Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2000 Commission file number 0-7275
Cullen/Frost Bankers, Inc.
(Exact name of registrant as specified in its charter)
Texas 74-1751768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 W. Houston Street, San Antonio, Texas 78205
(Address of principal executive offices) (Zip code)
(210) 220-4011
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X. No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At July 21, 2000, there were
52,045,243 shares of Common Stock, $.01 par value, outstanding.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
<TABLE>
<CAPTION>
Consolidated Statements of Income
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30 June 30
------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 97,254 $ 79,751 $188,522 $157,046
Securities:
Taxable 26,290 26,981 51,103 56,957
Tax-exempt 1,847 1,478 3,652 3,039
-------- -------- -------- --------
Total Securities 28,137 28,459 54,755 59,996
Time deposits 125 22 270 25
Federal funds sold and securities purchased
under resale agreements 1,372 831 2,100 1,163
-------- -------- -------- --------
Total Interest Income 126,888 109,063 245,647 218,230
INTEREST EXPENSE
Deposits 38,260 31,108 73,317 62,507
Federal funds purchased and securities
sold under repurchase agreements 4,376 2,731 7,914 6,738
Guaranteed preferred beneficial interest in the
Corporation's junior subordinated deferrable
interest debentures 2,119 2,119 4,238 4,238
Long-term notes payable and other borrowings 2,151 198 2,644 400
-------- -------- -------- --------
Total Interest Expense 46,906 36,156 88,113 73,883
-------- -------- -------- --------
Net Interest Income 79,982 72,907 157,534 144,347
Provision for possible loan losses 2,867 2,975 5,549 5,975
-------- -------- -------- --------
Net Interest Income After Provision
For Possible Loan Losses 77,115 69,932 151,985 138,372
NON-INTEREST INCOME
Trust fees 12,446 11,416 24,132 22,799
Service charges on deposit accounts 14,765 14,496 29,164 28,484
Other service charges, collection and
exchange charges, commissions and fees 6,595 4,170 12,651 7,364
Net loss on securities transactions (8) (68)
Other 9,068 7,017 16,552 16,069
-------- -------- -------- --------
Total Non-Interest Income 42,874 37,099 82,491 74,648
NON-INTEREST EXPENSE
Salaries and wages 34,439 29,732 67,668 58,836
Pension and other employee benefits 7,171 6,576 15,221 13,091
Net occupancy of banking premises 6,850 6,818 13,616 13,519
Furniture and equipment 5,219 4,984 10,285 9,559
Intangible amortization 3,818 3,554 7,774 6,891
Other 20,259 18,720 39,265 37,752
-------- -------- -------- --------
Total Non-Interest Expense 77,756 70,384 153,829 139,648
-------- -------- -------- --------
Income Before Income Taxes 42,233 36,647 80,647 73,372
Income Taxes 14,603 12,559 27,861 24,989
-------- -------- -------- --------
Net Income $ 27,630 $ 24,088 $ 52,786 $ 48,383
======== ======== ======== ========
Net income per common share:
Basic $ .53 $ .45 $ 1.01 $ .90
Diluted .52 .44 .98 .88
Dividends per common share .195 .175 .37 .325
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands, except per share amounts)
June 30 December 31 June 30
2000 1999 1999
---------- ----------- ----------
<S> <C> <C> <C>
Assets
Cash and due from banks $ 660,068 $ 760,612 $ 655,431
Time deposits 6,709 6,546 2,628
Securities held to maturity 78,337 85,045 95,435
Securities available for sale 1,614,106 1,544,865 1,725,002
Securities trading 1 682
Federal funds sold and securities purchased
under resale agreements 135,275 34,950 25,125
Loans, net of unearned discount of $6,713 at
June 30, 2000; $6,217 at December 31, 1999
and $4,942 at June 30, 1999 4,425,799 4,166,728 3,973,749
Less: Allowance for possible loan losses (58,965) (58,345) (58,974)
---------- ---------- ----------
Net Loans 4,366,834 4,108,383 3,914,775
Banking premises and equipment 146,591 142,984 143,291
Accrued interest and other assets 320,010 313,294 340,069
---------- ---------- ----------
Total Assets $7,327,930 $6,996,680 $6,902,438
========== ========== ==========
Liabilities
Demand Deposits:
Commercial and individual $1,781,292 $1,601,977 $1,594,194
Correspondent banks 201,493 212,942 216,878
Public funds 52,265 48,341 42,131
---------- ---------- ----------
Total demand deposits 2,035,050 1,863,260 1,853,203
Time Deposits:
Savings and Interest-on-Checking 946,060 984,438 940,062
Money market deposit accounts 1,665,102 1,635,524 1,655,953
Time accounts 1,237,584 1,234,894 1,249,722
Public funds 243,774 235,716 194,587
---------- ---------- ----------
Total time deposits 4,092,520 4,090,572 4,040,324
---------- ---------- ----------
Total deposits 6,127,570 5,953,832 5,893,527
Federal funds purchased and securities
sold under repurchase agreements 273,218 333,459 296,875
Accrued interest and other liabilities 304,031 101,565 103,550
Guaranteed preferred beneficial interest in the
Corporation's junior subordinated deferrable
interest debentures 98,541 98,513 98,486
---------- ---------- ----------
Total Liabilities 6,803,360 6,487,369 6,392,438
Shareholders' Equity
Common stock, par value $.01 per share 536 536 536
Shares authorized:90,000,000
Shares issued: 53,561,616;
53,561,616; and 53,558,846
Surplus 186,176 185,437 184,741
Retained earnings 414,305 382,168 353,244
Accumulated other comprehensive loss,
net of tax (37,901) (39,110) (28,507)
Treasury Stock (1,531,024; 738,463; 500 shares) (38,546) (19 720) (14)
---------- ---------- ----------
Total Shareholders' Equity 524,570 509,311 510,000
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity $7,327,930 $6,996,680 $6,902,438
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands)
Accumulated
Other
Comprehensive
Common Retained Income/(Loss) Treasury
Stock Surplus Earnings net of tax Stock Total
------ -------- -------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $267 $183,151 $321,754 $ 7,747 $512,919
Net income for the twelve months
ended December 31, 1999 97,642 97,642
Unrealized loss on securities
available for sale of $46,913,
net of tax and reclassification
adjustment for after-tax gains
included in net income of $56 (46,857) (46,857)
--------
Total comprehensive income 50,785
--------
Proceeds from employee stock
purchase plan and options 1 856 (1,816) $3,315 2,356
Tax benefit related to exercise
of stock options 1,698 1,698
Purchase of treasury stock (24,318) (24,318)
Issuance of restricted stock (23) 1,283 1,260
Restricted stock plan deferred
compensation, net 624 624
Cash dividend (36,013) (36,013)
Two-for-one-stock-split 268 (268)
---- -------- -------- -------- -------- --------
Balance at December 31, 1999 $536 $185,437 $382,168 $(39,110) $(19,720) $509,311
Net income for the six
months ended June 30, 2000 52,786 52,786
Unrealized gain on securities
available for sale of $1,204,
net of tax and reclassification
adjustment for after-tax losses
included in net income of $5 1,209 1,209
--------
Total comprehensive income 53,995
--------
Proceeds from employee stock
purchase plan and options 28 (2,049) 3,261 1,240
Tax benefit related to exercise
of stock options 707 707
Purchase of treasury stock (22,188) (22,188)
Issuance of restricted stock 4 (5) 101 100
Restricted stock plan deferred
compensation, net 807 807
Cash dividend (19,402) (19,402)
---- -------- -------- -------- -------- --------
Balance at June 30, 2000 $536 $186,176 $414,305 $(37,901) $(38,546) $524,570
==== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands)
Six Months Ended
June 30
------------------
2000 1999
------- -------
<S> <C> <C>
Operating Activities
Net income $ 52,786 $ 48,383
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 5,549 5,975
Credit for deferred taxes (2,688) (3,470)
Accretion of discounts on loans (566) (100)
Accretion of securities' discounts (1,338) (1,063)
Amortization of securities' premiums 885 2,825
Net decrease in trading securities 1 27
Net loss on securities transactions 8 68
Net gain on sale of assets (2,113) (2,736)
Depreciation and amortization 16,764 15,600
Increase in interest receivable (5,419) (3,871)
Increase in interest payable 2,637 2,810
Originations of mortgages held-for-sale (52,313) (81,695)
Proceeds from sales of loans held-for-sale 53,042 83,880
Net change in other assets and liabilities 18,859 (26,966)
--------- -------
Net cash provided by operating activities 86,094 39,667
Investing Activities
Proceeds from maturities of securities held to maturity 6,819 16,071
Purchases of investment securities (100) (99)
Proceeds from sales of securities available for sale 95,784 265,414
Proceeds from maturities of securities available for sale 131,805 366,230
Purchases of securities available for sale (294,538) (340,607)
Net increase in loans (264,206) (217,603)
Net increase in bank premises and equipment (10,541) (7,888)
Proceeds from sales of repossessed properties 732 376
Net cash and cash equivalents paid for acquisitions (859) (23,788)
--------- --------
Net cash (used) provided by investing activities (335,104) 58,106
Financing Activities
Net increase in demand deposits,
IOC accounts, and savings accounts 171,048 2,368
Net increase (decrease) in certificates of deposits 2,690 (180,203)
Net increases (decrease) in short-term borrowings 114,759 (8,689)
Net proceeds from issuance of common stock 2,047 2,022
Purchase of treasury stock (22,188) (535)
Dividends paid (19,402) (17,393)
-------- --------
Net cash provided (used) by financing activities 248,954 (202,430)
-------- --------
Decrease in cash and cash equivalents (56) (104,657)
Cash and cash equivalents at beginning of year 802,108 787,841
-------- --------
Cash and cash equivalents at the end of the period $802,052 $683,184
======== ========
Supplemental information:
Interest Paid $ 85,476 $ 71,073
See notes to consolidated financial statements.
</TABLE>
Notes to Consolidated Financial Statements
Cullen/Frost Bankers, Inc. and Subsidiaries
(tables in thousands)
Note A - Basis of Presentation
The consolidated financial statements include the accounts of Cullen/Frost
Bankers, Inc. ("Cullen/Frost" or the "Corporation") and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. The consolidated financial statements have not
been audited by independent accountants, but in the opinion of management,
reflect all adjustments necessary for a fair presentation of the financial
position and results of operations. All such adjustments were of a normal and
recurring nature. For further information, refer to the consolidated financial
statements and footnotes thereto included in Cullen/Frost's Annual Report on
Form 10-K for the year ended December 31, 1999. The balance sheet at December
31, 1999 has been derived from the audited financial statements at that date
but does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. Certain
reclassifications have been made to make prior periods comparable.
Note B - Allowance for Possible Loan Losses
An analysis of the transactions in the allowance for possible loan losses
is presented below. The amount charged to operating expense is based on
management's assessment of the adequacy of the allowance based on estimated
probable losses in the loan portfolio.
Six Months Ended
June 30
------------------
(in thousands) 2000 1999
----------------------------------------------------------------------
Balance at beginning of the period $58,345 $53,616
Provision for possible loan losses 5,549 5,975
Loan loss reserve of acquired institutions 1,066
Net charge-offs:
Losses charged to the allowance (6,680) (4,483)
Recoveries 1,751 2,800
------- -------
Net (charge-offs) (4,929) (1,683)
------- -------
Balance at the end of period $58,965 $58,974
======= =======
Note C - Impaired Loans
A loan within the scope of SFAS No. 114 is considered impaired when, based
on current information and events, it is probable that Cullen/Frost will be
unable to collect all amounts due according to the contractual terms of the
loan agreement, including scheduled principal and interest payments. All
impaired loans are included in non-performing assets. At June 30, 2000, the
majority of the impaired loans were real estate loans and collectibility was
measured based on the fair value of the collateral. Interest payments on
impaired loans are typically applied to principal unless collectibility of the
principal amount is fully assured, in which case interest is recognized on the
cash basis. No interest revenue was recognized on loans impaired as of June
30, 2000 and 1999. The total allowance for possible loan losses includes
activity related to allowances calculated in accordance with SFAS No. 114 and
activity related to other loan loss allowances determined in accordance with
SFAS No. 5.
The following is a summary of loans considered to be impaired:
June 30
-------------------
(in thousands) 2000 1999
--------------------------------------------------------------------------
Impaired loans with no valuation reserve $1,473 $2,471
Impaired loans with a valuation reserve 6,343 2,837
------ ------
Total recorded investment in impaired loans $7,816 $5,308
====== ======
Average recorded investment in impaired loans $8,637 $5,372
Valuation reserve 2,632 2,208
Note D - Earnings Per Common Share
The reconciliation of earnings per share follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
------------------------ --------------------
(in thousands, except per share amounts) 2000 1999 2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerators for both basic and diluted
earnings per share, net income $52,786 $48,383 $27,630 $24,088
======= ======= ======= =======
Denominators:
Denominators for basic earnings per share,
average outstanding common shares 52,458 53,512 52,235 53,554
Dilutive effect of stock options 1,139 1,366 1,283 1,395
------- ------- ------- -------
Denominator for diluted earnings per share 53,597 54,878 53,518 54,949
======= ======= ======= =======
Earnings per share:
Basic $ 1.01 $ .90 $ .53 $ .45
Diluted .98 .88 .52 .44
</TABLE>
Note E - Capital
The table below reflects various measures of regulatory capital at June
30, 2000 and 1999.
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------------- ------------------
Capital Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-Based
Tier 1 Capital $ 539,611 10.62% $ 503,171 11.26%
Tier 1 Capital Minimum requirement 203,255 4.00 178,702 4.00
Total Capital $ 598,576 11.78% $ 559,054 12.51%
Total Capital Minimum requirement 406,509 8.00 357,404 8.00
Risk-adjusted assets, net of goodwill $5,081,363 $4,467,555
Leverage ratio 7.68% 7.51%
Average equity as a percentage
of average assets 7.33 7.78
</TABLE>
At June 30, 2000 and 1999, Cullen/Frost's subsidiary banks were considered
"well capitalized" as defined by the FDIC Improvement Act of 1991, the highest
rating, and Cullen/Frost's capital ratios were in excess of "well capitalized"
levels. A financial institution is deemed to be well capitalized if the
institution has a total risk-based capital ratio of 10.0 percent or greater, a
Tier 1 risk-based capital ratio of 6.0 percent or greater, and a Tier 1
leverage ratio of 5.0 percent or greater, and the institution is not subject to
an order, written agreement, capital directive or prompt corrective action
directive to meet and maintain a specific capital level for any capital
measure. Cullen/Frost and its subsidiary banks currently exceed all minimum
capital requirements. Management is not aware of any conditions or events the
would have changed the Corporation's capital rating since June 30, 2000.
Cullen/Frost is subject to the regulatory capital requirements
administered by the Federal Reserve Bank. Regulators can initiate certain
mandatory actions, if Cullen/Frost fails to meet the minimum requirements, that
could have a direct material effect on Cullen/Frost's financial statements.
Note F - Income Taxes
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
-------------------- -------------------
(in thousands) 2000 1999 2000 1999
=======================================================================================
<S> <C> <C> <C> <C>
Current tax expense $30,549 $28,459 $15,998 $14,738
Deferred tax benefit (2,688) (3,470) (1,395) (2,179)
------- ------- ------- -------
Income taxes $27,861 $24,989 $14,603 $12,559
======= ======= ======= =======
Income tax payments $25,276 $26,804 $25,276 $25,872
</TABLE>
Net deferred tax assets at June 30, 2000, were $41.8 million with no valuation
allowance. The deferred tax assets were supported by taxes paid in prior
years.
Note G - Merger and Acquisitions
On July 1, 2000 Frost Insurance Agency ("FIA"), a subsidiary of The Frost
National Bank, acquired Nieman Hanks Puryear Partners and Nieman Hanks Puryear
Benefits ("Nieman Hanks"), an Austin based independent insurance agency.
Nieman Hanks offers property and casualty insurance, professional and umbrella
liability, homeowners and auto insurance, group health, life and disability
policies and 401(k) retirement plans and executive planning. Nieman Hanks is
the third acquisition made by Frost Insurance Agency, following the additions
of Professional Insurance Agents and Wayland Hancock mentioned below. The
purchase method of accounting was used to record the transaction and as such,
the results of operations will be included from the date of acquisition.
On May 6, 2000, United States National Bank of Galveston merged its
charter into The Frost National Bank. The Galveston-based bank has been a
member bank of Cullen/Frost since 1982.
On April 1, 2000, FIA acquired Wayland Hancock Insurance Agency, Inc.
("Wayland Hancock"), a Houston-based independent insurance agency. Wayland
Hancock offers a full range of life and health insurance, as well as retirement
and financial planning, to individuals and businesses. Wayland Hancock was
Frost Insurance Agency's second acquisition, following the 1999 acquisition of
Victoria-based Professional Insurance Agents, Inc. The purchase method of
accounting was used to record both transactions.
Note H - Accounting Changes
In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an amendment of FASB
Statement No. 133." SFAS No. 138 amends the accounting and reporting standards
of SFAS No. 133 for certain derivative instruments and certain hedging
activities. During 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133" which deferred the required adoption date of SFAS No.
133 to fiscal years beginning after June 15, 2000. SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities" will require the recognition
of all derivatives on the balance sheet at fair value. Derivatives that are
not hedges must be adjusted to fair value through income. If the derivative is
a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Even though early adoption is allowed,
Cullen/Frost has no plans to adopt this statement prior to the effective date
for the Corporation of January 1, 2001. 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 I - Operating Segments
Cullen/Frost 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 includes direct and indirect loans, mortgage loans
and depository services. The Financial Management Group includes fee based
services within private trust, retirement services, and financial management
services including personal wealth management, insurance and brokerage
services. These business units were identified through the products and
services that are offered within each unit.
The accounting policies of the individual business units are the same as
the Corporation except for the following items. The Corporation uses a match-
funded transfer pricing process to assess operating segment performance.
Expenses for consolidated back-office operations are allocated to operating
segments based on estimated uses of those services. General overhead type
expenses such as executive administration, accounting, internal audit, and
personnel are allocated based on the direct expense level of the operating
segment. Income tax expense for the individual segments is calculated
basically at the statutory rate. Parent Company records the tax expense or
benefit necessary to reconcile to the consolidated total.
<TABLE>
<CAPTION>
Six Months Ended: Financial
Management Consolidated
(in thousands) Banking Group Non-Banks Total
============================================================================================================
<S> <C> <C> <C> <C>
June 30, 2000
Revenues from (expenses to) external customers $207,745 $33,408 $(1,128) $240,025
------------------------------------------------------
Net income (loss) $ 51,023 $ 8,074 $(6,311) $ 52,786
======================================================
============================================================================================================
June 30, 1999
Revenues from (expenses to) external customers $193,296 $29,981 $(4,282) $218,995
------------------------------------------------------
Net income (loss) $ 45,856 $ 7,298 $(4,771) $ 48,383
======================================================
Three Months Ended: Financial
Management Consolidated
(in thousands) Banking Group Non-Banks Total
============================================================================================================
June 30, 2000
Revenues from (expenses to) external customers $106,243 $17,069 $ (456) $122,856
-------------------------------------------------------
Net income (loss) $ 26,694 $ 4,142 $(3,206) $ 27,630
=======================================================
============================================================================================================
June 30, 1999
Revenues from (expenses to) external customers $ 96,840 $15,337 $(2,171) $110,006
-------------------------------------------------------
Net income (loss) $ 22,801 $ 3,857 $(2,570) $ 24,088
=======================================================
</TABLE>
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Review
Cullen/Frost Bankers, Inc. and Subsidiaries
(taxable-equivalent basis - tables in thousands)
Results of Operations
The results of operations are included in the material that follows. All
balance sheet amounts are presented in averages unless otherwise noted. Certain
reclassifications have been made to make prior quarters comparable. Taxable-
equivalent adjustments assume a 35 percent federal income tax rate. Dollar
amounts in tables are stated in thousands, except for per share amounts.
Cullen/Frost reported net income of $27.6 million or $.52 per diluted
common share for the quarter ended June 30, 2000 compared to $25.2 million or
$.47 per diluted common share for the first quarter of 2000 and net income of
$24.1 million or $.44 per diluted common share for the second quarter of 1999.
Operating earnings for the quarter, which exclude an after-tax net impact from
the sale of mortgage servicing rights, were $26.7 million or $.50 per diluted
common share, a 14 percent increase from the $.44 per diluted common share
reported in the second quarter last year. Net income for the six months ended
June 30, 2000 was $52.8 million or $.98 per diluted common share compared to
$48.4 million or $.88 per diluted common share for the same period of 1999.
Operating earnings for the first six months of 2000 were $51.9 million, or $.97
per diluted common share, an increase of ten percent from $.88 per diluted
common share reported in the first six months of 1999.
Return on average equity and average assets were 21.31 percent and 1.56
percent, respectively for the second quarter of 2000. This compares to 18.23
percent and 1.42 percent for the second quarter of 1999. Return on average
equity and average assets for the six months ended June 30, 2000 increased to
20.54 percent and 1.52 percent compared to 18.51 percent and 1.43 percent for
1999. Operating return on average equity and average assets were 20.58 percent
and 1.51 percent, respectively for the second quarter of 2000 and 20.18 percent
and 1.49 percent for the six months ended June 30, 2000.
<TABLE>
<CAPTION>
Summary of Operations
-------------------------------------------------
Three Months Ended
Six Months Ended ---------------------------
June 30 2000 1999
----------------- ------------------ -------
2000 1999 June 30 March 31 June 30
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Taxable-equivalent net
interest income $159,807 $146,630 $81,095 $78,712 $74,023
Taxable-equivalent adjustment 2,273 2,283 1,113 1,160 1,116
-------- -------- ------- ------- -------
Net interest income 157,534 144,347 79,982 77,552 72,907
Provision for possible loan losses 5,549 5,975 2,867 2,682 2,975
Non-Interest income:
Net loss on securities transactions (8) (68) (8)
Other 82,499 74,716 42,874 39,625 37,099
-------- -------- ------- ------- -------
Total non-interest income 82,491 74,648 42,874 39,617 37,099
Non-Interest expense:
Intangible amortization 7,774 6,891 3,818 3,956 3,554
Other 146,055 132,757 73,938 72,117 66,830
-------- -------- ------- ------- -------
Total non-interest expense 153,829 139,648 77,756 76,073 70,384
-------- -------- ------- ------- -------
Income before income taxes 80,647 73,372 42,233 38,414 36,647
Income Taxes 27,861 24,989 14,603 13,258 12,559
-------- -------- ------- ------- -------
Net Income $ 52,786 $ 48,383 $27,630 $25,156 $24,088
======== ======== ======= ======= =======
Net income per diluted common share: $ .98 $ .88 $ .52 $ .47 $ .44
Return on Average Assets 1.52% 1.43% 1.56% 1.47% 1.42%
Return on Average Equity 20.54 18.51 21.31 19.76 18.23
</TABLE>
Results of Segment Operations
The Corporation's operations are managed along two major Operating
Segments: Banking and the Financial Management Group. The following table
summarizes net income by Operating Segment for the six months and three months
ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
-------------------- --------------------
(in thousands) 2000 1999 2000 1999
=========================================================================================
<S> <C> <C> <C> <C>
Banking $51,023 $45,856 $26,694 $22,801
Financial Management Group 8,074 7,298 4,142 3,857
Non-Banks (6,311) (4,771) (3,206) (2,570)
-------------------- --------------------
Consolidated net income $52,786 $48,383 $27,630 $24,088
==================== ====================
</TABLE>
The increase in Banking net income for the six months and three months
ended June 30, 2000 was due primarily to higher net interest income due to loan
growth and higher non-interest income impacted by internal growth, new business
initiatives and acquisitions. Also, contributing to the increase was the after
tax net gain from the sale of the mortgage servicing rights.
The Financial Management Group net income increased 10.6 percent on a
year-to-date comparison and 7.4 percent compared to the second quarter last
year. Most of the growth 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 was impacted by
expenses relating to Frost Securities Inc., a section 20 investment banking
subsidiary that began operations in August of 1999.
Net Interest Income
Net interest margin was 5.33 percent for the second quarter of 2000
compared to 5.36 percent and 5.10 percent for the first quarter of 2000 and
second quarter of 1999, respectively. The net interest spread of 4.34 percent
decreased 13 basis points from the first quarter of 2000 and increased five
basis points from the second quarter of 1999. The decreases in net interest
margin and spread from the first quarter of 2000 were due to an increased net
fed funds purchased position. The increase in net interest margin and spread
from a year ago is primarily related to strong loan growth resulting in an
improved earning asset mix.
<TABLE>
<CAPTION>
Change in Net Interest Income (Taxable-Equivalent)
---------------------------------------------------------
Second Quarter Second Quarter Year-to-Date
2000 2000 2000
vs. vs. vs.
Second Quarter First Quarter Year-to-Date
1999 2000 1999
--------------------------------------------------------
Amount Amount Amount
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Due to volume $4,204 $1,881 $ 7,602
Due to interest rate spread 2,868 502 5,575
------ ------ -------
$7,072 $2,383 $13,177
====== ====== =======
</TABLE>
Non-Interest Income
Growth in non-interest income resulted primarily from growth in Trust fees
and new fees from financial services initiatives such as Frost Securities and
Frost Insurance Agency.
<TABLE>
<CAPTION>
Three Months Ended
Six Months Ended ------------------------------
June 30 2000 1999
------------------ -------------------- -------
Non-Interest Income 2000 1999 June 30 March 31 June 30
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust fees $24,132 $22,799 $12,446 $11,686 $11,416
Service charges on deposit accounts 29,164 28,484 14,765 14,399 14,496
Other service charges, collection
and exchange charges, commissions
and fees 12,651 7,364 6,595 6,056 4,170
Net loss on securities transactions (8) (68) (8)
Other 16,552 16,069 9,068 7,484 7,017
------- ------- ------- ------- -------
Total $82,491 $74,648 $42,874 $39,617 $37,099
======= ======= ======= ======= =======
</TABLE>
For the second quarter 2000...
Total non-interest income was up $3.3 million or 8.2 percent compared to
the first quarter of 2000 and up $5.8 million, or 15.6 percent compared to the
second quarter of 1999. Included in this year's second quarter was a pre-tax
gain from the sale of mortgage servicing rights of the existing mortgage loan
portfolio for approximately $2 million.
Trust fees were up $760 thousand or 6.5 percent compared to the first
quarter of 2000 and up $1 million or 9.0 percent compared to the second quarter
of 1999. This increase is primarily in investment fees offset by decreases in
management fees associated with some small cap value funds. The market value
of trust assets at the end of the second quarter of 2000 was $13.1 billion flat
when compared to the first quarter of 2000 and up from $12.7 billion a year
ago.
Service charges on deposit accounts for the second quarter of 2000
increased $366 thousand or 2.5 percent from the first quarter of this year and
$269 thousand or 1.9 percent from the second quarter of 1999. The increase
from the previous quarter is a result of higher overdraft charges as well as
cash management fees on commercial accounts. The increase from the same
quarter a year ago is a result of higher overdraft charges offset by lower cash
management fees on commercial accounts. The decrease in cash management fees
from the year ago quarter reflects the impact of a higher earnings rate, which
results in more payment for services through keeping balances rather than
through the payment of fees. Other service charges were up $539 thousand or
8.9 percent compared to the previous quarter and up $2.4 million or 58.2
percent from the same quarter a year ago. Revenue from Frost Securities and
insurance commission revenue were responsible for the growth in this category
of non-interest income.
Other non-interest income increased $1.6 million or 21.2 percent when
compared to the previous quarter this year and $2.1 million or 29.2 percent
when compared to the second quarter a year ago. This higher income resulted
primarily from the $2 million non-recurring pre-tax gain from the sale of the
mortgage servicing rights.
For the six months ended June 30, 2000...
Non-interest income was up $7.8 million or 10.5 percent compared to the
same period last year. Trust income increased $1.3 million or 5.8 percent from
the same period a year ago, primarily in investment and oil and gas fees offset
by decreases in management fees associated with some small cap value funds.
Service charges on deposits increased $680 thousand or 2.4 percent compared to
the same period one year ago. This increase is due to higher overdraft charges
offset by lower cash management fees on commercial accounts and lower NSF
charges. The decrease in cash management fees from the same period a year ago
ago reflects the impact of a higher earnings rate, which results in more
payment for services through keeping balances rather than through the payment
of fees. Other service charge income increased $5.3 million or 71.8 percent
from the same period last year. Primary contributors to this growth were
insurance commission income, revenues from Frost Securities and mutual fund
fees. Other income was up $483 thousand or 3.0 percent compared to the same
period last year. This resulted from visa check card income and annuity income
offset by lower gains on the sale of student loans.
Non-Interest Expense
Higher non-interest expense resulted primarily from higher personnel and
operating expenses in response to higher volumes, new business initiatives such
as Frost Securities and Frost Insurance Agency, and market increases in
salaries and wages.
<TABLE>
<CAPTION>
Three Months Ended
Six Months Ended ------------------------------
June 30 2000 1999
------------------ ------------------- -------
Non-Interest Expense 2000 1999 June 30 March 31 June 30
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and wages $ 67,668 $ 58,836 $34,439 $33,229 $29,732
Pension and other employee benefits 15,221 13,091 7,171 8,050 6,576
Net occupancy of banking premises 13,616 13,519 6,850 6,766 6,818
Furniture and equipment 10,285 9,559 5,219 5,066 4,984
Intangible amortization 7,774 6,891 3,818 3,956 3,554
Other 39,265 37,752 20,259 19,006 18,720
-------- -------- ------- ------- -------
Total $153,829 $139,648 $77,756 $76,073 $70,384
======== ======== ======= ======= =======
</TABLE>
For the second quarter 2000...
Non-interest expense was up $1.7 million or 2 percent compared to last
quarter and increased $7.4 million or 10.5 percent compared to the second
quarter of 1999.
Salaries and wages increased $1.2 million compared with the first quarter
of 2000 and were up $4.7 million or 15.8 percent from the second quarter of
1999. These increases were related to the new business initiatives and market
increases in salaries and wages. Also impacting the second quarter were
approximately $600 thousand in severance costs, related to the sale of the
mortgage servicing rights and the initiation of the co-branding mortgage
origination program with GMAC Mortgage Corporation. Pension and employee
benefits were down $879 thousand or 10.9 percent compared to last quarter and
up $595 thousand or 9.0 percent compared to the second quarter of 1999. The
decrease from the previous quarter was a result of lower payroll taxes and
medical expenses. The increase from a year ago is due to higher payroll taxes
and bank contributions to the 401(k) stock plan.
Net occupancy of banking premises expense remained flat with the first
quarter of 2000 and the second quarter of 1999. Furniture and equipment
expense increased $153 thousand or 3 percent and $235 thousand or 4.7 percent
from the first quarter of 2000 and the second quarter last year, respectively.
The increases were primarily due to higher software maintenance and service
contracts costs.
Other non-interest expenses increased $1.3 million or 6.6 percent and $1.5
million or 8.2 percent compared to the first quarter of 2000 and second quarter
of 1999, respectively. The increase from the previous quarter is related to
higher stationery, printing and supplies expenses, education expenses and
sundry losses. The increase from a year ago is primarily due to higher
professional expenses and sundry losses.
For the six months ended June 30, 2000...
Total non-interest expense was up $14.2 million or 10.2 percent compared
to the same period one year ago. Salaries and wages were up $8.8 million or 15
percent compared to the same period a year ago primarily because of the new
business initiatives and market increases. Severance costs of almost $600
thousand impacted the first half of 2000 as a result of the sale of the
mortgage servicing rights and the initiation of the co-branding mortgage
origination program. Pension and other benefits increased $2.1 million or 16.3
percent from the same period last year due to higher payroll taxes, medical
insurance costs and bank contributions to the 401(k) stock plan. Net occupancy
of banking premises was constant compared to a year ago. Furniture and
equipment expense increased $726 thousand or 7.6 percent due to higher
amortized software and software maintenance and service contracts costs.
Intangible amortization increased $883 thousand or 12.8 percent from the same
period a year ago due to acquisitions. Other non-interest expenses increased
$1.5 million or 4.0 percent, primarily due to higher professional expenses
offset by lower stationery, printing and supplies expenses.
Income Taxes
Cullen/Frost's effective tax rate for the first and second quarters of
2000 approximated 35 percent. The effective tax rate for the second quarter of
1999 approximated 34 percent.
Cash Earnings
The Corporation has historically paid cash and used the purchase method of
accounting for the majority of its acquisitions, which has resulted in the
creation of intangible assets. These intangible assets are deducted from
capital in the determination of regulatory capital. Thus, "cash" or "tangible"
earnings represents regulatory capital generated during the year and can be
viewed as net income excluding intangible amortization, net of tax. While the
definition of "cash" or "tangible" earnings may vary by company, we believe
this definition is appropriate as it measures the per share growth of
regulatory capital, which impacts the amount available for dividends and
acquisitions.
The following table reconciles reported earnings to net income excluding
intangible amortization ("cash" earnings):
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------------------------------------
June 2000 June 1999
-------------------------------------------------------------------------------------------
Reported Intangible "Cash" Reported Intangible "Cash"
Earnings Amortization Earnings Earnings Amortization Earnings
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before income
taxes $80,647 $7,774 $88,421 $73,372 $6,891 $80,263
Income taxes 27,861 1,701 29,562 24,989 1,602 26,591
------- ------ ------- ------- ------ -------
Net income $52,786 $6,073 $58,859 $48,383 $5,289 $53,672
======= ====== ======= ======= ====== =======
Net income per diluted
common share $ .98 $ .12 $ 1.10 $ .88 $ .10 $ .98
Return on assets 1.52% 1.69%* 1.43% 1.58%*
Return on equity 20.54 22.90 ** 18.51 20.53**
* Calculated as A/B
** Calculated as A/C June 2000 June 1999
----------------- ---------- ----------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 58,859 $ 53,672
(B) Total average assets 7,004,765 6,836,555
(C) Average shareholders' equity 516,829 527,104
Three Months Ended
--------------------------------------------------------------------
June 2000 March 2000
-------------------------------------------------------------------------------------------
Reported Intangible "Cash" Reported Intangible "Cash"
Earnings Amortization Earnings Earnings Amortization Earnings
-------------------------------------------------------------------------------------------
Income before income
taxes $42,233 $3,818 $46,051 $38,414 $3,956 $42,370
Income taxes 14,603 827 15,430 13,258 874 14,132
------- ------ ------- ------- ------ -------
Net income $27,630 $2,991 $30,621 $25,156 $3,082 $28,238
======= ====== ======= ======= ====== =======
Net income per common
share $ .52 $ .05 $ .57 $ .47 $ .06 $ .53
Return on assets 1.56% 1.73%* 1.47% 1.65%*
Return on equity 21.31 23.61 ** 19.76 22.18**
* Calculated as A/B
** Calculated as A/C June 2000 March 2000
----------------- ---------- ----------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 30,621 $ 28,238
(B) Total average assets 7,111,133 6,899,514
(C) Average shareholders' equity 521,594 512,064
Three Months Ended
--------------------------------
June 1999
--------------------------------------------------------------
Reported Intangible "Cash"
Earnings Amortization Earnings
--------------------------------------------------------------
Income before income taxes $36,647 $3,554 $40,201
Income taxes 12,559 816 13,375
------- ------ -------
Net income $24,088 $2,738 $26,826
======= ====== =======
Net income per common share $ .44 $ .05 $ .49
Return on assets 1.42% 1.58%*
Return on equity 18.23 20.30 **
* Calculated as A/B
** Calculated as A/C
June 1999
----------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 26,826
(B) Total average assets 6,808,655
(C) Average shareholders' equity 529,919
</TABLE>
Cullen/Frost's cash earnings for the six months and second quarter ending
June 30, 2000 were $58.9 million or $1.10 per diluted common share and $30.6
million or $.57 per diluted common share, respectively. Cash earnings return
on assets and return on equity for the second quarter of 2000 were 1.73 percent
and 23.61 percent, respectively.
Balance Sheet
Average assets for the second quarter were $7.1 billion up $212 million or
12.3 percent on an annualized basis from the previous quarter and up $302
million or 4.4 percent from the second quarter of 1999. Total deposits
averaged $6.0 billion for the current quarter, up $81 million or 5.5 percent on
an annualized basis from the previous quarter and up $167 million or 2.9
percent when compared to the second quarter of 1999. Average loans for the
second quarter of 2000 were $4.3 billion. This represents an increase in
average loans of 11.7 percent on an annualized basis from the first quarter of
2000 and 11.6 percent from the second quarter of last year.
Loans
<TABLE>
<CAPTION>
2000 1999
---------------------- -----------------------
Loan Portfolio Percentage
Period-End Balances June 30 of Total December 31 June 30
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial:
Energy $ 129,947 2.9% $ 129,394 $ 62,789
Other 1,596,477 36.1 1,458,956 1,336,333
Consumer 485,132 11.0 541,026 572,058
Real estate 2,121,647 47.9 1,980,048 1,909,498
Other 99,309 2.3 63,521 98,013
Unearned discount (6,713) (.2) (6,217) (4,942)
---------- ----- ---------- ----------
Total Loans $4,425,799 100.0% $4,166,728 $3,973,749
========== ===== ========== ==========
</TABLE>
At June 30, 1999 period-end loans totaled $4.4 billion up 13.5 percent on
an annualized basis from the previous quarter and up 11.4 percent from the same
period last year. Most of the increase in loans is attributable to real estate
up $142 million and commercial and industrial up $138 million from year-end
1999. This increase is partially offset by a $56 million decrease in consumer
loans related to the continued run-off of indirect auto loans.
Real Estate Loans
Real estate loans at June 30, 2000, were $2.1 billion or 47.9 percent of
period-end loans compared to 48 percent a year ago. Residential permanent
mortgage loans at June 30, 2000, were $717 million compared to $695 million at
March 31, 2000, and $671 million at June 30, 1999. Real estate loans
classified as "other" are essentially amortizing commercial and industrial
loans with maturities of less than five years secured by real property. The
majority of all commercial real estate loans are owner occupied or have a major
tenant (National or Regional company). Historically these type of loans have
resulted in lower risk and provided financial stability and are less
susceptible to economic swings.
At June 30, 2000, real estate loans 90 days past due (excluding non-
accrual loans) were $2.4 million, compared with $2.0 million at March 31, 2000,
and $2.7 million at June 30, 1999.
<TABLE>
<CAPTION>
2000 1999
------------------------ --------
Real Estate Loans Percentage
Period-End Balances June 30 of Total June 30
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Construction $ 403,747 19.0% $ 367,160
Land 145,861 6.9 112,958
Permanent mortgages:
Commercial 481,517 22.7 405,431
Residential 716,710 33.8 671,105
Other 373,812 17.6 352,844
---------- ------ ----------
$2,121,647 100.0% $1,909,498
========== ====== ==========
Non-accrual $ 4,175 .2% $ 5,134
</TABLE>
Mexico
Cullen/Frost's cross border outstandings to Mexico, excluding $19.5
million in loans secured by assets held in the United States, totaled $8.8
million or .2 percent of total loans down from $17.4 million at March 31, 2000
and $48.4 million at June 30, 1999. The decrease from last quarter and the
second quarter last year represents normal fluctuations in lines of credit used
by Mexican banks to finance trade. At June 30, 2000, $285 thousand of Mexican-
related loans were on non-performing status.
<TABLE>
<CAPTION>
MEXICAN LOANS
-----------------------
Percentage of
June 30, 2000 Amount Total Loans
----------------------------------------------------------------------
<S> <C> <C>
Loans to financial institutions $8,795 .2%
Loans to private firms or individuals 6
------ --
$8,801 .2%
====== ==
</TABLE>
Non-Performing Assets
NON-PERFORMING ASSETS
--------------------------
Real
June 30, 2000 Estate Other Total
---------------------------------------------------------------------------
Non-accrual $4,175 $8,841 $13,016
Foreclosed assets 2,594 362 2,956
------ ------ -------
Total $6,769 $9,203 $15,972
====== ====== =======
As a percentage of total
non-performing assets 42.4% 57.6% 100.0%
Non-performing assets totaled $16.0 million at June 30, 2000 down 1.4
percent from $16.2 million at June 30, 1999 and down 11 percent from $18.0
million at March 31, 2000. Non-performing assets as a percentage of total
loans and foreclosed assets decreased to .36 percent at June 30, 2000 from .41
percent one year ago.
Foreclosed assets consist of property which has been formally repossessed.
Foreclosed assets are valued at the lower of the loan balance or estimated fair
value, less estimated selling costs, at the time of foreclosure. Write-downs
occurring at foreclosure are charged against the allowance for possible loan
losses. On an ongoing basis, properties are appraised as required by market
indications and applicable regulations. Write-downs are provided for
subsequent declines in value. Expenses related to maintaining foreclosed
properties are included in other non-interest expense.
The after-tax impact (assuming a 35 percent marginal tax rate) of lost
interest from non-performing assets was $325 thousand for the second quarter of
2000, compared to approximately $217 thousand for the second quarter of 1999
and $271 thousand for the first quarter of 2000. For the six months ended June
30, 2000, the after-tax impact (assuming a 35 percent marginal tax rate) was
approximately $596 thousand compared with approximately $467 thousand for the
comparable period last year. Total loans 90 days past due (excluding non-
accrual loans) were $5.8 million at June 30, 2000, compared to $5.6 million at
June 30, 1999, and $6.3 million at March 31, 2000.
Allowance for Possible Loan Losses
The allowance for possible loan losses was $59 million or 1.33 percent of
period-end loans at June 30, 2000, compared to $59 million or 1.48 percent at
June 30, 1999 and $58.5 million or 1.37 percent at March 31, 2000. The
allowance for possible loan losses as a percentage of non-accrual loans was 453
percent at June 30, 2000, compared to 454 percent at June 30, 1999 and 401
percent at the end of the first quarter of 2000.
Cullen/Frost recorded a $2.9 million provision for possible loan losses
during the second quarter of 2000. This compares to $3 million provision for
possible loan losses during the second quarter of 1999 and $2.7 million for the
first quarter of 2000. Net charge-offs in the second quarter of 2000 totaled
$2.4 million, compared to net charge-offs of $624 thousand and $2.6 million for
the second quarter of 1999 and for the first quarter of 2000, respectively.
The net charge-offs in the second quarter of 1999 were low on a comparative
basis due to a large recovery last year.
NET CHARGE-OFFS (RECOVERIES)
----------------------------
2000 1999
------------------ -------
Second First Second
Quarter Quarter Quarter
-------------------------------------------------------------------
Real estate $ (7) $ 59 $ 86
Commercial and industrial 1,689 1,075 (289)
Consumer 688 1,430 853
Other, including foreign (3) (2) (26)
------- ------- -------
$ 2,367 $ 2,562 $ 624
======= ======= =======
Provision for possible loan losses $ 2,867 $ 2,682 $ 2,975
Allowance for possible loan losses 58,965 58,465 58,974
Capital and Liquidity
At June 30, 2000, shareholders' equity was $525 million compared to $510
million at June 30, 1999 and $511 million at March 31, 2000. Activity in the
shareholders equity account during 2000 includes $19.4 million of dividends
paid and $22.2 million paid for the repurchase of shares of Cullen/Frost,
offset by earnings growth. In addition, Cullen/Frost had an unrealized loss on
securities available for sale, net of deferred taxes, of $37.9 million as of
June 30, 2000 compared to an unrealized loss of $39.1 million as of December
31, 1999 which had the effect of increasing shareholder's equity by $1.2
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. See page seven for a discussion of the
Corporation's regulatory capital ratios.
The Cullen/Frost board of directors raised the cash dividend 11 percent in
the second quarter of 2000 to $.195 per common share compared to $.175 per
common share in the first quarter of 2000 and second quarter of 1999. This
equates to a dividend payout ratio of 36.8 percent and 36.7 percent for the
second and first quarters of 2000, respectively. The dividend payout ratio for
the second quarter of 1999 was 38.9 percent.
Funding sources available at the holding company level include a $7.5
million short-term line of credit. There were no borrowings outstanding from
this source at June 30, 2000 or 1999.
Asset liquidity is provided by cash and assets which are readily
marketable or pledgeable or which will mature in the near future. Liquid
assets include cash, short-term time deposits in banks, securities available
for sale, maturities and cash flow from securities held to maturity, and
Federal funds sold and securities purchased under resale agreements.
Liability liquidity is provided by access to funding sources which include
core depositors and correspondent banks in Cullen/Frost's natural trade area
which maintain accounts with and sell Federal funds to 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.
Financial Modernization Legislation
On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 ("Modernization
Act") was signed into law. The Modernization Act: (i) allows bank holding
companies meeting management, capital and CRA standards, and receiving the
prior approval of the Federal Reserve, to engage in a substantially broader
range of financial activities and activities incidental to financial activities
than was previously permissible, including insurance underwriting and making
merchant banking investments in commercial and financial companies; (ii) allows
insurers and other financial services companies to acquire banks; (iii) removes
various restrictions that previously applied to bank holding company ownership
of securities firms and mutual fund advisory companies; and (iv) established
the overall regulatory structure applicable to bank holding companies that also
engage in insurance and securities operations. Bank holding companies approved
for the broader range of activities are called "financial holding companies".
This part of the Modernization Act became effective on March 11, 2000.
Cullen/Frost was designated a financial holding company under the Modernization
Act effective March 15, 2000.
The Modernization Act also modified laws related to financial privacy and
community reinvestment. The new financial privacy provisions generally
prohibit financial institutions, including Cullen/Frost, from disclosing
nonpublic personal financial information to third parties unless customers have
the opportunity to "opt out" of the disclosure.
Forward-Looking Statements
Cullen/Frost may from time to time make forward-looking statements (within
the meaning of the Private Securities Litigation Reform Act of 1995) with
respect to earnings per share, credit quality, corporate objectives and other
financial and business matters. The Corporation cautions the reader that these
forward-looking statements are subject to numerous assumptions, risks and
uncertainties, including economic conditions, actions taken by the Federal
Reserve Board, legislative and regulatory actions and reforms, competition, as
well as other reasons, all of which change over time. Actual results may
differ materially from forward-looking statements.
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets and Interest Income Analysis-Year-to-Date
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands - taxable-equivalent basis*)
June 30, 2000 June 30, 1999
---------------------------- ----------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Time deposits $ 6,952 $ 270 5.72% $ 1,522 $ 25 3.29%
Securities:
U.S. Treasury 127,765 3,701 5.83 195,660 4,844 4.99
U.S. Government agencies
and corporations 1,344,320 45,883 6.83 1,596,862 50,606 6.34
States and political subdivisions
Tax-exempt 148,448 5,603 7.55 136,358 4,991 7.32
Taxable 3,463 115 6.67 3,647 107 5.85
Other 34,707 1,458 8.40 43,010 1,234 5.74
---------- -------- --------- --------
Total securities 1,658,703 56,760 6.85 1,975,537 61,782 6.26
Federal funds sold and securities
purchased under resale agreements 68,417 2,100 6.07 47,528 1,163 4.87
Loans, net of unearned discount 4,272,968 188,790 8.89 3,823,480 157,543 8.31
---------- -------- ---------- --------
Total Earning Assets and
Average Rate Earned 6,007,040 247,920 8.29 5,848,067 220,513 7.59
Cash and due from banks 604,410 613,395
Allowance for possible loan losses (58,773) (55,930)
Banking premises and equipment 145,062 138,811
Accrued interest and other assets 307,026 292,212
---------- ----------
Total Assets $7,004,765 $6,836,555
========== ==========
LIABILITIES
Commercial and individual $1,601,978 $1,500,961
Correspondent banks 220,686 220,428
Public funds 30,520 39,098
---------- ---------
Total demand deposits 1,853,184 1,760,487
Time deposits:
Savings and Interest-on-Checking 976,027 3,237 .67 947,250 3,308 .70
Money market deposit accounts 1,638,872 35,157 4.31 1,574,255 28,070 3.60
Time accounts 1,229,774 29,792 4.87 1,259,466 26,931 4.31
Public funds 232,334 5,131 4.44 235,636 4,198 3.59
---------- -------- --------- --------
Total time deposits 4,077,007 73,317 3.62 4,016,607 62,507 3.14
---------- ---------
Total Deposits 5,930,191 5,777,094
Federal funds purchased and securities
sold under repurchase agreements 302,376 7,914 5.18 316,326 6,738 4.24
Long-term notes payable 2,548 70 5.53 891 26 5.84
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures, net 98,529 4,238 8.60 98,471 4,238 8.61
Other borrowings 69,832 2,574 7.41 12,895 374 5.86
---------- -------- ---------- --------
Total Interest-Bearing Funds
and Average Rate Paid 4,550,292 88,113 3.89 4,445,190 73,883 3.35
---------- -------- ---- ---------- -------- ----
Accrued interest and other liabilities 84,460 103,774
---------- ----------
Total Liabilities 6,487,936 6,309,451
SHAREHOLDERS' EQUITY 516,829 527,104
---------- ----------
Total Liabilities and
Shareholders' Equity $7,004,765 $6,836,555
========== ==========
Net interest income $159,807 $146,630
======== ========
Net interest spread 4.40% 4.24%
==== ====
Net interest income to total average earning assets 5.34% 5.04%
==== ====
*Taxable-equivalent basis assuming a 35% tax rate.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands - taxable-equivalent basis*)
June 30, 2000 March 31, 2000
--------------------------- --------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
---------- -------- ------ ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Time deposits $ 7,022 $ 125 6.04% $ 6,883 $ 145 5.48%
Securities:
U.S. Treasury 123,932 1,837 5.96 131,598 1,864 5.70
U.S. Government agencies
and corporations 1,372,244 23,515 6.85 1,316,395 22,368 6.80
States and political subdivisions
Tax-exempt 148,872 2,794 7.51 148,024 2,810 7.59
Taxable 3,460 58 6.67 3,466 58 6.66
Other 35,067 934 10.66 34,346 523 6.09
---------- -------- ---------- -------
Total securities 1,683,575 29,138 6.93 1,633,829 27,623 6.77
Federal funds sold and securities
purchased under resale agreements 86,578 1,372 6.27 50,256 728 5.73
Loans, net of unearned discount 4,334,450 97,366 9.04 4,211,488 91,423 8.73
---------- -------- ---------- --------
Total Earning Assets and
Average Rate Earned 6,111,625 128,001 8.41 5,902,456 119,919 8.16
Cash and due from banks 607,792 601,030
Allowance for possible loan losses (58,951) (58,598)
Banking premises and equipment 146,498 143,625
Accrued interest and other assets 304,169 311,001
---------- ----------
Total Assets $7,111,133 $6,899,514
========== ==========
LIABILITIES
Demand deposits:
Commercial and individual $1,636,719 $1,567,238
Correspondent banks 217,843 223,528
Public funds 29,157 31,882
---------- ----------
Total demand deposits 1,883,719 1,822,648
Time deposits:
Savings and Interest-on-Checking 974,995 1,621 .67 977,059 1,615 .66
Money market deposit accounts 1,645,561 18,343 4.48 1,632,184 16,814 4.14
Time accounts 1,235,310 15,593 5.08 1,224,239 14,200 4.66
Public funds 231,319 2,703 4.70 233,349 2,428 4.19
---------- ------- ---------- -------
Total time deposits 4,087,185 38,260 3.76 4,066,831 35,057 3.47
---------- ------- ---------- -------
Total Deposits 5,970,904 5,889,479
Federal funds purchased and securities
sold under repurchase agreements 318,303 4,376 5.44 286,449 3,538 4.89
Long-term notes payable 2,460 31 5.04 2,635 39 5.92
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures, net 98,534 2,119 8.60 98,524 2,119 8.60
Other borrowings 113,074 2,120 7.54 26,591 454 6.87
---------- ------- ---------- -------
Total Interest-Bearing Funds
and Average Rate Paid 4,619,556 46,906 4.07 4,481,030 41,207 3.69
---------- ------- ---- ---------- ------- ----
Accrued interest and other liabilities 86,264 83,772
---------- ----------
Total Liabilities 6,589,539 6,387,450
SHAREHOLDERS' EQUITY 521,594 512,064
---------- ----------
Total Liabilities and
Shareholders' Equity $7,111,133 $6,899,514
========== ==========
Net interest income $ 81,095 $ 78,712
======== ========
Net interest spread 4.34% 4.47%
==== ====
Net interest income to total average earning assets 5.33% 5.36%
==== ====
*Taxable-equivalent basis assuming a 35% tax rate.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands - taxable-equivalent basis*)
December 31, 1999 September 30, 1999
---------------------------- ---------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
---------- --------- ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Time deposits $ 5,810 $ 94 5.40% $ 3,506 $ 45 5.10%
Securities:
U.S. Treasury 142,335 1,891 5.27 173,832 2,241 5.12
U.S. Government agencies
and corporations 1,349,023 22,361 6.63 1,375,186 22,524 6.55
States and political subdivisions
Tax-exempt 149,009 2,775 7.45 143,012 2,617 7.32
Taxable 3,510 58 6.58 3,540 58 6.55
Other 35,683 513 5.75 33,647 456 5.42
---------- -------- ---------- --------
Total securities 1,679,560 27,598 6.57 1,729,217 27,896 6.45
Federal funds sold and securities
purchased under resale agreements 122,332 1,678 5.37 106,962 1,404 5.14
Loans, net of unearned discount 4,101,779 88,663 8.58 3,985,270 84,191 8.38
---------- -------- ---------- --------
Total Earning Assets and
Average Rate Earned 5,909,481 118,033 7.94 5,824,955 113,536 7.75
Cash and due from banks 644,251 608,414
Allowance for possible loan losses (58,795) (59,221)
Banking premises and equipment 144,013 144,092
Accrued interest and other assets 319,615 321,928
---------- ----------
Total Assets $6,958,565 $6,840,168
========== ==========
LIABILITIES
Demand deposits:
Commercial and individual $1,576,527 $1,553,142
Correspondent banks 223,178 222,049
Public funds 35,118 37,006
---------- ----------
Total demand deposits 1,834,823 1,812,197
Time deposits:
Savings and Interest-on-Checking 955,664 1,624 .67 943,741 1,626 .68
Money market deposit accounts 1,705,498 16,700 3.88 1,691,611 15,708 3.68
Time accounts 1,236,682 13,645 4.38 1,246,044 13,238 4.22
Public funds 223,733 1,998 3.54 188,856 1,772 3.72
---------- -------- ---------- --------
Total time Deposits 4,121,577 33,967 3.27 4,070,252 32,344 3.15
---------- -------- ---------- --------
Total Deposits 5,956,400 5,882,449
Federal funds purchased and securities
sold under repurchase agreements 271,477 3,128 4.51 238,757 2,635 4.32
Long-term notes payable 2,657 38 5.76 2,702 39 5.71
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures, net 98,506 2,119 8.60 98,492 2,119 8.61
Other borrowings 13,083 171 5.19 9,896 159 6.40
---------- -------- ---------- --------
Total Interest-Bearing Funds
and Average Rate Paid 4,507,300 39,423 3.47 4,420,099 37,296 3.35
---------- -------- ---- ---------- -------- ----
Accrued interest and other
liabilities 97,040 90,258
---------- ----------
Total Liabilities 6,439,163 6,322,554
SHAREHOLDERS' EQUITY 519,402 517,614
---------- ----------
Total Liabilities and
Shareholders' Equity $6,958,565 $6,840,168
========== ==========
Net interest income $ 78,610 $ 76,240
======== ========
Net interest spread 4.47% 4.40%
==== ====
Net interest income to total average earning assets 5.29% 5.21%
==== ====
* Taxable-equivalent basis assuming a 35% tax rate.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands - taxable-equivalent basis*)
June 30, 1999
-----------------------------
Interest
Average Income/ Yield/
Balance Expense Cost
---------- -------- ------
<S> <C> <C> <C>
ASSETS
Time deposits $ 2,599 $ 21 3.26%
Securities:
U.S. Treasury 184,647 2,279 4.95
U.S. Government agencies
and corporations 1,500,643 23,986 6.39
States and political subdivisions
Tax-exempt 141,183 2,639 7.48
Taxable 3,591 58 6.43
Other 32,002 442 5.52
---------- --------
Total securities 1,862,066 29,404 6.32
Federal funds sold and securities
purchased under resale agreement 66,407 831 4.95
Loans, net of unearned discount 3,885,535 79,923 8.25
---------- --------
Total Earning Assets and
Average Rate Earned 5,816,607 110,179 7.59
Cash and due from banks 608,476
Allowance for possible loan losses (57,310)
Banking premises and equipment 140,684
Accrued interest and other assets 300,198
----------
Total Assets $6,808,655
==========
LIABILITIES
Demand deposits:
Commercial and individual $1,519,140
Correspondent banks 223,648
Public funds 37,146
----------
Total demand deposits 1,779,934
Time deposits:
Savings and Interest-on-Checking 958,665 1,652 .69
Money market deposit accounts 1,606,753 14,375 3.59
Time accounts 1,250,747 13,174 4.22
Public funds 207,827 1,907 3.68
---------- --------
Total time deposits 4,023,992 31,108 3.10
---------- --------
Total Deposits 5,803,926
Federal funds purchased and securities
sold under repurchase agreements 256,954 2,731 4.20
Long-term notes payable 1,772 26 5.82
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures, net 98,478 2,119 8.61
Other borrowings 12,590 172 5.49
---------- --------
Total Interest-Bearing Funds
and Average Rate Paid 4,393,786 36,156 3.30
---------- -------- ----
Accrued interest and other liabilities 105,016
----------
Total Liabilities 6,278,736
SHAREHOLDERS' EQUITY 529,919
----------
Total Liabilities and
Shareholders' Equity $6,808,655
==========
Net interest income $ 74,023
========
Net interest spread 4.29%
====
Net interest income to total average earning assets 5.10%
====
*Taxable-equivalent basis assuming a 35% tax rate.
</TABLE>
Item 3.
Quantitative and Qualitative Disclosures About Market Risks
There has been no material change in the market risks faced by the Company
since December 31, 1999. For information regarding the Company's market risk,
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
Part II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Corporation was held on May 31,
2000. The following matters were submitted to a vote of the Corporation's
shareholders.
1. Election of Directors:
Election of six director nominees into Class I with terms expiring in 2003
was approved with no nominee receiving less than 42.1 million votes.
Nominee Total Votes For Total Votes Withheld
------- --------------- --------------------
Class I:
Isaac Arnold, Jr. 42,144,144 5,943,103
Harry H. Cullen 47,999,182 88,065
Patrick B. Frost 47,997,972 89,275
James L. Hayne 47,510,721 576,526
Robert S. McClane 47,979,550 107,697
Mary Beth Williamson 47,994,153 93,094
2. Selection of Independent Auditors
Total Votes For 47,731,150
Total Votes Withheld 356,097
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Statement regarding Financial Data Schedule (EDGAR Version)
(b) Reports on Form 8-K
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cullen/Frost Bankers, Inc.
(Registrant)
Date: July 26, 2000 By: /S/Phillip D. Green
-----------------------
Phillip D. Green
Senior Executive Vice President
and Chief Financial Officer
(Duly Authorized Officer and
Principal Accounting Officer)
Cullen/Frost Bankers, Inc.
Form 10-Q
Exhibit Index
Exhibit Description
------- -------------------------------------------------------------
27 Statement re: Financial Data Schedule 6-30-00 (EDGAR VERSION)
