of hedging floating interest rate exposure in commercial
loan accounts in an environment of falling interest rates. Cullen/Frost is
amortizing the gain on the transaction of $2.8 million over the remaining term
of the interest rate floors.
31
<PAGE> 32
DEPOSITS
- --------
Total average demand deposits increased 10.2 percent from 1998. Most of the
increase came in commercial and individual accounts which increased $145.3
million. The increase in commercial and individual levels is mostly related to
the 1999 acquisitions. Cullen/Frost has made a strategic effort in growing its
correspondent bank relationships in the markets it serves. In response to this
effort correspondent bank deposits have increased $26.0 million or 13.3 percent.
As of June 30, 1999, the Corporation ranked 27th in the United States for
Correspondent bank balances.
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
AVERAGE PERCENT AVERAGE PERCENT AVERAGE PERCENT
DEMAND DEPOSITS BALANCE CHANGE BALANCE CHANGE BALANCE CHANGE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and individual... $1,533,160 +10.5% $1,387,824 +21.3% $1,143,828 +16.7%
Correspondent banks......... 221,530 +13.3 195,555 + 1.7 192,231 - 3.9
Public funds................ 37,567 -13.7 43,507 - 1.5 44,183 - 2.3
---------- ---------- ----------
Total.................. $1,792,257 +10.2 $1,626,886 +17.9 $1,380,242 +12.7
========== ========== ==========
</TABLE>
Total average time deposits increased 6.0 percent from 1998 with the
largest increase of 17.9 percent coming from money market deposit accounts
offset slightly by decreases in Jumbo and Consumer time accounts of 1.2 percent
and 4.4 percent, respectively.
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
AVERAGE PERCENT AVERAGE PERCENT AVERAGE PERCENT
TIME DEPOSITS BALANCE CHANGE COST BALANCE CHANGE COST BALANCE CHANGE COST
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings and Interest-on-Checking.... $ 948,487 + 5.2% .69% $ 901,960 +10.2% 1.21% $ 818,216 +10.4% 1.32%
Money market deposit accounts....... 1,636,915 +17.9 3.69 1,387,994 +16.1 3.91 1,195,773 +13.5 4.08
Time accounts of $100,000 or more... 648,820 - 1.2 4.44 656,776 +15.9 5.23 566,588 +13.2 5.14
Time accounts under $100,000........ 601,520 - 4.4 4.15 629,260 - 1.5 4.65 638,673 - 1.0 4.81
Public funds........................ 220,845 -12.2 3.61 251,570 - 6.5 3.73 269,027 + 9.7 4.35
---------- ---------- ----------
Total........................... $4,056,587 + 6.0 3.18 $3,827,560 + 9.7 3.61 $3,488,277 + 9.5 3.76
========== ========== ==========
</TABLE>
The following table summarizes the certificates of deposit in amounts of
$100,000 or more as of December 31, 1999 by time remaining until maturity.
<TABLE>
<CAPTION>
December 31
---------------------
1999
REMAINING MATURITY OF PRIVATE ---------------------
CERTIFICATES OF DEPOSIT PERCENTAGE
OF $100,000 OR MORE AMOUNT OF TOTAL
- -----------------------------------------------------------------------------------
<S> <C> <C>
Three months or less........................................ $337,754 52.0%
After three, within six months.............................. 165,270 25.4
After six, within twelve months............................. 132,466 20.4
After twelve months......................................... 14,073 2.2
---------------------
Total.................................................. $649,563 100.0%
=====================
Percentage of total private time deposits................... 16.9%
</TABLE>
Other time deposits of $100,000 or more were $100.8 million at December 31,
1999. Of this amount 67.9 percent matures within three months, 15.2 percent
matures between three and six months and the remainder matures between six
months and one year.
Mexico is a part of the natural trade territory of the banking offices of
Cullen/Frost. Thus, dollar-denominated foreign deposits from Mexican sources
have traditionally been a significant source of funding. The Corporation's
average foreign deposits increased 7.6 percent from 1998.
<TABLE>
<CAPTION>
FOREIGN DEPOSITS 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average balance............................................. $691,356 $642,822 $607,642
Percentage of total average deposits........................ 11.8% 11.8% 12.5%
</TABLE>
32
<PAGE> 33
SHORT-TERM BORROWINGS
- ---------------------
The Corporation's primary source of short-term borrowings is Federal funds
purchased from correspondent banks and securities sold under repurchase
agreements in the natural trade territories of the Cullen/Frost subsidiary
banks, as well as from upstream banks. The net purchase position experienced in
both 1999 and 1998 is primarily the result of continued growth in earning assets
over core deposit growth. The weighted-average interest rate on Federal funds
purchased at December 31, 1999 and 1998 was 3.66 percent and 4.69 percent,
respectively. Generally, the interest rates on securities sold under repurchase
agreements are 80 percent of the Federal funds rate.
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
FEDERAL FUNDS BALANCE RATE BALANCE RATE BALANCE RATE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold............... $ 81,363 5.22% $ 127,273 5.59% $ 228,245 5.44%
Federal funds purchased and
securities sold under
repurchase agreements.......... (285,470) 4.38 (252,977) 4.59 (189,468) 4.61
--------- --------- ---------
Net funds position............... $(204,107) $(125,704) $ 38,777
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
FEDERAL FUNDS PURCHASED AND SECURITIES ------------------------------
SOLD UNDER REPURCHASE AGREEMENTS 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at year end......................................... $333,459 $305,564 $200,774
Maximum month-end balance................................... 474,013 523,178 231,418
</TABLE>
Other funding sources include a $7.5 million short-term line of credit to the
parent Corporation used for short-term liquidity needs. There were no borrowings
outstanding from this source at December 31, 1999 and 1998.
GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE CORPORATION'S JUNIOR
- --------------------------------------------------------------------
SUBORDINATED DEFERRABLE INTEREST DEBENTURES
- -------------------------------------------
During February 1997, the Corporation issued $100 million of its 8.42
percent Capital Securities, Series A which represent a beneficial interest in
Cullen/Frost Capital Trust I, a Delaware statutory business trust and
wholly-owned subsidiary of the Corporation. The Issuer Trust used the proceeds
of the sale of the Capital Securities to purchase Junior Subordinated Debentures
of Cullen/Frost. The $100 million Trust Preferred Capital Securities are
included in the Tier 1 capital of Cullen/Frost for regulatory capital purposes
and are reported as debt on the balance sheet. See Note I "Borrowed Funds" on
page 48.
CAPITAL
- -------
At December 31, 1999, shareholders' equity was $509.3 million, a decrease
of .7 percent from $512.9 million at December 31, 1998. Activity in 1999
included $36.0 million of dividends paid and $24.3 million paid for the
repurchase of shares of the Corporation, offset by strong earnings growth. In
addition, Cullen/Frost had an unrealized loss on securities available for sale,
net of deferred taxes, of $39.1 million as of December 31, 1999 compared to an
unrealized gain of $7.7 million as of December 31, 1998 which had the effect of
reducing capital by $46.8 million. 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.
Cullen/Frost paid a quarterly dividend of $.15 per common share during the
first quarter of 1999. During the second quarter of 1999 the Corporation
declared and distributed a two-for-one stock split and raised its cash dividend
17 percent to .175 for the second, third, and fourth quarters of 1999. The
Corporation paid a quarterly dividend of $.125 per common share during the first
quarter of 1998 increasing to $.15 per common share during the second, third and
fourth quarters of 1998. The dividend payout ratio was 36.9 percent for
33
<PAGE> 34
1999 compared to 35.8 percent, excluding the merger related charge, for 1998. In
addition, the Corporation announced that its Board of Directors had authorized
it to repurchase up to $100 million of its common stock from time to time. As of
December 31, 1999, $23.4 million worth of shares had been repurchased under this
program.
The Federal Reserve Board utilizes capital guidelines designed to measure
Tier 1 and Total Capital and take into consideration the risk inherent in both
on-balance sheet and off-balance sheet items. For the Corporation's capital
ratios at December 31, 1999 and 1998, see Note L "Capital" on page 50.
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.
PARENT CORPORATION
- ------------------
Historically, a large portion of the parent Corporation's income, which
provides funds for the payment of dividends to shareholders and for other
corporate purposes, has been derived from Cullen/Frost's investments in
subsidiaries. Dividends received from the subsidiaries are based upon each
bank's earnings and capital position. See Note K "Dividends" on page 50.
Management fees are not assessed.
NON-BANKING SUBSIDIARIES
- ------------------------
The New Galveston Company is a wholly-owned second tier bank holding
company subsidiary which holds all shares of each banking and non-banking
subsidiary. Cullen/Frost has four principal non-banking subsidiaries. Main Plaza
Corporation occasionally makes loans to qualified borrowers. Such loans are
typically funded with borrowings against Cullen/Frost's current cash or
borrowing against credit lines. Daltex General Agency, Inc., a managing general
insurance agency, provides vendor's single interest insurance for Cullen/ Frost
subsidiary banks. Cullen/Frost Capital Trust I, a wholly-owned non-banking
subsidiary, is a Delaware statutory trust. The sole purpose of the trust was to
sell Capital Securities and to purchase Junior Debentures of the Corporation.
In 1999 Cullen/Frost formed Frost Securities, Inc., a Section 20 investment
banking subsidiary based in Dallas, Texas. Frost Securities, Inc. offers a full
range of services including equity research, institutional sales, trading and
investment banking services to institutional investors and corporate customers.
SUBSEQUENT EVENTS
- -----------------
On January 27, 2000 Frost Insurance Agency, a subsidiary of The Frost
National Bank signed a letter of intent to acquire 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. The
transaction is subject to regulatory approval and is expected to close in April,
2000. Wayland Hancock is Frost Insurance Agency's second acquisition, following
the 1999 acquisition of Victoria-based Professional Insurance Agents, Inc. The
purchase method of accounting will be used to record the transaction.
On February 17, 2000 Cullen/Frost announced that United States National
Bank of Galveston will merge its charter into Frost National Bank. The
Galveston-based bank has been a member bank of Cullen/ Frost since 1982. The
merger will be effective in the second quarter of 2000.
34
<PAGE> 35
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
- ---------------------------------------------------
The management of Cullen/Frost Bankers, Inc. is responsible for the
preparation of the financial statements, related financial data and other
information in this annual report. The consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
include amounts based on management's estimates and judgment where appropriate.
Financial information appearing throughout this annual report is consistent with
the financial statements.
In meeting its responsibility both for the integrity and fairness of these
financial statements and information, management depends on the accounting
systems and related internal accounting controls that are designed to provide
reasonable assurances that transactions are authorized and recorded in
accordance with established procedures and that assets are safeguarded and that
proper and reliable records are maintained.
The concept of reasonable assurance is based on the recognition that the
cost of a system of internal controls should not exceed the related benefits. As
an integral part of the system of internal controls, Cullen/ Frost maintains an
internal audit staff which monitors compliance with and evaluates the
effectiveness of the system of internal controls and coordinates audit coverage
with the independent auditors.
The Audit Committee of Cullen/Frost's Board of Directors, which is composed
entirely of directors independent of management, meets regularly with
management, regulatory examiners, internal auditors, the asset review staff and
independent auditors to discuss financial reporting matters, internal controls,
regulatory reports, internal auditing and the nature, scope and results of the
audit efforts. Internal Audit and Asset Review report directly to the Audit
Committee. The banking regulators, internal auditors and independent auditors
have direct access to the Audit Committee.
The consolidated financial statements have been audited by Ernst & Young
LLP, independent auditors, who render an independent opinion on management's
financial statements. Their appointment was recommended by the Audit Committee
and approved by the Board of Directors and by the shareholders. The audit by the
independent auditors provides an additional assessment of the degree to which
Cullen/Frost's management meets its responsibility for financial reporting.
Their opinion on the financial statements is based on auditing procedures, which
include their consideration of internal controls and performance of selected
tests of transactions and records, as they deem appropriate. These auditing
procedures are designed to provide an additional reasonable level of assurance
that the financial statements are fairly presented in conformity with generally
accepted accounting principles in all material respects.
/S/ DICK EVANS /s/ PHILLIP D. GREEN
Dick Evans Phillip D. Green
Chairman and Chief Senior Executive Vice President
Executive Officer and Chief Financial Officer
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ---------------------------------------------------------------------
The information required by this Item is set forth in the section entitled
"Market Risk -- Interest Rate Sensitivity" included under Item 7 of this
document on page 18, and is incorporated herein by reference.
35
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
==============================
1999 1998 1997
============================================================================================
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees.................................. $329,610 $300,721 $261,607
Securities:
Taxable........................................... 106,893 117,261 108,249
Tax-exempt........................................ 6,668 2,998 1,821
------------------------------
TOTAL SECURITIES............................. 113,561 120,259 110,070
Time deposits.......................................... 164
Federal funds sold and securities purchased under
resale agreements.................................... 4,245 7,111 12,423
------------------------------
TOTAL INTEREST INCOME........................ 447,580 428,091 384,100
INTEREST EXPENSE:
Deposits............................................... 128,819 138,283 131,140
Federal funds purchased and securities sold under
repurchase agreements................................ 12,500 11,606 8,739
Guaranteed preferred beneficial interests in the
Corporation's subordinated debentures................ 8,475 8,475 7,652
Long-term notes payable and other borrowings........... 808 1,754 1,434
------------------------------
TOTAL INTEREST EXPENSE....................... 150,602 160,118 148,965
------------------------------
NET INTEREST INCOME.......................... 296,978 267,973 235,135
Provision for possible loan losses.......................... 12,427 10,393 9,174
------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES....................... 284,551 257,580 225,961
NON-INTEREST INCOME:
Trust fees............................................. 46,411 46,863 43,275
Service charges on deposit accounts.................... 58,787 53,601 47,627
Other service charges, collection and exchange charges,
commissions and fees................................. 23,503 15,482 11,349
Net (loss) gain on securities transactions............. (86) 359 498
Other.................................................. 28,470 22,361 18,953
------------------------------
TOTAL NON-INTEREST INCOME.................... 157,085 138,666 121,702
NON-INTEREST EXPENSE:
Salaries and wages..................................... 126,471 111,423 98,874
Pension and other employee benefits.................... 26,096 21,295 19,874
Net occupancy of banking premises...................... 27,149 25,486 22,812
Furniture and equipment................................ 19,958 18,921 16,147
Intangible amortization................................ 15,000 13,293 11,920
Merger related charge.................................. 12,244
Other.................................................. 78,341 75,844 65,514
------------------------------
TOTAL NON-INTEREST EXPENSE................... 293,015 278,506 235,141
------------------------------
INCOME BEFORE INCOME TAXES................... 148,621 117,740 112,522
Income taxes................................................ 50,979 42,095 39,555
------------------------------
NET INCOME................................... $ 97,642 $ 75,645 $ 72,967
==============================
Net income per share:
Basic.................................................. $ 1.83 $ 1.42 $ 1.38
Diluted................................................ 1.78 1.38 1.33
Dividends per share......................................... .675 .575 .480
</TABLE>
See notes to consolidated financial statements.
36
<PAGE> 37
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31
=======================
1999 1998
=====================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 760,612 $ 684,941
Time deposits............................................... 6,546
Securities held to maturity (market value: 1999 -- $85,627;
1998 -- $113,682)......................................... 85,045 111,439
Securities available for sale............................... 1,544,865 1,979,555
Trading account securities.................................. 1 709
Federal funds sold and securities purchased under resale
agreements................................................ 34,950 102,900
Loans, net of unearned discount of $6,217 in 1999 and $3,357
in 1998................................................... 4,166,728 3,646,603
Less: Allowance for possible loan losses.................. (58,345) (53,616)
-----------------------
Net loans.............................................. 4,108,383 3,592,987
Banking premises and equipment.............................. 142,984 137,290
Accrued interest and other assets........................... 313,294 259,784
-----------------------
TOTAL ASSETS......................................... $6,996,680 $6,869,605
=======================
LIABILITIES
Demand deposits:
Commercial and individual................................. $1,601,977 $1,585,891
Correspondent banks....................................... 212,942 201,355
Public funds.............................................. 48,341 56,253
-----------------------
Total demand deposits................................ 1,863,260 1,843,499
Time deposits:
Savings and Interest-on-Checking.......................... 984,438 961,597
Money market deposit accounts............................. 1,635,524 1,493,778
Time accounts............................................. 1,234,894 1,264,121
Public funds.............................................. 235,716 282,492
-----------------------
Total time deposits.................................. 4,090,572 4,001,988
-----------------------
Total deposits....................................... 5,953,832 5,845,487
Federal funds purchased and securities sold under repurchase
agreements................................................ 333,459 305,564
Accrued interest and other liabilities...................... 101,565 107,177
Guaranteed preferred beneficial interest in the
Corporation's junior subordinated deferrable interest
debentures, net........................................... 98,513 98,458
-----------------------
TOTAL LIABILITIES.................................... 6,487,369 6,356,686
SHAREHOLDERS' EQUITY
Common stock, par value $.01 per share...................... 536 267
Shares authorized: 1999 -- 90,000,000;
1998 -- 90,000,000
Shares issued: 1999 -- 53,561,616; 1998 -- 53,425,296
Surplus..................................................... 185,437 183,151
Retained earnings........................................... 382,168 321,754
Accumulated other comprehensive (loss) income, net of tax... (39,110) 7,747
Treasury stock at cost (738,463 shares)..................... (19,720)
-----------------------
TOTAL SHAREHOLDERS' EQUITY........................... 509,311 512,919
-----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $6,996,680 $6,869,605
=======================
</TABLE>
See notes to consolidated financial statements.
37
<PAGE> 38
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
=======================================
1999 1998 1997
===============================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................ $ 97,642 $ 75,645 $ 72,967
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses............... 12,427 10,393 9,174
Credit for deferred taxes........................ (6,083) (5,574) (6,703)
Accretion of discounts on loans.................. (547) (2,841) (1,212)
Accretion of securities' discounts............... (2,306) (3,911) (11,960)
Amortization of securities' premiums............. 4,738 5,824 3,847
Decrease (increase) in trading account
securities..................................... 708 1,231 (1,153)
Net realized loss (gain) on securities
transactions................................... 86 (359) (498)
Net gain on sale of assets....................... (4,052) (773) (654)
Depreciation and amortization.................... 32,657 30,024 26,459
(Increase) decrease in accrued interest
receivable..................................... (1,951) 660 (6,374)
Increase (decrease) in accrued interest
payable........................................ 3,566 (4,072) 4,453
Originations of mortgages held-for-sale.......... (69,587) (181,219) (104,271)
Proceeds from sales of mortgages held-for-sale... 75,054 177,160 102,728
Net change in other assets and liabilities....... (5,716) 13,161 (38,571)
---------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........ 136,636 115,349 48,232
INVESTING ACTIVITIES
Proceeds from maturities of securities held to
maturity............................................ 26,471 36,906 40,606
Purchases of securities held to maturity.............. (123) (9,650) (32,040)
Proceeds from sales of securities available for
sale................................................ 1,696,657 900,398 434,488
Proceeds from maturities of securities available for
sale................................................ 929,644 1,145,806 908,197
Purchases of securities available for sale............ (2,172,113) (2,314,252) (1,354,280)
Net increase in loan portfolio........................ (421,478) (407,212) (342,559)
Proceeds from sales of premises and equipment......... 4,694 30 49
Purchases of premises and equipment................... (20,334) (18,798) (18,104)
Proceeds from sales of repossessed properties......... 2,653 2,982 2,038
Net cash and cash equivalents (paid) received from
acquisitions........................................ (23,788) (8,899) 14,277
---------------------------------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES..................................... 22,283 (672,689) (347,328)
FINANCING ACTIVITIES
Net increase in demand deposits, IOC accounts, and
savings accounts.................................... 77,501 566,136 159,070
Net decrease in certificates of deposit............... (195,031) (111,941) (16,532)
Net increase (decrease) in Federal funds purchased and
securities sold under repurchase agreements......... 27,895 89,361 (31,916)
Net proceeds from issuance of guaranteed preferred
beneficial interest in the Corporation's
subordinated debentures............................. 98,353
Net proceeds from issuance of common stock............ 5,314 7,983 3,735
Purchase of treasury stock............................ (24,318) (3,495) (17,834)
Dividends paid........................................ (36,013) (30,476) (22,256)
---------------------------------------
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES..................................... (144,652) 517,568 172,620
---------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 14,267 (39,772) (126,476)
Cash and cash equivalents at beginning of year........ 787,841 827,613 954,089
---------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR......... $ 802,108 $ 787,841 $ 827,613
=======================================
</TABLE>
See notes to consolidated financial statements.
38
<PAGE> 39
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
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, 1997.................... $ 133,475 $ 51,132 $232,201 $ 8,114 $ (136) $424,786
Net Income for 1997......................... 72,967 72,967
Unrealized gain on securities available for
sale of $1,127, net of tax and
reclassification adjustment for after-tax
gains included in net income of $324...... 803 803
--------
Total comprehensive income............ 73,770
--------
Proceeds from employee stock purchase plan
and option................................ 300 437 (1,949) 3,201 1,989
Tax benefit related to exercise of stock
options................................... 1,492 1,492
Purchase of treasury stock.................. (17,814) (17,814)
Issuance of restricted stock................ 522 2,297 2,819
Restricted stock plan deferred compensation,
net....................................... (2,112) (2,112)
Cash dividend............................... (21,463) (21,463)
Pre-merger transaction of pooled company:
Release of unearned ESOP shares........... 64 143 207
Cash dividend............................. (793) (793)
Purchase of treasury stock................ (20) (20)
Sale of treasury stock.................... 68 68
---------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997.................. 133,775 53,647 278,994 8,917 (12,404) 462,929
Net Income for 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 1999......................... 97,642 97,642
Unrealized loss on securities available for
sale of $46,913 net of tax and
reclassification adjustment for after-tax
losses 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 (1,839) 4,598 3,616
Tax benefit related to exercise of stock
options................................... 1,698 1,698
Purchase of treasury stock.................. (24,318) (24,318)
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
=====================================================================
</TABLE>
See notes to consolidated financial statements.
39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
- ----------------------------------------
Cullen/Frost Bankers, Inc., ("Cullen/Frost" or "the Corporation") through
its wholly-owned subsidiary banks provides a broad array of products and
services throughout 11 Texas markets. In addition to general commercial banking,
other products and services offered include trust and investment management,
mortgage banking, insurance, investment banking, leasing, asset-based lending,
treasury management and item processing.
The accounting and reporting policies followed by Cullen/Frost are in
accordance with generally accepted accounting principles and conform to general
practices within the banking industry. The more significant accounting and
reporting policies are summarized below.
BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of Cullen/Frost and its wholly-owned subsidiaries. Condensed parent
company financial statements reflect investments in subsidiaries using the
equity method of accounting. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to make prior years comparable.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
SECURITIES -- Securities are classified as held to maturity and carried at
amortized cost when Cullen/Frost has the intent and ability to hold the
securities until maturity. Securities held for resale in anticipation of
short-term market movements are classified as trading and are carried at market
value with both net realized and unrealized gains and losses included in other
income during the period. Securities to be held for indefinite periods of time
are classified as available for sale and stated at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity. The adjusted carrying value of the specific security sold
is used to compute gain or loss on the sale of securities. Declines in value
other than temporary declines are adjusted against the security with a charge to
operations.
LOANS -- Interest on loans is accrued and accreted to operations based on
the principal amount outstanding. Interest on certain consumer loans is
recognized over their respective terms using a method which approximates the
interest method. Generally, loans are placed on non-accrual status if principal
or interest payments become 90 days past due and/or management deems the
collectability of the principal and/or interest to be in question as well as
when required by regulatory provisions. Once interest accruals are discontinued,
uncollected but accrued interest is charged to current year operations.
Subsequent receipts on nonaccrual loans are recorded as a reduction of
principal, and interest income is recorded once principal recovery is reasonably
assured. Loans which are determined to be uncollectible are charged to the
allowance for possible loan losses. The collectability of loans is continually
reviewed by management.
ALLOWANCE FOR POSSIBLE LOAN LOSSES -- The allowance for possible loan
losses is established through a provision for possible loan losses charged to
current operations. The allowance for loan losses is maintained at a level
considered appropriate by management, based on estimated probable losses in the
loan portfolio. The allowance consists of three elements: (i) allowances
established on specific loans, (ii) allowances based on historical loan loss
experience and trends, and (iii) unallocated allowances based on general
economic conditions and other internal and external risk factors in the
Corporation's individual markets. An allowance for possible loan losses is
maintained in an amount which, in management's judgment, provides an adequate
reserve to absorb probable credit losses related to specifically identified
loans as well as loan losses inherent in the remainder of the loan portfolio
that have been incurred as of the balance sheet date. Certain non-homogeneous
loans are accounted for under the provisions of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosure." These
standards require an allowance to be established as a
40
<PAGE> 41
component of the allowance for loan losses for certain loans when it is probable
that all amounts due pursuant to the contractual terms of the loan will not be
collected and the recorded investment in the loan exceeds the fair value. The
allowance for possible loan losses related to loans that are impaired as defined
by SFAS No. 114 and SFAS No. 118 is based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral for
certain collateral dependent loans. Income on impaired loans is recognized in
accordance with SFAS No. 118 which is based on the collectability of the
principal amount.
FORECLOSED ASSETS -- Foreclosed assets consist of property which has been
formally repossessed. Collateral obtained through foreclosure is recorded at the
lower of fair value less estimated selling costs or the underlying loan amounts.
Write-downs are provided for subsequent declines in value.
BANKING PREMISES AND EQUIPMENT -- Banking premises and equipment are stated
at cost, less accumulated depreciation and amortization. Depreciation and
amortization are generally computed on a straight-line basis over the estimated
useful lives of the assets. Leasehold improvements are generally amortized over
the lesser of the term of the respective leases or the estimated useful lives of
the improvements.
Long-lived assets and certain identifiable intangibles are accounted for
under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This statement requires that those assets
and intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable on an undiscounted basis. If impairment is indicated the present
value of expected future cash flows from the use of the asset and its eventual
disposition are less than the carrying amount of the asset, an impairment loss
is recognized.
INTANGIBLE ASSETS -- The excess of cost over fair value of net assets of
businesses acquired (goodwill) is amortized on a straight-line and accelerated
basis (as appropriate) over periods generally not exceeding twenty-five years.
Core deposit and other intangibles are amortized on an accelerated basis over
their estimated lives ranging from five to ten years. Intangible assets are
included in other assets. All such intangible assets are periodically evaluated
as to the recoverability of their carrying value.
FEDERAL INCOME TAXES -- Cullen/Frost files a consolidated federal income
tax return which includes the taxable income of all of its principal
subsidiaries. Deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial
reporting bases and the tax bases of assets and liabilities. If it is more
likely than not that some portion or all of a deferred tax asset will not be
realized, a valuation allowance is recognized.
STOCK OPTION PLANS -- Cullen/Frost accounts for its stock option plans
under SFAS No. 123, "Accounting for Stock Based Compensation." The Statement
allows the continued use of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB No. 25) and related
Interpretations. Cullen/Frost continues to account for its stock option plans in
accordance with APB No. 25. Under APB No. 25, because the exercise price of
Cullen/Frost's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized. SFAS No. 123
also allows for the fair value method of accounting for employees stock options.
The continued use of APB No. 25 requires pro forma disclosures of net income and
earnings per share as if the fair value method of accounting had been applied.
STOCK SPLIT -- The number of shares outstanding and related earnings per
share amounts have been restated to retroactively give effect for the
two-for-one stock split declared and distributed by Cullen/Frost during the
second quarter of 1999.
FINANCIAL DERIVATIVES -- Derivatives are used to hedge interest rate
exposure by modifying the interest rate characteristics of related balance sheet
instruments. The specific criteria required for derivatives used for these
purposes are described below. Derivatives that do not meet these criteria are
carried at market value with changes in value recognized currently in earnings.
Derivatives used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at
the inception of the derivative contract. Derivatives currently
41
<PAGE> 42
used for hedging purposes include interest rate swaps. These swap transactions
allow management to structure the interest rate sensitivity of the asset side of
the balance sheet to more closely match its view of the interest rate
sensitivity of Cullen/Frost's funding sources. The fair value of derivative
contracts are carried off-balance sheet and the unrealized gains and losses on
derivative contracts are generally deferred. The interest component associated
with derivatives used as hedges or to modify the interest rate characteristics
of assets and liabilities is recognized over the life of the contract in net
interest income. Upon contract settlement or early termination, the cumulative
change in the market value of such derivatives is recorded as an adjustment to
the carrying value of the underlying asset or liability and recognized in net
interest income over the expected remaining life of the derivative contract. In
instances where the underlying instrument is repaid, the cumulative change in
the value of the associated derivative is recognized immediately in earnings.
ACCOUNTING CHANGES -- The following is a brief discussion of the SFAS
pronouncements issued by the FASB that are pending adoption by Cullen/Frost.
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. 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 Cullen/Frost at that time.
NOTE B -- ACQUISITIONS
- ---------------------
The transactions listed below, with the exception of the merger with
Overton Bancshares, Inc. ("Overton"), have been accounted for as purchase
transactions with the total cash consideration funded through internal sources.
The purchase price has been allocated to the underlying assets and liabilities
based on estimated fair values at the date of acquisition. Results of operations
are included from the date of acquisition. The Overton acquisition was accounted
for under the pooling-of-interests method of accounting which requires the
assets, liabilities and shareholders' equity of the merged entity to be
retroactively combined with the Corporation's respective accounts at recorded
value.
1999 ACQUISITIONS
COMMERCE FINANCIAL CORP. -- FORT WORTH
On May 20, 1999, Cullen/Frost paid approximately $42.3 million to acquire
Commerce Financial Corporation and its four-location subsidiary, Bank of
Commerce, in Fort Worth, 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 $76 million and deposits of approximately $164
million. The intangible assets associated with the acquisition amounted to
approximately $30.5 million. This acquisition did not have a material impact on
Cullen/Frost's 1999 net income.
PROFESSIONAL INSURANCE AGENTS, INC. -- VICTORIA
On May 1, 1999, Frost Insurance Agency, a subsidiary of The Frost National
Bank, acquired 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
42
<PAGE> 43
purchase method of accounting was used to record the transaction. This
acquisition did not have a material impact on Cullen/Frost's 1999 net income.
KELLER STATE BANK -- TARRANT COUNTY
On January 15, 1999, Cullen/Frost 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. The Corporation acquired
loans of approximately $38 million and deposits of approximately $62 million.
The intangible assets associated with the acquisition amounted to approximately
$11.8 million. This acquisition did not have a material impact on Cullen/Frost's
1999 net income.
1998 MERGERS AND ACQUISITIONS
OVERTON BANCSHARES, INC. -- FORT WORTH
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, was Cullen/Frost's first entry into the Fort
Worth market. With the merger, Cullen/Frost acquired twelve locations in Fort
Worth/Arlington and two in Dallas. Cullen/Frost issued approximately 4.38
million common shares as part of this transaction. As a result of the
transaction, Cullen/Frost recorded a merger related charge of $12.2 million
primarily consisting of severance payments, other employee benefits and
investment banking fees. In addition, shortly after the merger was consummated
Cullen/Frost reclassified approximately $116 million of held to maturity
securities of Overton to available for sale securities.
HARRISBURG BANCSHARES, INC. -- HOUSTON
On January 2, 1998, the Corporation paid approximately $55.3 million to
acquire Harrisburg Bancshares, Inc., including its subsidiary Harrisburg Bank in
Houston, Texas. Goodwill associated with the transaction amounted to
approximately $24.5 million and approximately $10.6 million of other intangibles
associated with the acquisition were recorded. Cullen/Frost acquired loans of
approximately $125 million and deposits of approximately $222 million. This
acquisition did not have a material impact on the Corporation's 1998 net income.
1997 ACQUISITION
CORPUS CHRISTI BANCSHARES, INC. -- CORPUS CHRISTI
On March 7, 1997, Cullen/Frost paid approximately $32.2 million to acquire
Corpus Christi Bancshares, Inc., including its subsidiary Citizens State Bank,
in Corpus Christi, Texas. Goodwill associated with the transaction amounted to
approximately $13.8 million and approximately $7.1 million of other intangibles
associated with the acquisition were recorded. Cullen/Frost acquired loans of
approximately $108 million and deposits of approximately $184 million. This
acquisition did not have a material impact on the Corporation's 1997 net income.
INVESTMENT BANKING SUBSIDIARY
On August 2, 1999 Cullen/Frost began operations of its Section 20
investment banking subsidiary in Dallas, Texas. The new subsidiary, Frost
Securities, Inc., offers 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.
43
<PAGE> 44
NOTE C -- CASH AND DUE FROM BANKS
- ---------------------------------
Cullen/Frost subsidiary banks are required to maintain cash or non-interest
bearing reserves with the Federal Reserve Bank which are equal to specified
percentages of deposits. The average amounts of reserve and contractual balances
were $76.9 million for 1999 and $75.1 million for 1998.
NOTE D -- SECURITIES
- --------------------
A summary of the amortized cost and estimated fair value of securities is
presented below.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 December 31, 1998
================================================= =================================================
AMORTIZED UNREALIZED UNREALIZED ESTIMATED AMORTIZED UNREALIZED UNREALIZED ESTIMATED
(IN THOUSANDS) COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Held to
Maturity:
U.S. Government agencies
and corporations...... $ 82,413 $ 664 $ 220 $ 82,857 $ 107,182 $ 1,939 $ 12 $ 109,109
States and political
subdivisions.......... 2,582 142 4 2,720 4,232 316 4,548
Other................... 50 50 25 25
-----------------------------------------------------------------------------------------------------
Total................. $ 85,045 $ 806 $ 224 $ 85,627 $ 111,439 $ 2,255 $ 12 $ 113,682
=====================================================================================================
Securities Available for
Sale:
U.S. Treasury........... $ 118,269 $ 55 $ 194 $ 118,130 $ 189,240 $ 357 $ 23 $ 189,574
U.S. Government agencies
and corporations...... 1,293,803 2,668 54,444 1,242,027 1,601,930 13,448 2,980 1,612,398
State and political
subdivisions.......... 158,990 262 8,516 150,736 119,962 1,943 907 120,998
Other................... 33,972 33,972 56,504 97 16 56,585
-----------------------------------------------------------------------------------------------------
Total................. $1,605,034 $2,985 $63,154 $1,544,865 $1,967,636 $15,845 $3,926 $1,979,555
=====================================================================================================
</TABLE>
The amortized cost and estimated fair value of securities at December 31,
1999 are presented below by contractual maturity. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
==============================================================
SECURITIES HELD TO MATURITY SECURITIES AVAILABLE FOR SALE
---------------------------- ------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
(IN THOUSANDS) COST FAIR VALUE COST FAIR VALUE
============================================================================================================
<S> <C> <C> <C> <C>
Due in one year or less..................... $ 25 $ 25 $ 117,460 $ 117,485
Due after one year through five years....... 945 941 35,347 34,627
Due after five years through ten years...... 1,662 1,804 45,546 43,461
Due after ten years......................... 112,878 107,265
--------------------------------------------------------------
2,632 2,770 311,231 302,838
Mortgage-backed securities and
collateralized mortgage obligations....... 82,413 82,857 1,293,803 1,242,027
--------------------------------------------------------------
Total.................................. $85,045 $85,627 $1,605,034 $1,544,865
==============================================================
</TABLE>
Proceeds from sales of securities available for sale during 1999 were $1.7
billion. During 1999, gross gains of $625 thousand and gross losses of $711
thousand were realized on those sales. Proceeds from sales of securities
available for sale during 1998 were $900.4 million. During 1998, gross gains of
$1.1 million and gross losses of $705 thousand were realized on those sales.
Proceeds from sales of securities available for sale during 1997 were $434.5
million. During 1997, gross gains of $556 thousand and gross losses of $58
thousand were realized on those sales.
44
<PAGE> 45
The carrying value of securities pledged to secure public funds, trust
deposits, securities sold under repurchase agreements and for other purposes as
required or permitted by law amounted to $1.5 billion at December 31, 1999 and
$1.2 billion at December 31, 1998.
NOTE E -- LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
- ------------------------------------------------------
A summary of loans outstanding follows:
<TABLE>
<CAPTION>
December 31
=======================
(in thousands) 1999 1998
=====================================================================================
<S> <C> <C>
Real estate:
Construction........................................... $ 379,559 $ 292,789
Land................................................... 128,765 75,397
Permanent mortgages:
Commercial........................................ 422,022 346,479
Residential....................................... 684,827 655,484
Other.................................................. 364,875 349,255
Commercial and industrial:
Energy................................................. 129,394 67,187
Other.................................................. 1,458,956 1,143,993
Consumer.................................................... 541,026 625,018
Financial institutions...................................... 7,416
Foreign..................................................... 20,298 45,187
Other....................................................... 43,223 41,755
Unearned discount........................................... (6,217) (3,357)
-----------------------
Total loans............................................ $4,166,728 $3,646,603
=======================
</TABLE>
In the normal course of business, in order to meet the financial needs of
its customers, Cullen/Frost is a party to financial instruments with off-balance
sheet risk. These include commitments to extend credit and standby letters of
credit which commit the Corporation to make payments on behalf of customers when
certain specified future events occur. Both arrangements have credit risk
essentially the same as that involved in extending loans to customers and are
subject to the Corporation's normal credit policies. Collateral is obtained
based on management's credit assessment of the customer. No material losses are
anticipated as a result of these commitments. Commitments to extend credit and
standby letters of credit amounted to $1.8 billion and $80.2 million,
respectively, at December 31, 1999. Commitments to extend credit and standby
letters of credit amounted to $1.2 billion and $53 million respectively, at
December 31, 1998. Commercial and industrial loan commitments represent
approximately 71 percent of the total loan commitments outstanding at December
31, 1999 and 1998.
The majority of Cullen/Frost's real estate loans are secured by real estate
in San Antonio, Houston and Fort Worth. Mortgage loans of approximately $8.6
million and $14.0 million were held for sale by the Corporation and are included
in residential permanent mortgages at December 31, 1999 and 1998, respectively.
These loans are valued at the lower of cost or market, on an aggregate basis.
In the normal course of business, Cullen/Frost subsidiary banks make loans
to directors and officers of both Cullen/Frost and its subsidiaries. These loans
are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons. Loans made to directors and executive officers of Cullen/Frost
and its significant subsidiaries, including loans made to their associates,
amounted to $16.5 million and $45.3 million at December 31, 1999 and 1998,
respectively. During 1999, additions to these loans amounted to $5.8 million,
repayments totaled $16.3 million and other changes totaled $18.3 million. These
other changes consist primarily of changes in related-party status. Standby
letters of credit extended to directors and executive officers of Cullen/Frost
and its significant
45
<PAGE> 46
subsidiaries and their associates amounted to $608 thousand and $614 thousand at
December 31, 1999 and 1998, respectively. A summary of the changes in the
allowance for possible loan losses follows:
<TABLE>
<CAPTION>
Year Ended December 31
===========================
(in thousands) 1999 1998 1997
=========================================================================================
<S> <C> <C> <C>
Balance at the beginning of the year........................ $53,616 $48,073 $42,821
Provision for possible loan losses.......................... 12,427 10,393 9,174
Loan loss reserve of acquired institutions.................. 1,066 1,250 2,105
Net charge-offs:
Losses charged to the allowance........................ (13,133) (12,548) (9,927)
Recoveries............................................. 4,369 6,448 3,900
---------------------------
Net charge-offs................................... (8,764) (6,100) (6,027)
---------------------------
Balance at the end of the year.............................. $58,345 $53,616 $48,073
===========================
</TABLE>
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 December 31, 1999, the majority
of the impaired loans were real estate loans and collectability was measured
based on the fair value of the collateral. Interest payments on impaired loans
are typically applied to principal unless collectability of the principal amount
is fully assured, in which case interest is recognized on the cash basis. There
was no interest revenue recognized on impaired loans in 1999 compared to $70,000
recognized in 1998. 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:
<TABLE>
<CAPTION>
December 31
===============
(in thousands) 1999 1998
=============================================================================
<S> <C> <C>
Impaired loans with no valuation reserve.................... $1,783 $1,924
Impaired loans with a valuation reserve..................... 6,637 2,779
---------------
Total recorded investment in impaired loans................. $8,420 $4,703
===============
Valuation reserve........................................... $3,387 $1,834
</TABLE>
The average recorded investment in impaired loans was $6.2 million, $5.7
million, and $5.5 million for the years ended December 31, 1999, 1998, and 1997
respectively.
NOTE F -- NON-PERFORMING ASSETS
- -------------------------------
A summary of non-performing assets follows:
<TABLE>
<CAPTION>
December 31
=================
(in thousands) 1999 1998
===============================================================================
<S> <C> <C>
Non-accrual................................................. $14,854 $12,997
Foreclosed assets........................................... 3,983 4,107
-----------------
$18,837 $17,104
=================
</TABLE>
Cullen/Frost did not have any restructured loans for the years ended December
31, 1999 and 1998, respectively.
Cullen/Frost recognized interest income on non-accrual loans of
approximately $1.1 million, $742 thousand and $594 thousand in 1999, 1998 and
1997, respectively. Had these reduced earning and non-earning loans performed
according to their original contract terms, Cullen/Frost would have recognized
additional interest income of approximately $1.3 million in 1999 and 1998 and
$1.2 million in 1997.
46
<PAGE> 47
NOTE G -- BANKING PREMISES AND EQUIPMENT
- ----------------------------------------
A summary of banking premises and equipment follows:
<TABLE>
<CAPTION>
December 31
=======================================================================
1999 1998
---------------------------------- ----------------------------------
ACCUMULATED ACCUMULATED
DEPRECIATION NET DEPRECIATION NET
AND CARRYING AND CARRYING
(IN THOUSANDS) COST AMORTIZATION VALUE COST AMORTIZATION VALUE
====================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Land....................... $ 47,125 $ 47,125 $ 44,528 $ 44,528
Buildings.................. 78,403 $ 31,074 47,329 64,103 $ 22,012 42,091
Furniture and equipment.... 115,180 88,485 26,695 104,200 79,730 24,470
Leasehold improvements..... 39,980 22,475 17,505 37,881 19,519 18,362
Construction in progress... 4,330 4,330 7,839 7,839
-----------------------------------------------------------------------
Total banking premises
and equipment....... $285,018 $142,034 $142,984 $258,551 $121,261 $137,290
=======================================================================
</TABLE>
NOTE H -- DEPOSITS
- ------------------
A summary of deposits outstanding by category follows:
<TABLE>
<CAPTION>
December 31
=======================
(IN THOUSANDS) 1999 1998
=====================================================================================
<S> <C> <C>
Demand deposits............................................. $1,863,260 $1,843,499
Savings and Interest-on-Checking............................ 984,438 961,597
Money market deposit accounts............................... 1,635,524 1,493,778
Time accounts of $100,000 or more........................... 649,563 662,923
Time accounts under $100,000................................ 585,331 601,198
Other....................................................... 235,716 282,492
-----------------------
Total deposits......................................... $5,953,832 $5,845,487
=======================
</TABLE>
Foreign deposits totaled $716 million and $673 million at December 31, 1999
and 1998, respectively.
At December 31, 1999, Cullen/Frost's aggregate amount of maturities of
public and private time accounts are as follows:
<TABLE>
<CAPTION>
(in thousands) Maturities
=========================================================================
<S> <C>
2000........................................................ $1,251,844
2001........................................................ 78,260
2002........................................................ 6,410
2003........................................................ 3,206
2004........................................................ 745
Subsequent to 2004.......................................... 225
----------
Total.................................................. $1,340,690
==========
</TABLE>
47
<PAGE> 48
NOTE I -- BORROWED FUNDS
- ------------------------
Cullen/Frost has a $7.5 million revolving credit facility with another
financial institution. The line of credit bears interest at prime. There were no
borrowings outstanding on this line at December 31, 1999 and 1998.
Cullen/Frost has received advances totaling $23.5 million, and $13.3
million as of December 31, 1999 and 1998, respectively, from the Federal Home
Loan Bank (FHLB) included in other liabilities. These advances fall under
provisions of a credit facility designed to enable the Corporation to fund
long-term loans. The advances mature on October 30, 2000 through July 2, 2018,
bear interest at the FHLB's floating rate (average 6.22 percent at December 31,
1999), and are collateralized by a blanket floating lien on all first mortgage
loans, the FHLB capital stock owned by the Corporation, and any Bank funds on
deposit with the FHLB.
Scheduled payments and principal amounts due under terms of the above notes
and advances are as follows:
<TABLE>
<CAPTION>
FHLB
Repayment
(in thousands) Obligations
==========================================================================
<S> <C>
2000........................................................ $ 9,818
2001........................................................ 5,353
2002........................................................ 749
2003........................................................ 6,021
2004........................................................ 314
Subsequent to 2004.......................................... 1,265
----------
Total.................................................. $23,520
----------
</TABLE>
The following table represents balances as they relate to securities sold
under repurchase agreements:
<TABLE>
<CAPTION>
Year Ended December 31
=======================
(IN THOUSANDS) 1999 1998
=====================================================================================
<S> <C> <C>
Balance at year end......................................... $210,909 $209,526
Maximum month-end balance................................... 229,455 209,526
For the year:
Average daily balance..................................... 194,823 175,699
</TABLE>
Cullen/Frost Capital Trust I, a Delaware statutory business trust (the
"Issuer Trust") and wholly-owned subsidiary of the Corporation, issued on
February 6, 1997, $100 million of its 8.42 percent Capital Securities, Series A
(the "Capital Securities"), which represent beneficial interests in the Issuer
Trust, in an offering exempt from registration under the Securities Act of 1933
pursuant to Rule 144A. The Capital Securities will mature on February 1, 2027
and are redeemable in whole or in part at the option of the Corporation at any
time after February 1, 2007 with the approval of the Federal Reserve and in
whole at any time upon the occurrence of certain events affecting their tax or
regulatory capital treatment. The Issuer Trust used the proceeds of the offering
of the Capital Securities to purchase Junior Subordinated Debentures of the
Corporation which constitute its only assets and which have terms substantially
similar to the Capital Securities. Payments of distributions on the Capital
Securities and payments on liquidation or redemption of the Capital Securities
are guaranteed by the Corporation on a limited basis pursuant to a Guarantee.
The Corporation has also entered into an Agreement as to Expenses and
Liabilities with the Issuer Trust pursuant to which it has agreed on a
subordinated basis to pay any costs, expenses or liabilities of the Issuer Trust
other than those arising under the Capital Securities. The obligations of the
Corporation under the Junior Subordinated Debentures, the related Indenture, the
trust agreement establishing the Issuer Trust, the Guarantee and the Agreement
as to Expenses and Liabilities, in the aggregate, constitute a full and
unconditional guarantee by the Corporation of the Issuer Trust's obligations
under the Capital Securities.
48
<PAGE> 49
The Corporation used the majority of the proceeds of the sale of the Junior
Subordinated Debentures for acquisitions and the repurchase of the Corporation's
common stock. The Capital Securities are included in the Tier 1 capital of the
Corporation for regulatory capital purposes and are reported as debt on the
balance sheet, net of deferred issuance costs. The Corporation records
distributions payable on the Capital Securities as interest expense. The
Corporation has the right to defer payments of interest on the Junior
Subordinated Debentures at any time or from time to time for a period of up to
ten consecutive semi-annual periods with respect to each deferral period. Under
the terms of the Junior Subordinated Debentures, in the event that under certain
circumstances there is an event of default under the Junior Subordinated
Debentures or the Corporation has elected to defer interest on the Junior
Subordinated Debentures, the Corporation may not, with certain exceptions,
declare or pay any dividends or distributions on its capital stock or purchase
or acquire any of its capital stock.
On March 13, 1997, the Corporation and the Issuer Trust, filed a
Registration Statement on Form S-4 with the Securities and Exchange Commission
to register under the Securities Act of 1933 the exchange of up to $100 million
aggregate Liquidation Amount of "new" 8.42 percent Capital Securities, Series A
for the then outstanding Capital Securities. On April 25, 1997, the Corporation
exchanged all of the outstanding Capital Securities for registered Capital
Securities. The "new" Capital Securities have the same terms as the "old"
Capital Securities. This exchange enhanced the transferability of the Capital
Securities and had no impact on redemption of the Capital Securities, the Junior
Subordinated Debentures issued by the Company, the Company's guarantee of the
Capital Securities, or other matters described above.
NOTE J -- COMMON STOCK AND EARNINGS PER COMMON SHARE
- ----------------------------------------------------
A reconciliation of earnings per share for 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
December 31
===========================
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
=========================================================================================
<S> <C> <C> <C>
Numerators for both basic and diluted earnings per share,
net income................................................ $97,642 $75,645 $72,967
===========================
Denominators:
Denominators for basic earnings per share, average
outstanding common shares................................. 53,368 53,150 52,999
Dilutive effect of stock options............................ 1,378 1,529 1,753
---------------------------
Denominator for diluted earnings per share.................. 54,746 54,679 54,752
===========================
Earnings per share:
Basic....................................................... $ 1.83 $ 1.42 $ 1.38
Diluted..................................................... 1.78 1.38 1.33
</TABLE>
49
<PAGE> 50
NOTE K -- DIVIDENDS
- -------------------
In the ordinary course of business Cullen/Frost is dependent upon dividends
from its subsidiary banks to provide funds for the payment of dividends to
shareholders and to provide for other cash requirements. The amount of dividends
that subsidiary banks may declare is subject to regulations. Without prior
regulatory approval, the subsidiary banks had approximately $78.5 million
available for the payment of dividends to Cullen/Frost at December 31, 1999.
NOTE L -- CAPITAL
- -----------------
The table below reflects various measures of regulatory capital at year end
1999 and 1998 for Cullen/Frost. As a result of the acquisitions during the first
half of 1999, all regulatory capital ratios are down when compared to a year
ago.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 December 31, 1998
=================== ===================
(IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO
=============================================================================================
<S> <C> <C> <C> <C>
Risk-Based
Tier 1 Capital.............................. $ 519,151 11.04% $ 512,125 12.23%
Tier 1 Capital Minimum requirement.......... 188,131 4.00 167,470 4.00
Total Capital............................... $ 577,496 12.28% $ 564,477 13.48%
Total Capital Minimum requirement........... 376,263 8.00 334,940 8.00
Risk-adjusted assets, net of goodwill....... $4,703,284 $4,186,744
Leverage ratio................................... 7.56% 7.71%
Average equity as a percentage of average
assets......................................... 7.60 7.63
</TABLE>
At December 31, 1999 and 1998, 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 banks 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 December 31, 1999.
Cullen/Frost 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.
50
<PAGE> 51
NOTE M -- LEASES AND RENTAL AGREEMENTS
- --------------------------------------
Rental expense for all leases amounted to $14.3 million, $13.9 million and
$12.8 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
In June 1987, Frost Bank consummated the sale of its office tower and
leased back a portion of the premises under a 13-year primary lease term with
options allowing for occupancy up to 50 years. The Bank also sold its related
parking garage facility and leased back space in that structure under a 12-year
primary lease term with options allowing for occupancy up to 50 years. Both
leases allow for purchase of the related asset under specific terms. Frost Bank
has agreed to repurchase the office tower and related parking garage facility.
Closing of the transaction is expected to take place in the second quarter of
2002.
A summary of the total future minimum rental commitments due under
non-cancelable equipment leases and long-term agreements on banking premises,
not including the aforementioned commitment after the second quarter of 2002, at
December 31, 1999 follows:
<TABLE>
<CAPTION>
Total
(in thousands) Commitments
=========================================================================
<S> <C>
2000........................................................ $14,911
2001........................................................ 15,261
2002........................................................ 12,317
2003........................................................ 8,365
2004........................................................ 6,580
Subsequent to 2004.......................................... 24,863
----------
Total future minimum rental commitments................ $82,297
==========
</TABLE>
It is expected that certain leases will be renewed, or equipment replaced
with new leased equipment, as these leases expire.
NOTE N -- EMPLOYEE BENEFIT PLANS
- --------------------------------
RETIREMENT PLANS --
Cullen/Frost has a non-contributory defined benefit plan which covers
substantially all employees who have completed at least one year of service and
have attained the age of 21. Defined benefits are provided based on an
employee's final average compensation, age at retirement and years of service.
Cullen/Frost's funding policy is to contribute quarterly an amount necessary to
satisfy the Employee Retirement Income Security Act (ERISA) funding standards.
An eligible employee's right to receive benefits under the plan becomes fully
vested upon the earlier of the date on which such employee has completed five
years of service or the date on which such employee attains 65 years of age.
Retirement benefits under the plan are paid to vested employees upon their (i)
normal retirement at age 65 or later or (ii) early retirement at or after age
55, but before age 65. In addition, Cullen/Frost has a Restoration of Retirement
Income Plan (providing benefits in excess of the limits under Section 415 of the
Internal Revenue Code of 1986, as amended) for eligible employees which is
designed to comply with the requirements of ERISA and the entire cost of which
is provided by Cullen/Frost contributions. Both plans, as amended, provide for
the payment of monthly retirement income pursuant to a formula based on an
eligible employee's highest three consecutive years of final average
compensation during the last ten consecutive years of employment.
51
<PAGE> 52
The following table summarizes benefit obligation and plan asset activity
for the plans.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
===============================================================================
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year................... $65,666 $51,776
Service cost.............................................. 3,987 2,915
Interest cost............................................. 4,387 3,711
Plan Amendments........................................... 6,071
Actuarial (gain) loss..................................... (7,997) 2,545
Benefits paid............................................. (1,450) (1,352)
-----------------
Benefit obligation at end of year......................... $64,593 $65,666
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year............ $47,760 $42,357
Actual return on plan assets.............................. 4,747 6,601
Employer contributions.................................... 237 154
Benefits paid............................................. (1,450) (1,352)
-----------------
Fair value of plan assets at end of year.................. $51,294 $47,760
Funded status of the plan................................. $13,299 $17,906
Unrecognized net actuarial gain (loss).................... 1,292 (7,329)
Unrecognized prior service cost........................... (8,731) (9,805)
Unrecognized net transition asset......................... 390 490
-----------------
Accrued benefit cost...................................... $ 6,250 $ 1,262
=================
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate............................................. 7.50% 6.75%
Expected return on plan assets............................ 9.00 9.00
Rate of compensation increase............................. 5.00 5.00
</TABLE>
Net pension cost included the following components:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998 1997
=========================================================================================
<S> <C> <C> <C>
Service cost for benefits earned during the year............ $ 3,987 $ 2,915 $ 2,741
Expected return on plan assets, net of expenses............. (4,245) (3,765) (3,000)
Interest cost on projected benefit obligation............... 4,387 3,711 3,319
Net amortization and deferral............................... 1,096 714 742
---------------------------
Net pension cost....................................... $ 5,225 $ 3,575 $ 3,802
===========================
</TABLE>
Cullen/Frost has a supplemental executive retirement plan ("SERP") for
certain key executives. The plan provides for target retirement benefits, as a
percentage of pay, beginning at age 55. The target percentage is 45 percent of
pay at age 55, increasing to 60 percent at age 60 and later. Benefits under the
SERP are reduced, dollar-for-dollar, by benefits received under the Retirement
and Restoration Plans, described above, and any social security benefits.
52
<PAGE> 53
SAVINGS PLANS --
Cullen/Frost maintains a 401(k) stock purchase plan (the "401(k) Plan").
The 401(k) Plan permits each participant to make before-tax or after-tax
contributions up to 16 percent of eligible compensation. Cullen/Frost makes
matching contributions to the 401(k) Plan based on the amount of each
participant's contributions up to a maximum of six percent of eligible
compensation. Eligible employees must complete 90 days of service to be eligible
for enrollment and beginning on January 1, 1999, vest in the Corporation's
matching contributions immediately. Cullen/Frost's gross expenses related to the
401(k) Plan were $4.8 million, $2.8 million and $2.3 million for 1999, 1998 and
1997, respectively. During 1999, 1998 and 1997, the Corporation utilized
forfeitures with a value of $38 thousand, $199 thousand and $308 thousand,
respectively, to offset this expense.
The 1991 Thrift Incentive Stock Purchase Plan ("1991 Stock Purchase Plan")
was adopted to offer those employees whose participation in the 401(k) Plan is
limited an alternative means of receiving comparable benefits. Cullen/Frost's
expenses related to the 1991 Stock Purchase Plan were $123 thousand, $861
thousand and $743 thousand for 1999, 1998 and 1997, respectively.
EXECUTIVE STOCK PLANS --
Cullen/Frost has four executive stock plans and one outside director stock
plan; the 1983 Nonqualified Stock Option Plan ("1983 Plan"), the 1988
Nonqualified Stock Option Plan ("1988 Plan"), the Restricted Stock Plan, the
1992 Stock Plan and the 1997 Outside Directors Stock Plan ("1997 Plan"). The
1992 Stock Plan is an all-inclusive plan, with an aggregate of 8,707,410 shares
of common stock authorized for award. The 1992 Stock Plan has replaced all other
previously approved executive stock plans.
The 1992 Stock Plan allows Cullen/Frost to grant restricted stock,
incentive stock options, nonqualified stock options, stock appreciation rights,
or any combination thereof to certain key executives of the Corporation.
The 1997 Outside Directors Plan allows Cullen/Frost to grant nonqualified
stock options to outside directors. The options may be awarded to outside
directors in such number, and upon such terms, and at any time and from time to
time as determined by the Compensation and Benefits Committee ("Committee").
Each award is evidenced by an award agreement that specifies the option price,
the duration of the option, the number of shares to which the option pertains,
and such other provisions as the Committee determines. The option price for each
grant is at least equal to the fair market value of a share on the date of
grant. Options granted expire at such time as the Committee determines at the
date of grant and in no event does the exercise period exceed a maximum of ten
years.
53
<PAGE> 54
The following is a summary of option transactions in each of the last three
years:
<TABLE>
<CAPTION>
1983 Plan 1988 Plan 1992 Plan
====================== ====================== ===================================
Weighted Weighted Shares Weighted
Options Average Options Average Available Options Average
Outstanding Price Outstanding Price For Grant Outstanding Price
============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, Dec. 31,
1996................ 73,260 $2.42 356,096 $2.60 717,380 2,341,852 $11.28
Authorized........... 2,000,000
Granted.............. (352,000) 352,000 24.10
Exercised............ (20,496) 2.73 (71,430) 2.53 (191,676) 9.15
Canceled............. 18,760 (18,760) 11.33
-------------------------------------------------------------------------------------
Balance, Dec. 31,
1997................ 52,764 2.29 284,666 2.62 2,384,140 2,483,416 13.26
Granted.............. (841,800) 841,800 24.70
Exercised............ (32,492) 2.02 (26,164) 2.21 (126,070) 10.25
Canceled............. 15,080 (15,080) 26.26
-------------------------------------------------------------------------------------
Balance Dec. 31,
1998................ 20,272 2.73 258,502 2.66 1,557,420 3,184,066 16.35
Granted.............. (1,519,000) 1,519,000 24.80
Authorized........... 3,000,000
Exercised............ (77,578) 2.50 (187,262) 11.27
Canceled............. 54,000 (54,000) 21.57
-------------------------------------------------------------------------------------
Balance Dec. 31,
1999................ 20,272 $2.73 180,924 $2.73 3,092,420 4,461,804 $19.37
=====================================================================================
At Dec. 31, 1999
Per Share Price $6.37-$*9.07
Range............... $2.73 $2.73
$11.44-$15.13**
$24.09-$30.31***
Weighted-Average
Remaining * 4.2 Years
Contractual Life.... 1.8 Years 1.8 Years
** 6.5 Years
***9.2 Years
<CAPTION>
1997 Plan
=====================================
Shares Weighted
Available Options Average
For Grant Outstanding Price
===============================================================
<S> <C> <C> <C>
Balance, Dec. 31,
1996................
Authorized........... 300,000
Granted.............. (36,000) 36,000 $22.56
Exercised............
Canceled.............
----------------------------------------
Balance, Dec. 31,
1997................ 264,000 36,000 22.56
Granted.............. (72,000) 72,000 26.88
Exercised............
Canceled.............
----------------------------------------
Balance Dec. 31,
1998................ 192,000 108,000 25.44
Granted.............. (76,000) 76,000 26.63
Authorized...........
Exercised............
Canceled.............
----------------------------------------
Balance Dec. 31,
1999................ 116,000 184,000 $25.93
========================================
At Dec. 31, 1999
Per Share Price
Range............... $22.56-$26.88
Weighted-Average
Remaining
Contractual Life.... 8.8 Years
</TABLE>
* Includes 807,484 options of which 807,484 are exercisable, both with a
weighted-average exercise price of $8.63.
** Includes 1,000,920 options of which 602,696 are exercisable, both with a
weighted-average exercise price of $13.98.
*** Includes 2,653,400 options of which 257,440 are exercisable, both with a
weighted-average exercise price of $24.68.
There were 2,052,816, 1,702,272 and 1,299,956 options exercisable for 1999,
1998, and 1997 with a weighted-average exercise price of $13.07, $10.69 and
$8.33, respectively. The 1999 and 1998 options were awarded having a ten-year
life with a three-year cliff vesting period. In general, options awarded prior
to 1998 had a ten-year life with a five-year vesting period. These plans which
were approved by shareholders were established to enable Cullen/Frost to retain
and motivate key employees. A committee of non-participating directors has sole
authority to select the employees, establish the awards to be issued, and
approve the terms and conditions of each award contract. Cullen/Frost has common
stock reserved for future issuance upon the grant and exercise of options of
8,055,420 shares.
In accounting for the impact of issuing stock options, Cullen/Frost has
elected to continue to follow the requirements of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and Related
Interpretation as allowed by SFAS No. 123, rather than to follow the recognition
requirements of SFAS No. 123, which requires fair value accounting. SFAS No. 123
requires disclosure of proforma net income and earnings per share information
assuming that stock options granted in 1997, 1998 and 1999 have been accounted
for in accordance with the fair value requirements of SFAS No. 123.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options which have
characteristics which are different from Cullen/Frost's employee stock options.
In addition, option valuation models require the input of highly subjective
assumptions which can significantly
54
<PAGE> 55
impact the estimated fair value. As such, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
employee/outside director stock options.
The following weighted-average assumptions were used for 1999, 1998 and
1997, respectively: risk-free interest rates of 5.87 percent, 4.87 percent and
5.37 percent; dividend yield of 3.00 percent, 2.25 percent and 2.00 percent;
volatility factors of the expected market price of Cullen/Frost's common stock
of 24 percent, 23 percent and 19 percent; and weighted-average expected lives of
the options of 8 years. The weighted-average grant-date fair value of options
granted during 1999, 1998 and 1997 was $6.65, $8.36, and $6.59, respectively.
For purposes of proforma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.
Cullen/Frost's proforma information as if compensation expense had been
recognized in accordance with SFAS 123 is summarized below:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT FOR EARNINGS PER SHARE AMOUNTS) 1999 1998 1997
===========================================================================================
<S> <C> <C> <C>
Proforma net income*........................................ $95,091 $74,345 $72,265
Proforma earnings per common share
Basic.................................................. $ 1.78 $ 1.40 $ 1.37
Diluted................................................ 1.77 1.40 1.36
</TABLE>
* Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its proforma effect is not necessarily indicative of its
impact on future years.
In 1999, restricted stock grants of 50,171 were awarded under the 1992
Stock Plan. Restricted stock grants awarded under the 1992 Stock Plan totaled
83,000 and 117,000 shares for 1998 and 1997, respectively. The weighted-average
price for these awards equaled the market price at the date of grant and was
$25.12, $24.65, and $24.10 for 1999, 1998 and 1997, respectively. Deferred
compensation expense related to the restricted stock was $1.6 million in 1999,
$1.5 million in 1998, and $707 thousand in 1997. Restricted shares are generally
awarded under a three-year to four-year cliff vesting period. The market value
of restricted shares at the date of grant is expensed over the restriction
period.
Cullen/Frost has change-in-control agreements with 18 of its executives.
Under seven of these agreements, as revised, each covered person could receive,
in the event of a change in control, one-half of his base compensation upon the
effectiveness of the change in control, and from one and one-half times up to
2.49 times (depending on the executive) of his average annual W-2 compensation
during the previous five years if such person is constructively terminated or
discharged for reasons other than cause within two years following the change in
control. Under the remaining 11 agreements, each covered person could receive
from two times up to 2.99 times (depending on the executive) of his average W-2
compensation during the previous five years if such person is constructively
terminated or discharged for reasons other than cause within two years following
the change in control. These agreements, other than certain instances of stock
appreciation and SERPS, limit payments to avoid being considered "parachute
payments" as defined by the Internal Revenue Code. The maximum contingent
liability under these agreements approximated $13.6 million at December 31,
1999.
The Corporation has no material liability for post-retirement or
post-employment benefits other than pensions.
55
<PAGE> 56
NOTE O -- INCOME TAXES
- ----------------------
The following is an analysis of the Corporation's income taxes included in
the consolidated statements of operations for the years ended December 31, 1999,
1998, and 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998 1997
=========================================================================================
<S> <C> <C> <C>
Current income tax expense.................................. $57,062 $47,669 $46,236
Deferred income tax benefit................................. (6,083) (5,574) (6,681)
---------------------------
Income tax expense as reported.............................. $50,979 $42,095 $39,555
===========================
</TABLE>
The following is a reconciliation of the difference between income tax
expense as reported and the amount computed by applying the statutory income tax
rate to income before income taxes:
<TABLE>
<CAPTION>
Year Ended December 31
==============================
(IN THOUSANDS) 1999 1998 1997
============================================================================================
<S> <C> <C> <C>
Income before income taxes.................................. $148,621 $117,740 $112,522
Statutory rate.............................................. 35% 35% 35%
------------------------------
Income tax expense at the statutory rate.................... 52,017 41,209 39,383
Effect of tax-exempt interest............................... (2,927) (1,820) (1,298)
Amortization of goodwill.................................... 1,910 1,410 1,027
Acquisition costs........................................... 931
Other....................................................... (21) 365 443
------------------------------
Income tax expense as reported.............................. $ 50,979 $ 42,095 $ 39,555
==============================
Tax (expense) benefits related to securities transactions... $ 30 $ (126) $ (174)
==============================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1999, and 1998
are presented below:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
===============================================================================
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses..................... $20,421 $18,766
Building modification reserve.......................... 1,592 1,592
Gain on sale of assets................................. 1,064 1,079
Unrealized loss on securities available for sale....... 21,059
Retirement plan........................................ 2,450 903
Other.................................................. 1,421 698
-----------------
Total gross deferred tax assets................... $48,007 $23,038
Deferred tax liabilities:
Prepaid expenses....................................... $ (508) $ (569)
Unrealized gain on securities available for sale....... (4,172)
Intangible assets...................................... (6,239) (3,896)
Bank premises and equipment............................ (323) (351)
Other.................................................. (1,144) (500)
-----------------
Total gross deferred tax liabilities.............. (8,214) (9,488)
-----------------
Net deferred tax asset............................ $39,793 $13,550
=================
</TABLE>
At December 31, 1999 and 1998, no valuation allowance for deferred tax
assets was necessary because they were supported by recoverable taxes paid in
prior years.
56
<PAGE> 57
NOTE P -- NON-INTEREST EXPENSE
- ------------------------------
Significant components of other non-interest expense for the years ended
December 31, 1999, 1998, and 1997 are presented below:
<TABLE>
<CAPTION>
Year Ended December 31
=============================
(IN THOUSANDS) 1999 1998 1997
===========================================================================================
<S> <C> <C> <C>
Outside computer service.................................... $ 9,537 $ 9,380 $ 7,936
Other professional expenses................................. 5,867 6,327 5,793
Stationery, printing and supplies........................... 6,676 6,024 5,850
Armored motor service....................................... 4,441 3,946 3,497
Postage and express......................................... 4,154 3,830 3,558
Other....................................................... 47,666 46,337 38,880
-----------------------------
Total.................................................. $78,341 $75,844 $65,514
=============================
</TABLE>
NOTE Q -- CASH FLOW DATA
- ------------------------
For purposes of reporting cash flow, cash and cash equivalents include the
following:
<TABLE>
<CAPTION>
December 31
================================
(IN THOUSANDS) 1999 1998 1997
=============================================================================================
<S> <C> <C> <C>
Cash and due from banks.................................... $760,612 $684,941 $637,613
Time deposits.............................................. 6,546
Federal funds sold and securities purchased under resale
agreements............................................... 34,950 102,900 190,000
--------------------------------
Total................................................. $802,108 $787,841 $827,613
================================
</TABLE>
Generally, Federal funds are sold for one-day periods and securities
purchased under resale agreements are held for less than thirty-five days.
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
================================
(IN THOUSANDS) 1999 1998 1997
=============================================================================================
<S> <C> <C> <C>
Cash paid:
Interest.............................................. $147,036 $164,150 $144,512
Income Taxes.......................................... 57,549 45,968 39,391
Non-cash items:
Loans originated to facilitate the sale of foreclosed
assets.............................................. 278 269 1,690
Loan foreclosures..................................... 2,766 1,995 4,240
</TABLE>
57
<PAGE> 58
NOTE R -- FAIR VALUES OF FINANCIAL INSTRUMENTS
- ----------------------------------------------
Fair Values of Financial Instruments -- SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments" requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
This disclosure does not and is not intended to represent the fair value of
Cullen/Frost.
The following methods and assumptions were used by Cullen/Frost in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
consolidated balance sheet, for cash and due from banks, including time
deposits, and Federal funds sold and securities purchased under resale
agreements, approximates their fair value.
Securities: Estimated fair values are based on quoted market prices, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for certain mortgage loans are based on quoted market prices of
similar loans sold, adjusted for differences in loan characteristics. The fair
value for other loans is estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. The carrying amount of accrued interest approximated
its fair value.
Deposits: SFAS No. 107 defines the fair value of demand deposits as the
amount payable on demand, and prohibits adjusting fair value for any deposit
base intangible. The deposit base intangible is not considered in the fair value
amounts. The carrying amounts for variable-rate money market accounts
approximate their fair value. The fair value of fixed-term certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities.
Short-term borrowings: The carrying amount reported in the consolidated
balance sheet approximates the estimated fair value.
Loan commitments, standby and commercial letters of credit: Cullen/Frost's
lending commitments have variable interest rates and "escape" clauses if the
customer's credit quality deteriorates. Therefore the amounts committed
approximate fair value.
Guaranteed preferred beneficial interest in the Corporation's junior
subordinated deferrable interest debentures: The fair value of the Trust
Preferred Capital Securities is estimated based on the quoted market prices of
the instruments.
Interest rate swaps: The estimated fair value of the existing agreements
are based on quoted market prices.
58
<PAGE> 59
The estimated fair values of Cullen/Frost's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31
=================================================
1999 1998
----------------------- -----------------------
ESTIMATED Estimated
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
================================================================================================
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............... $ 802,108 $ 802,108 $ 787,841 $ 787,841
Securities.............................. 1,629,911 1,630,493 2,091,703 2,093,946
Loans................................... 4,166,728 4,153,626 3,646,603 3,678,077
Allowance for loan losses............... (58,345) (53,616)
-------------------------------------------------
Net loans.......................... 4,108,383 4,153,626 3,592,987 3,678,077
Financial liabilities:
Deposits................................ 5,953,832 5,792,352 5,845,487 5,845,859
Short-term borrowings................... 356,979 356,979 305,564 305,564
Guaranteed preferred beneficial interest
in the Corporation's junior
subordinated deferrable interest
debentures, net....................... 98,513 94,230 98,458 108,340
Off-balance sheet instruments:
Interest rate swaps..................... 211 (2,505)
</TABLE>
NOTE S -- DERIVATIVE FINANCIAL INSTRUMENTS
- ------------------------------------------
Cullen/Frost uses off-balance sheet interest rate swaps to hedge its
interest rate risk. These swap transactions allow management to structure the
interest rate sensitivity of the asset side of the Corporation's balance sheet
to more closely match its view of the interest rate sensitivity of the
Corporation's funding sources. Cullen/Frost had 30 interest rate swaps at
December 31, 1999 compared to 22 interest rate swaps at December 31, 1998. In
1999, each swap was a hedge against a specific commercial fixed-rate loan or
against a specific pool of commercial floating-rate loans, with a notional
amount of $259 million. In 1998 each swap was a hedge against a specific
commercial fixed-rate loan or against a specific pool of consumer fixed-rate
loans with a notional amount of $75 million. For 1999 and 1998, in each case,
the amortization of the interest rate swap effectively matched the expected
amortization of the underlying loan or pool of loans with lives ranging from
approximately one and one-half to ten years. These interest rate contracts
involve the risk of dealing with counterparties and their ability to meet
contractual terms. Each counterparty to a swap transaction has a credit rating
that is investment grade. The net amount payable or receivable under interest
rate swaps/floors is accrued as an adjustment to interest income and was not
material in 1999 or 1998. In the third quarter of 1998, Cullen/Frost terminated
interest rate swaps hedging fixed rate consumer loans. Cullen/Frost is
amortizing the loss on the transaction of $1.9 million over the remaining term
of the interest swaps ending in the second quarter of 2002. During 1998,
Cullen/Frost terminated all three of its interest rate floor agreements with a
notional amount totaling $500 million and an original term of three years. These
interest rate floors were purchased in 1997 for the purpose of hedging floating
interest rate exposure in commercial loan accounts in an environment of falling
interest rates. Cullen/Frost is amortizing the gain on the transaction of $2.8
million over the remaining term of the interest rate floors.
Cullen/Frost's credit exposure on interest rate swaps/floors is limited to
Cullen/Frost's net favorable value and interest payments of all swaps/floors to
each counterparty. In such cases collateral is required from the counterparties
involved if the net value of the swaps/floors exceeds a nominal amount
considered to be immaterial. At December 31, 1999, the Corporation's credit
exposure relating to interest rate swaps/floors was immaterial. The fair value
and related carrying amounts of the interest rate swaps can be found in Note R
on page 58.
59
<PAGE> 60
Activity in the notional amounts of end-user derivatives for each of the
three years ended December 31, 1999, 1998 and 1997, is summarized as follows:
<TABLE>
<CAPTION>
Amortizing
Interest Rate Interest Rate Total
(in millions) Swaps Floors Derivatives
=========================================================================================================
<S> <C> <C> <C>
Balance, January 1, 1997.................................. $ 251 $ 251
Additions............................................ 125 $ 500 625
Amortization and maturities.......................... (89) (89)
Terminations......................................... (20) (20)
----------------------------------------
Balance, December 31, 1997................................ 267 500 767
Additions............................................ 19 19
Amortization and maturities.......................... (55) (55)
Terminations......................................... (156) (500) (656)
----------------------------------------
Balance, December 31, 1998................................ 75 -- 75
Additions............................................ 239 239
Amortization and maturities.......................... (54) (54)
Terminations......................................... (1) (1)
----------------------------------------
Balance, December 31, 1999................................ $ 259 $ -- $ 259
========================================
</TABLE>
NOTE T -- CONTINGENCIES
- -----------------------
Certain subsidiaries of Cullen/Frost are defendants in various matters of
litigation which have arisen in the normal course of conducting a commercial
banking business. In the opinion of management, the disposition of such pending
litigation will not have a material effect on Cullen/Frost's consolidated
financial position.
NOTE U -- SUBSEQUENT EVENTS (UNAUDITED)
- ---------------------------------------
PENDING ACQUISITION
On January 27, 2000 Frost Insurance Agency, a subsidiary of The Frost
National Bank signed a letter of intent to acquire 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. The
transaction is subject to regulatory approval and is expected to close in the
second quarter of 2000. The purchase method of accounting will be used to record
the transaction.
PENDING MERGER
On February 17, 2000, Cullen/Frost announced that United States National
Bank of Galveston, member bank of Cullen/Frost since 1982, will merge its
charter into Frost National Bank. United States National Bank's two branches in
Galveston will be converted to Frost Bank branches. It is expected that the
merger will be effective in the second quarter of 2000.
60
<PAGE> 61
NOTE V -- 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, insurance,
and brokerage services. These business units were identified through the
products and services that are offered within each unit.
The accounting policies of each reportable segment are the same as those of
the Corporation described in Note A, 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>
1999
NET INTEREST INCOME (EXPENSE)................... $297,636 $ 8,077 $ (8,735) $296,978
PROVISION FOR LOAN LOSSES....................... 12,426 1 12,427
NON-INTEREST INCOME............................. 102,071 53,808 1,206 157,085
NON-INTEREST EXPENSE............................ 243,547 38,404 11,064 293,015
------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES............... 143,734 23,480 (18,593) 148,621
INCOME TAX EXPENSE (CREDIT)..................... 50,307 8,218 (7,546) 50,979
------------------------------------------------
NET INCOME (LOSS)............................... $ 93,427 $15,262 $(11,047) $ 97,642
================================================
AVERAGE ASSETS (IN MILLIONS).................... $ 6,841 $ 34 $ N/M $ 6,875
==================================================================================================
1998
Net interest income (expense)................... $270,261 $ 6,456 $ (8,744) $267,973
Provision for loan losses....................... 10,337 56 10,393
Non-interest income............................. 84,820 53,162 684 138,666
Non-interest expense............................ 223,473 37,282 5,507 266,262
------------------------------------------------
Earnings (loss) before income taxes............. 121,271 22,280 (13,567) 129,984*
Income tax expense (credit)..................... 42,445 7,783 (5,400) 44,828
------------------------------------------------
Operating earnings (loss)....................... $ 78,826 $14,497 $ (8,167) $ 85,156*
================================================
Average assets (in millions).................... $ 6,413 $ 31 $ N/M $ 6,418
==================================================================================================
1997
Net interest income (expense)................... $236,998 $ 6,100 $ (7,963) $235,135
Provision for loan losses....................... 9,169 5 9,174
Non-interest income............................. 73,136 48,220 346 121,702
Non-interest expense............................ 195,870 34,507 4,764 235,141
------------------------------------------------
Income (loss) before income taxes............... 105,095 19,808 (12,381) 112,522
Income tax expense (credit)..................... 36,783 6,930 (4,158) 39,555
------------------------------------------------
Net income (loss)............................... $ 68,312 $12,878 $ (8,223) $ 72,967
================================================
Average assets (in millions).................... $ 5,654 $ 24 $ N/M $ 5,688
==================================================================================================
</TABLE>
* Excludes the after-tax impact of the $12.2 million Overton merger related
charge. See discussion on page 15.
61
<PAGE> 62
NOTE W -- CONDENSED PARENT CORPORATION FINANCIAL STATEMENTS
- -----------------------------------------------------------
Condensed financial information of the Parent Corporation as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999 follows:
<TABLE>
<CAPTION>
Year Ended December 31
===========================
STATEMENT OF OPERATIONS (IN THOUSANDS) 1999 1998 1997
=========================================================================================
<S> <C> <C> <C>
INCOME:
Dividends from second tier bank holding company
subsidiary............................................. $81,444 $91,673 $23,514
Interest and other...................................... 3,851 2,943 5,075
---------------------------
TOTAL INCOME........................................ 85,295 94,616 28,589
EXPENSES:
Salaries and employee benefits.......................... 4,645 6,698 3,350
Interest expense........................................ 8,735 8,761 7,962
Other................................................... 1,534 6,635 1,414
---------------------------
TOTAL EXPENSES...................................... 14,914 22,094 12,726
---------------------------
INCOME BEFORE INCOME TAX CREDITS AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARIES............ 70,381 72,522 15,863
Income tax credits.......................................... 4,394 4,812 2,326
Equity in undistributed net income of subsidiaries.......... 22,867 (1,689) 54,778
---------------------------
NET INCOME.......................................... $97,642 $75,645 $72,967
===========================
</TABLE>
<TABLE>
<CAPTION>
December 31
===================
BALANCE SHEETS (IN THOUSANDS) 1999 1998
=================================================================================
<S> <C> <C>
ASSETS
Cash........................................................ $ 421 $ 304
Securities purchased under resale agreements................ 71,330 100,830
Loans to non-bank subsidiaries.............................. 52
Investment in second tier bank holding company subsidiary... 553,655 527,124
Other....................................................... 3,275 2,370
-------------------
TOTAL ASSETS........................................ $628,681 $630,680
===================
LIABILITIES
Other....................................................... $ 17,764 $ 16,210
Guaranteed preferred beneficial interest in the
Corporation's junior subordinated deferrable interest
debentures................................................ 101,606 101,551
-------------------
TOTAL LIABILITIES................................... 119,370 117,761
SHAREHOLDERS' EQUITY........................................ 509,311 512,919
-------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $628,681 $630,680
===================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
===============================
STATEMENTS OF CASH FLOWS (IN THOUSANDS) 1999 1998 1997
=============================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 97,642 $ 75,645 $ 72,967
Adjustments to reconcile net income to net cash provided by
operating activities:
Net income of subsidiaries.............................. (104,311) (89,984) (78,292)
Dividends from subsidiaries............................. 81,444 91,673 23,514
Net change in other liabilities and assets.............. 1,328 5,557 1,523
-------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 76,103 82,891 19,712
INVESTING ACTIVITIES
Capital contributions to subsidiaries....................... (50,521) (88,211)
Decrease in loans........................................... 52 160
-------------------------------
NET CASH USED BY INVESTING ACTIVITIES............... (50,469) (88,051)
FINANCING ACTIVITIES
Proceeds from issuance of guaranteed preferred beneficial
interest in the Corporation's junior subordinated
deferrable interest debentures............................ 101,446
Purchase of treasury stock.................................. (24,318) (3,495) (17,834)
Net proceeds from issuance of common stock.................. 5,314 7,983 3,735
Cash dividends.............................................. (36,013) (30,476) (22,256)
-------------------------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES.... (55,017) (25,988) 65,091
-------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.... (29,383) 56,903 (3,248)
Cash and cash equivalents at beginning of year.............. 101,134 44,231 47,479
-------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR............ $ 71,751 $101,134 $ 44,231
===============================
</TABLE>
62
<PAGE> 63
Report of Ernst & Young LLP
Independent Auditors
SHAREHOLDERS AND BOARD OF DIRECTORS
CULLEN/FROST BANKERS, INC.
We have audited the accompanying consolidated balance sheets of
Cullen/Frost Bankers, Inc. and Subsidiaries (Cullen/Frost or Corporation) as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
consolidated financial statements give retroactive effect to the merger of
Cullen/Frost and Overton Bancshares, Inc. and Subsidiaries (Overton) on May 29,
1998, which has been accounted for using the pooling of interests method as
described in Note B to the consolidated financial statements. We did not audit
the consolidated financial statements of Overton for the year ended December 31,
1997, which statements reflect net interest income of 16 percent in 1997 of the
related Cullen/Frost's consolidated totals. Those Overton statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Overton, is based solely on
the report of other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Cullen/Frost Bankers, Inc. and
Subsidiaries at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
San Antonio, Texas
February 4, 2000
63
<PAGE> 64
CONSOLIDATED AVERAGE BALANCE SHEETS
(dollars in thousands -- taxable-equivalent basis)
The following unaudited schedule is presented for additional information
and analysis.
<TABLE>
<CAPTION>
Year Ended December 31
1999 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........................................ $ 3,103 $ 164 5.27%
Securities:
U.S. Treasury.................................... 176,718 8,976 5.08 $ 262,098 $ 14,339 5.47%
U.S. Government agencies and corporations........ 1,478,519 95,491 6.46 1,557,489 99,971 6.42
States and political subdivisions:
Tax-exempt................................... 141,224 10,377 7.35 66,278 4,963 7.49
Taxable...................................... 3,585 229 6.38 2,229 138 6.19
Other............................................ 38,803 2,203 5.68 42,025 2,579 6.14
---------- -------- ---------- --------
Total securities......................... 1,838,849 117,276 6.38 1,930,119 121,990 6.32
Federal funds sold and securities purchased under
resale agreements.................................. 81,363 4,245 5.22 127,273 7,111 5.59
Loans, net of unearned discount...................... 3,934,406 330,397 8.40 3,437,510 301,789 8.78
---------- -------- ---------- --------
TOTAL EARNING ASSETS AND AVERAGE RATE EARNED..... 5,857,721 452,082 7.72 5,494,902 430,890 7.84
Cash and due from banks.............................. 619,917 577,489
Allowance for possible loan losses................... (57,481) (51,230)
Banking premises and equipment....................... 141,453 135,577
Accrued interest and other assets.................... 313,826 260,831
---------- ----------
TOTAL ASSETS..................................... $6,875,436 $6,417,569
========== ==========
LIABILITIES:
Demand deposits:
Commercial and individual........................ $1,533,160 $1,387,824
Correspondent banks.............................. 221,530 195,555
Public funds..................................... 37,567 43,507
---------- ----------
Total demand deposits........................ 1,792,257 1,626,886
Time deposits:
Savings and Interest-on-Checking................. 948,487 6,557 0.69 901,960 10,958 1.21
Money market deposit accounts.................... 1,636,915 60,478 3.69 1,387,994 54,326 3.91
Time accounts.................................... 1,250,340 53,815 4.30 1,286,036 63,621 4.95
Public funds..................................... 220,845 7,969 3.61 251,570 9,378 3.73
---------- -------- ---------- --------
Total time deposits...................... 4,056,587 128,819 3.18 3,827,560 138,283 3.61
---------- ----------
Total deposits........................... 5,848,844 5,454,446
Federal funds purchased and securities sold under
repurchase agreements.............................. 285,470 12,500 4.38 252,977 11,606 4.59
Guaranteed preferred beneficial interests in the
Corporation's junior subordinated deferrable
interest debentures, net........................... 98,485 8,475 8.61 98,429 8,475 8.61
Long-term notes payable.............................. 1,793 103 5.74
Other borrowings..................................... 12,186 705 5.79 30,666 1,754 5.72
---------- -------- ---------- --------
TOTAL INTEREST-BEARING FUNDS AND AVERAGE RATE
PAID........................................... 4,454,521 150,602 3.38 4,209,632 160,118 3.80
-------- ---- -------- ----
Accrued interest and other liabilities............... 105,888 91,093
---------- ----------
TOTAL LIABILITIES................................ 6,352,666 5,927,611
SHAREHOLDERS' EQUITY................................. 522,770 489,958
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $6,875,436 $6,417,569
========== ==========
Net interest income.................................. $301,480 $270,772
======== ========
Net interest spread.................................. 4.34% 4.04%
==== ====
Net interest income to total average earning
assets............................................. 5.15% 4.93%
==== ====
</TABLE>
The above information is shown on a taxable-equivalent basis assuming a 35
percent tax rate. Non-accrual loans are included in the average loan amounts
outstanding for these computations.
64
<PAGE> 65
<TABLE>
<CAPTION>
Year Ended December 31
=================================================================================================================================
1997 1996 1995 1994
- ------------------------------ ------------------------------ ------------------------------ ------------------------------
Interest Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost Balance Expense Cost
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 301,133 $ 16,596 5.51% $ 282,692 $ 15,049 5.32% $ 238,968 $ 14,142 5.92% $ 362,881 $ 16,616 4.58%
1,374,202 90,688 6.60 1,439,744 95,838 6.66 1,447,288 93,373 6.45 1,438,632 85,507 5.94
36,888 2,850 7.73 29,863 2,340 7.84 27,128 2,211 8.15 20,555 1,729 8.41
3,185 239 7.50 1,783 118 6.62 605 39 6.45 320 20 6.25
11,317 686 6.06 6,723 389 5.79 9,314 593 6.37 30,908 1,711 5.54
- ---------- -------- ---------- -------- ---------- -------- ---------- --------
1,726,725 111,059 6.43 1,760,805 113,734 6.46 1,723,303 110,358 6.40 1,853,296 105,583 5.70
228,245 12,423 5.44 143,401 7,476 5.21 121,122 6,957 5.74 109,563 4,217 3.85
2,917,371 262,569 9.00 2,445,777 220,417 9.01 1,971,681 181,597 9.21 1,552,249 126,039 8.12
- ---------- -------- ---------- -------- ---------- -------- ---------- --------
4,872,341 386,051 7.92 4,349,983 341,627 7.85 3,816,106 298,912 7.83 3,515,108 235,839 6.71
527,924 508,934 400,270 358,927
(44,837) (39,814) (31,969) (29,214)
124,629 117,352 102,920 99,518
207,520 177,040 156,229 144,359
- ---------- ---------- ---------- ----------
$5,687,577 $5,113,495 $4,443,556 $4,088,698
========== ========== ========== ==========
$1,143,828 $ 979,757 $ 814,169 $ 773,912
192,231 199,983 131,295 124,416
44,183 45,200 42,033 40,293
- ---------- ---------- ---------- ----------
1,380,242 1,224,940 987,497 938,621
818,216 10,764 1.32 741,102 10,176 1.37 741,003 13,195 1.78 880,969 15,923 1.81
1,195,773 48,816 4.08 1,053,819 40,208 3.82 801,081 29,631 3.70 638,277 18,294 2.87
1,205,261 59,867 4.97 1,145,194 56,110 4.90 1,057,100 52,509 4.97 939,493 32,273 3.44
269,027 11,693 4.35 245,266 10,685 4.36 125,971 5,450 4.33 92,092 2,705 2.94
- ---------- -------- ---------- -------- ---------- -------- ---------- --------
3,488,277 131,140 3.76 3,185,381 117,179 3.68 2,725,155 100,785 3.70 2,550,831 69,195 2.71
- ---------- ---------- ---------- ----------
4,868,519 4,410,321 3,712,652 3,489,452
189,468 8,739 4.61 204,515 9,761 4.77 290,636 15,150 5.21 220,367 8,177 3.71
88,745 7,652 8.62
25,794 1,434 5.56 19,389 1,019 5.26 12,514 733 5.86
- ---------- -------- ---------- -------- ---------- -------- ---------- --------
3,792,284 148,965 3.93 3,409,285 127,959 3.75 3,028,305 116,668 3.85 2,771,198 77,372 2.79
-------- ---- -------- ---- -------- ---- -------- ----
69,601 76,583 67,940 61,579
- ---------- ---------- ---------- ----------
5,242,127 4,710,808 4,083,742 3,771,398
445,450 402,687 359,814 317,300
- ---------- ---------- ---------- ----------
$5,687,577 $5,113,495 $4,443,556 $4,088,698
========== ========== ========== ==========
$237,086 $213,668 $182,244 $158,467
======== ======== ======== ========
3.99% 4.10% 3.98% 3.92%
==== ==== ==== ====
4.87% 4.91% 4.78% 4.51%
==== ==== ==== ====
</TABLE>
65
<PAGE> 66
FINANCIAL STATISTICS
(dollars in thousands)
The following unaudited schedules and statistics are presented for
additional information and analysis.
RATE/VOLUME ANALYSIS
- --------------------
<TABLE>
<CAPTION>
1999/1998 1998/1997
================================= =================================
INCREASE (DECREASE) Increase (Decrease)
DUE TO CHANGE IN TOTAL Due to Change in Total
-------------------- OR NET -------------------- or Net
AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE
RATE BALANCE (DECREASE) RATE BALANCE (DECREASE)
============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Changes in interest earned on:
Time deposits...................... $ 164 $ 164
Securities:
U.S. Treasury................... $ (966) (4,397) (5,363) $ (121) $ (2,136) $ (2,257)
U.S. Government agencies and
corporations.................. 617 (5,097) (4,480) (2,538) 11,821 9,283
States and political
subdivisions
Tax-exempt.................... (95) 5,509 5,414 (90) 2,203 2,113
Taxable....................... 4 87 91 (64) (37) (101)
Other........................... (186) (190) (376) 9 1,884 1,893
Federal funds sold................. (444) (2,422) (2,866) 321 (5,633) (5,312)
Loans.............................. (13,558) 42,166 28,608 (6,584) 45,804 39,220
---------------------------------------------------------------------
Total...................... (14,628) 35,820 21,192 (9,067) 53,906 44,839
Changes in interest paid on:
Savings, Interest-on-Checking...... 4,940 (539) 4,401 859 (1,053) (194)
Money market deposits accounts..... 3,175 (9,327) (6,152) 2,080 (7,590) (5,510)
Time accounts and public funds..... 8,374 2,841 11,215 1,833 (3,272) (1,439)
Federal funds purchased and
securities sold under repurchase
agreements...................... 546 (1,440) (894) 47 (2,914) (2,867)
Long-term notes payable and other
borrowings...................... (16) 962 946 (31) (1,112) (1,143)
---------------------------------------------------------------------
Total...................... 17,019 (7,503) 9,516 4,788 (15,941) (11,153)
---------------------------------------------------------------------
Changes in net interest income....... $ 2,391 $28,317 $30,708 $(4,279) $ 37,965 $ 33,686
=====================================================================
</TABLE>
The allocation of the rate/volume variance has been made on a pro-rata basis
assuming absolute values. The above information is shown on a taxable-equivalent
basis assuming a 35 percent tax rate.
LOAN MATURITY AND SENSITIVITY
- -----------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1999
================================================
DUE IN AFTER ONE, AFTER
ONE YEAR BUT WITHIN FIVE
OR LESS FIVE YEARS YEARS TOTAL
================================================================================================
<S> <C> <C> <C> <C>
Real estate construction and land loans....... $ 287,315 $ 142,973 $ 78,037 $ 508,325
Other real estate loans....................... 90,202 285,550 446,153 821,905
All other loans............................... 887,501 572,652 191,718 1,651,871
------------------------------------------------
Total.................................... $1,265,018 $1,001,175 $715,908 $2,982,101
================================================
Loans with fixed interest rates............... $ 386,489 $ 346,406 $397,458 $1,130,353
Loans with floating interest rates............ 878,529 654,769 318,450 1,851,748
------------------------------------------------
Total.................................... $1,265,018 $1,001,175 $715,908 $2,982,101
================================================
</TABLE>
Loans for 1-4 family housing totaling $650 million and consumer loans totaling
$541 million and unearned income of $6 million are not included in the amounts
in the table.
66
<PAGE> 67
MATURITY DISTRIBUTION AND SECURITIES PORTFOLIO YIELDS
- -----------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1999
======================================================================================
Maturity
--------------------------------------------------------------------------------------
Within 1 Year 1-5 Years 5-10 Years After 10 Years
------------------- ------------------- ------------------ ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
(in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Government agencies
and corporations........ $10,011 8.31% $ 72,402 9.91%
States and political
subdivisions............ $ 920 7.42% 1,662 10.00
Other..................... $ 25 7.64% 25 7.00
--------------------------------------------------------------------------------------
Total securities held
to maturity......... $ 25 7.64% $ 945 4.88% $11,673 8.05% $ 72,402 9.91%
======================================================================================
Available for sale:
U.S. Treasury............. $113,331 5.31% $ 4,799 5.51%
U.S. Government agencies
and corporations........ 48,944 6.83 117,710 6.53 $16,091 6.33% $1,059,282 6.52%
States and political
subdivisions............ 4,154 7.88 29,828 7.62 43,461 6.98 73,293 6.83
Other..................... 33,972 5.83
--------------------------------------------------------------------------------------
Total securities
available for
sale................ $166,429 5.75% $152,337 6.19% $59,552 5.02% $1,166,547 6.37%
======================================================================================
<CAPTION>
December 31, 1999
=====================
Maturity
---------------------
Total Carrying Amount
---------------------
Weighted
Average
(in thousands) Amount Yield
=================================================
<S> <C> <C>
Held to maturity:
U.S. Government agencies
and corporations........ $ 82,413 9.72%
States and political
subdivisions............ 2,582 9.08
Other..................... 50 7.32
---------------------
Total securities held
to maturity......... $ 85,045* 9.60%
=====================
Available for sale:
U.S. Treasury............. $ 118,130 5.31%
U.S. Government agencies
and corporations........ 1,242,027 6.53
States and political
subdivisions............ 150,736 7.06
Other..................... 33,972 5.83
---------------------
Total securities
available for
sale................ $1,544,865* 6.23%
=====================
</TABLE>
Weighted average yields have been computed on a fully taxable-equivalent basis
assuming a tax rate of 35%.
* Included in the totals are mortgage-backed securities and collateralized
mortgage obligations of $1.3 billion which are included in maturity categories
based on their stated maturity date.
QUARTERLY RESULTS OF OPERATIONS
- -------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1999 Three Months Ended 1998
========================================= =========================================
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MAR 31 JUNE 30 SEPT 30 DEC 31 MAR 31* JUNE 30 SEPT 30 DEC 31
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income.................... $109,167 $109,063 $112,466 $116,884 $104,072 $106,240 $107,920 $109,859
Interest expense................... 37,727 36,156 37,297 39,422 40,014 40,018 40,250 39,836
Net interest income................ 71,440 72,907 75,169 77,462 64,058 66,222 67,670 70,023
Provision for possible loan losses... 3,000 2,975 2,976 3,476 2,579 2,600 2,555 2,659
(Loss)gain on securities transactions... (68) (18) 73 71 67 148
Non-interest income**.............. 38,361 38,195 39,663 40,866 33,462 35,004 36,009 34,191
Non-interest expense***............ 70,076 71,480 74,555 76,904 64,853 79,028 67,398 67,227
Income before income taxes......... 36,725 36,647 37,301 37,948 30,088 19,598 33,726 34,328
Income taxes....................... 12,430 12,559 12,928 13,062 10,675 8,142 11,728 11,550
Net income......................... 24,295 24,088 24,373 24,886 19,413 11,456 21,998 22,778
Net income per diluted common share... .44 .44 .45 .46 .35 .21 .40 .42
</TABLE>
* All financial information has been restated for the merger with Overton
Bancshares, Inc. accounted for as a pooling-of-interests.
** Includes (loss) gain on securities transactions.
*** Includes a merger related charge of $12.2 million associated with the
second quarter 1998 merger with Overton Bancshares, Inc. Without the merger
related charge after-tax operating earnings per diluted common share for
the second quarter of 1998 were $.38.
67
<PAGE> 68
CULLEN/FROST BANKERS, INC. AND SUBSIDIARIES
BANK SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
===================================================================================================
DECEMBER 31, 1999
------------------------------------
TOTAL TOTAL TOTAL
ASSETS LOANS DEPOSITS
====================================
<S> <C> <C> <C>
Frost National Bank......................................... $6,868,318 $4,103,284 $5,832,133
San Antonio, Austin, Boerne/Fair Oaks, Corpus Christi,
Dallas, Fort Worth, Houston, McAllen, New Braunfels,
San Marcos
Main Office:
P. O. Box 1600, 100 West Houston Street
San Antonio, Texas 78296 (210)220-4011
United States National Bank................................. 133,534 63,200 122,882
P. O. Box 179, 2201 Market Street
Galveston, Texas 77553 (409)763-1151
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- -------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information regarding directors and executive officers called for by
Item 10 is incorporated herein by reference to Cullen/Frost's Proxy Statement
for its Annual Meeting of Shareholders to be held May 31, 2000.
The additional information regarding executive officers called for by Item
10 is included in Part I, Item 1 of this document under the heading "Executive
Officers of the Registrant".
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information called for by Item 11 is incorporated herein by reference
to Cullen/Frost's Proxy Statement for its Annual Meeting of Shareholders to be
held May 31, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information called for by Item 12 is incorporated herein by reference
to Cullen/Frost's Proxy Statement for its Annual Meeting of Shareholders to be
held May 31, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information called for by Item 13 is incorporated herein by reference
to Cullen/Frost's Proxy Statement for its Annual Meeting of Shareholders to be
held May 31, 2000.
68
<PAGE> 69
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
1. Financial Statements -- Reference is made to Part II, Item 8, of
this Annual Report on Form 10-K.
2. The Financial Statement Schedules are omitted, as the required
information is included as a part of this Annual Report.
3. Exhibits -- The following exhibits are filed as a part of this
Annual Report on Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
3.1 -- Articles of Incorporation, of Cullen/Frost Bankers, Inc.
as amended (10)
3.2 -- Amended By-Laws of Cullen/Frost Bankers, Inc. (8)
4.1 -- Shareholder Protection Rights Agreement dated as of
February 1, 1999 between Cullen/Frost Bankers, Inc. and
The Frost National Bank, as Rights Agent (12)
10.1 -- Restoration of Retirement Income Plan for Participants in
the Retirement Plan for Employees of Cullen/Frost
Bankers, Inc. and its Affiliates (as amended and
restated) (11)*
10.2 -- 1983 Non-qualified Stock Option Plan, as amended (1)
10.3 -- Form of Revised Change-In-Control Agreements with four
Executive Officers (3)*
10.4 -- 1988 Non-qualified Stock Option Plan (2)*
10.5 -- The 401(k) Stock Purchase Plan for employees of
Cullen/Frost Bankers, Inc. and its Affiliates (4)*
10.6 -- 1991 Thrift Incentive Stock Purchase Plan for Employees
of Cullen/Frost Bankers, Inc. and its Affiliates (5)*
10.7 -- Cullen/Frost Bankers, Inc. Restricted Stock Plan (6)*
10.8 -- Cullen/Frost Bankers, Inc. Supplemental Executive
Retirement Plan (7)*
10.9 -- Form of Revised Change-In-Control Agreements with one
Executive Officer (7)*
10.10 -- Cullen/Frost Bankers, Inc. 1997 Directors Stock Plan (9)
10.11 -- Cullen/Frost Bankers, Inc. 1992 Stock Plan, as amended
(9)
19.1 -- Annual Report on Form 11-K for the Year Ended December
31, 1999, for the 1991 Thrift Incentive Stock Purchase
Plan (filed pursuant to Rule 15d-21 of the Securities and
Exchange Act of 1934)(13)
19.2 -- Annual Report on Form 11-K for the Year Ended December
31, 1999, for the 401(k) Stock Purchase Plan (filed
pursuant to Rule 15d-21 of the Securities and Exchange
Act of 1934)(13)
21 -- Subsidiaries of Cullen/Frost Bankers, Inc.
23.1 -- Consent of Independent Auditors
23.2 -- Consent of PricewaterhouseCoopers LLP Independent
Auditors for Overton Bancshares, Inc.
24 -- Power of Attorney
27 -- Financial Date Schedule (EDGAR Version)
99 -- Report of PricewaterhouseCoopers LLP on Overton
Bancshares, Inc. financial statements as of December 31,
1997 and for each of the years in the two year period
ended December 31, 1997.
</TABLE>
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 601 of Regulation S-K.
(b) Reports on Form 8-K -- No such reports were filed during the quarter
ended December 31, 1999.
69
<PAGE> 70
- ---------------
(1) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed September 5, 1989 (File No.
33-30776)
(2) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed September 5, 1989 (File No.
33-30777)
(3) Incorporated herein by reference to the designated Exhibits to the
Cullen/Frost Annual Report on Form 10-K for the Year Ended December 31,
1989 (File No. 0-7275)
(4) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed October 31, 1990 (File No.
33-37500)
(5) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed March 18, 1991 (File No. 33-39478)
(6) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed October 20, 1992 (File No.
33-53492)
(7) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual Report on Form 10-K for the Year Ended December 31,
1994 (File No. 0-7275)
(8) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual Report on Form 10-K/A for the Year Ended December 31,
1995 (File No. 0-7275)
(9) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual Report on Form 10-K for the Year Ended December 31,
1997 (File No. 0-7275)
(10) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form 8-A12B/A filed on August 31, 1998 (File No.
0-7275)
(11) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual report on Form 10-K for the Year Ended December 31,
1998 (File No. 0-7275)
(12) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Current Report on Form 8-A12G/A dated February 1, 1999 (File
No. 0-7275)
(13) To be filed as an amendment.
70
<PAGE> 71
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
Date: March 30, 2000 CULLEN/FROST BANKERS, INC.
(Registrant)
By: /s/ PHILLIP D. GREEN
----------------------------------
PHILLIP D. GREEN
SENIOR EXECUTIVE VICE PRESIDENT
AND
CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 30, 2000.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
T.C. FROST* Senior Chairman of the Board
- ----------------------------------------------------- and Director
T.C. FROST
RICHARD W. EVANS, JR.* Chairman of the Board and
- ----------------------------------------------------- Director (Principal Executive
RICHARD W. EVANS, JR. Officer)
R. DENNY ALEXANDER* Director
- -----------------------------------------------------
R. DENNY ALEXANDER
ISAAC ARNOLD, JR.* Director
- -----------------------------------------------------
ISAAC ARNOLD, JR.
ROYCE S. CALDWELL* Director
- -----------------------------------------------------
ROYCE S. CALDWELL
RUBEN R. CARDENAS* Director
- -----------------------------------------------------
RUBEN R. CARDENAS
HENRY E. CATTO* Director
- -----------------------------------------------------
HENRY E. CATTO
BOB W. COLEMAN* Director
- -----------------------------------------------------
BOB W. COLEMAN
HARRY H. CULLEN* Director
- -----------------------------------------------------
HARRY H. CULLEN
ROY H. CULLEN* Director
- -----------------------------------------------------
ROY H. CULLEN
</TABLE>
71
<PAGE> 72
SIGNATURES -- (CONTINUED)
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
EUGENE H. DAWSON, SR.* Director
- -----------------------------------------------------
EUGENE H. DAWSON, SR.
CASS EDWARDS* Director
- -----------------------------------------------------
CASS EDWARDS
RUBEN M. ESCOBEDO* Director
- -----------------------------------------------------
RUBEN M. ESCOBEDO
PATRICK B. FROST* Director
- -----------------------------------------------------
PATRICK B. FROST
JOE R. FULTON* Director
- -----------------------------------------------------
JOE R. FULTON
JAMES W. GORMAN, JR.* Director
- -----------------------------------------------------
JAMES W. GORMAN, JR.
JAMES L. HAYNE* Director
- -----------------------------------------------------
JAMES L. HAYNE
RICHARD M. KLEBERG, III* Director
- -----------------------------------------------------
RICHARD M. KLEBERG, III
ROBERT S. MCCLANE* Director
- -----------------------------------------------------
ROBERT S. MCCLANE
IDA CLEMENT STEEN* Director
- -----------------------------------------------------
IDA CLEMENT STEEN
HORACE WILKINS, JR.* Director
- -----------------------------------------------------
HORACE WILKINS, JR.
MARY BETH WILLIAMSON* Director
- -----------------------------------------------------
MARY BETH WILLIAMSON
*By: /s/ PHILLIP D. GREEN Senior Executive Vice March 30, 2000
President and Chief Financial
- ----------------------------------------------------- Officer
PHILLIP D. GREEN
(AS ATTORNEY-IN-FACT FOR
THE PERSONS INDICATED)
</TABLE>
72
<PAGE> 73
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- --------------------------------------------------------------------------------
<S> <C>
21 Subsidiaries of Cullen/Frost
23.1 Consent of Independent Auditors
23.2 Consent of PricewaterhouseCoopers LLP, Independent Auditors for
Overton Bancshares, Inc.
24 Power of Attorney
27 1999 Financial Data Schedule*
99 Report of PricewaterhouseCoopers LLP on Overton Bancshares, Inc.
financial statements as of December 31, 1997 and for each of the
years in the two year period ended December 31, 1997.
</TABLE>
* EDGAR Version Only.
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
As of March 30, 2000 Cullen/Frost owned directly, or indirectly through
wholly owned subsidiaries, the following subsidiaries.
<TABLE>
<CAPTION>
Percentage of
Organized Voting Securities
Under Owned By
Laws of Cullen/Frost
=====================================================================================================
<S> <C> <C>
The Frost National Bank United States 100%
United States National Bank of Galveston United States 100%
Main Plaza Corporation Texas 100%
Daltex General Agency, Inc. Texas 100%
The New Galveston Company, Inc. Delaware 100%
Cullen/Frost Capital Trust I Delaware 100%
Frost Insurance Agency Texas 100%
Frost Securities, Inc. Delaware 100%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-30776) pertaining to the Cullen/Frost Bankers, Inc. 1983 Nonqualified
Stock Option Plan, the Registration Statement (Form S-8 No. 33-30777) pertaining
to the Cullen/Frost Bankers, Inc. 1988 Nonqualified Stock Option Plan, the
Registration Statement (Form S-8 No. 33-37500) pertaining to the 401(k) Stock
Purchase Plan for Employees of Cullen/Frost Bankers, Inc. and Its Affiliates,
the Registration Statement (Form S-8 No. 33-39478) pertaining to the 1991 Thrift
Incentive Stock Purchase Plan for Employees of Cullen/Frost Bankers, Inc. and
Its Affiliates, the Registration Statement (Form S-8 No. 33-53492) pertaining to
the Cullen/Frost Bankers, Inc. Restricted Stock Plan, the Registration Statement
(Form S-8 No. 33-53622) pertaining to the Cullen/Frost Bankers, Inc. 1992 Stock
Plan, and the Registration Statement (Form S-8 No. 333-81461) pertaining to 1997
Directors Stock Plan of Cullen/Frost Bankers, Inc.) of our report dated February
4, 2000, with respect to the consolidated financial statements of Cullen/Frost
Bankers, Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 1999.
/s/ ERNST & YOUNG LLP
San Antonio, Texas
March 24, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-30776) pertaining to the Cullen/Frost Bankers, Inc.
1983 Nonqualified Stock Option Plan, the Registration Statement (Form S-8 No.
33-30777) pertaining to the Cullen/Frost Bankers, Inc. 1988 Nonqualified Stock
Option Plan, the Registration Statement (Form S-8 No. 33-37500) pertaining to
the 401 (k) Stock Purchase Plan for Employees of Cullen/Frost Bankers, Inc. and
Its Affiliates, the Registration Statement (Form S-8 No. 33-39478) pertaining
to the 1991 Thrift Incentive Stock Purchase Plan for Employees of Cullen/Frost
Bankers, Inc. and Its Affiliates, the Registration Statement (Form S-8 No.
33-53492) pertaining to the Cullen/Frost Bankers, Inc. Restricted Stock Plan,
the Registration Statement (Form S-8 No 33-53622) pertaining to the
Cullen/Frost Bankers, Inc. 1992 Stock Plan, and the Registration Statement
(Form S-8 No. 333-81461) pertaining to the 1997 Directors Stock Plan of
Cullen/Frost Bankers, Inc., of our report dated February 17, 1998, on our audit
of the consolidated statements of income, shareholders' equity and cash flows
of Overton Bancshares, Inc. and Subsidiaries for the year ended December 31,
1997 (not presented separately in the Cullen/Frost Bankers, Inc., 1999 Annual
Report on Form 10-K), which report is included as Exhibit 99 to the
Cullen/Frost Bankers, Inc. 1999 Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Fort Worth, Texas
March 24, 2000
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Patrick B. Frost, Richard W. Evans, Jr. and Phillip D.
Green, and each of them, his true and lawful attorneys-in-fact and agents, and
with power of substitution and resubstitution, for him and in his name, place
and stead, and in any and all capacities, to sign the Annual Report on Form 10-K
of Cullen/Frost Bankers, Inc. for the fiscal year ended December 31, 1999, to
sign any and all amendments thereto, and to file such Annual Report and
amendments, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
<PAGE> 2
<TABLE>
<CAPTION>
Signatures Title Date
- ------------------------------------------- ------------------------------- ----------------
<S> <C> <C>
/s/ T.C. FROST
- ------------------------------------------- Senior Chairman of the Board January 26, 2000
(T.C. Frost) and Director
/s/ RICHARD W. EVANS, JR.
- ------------------------------------------- Chairman of the Board and January 26, 2000
(Richard W. Evans, Jr.) Director
/s/ R. DENNY ALEXANDER
- ------------------------------------------- Director January 26, 2000
(R. Denny Alexander)
/s/ ISAAC ARNOLD, JR.
- ------------------------------------------- Director January 26, 2000
(Isaac Arnold, Jr.)
/s/ ROYCE S. CALDWELL
- ------------------------------------------- Director January 26, 2000
(Royce S. Caldwell)
/s/ RUBEN R. CARDENAS
- ------------------------------------------- Director January 26, 2000
(Ruben R. Cardenas)
/s/ HENRY E. CATTO
- ------------------------------------------- Director January 26, 2000
(Henry E. Catto)
/s/ BOB W. COLEMAN
- ------------------------------------------- Director January 26, 2000
(Bob W. Coleman)
/s/ HARRY H. CULLEN
- ------------------------------------------- Director January 26, 2000
(Harry H. Cullen)
/s/ ROY H. CULLEN
- ------------------------------------------- Director January 26, 2000
(Roy H. Cullen)
/s/ EUGENE H. DAWSON, SR.
- ------------------------------------------- Director January 26, 2000
(Eugene H. Dawson, Sr.)
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Signatures Title Date
- ------------------------------------------- ------------------------------- ----------------
<S> <C> <C>
/s/ CASS EDWARDS
- ------------------------------------------ Director January 26, 2000
(Cass Edwards)
/s/ RUBEN M. ESCOBEDO
- ------------------------------------------- Director January 26, 2000
(Ruben M. Escobedo)
/s/ PATRICK B. FROST
- ------------------------------------------- Director January 26, 2000
(Patrick B. Frost)
/s/ JOE R. FULTON
- ------------------------------------------- Director January 26, 2000
(Joe R. Fulton)
/s/ JAMES W. GORMAN, JR.
- ------------------------------------------- Director January 26, 2000
(James W. Gorman, Jr.)
/s/ JAMES L. HAYNE
- ------------------------------------------- Director January 26, 2000
(James L. Hayne)
/s/ RICHARD M. KLEBERG, III
- ------------------------------------------- Director January 26, 2000
(Richard M. Kleberg, III)
/s/ ROBERT S. McCLANE
- ------------------------------------------- Director January 26, 2000
(Robert S. McClane)
/s/ IDA CLEMENT STEEN
- ------------------------------------------- Director January 26, 2000
(Ida Clement Steen)
/s/ HORACE WILKINS, JR.
- ------------------------------------------- Director January 26, 2000
(Horace Wilkins, Jr.)
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Signatures Title Date
- ------------------------------------------- ------------------------------- -----------------
<S> <C> <C>
/s/ MARY BETH WILLIAMSON
- ------------------------------------------- Director January 26, 2000
(Mary Beth Williamson)
/s/ PHILLIP D. GREEN
- ------------------------------------------- Senior Executive Vice President January 26, 2000
(Phillip D. Green) and Chief Financial Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CURRENT
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 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> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 751,612
<INT-BEARING-DEPOSITS> 6,546
<FED-FUNDS-SOLD> 34,950
<TRADING-ASSETS> 1
<INVESTMENTS-HELD-FOR-SALE> 1,544,865
<INVESTMENTS-CARRYING> 85,045
<INVESTMENTS-MARKET> 85,627
<LOANS> 4,166,728
<ALLOWANCE> 58,345
<TOTAL-ASSETS> 6,987,680
<DEPOSITS> 5,953,832
<SHORT-TERM> 92,565
<LIABILITIES-OTHER> 333,459
<LONG-TERM> 98,513
536
0
<COMMON> 0
<OTHER-SE> 508,775
<TOTAL-LIABILITIES-AND-EQUITY> 6,987,680
<INTEREST-LOAN> 329,610
<INTEREST-INVEST> 113,561
<INTEREST-OTHER> 4,409
<INTEREST-TOTAL> 447,580
<INTEREST-DEPOSIT> 128,819
<INTEREST-EXPENSE> 150,602
<INTEREST-INCOME-NET> 296,978
<LOAN-LOSSES> 12,427
<SECURITIES-GAINS> (86)
<EXPENSE-OTHER> 293,015
<INCOME-PRETAX> 148,621
<INCOME-PRE-EXTRAORDINARY> 148,621
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97,642
<EPS-BASIC> 1.83
<EPS-DILUTED> 1.78
<YIELD-ACTUAL> 7.72
<LOANS-NON> 14,854
<LOANS-PAST> 6,910
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,812
<ALLOWANCE-OPEN> 53,616
<CHARGE-OFFS> (13,132)
<RECOVERIES> 4,369
<ALLOWANCE-CLOSE> 58,345
<ALLOWANCE-DOMESTIC> 55,367
<ALLOWANCE-FOREIGN> 64
<ALLOWANCE-UNALLOCATED> 2,914
</TABLE>
<PAGE> 1
EXHIBIT 99
Report of Independent Accountants
Board of Directors and Shareholders
Overton Bancshares, Inc.
Fort Worth, Texas
In our opinion, the consolidated statements of income, shareholders' equity and
cash flows for the year ended December 31, 1997 (not presented separately in the
Cullen/Frost Bankers, Inc., 1999 Annual Report on Form 10-K) present fairly, in
all material respects, the results of operations and cash flows of Overton
Bancshares, Inc. and Subsidiaries for the year ended December 31, 1997, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above. We have not audited the consolidated financial
statements of Overton Bancshares, Inc. for any period subsequent to December 31,
1997.
/s/ PricewaterhouseCoopers LLP
Fort Worth, Texas
February 17, 1998
