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