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, 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 August 13 1999, there were 53,465,387 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 -------------------- ------------------- 1999 1998 1999 1998 ------- ------- ------- ------- <S> <C> <C> <C> <C> INTEREST INCOME Loans, including fees $79,751 $74,562 $157,046 $146,705 Securities: Taxable 26,981 29,138 56,957 58,670 Tax-exempt 1,478 677 3,039 1,057 ------- ------- -------- -------- Total Securities 28,459 29,815 59,996 59,727 Time deposits 22 25 Federal funds sold 831 1,863 1,163 3,880 ------- ------- -------- -------- Total Interest Income 109,063 106,240 218,230 210,312 INTEREST EXPENSE Deposits 31,108 34,653 62,507 69,436 Federal funds purchased and securities sold under repurchase agreements 2,731 2,827 6,738 5,574 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 198 419 400 784 ------- ------- -------- -------- Total Interest Expense 36,156 40,018 73,883 80,032 ------- ------- -------- -------- Net Interest Income 72,907 66,222 144,347 130,280 Provision for possible loan losses 2,975 2,600 5,975 5,179 ------- ------- -------- -------- Net Interest Income After Provision For Possible Loan Losses 69,932 63,622 138,372 125,101 NON-INTEREST INCOME Trust fees 11,416 11,625 22,799 23,661 Service charges on deposit accounts 14,496 13,118 28,484 25,573 Other service charges, collection and exchange charges, commissions and fees 5,266 3,948 9,272 7,533 Net gain (loss) on securities transactions 71 (68) 144 Other 7,017 6,242 16,069 11,555 ------- ------- -------- -------- Total Non-Interest Income 38,195 35,004 76,556 68,466 NON-INTEREST EXPENSE Salaries and wages 30,554 27,757 60,267 54,964 Pension and other employee benefits 6,576 5,462 13,091 11,060 Net occupancy of banking premises 6,818 6,112 13,519 12,220 Furniture and equipment 4,984 4,647 9,559 9,088 Intangible amortization 3,554 3,360 6,891 6,708 Merger related charge 12,244 12,244 Other 18,994 19,446 38,229 37,597 ------- ------- -------- -------- Total Non-Interest Expense 71,480 79,028 141,556 143,881 ------- ------- -------- -------- Income Before Income Taxes 36,647 19,598 73,372 49,686 Income Taxes 12,559 8,142 24,989 18,817 ------- ------- -------- -------- Net Income $24,088 $11,456 $ 48,383 $ 30,869 ======= ======= ======== ======== Net income per common share: Basic $ .45 $ .22 $ .90 $ .58 Diluted .44 .21 .88 .57 Dividends per common share .175 .15 .325 .28 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 1999 1998 1998 ---------- ----------- ---------- <S> <C> <C> <C> Assets Cash and due from banks $ 655,431 $ 684,941 $ 754,017 Time deposits 2,628 Securities held to maturity 95,435 111,439 129,819 Securities available for sale 1,725,002 1,979,555 1,683,040 Securities trading 682 709 587 Federal funds sold 25,125 102,900 61,400 Loans, net of unearned discount of $4,942 at June 30, 1999; $3,357 at December 31, 1998 and $3,602 at June 30, 1998 3,973,749 3,646,603 3,447,353 Less: Allowance for possible loan losses (58,974) (53,616) (51,115) ---------- ---------- ---------- Net Loans 3,914,775 3,592,987 3,396,238 Banking premises and equipment 143,291 137,290 133,815 Accrued interest and other assets 340,069 259,784 266,476 ---------- ---------- ---------- Total Assets $6,902,438 $6,869,605 $6,425,392 ========== ========== ========== Liabilities Demand Deposits: Commercial and individual $1,594,194 $1,585,891 $1,465,420 Correspondent banks 216,878 201,355 289,460 Public funds 42,131 56,253 42,830 ---------- ---------- ---------- Total demand deposits 1,853,203 1,843,499 1,797,710 Time Deposits: Savings and Interest-on-Checking 940,062 961,597 874,239 Money market deposit accounts 1,655,953 1,493,778 1,354,368 Time accounts 1,249,722 1,264,121 1,299,283 Public funds 194,587 282,492 215,576 ---------- ---------- ---------- Total time deposits 4,040,324 4,001,988 3,743,466 ---------- ---------- ---------- Total deposits 5,893,527 5,845,487 5,541,176 Federal funds purchased and securities sold under repurchase agreements 296,875 305,564 177,842 Accrued interest and other liabilities 103,550 107,177 124,619 Guaranteed preferred beneficial interest in the Corporation's junior subordinated deferrable interest debentures 98,486 98,458 98,431 ---------- ---------- ---------- Total Liabilities 6,392,438 6,356,686 5,942,068 Shareholders' Equity Common stock, par value per share:$.01 536 267 266 Shares authorized:90,000,000 Shares issued: 53,558,846; 53,425,296; and 53,296,020 Surplus 184,741 183,151 179,110 Retained earnings 353,244 321,754 295,131 Accumulated other comprehensive income, net of tax (28,507) 7,747 8,817 Treasury Stock (500 shares) (14) ---------- ---------- ---------- Total Shareholders' Equity 510,000 512,919 483,324 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity $6,902,438 $6,869,605 $6,425,392 ========== ========== ========== 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 six months ended June 30, 1999 48,383 48,383 Unrealized loss on securities available for sale of $36,298, net of tax and reclassification adjustment for after-tax losses included in net income of $44 (36,254) (36,254) -------- Total comprehensive income 12,129 -------- Proceeds from employee stock purchase plan and options 1 908 (358) 521 1,072 Tax benefit related to exercise of stock options 950 950 Purchase of treasury stock (535) (535) Restricted stock plan deferred compensation, net 858 858 Cash dividend (17,393) (17,393) Two-for-one stock split 268 (268) -------- -------- -------- ------- ------- -------- Balance at June 30, 1999 $ 536 $184,741 $353,244 $(28,507) $ (14) $510,000 ======== ======== ======== ======= ======= ======== 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 ------------------ 1999 1998 ------- ------- <S> <C> <C> Operating Activities Net income $ 48,383 $ 30,869 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 5,975 5,179 Credit for deferred taxes (3,470) (2,124) Accretion of discounts on loans (100) (631) Accretion of securities' discounts (1,063) (1,213) Amortization of securities' premiums 2,825 2,732 Net decrease in trading securities 27 1,353 Net loss (gain) on securities transactions 68 (144) Net gain on sale of assets (2,736) (33) Depreciation and amortization 15,600 14,911 Increase in interest receivable (3,871) (3,224) Increase in interest payable 2,810 130 Originations of mortgages held-for-sale (81,695) (85,467) Proceeds from sales of mortgages held-for-sale 83,880 81,061 Net change in other assets and liabilities (26,966) 30,406 --------- -------- Net cash provided by operating activities 39,667 73,805 Investing Activities Proceeds from maturities of securities held to maturity 16,071 18,822 Purchases of investment securities (99) (9,650) Proceeds from sales of securities available for sale 265,414 260,158 Proceeds from maturities of securities available for sale 366,230 473,793 Purchases of securities available for sale (340,607) (703,783) Net increase in loans (217,603) (206,934) Net increase in bank premises and equipment (7,888) (6,747) Proceeds from sales of repossessed properties 376 738 Net cash and cash equivalents paid from bank acquisitions (23,788) (8,899) --------- --------- Net cash provided (used) by investing activities 58,106 (182,502) Financing Activities Net increase in demand deposits, IOC accounts, and savings accounts 2,368 226,663 Net decrease in certificates of deposits (180,203) (76,779) Net decrease in short-term borrowings (8,689) (38,361) Net proceeds from issuance of common stock 2,022 1,312 Purchase of treasury stock (535) (1,866) Dividends paid (17,393) (14,468) --------- -------- Net cash (used) provided by financing activities (202,430) 96,501 --------- -------- Decrease in cash and cash equivalents (104,657) (12,196) Cash and cash equivalents at beginning of year 787,841 827,613 --------- -------- Cash and cash equivalents at the end of the period $683,184 $815,417 ========= ======== Supplemental information: Interest Paid $ 71,073 $ 79,902 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 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. Certain reclassifications have been made to make prior periods comparable. 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, 1998. The balance sheet at December 31, 1998 has been derived from our 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. 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 to absorb loan losses inherent in the loan portfolio. Six Months Ended June 30 -------------------- (in thousands) 1999 1998 - ----------------------------------------------------------------------- Balance at beginning of the period $53,616 $48,073 Provision for possible loan losses 5,975 5,179 Loan loss reserve of acquired institutions 1,066 1,250 Net charge-offs: Losses charged to the allowance (4,483) (5,847) Recoveries 2,800 2,460 ------- ------- Net (charge-offs) (1,683) (3,387) ------- ------- Balance at the end of period $58,974 $51,115 ======= ======= 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, 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. No interest revenue was recognized on loans impaired as of June 30, 1999 compared to $52,000 recognized a year ago. 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) 1999 1998 - -------------------------------------------------------------------------- Impaired loans with no valuation reserve $2,471 $3,039 Impaired loans with a valuation reserve 2,837 4,137 ------ ------ Total recorded investment in impaired loans $5,308 $7,176 ====== ====== Average recorded investment in impaired loans $5,372 $6,358 Valuation reserve 2,208 2,273 Note D-Earnings Per Common Share On June 22, 1999, the Corporation completed the previously announced two- for-one stock split. As a result of the split, $268,000 was transferred from surplus to common stock. All related share amounts have been restated to make prior periods comparable. 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) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Numerators for both basic and diluted earnings per share, net income $48,383 $30,869 $24,088 $11,456 ======= ======= ======= ======= Denominators: Denominators for basic earnings per share, average outstanding common shares 53,512 52,941 53,554 53,040 Dilutive effect of stock options 1,366 1,590 1,395 1,568 ------- ------- ------- ------- Denominator for diluted earnings per share 54,878 54,531 54,949 54,608 ======= ======= ======= ======= Earnings per share: Basic $ .90 $ .58 $ .45 $ .22 Diluted .88 .57 .44 .21 </TABLE> Note E-Capital The table below reflects various measures of regulatory capital at June 30, 1999 and 1998. As a result of the acquisitions during the first half of 1999, all regulatory capital ratios are down when compared to a year ago. <TABLE> <CAPTION> June 30, 1999 June 30, 1998 ------------------- ------------------- Capital Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Risk-Based Tier 1 Capital $ 503,171 11.26% $ 474,933 11.87% Tier 1 Capital Minimum requirement 178,702 4.00 160,049 4.00 Total Capital $ 559,054 12.51% $ 524,962 13.12% Total Capital Minimum requirement 357,404 8.00 320,098 8.00 Risk-adjusted assets, net of goodwill $4,467,555 $4,001,229 Leverage ratio 7.51% 7.64% Average equity as a percentage of average assets 7.78 7.57 </TABLE> At June 30, 1999 and 1998, Cullen/Frost's subsidiary banks were considered "well capitalized" as defined by the FDIC Improvement Act of 1991, the highest rating, and Cullen/Frost's capital ratios were in excess of "well capitalized" levels. A financial institution is deemed to be well capitalized if the institution has a total risk-based capital ratio of 10.0 percent or greater, a Tier 1 risk-based capital ratio of 6.0 percent
or greater, and a 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 level for any capital measure. Cullen/Frost and its subsidiary banks currently exceed all minimum capital requirements. 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 The tax expense for the second quarter of 1999 was $12.6 million. This amount consisted of current tax expense of $14.7 million and deferred tax benefit of $2.1 million. Year-to-date tax expense is $25.0 million, consisting of current tax expense of $28.5 million and deferred tax benefit of $3.5 million. Net deferred tax assets were $31.3 million with no valuation allowance. The deferred tax assets were supported by taxes paid in prior years. The tax expense for the second quarter of 1998 was $8.1 million, consisting of current tax expense of $9 million and deferred tax benefit of $.9 million. Year-to-date tax expense for 1998 was $18.8 million, consisting of current tax expense of $20.9 million and deferred tax benefit of $2.1 million. Income tax payments for the first six months of 1999 and 1998 were $26.8 million and $22.9 million, respectively. Note G-Merger and Acquisitions On May 20, 1999, the Corporation paid approximately $42.25 million to acquire Commerce Financial Corporation and its four-location subsidiary, Bank of Commerce, in Fort Worth, Texas. The total cash consideration was funded through internal sources. The purchase method of accounting has been used to record the transaction and as such, the purchase price has been allocated to the underlying assets and liabilities based on estimated fair values at the date of acquisition. Such estimates may be subsequently revised. The Corporation acquired loans of approximately $76 million and deposits of approximately $164 million. The intangible assets associated with the acquisition amounted to approximately $ 31.6 million. This acquisition is not expected to have a material impact on the Corporation's 1999 net income. On May 1, 1999, Frost Insurance Agency, a subsidiary of The Frost National Bank, acquired Professional Insurance Agents, Inc. (PIA), a mid-sized independent insurance agency based in Victoria, Texas, with additional locations in San Antonio, New Braunfels and Refugio. PIA offers corporate and personal property and casualty insurance as well as group, health and life insurance products to individuals and businesses. The purchase method of accounting was used to record the transaction. This acquisition is not expected to have a material impact on the Corporation's 1999 net income. 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 intangible assets 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, was the Corporation's first entry into the Fort Worth market. With the merger, the Corporation acquired twelve locations in Fort Worth/Arlington and two in Dallas. The Corporation issued approximately 4.38 million (pre-split) 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 internal sources. 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 intangible assets associated with the acquisition amounted to approximately $34.2 million. Investment Banking Subsidiary On August 2, 1999 the Corporation began operations of its Section 20 investment banking subsidiary in Dallas, Texas. The new subsidiary, Frost Securities, Inc., offers a full range of services including equity research, institutional sales, trading and investment banking services to institutional investors and corporate customers who need access to the capital markets. Note H-Accounting Changes In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted in years beginning after June 15, 1999. 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 will require the Corporation to recognize 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 hedge item is recognized in earnings. The effective portion of a derivative's change in fair value will be immediately recognized in earnings. 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. Note I-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> Six Months Ended: Financial Management Consolidated (in thousands) Banking Group Non-Banks Total =============================================================================================================== <S> <C> <C> <C> <C> June 30, 1999 Revenues from external customers.................... $195,204 $ 29,981 $ (4,282) $220,903 ------------------------------------------------------- Net income (loss)................................... $ 45,856 $ 7,298 $ (4,771) $ 48,383 ======================================================= ================================================================================================================ June 30, 1998 Revenues from external customers.................... $172,713 $ 29,745 $ (3,712) $198,746 ------------------------------------------------------- Operating earnings (loss)........................... $ 36,644 $ 7,204 $ (3,468) $ 40,380* ======================================================= Three Months Ended: Financial Management Consolidated (in thousands) Banking Group Non-Banks Total =============================================================================================================== June 30, 1999 Revenues from external customers.................... $ 97,935 $ 15,337 $ (2,171) $111,102 ------------------------------------------------------- Net income (loss)................................... $ 22,801 $ 3,857 $ (2,570) $ 24,088 ======================================================= ================================================================================================================ June 30, 1998 Revenues from external customers.................... $ 87,916 $ 14,852 $ (1,542) $101,226 ------------------------------------------------------- Operating earnings (loss)........................... $ 18,761 $ 3,618 $ (1,411) $ 20,968* ======================================================= *Excludes the after-tax impact of the $12.2 million Overton merger related charge. </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. Certain reclassifications have been made to make prior quarters comparable. All balance sheet figures are presented in averages unless otherwise noted. Cullen/Frost completed acquisitions during the first and second quarters 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. In addition, 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. The acquisitions and merger are outlined in the footnotes to the financial statements on page eight. During the second quarter of 1999, the board of directors declared and paid a two for one stock split. All periods presented have been restated to give effect to the split. Cullen/Frost Bankers, Inc. reported net income of $24.1 million or $.44 per diluted common share for the quarter ended June 30, 1999 compared to $24.3 million or $.44 per diluted common share for the first quarter of 1999. Operating earnings were $21.0 million or $.38 per diluted common share for the second quarter of 1998. Operating earnings exclude the after-tax impact of the merger related charge associated with the merger of Overton. Return on average assets and average equity increased to 1.42 percent and 18.23 percent for the second quarter of 1999 compared to 1.33 percent and 17.40 percent, respectively, for the second quarter of 1998 excluding the merger related charge. Earnings for the six months ended June 30, 1999 were $48.4 million or $.88 per diluted common share compared to $40.4 million or $.74 per diluted common share (excluding the after tax impact of the merger related charge) for the same period of 1998. Return on average assets and average equity for the six months ended June 30, 1999 increased to 1.43 percent and 18.51 percent compared to 1.29 percent and 17.05 percent for 1998(excluding the merger related charge). <TABLE> <CAPTION> Summary of Operations ------------------------------------------------- Three Months Ended Six Months Ended --------------------------- June 30 1999 1998 ----------------- ------------------ ------- 1999 1998 June 30 March 31 June 30 - ---------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Taxable-equivalent net interest income $146,630 $131,327 $74,023 $72,607 $66,869 Taxable-equivalent adjustment 2,283 1,047 1,116 1,167 647 -------- -------- ------- ------- ------- Net interest income 144,347 130,280 72,907 71,440 66,222 Provision for possible loan losses 5,975 5,179 2,975 3,000 2,600 Non-Interest income: Net gain (loss) on securities transactions (68) 144 (68) 71 Other 76,624 68,322 38,195 38,429 34,933 -------- -------- ------- ------- ------- Total non-interest income 76,556 68,466 38,195 38,361 35,004 Non-Interest expense: Intangible amortization 6,891 6,708 3,554 3,337 3,360 Merger related charge 12,244 12,244 Other 134,665 124,929 67,926 66,739 63,424 -------- -------- ------- ------- ------- Total non-interest expense 141,556 143,881 71,480 70,076 79,028 -------- -------- ------- ------- ------- Income before income taxes 73,372 49,686 36,647 36,725 19,598 Income Taxes 24,989 18,817 12,559 12,430 8,142 -------- -------- ------- ------- ------- Net Income $ 48,383 $ 30,869 $24,088 $24,295 $11,456 ======== ======== ======= ======= ======= Net income per diluted common share: $ .88 $ .57 $ .44 $ .44 $ .21 Return on Average Assets 1.43% .99% 1.42% 1.44% .73% Return on Average Equity 18.51 13.06 18.23 18.79 9.51 </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, 1999 and 1998. <TABLE> <CAPTION> Six Months Ended Three Months Ended June 30 June 30 (in thousands) 1999 1998 1999 1998 ========================================================================================== <S> <C> <C> <C> <C> Banking............................... $ 45,856 $ 36,644 $22,801 $18,761 Financial Management Group............ 7,298 7,204 3,857 3,618 Non-Banks............................. (4,771) (3,468) (2,570) (1,411) ---------------------- --------------------- Consolidated operating earnings....... $ 48,383 $ 40,380* $ 24,088 $ 20,968* Consolidated net income............... 48,383 $ 30,869 $ 24,088 $ 11,456 ====================== ===================== * Excludes the after-tax impact of the $12.2 million Overton merger related charge. </TABLE> The increase in Banking net income for the six months and three months ended June 30, 1999 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. Net Interest Income Net interest margin was 5.10 percent for the second quarter of 1999 compared to 4.98 percent and 4.96 percent for the first quarter of 1999 and second quarter of 1998, respectively. The net interest spread of 4.29 percent increased 10 basis points from the first quarter of 1999 and 23 basis points from the second quarter of 1998. The increases in net interest margin and spread from the first quarter of 1999 and the second quarter of 1998 were due to strong loan growth resulting in an improved earning asset mix, as well as, decreased deposit costs. <TABLE> <CAPTION> Change in Net Interest Income (Taxable Equivalent) ------------------------------------------------------------------- Second Quarter Second Quarter Year-to-Date 1999 1999 1999 vs. vs. vs. Second Quarter First Quarter Year-to-Date 1998 1999 1998 ------------------------------------------------------------------- Amount Amount Amount - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> Due to volume $ 7,972 $ 878 $17,124 Due to interest rate spread (818) 538 (1,821) ------- ------- ------- $ 7,154 $ 1,416 $15,303 ======= ======= ======= </TABLE>
Non-Interest Income Growth in non-interest income was favorably impacted by the 1999 first quarter acquisition of Keller State Bank and the second quarter acquisitions of Professional Insurance Agents, Inc. ("PIA") and Commerce Financial Corporation. Also impacting 1999 was a $2 million non-recurring gain recorded in the first quarter. <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------------ June 30 1999 1998 ------------------ -------------------- ------- Non-Interest Income 1999 1998 June 30 March 31 June 30 - ------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Trust fees $22,799 $23,661 $11,416 $11,383 $11,625 Service charges on deposit accounts 28,484 25,573 14,496 13,988 13,118 Other service charges, collection and exchange charges, commissions and fees 9,272 7,533 5,266 4,006 3,948 Net gain (loss) on securities transactions (68) 144 (68) 71 Other 16,069 11,555 7,017 9,052 6,242 ------- ------- ------- ------- ------- Total $76,556 $68,466 $38,195 $38,361 $35,004 ======= ======= ======= ======= ======= </TABLE> For the second quarter 1999... Total non-interest income was flat compared to the first quarter of 1999 and up $3.2 million, an increase of 9.1 percent compared to the second quarter of 1998. Included in the first quarter of 1999 was a $2 million non-recurring gain from the sale of a piece of property in connection with a branch restructuring. Excluding this non-recurring gain, non-interest income for the second quarter of 1999 was up 5.0 percent from the previous quarter. Trust fees were relatively flat when compared with the previous and year ago quarters primarily as a result of lower management fees associated with small cap value funds, as well as trust oil and gas fees, which were offset by growth in other areas of the Financial Management Group. The market value of trust assets at the end of the second quarter of 1999 was $12.7 billion with $5.6 billion in discretionary assets and $7.1 billion in non-discretionary assets compared to $11.9 billion a year ago with $5.5 billion in discretionary assets and $6.4 billion in non-discretionary assets. Service charges on deposit accounts for the second quarter of 1999 increased $508 thousand or 3.6 percent from the first quarter of this year and $1.4 million or 10.5 percent from the second 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 and cash management fees on commercial and individual deposits. Other service charges were up $1.3 million for the second quarter of 1999 compared to the first quarter of 1999 and $1.3 million or 33 percent from the same quarter a year ago. Insurance commission income and mutual fund fees led the way in growth in this category of non-interest income. Compared to the first quarter of 1999, other non-interest income decreased $2.0 million. This resulted primarily from the $2 million non-recurring gain from the sale of a piece of property in connection with a branch restructuring in the first quarter of 1999. Other non-interest income increased $775 thousand or 12.4 percent from the second quarter of 1998. This increase is primarily due to gains on the sale of foreclosed assets and student loans offset by lower recoveries on loans that are carried at a discount and mineral interest income than a year ago. For the six months ended June 30, 1999... Non-interest income was up $8.1 million or 11.8 percent compared to the same period last year. Trust income decreased $862 thousand or 3.6 percent from the same period a year ago, due to lower management fees associated with small cap value funds, as well as trust oil and gas fees. Service charges on deposits increased $2.9 million or 11.4 percent
compared to the same period one year ago. Broad based deposit growth generated increases in overdraft charges, cash management fees on commercial deposits, as well as increases in ATM income offset by lower NSF charges. Other service charge income increased $1.7 million or 23.1 percent from the same period last year. Primary contributors to this growth were insurance commission income and mutual fund fees. Other income was up $4.5 million or 39.1 percent compared to the same period last year. Main contributors were the $2 million non-recurring gain from the sale of a piece of property in connection with a branch restructuring, gains on the sale of foreclosed assets and student loans offset by lower recoveries on loans that are carried at a discount and mineral interest income than a year ago. Non-Interest Expense The acquisitions of Commerce Financial Corporation, Keller State Bank, and PIA as well as the formation of Frost Securities, Inc. impacted the growth in expenses. <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------------ June 30 1999 1998 ------------------ ------------------- ------- Non-Interest Expense 1999 1998 June 30 March 31 June 30 - ------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Salaries and wages $ 60,267 $ 54,964 $30,554 $29,713 $27,757 Pension and other employee benefits 13,091 11,060 6,576 6,515 5,462 Net occupancy of banking premises 13,519 12,220 6,818 6,701 6,112 Furniture and equipment 9,559 9,088 4,984 4,575 4,647 Intangible amortization 6,891 6,708 3,554 3,337 3,360 Merger related charge 12,244 12,244 Other 38,229 37,597 18,994 19,235 19,446 -------- -------- ------- ------- ------- Total $141,556 $143,881 $71,480 $70,076 $79,028 ======== ======== ======= ======= ======= </TABLE> For the second quarter 1999... Non-interest expense was up $1.4 million or 2 percent compared to last quarter and increased $4.7 million or 7 percent compared to the second quarter of 1998 excluding the merger-related charge associated with the merger of Overton. Salaries and wages increased $841 thousand compared with the first quarter of 1999 and were up $2.8 million or 10.1 percent from the second quarter of 1998. These increases were related to the acquisitions, as well as new business initiatives and merit increases. Pension and employee benefits were flat compared to last quarter and up 20.4 percent compared to the second quarter of 1998. The increase from a year ago reflects higher medical insurance expense and the impact of the acquisitions on bank contributions to the 401(k) stock plan. Net occupancy of banking premises expense remained flat with the first quarter of 1999 and increased $706 thousand or 11.6 percent from the second quarter of 1998. Costs associated with closing a branch location were primarily responsible for the increase from the year ago quarter. Lower operating costs during the second quarter of 1999 offset the branch closing costs when compared to the previous quarter. Furniture and equipment expense increased $409 thousand or 8.9 percent and $337 thousand or 7.3 percent from the first quarter of 1999 and the second quarter last year, respectively. This increase is primarily due to higher amortized software and software maintenance costs. Intangible amortization increased 6.5 percent and 5.8 percent from the first quarter of 1999 and second quarter of 1998 due to the previously mentioned acquisitions. Also included in the second quarter of 1998 was a $12.2 million merger related charge associated with the merger of Overton. Of the $12.2 million charge approximately 39 percent related to severance payments and 29 percent related to investment banking fees. Other non-interest expenses decreased $241 thousand or 1.3 percent and $452 thousand or 2.3 percent compared to the first quarter of 1999 and second quarter of 1998, respectively. The decrease from a year ago is related to lower professional expenses and security costs offset by higher conversion related acquisition costs.
For the six months ended June 30, 1999... Total non-interest expense was up $9.9 million or 7.5 percent compared to the same period one year ago excluding the merger-related charge. Salaries and wages were up $5.3 million or 9.6 percent compared to the same period a year ago primarily because of the acquisitions, as well as new business initiatives and merit increases. Pension and other benefits increased $2.0 million or 18.4 percent from the same period last year due to higher medical insurance expense and the impact of the acquisitions on bank contributions to the 401(k) stock plan. Net occupancy of banking premises was up $1.3 million or 10.6 percent compared to a year ago. This increase is attributable to cost associated with branch activity, building maintenance influenced by the acquisitions and higher property taxes. Furniture and equipment expense increased $471 thousand or 5.2 percent due to higher amortized software and software maintenance. Intangible amortization increased $183 thousand or 2.7 percent from the same period a year ago due to acquisitions. Other non-interest expenses increased $632 thousand or 1.7 percent, primarily due to appraisal expense and higher conversion related acquisition costs. Income Taxes The Corporation's effective tax rate for the first and second quarters of 1999 approximates 34 percent. The effective tax rate for the second quarter of 1998 was impacted by the merger related charge associated with Overton and approximated 42 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 1999 June 1998 - ----------------------------------------------------------------------------------------- Reported Intangible "Cash" Reported Intangible "Cash" Earnings Amortization Earnings Earnings Amortization Earnings - ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Income before income taxes $73,372 $6,891 $80,263 $49,686 $6,708 $56,394 Income taxes 24,989 1,602 26,591 18,817 1,656 20,473 ------- ------ ------- ------- ------ ------- Net income $48,383 $5,289 $53,672 $30,869 $5,052 $35,921 ======= ====== ======= ======= ====== ======= Net income per diluted common share $ .88 $ .10 $ .98 $ .57 $ .09 $ .66 Return on assets 1.43% 1.58%* .99% 1.15%* Return on equity 18.51 20.53 ** 13.04 15.17** * Calculated as A/B ** Calculated as A/C June 1999 June 1998 ----------------- ---------- ---------- (A) Net income before intangible amortization (including goodwill and core deposit intangibles, net of tax) $ 53,672 $ 35,921 (B) Total average assets 6,836,555 6,307,061 (C) Average shareholders' equity 527,104 476,805 </TABLE> <TABLE> <CAPTION> Three Months Ended -------------------------------------------------------------- June 1999 March 1999 - ----------------------------------------------------------------------------------------- Reported Intangible "Cash" Reported Intangible "Cash" Earnings Amortization Earnings Earnings Amortization Earnings - ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Income before income taxes $36,647 $3,554 $40,201 $36,725 $3,337 $40,062 Income taxes 12,559 816 13,375 12,430 786 13,216 ------- ------ ------- ------- ------ ------- Net income $24,088 $2,738 $26,826 $24,295 $2,551 $26,846 ======= ====== ======= ======= ====== ======= Net income per common share $ .44 $ .05 $ .49 $ .44 $ .05 $ .49 Return on assets 1.42% 1.58%* 1.44% 1.59%* Return on equity 18.23 20.30 ** 18.79 20.77** * Calculated as A/B ** Calculated as A/C June 1999 March 1999 ----------------- ---------- ----------- (A) Net income before intangible amortization (including goodwill and core deposit intangibles, net of tax) $ 26,826 $ 26,846 (B) Total average assets 6,808,655 6,852,825 (C) Average shareholders' equity 529,919 524,257 </TABLE> Three Months Ended -------------------------------- June 1998 - -------------------------------------------------------------- Reported Intangible "Cash" Earnings Amortization Earnings - -------------------------------------------------------------- Income before income taxes $19,598 $3,360 $22,958 Income taxes 8,142 812 8,954 ------- ------ ------- Net income $11,456 $2,548 $14,004 ======= ====== ======= Net income per common share $ .21 $ .05 $ .26 Return on assets .73% .89%* Return on equity 9.51 11.62 ** * Calculated as A/B ** Calculated as A/C June 1998 ---------- (A) Net income before intangible amortization (including goodwill and core deposit intangibles, net of tax) $ 14,004 (B) Total average assets 6,318,904 (C) Average shareholders' equity 483,334
Excluding the merger related charge, the Corporation's cash earnings for the six months and second quarter ending June 30, 1998 were $45.4 million or $.83 per diluted common share and $23.5 million or $.43 per diluted common share, respectively. Cash earnings (excluding the merger related charge) return on assets and return on equity for the second quarter of 1998 were 1.49 percent and 19.51 percent, respectively. Balance Sheet Average assets of $6.8 billion were flat when compared to the previous quarter and up 7.8 percent from the second quarter of 1998 with approximately half of the increase related to the acquisitions. Total deposits averaged $5.8 billion for the current quarter, flat from the previous quarter and up 8 percent when compared to the second quarter of 1998. Average loans for the second quarter of 1999 were $3.9 billion. This represents an increase in average loans of 13.3 percent on an annualized basis from the first quarter of 1999 and 14.6 percent from the second quarter of last year. Loans 1999 1998 ---------------------- ------------------------- Loan Portfolio Percentage Period-End Balances June 30 of Total December 31 June 30 - ------------------------------------------------------------------------------ Commercial $1,399,122 35.2% $1,211,180 $1,105,949 Consumer 572,058 14.4 625,018 695,563 Real estate 1,909,498 48.0 1,719,404 1,553,566 Other 98,013 2.5 94,358 95,877 Unearned discount (4,942) (.1) (3,357) (3,602) ---------- ------ ---------- ---------- Total Loans $3,973,749 100.0% $3,646,603 $3,447,353 ========== ====== ========== ========== At June 30, 1999 period-end loans totaled $4 billion up 17.5 percent on an annualized basis from the previous quarter and up 15.3 percent from the same period last year. Approximately 65 percent of the increase in loans from a year ago resulted from internally generated growth. Real Estate Loans Real estate loans at June 30, 1999, were $1.9 billion or 48 percent of period-end loans compared to 45.1 percent a year ago. Residential permanent mortgage loans at June 30, 1999, were $671 million compared to $652 million at March 31, 1999, and $560 million at June 30, 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 June 30, 1999, real estate loans 90 days past due (excluding non- accrual loans) were $2.7 million, compared with $4.1 million at March 31, 1999, and $2.6 million at June 30, 1998. 1999 1998 ------------------------ -------- Real Estate Loans Percentage Period-End Balances June 30 of Total June 30 - ------------------------------------------------------------------------------- Construction $ 367,160 19.2% $ 259,236 Land 112,958 5.9 61,163 Permanent mortgages: Commercial 405,431 21.2 414,468 Residential 671,105 35.2 559,548 Other 352,844 18.5 259,151 ---------- ------ ---------- $1,909,498 100.0% $1,553,566 ========== ====== ========== Non-accrual and restructured $ 5,134 .3% $ 8,857
Mexico At June 30, 1999, the Corporation's cross border outstanding to Mexico, excluding $16.5 million in loans secured by liquid U.S. assets, totaled $48.4 million or 1.2 percent of total loans down from $50.4 million at March 31, 1999 and $51.4 million at June 30, 1998. The decrease from last year represents normal fluctuations in lines of credit used by Mexican banks to finance trade. At June 30, 1999, $583 thousand of Mexican-related loans were on non-performing status. MEXICAN LOANS ----------------------- Percentage of June 30, 1999 Amount Total Loans - ---------------------------------------------------------------------- Loans to financial institutions $40,379 1.0% Loans to private firms or individuals 8,012 .2 ------- ---- $48,391 1.2% ======= ==== Non-Performing Assets NON-PERFORMING ASSETS -------------------------- Real June 30, 1999 Estate Other Total - --------------------------------------------------------------------------- Non-accrual $ 5,134 $7,862 $12,996 Foreclosed assets 2,919 287 3,206 ------- ------ ------- Total $ 8,053 $8,149 $16,202 ======= ====== ======= As a percentage of total non-performing assets 49.7% 50.3% 100.0% Non-performing assets totaled $16.2 million at June 30, 1999 down 18 percent from $19.7 million at June 30, 1998 and down 12 percent from $18.4 million at March 31, 1999. Non-performing assets as a percentage of total loans and foreclosed assets decreased to .41 percent at June 30, 1999 from .57 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 $217 thousand for the second quarter of 1999, compared to approximately $297 thousand for the second quarter of 1998 and $250 thousand for the first quarter of 1999. For the six months ended June 30, 1999, the after-tax impact (assuming a 35 percent marginal tax rate) was approximately $467 thousand compared with approximately $573,000 for the comparable period last year. Total loans 90 days past due (excluding non- accrual loans) were $5.6 million at June 30, 1999, compared to $7.0 million at June 30, 1998, and $7.9 million at March 31, 1999.
Allowance for Possible Loan Losses The allowance for possible loan losses was $59 million or 1.48 percent of period-end loans at June 30, 1999, compared to $51.1 million or 1.48 percent at June 30, 1998 and $55.9 million or 1.47 percent at March 31, 1999. The allowance for possible loan losses as a percentage of non-accrual and restructured loans was 454 percent at June 30, 1999, compared to 352 percent at June 30, 1998 and 391 percent at the end of the first quarter of 1999. The Corporation recorded a $3 million provision for possible loan losses during the second quarter of 1999. This compares to $2.6 million provision for possible loan losses during the second quarter of 1998 and $3 million for the first quarter of 1999. The provision is reflective of the continued growth in the loan portfolio. Net charge-offs in the second quarter of 1999 totaled $624 thousand, compared to net charge-offs of $1.2 million and $1.1 million for the second quarter of 1998 and for the first quarter of 1999, respectively. NET CHARGE-OFFS (RECOVERIES) ---------------------------- 1999 1998 ------------------ ------- Second First Second Quarter Quarter Quarter - ------------------------------------------------------------------- Real estate $ 86 $ (243) $ (303) Commercial and industrial (289) 170 (100) Consumer 853 1,150 1,600 Other, including foreign (26) (18) (14) ------- ------- ------- $ 624 $ 1,059 $ 1,183 ======= ======= ======= Provision for possible loan losses $ 2,975 $ 3,000 $ 2,600 Allowance for possible loan losses 58,974 55,857 51,115 Capital and Liquidity At June 30, 1999, shareholders' equity was $510 million compared to $483.3 million at June 30, 1998 and $523.8 million at March 31, 1999. The Corporation had an unrealized loss on securities available for sale, net of deferred taxes, of $28.5 million as of June 30, 1999 compared to a $8.8 million unrealized gain as of June 30, 1998, reflecting a change of $37.3 million. This decrease in the market value of securities available for sale is primarily due to an increase in market interest rates. 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. During the second quarter of 1999, the board of directors declared and paid a two for one stock split. In addition, the Corporation raised its cash dividend 17 percent in the second quarter of 1999 to $.175 per common share (post-split) compared to $.15 per common share in the first quarter of 1999 and second quarter of 1998. This equates to a dividend payout ratio of 38.9 percent and 33 percent for the second and first quarters of 1999, respectively. The dividend payout ratio for the second quarter of 1998 (excluding the merger related charge) was 38.1 percent. Funding sources available at the holding company level include a $7,500,000 short-term line of credit. There were no borrowings outstanding from this source at June 30, 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, principally core deposits and Federal funds purchased. Additional sources of liability liquidity include brokered deposits and securities sold under agreement to repurchase. 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 $4.7 million over the three year period beginning in 1997, funded out of its earnings, with approximately $4.29 million spent through the second quarter of 1999. These costs are being expensed as incurred. Additionally, the Corporation is spending about 30 percent 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 100 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. The Corporation is substantially complete with the non-mission critical applications. 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 complete. 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. 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, results of operations 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.
<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, 1999 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 Time deposits $ 1,522 $ 25 3.29% Securities: U.S. Treasury 195,660 4,844 4.99 $ 295,857 $ 8,268 5.64% U.S. Government agencies and corporations 1,596,862 50,606 6.34 1,512,706 49,177 6.50 States and political subdivisions 140,005 5,098 7.28 45,266 1,778 7.86 Other 43,010 1,234 5.74 33,950 1,055 6.21 --------- -------- --------- -------- Total securities 1,975,537 61,782 6.26 1,887,779 60,278 6.39 Federal funds sold 47,528 1,163 4.87 139,702 3,880 5.52 Loans, net of unearned discount 3,823,480 157,543 8.31 3,336,701 147,201 8.90 --------- -------- ---------- -------- Total Earning Assets and Average Rate Earned 5,848,067 220,513 7.59 5,364,182 211,359 7.93 Cash and due from banks 613,395 592,705 Allowance for possible loan losses (55,930) (49,884) Banking premises and equipment 138,811 134,797 Accrued interest and other assets 292,212 265,261 --------- ---------- Total Assets $6,836,555 $6,307,061 ========== ========== LIABILITIES Demand deposits: Commercial and individual $1,500,961 $1,347,314 Correspondent banks 220,428 207,802 Public funds 39,098 39,540 --------- --------- Total demand deposits 1,760,487 1,594,656 Time deposits: Savings and Interest-on-Checking 947,250 3,308 .70 905,247 5,671 1.26 Money market deposit accounts 1,574,255 28,070 3.60 1,316,894 26,000 3.98 Time accounts 1,259,466 26,931 4.31 1,281,803 32,313 5.08 Public funds 235,636 4,198 3.59 274,613 5,452 4.00 --------- -------- --------- -------- Total time deposits 4,016,607 62,507 3.14 3,778,557 69,436 3.71 --------- --------- Total Deposits 5,777,094 5,373,213 Federal funds purchased and securities sold under resale agreements 316,326 6,738 4.24 239,090 5,574 4.64 Long-term notes payable 891 26 5.84 Guaranteed preferred beneficial interests in the Corporation's subordinated debentures,net 98,471 4,238 8.61 98,416 4,238 8.61 Other borrowings 12,895 374 5.86 30,248 784 5.23 --------- -------- ---------- -------- Total Interest-Bearing Funds and Average Rate Paid 4,445,190 73,883 3.35 4,146,311 80,032 3.89 --------- -------- ---- ---------- -------- ---- Accrued interest and other liabilities 103,774 89,289 --------- ---------- Total Liabilities 6,309,451 5,830,256 SHAREHOLDERS' EQUITY 527,104 476,805 --------- ---------- Total Liabilities and Shareholders' Equity $6,836,555 $6,307,061 ========== ========== Net interest income $146,630 $131,327 ======== ======== Net interest spread 4.24% 4.04% ===== ===== Net interest income to total average earning assets 5.04% 4.92% ===== ===== *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 March 31, 1999 ---------------------------- ------------------------ Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Cost Balance Expense Cost ---------- ------- ----- -------- ------- ----- <S> <C> <C> <C> <C> <C> <C> ASSETS Time deposits $ 2,599 $ 21 3.26% $ 432 $ 3 3.47% Securities: U.S. Treasury 184,647 2,279 4.95 206,795 2,565 5.03 U.S. Government agencies and corporations 1,500,643 23,986 6.39 1,694,151 26,620 6.29 States and political subdivisions 144,774 2,697 7.45 135,183 2,401 7.10 Other 32,002 442 5.52 54,141 792 5.86 ---------- ------- ---------- ------- Total securities 1,862,066 29,404 6.32 2,090,270 32,378 6.20 Federal funds sold 66,407 831 4.95 28,439 332 4.67 Loans, net of unearned discount 3,885,535 79,923 8.25 3,760,734 77,621 8.37 ---------- ------- ---------- ------- Total Earning Assets and Average Rate Earned 5,816,607 110,179 7.59 5,879,875 110,334 7.58 Cash and due from banks 608,476 618,369 Allowance for possible loan losses (57,310) (54,534) Banking premises and equipment 140,684 136,918 Accrued interest and other assets 300,198 272,197 ---------- ---------- Total Assets $6,808,655 $6,852,825 ========== ========== LIABILITIES Demand deposits: Commercial and individual $1,519,140 $1,482,579 Correspondent banks 223,648 217,173 Public funds 37,146 41,071 ---------- ---------- Total demand deposits 1,779,934 1,740,823 Time deposits: Savings and Interest-on-Checking 958,665 1,652 .69 935,709 1,656 .72 Money market deposit accounts 1,606,753 14,375 3.59 1,541,395 13,695 3.60 Time accounts 1,250,747 13,174 4.22 1,268,283 13,757 4.40 Public funds 207,827 1,907 3.68 263,754 2,291 3.52 ---------- ------- ---------- ------- Total time deposits 4,023,992 31,108 3.10 4,009,141 31,399 3.18 ---------- ------- ---------- ------- Total Deposits 5,803,926 5,749,964 Federal funds purchased and securities sold under resale agreements 256,954 2,731 4.20 376,357 4,007 4.26 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 98,464 2,119 8.61 Other borrowings 12,590 172 5.49 13,204 202 6.21 ---------- ------- ---------- ------- Total Interest-Bearing Funds and Average Rate Paid 4,393,786 36,156 3.30 4,497,166 37,727 3.39 ---------- ------- ---- ---------- ------- ---- Accrued interest and other liabilities 105,016 90,579 ---------- ---------- Total Liabilities 6,278,736 6,328,568 SHAREHOLDERS' EQUITY 529,919 524,257 ---------- ---------- Total Liabilities and Shareholders' Equity $6,808,655 $6,852,825 ========== ========== Net interest income $ 74,023 $ 72,607 ======== ======== Net interest spread 4.29% 4.19% ==== ==== Net interest income to total average earning assets 5.10% 4.98% ==== ==== *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, 1998 September 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 $ 252,567 $ 3,204 5.03% $ 205,209 $ 2,867 5.54% U.S. Government agencies and corporations 1,687,422 26,508 6.28 1,515,663 24,286 6.41 States and political subdivisions 107,122 1,912 7.14 72,949 1,367 7.49 Other 50,937 772 6.06 51,667 753 5.83 ---------- -------- ---------- -------- Total securities 2,098,048 32,396 6.17 1,845,488 29,273 6.34 Federal funds sold 106,523 1,431 5.26 123,572 1,800 5.70 Loans, net of unearned discount 3,602,690 76,980 8.48 3,470,656 77,607 8.87 ---------- -------- ---------- -------- Total Earning Assets and Average Rate Earned 5,807,261 110,807 7.59 5,439,716 108,680 7.94 Cash and due from banks 588,053 536,988 Allowance for possible loan losses (52,837) (52,273) Banking premises and equipment 137,121 135,322 Accrued interest and other assets 257,995 250,163 ---------- ---------- Total Assets $6,737,593 $6,309,916 ========== ========== LIABILITIES Demand deposits: Commercial and individual $1,471,437 $1,383,898 Correspondent banks 176,041 190,975 Public funds 55,965 38,856 ---------- ---------- Total demand deposits 1,703,443 1,613,729 Time deposits: Savings and Interest-on-Checking 906,111 2,066 .90 891,341 2,942 1.31 Money market deposit accounts 1,509,580 14,238 3.74 1,406,293 14,088 3.97 Time accounts 1,281,352 15,170 4.70 1,299,045 16,138 4.93 Public funds 266,688 2,310 3.44 191,118 1,894 3.93 ---------- -------- ---------- -------- Total time Deposits 3,963,731 33,784 3.38 3,787,797 35,062 3.67 ---------- -------- ---------- -------- Total Deposits 5,667,174 5,401,526 Federal funds purchased and securities sold under repurchase agreements 328,794 3,554 4.23 204,480 2,478 4.74 Guaranteed preferred beneficial interests in the Corporation's subordinated debentures, net 98,450 2,119 8.61 98,436 2,118 8.61 Other borrowings 24,185 379 6.22 37,969 592 6.17 ---------- -------- ---------- -------- Total Interest-Bearing Funds and Average Rate Paid 4,415,160 39,836 3.58 4,128,682 40,250 3.87 ---------- -------- ---- ---------- -------- ---- Accrued interest and other liabilities 106,561 76,058 ---------- ---------- Total Liabilities 6,225,164 5,818,469 SHAREHOLDERS' EQUITY 512,429 491,447 ---------- ---------- Total Liabilities and Shareholders' Equity $6,737,593 $6,309,916 ========== ========== Net interest income $ 70,971 $ 68,430 ======== ======== Net interest spread 4.01% 4.07% ==== ==== Net interest income to total average earning assets 4.87% 5.01% ==== ==== * 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*) June 30, 1998 ---------------------------- Interest Average Income/ Yield/ Balance Expense Cost ASSETS ---------- ------- ----- Securities: U.S. Treasury $ 256,937 $ 3,620 5.65% U.S. Government agencies and corporations 1,523,283 24,766 6.50 States and political subdivisions 48,762 1,034 8.48 Other 48,000 783 6.53 ---------- ------- Total securities 1,876,982 30,203 6.44 Federal funds sold 136,194 1,863 5.41 Loans, net of unearned discount 3,389,805 74,821 8.85 ---------- ------- Total Earning Assets and Average Rate Earned 5,402,981 106,887 7.93 Cash and due from banks 573,970 Allowance for possible loan losses (50,307) Banking premises and equipment 134,842 Accrued interest and other assets 257,418 ---------- Total Assets $6,318,904 ========== LIABILITIES Demand deposits: Commercial and individual $1,369,084 Correspondent banks 195,762 Public funds 38,059 ---------- Total demand deposits 1,602,905 Time deposits: Savings and Interest-on-Checking 916,899 2,921 1.28 Money market deposit accounts 1,337,586 13,259 3.98 Time accounts 1,291,537 16,279 5.06 Public funds 224,173 2,194 3.93 ---------- ------- Total time deposits 3,770,195 34,653 3.69 ---------- ------- Total Deposits 5,373,100 Federal funds purchased and securities sold under resale agreements 243,033 2,827 4.60 Guaranteed preferred beneficial interests in the Corporation's subordinated debentures, net 98,422 2,119 8.61 Other borrowings 33,929 419 4.96 ---------- ------- Total Interest-Bearing Funds and Average Rate Paid 4,145,579 40,018 3.87 ---------- ------- ---- Accrued interest and other liabilities 87,086 ---------- Total Liabilities 5,835,570 SHAREHOLDERS' EQUITY 483,334 ---------- Total Liabilities and Shareholders' Equity $6,318,904 ========== Net interest income $ 66,869 ======== Net interest spread 4.06% ==== Net interest income to total average earning assets 4.96% ==== *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 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of the Corporation was held on May 26, 1999. The following matters were submitted to a vote of the Corporation's shareholders. 1. Election of Directors: Election of two director nominees into Class II with terms expiring in 2001 and election of six director nominees into Class III with terms expiring in 2002 was approved with no nominee receiving less than 22.6 million votes. Nominee Total Votes For Total Votes Withheld - ------- --------------- -------------------- Class II: Cass O. Edwards 22,767,601 363,512 T. C. Frost 22,770,593 360,520 Class III: R. Denny Alexander 22,682,090 449,023 Bob W. Coleman 22,738,110 393,003 Eugene H. Dawson, Sr. 22,681,056 450,057 Ruben M. Escobedo 22,772,045 359,068 Joe R. Fulton 22,770,733 360,380 Ida Clement Steen 22,773,400 357,713 2. Amend 1992 Stock Plan Total Votes For 18,571,844 Total Votes Withheld 1,559,569 3. Selection of Independent Auditors Total Votes For 23,106,340 Total Votes Withheld 24,773 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: August 16, 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 6-30-99 (EDGAR VERSION)