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, 2001 Commission file number 0-7275
Cullen/Frost Bankers, Inc.
(Exact name of registrant as specified in its charter)
Texas 74-1751768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 W. Houston Street, San Antonio, Texas 78205
(Address of principal executive offices) (Zip code)
(210) 220-4011
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X. No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At July 20, 2001, there were
51,580,959 shares of Common Stock, $.01 par value, outstanding.
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 Six Months Ended
June 30 June 30
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
INTEREST INCOME
Loans, including fees $ 90,033 $ 97,254 $188,636 $188,522
Securities:
Taxable 22,137 26,290 46,460 51,103
Tax-exempt 1,869 1,847 3,759 3,652
-------- -------- -------- --------
Total Securities 24,006 28,137 50,219 54,755
Time deposits 99 125 215 270
Federal funds sold and securities purchased
under resale agreements 3,520 1,372 5,764 2,100
-------- -------- -------- --------
Total Interest Income 117,658 126,888 244,834 245,647
INTEREST EXPENSE
Deposits 32,422 38,260 71,962 73,317
Federal funds purchased and securities
sold under repurchase agreements 3,417 4,376 7,779 7,914
Guaranteed preferred beneficial interests in the
Corporation's junior subordinated deferrable
interest debentures 2,119 2,119 4,238 4,238
Long-term notes payable and other borrowings 502 2,151 1,038 2,644
-------- -------- -------- --------
Total Interest Expense 38,460 46,906 85,017 88,113
-------- -------- -------- --------
Net Interest Income 79,198 79,982 159,817 157,534
Provision for possible loan losses 1,000 2,867 16,031 5,549
-------- -------- -------- --------
Net Interest Income After Provision
For Possible Loan Losses 78,198 77,115 143,786 151,985
NON-INTEREST INCOME
Trust fees 12,837 12,446 24,843 24,132
Service charges on deposit accounts 18,051 14,765 34,551 29,164
Insurance commissions 3,598 1,586 7,493 3,106
Other service charges, collection and
exchange charges, commissions and fees 6,665 5,009 12,599 9,545
Net loss on securities transactions (12) (2) (8)
Other 7,334 9,068 15,747 16,552
-------- -------- -------- --------
Total Non-Interest Income 48,473 42,874 95,231 82,491
NON-INTEREST EXPENSE
Salaries and wages 36,711 34,439 72,321 67,668
Pension and other employee benefits 8,339 7,171 17,250 15,221
Net occupancy of banking premises 7,343 6,850 14,546 13,616
Furniture and equipment 6,240 5,219 12,252 10,285
Intangible amortization 3,752 3,818 7,632 7,774
Other 21,382 20,259 42,367 39,265
-------- -------- -------- --------
Total Non-Interest Expense 83,767 77,756 166,368 153,829
-------- -------- -------- --------
Income Before Income Taxes and
Cumulative Effect of Accounting Change 42,904 42,233 72,649 80,647
Income Taxes 14,243 14,603 24,458 27,861
-------- -------- -------- --------
Income Before Cumulative Effect of Accounting
Change 28,661 27,630 48,191 52,786
Cumulative effect of change in accounting for
derivatives, net of tax 3,010
-------- -------- -------- --------
Net Income $ 28,661 $ 27,630 $ 51,201 $ 52,786
======== ======== ======== ========
Basic per share:
Income before cumulative effect of
accounting change $ .56 $ .53 $ .93 $ 1.01
Cumulative effect of change in accounting,
net of taxes .06
-------- -------- -------- --------
Net Income $ .56 $ .53 $ .99 $ 1.01
======== ======== ======== ========
Diluted per share:
Income before cumulative effect of
accounting change $ .54 $ .52 $ .90 $ .98
Cumulative effect of change in accounting,
net of taxes .06
-------- -------- -------- --------
Net Income $ .54 $ .52 $ .96 $ .98
======== ======== ======== ========
Dividends per common share $ .215 $ .195 $ .410 $ .370
See notes to consolidated financial statements.
Consolidated Balance Sheets
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands, except per share amounts)
June 30 December 31 June 30
2001 2000 2000
---------- ----------- ----------
Assets
Cash and due from banks $ 975,169 $ 820,459 $ 660,068
Time deposits 4,379 3,574 6,709
Securities held to maturity 61,534 71,153 78,337
Securities available for sale 1,651,385 1,594,860 1,614,106
Trading account securities 1,665 2,471
Federal funds sold and securities purchased
under resale agreements 141,650 215,050 135,275
Loans, net of unearned discount of $6,762 at
June 30, 2001; $7,349 at December 31, 2000
and $6,713 at June 30, 2000 4,545,914 4,534,645 4,425,799
Less: Allowance for possible loan losses (65,254) (63,265) (58,965)
---------- ---------- ----------
Net loans 4,480,660 4,471,380 4,366,834
Banking premises and equipment 149,853 149,893 146,591
Accrued interest and other assets 398,191 331,532 320,010
---------- ---------- ----------
Total Assets $7,864,486 $7,660,372 $7,327,930
========== ========== ==========
Liabilities
Demand Deposits:
Commercial and individual $2,029,368 $1,817,761 $1,781,292
Correspondent banks 250,451 245,734 201,493
Public funds 40,077 55,129 52,265
---------- ---------- ----------
Total demand deposits 2,319,896 2,118,624 2,035,050
Time Deposits:
Savings and Interest-on-Checking 951,151 1,012,790 946,060
Money market deposit accounts 1,820,766 1,774,656 1,665,102
Time accounts 1,271,100 1,275,289 1,237,584
Public funds 324,177 318,331 243,774
---------- ---------- ----------
Total time deposits 4,367,194 4,381,066 4,092,520
---------- ---------- ----------
Total deposits 6,687,090 6,499,690 6,127,570
Federal funds purchased and securities
sold under repurchase agreements 342,896 363,111 273,218
Accrued interest and other liabilities 123,468 125,977 304,031
Guaranteed preferred beneficial interest in the
Corporation's junior subordinated deferrable
interest debentures, net 98,595 98,568 98,541
---------- ---------- ----------
Total Liabilities 7,252,049 7,087,346 6,803,360
Shareholders' Equity
Common stock, par value $.01 per share 536 536 536
Shares authorized:90,000,000
Shares issued: 53,561,616
Surplus 190,240 187,673 186,176
Retained earnings 473,932 448,006 414,305
Accumulated other comprehensive gain (loss),
net of tax 3,605 (4,023) (37,901)
Treasury stock(1,980,490; 2,131,534; 1,531,024 shares) (55,876) (59,166) (38,546)
---------- ---------- ----------
Total Shareholders' Equity 612,437 573,026 524,570
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity $7,864,486 $7,660,372 $7,327,930
========== ========== ==========
See notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands)
Accumulated
Other
Comprehensive
Common Retained Income/(Loss) Treasury
Stock Surplus Earnings net of tax Stock Total
------ -------- -------- ----------- ---------- --------
Balance at January 1, 2000 $536 $185,437 $382,168 $(39,110) $(19,720) $509,311
Net income for the twelve months
ended December 31, 2000 108,817 108,817
Unrealized gain on securities
available for sale of $36,826,
net of tax and reclassification
adjustment for after-tax losses
included in net income of $3 36,829 36,829
Additional minimum pension
Liability, net of tax (1,742) (1,742)
--------
Total comprehensive income 143,904
--------
Proceeds from employee stock
purchase plan and options 28 (3,532) 6,208 2,704
Tax benefit related to exercise
of stock options 1,926 1,926
Purchase of treasury stock (44,985) (44,985)
Treasury stock obtained on the
exercise of stock options (2,177) (2,177)
Issuance of restricted stock 282 (5) 1,508 1,785
Restricted stock plan deferred
compensation, net 112 112
Cash dividend (39,554) (39,554)
---- -------- -------- -------- -------- --------
Balance at December 31, 2000 536 187,673 448,006 (4,023) (59,166) 573,026
Net income for the six
months ended June 30, 2001 51,201 51,201
Unrealized gain on securities
available for sale of $7,627,
net of tax and reclassification
adjustment for after-tax losses
included in net income of $1 7,628 7,628
--------
Total comprehensive income 58,829
--------
Proceeds from employee stock
purchase plan and options (4,662) 7,155 2,493
Tax benefit related to exercise
of stock options 2,497 2,497
Treasury stock obtained on the
exercise of stock options (4,145) (4,145)
Issuance of restricted stock 70 280 350
Restricted stock plan deferred
compensation, net 524 524
Cash dividend (21,137) (21,137)
---- -------- -------- -------- -------- --------
Balance at June 30, 2001 $536 $190,240 $473,932 $ 3,605 $(55,876) $612,437
==== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands)
Six Months Ended
June 30
--------------------
2001 2000
--------- -------
Operating Activities
Net income $ 51,201 $ 52,786
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 16,031 5,549
Credit for deferred taxes (965) (2,688)
Accretion of discounts on loans (594) (566)
Accretion of securities' discounts (2,767) (1,338)
Amortization of securities' premiums 1,073 885
Net decrease in trading securities 806 1
Net loss on securities transactions 2 8
Net gain on sale of assets (1,397) (2,113)
Depreciation and amortization 17,891 16,764
Increase in interest receivable (4,792) (5,419)
(Decrease) increase in interest payable (2,446) 2,637
Originations of loans held-for-sale (6,510) (52,313)
Proceeds from sales of loans held-for-sale 14,408 53,042
Tax benefit from exercise of employee stock options 2,497 707
Net change in other assets and liabilities 22,832 18,476
--------- -------
Net cash provided by operating activities 107,270 86,418
Investing Activities
Proceeds from maturities of securities held to maturity 9,562 6,819
Purchases of investment securities (100)
Proceeds from sales of securities available for sale 181,295 95,784
Proceeds from maturities of securities available for sale 362,815 131,805
Purchases of securities available for sale (587,152) (294,538)
Purchase of bank-owned life insurance (100,000)
Net increase in loans (31,916) (264,206)
Net increase in bank premises and equipment (9,007) (10,541)
Proceeds from sales of repossessed properties 707 732
Net cash and cash equivalents paid for acquisitions (859)
--------- --------
Net cash used by investing activities (173,696) (335,104)
Financing Activities
Net increase in demand deposits,
IOC accounts, and savings accounts 191,589 171,048
Net (decrease) increase in certificates of deposits (4,189) 2,690
Net (decrease) increase in short-term borrowings (20,215) 114,759
Proceeds from employee stock purchase plan and options 2,493 1,340
Purchase of treasury stock (21,805)
Dividends paid (21,137) (19,402)
-------- --------
Net cash provided by financing activities 148,541 248,630
-------- --------
Increase (decrease) in cash and cash equivalents 82,115 (56)
Cash and cash equivalents at beginning of year 1,039,083 802,108
---------- --------
Cash and cash equivalents at the end of the period $1,121,198 $802,052
========== ========
Supplemental information:
Interest paid $ 79,684 $ 85,476
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Cullen/Frost Bankers, Inc. and Subsidiaries
(tables in thousands)
Note A - Basis of Presentation
The consolidated financial statements include the accounts of Cullen/Frost
Bankers, Inc. ("Cullen/Frost" or the "Corporation") and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation. The consolidated financial statements have not
been audited by independent accountants, but in the opinion of management,
reflect all adjustments necessary for a fair presentation of the financial
position and results of operations. All such adjustments were of a normal and
recurring nature. For further information, refer to the consolidated financial
statements and footnotes thereto included in Cullen/Frost's Annual Report on
Form 10-K for the year ended December 31, 2000. The balance sheet at December
31, 2000 has been derived from the audited financial statements at that date
but does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. Certain
reclassifications have been made to make prior periods comparable.
Note B - Allowance for Possible Loan Losses
An analysis of the transactions in the allowance for possible loan losses
is presented below. The amount charged to operating expense is based on
management's assessment of the adequacy of the allowance based on estimated
probable losses in the loan portfolio.
Six Months Ended
June 30
------------------
(in thousands) 2001 2000
----------------------------------------------------------------------
Balance at beginning of the period $63,265 $58,345
Provision for possible loan losses 16,031 5,549
Net charge-offs:
Losses charged to the allowance (18,444) (6,680)
Recoveries 4,402 1,751
------- -------
Net charge-offs (14,042) (4,929)
------- -------
Balance at the end of period $65,254 $58,965
======= =======
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 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 June 30, 2001, the
majority of the impaired loans were commercial 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 for the six months
ended June 30, 2001 was $627 thousand compared to none for the first six months
of 2000. 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) 2001 2000
--------------------------------------------------------------------------
Impaired loans with no valuation reserve $ 1,621 $1,473
Impaired loans with a valuation reserve 16,997 6,343
------- ------
Total recorded investment in impaired loans $18,618 $7,816
======= ======
Average recorded investment in impaired loans $15,492 $8,637
Valuation reserve 7,318 2,632
Note D - Common Stock and Earnings Per Common Share
A reconciliation of earnings per share follows:
Six Months Ended Three Months Ended
June 30 June 30
------------------- --------------------
(in thousands, except per share amounts) 2001 2000 2001 2000
---------------------------------------------------------------------------------------
Numerators for both basic and diluted
earnings per share, net income $51,201 $52,786 $28,661 $27,630
======= ======= ======= =======
Denominators:
Denominators for basic earnings per share,
average outstanding common shares 51,540 52,458 51,562 52,235
Dilutive effect of stock options 2,008 1,139 1,685 1,283
------- ------- ------- -------
Denominator for diluted earnings per share 53,548 53,597 53,247 53,518
======= ======= ======= =======
Basic per share:
Income before cumulative effect of
accounting change $ .93 $ 1.01 $ .56 $ .53
Cumulative effect of change in accounting,
net of taxes .06
------- ------- ------- -------
Net Income $ .99 $ 1.01 $ .56 $ .53
======= ======= ======= =======
Diluted per share:
Income before cumulative effect
accounting change $ .90 $ .98 $ .54 $ .52
Cumulative effect of change in accounting,
net of taxes .06
------- ------- ------- -------
Net Income $ .96 $ .98 $ .54 $ .52
======= ======= ======= =======
Note E - Capital
The table below reflects various measures of regulatory capital at June
30, 2001 and 2000 for Cullen/Frost.
June 30, 2001 June 30, 2000
------------------- ------------------
Capital Amount Ratio Amount Ratio
---------------------------------------------------------------------------------------
Risk-Based
Tier 1 Capital $ 587,793 10.70% $ 539,611 10.62%
Tier 1 Capital minimum requirement 219,691 4.00 203,255 4.00
Total Capital $ 653,047 11.89% $ 598,576 11.78%
Total Capital minimum requirement 439,382 8.00 406,509 8.00
Risk-adjusted assets, net of goodwill $5,492,274 $5,081,363
Leverage ratio 7.78% 7.68%
Average equity as a percentage
of average assets 7.84 7.33
At June 30, 2001 and 2000, Cullen/Frost's subsidiary bank was considered
"well capitalized" as defined by the FDIC Improvement Act of 1991, the highest
rating, and Cullen/Frost's capital ratios were in excess of "well capitalized"
levels. A financial institution is deemed to be well capitalized if the
institution has a total risk-based capital ratio of 10.0 percent or greater, a
Tier 1 risk-based capital ratio of 6.0 percent or greater, and a Tier 1
leverage ratio of 5.0 percent or greater, and the institution is not subject to
an order, written agreement, capital directive or prompt corrective action
directive to meet and maintain a specific capital level for any capital
measure. Cullen/Frost and its subsidiary bank currently exceed all minimum
capital requirements. Management is not aware of any conditions or events that
would have changed the Corporation's capital rating since June 30, 2001.
Cullen/Frost is subject to the regulatory capital requirements
administered by the Federal Reserve Bank. Regulators can initiate certain
mandatory actions, if the Corporation fails to meet the minimum requirements,
that could have a direct material effect on the Corporation's financial
statements.
Note F - Income Taxes
The following is an analysis of Cullen/Frost's income taxes included in
the consolidated statements of operations for the six-month periods and
quarters ended June 30, 2001 and 2000:
Six Months Ended Three Months Ended
June 30 June 30
-------------------- -------------------
(in thousands) 2001 2000 2001 2000
=======================================================================================
Current income tax expense $25,423 $30,549 $14,546 $15,998
Deferred income tax benefit (965) (2,688) (303) (1,395)
------- ------- ------- -------
Income taxes $24,458 $27,861 $14,243 $14,603
======= ======= ======= =======
Current income tax expense related to
the cumulative effect of change in
accounting for derivatives 1,620
Income tax payments $18,925 $25,276 $18,925 $25,276
Net deferred tax assets at June 30, 2001, were $17.7 million with no valuation
allowance. The deferred tax assets were supported by taxes paid in prior
years.
Note G - Merger and Acquisitions
Cullen/Frost regularly evaluates acquisition opportunities and conducts
due diligence activities in connection with possible acquisitions. As a
result, acquisition discussions and, in some cases, negotiations may take place
and future acquisitions involving cash, debt or equity securities may occur.
Acquisitions typically involve the payment of a premium over book and market
values, and, therefore, some dilution of the Corporation's book value and net
income per common share may occur in connection with any future transactions.
On June 14, 2001, Frost Insurance Agency ("FIA"), a subsidiary of The
Frost National Bank, announced the acquisition of AIS Insurance & Risk
Management, an independent insurance agency in Fort Worth. AIS offers a broad
range of commercial insurance for small to mid-size businesses, including
property and casualty, employee benefits (health, life and retirement plans),
business succession planning and risk management services. The transaction is
subject to regulatory approval and is expected to close on August 1, 2001.
On July 1, 2000, FIA acquired Nieman Hanks Puryear Partners and Nieman
Hanks Puryear Benefits ("Nieman Hanks"), an Austin-based independent insurance
agency. Nieman Hanks offers property and casualty insurance, professional and
umbrella liability, homeowners and auto insurance, group health, life and
disability policies and 401(k) retirement plans and executive planning.
Results of operations have been included from the date of acquisition. The
Nieman Hanks acquisition did not have a material impact on Cullen/Frost's
results of operations for the quarter or year-to-date ended June 30, 2001 and
2000.
On April 1, 2000, FIA acquired Wayland Hancock, a Houston-based
independent insurance agency. Wayland Hancock offers a full range of life and
health insurance, as well as retirement and financial planning, to individuals
and businesses. Results of operations have been included from the date of
acquisition. This acquisition did not have a material impact on Cullen/Frost's
results of operations for the quarter or year-to-date ended June 30, 2001 and
2000.
Note H - Accounting for SFAS No. 133
On January 1, 2001 Cullen/Frost adopted SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133
requires the recognition of all derivatives on the balance sheet at fair value.
Derivatives that do not meet the specified "hedge" criterion of SFAS No. 133
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value is immediately
recognized in earnings.
Cullen/Frost uses derivative instruments to protect against the risk of
interest rate movements on the value of certain assets or on future cash flows.
The Company generally uses interest rate swaps to hedge fair values on certain
fixed rate loans. Prior to the adoption of SFAS No. 133, the fair value of
derivative instruments held by Cullen/Frost were not recorded on the balance
sheet. On January 1, 2001, Cullen/Frost adopted SFAS No. 133, and at that
time, designated anew certain derivative instruments used for risk management
into hedging relationships in accordance with the requirements of SFAS No. 133.
Derivative instruments, particularly interest rate swaps, used to hedge changes
in the fair value of certain fixed rate loans due to changes in interest rates
were formally designated as fair value hedges. As of January 1, 2001,
Cullen/Frost also held an interest rate floor with a notional amount of $1
billion. Prior to the adoption of SFAS No. 133,this interest rate floor
contract was considered a hedge of interest rate exposure associated with
commercial loan accounts in an environment of falling interest rates. This
interest rate floor did not meet the criteria for hedge accounting under SFAS
No. 133; and therefore, Cullen/Frost accounted for this floor as trading upon
adoption of SFAS No. 133. Additionally, one interest rate swap contract
historically characterized as a cash-flow type hedge of a pool of commercial
floating rate loans also did not meet the criteria for hedge accounting upon
adoption of SFAS No. 133. This interest rate swap contract was recorded at
fair-value at January 1, 2001 as a trading derivative with an offsetting amount
recorded as other comprehensive loss. On March 30, 2001, this interest rate
contract matured and the fair value recorded at January 1, 2001 was reversed.
The adoption of SFAS No. 133 on January 1, 2001 resulted in the after-tax
cumulative effect of accounting change of approximately $3 million being
recognized as income in the statement of income and the after-tax cumulative
effect of accounting change of approximately $185 thousand recorded to other
comprehensive income. The cumulative effect adjustments were determined based
on the interpretive guidance issued by the Financial Accounting Standards Board
to date. The after-tax cumulative effect of accounting change of approximately
$3 million (net of taxes of $1.6 million) to the statement of income was
primarily due to the recording of the fair value of the interest rate floor as
there was no intrinsic value to this interest rate floor. Subsequent to the
adoption of SFAS No. 133, the interest rate floor was sold with an additional
pre-tax gain of approximately $1.1 million recorded in other income above the
amount reported in the cumulative effect amount.
Cullen/Frost had 33 interest rate swaps with a notional amount of $95.7
million at June 30, 2001 used to hedge changes in the fair value of certain
fixed rate loans due to changes in interest rates. These interest rate swaps
were formally designated as fair value hedges. Each swap is expected to be
highly effective as a fair value hedge for a specific fixed rate commercial
loan or lease. As of June 30, 2001, the Corporation recognized an immaterial
net pre-tax loss in other non-interest expense which represents the period
change in the ineffective portion of all the fair-value hedges.
All interest rate contracts involve the risk of dealing with
counterparties and their ability to meet contractual terms. Each counterparty
to a swap transaction has a credit rating that is investment grade. The net
amount payable or receivable under interest rate swaps/floor is accrued as an
adjustment to interest income and these amounts have not been material in 2001
or 2000.
SFAS No. 133, as applied to Cullen/Frost's risk management strategies, may
increase or decrease reported net income and stockholders' equity
prospectively, depending on future levels of interest rates and other variables
affecting the fair values of derivative instruments and hedged items, but will
have no effect on cash flows or economic risk.
Note I - Accounting Changes
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
140). SFAS No. 140 replaces SFAS No. 125. The guidance in SFAS No. 140,
while not changing most of the guidance originally issued in SFAS No. 125,
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain additional disclosures
related to transferred assets. Certain provisions of the statement related to
the recognition, reclassification and disclosure of collateral, as well as the
disclosure of securitization transactions, became effective for Cullen/Frost
for 2000 year-end reporting. Other provisions related to the transfer and
servicing of financial assets and extinguishments of liabilities are effective
for transactions occurring after March 31, 2001. Based on current
circumstances, the application of the new rules did not have a material impact
on the Corporation's results of operations, financial position or liquidity.
On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets." These Statements
make significant changes to the accounting for business combinations, goodwill,
and intangible assets. SFAS No. 141 eliminates the pooling-of-interests method
of accounting for business combinations with limited exceptions for
combinations initiated prior to July 1, 2001. In addition, it further
clarifies the criteria for recognition of intangible assets separately from
goodwill. This statement is effective for business combinations completed
after June 30, 2001.
SFAS No. 142 discontinues the practice of amortizing goodwill and
indefinite lived intangible assets and initiates an annual review for
impairment. Impairment would be examined more frequently if certain indicators
are encountered. Intangible assets with a determinable useful life will
continue to be amortized over that period. The amortization provisions apply
to goodwill and intangible assets acquired after June 30, 2001. Goodwill and
intangible assets on the books at June 30, 2001 will be affected when the
Corporation adopts the Statement.
Cullen/Frost will adopt this statement on January 1, 2002. Application of
the non-amortization provisions of the Statement is expected to result in
additional net income of approximately $7 million per year or $.13 per diluted
common share. During 2002, the Corporation will perform the first of the
required impairment tests of goodwill as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Corporation.
Note J - Operating Segments
Cullen/Frost has three reportable operating segments: Banking, the
Financial Management Group and Frost Securities Inc. 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 lending and
depository services. The Financial Management Group includes fee based
services within private trust, retirement services, and financial management
services including personal wealth management, insurance, and brokerage
services. Frost Securities Inc., an investment banking subsidiary, began
operations in August of 1999. These business units were identified through the
products and services that are offered within each unit. Prior period amounts
have been reclassified to conform to the current year's presentation.
The accounting policies of each reportable segment are the same as those
of the Corporation except for the following items, which impact the Banking and
Financial Management Group segments. 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.
Six Months Ended: Financial
Management Frost Consolidated
(in thousands) Banking Group Securities Non-Banks Total
=================================================================================================================
June 30, 2001
Revenues from (expenses to) external customers $220,288 $33,702 $ 5,329 $(4,271) $255,048
----------------------------------------------------------------
Net income (loss) $ 50,988 $ 5,669 $(2,013) $(3,443) $ 51,201
================================================================
================================================================================================================
June 30, 2000
Revenues from (expenses to) external customers $207,745 $33,408 $ 3,112 $(4,240) $240,025
----------------------------------------------------------------
Net income (loss) $ 51,023 $ 8,074 $(1,140) $(5,171) $ 52,786
================================================================
Three Months Ended: Financial
Management Frost Consolidated
(in thousands) Banking Group Securities Non-Banks Total
=================================================================================================================
June 30, 2001
Revenues from (expenses to) external customers $109,610 $17,242 $ 2,926 $(2,107) $127,671
----------------------------------------------------------------
Net income (loss) $ 28,114 $ 3,235 $ (958) $(1,730) $ 28,661
================================================================
=================================================================================================================
March 31, 2001
Revenues from (expenses to) external customers $110,677 $16,460 $ 2,403 $(2,163) $127,377
----------------------------------------------------------------
Net income (loss) $ 22,874 $ 2,434 $(1,055) $(1,713) $ 22,540
================================================================
=================================================================================================================
June 30, 2000
Revenues from (expenses to) external customers $106,243 $17,069 $ 1,676 $(2,132) $122,856
----------------------------------------------------------------
Net income (loss) $ 26,694 $ 4,142 $ (682) $(2,524) $ 27,630
================================================================
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)
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q that
are not statements of historical fact constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Act"), not withstanding that they are not specifically identified as such. In
addition, certain statements in future filings by Cullen/Frost with the
Securities and Exchange Commission, in press releases, and in oral and written
statements made by or with the approval of the Corporation which are not
statements of historical fact also constitute forward-looking statements within
the meaning of the Act. Examples of forward-looking statements include, but
are not limited to: (i) projections of revenues, income or loss, earnings or
loss per share, the payment or nonpayment of dividends, capital structure and
other financial items; (ii) statements of plans and objectives of Cullen/Frost
or its management or Board of Directors, including those relating to products
or services; (iii) statements of future economic performance; and (iv)
statements of assumptions underlying such statements. Words such as
"believes", "anticipates", "expects", "intends", "targeted" and similar
expressions are intended to identify forward-looking statements but are not the
exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause
actual results to differ materially from those in such statements. Factors
that could cause actual results to differ from those discussed in the forward-
looking statements include, but are not limited to: (i) local, regional and
international economic conditions and the impact they may have on Cullen/Frost
and its customers; (ii) the effects of and changes in trade, monetary and
fiscal policies and laws, including interest rate policies of the Federal
Reserve Board; (iii) inflation, interest rate, market and monetary
fluctuations; (iv) the timely development and acceptance of new products and
services and the perceived overall value of these products and services by
users; (v) changes in consumer spending, borrowings and savings habits; (vi)
technological changes; (vii) acquisitions and integration of acquired
businesses; (viii) the ability to increase market share and control expenses;
(ix) changes in the competitive environment among financial institutions; (x)
the effect of changes in laws and regulations (including laws and regulations
concerning taxes, banking, securities and insurance) with which Cullen/Frost
and its subsidiaries must comply; (xi) the effect of changes in accounting
policies and practices, as may be adopted by the regulatory agencies as well as
the Financial Accounting Standards Board; (xii) changes in the Corporation's
organization, compensation and benefit plans; (xiii) the costs and effects of
litigation and of unexpected or adverse outcomes in such litigation; (xiv)
costs or difficulties related to the integration of the businesses of
Cullen/Frost being greater than expected; and (xv) the Corporation's success at
managing the risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made. Cullen/Frost undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made, or to reflect the occurrence of unanticipated
events.
Results of Operations
The results of operations are included in the material that follows. All
balance sheet amounts are presented in averages unless otherwise indicated.
Certain reclassifications have been made to make prior periods comparable.
Taxable-equivalent adjustments assume a 35 percent federal income tax rate.
Dollar amounts in tables are stated in thousands, except for per share amounts.
Cullen/Frost reported net income of $28.7 million or $.54 per diluted
common share for the quarter ended June 30, 2001 compared to $22.5 million or
$.42 per diluted common share for the first quarter of 2001 and net income of
$27.6 million or $.52 per diluted common share for the second quarter of 2000.
First quarter 2001 results were impacted by an additional provision for
possible loan losses of $13.0 million related to a single shared national
credit. Partially offsetting this impact on the first quarter's results was a
pre-tax gain of $5.7 million related to the sale of interest rate floors which
had been purchased to hedge interest rate exposure in an environment of falling
interest rates. Of the gain, $1.1 million was included in other non-interest
income, with the remainder included, net of tax, as the cumulative effect of
adopting SFAS No. 133, which went into effect January 1, 2001. Excluding the
after-tax net impact of the additional provision and the gain on the sale of
the interest rate floors, earnings per diluted common share for the first
quarter of 2001 would have been $.51. Second quarter 2000 results were
impacted by a $2 million gain from the sale of mortgage servicing rights to
GMAC Mortgage Corporation. Excluding the after-tax net impact from the sale of
mortgage servicing rights, earnings per diluted common share for the second
quarter of 2000 would have been $.50. Net income for the six months ended June
30, 2001 was $51.2 million or $.96 per diluted common share compared to $52.8
million or $.98 per diluted common share for the same period of 2000.
Return on average equity and average assets were 19.09 percent and 1.50
percent, respectively for the second quarter of 2001. This compares to 21.31
percent and 1.56 percent for the second quarter of 2000 or 20.58 percent and
1.51 percent excluding the gain from the mortgage servicing sale. Return on
average equity and average assets for the six months ended June 30, 2001
decreased to 17.31 percent and 1.36 percent compared to 20.54 percent and 1.52
percent for 2000.
Summary of Operations
-------------------------------------------------
Three Months Ended
Six Months Ended ---------------------------
June 30 2001 2000
------------------ ------------------ -------
2001 2000 June 30 March 31 June 30
-----------------------------------------------------------------------------------------
Taxable-equivalent net
interest income $162,176 $159,807 $80,367 $81,809 $81,095
Taxable-equivalent adjustment 2,359 2,273 1,169 1,190 1,113
-------- -------- ------- ------- -------
Net interest income 159,817 157,534 79,198 80,619 79,982
Provision for possible loan losses 16,031 5,549 1,000 15,031 2,867
Non-Interest income:
Net (loss) gain on securities
transactions (2) (8) (12) 10
Other 95,233 82,499 48,485 46,748 42,874
-------- -------- ------- ------- -------
Total non-interest income 95,231 82,491 48,473 46,758 42,874
Non-Interest expense:
Goodwill amortization 4,032 3,850 2,012 2,020 1,924
Other intangible amortization 3,600 3,924 1,740 1,860 1,894
Other 158,736 146,055 80,015 78,721 73,938
-------- -------- ------- ------- -------
Total non-interest expense 166,368 153,829 83,767 82,601 77,756
-------- -------- ------- ------- -------
Income before income taxes and
cumulative effect of accounting change 72,649 80,647 42,904 29,745 42,233
Income taxes 24,458 27,861 14,243 10,215 14,603
-------- -------- ------- ------- -------
Income before cumulative effect of
accounting change 48,191 52,786 28,661 19,530 27,630
Cumulative effect of change in
accounting for derivatives, net of tax 3,010 3,010
-------- -------- ------- ------- -------
Net income $ 51,201 $ 52,786 $28,661 $22,540 $27,630
======== ======== ======= ======= =======
Net income per diluted common share: $ .96 $ .98 $ .54 $ .42 $ .52
Return on Average Assets 1.36% 1.52% 1.50% 1.23% 1.56%
Return on Average Equity 17.31 20.54 19.09 15.48 21.31
Results of Segment Operations
Cullen/Frost's operations are managed along three major Operating
Segments: Banking, the Financial Management Group and Frost Securities Inc.
("FSI"), the investment banking subsidiary started in August of 1999. A
description of each business and the methodologies used to measure financial
performance are described in Note J to the Consolidated Financial Statements on
page 11. The following table summarizes net income by Operating Segment for
the six months and three months ended June 30, 2001 and 2000.
Three Months Ended
Six Months Ended -----------------------------
June 30 2001 2000
------------------- ------------------- -------
(in thousands) 2001 2000 June 30 March 31 June 30
========================================================================================
Banking $50,988 $51,023 $28,114 $22,874 $26,694
Financial Management Group 5,669 8,074 3,235 2,434 4,142
Frost Securities Inc. (2,013) (1,140) (958) (1,055) (682)
Non-Banks (3,443) (5,171) (1,730) (1,713) (2,524)
------------------- -----------------------------
Consolidated net income $51,201 $52,786 $28,661 $22,540 $27,630
=================== =============================
Banking net income was $28.1 million for the second quarter of 2001 up
$5.2 million, or 22.9%, over the first quarter of 2001, and $1.4 million over
the second quarter of 2000. First quarter results for the Banking segment were
negatively impacted by the additional provision for possible loan losses of
$13.0 million and the offsetting gain on sale of interest rate floors
previously discussed in the Results of Operations section on page 13. The
increase over the same quarter last year represents higher fee income from
insurance commissions, up $2.0 million, and other service charges, up $1.3
million, offset partially by the $2 million gain from the sale of mortgage
servicing rights included in the second quarter of 2000. Also offsetting this
increase was higher non-interest expense, up 4.9 percent, due to increased
salaries and benefits impacted by the insurance acquisitions and normal merit
and market increases. For the six months ended June 30, 2001 Banking net
income was $51.0 million, which is essentially flat with the same period of
2000. Higher insurance commissions, positively impacted by the combined
success of two insurance acquisitions made in the second and third quarters of
2000 and the existing Frost Insurance Agency, were offset by lower net interest
margins, resulting from the steep decline in rates over the first half of this
year, and higher non-interest expenses, up 5.5 percent, related to the same
factors as in the quarter comparison.
The Financial Management Group ("FMG") net income for the current quarter
was $3.2 million, up $801 thousand over the previous quarter and down $907
thousand from the same quarter of 2000. Most of the increase from the first
quarter of 2001 is due to an increase in oil and gas fees and tax fees. The
decrease from the second quarter last year was due to higher expenses,
including overhead allocations and higher salaries and benefits, and lower net
interest margin due to lower funds transfer pricing. Net income for the first
half of 2001 for FMG was $5.7 million, down $2.4 million from the first six
months of 2000, due to the same factors.
Frost Securities recorded a net loss of $958 thousand for the current
quarter, an improvement over last quarter and up $276 thousand from the second
quarter of 2000. The comparable loss for the six months ended June 30, 2001
was $2.0 million up $873 thousand from the first six months of 2000. The loss
in the current year was impacted by less than favorable market conditions.
Revenues were up $1.3 million or 74.6 percent for the second quarter of 2001
compared to the same quarter of 2000, and $2.2 million or 71.2 percent for the
six month periods, driven primarily by equities sales. Non-interest expenses
were up 60.8 percent to $4.4 million for the current quarter over the same
quarter last year, and 72.5 percent to $8.4 million for the six-month periods.
These increases were due to increased staffing, expenses related to business
development and increased outside professional services. Staffing at June 30,
200l included 47 employees compared to 34 at June 30, 2000.
Most of the reduction in the operating loss for non-banks in the first
half of 2001 was due to a decrease in expenses relating to incentive based
compensation.
Net Interest Income
Net interest margin was 5.00 percent for the second quarter of 2001
compared to 5.18 percent and 5.33 percent for the first quarter of 2001 and
second quarter of 2000, respectively. The net interest spread of 4.23 percent
was flat with the first quarter of 2001 and decreased 11 basis points from the
second quarter of 2000. The decreases in net interest margin and spread were
primarily the result of a lag affect in deposit pricing compared to the
immediate repricing of earning assets in an environment of rapidly declining
market rates. Interest rates have decreased 125 basis points in the second
quarter of 2001 for a total of 275 basis points since the beginning of the
year. Also as rates fall, deposit mixes have shifted toward higher rate
products negatively impacting the net interest margin.
Change in Net Interest Income (Taxable-Equivalent)
------------------------------------------------------------
Second Quarter Second Quarter First Six Months
2001 2001 2001
vs. vs. vs.
Second Quarter First Quarter First Six Months
2000 2001 2000
-------------- -------------- ------------------
Amount Amount Amount
---------------------------------------------------------------------------------------
Due to volume $3,629 $ 396 $8,764
Due to interest rate spread (4,357) (1,838) (6,395)
------ ------- ------
$ (728) $(1,442) $2,369
====== ======= ======
Non-Interest Income
Growth in non-interest income continues to come from banking business
growth, and was favorably impacted by the acquisitions of Nieman Hanks and
Wayland Hancock by FIA in the third and second quarters of 2000 and operations
related to Frost Securities.
Three Months Ended
Six Months Ended ------------------------------
June 30 2001 2000
----------------- ------------------- -------
Non-Interest Income 2001 2000 June 30 March 31 June 30
-------------------------------------------------------------------------------------------
Trust fees $24,843 $24,132 $12,837 $12,006 $12,446
Service charges on deposit accounts 34,551 29,164 18,051 16,500 14,765
Insurance commissions 7,493 3,106 3,598 3,895 1,586
Other service charges, collection
and exchange charges, commissions
and fees 12,599 9,545 6,665 5,934 5,009
Net (loss) gain on securities
transactions (2) (8) (12) 10
Other 15,747 16,552 7,334 8,413 9,068
------- ------- ------- ------- -------
Total $95,231 $82,491 $48,473 $46,758 $42,874
======= ======= ======= ======= =======
For the second quarter 2001...
Total non-interest income was up $1.7 million or 3.7 percent compared to
the first quarter of 2001 and (excluding the $2 million gain recognized from
the sale of the mortgage servicing rights) up $7.6 million, or 18.6 percent
compared to the second quarter of 2000. These increases from comparable
quarters resulted from banking business growth, the favorable impact of the
acquisitions of Nieman Hanks and Wayland Hancock by FIA in the third and second
quarters of 2000 and operations related to Frost Securities.
Trust fees were up $831 thousand or 6.9 percent compared to the first
quarter of 2001 and up $391 thousand or 3.1 percent compared to the second
quarter of 2000. Trust income was up from the first quarter 2001 and second
quarter 2000 due to an increase in oil and gas fees, which remains a positive
for the Corporation and the state of Texas. The increase from the previous
quarter was also impacted by higher tax fees. The market value of trust assets
at the end of the second quarter of 2001 was $13.1 billion, up $251 million and
$48 million from the first quarter of 2001 and second quarter of 2000,
respectively. Trust assets were comprised of discretionary assets of $5.8
billion and non-discretionary assets of $7.3 billion compared to $5.5 billion
and $7.6 billion, respectively, a year ago.
Service charges on deposit accounts for the second quarter of 2001
increased $1.6 million or 9.4 percent from the first quarter of this year. This
increase was mainly due to higher revenues associated with commercial accounts
and a modest increase in overdraft charges and NSF income. When compared to
the second quarter of 2000 service charges increased by $3.3 million or 22.3
percent. The increase from the second quarter of last year is primarily
attributable to higher revenues associated with commercial accounts as well as
an increase in individual account fees and higher overdraft fees offset by
lower NSF charges. The increase in commercial service charges is primarily the
result of a lower earnings credit rate, which results in more payment for
services through the payment of fees rather than through balances. The
increase in individual accounts resulted from the simplification of deposit
account offerings while providing Cullen/Frost customers with better value.
Insurance commissions were down $297 thousand or 7.6 percent compared to
the first quarter of 2001 and up $2 million, or 127 percent compared to the
second quarter of 2000. The decrease from the first quarter 2001 is related to
the normal business cycle due to policy effective dates. The increases from
the second quarter a year ago was the result of the combined success of the
insurance acquisitions made in the third and second quarters of 2000 and the
continued selling efforts of Frost Insurance Agency.
Other service charges were up $731 thousand or 12.3 percent compared to
the previous quarter and up $1.7 million or 33.1 percent from the same quarter
a year ago. The primary contributor to this growth was revenue from Frost
Securities.
Other non-interest income decreased $1.1 million or 12.8 percent when
compared to the previous quarter this year and $1.7 million or 19.1 percent
when compared to the second quarter a year ago. The decrease from the first
quarter of 2001 is mainly due to the $1.1 million gain recognized on the sale
of a LIBOR interest rate floor contract (see page nine) and rebate income
recognized in the first quarter of 2000 related to the favorable performance of
insurance policies written. The decrease from the second quarter 2000 is
related to the $2 million gain recognized from the sale of the mortgage
servicing rights and higher gains recognized on the sale of student loans
during the second quarter of 2000. During the second quarter of 2001,
Cullen/Frost purchased bank owned life insurance on certain of its employees
and is the beneficiary on these policies. The increase in cash surrender value
during the quarter was $764 thousand and was recorded in other non-interest
income offsetting some of the decrease from the previous periods. Also
offsetting the decrease from the second quarter 2000 was higher revenues
received on larger balances held by the provider of the Corporation's official
checks program.
For the six months ended June 30, 2001...
Non-interest income was up $12.7 million or 15.4 percent compared to the
same period last year. Trust income increased $711 thousand or 2.9 percent
from the same period a year ago, primarily in oil and gas and investment fees.
Service charges on deposits increased $5.4 million or 18.5 percent compared to
the same period one year ago. This increase can be attributed to higher
revenues associated with both commercial and individual accounts and higher
overdraft fees offset by lower NSF charges. The increase in commercial service
charges is primarily the result of a lower earnings credit rate, which results
in more payment for services through the payment of fees rather than through
balances. The increase in individual accounts resulted from the simplification
of deposit account offerings while providing Cullen/Frost customers with better
value. Insurance commissions increased $4.4 million or 141.2 percent compared
to the same period ago. The increases from a year ago was the result of the
combined success of the insurance acquisitions made in the third and second
quarters of 2000 and the existing Frost Insurance Agency. Other service charge
income increased $3.1 million or 32.0 percent from the same period last year.
The primary contributor to this growth was the equities sales revenue from
Frost Securities. Other income was down $805 thousand or 4.9 percent compared
to the same period last year. This resulted primarily from the $2 million non-
recurring pre-tax gain from the sale of the mortgage servicing rights in the
second quarter of 2000 and lower gains on the sale of student loans offset by
income related to the bank owned life insurance program initiated in the second
quarter of 2001. Also offsetting the decrease from a year ago was higher
revenues received on larger balances held by the provider of the Corporation's
official checks program.
Non-Interest Expense
Growth in non-interest expense can be attributed to higher personnel and
operating expenses connected with fee business expansion, as well as increases
in salaries and wages.
Three Months Ended
Six Months Ended ------------------------------
June 30 2001 2000
------------------ ------------------- -------
Non-Interest Expense 2001 2000 June 30 March 31 June 30
-------------------------------------------------------------------------------------------
Salaries and wages $ 72,321 $ 67,668 $36,711 $35,610 $34,439
Pension and other employee benefits 17,250 15,221 8,339 8,911 7,171
Net occupancy of banking premises 14,546 13,616 7,343 7,203 6,850
Furniture and equipment 12,252 10,285 6,240 6,012 5,219
Intangible amortization 7,632 7,774 3,752 3,880 3,818
Other 42,367 39,265 21,382 20,985 20,259
-------- -------- ------- ------- -------
Total $166,368 $153,829 $83,767 $82,601 $77,756
======== ======== ======= ======= =======
For the second quarter 2001...
Non-interest expense was up $1.2 million or 1.4 percent compared to last
quarter and increased $6.0 million or 7.7 percent compared to the second
quarter of 2000. Excluding expenses related to insurance and investment
banking non-interest expense would have been up 2.4 percent from the second
quarter last year.
Salaries and wages increased $1.1 million or 3.1 percent compared with the
first quarter of 2001 and were up $2.3 million or 6.6 percent from the second
quarter of 2000. The increase from the first quarter of 2001 was primarily
related to higher incentive compensation. The increase of 6.6 percent from the
second quarter last year is primarily related to increases at Frost Insurance
Agency and Frost Securities (acquisition related for insurance and new hires
for investment banking). Excluding those businesses, salaries were up 1.0
percent, or 2.7 percent excluding $600 thousand of severance costs recorded in
the second quarter last year related to the sale of the mortgage servicing
rights and the initiation of the co-branding mortgage origination program with
GMAC Mortgage Corporation. Pension and employee benefits were down $572
thousand or 6.4 percent compared to last quarter and up $1.2 million or 16.3
percent compared to the second quarter of 2000. The decrease from the previous
quarter was a result of lower payroll taxes. The increase from a year ago is
due primarily from higher payroll taxes related to the acquisitions and higher
retirement plan expense.
Net occupancy of banking premises expenses remained flat from the first
quarter of 2001 and up $493 thousand or 7.2 percent from the second quarter of
2000. The increase from the second quarter a year ago was related to new
locations, general building maintenance and utility expenses. Furniture and
equipment expense was up $228 thousand or 3.8 percent from the first quarter of
2001 and increased by $1.0 million or 19.6 percent from the second quarter of
2000. The increase from the previous quarter is due to higher service
contracts, while the increase from the second quarter a year ago is due to
higher software maintenance and amortization partially related to the
Corporation's enhanced web site introduced in November of 2000.
Other non-interest expenses remained flat from the first quarter of 2001
and up $1.1 million or 5.5 percent from the second quarter of 2000. The
increase from the second quarter a year ago is related to higher professional,
advertising, and travel expenses primarily related to our fee business
expansion efforts, partially offset by good expense control in our core banking
business.
For the six months ended June 30, 2001...
Total non-interest expense was up $12.5 million or 8.2 percent compared to
the same period one year ago. Salaries and wages were up $4.7 million or 6.9
percent compared to the same period a year ago primarily related to Frost
Securities and acquisitions made by Frost Insurance Agency. Severance costs of
almost $600 thousand impacted the first half of 2000 as a result of the sale of
the mortgage servicing rights and the initiation of the co-branding mortgage
origination program. Pension and other benefits increased $2.0 million or 13.3
percent from the same period last year due primarily from higher retirement
plan expense and higher payroll taxes partially offset by lower medical
insurance costs. Net occupancy of banking premises was up $930 thousand or 6.8
percent compared to a year ago. The increase from a year ago was related to
new locations, general building maintenance and utility expenses. Furniture
and equipment expense increased $2.0 million or 19.1 percent due to higher
software maintenance and amortization partially related to the Corporation's
enhanced web site introduced in November of 2000. Other non-interest expenses
increased $3.1 million or 7.9 percent primarily due to higher professional,
advertising, and travel expenses primarily related to our fee business
expansion efforts, partially offset by good expense control in our core banking
business.
Income Taxes
Cullen/Frost's effective tax rate for the first and second quarters of
2001 approximated 34 and 33 percent, respectively. The effective tax rate for
the second quarter of 2000 approximated 35 percent. The decrease in the
effective tax rate in the second quarter of 2001 is due to an increase in tax-
exempt income resulting from the purchase of bank owned life insurance.
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):
Six Months Ended
--------------------------------------------------------------------
June 2001 June 2000
-------------------------------------------------------------------------------------------
Reported Intangible "Cash" Reported Intangible "Cash"
Earnings Amortization Earnings Earnings Amortization Earnings
-------------------------------------------------------------------------------------------
Income before income
taxes and cumulative
effect of accounting
change $72,649 $7,632 $80,281 $80,647 $7,774 $88,421
Income taxes 24,458 1,662 26,120 27,861 1,701 29,562
------- ------ ------- ------- ------ -------
Income before cumulative
effect of accounting
change 48,191 5,970 54,161 52,786 6,073 58,859
Cumulative effect of
accounting change,
net of tax 3,010 3,010
------- ------ ------- ------- ------ -------
Net income $51,201 $5,970 $57,171 $52,786 $6,073 $58,859
======= ====== ======= ======= ====== =======
Net income per diluted
common share $ .96 $ .11 $ 1.07 $ .98 $ .12 $ 1.10
Return on assets 1.36% 1.52%* 1.52% 1.69%*
Return on equity 17.31 19.33** 20.54 22.90**
* Calculated as A/B
** Calculated as A/C June 2001 June 2000
----------------- ---------- ----------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 57,171 $ 58,859
(B) Total average assets 7,566,596 7,004,765
(C) Average shareholders' equity 596,360 516,829
Three Months Ended
--------------------------------------------------------------------
June 2001 March 2001
-------------------------------- --------------------------------
Reported Intangible "Cash" Reported Intangible "Cash"
Earnings Amortization Earnings Earnings Amortization Earnings
-------------------------------------------------------------------------------------------
Income before income
taxes $42,904 $3,752 $46,656 $29,745 $3,880 $33,625
Income taxes 14,243 809 15,052 10,215 853 11,068
------- ------ ------- ------- ------ -------
Income before cumulative
effect of accounting
change 28,661 2,943 31,604 19,530 3,027 22,557
Cumulative effect of
accounting change,
net of tax 3,010 3,010
------- ------ ------- ------- ------ -------
Net income $28,661 $2,943 $31,604 $22,540 $3,027 $25,567
======= ====== ======= ======= ====== =======
Net income per common
share $ .54 $ .05 $ .59 $ .42 $ .06 $ .48
Return on assets 1.50% 1.65%* 1.23% 1.39%*
Return on equity 19.09 21.05** 15.48 17.56**
* Calculated as A/B
** Calculated as A/C June 2001 March 2001
----------------- ---------- ----------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 31,604 $ 25,567
(B) Total average assets 7,680,715 7,451,495
(C) Average shareholders' equity 602,201 590,454
Three Months Ended
--------------------------------
June 2000
--------------------------------
Reported Intangible "Cash"
Earnings Amortization Earnings
--------------------------------------------------------------
Income before income taxes $42,233 $3,818 $46,051
Income taxes 14,603 827 15,430
------- ------ -------
Income before cumulative
effect of accounting
change 27,630 2,991 30,621
Cumulative effect of
Accounting change,
Net of tax
------- ------ -------
Net income $27,630 $2,991 $30,621
======= ====== =======
Net income per common share $ .52 $ .05 $ .57
Return on assets 1.56% 1.73%*
Return on equity 21.31 23.61 **
* Calculated as A/B
** Calculated as A/C
June 2000
----------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 30,621
(B) Total average assets 7,111,133
(C) Average shareholders' equity 521,594
Cullen/Frost's cash earnings for the six months and second quarter ending
June 30, 2001 were $57.2 million or $1.07 per diluted common share and $31.6
million or $.59 per diluted common share, respectively. Cash earnings return
on assets and return on equity for the second quarter of 2001 were 1.65 percent
and 21.05 percent, respectively.
Balance Sheet
Average assets for the second quarter were $7.7 billion up $570 million or
8.0 percent from the second quarter of 2000. Total deposits averaged $6.5
billion for the current quarter, up $508 million or 8.5 percent when compared
to the second quarter of 2000. This growth was influenced by one major
customer of the bank where deposits increased related to the clearing of
payments for mortgage refinances. Excluding the impact of this customer the
growth from the second quarter of 2000 would have been 5.9 percent. Average
loans for the second quarter of 2001 were $4.6 billion. This is flat with the
first quarter of 2001 and up 5.2 percent from the second quarter of last year
or 9 percent excluding the combined impact of mortgage lending (mortgage
products are now offered through a co-branding relationship with GMAC Mortgage)
and indirect loans which have been de-emphasized.
Loans
2001 2000
---------------------- -----------------------
Loan Portfolio Percentage
Period-End Balances June 30 of Total December 31 June 30
-----------------------------------------------------------------------------
Commercial and industrial:
Energy $ 108,409 2.4% $ 141,682 $ 129,947
Other 1,793,030 39.4 1,678,537 1,596,477
Consumer:
Indirect 98,210 2.2 136,914 176,709
Other 330,365 7.3 308,726 308,423
Real estate 2,151,071 47.3 2,191,732 2,121,647
Other 71,591 1.6 84,403 99,309
Unearned discount (6,762) (.2) (7,349) (6,713)
---------- ----- ---------- ----------
Total Loans $4,545,914 100.0% $4,534,645 $4,425,799
========== ===== ========== ==========
At June 30, 2001 period-end loans totaled $4.5 billion flat from the
previous quarter and up 2.7 percent from the same period last year. Period-end
loans would have been flat and up 6.2 percent, respectively, from the first
quarter of 2001 and second quarter of 2000 excluding the combined impact of
mortgage lending and indirect loans. As indicated below, purchased shared
national credits outstanding have decreased during 2001 affecting loan volumes.
These loans decreased $45 million since March 31, 2001. Declines in energy
(primarily shared national credits) and other residential loans offset the
increases in direct consumer loans and other commercial and industrial loans
when compared to the first quarter of 2001. Most of the increase from a year
ago is attributable to commercial and industrial loans, excluding energy, up
$197 million or 12.3 percent.
At June 30, 2001, Cullen/Frost had approximately $258 million of purchased
shared national credits outstanding down from $303 million at March 31, 2001
and $316 million at year-end 2000. These participations are done in the normal
course of business to meet the needs of the Corporation's customers. General
corporate policy towards participations is to lend to companies either
headquartered in or having significant operations within our markets. In
addition, Cullen/Frost must have an existing banking relationship or the
expectation of broadening the relationship with other bank products.
Approximately 28 percent of the outstanding balance of shared national credits
are energy related with the remainder diversified throughout various
industries.
Real Estate Loans
Real estate loans at June 30, 2001, were $2.2 billion or 47.3 percent of
period-end loans compared to 47.9 percent a year ago. Amortizing permanent
mortgages represented 54.4 percent of the total real estate loan portfolio at
quarter end. Other real estate loans increased $59 million and was offset by
$37 million in permanent mortgages including 1-4 family residential mortgages
which were impacted as Cullen/Frost withdrew from mortgage origination.
Mortgage loans are now offered through Cullen/Frost's co-branding arrangement
with GMAC Mortgage. This arrangement will broaden the mortgage products that
can be offered to the Corporation's customer base, as well as leverage GMAC's
commitment to web-based mortgage products. Real estate loans categorized as
"other" are primarily amortizing commercial and industrial loans with
maturities of less than five years secured by real property. Approximately 42
percent of all commercial real estate loans are owner occupied or have a major
tenant (National or Regional company) which historically has resulted in lower
risk, provides financial stability and is less susceptible to economic swings.
At June 30, 2001, real estate loans 90 days past due (excluding non-
accrual loans) were $9.4 million, compared with $4.6 million at March 31, 2001,
and $2.4 million at June 30, 2000. The increase from the prior quarter is
related to a $7.5 million commercial real estate loan that is well secured and
in the process of collection.
2001 2000
------------------------ --------
Real Estate Loans Percentage
Period-End Balances June 30 of Total June 30
----------------------------------------------------------------------------
Construction $ 411,379 19.1% $ 403,747
Land 145,864 6.8 145,861
Permanent mortgages:
Commercial 485,699 22.6 481,517
1-4 Family residential 282,798 13.2 328,396
Other residential 392,270 18.2 388,314
Other 433,061 20.1 373,812
---------- ------ ----------
$2,151,071 100.0% $2,121,647
========== ====== ==========
Non-accrual $ 1,716 .1% $ 4,175
Mexico
Cullen/Frost's cross border outstandings to Mexico, excluding $14.7
million in loans secured by assets held in the United States, totaled $74
thousand at June 30, 2001 compared to $32 thousand at March 31, 2001 and down
from $8.8 million last year. The variance from the second quarter last year
represents normal fluctuations in lines of credit used by Mexican banks to
finance trade. At June 30, 2001, there were no Mexican-related loans on non-
performing status compared to $285 thousand a year ago.
Non-Performing Assets
NON-PERFORMING ASSETS
--------------------------
Real
June 30, 2001 Estate Other Total
---------------------------------------------------------------------------
Non-accrual $1,716 $21,198 $22,914
Foreclosed assets 2,418 384 2,802
------ ------- -------
Total $4,134 $21,582 $25,716
====== ======= =======
As a percentage of total
non-performing assets 16.1% 83.9% 100.0%
Non-performing assets totaled $25.7 million at June 30, 2001 up 61.1
percent from $16.0 million at June 30, 2000 and up 11.7 percent from $23.0
million at March 31, 2001. Included in non-performing loans is a shared
national credit currently recorded at $6.6 million. Non-performing assets as a
percentage of total loans and foreclosed assets increased to .57 percent at
June 30, 2001 from .36 percent one year ago. Non-performing assets as a
percentage of total assets was .33 percent for the second quarter 2001 compared
to .22 percent for the second quarter 2000. The Company expects non-performing
assets will continue to increase through the remainder of 2001.
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 approximately $473 thousand for the
second quarter of 2001, compared to approximately $649 thousand for the first
quarter of 2001 and approximately $325 thousand for the second quarter of 2000.
Accruing loans past due are summarized below:
ACCRUING LOANS PAST DUE
------------------------------
June 30 December 31 June 30
2001 2000 2000
--------------------------------------------------------------------------
30 to 89 days $31,656 $43,671 $24,106
90 days or more 13,369 7,972 5,810
------- ------- -------
Total $45,025 $51,643 $29,916
======= ======= =======
Allowance for Possible Loan Losses
The allowance for possible loan losses was $65.3 million or 1.44 percent
of period-end loans at June 30, 2001, compared to $59.0 million or 1.33 percent
at June 30, 2000 and $64.1 million or 1.40 percent at March 31, 2001. The
allowance for possible loan losses as a percentage of non-accrual loans was 285
percent at June 30, 2001, compared to 453 percent at June 30, 2000 and 310
percent at the end of the first quarter of 2001.
Cullen/Frost recorded a $1.0 million provision for possible loan losses
during the second quarter of 2001. This compares to $2.9 million provision for
possible loan losses during the second quarter of 2000 and $15.0 million for
the first quarter of 2001. Net recoveries in the second quarter of 2001
totaled $189 thousand, compared to net charge-offs of $2.4 million and $14.2
million for the second quarter of 2000 and for the first quarter of 2001,
respectively. The higher provision and charge-offs in the first quarter of
2001 resulted from a write down to discounted collateral value of $6.9 million
of the $20 million previously mentioned shared national credit.
NET CHARGE-OFFS (RECOVERIES)
----------------------------
2001 2000
------------------ -------
Second First Second
Quarter Quarter Quarter
------------------------------------------------------------------------------
Real estate $ (688) $ 77 $ (7)
Commercial and industrial 84 13,563 1,689
Consumer 387 594 688
Other, including foreign 28 (3) (3)
------- ------- -------
$ (189) $14,231 $ 2,367
======= ======= =======
Provision for possible loan losses $ 1,000 $15,031 $ 2,867
Allowance for possible loan losses 65,254 64,065 58,965
Capital and Liquidity
At June 30, 2001, shareholders' equity was $612.4 million compared to
$524.6 million at June 30, 2000 and $592.5 million at March 31, 2001. Activity
in the shareholders equity account during 2001 includes $21.1 million of
dividends paid offset by earnings of $51.2 million. In addition, Cullen/Frost
had an unrealized gain on securities available for sale, net of deferred taxes,
of $3.6 million as of June 30, 2001 compared to an unrealized loss of $4.0
million as of December 31, 2000 which had the effect of increasing capital by
$7.6 million. Currently, under regulatory requirements, the unrealized gain or
loss on securities available for sale is not included in the calculation of
risk-based capital and leverage ratios. See page seven for a discussion of the
Corporation's regulatory capital ratios.
The Cullen/Frost board of directors raised the cash dividend 10.3 percent
in the second quarter of 2001 to $.215 per common share compared to $.195 per
common share paid since the second quarter of 2000. This equates to a dividend
payout ratio of 38.7 percent and 44.6 percent for the second and first quarters
of 2001, respectively. The dividend payout ratio for the second quarter of
2000 was 36.8 percent.
Funding sources available at the holding company level include a $7.5
million short-term line of credit. There were no borrowings outstanding from
this source at June 30, 2001 or 2000.
Asset liquidity is provided by cash and assets which are readily
marketable or pledgeable or which will mature in the near future. Liquid
assets include cash, short-term time deposits in banks, securities available
for sale, maturities and cash flow from securities held to maturity, and
Federal funds sold and securities purchased under resale agreements.
Liability liquidity is provided by access to funding sources which include
core depositors and correspondent banks in Cullen/Frost's natural trade area
which maintain accounts with and sell Federal funds to The Frost National Bank,
as well as Federal funds purchased and securities sold under repurchase
agreements from upstream banks. The liquidity position of Cullen/Frost is
continuously monitored and adjustments are made to the balance between sources
and uses of funds as deemed appropriate.
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, 2001 June 30, 2000
---------------------------- ----------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
---------- -------- ------ ---------- -------- ------
ASSETS
Time deposits $ 7,071 $ 215 5.24% $ 6,952 $ 270 5.72%
Securities:
U.S. Treasury 59,556 1,784 6.04 127,765 3,701 5.83
U.S. Government agencies
and corporations 1,339,492 43,525 6.50 1,344,320 45,883 6.83
States and political subdivisions
Tax-exempt 163,199 5,851 7.17 148,448 5,603 7.55
Taxable 3,378 109 6.48 3,463 115 6.67
Other 34,793 1,050 6.04 34,707 1,458 8.40
---------- -------- --------- --------
Total securities 1,600,418 52,319 6.54 1,658,703 56,760 6.85
Federal funds sold and securities
purchased under resale agreements 238,654 5,764 4.80 68,417 2,100 6.07
Loans, net of unearned discount 4,561,781 188,895 8.35 4,272,968 188,790 8.89
---------- -------- ---------- --------
Total Earning Assets and
Average Rate Earned 6,407,924 247,193 7.76 6,007,040 247,920 8.29
Cash and due from banks 741,280 604,410
Allowance for possible loan losses (64,529) (58,773)
Banking premises and equipment 150,477 145,062
Accrued interest and other assets 331,444 307,026
---------- ----------
Total Assets $7,566,596 $7,004,765
========== ==========
LIABILITIES
Demand deposits:
Commercial and individual $1,744,306 $1,601,978
Correspondent banks 242,229 220,686
Public funds 37,486 30,520
---------- ---------
Total demand deposits 2,024,021 1,853,184
Time deposits:
Savings and Interest-on-Checking 960,548 2,542 .53 976,027 3,237 .67
Money market deposit accounts 1,802,539 30,022 3.36 1,638,872 35,157 4.31
Time accounts 1,279,978 33,333 5.25 1,229,774 29,792 4.87
Public funds 301,746 6,065 4.05 232,334 5,131 4.44
---------- -------- --------- --------
Total time deposits 4,344,811 71,962 3.34 4,077,007 73,317 3.62
---------- ---------
Total deposits 6,368,832 5,930,191
Federal funds purchased and securities
sold under repurchase agreements 361,322 7,779 4.28 302,376 7,914 5.18
Guaranteed preferred beneficial
interests in the Corporation's
junior subordinated deferrable
interest debentures, net 98,582 4,238 8.60 98,529 4,238 8.60
Long-term notes payable 3,347 109 6.57 2,548 70 5.53
Other borrowings 31,623 929 5.93 69,832 2,574 7.41
---------- -------- ---------- --------
Total Interest-Bearing Funds
and Average Rate Paid 4,839,685 85,017 3.53 4,550,292 88,113 3.89
---------- -------- ---- ---------- -------- ----
Accrued interest and other liabilities 106,530 84,460
---------- ----------
Total Liabilities 6,970,236 6,487,936
SHAREHOLDERS' EQUITY 596,360 516,829
---------- ----------
Total Liabilities and
Shareholders' Equity $7,566,596 $7,004,765
========== ==========
Net interest income $162,176 $159,807
======== ========
Net interest spread 4.23% 4.40%
==== ====
Net interest income to total average earning assets 5.09% 5.34%
==== ====
The above information is shown on a taxable-equivalent basis assuming a 35% tax rate. Non-
accrual loans are included in the average loan amounts outstanding for these computations.
Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands - taxable-equivalent basis)
June 30, 2001 March 31, 2001
--------------------------- --------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
---------- -------- ------ ---------- --------- -----
ASSETS
Time deposits $ 7,751 $ 99 5.11% $ 6,383 $ 116 5.37%
Securities:
U.S. Treasury 17,028 192 4.52 102,556 1,592 6.29
U.S. Government agencies
and corporations 1,337,607 21,427 6.41 1,341,398 22,098 6.59
States and political subdivisions
Tax-exempt 163,453 2,908 7.12 162,943 2,943 7.22
Taxable 3,388 55 6.46 3,368 55 6.50
Other 32,751 469 5.73 36,858 580 6.30
---------- -------- ---------- -------
Total securities 1,554,227 25,051 6.45 1,647,123 27,268 6.63
Federal funds sold and securities
purchased under resale agreements 315,871 3,520 4.41 160,578 2,244 5.59
Loans, net of unearned discount 4,559,623 90,157 7.93 4,563,963 98,738 8.77
---------- -------- ---------- --------
Total Earning Assets and
Average Rate Earned 6,437,472 118,827 7.40 6,378,047 128,366 8.14
Cash and due from banks 806,665 675,168
Allowance for possible loan losses (65,728) (63,316)
Banking premises and equipment 150,376 150,581
Accrued interest and other assets 351,930 311,015
---------- ----------
Total Assets $7,680,715 $7,451,495
========== ==========
LIABILITIES
Demand deposits:
Commercial and individual $1,828,870 $1,658,802
Correspondent banks 248,370 236,020
Public funds 35,709 39,282
---------- ----------
Total demand deposits 2,112,949 1,934,104
Time deposits:
Savings and Interest-on-Checking 970,673 1,115 .46 950,311 1,427 .61
Money market deposit accounts 1,824,869 12,857 2.83 1,780,012 17,166 3.91
Time accounts 1,276,765 15,741 4.95 1,283,226 17,592 5.56
Public funds 293,816 2,709 3.70 309,713 3,355 4.39
---------- ------- ---------- -------
Total time deposits 4,366,123 32,422 2.98 4,323,262 39,540 3.71
---------- ------- ---------- -------
Total deposits 6,479,072 6,257,366
Federal funds purchased and securities
sold under repurchase agreements 360,786 3,417 3.75 361,864 4,362 4.82
Guaranteed preferred beneficial
interests in the Corporation's
junior subordinated deferrable
interest debentures, net 98,589 2,119 8.60 98,575 2,119 8.60
Long-term notes payable 3,060 47 6.17 3,637 62 6.92
Other borrowings 31,405 455 5.81 31,843 474 6.04
---------- ------- ---------- -------
Total Interest-Bearing Funds
and Average Rate Paid 4,859,963 38,460 3.17 4,819,181 46,557 3.91
---------- ------- ---- ---------- ------- ----
Accrued interest and other liabilities 105,602 107,756
---------- ----------
Total Liabilities 7,078,514 6,861,041
SHAREHOLDERS' EQUITY 602,201 590,454
---------- ----------
Total Liabilities and
Shareholders' Equity $7,680,715 $7,451,495
========== ==========
Net interest income $ 80,367 $ 81,809
======== ========
Net interest spread 4.23% 4.23%
==== ====
Net interest income to total average earning assets 5.00% 5.18%
==== ====
The above information is shown on a taxable-equivalent basis assuming a 35% tax rate. Non-
accrual loans are included in the average loan amounts outstanding for these computations.
Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands - taxable-equivalent basis)
December 31, 2000 September 30, 2000
---------------------------- ---------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
---------- --------- ----- ---------- -------- -----
ASSETS
Time deposits $ 8,092 $ 121 5.96% $ 6,903 $ 114 6.60%
Securities:
U.S. Treasury 131,205 2,107 6.39 133,932 2,108 6.26
U.S. Government agencies
and corporations 1,369,655 23,281 6.80 1,287,967 22,080 6.86
States and political subdivisions
Tax-exempt 155,761 2,835 7.28 154,421 2,847 7.38
Taxable 3,319 55 6.59 3,354 56 6.65
Other 36,443 590 6.42 35,608 569 6.39
---------- -------- ---------- --------
Total securities 1,696,383 28,868 6.80 1,615,282 27,660 6.85
Federal funds sold and securities
purchased under resale agreements 202,699 3,354 6.47 182,310 3,052 6.55
Loans, net of unearned discount 4,458,675 103,971 9.28 4,405,125 101,765 9.19
---------- -------- ---------- --------
Total Earning Assets and
Average Rate Earned 6,365,849 136,314 8.52 6,209,620 132,591 8.50
Cash and due from banks 646,062 632,534
Allowance for possible loan losses (60,396) (59,170)
Banking premises and equipment 147,372 147,221
Accrued interest and other assets 304,500 308,265
---------- ----------
Total Assets $7,403,387 $7,238,470
========== ==========
LIABILITIES
Demand deposits:
Commercial and individual $1,678,877 $1,662,944
Correspondent banks 226,760 242,942
Public funds 35,241 34,598
---------- ----------
Total demand deposits 1,940,878 1,940,484
Time deposits:
Savings and Interest-on-Checking 948,065 1,548 .65 945,462 1,559 .66
Money market deposit accounts 1,795,348 21,125 4.68 1,739,909 20,255 4.63
Time accounts 1,257,464 17,797 5.63 1,238,874 16,909 5.43
Public funds 302,853 3,542 4.65 234,320 2,806 4.76
---------- -------- ---------- --------
Total time deposits 4,303,730 44,012 4.07 4,158,565 41,529 3.97
---------- -------- ---------- --------
Total deposits 6,244,608 6,099,049
Federal funds purchased and securities
sold under repurchase agreements 368,071 5,205 5.53 332,446 4,770 5.61
Guaranteed preferred beneficial
interests in the Corporation's
junior subordinated deferrable
interest debentures, net 98,561 2,119 8.60 98,547 2,118 8.60
Long-term notes payable 3,683 61 6.63 6,270 73 4.67
Other borrowings 34,750 530 6.07 78,701 1,038 5.25
---------- -------- ---------- --------
Total Interest-Bearing Funds
and Average Rate Paid 4,808,795 51,927 4.29 4,674,529 49,528 4.21
---------- -------- ---- ---------- -------- ----
Accrued interest and other
liabilities 93,988 84,695
---------- ----------
Total Liabilities 6,843,661 6,699,708
SHAREHOLDERS' EQUITY 559,726 538,762
---------- ----------
Total Liabilities and
Shareholders' Equity $7,403,387 $7,238,470
========== ==========
Net interest income $ 84,387 $ 83,063
======== ========
Net interest spread 4.23% 4.29%
==== ====
Net interest income to total average earning assets 5.28% 5.33%
==== ====
The above information is shown on a taxable-equivalent basis assuming a 35% tax rate. Non-
accrual loans are included in the average loan amounts outstanding for these computations.
Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands - taxable-equivalent basis)
June 30, 2000
-----------------------------
Interest
Average Income/ Yield/
Balance Expense Cost
---------- -------- ------
ASSETS
Time deposits $ 7,022 $ 125 6.04%
Securities:
U.S. Treasury 123,932 1,837 5.96
U.S. Government agencies
and corporations 1,372,244 23,515 6.85
States and political subdivisions
Tax-exempt 148,872 2,794 7.51
Taxable 3,460 58 6.67
Other 35,067 934 10.66
---------- --------
Total securities 1,683,575 29,138 6.93
Federal funds sold and securities
purchased under resale agreement 86,578 1,372 6.27
Loans, net of unearned discount 4,334,450 97,366 9.04
---------- --------
Total Earning Assets and
Average Rate Earned 6,111,625 128,001 8.41
Cash and due from banks 607,792
Allowance for possible loan losses (58,951)
Banking premises and equipment 146,498
Accrued interest and other assets 304,169
----------
Total Assets $7,111,133
==========
LIABILITIES
Demand deposits:
Commercial and individual $1,636,719
Correspondent banks 217,843
Public funds 29,157
----------
Total demand deposits 1,883,719
Time deposits:
Savings and Interest-on-Checking 974,995 1,621 .67
Money market deposit accounts 1,645,561 18,343 4.48
Time accounts 1,235,310 15,593 5.08
Public funds 231,319 2,703 4.70
---------- --------
Total time deposits 4,087,185 38,260 3.76
---------- --------
Total deposits 5,970,904
Federal funds purchased and securities
sold under repurchase agreements 318,303 4,376 5.44
Guaranteed preferred beneficial
interests in the Corporation's
junior subordinated deferrable
interest debentures, net 98,534 2,119 8.60
Long-term notes payable 2,460 31 5.04
Other borrowings 113,074 2,120 7.54
---------- --------
Total Interest-Bearing Funds
and Average Rate Paid 4,619,556 46,906 4.07
---------- -------- ----
Accrued interest and other liabilities 86,264
----------
Total Liabilities 6,589,539
SHAREHOLDERS' EQUITY 521,594
----------
Total Liabilities and
Shareholders' Equity $7,111,133
==========
Net interest income $ 81,095
========
Net interest spread 4.34%
====
Net interest income to total average earning assets 5.33%
====
The above information is shown on a taxable-equivalent basis assuming a 35% tax rate. Non-
accrual loans are included in the average loan amounts outstanding for these computations.
Item 3.
Quantitative and Qualitative Disclosures About Market Risks
Market risk is the potential loss arising from adverse changes in the fair
value of a financial instrument due to the changes in market rates and prices.
In the ordinary course of business, Cullen/Frost's market risk is primarily
interest rate risk. The Corporation's interest rate sensitivity and liquidity
are monitored by its Asset/Liability Management Committee on an ongoing basis.
The Committee seeks to avoid fluctuating net interest margins and to maintain
consistent growth of net interest income through periods of changing interest
rates. A variety of measures are used to provide for a comprehensive view of
the magnitude of interest rate risk, the distribution of risk, level of risk
over time and exposure to changes in certain interest rate relationships.
Cullen/Frost utilizes an earnings simulation model as the primary
quantitative tool in measuring the amount of interest rate risk associated with
changing market rates. The model quantifies the effects of various interest
rate scenarios on the projected net interest income and net income over the
ensuing 12 month period. The model was used to measure the impact on net
interest income relative to a base case scenario, of rates increasing or
decreasing ratably 200 basis points over the next 12 months. These simulations
incorporate assumptions regarding balance sheet growth and mix, pricing and the
repricing and maturity characteristics of the existing and projected balance
sheet. All off-balance sheet financial instruments such as derivatives are
included in the model. Other interest rate-related risks such as prepayment,
basis and option risk are also considered. The resulting model simulations
show that a 200 basis point increase in rates will result in a positive
variance in net interest income of 1.9 percent relative to the base case over
the next 12 months; while a decrease of 200 basis points will result in a
negative variance in net interest income of 3.6 percent. This compares to the
year-end 2000 estimate when a 200 basis points increase in rates resulted in a
positive variance in net interest income of 0.9 percent relative to the base
case over the next 12 months; while a decrease of 200 basis points resulted in
a negative variance in net interest income of 1.8 percent. The Corporation's
trading portfolio is immaterial and as such separate quantitative disclosure is
not presented.
Cullen/Frost continuously monitors and manages the balance between
interest rate-sensitive assets and liabilities. The Corporation's objective is
to manage the impact of fluctuating market rates on net interest income within
acceptable levels. In order to meet this objective, the Corporation may
lengthen or shorten the duration of assets or liabilities or enter into
derivative contracts to mitigate potential market risk.
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 30,
2001. The following matters were submitted to a vote of the Corporation's
shareholders.
1. Election of Directors:
Election of one director nominee into Class I, with a term expiring in
2003, and seven director nominees into Class II, with terms expiring in 2004,
was approved with no nominee receiving less than 41.1 million votes.
Nominee Total Votes For Total Votes Withheld
------- --------------- --------------------
Class I:
Carlos Alvarez 46,146,369 189,903
Class II:
Royce S. Caldwell 46,171,885 164,387
Richard W. Evans, Jr. 41,195,676 5,140,596
T. C. Frost 41,201,630 5,134,642
Preston M. Geren III 46,172,151 164,121
Karen E. Jennings 46,161,921 174,351
Richard M. Kleberg, III 46,172,551 163,721
Horace Wilkins, Jr. 46,172,551 163,721
2. Approval of the Cullen/Frost Bankers, Inc. 2001 Stock Plan
Total Votes For 31,697,738
Total Votes Against 9,405,281
Total Abstentions 148,894
3. Amend the Cullen/Frost Bankers, Inc. 1997 Director Stock Plan
Total Votes For 32,460,926
Total Votes Against 8,601,201
Total Abstentions 189,788
4. Selection of Independent Auditors
Total Votes For 46,081,065
Total Votes Against 198,472
Total Abstentions 56,735
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
During the quarter ended June 30, 2001, a Current Report on Form 8-K,
dated April 18, 2001, was filed with the Commission by Cullen/Frost.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cullen/Frost Bankers, Inc.
(Registrant)
Date: July 25, 2001 By: /S/Phillip D. Green
-----------------------
Phillip D. Green
Group Executive Vice President
and Chief Financial Officer
(Duly Authorized Officer and
Principal Accounting Officer)
11
15
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