10-K405 1 10-K405 ELECTRONIC SUBMISSION 12/31/94 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 ___ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] FOR THE TRANSITION PERIOD FROM _______ to _______ Commission File Number 0-7275 CULLEN/FROST BANKERS, INC. (Exact name of registrant as specified in its charter) Texas 74-1751768 ------------------------------- ------------------------ (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) Registrant's telephone number, including area code: (210) 220-4011 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, $5 Par Value -------------------------- (Title of Class) 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 such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- The aggregate market value of the voting stock held by non-affiliates of the registrant was $381,504,617 based on the closing price of such stock as of March 24, 1995. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Outstanding at Class March 24, 1995 -------------------------- -------------- Common Stock, $5 par value 11,136,987 DOCUMENTS INCORPORATED BY REFERENCE (1) Annual Report to Shareholders for the Year Ended December 31, 1994 (Parts I & II) (2) Proxy Statement for Annual Meeting of Shareholders to be held May 16, 1995 (Part III) TABLE OF CONTENTS PART I Page ------ ---- ITEM 1. BUSINESS 1 ITEM 2. PROPERTIES 8 ITEM 3. LEGAL PROCEEDINGS 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS * PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 9 ITEM 6. SELECTED FINANCIAL DATA 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 9 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE * PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 10 ITEM 11. EXECUTIVE COMPENSATION 10 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 10 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 10 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 11 * Not Applicable PART I Item 1. BUSINESS ------------------ General Cullen/Frost Bankers, Inc. ("Cullen/Frost" or "Company"), a Texas business corporation incorporated in 1977 and headquartered in San Antonio, Texas, is a bank holding company within the meaning of the Bank Holding Company Act of 1956 ("the Bank Holding Company Act") and as such is registered with the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). The New Galveston Company, incorporated under the laws of Delaware, is a wholly owned second tier bank holding company subsedeary which owns all banking and non-banking subsidiaries. Cullen/Frost's principal assets consist of all the capital stock of two national banks. At year end 1994, Cullen/Frost had 28 offices in four major Texas banking markets with 16 locations in San Antonio, four in the Houston/Galveston area, five in the Corpus Christi area and three in the Austin area. At December 31, 1994, Cullen/Frost had consolidated assets of $3,793,720,000 and total deposits of $3,087,962,000. Based on information from the Federal Reserve Board, at September 30, 1994, Cullen/Frost was the largest of the 99 bank holding companies in Texas and the sixth largest of 889 banking organizations in Texas. Cullen/Frost provides policy direction to the Cullen/Frost subsidiary banks in the following areas: (i) lending policies and techniques, loan participation and credit administration; (ii) asset and liability management; (iii) trust services; (iv) personnel management and compensation; (v) accounting, budgeting, planning, operations, insurance and auditing; (vi) capitalization; (vii) marketing programs and (viii) regulatory compliance. Cullen/Frost Subsidiary Banks ----------------------------- Each of the Cullen/Frost subsidiary banks is a separate entity which operates under the day-to-day management of its own board of directors and officers. The largest of these banks is The Frost National Bank ("Frost Bank"), the origin of which can be traced to a mercantile partnership organized in 1868. Frost Bank was chartered as a national banking association in 1899. At December 31, 1994, Frost Bank, which accounted for approximately 97 percent of consolidated assets, 96 percent of consolidated loans, and 96 percent of consolidated deposits of Cullen/Frost, was the largest bank headquartered in San Antonio and South Texas. The following table provides information as of December 31, 1994, as to total assets, total loans and total deposits of each of the Cullen/Frost subsidiary banks:
Name of Bank and Location Total Assets Total Loans Total Deposits ------------------------- ------------ ----------- -------------- The Frost National Bank, San Antonio, Corpus Christi, Austin, and Houston, Texas $3,683,317,000 $1,424,062,000 $2,970,245,000 United States National Bank of Galveston Galveston, Texas 138,222,000 53,703,000 125,904,000
During April 1994, Cullen/Frost acquired Texas Commerce Bank in Corpus Christi as a branch of Frost Bank in exchange for Cullen/Frost Bank of Dallas, N.A. The banks exchanged were comparable in asset size. 1 Services Offered by the Cullen/Frost Subsidiary Banks ----------------------------------------------------- Commercial Banking The subsidiary banks provide commercial services for corporations and other business clients. Loans are made for a wide variety of purposes, including interim construction financing on industrial and commercial properties and financing on equipment, inventories and accounts receivable. Frost Bank provides financial services to business clients on both a national and international basis. Consumer Services The subsidiary banks provide a full range of consumer banking services, including checking accounts, savings programs, automated teller machines, installment and real estate loans, drive-in and night deposit services, safe deposit facilities, credit card services and discount brokerage services. International Banking Frost Bank provides international banking services to customers residing in or dealing with businesses located in Mexico. Such services consist of accepting deposits (in United States dollars only), making loans (in United States dollars only), issuing letters of credit, handling foreign collections, transmitting funds and, to a limited extent, dealing in foreign exchange. Reference is made to pages 15 and 21 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1994, which pages are incorporated herein by reference. Trust Services The subsidiary banks provide a wide range of trust, investment, agency and custodial services for individual and corporate clients. These services include the administration of estates and personal trusts and the management of investment accounts for individuals, employee benefit plans and charitable foundations. At December 31, 1994, trust assets with a market value of approximately $10.4 billion were being administered by the sub-sidiary banks. In addition, both banks serve as transfer agents or registrars for securities, as trustees of bond issues and as paying agents for dividends and interest. Correspondent Banking Frost Bank acts as correspondent for approximately 258 financial institutions, primarily banks in Texas. These banks maintain deposits with Frost Bank, which offers to the correspondents a full range of services including check clearing, transfer of funds, loan participations, and securities custody and clearance. Discount Brokerage Cullen/Frost Discount Brokers, Inc. was formed in March 1986 to provide discount brokerage services and perform other transactions or operations related to the sale and purchase of securities of all types. Cullen/Frost Discount Brokers, Inc. is a subsidiary of Frost Bank. Services Offered by the Cullen/Frost Non-Banking Subsidiaries ------------------------------------------------------------- Main Plaza Corporation ("Main Plaza") is a wholly owned non-banking subsidiary. Main Plaza holds real estate for future expansion of certain of the subsidiary banks and occasionally makes loans to qualified borrowers. Loans are funded with borrowings against Cullen/Frost's current cash or borrowings against credit lines. Daltex General Agency, Inc. ("Daltex"), a wholly owned non-banking subsidiary, is a managing general insurance agency. Daltex provides vendor's single interest insurance for the subsidiary banks. Competition ----------- The subsidiary banks encounter intense competition in their commercial banking businesses, primarily from other banks located in their respective service areas. The subsidiary banks also compete with insurance, finance and mortgage companies, savings and loan institutions, credit unions, money market funds and other financial institutions. In the case of some larger customers, competition exists with institutions in other major 2 metropolitan areas in Texas and in the remainder of the United States, some of which are larger than the Cullen/Frost subsidiary banks in terms of capital, resources and personnel. Supervision and Regulation -------------------------- Cullen/Frost Cullen/Frost is a legal entity separate and distinct from its bank subsidiaries and is a registered bank holding company under the Bank Holding Company Act (the "BHC Act"). The BHC Act generally prohibits Cullen/Frost from engaging in any business activity other than banking, managing and controlling banks, furnishing services to a bank which it owns and controls or engaging in non-banking activities closely related to banking. As a bank holding company, Cullen/Frost is primarily regulated by the Federal Reserve Board which has established guidelines with respect to the maintenance of appropriate levels of capital and payment of dividends by bank holding companies. Cullen/Frost is required to obtain prior approval of the Federal Reserve Board for the acquisition of more than five percent of the voting shares or substantially all of the assets of any company (including a bank) or to merge or consolidate with another bank holding company. The Texas Banking Code permits the acquisition of Texas banks or bank holding companies by certain out-of-state registered bank holding companies. A Texas bank holding company is likewise permitted to acquire a bank or bank holding company in other states if the acquisition is permitted by the laws of the other states. The Federal Reserve Act and the Federal Deposit Insurance Act ("FDIA") impose restrictions on loans by the subsidiary banks to Cullen/Frost and certain of its subsidiaries, on investments in securities thereof and on the taking of such securities as collateral for loans. Such restrictions generally prevent Cullen/Frost from borrowing from the subsidiary banks unless the loans are secured by marketable obligations. Also, such restrictions prevent Cullen/Frost and certain other subsidiaries from borrowing from Cullen/Frost's bank subsidiaries unless the loans are secured. Further, such secured loans, other transactions, and investments by each of such bank subsidiaries are limited in amount as to Cullen/Frost or to certain other subsidiaries to ten percent of the lending bank subsidiary's capital and surplus and as to Cullen/Frost and all such subsidiaries to an aggregate of 20 percent of the lending bank subsidiary's capital and surplus. Subsidiary Banks The two subsidiary national banks are organized as national banking associations under the National Bank Act and are subject to regulation and examination by the Office of the Comptroller of the Currency (the "Comptroller of the Currency"). Federal and state laws and regulations of general application to banks have the effect, among others, of regulating the scope of the business of the subsidiary banks, their investments, cash reserves, the purpose and nature of loans, collateral for loans, the maximum interest rates chargeable on loans, the amount of dividends that may be declared and required capitalization ratios. Federal law imposes restrictions on extensions of credit to, and certain other transactions with, Cullen/Frost and other subsidiaries, on investments in stock or other securities thereof and on the taking of such securities as collateral for loans to other borrowers. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Frost Bank and United States National Bank of Galveston ("U.S. National Bank") have registered with the Comptroller of the Currency as transfer agents and are subject to certain reporting requirements of and regulatory control by the Comptroller of the Currency. The bond department of Frost Bank is subject to regulation under the Texas Securities Act. The Comptroller of the Currency with respect to Cullen/Frost's bank subsidiaries has authority under the Financial Institutions Supervisory Act to prohibit a bank from engaging in what, in such agency's opinion, constitutes an unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that such agency could claim that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. 3 The principal source of Cullen/Frost's cash revenues is dividends from its bank subsidiaries, and there are certain limitations on the payment of dividends to Cullen/Frost by such bank subsidiaries. The prior approval of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year would exceed the bank's net profits, as defined, for that year combined with its retained net profits for the preceding two calendar years less any required transfers to surplus. In addition, a national bank may not pay dividends in an amount in excess of its net profits less an allowance for bad debts. Although not necessarily indicative of amounts available to be paid in future periods, Cullen/Frost's subsidiary banks had approximately $45,095,000 available for payment of dividends at December 31, 1994. Capital Adequacy Bank regulators have adopted risk-based capital guidelines for bank holding companies and banks. The minimum ratio of qualifying total capital to risk- weighted assets (including certain off-balance sheet items) is 8 percent. At least half of the total capital is to be comprised of common stock, retained earnings, perpetual preferred stocks, minority interests and for bank holding companies, a limited amount of qualifying cumulative perpetual preferred stock, less certain intangibles including goodwill ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist of other preferred stock, certain other instruments, and limited amounts of subordinated debt and the loan and lease loss allowance. In addition, the Federal Reserve Board has established minimum Leverage Ratio (Tier 1 capital to average total assets) guidelines for bank holding companies and banks. These guidelines provide for a minimum leverage ratio of 3 percent for bank holding companies and banks that meet certain specified criteria, including that they have the highest regulatory rating. All other banking organizations will be required to maintain a leverage ratio of 3 percent plus an additional cushion of at least 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the ratio of Tier 1 capital, less intangibles not deducted from Tier 1 capital, to average total assets. The Federal Reserve Board has not advised Cullen/Frost of any specific minimum leverage ratio applicable to it. For information concerning Cullen/Frost's capital ratios, see the discussion under the caption "Capital" on page 22 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1994, which discussion is incorporated herein by reference. FDICIA In December 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted, which substantially revises the bank regulatory and funding provisions of the Federal Deposit Insurance Act and makes revisions to several other Federal banking statutes. Among other things, FDICIA requires the Federal banking agencies to take "prompt corrective action" in respect of depository institutions that do not meet minimum capital require- ments. FDICIA establishes five capital tiers: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". Federal banking agencies have adopted final rules, effective December 16, 1992, relating to these capital tiers. Under the final rules, an institution will be deemed to be: well capitalized if the institution has a total risk-based capital ratio of 10.0 percent or greater, a Tier 1 risk-based capital ratio of 6.0 percent or greater, and a leverage ratio of 5.0 percent or greater, and the institution is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure; adequately capitalized if the institution has a total risk-based capital ratio of 8.0 percent or greater, a Tier 1 risk-based capital ratio of 4.0 percent or greater, and a leverage ratio of 4.0 percent or greater (or a leverage ratio of 3.0 percent for bank holding companies which meet certain specified criteria, including having the highest regulatory rating); undercapitalized if the institution has a total risk-based capital ratio that is less than 8.0 percent, a Tier 1 risk-based capital ratio less than 4.0 percent or a leverage ratio less than 4.0 percent (or a leverage ratio less than 3.0 percent if the institution is rated composite 1 in its most recent report of examination, subject to appropriate Federal banking agency guidelines); significantly undercapitalized if the institution has a total risk-based capital ratio less than 6.0 percent, a Tier 1 risk-based capital ratio less than 3.0 percent, or a leverage ratio less 4 than 3.0 percent; and critically undercapitalized if the institution has a ratio of tangible equity to total assets equal to or less than 2.0 percent. At December 31, 1994, the two subsidiaries of Cullen/Frost that are insured depository institutions -- Frost Bank and U.S. National Bank -- were considered "well capitalized". At December 31, 1994, the subsidiary banks capital ratios were as follows: Tier 1 Capital Total Capital Leverage Ratio Ratio Ratio --------------- ------------- -------- Frost Bank 13.30% 14.55% 6.43% U. S. National Bank 16.09 17.36 7.66 FDICIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Federal banking agencies subject undercapitalized institu- tions to growth limitations and require such institutions to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5 percent of the depository institution's total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. FDICIA also contains a variety of other provisions that affect the operations of Cullen/Frost, including reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions, and the requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch. The Federal regulatory agencies issued a final rule on real estate lending standards which became effective March 19, 1993. These standards establish loan-to-value ("LTV") limitations on real estate lending. The LTV limitations range from 50 percent for raw land loans to 95 percent for loans on one to four family residential properties, subject to certain exceptions and limitations. These standards have not had a significant effect on Cullen/Frost and are not expected to have a significant effect in the future. Deposit Insurance ----------------- Cullen/Frost's subsidiary banks are subject to FDIC deposit insurance assessments and to certain other statutory and regulatory provisions applicable to FDIC-insured depository institutions. The FDIC adopted in 1993 a risk-based assessment system to replace the previous flat-rate system. The new system imposes insurance premiums based upon a matrix that takes into account a bank's capital level and supervisory rating. Under this risk-based system, the assessment rate imposed on banks ranges from 23 cents for each $100 of domestic deposits (for well capitalized banks in the highest of three supervisory rating categories) to 31 cents (for inadequately capitalized banks in the lowest of the three supervisory rating categories.) It should be noted, however, that the FDIC is proposing to change assessment rates again. Under the latest proposal, the range of the assessment rate would be from 4 cents for each $100 of domestic deposits to 31 cents for each $100 of domestic deposits. A depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989, in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled, FDIC-insured depository institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver, and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. 5 Depositor Preference -------------------- Legislation has been enacted providing that deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the "liquidation or other resolution" of such an institution by any receiver. Acquisitions ------------ The BHC Act generally limits acquisitions by Cullen/Frost to commercial banks and companies engaged in activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. Cullen/Frost's direct activities are generally limited to furnishing to its subsidiaries services that qualify under the "closely related" and "proper incident" tests. Prior Federal Reserve Board approval is required under the BHC Act for new activities and acquisitions of most nonbanking companies. The BHC Act, the Federal Bank Merger Act, and the Texas Banking Code regulate the acquisition of commercial banks. The BHC Act requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition of more than five percent of the voting shares of a commercial bank. The BHC Act currently prohibits the acquisition of a domestic bank located outside Cullen/Frost's state of principal operations, Texas, unless authorized by the law of the state of the target bank. Effective September 27, 1995, this prohibition has been recalled to permit bank holding companies generally to acquire a bank located in any state. With respect to Cullen/Frost's subsidiary banks, the approval of the Comptroller of the Currency is required for branching, purchasing the assets of other banks and for bank mergers in which the continuing bank is a national bank. In reviewing bank acquisition and merger applications, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, and the applicant's record under the Community Reinvestment Act and fair housing laws. Under Federal Reserve Board policy, Cullen/Frost is expected to act as a source of financial strength to its banks and to commit resources to support such banks in circumstances where it might not do so absent such policy. In addition, any loans by Cullen/Frost to its banks would be subordinate in right of payment to deposits and to certain other indebtedness of its banks. Economic Environment -------------------- The earnings of the subsidiary banks are affected not only by general economic conditions but also by the policies of various governmental regulatory authorities. The Federal Reserve Board regulates the supply of credit in order to influence general economic conditions, primarily through open market operations in United States government obligations, varying the discount rate on financial institution borrowings, varying reserve requirements against financial institution deposits and restricting certain borrowings by such financial institutions and their subsidiaries. The deregulation of interest rates has had and is expected to continue to have an impact on the competitive environment in which the subsidiary banks operate. Governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. However, Cullen/Frost cannot accurately predict the nature or extent of any effect such policies may have on its future business and earnings. Statistical Information ----------------------- Statistical and other information is included on pages 8 through 23, pages 43 and 44 and pages 46 through 49 of the Cullen/Frost Annual Report to Shareholders for the year ended December 31, 1994, which information is incorporated herein by reference. Employees --------- At December 31, 1994, Cullen/Frost employed 1,862 persons. Employees of Cullen/Frost enjoy a variety of employee benefit programs, including a retirement plan, 401(k) stock purchase plans, various comprehensive medical, accident and group life insurance plans and paid vacations. Cullen/Frost considers its employee relations to be good. 6 Executive Officers of the Registrant ------------------------------------ The names, ages, recent business experience and positions or offices held by each of the principal executive officers during 1994 of Cullen/Frost are as follows: Name and Positions or Offices Age as of 12/31/94 Recent Business Experience ----------------------------- ------------------ -------------------------- T.C. Frost 67 Officer and director of Chairman of the Board Frost Bank since 1950. and Chief Executive Officer, Chairman of the Board and Director, and Member of the Member of the Executive Executive Committee Committee of Cullen/Frost from 1973 to present. Robert S. McClane 55 Officer of Frost Bank since President and Chief 1962. Senior Vice President Administrative Officer, of Cullen/Frost from Novem- Director, and Member of the ber 1973 to April 1978, Executive Committee Secretary from May 1973 to April 1985. Executive Vice President from April 1978 to April 1985. President, Director, and Member of the Executive Committee of Cullen/Frost from April 1985 to present. Richard W. Evans, Jr. 48 Officer of Frost Bank since Chief Banking Officer, Director, 1973. Executive Vice Pres- and Member of the Executive ident of Frost Bank from Committee. Chairman of the Board 1978 to April 1985. Pres- and Chief Executive Officer of ident of Frost Bank from Frost Bank. April 1985 to August 1993. Chairman of the Board and Chief Executive Officer of Frost Bank from August 1993 to present. Chief Banking Officer, Director, and Mem- ber of the Executive Com- mittee of Cullen/Frost from August 1993 to present. J. Gordon Muir, Jr. 53 President of Cullen/Frost Vice Chairman and Director Bank from September 1978 to June 1983 and from January 1994 to April 1994. Direc- tor of Cullen/Frost from 1979 to present. Member of the Executive Committee of Cullen/Frost from 1979 to October, 1994. Chairman of the Board and Chief Execu- tive Officer of Cullen Bank from June 1983 to November 1993. Vice Chairman of Cullen/Frost from November 1993 to present. Phillip D. Green 40 Officer of Frost Bank since Executive Vice President July 1980. Vice President and Treasurer and Controller of Frost Bank from January 1981 to January 1983. Senior Vice President and Controller of Frost Bank from January 1983 to July 1985. Senior Vice President and Treasur- er of Cullen/Frost from July 1985 to April 1989. Executive Vice President and Treasurer of Cullen/ Frost from May 1989 to present. Diane Jack, age 46, has been an officer of Frost Bank since 1984; Secretary of Cullen/Frost from October 1993 to present. 7 There are no arrangements or understandings between any executive officer of Cullen/Frost and any other person pursuant to which he was or is to be selected as an officer. Item 2. PROPERTIES ------------------- The executive offices of Cullen/Frost, as well as the principal banking quarters of Frost Bank, are housed in both a 21-story office tower and a nine- story office building located on approximately 3.5 acres of land in downtown San Antonio. Cullen/Frost and Frost Bank lease approximately 50 percent of the office tower. The nine-story office building was purchased in April 1994. Frost Bank also leases space in a seven-story parking garage adjacent to the banking quarters. In June 1987 Frost Bank consummated the sale of its office tower and leased back a portion of the premises under a 13-year primary lease term with options allowing for occupancy up to 50 years. The Bank also sold its related parking garage facility and leased back space in that structure under a 12-year primary lease term with options allowing for occupancy up to 50 years. The subsidiary bank located in Galveston is housed in modern facilities which, together with tracts of adjacent land used for parking and drive-in facilities, are either owned or leased by the subsidiary bank. Item 3. LEGAL PROCEEDINGS -------------------------- Certain subsidiaries of Cullen/Frost are defendants in various matters in litigation which have arisen in the ordinary course of conducting a commercial banking business. In the opinion of management, the judicial disposition of such pending litigation will not have a material effect on Cullen/Frost's consolidated financial position. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------------------------------------------------------------ None. 8 PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS ----------------------------------------------------------------------------- The information called for by Item 5 is incorporated herein by reference to "Common Stock Market Prices and Dividends" on page 45 and "Note K-Dividends" on page 34 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1994. Item 6. SELECTED FINANCIAL DATA -------------------------------- The information called for by Item 6 is incorporated herein by reference to "Selected Financial Data" on page 46 and "Consolidated Statements of Operations" and "Consolidated Average Balance Sheets" on pages 47 through 49 of the Cullen/ Frost Annual Report to Shareholders for the Year Ended December 31, 1994. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------- The information called for by Item 7 is incorporated herein by reference to "Financial Review" on pages 8 through 23, "Consolidated Statements of Operations" and "Consolidated Average Balance Sheets" on pages 47 through 49 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1994. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ---------------------------------------------------- The information called for by Item 8 is incorporated herein by reference to the consolidated financial statements and report of independent auditors included on pages 24 through 42 and "Quarterly Results of Operations" on page 45, of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1994. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ------------------------------ None. 9 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------------------------------ The information regarding directors and executive officers called for by Item 10 is incorporated herein by reference to Cullen/Frost's Proxy Statement for its Annual Meeting of Shareholders to be held May 16, 1995. The additional information regarding executive officers called for by Item 10 is included in Part I, Item 1 of this document under the heading "Executive Officers of the Registrant". Item 11. EXECUTIVE COMPENSATION -------------------------------- The information called for by Item 11 is incorporated herein by reference to Cullen/Frost's Proxy Statement for its Annual Meeting of Shareholders to be held May 16, 1995. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ------------------------------------------------------------------------ The information called for by Item 12 is incorporated herein by reference to Cullen/Frost's Proxy Statement for its Annual Meeting of Shareholders to be held May 16, 1995. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------------------------------------------------------- The information called for by Item 13 is incorporated herein by reference to Cullen/Frost's Proxy Statement for its Annual Meeting of Shareholders to be held May 16, 1995. 10 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K -------------------------------------------------------------------------- (a) The following documents are filed as part of this Annual Report on Form 10-K: 1. Financial Statements -- Reference is made to Part II, Item 8, of this Annual Report on Form 10-K. 2. The Financial Statement Schedules are omitted, as the required information is not applicable. 3. Exhibits -- The following exhibits are filed as a part of this Annual Report on Form 10-K: Exhibit Number ------- 2.1 Agreement and Plan of Merger among Texas Commerce Bancshares, Inc., Texas Commerce Equity Holdings, Inc., Texas Commerce Bank, N.A., Texas Commerce Bank - Corpus Christi, N.A., Cullen/Frost Bankers, Inc., The New Galveston Company, The Frost National Bank of San Antonio and Cullen/Frost Bank of Dallas, N.A. dated August 26, 1993. (1993 Form 8-K, Exhibit 10)(14) 3.1 Restated Articles of Incorporation, as amended (1988 Form S-8, Exhibit 4(a))(4) 3.2 Amended By-Laws of Cullen/Frost Bankers, Inc. 4.1 Guaranty, dated April 27, 1981, by Cullen/Frost Bankers, Inc.to Colonial/Citizens Associates (1985 Form S-8, Exhibit 4(e))(2) 4.2 Shareholder Protection Rights Agreement dated as of July 25, 1989 between Cullen/Frost Bankers, Inc. and The Bank of New York, as Rights Agent (1989 Form 8-K, Exhibit 1)(6) 10.1 1983 Non-qualified Stock Option Plan, as amended (1989 Form S-8, Exhibit 4(g))(7) 10.2 Restoration of Retirement Income Plan for Participants in the Retirement Plan for Employees of Cullen/Frost Bankers, Inc. and its Affiliates (as amended and restated)(1988 Form 10-K, Exhibit 10.4)(5)* 10.3 Pension Benefit Contract (1984 Form 10-K, Exhibit 10.8)(1)* 10.4 Contract of Sale, dated June 9, 1987, between The Frost National Bank of San Antonio and Tower Investors, Ltd. for the sale of the Frost Bank Tower (1987 Form 10-K, Exhibit 10.10)(3) 10.5 Master Lease, dated June 9, 1987, between The Frost National Bank of San Antonio and Tower Investments, Ltd. for the lease of the Frost Bank Tower (1987 Form 10-K, Exhibit 10.11)(3) 10.6 Agreement dated September 30, 1988, among Electronic Data Systems Corporation, The Frost National Bank of San Antonio and Cullen/Frost Bankers, Inc. for the sale of rights to revenues of data processing services (1988 Form 10-K, Exhibit 10.12)(5) 10.7 Form of Revised Change-In-Control Agreements with four Executive Officers (1989 Form 10-K, Exhibit 10.13(a))(9)* 10.8 1988 Non-qualified Stock Option Plan (1989 Form S-8, Exhibit 4(g))(8) 10.9 The 401(k) Stock Purchase Plan for Employees of Cullen/Frost Bankers, Inc. and its Affiliates (1990 Form S-8, Exhibit 4(g))(10)* 10.10 1991 Thrift Incentive Stock Purchase Plan for Employees of Cullen/Frost Bankers, Inc. and its Affiliates (1991 Form S-8, Exhibit 4(g))(11)* 10.11 Cullen/Frost Bankers, Inc. Restricted Stock Plan (1992 Form S-8, Exhibit 4(d))(12)* 10.12 Cullen/Frost Bankers, Inc. 1992 Stock Plan (1992 Form S-8, Exhibit 4(d))(13) 10.13 Cullen/Frost Bankers, Inc. Supplemental Executive Retirement Plan 10.14 Form of Revised Change-In-Control Agreements with one Executive Officer 11 Statement re: computation of earnings per share 13 The Cullen/Frost 1994 Annual Report to Shareholders for the Year Ended December 31, 1994, (furnished for the information of the Commission and not deemed to be "filed" except for the portion expressly incorporated by reference) 11 19.1 Annual Report on Form 11-K for the Year Ended December 31, 1994, for the 1991 Thrift Incentive Stock Purchase Plan (filed pursuant to Rule 15d-21 of the Securities and Exchange Act of 1934)(15) 19.2 Annual Report on Form 11-K for the Year Ended December 31, 1994, for the 401(k) Stock Purchase Plan (filed pursuant to Rule 15d-21 of the Securities and Exchange Act of 1934)(15) 21 Subsidiaries of Cullen/Frost 23 Consent of Independent Auditors 24 Power of Attorney * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K. (b) Reports on Form 8-K -- No such reports were filed during the quarter ended December 31, 1994. ______________________ (1) Incorporated herein by reference to the designated Exhibits to the Cullen/Frost Annual Report on Form 10-K for the Year Ended December 31, 1984 (File No. 0-7275) (2) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed December 18, 1985 (File No. 33-2271) (3) Incorporated herein by reference to the designated Exhibits to the Cullen/Frost Annual Report on Form 10-K for the Year Ended December 31, 1987 (File No. 0-7275) (4) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed June 24, 1988 (File No. 33- 22758) (5) Incorporated herein by reference to the designated Exhibits to the Cullen/Frost Annual Report on Form 10-K for the Year Ended December 31, 1988 (File No. 0-7275) (6) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Current Report on Form 8-K dated July 25, 1989 (File No. 0-7275) (7) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed September 5, 1989 (File No. 33-30776) (8) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed September 5, 1989 (File No. 33-30777) (9) Incorporated herein by reference to the designated Exhibits to the Cullen/Frost Annual Report on Form 10-K for the Year Ended December 31, 1989 (File No. 0-7275) (10) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed October 31, 1990 (File No. 33-37500) (11) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed March 18, 1991 (File No. 33-39478) (12) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed October 20, 1992 (File No. 33-53492) (13) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed October 23, 1992 (File No. 33-53622) (14) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Current Report on Form 8-K dated August 26, 1993 (File No. 0-7275) (15) To be filed as an amendment. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 30, 1995 CULLEN/FROST BANKERS, INC. (Registrant) By:/s/ PHILLIP D. GREEN ------------------------ Phillip D. Green Executive Vice President and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 30, 1995 Signatures Title Date ---------- ----- ----- Chairman of the Board and Director (Principal Executive T.C. FROST* Officer) ------------------------ (T.C. Frost) Robert S. McClane President and Chief Administrative ------------------------ Officer and Director (Robert S. McClane) ISAAC ARNOLD, JR.* Director ------------------------ (Isaac Arnold, Jr.) ROYCE S.CALDWELL Director ------------------------ (Royce S. Caldwell) RUBEN R. CARDENAS Director ------------------------ (Ruben R. Cardenas) HENRY E. CATTO* Director ------------------------ (Henry E. Catto) HARRY H. CULLEN* Director ------------------------ (Harry H. Cullen) 13 Signatures Title Date ---------- ----- ----- ROY H. CULLEN* Director ------------------------ (Roy H. Cullen) RICHARD W. EVANS, JR.* Director ------------------------ (Richard W. Evans, Jr.) W.N. FINNEGAN III* Director ------------------------ (W.N. Finnegan III) Director ------------------------ (Joseph H. Frost) Director ------------------------ (James W. Gorman, Jr.) JAMES L. HAYNE* Director ------------------------ (James L. Hayne) Director ------------------------ (Harris L. Kempner, Jr.) RICHARD M. KLEBERG, III* Director ------------------------ (Richard M. Kleberg, III) QUINCY LEE* Director ------------------------ (Quincy Lee) J. GORDON MUIR, JR.* Director ------------------------ (J. Gordon Muir, Jr.) W.B. OSBORN, JR.* Director ------------------------ (W.B. Osborn, Jr.) 14 Signatures Title Date ---------- ----- ----- ROBERT G. POPE* Director ------------------------ (Robert G. Pope) Director ------------------------ (Herman J. Richter) CURTIS VAUGHAN, JR.* Director ------------------------ (Curtis Vaughan, Jr.) *By:/s/ PHILLIP D. GREEN March 30, 1995 -------------------------- (Phillip D. Green) [as Attorney-in-Fact for the persons indicated] 15 EXHIBIT INDEX Exhibit Number Description of Exhibits ------------------------------------------ 10.13 Cullen/Frost Bankers, Inc. Supplemental Executive Retirement Plan 10.14 Form of Revised Change-in-Control Agreements with one Executive Officer 11 Statement re: computation of earnings per share 13 The Cullen/Frost 1994 Annual Report to Shareholders for the YearEnded December 31, 1994 (furnished for the information of the Commission and not deemed to be "filed" except for the portion expressly incorporated by reference) 21 Subsidiaries of Cullen/Frost 23 Consent of Independent Auditors 24 Power of Attorney EX-10.13 2 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10.13 Cullen/Frost Bankers, Inc. Supplemental Executive Retirement Plan CULLEN/FROST BANKERS, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Effective as of January 1, 1994) CULLEN/FROST BANKERS, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Effective as of January 1, 1994) TABLE OF CONTENTS ----------------- Section Page ------- ---- Article I. Establishment and Purpose ------------------------------------- 1.1 Establishment of Plan 1 1.2 Purpose 1 1.3 Application of the Plan 1 Article II. Definitions and Construction ----------------------------------------- 2.1 Definitions 3 2.2 Gender and Number; Headings 4 2.3 Incorporation of the Retirement Plan and the Restoration Plan 4 Article III. Eligibility and Participation ------------------------------------------- 3.1 Eligibility 5 3.2 Participation 5 Article IV. Benefits --------------------- 4.1 Amount of Benefits 6 4.2 Eligibility for Benefits 8 4.3 Payment of Benefits 10 Article V. Administration -------------------------- 5.1 Administration 12 5.2 Finality of Determination 12 5.3 Expenses 12 5.4 Indemnification and Exculpation 12 Article VI. Funding of the Plan -------------------------------- 6.1 Funding 14 Article VII. Amendment and Termination --------------------------------------- 7.1 Amendment and Termination 15 Article VIII. Adoption Procedure --------------------------------- 8.1 Adoption Procedure 16 8.2 Withdrawal of Participating Employer 16 -i- CULLEN/FROST BANKERS, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Effective as of January 1, 1994) TABLE OF CONTENTS (Continued) Section Page ------- ---- Article IX. General Provisions ------------------------------- 9.1 Nonalienation 17 9.2 Effect on Other Benefit Plans 17 9.3 Severability 17 9.4 Applicable Law 17 9.5 Employer-Employee Relationship 18 9.6 Incompetence 18 9.7 Binding on Employer, Eligible Participants and Their Successors 18 9.8 Tax Liability 19 9.9 Beneficiary Designation 19 Participating Employers under the Cullen/Frost Bankers, Inc. Supplemental Executive Retirement Plan 21 Appendix A 22 -ii- CULLEN/FROST BANKERS, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Effective as of January 1, 1994) Article I. Establishment and Purpose ------------------------------------- 1.1. Establishment of Plan. Cullen/Frost Bankers, Inc. ("Company") hereby establishes, effective as of January 1, 1994, an unfunded supplement executive retirement plan to be known as the "Cullen/Frost Bankers, Inc. Supplemental Executive Retirement Plan" ("Plan"). 1.2 Purpose. The Plan is established and is intended as an unfunded plan to be maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of section 201(2) of the Employee Income Retirement Security Act of 1974, as amended ("ERISA"), and as such it is intended that the Plan be exempt from the relevant requirements of Title I of ERISA. The Plan is not intended to satisfy the qualification requirements of Code section 401. 1.3 Application of the Plan. The terms of this Plan are applicable only to or with respect to those Eligible Participants who become Eligible Partici- pants under this Plan on or after January 1, 1994. -1- Article II. Definitions and Construction ----------------------------------------- 2.1 Definitions. All terms used in this Plan shall have the same meanings assigned to them under the provisions of the Retirement Plan (as defined below), unless otherwise qualified by the context hereof. Notwithstanding the prior sentence, the following terms shall have the meanings set forth below, unless their context clearly indicates to the contrary: (a) "Change in Control" means a change in control of the Company of a nature that would be required to be reported (assuming such event has not been "previously reported") in response to Item 1(a) of the Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Exchange Act; provided that, without limitation, such a Change in Control shall be deemed to have occurred at such time as (a) any person is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20 percent or more of the combined voting power of the Company's voting securities; or (b) individuals who constitute the Board on the date thereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three quarters of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (b), considered as though such person were a member of the Incumbent Board. Notwithstanding anything in the foregoing to the contrary, no Change in Control shall be deemed to have occurred for purposes of this Plan by virtue of any transaction which results in -2- Eligible Participants, or a group of persons which includes Eligible Participants, acquiring, directly or indirectly, 20 percent or more of the combined voting power of the Company's voting securities. (b) "Beneficiary" means the person, persons or trust designated by the Eligible Participant, as provided in Section 9.9. (c) "Eligible Employee" means an executive Employee of the Company, or other Employer, who is designated as an "Eligible Employee" under this Plan by the Board of Directors of the Company. All individuals who are designated as "Eligible Employees" shall be listed on Appendix A attached to the end of the basic Plan document. (d) "Eligible Participant" means an Eligible Employee who satisfies the conditions of Section 3.2. (e) "Employer" means the Company and each other Employer who is a participating Employer under the Retirement Plan and who has elected to become a participating Employer under this Plan as provided in Article VIII. (f) "Restoration Plan" means the "Cullen/Frost Bankers, Inc. Restoration Plan," as amended and restated effective as of January 1, 1989, and as the same may thereafter be amended from time to time. (g) "Plan" means the "Cullen/Frost Bankers, Inc. Supplemental Executive Retirement Plan" as set forth in this document and as the same may be amended from time to time. (h) "Retirement Plan" means the "Retirement Plan for Employees of Cullen/ Frost Bankers, Inc., and Its Affiliates," as amended and restated effective as of January 1, 1989, and as the same may thereafter be amended from time to time. 2.2 Gender and Number; Headings. Except when otherwise indicated by the context, any masculine terminology when used in -3- this Plan shall also include the feminine gender, and the definition of any term in the singular shall also include the plural. Headings of Articles and Sections herein are included solely for convenience, and if there is any conflict between such headings and the text of the Plan, the text shall control. 2.3 Incorporation of the Retirement Plan and the Restoration Plan. The Retirement Plan and the Restoration Plan are hereby incorporated by reference into and shall form a part of this Plan as fully as if set forth herein verbatim. Any amendment made to the Retirement Plan or the Restoration Plan shall also be incorporated by reference into and form a part of this Plan, effective as of the effective date of such amendment. The Retirement Plan (or the Restoration Plan), whenever referred to in this Plan, shall mean the Retirement Plan (or the Restoration Plan) as amended, as such plan exists as of the date any determination is made of benefits payable under this Plan. -4- Article III. Eligibility and Participation ------------------------------------------- 3.1 Eligibility. Each Employee who is an "Eligible Employee" shall be eligible to participate in the Plan, and shall become an Eligible Participant in the Plan as described in Section 3.2. For purposes of this Plan, an "Eligible Employee" means an executive Employee of the Employer who has been designated by the Board of Directors of the Company as eligible for participa- tion under the Plan. Such Employee shall continue as an Eligible Employee so long as he remains employed as an Employee of the Employer and the Committee continues his designated eligibility status under the Plan. All determinations as to an Employee's status as an Eligible Employee shall be made by the Committee, whose determinations shall be final and binding on all Employees. The Committee shall provide each Eligible Employee with notice of his status as an Eligible Employee. Such notice may be given at such time and in such manner as the Committee may determine from time to time. 3.2 Participation. Each Eligible Employee shall become an Eligible Participant under the Plan as of the date of his designation as an Eligible Employee, but in no event earlier than January 1, 1994. Such Eligible Employee shall continue as an Eligible Participant under the Plan so long as he remains employed as an Eligible Employee. An Eligible Employee who has become an Eligible Participant and who later terminates employment as an Employee, or who otherwise ceases to be designated as an Eligible Employee, shall continue to be an Eligible Participant under the Plan so long as he has an accrued benefit under the Plan. -5- Article IV. Benefits --------------------- 4.1 Amount of Benefits. (a) Amount. The benefit shall be a single sum amount which is the actuarial equivalent of the Eligible Participant's expected monthly benefit payable as a single life annuity for the life of the Eligible Participant. Actuarial equivalent amounts hereunder shall be computed using the same actuarial factors and assumptions used to compute the benefit payable under the Retirement Plan. Except as provided in Section 4.2, such monthly benefit shall be equal to the difference between the amount in paragraph (1) and the amount in paragraph (2) where-- (1) is the product of-- (A) the Applicable Percentage, and (B) the Eligible Participant's Final Average Monthly Compensation, and (2) is the sum of-- (A) the Annuity Value of the Retirement Plan, (B) the Annuity Value of the Restoration Plan, and (B) the Primary Social Security Benefit to which the Eligible Participant is entitled. (b) Definitions. (1) "Annuity Value of the Restoration Plan" means the estimated monthly benefit amount payable as a single life annuity, as determined by the Committee, of the Eligible Participant's accrued retirement benefit under the Restoration Plan (to the extent it is restoring benefits limited under the Retirement Plan) as of the earliest date for his benefit distribution as determined under Section 4.3(b). If the benefit under the Restoration Plan is not stated as a benefit payable at the same time or in the same form as described in the preceding sentence, then the amount of the -6- benefit under the Restoration Plan shall be adjusted so that it is stated as an actuarial equivalent of the benefit under this Plan. (2) "Annuity Value of the Retirement Plan" means the estimated monthly benefit amount payable as a single life annuity, as determined by the Committee, of the Eligible Participant's accrued retirement benefit under the Retirement Plan as of the earliest date for his benefit distribution as determined under Section 4.3(b). If the benefit under the Retirement Plan is not stated as a benefit payable at the same time or in the same form as described in the preceding sentence, then the amount of the benefit under the Retirement Plan shall be adjusted so that it is stated as an actuarial equivalent of the benefit under this Plan. (3) "Applicable Percentage" means 60 percent; provided, however, for any Eligible Participant who terminates employment with the Employer and its Controlled Group Members before attaining age 60, then his Applicable Percentage shall be determined based on his age as of the earliest date for his benefit distribution as determined under Section 4.3(b) using the following table: Age Applicable Percentage --- --------------------- 59 57% 58 54% 57 51% 56 48% 55 45% (4) "Primary Social Security Benefit" means the estimated monthly primary insurance benefit that an Eligible Participant would be entitled to be paid -7- under the Social Security Act commencing at his earliest eligible age on or after his termination of employment with the Employer and its Controlled Group Members, whether or not such benefit payment is delayed, suspended, forfeited or reduced on account of a failure to apply, other work, excess earnings, taxation of Social Security benefits or any similar reason, and such estimated amount shall be based on the following assumptions: (A) the Social Security Act as in effect on the January 1 of the calendar year with respect to which benefits are calculated under this Plan applies (regardless of any retroactive changes made by legislation enacted after such January 1); (B) the rate of the Eligible Participant's past wage increases equaled the rate of the increases in the average national wage as reported by the Social Security Administration; and (C) no change occurs in the primary insurance benefit under the Social Security Act (by amendment to the Act or by applica- tion of the provisions of the Act) after termination of em- ployment with the Employer or its Controlled Group Members. 4.2 Eligibility for Benefits. (a) Termination of Employment. An Eligible Participant who terminates employment with the Employer and its Controlled Group Members for a reason other than death on or after attaining age 55 and completing 5 years of Vesting Service shall be entitled to receive his benefit as determined under Section 4.1. (b) Termination of Employment Following a Change in Control. An Eligible Participant with at least 5 years of Vesting -8- Service who terminates employment with the Employer and its Controlled Group Members within 24 months following a Change in Control shall be entitled to receive his benefit as determined under Section 4.1; provided, however, that the Applicable Percentage shall be 60 percent regardless of his age at termination. (c) Termination of Eligible Employee Status. An Eligible Participant who ceases to be an Eligible Employee on or after he has attained age 55 and completed 5 years of Vesting Service shall be entitled to receive his benefit as determined under Section 4.1; provided, however, that for purposes of determining his benefit under Section 4.1(a)(1), his Final Average Monthly Compensation and Applicable Percentage shall be determined as of the date he ceased to be an Eligible Employee. (d) Termination of the Plan. In the event the Plan is terminated, an Eligible Participant who is at least age 55 and has completed at least 5 years of Vesting Service on the termination date shall be entitled to receive his benefit determined under Section 4.1; provided, however, that for purposes of determining his benefit under Section 4.1(a)(1), his Final Average Monthly Compensation and Applicable Percentage shall be determined as of the date he ceased to be an Eligible Employee. (e) Disability. An Eligible Participant who suffers total and permanent Disability while he is an Eligible Employee and after he has complet- ed 5 years of Vesting Service shall be entitled to receive his benefit under Section 4.1; provided, however, that for purposes of determining his benefit under Section 4.1(a)(1), his Final Average Monthly Compensation and Applicable Percentage shall be determined as of the date he incurred his Disability. For purposes of this Plan, "Disability" means a physical or mental condition of an Eligible Participant which, in -9- the opinion of the Committee, and based on medical evidence satisfactory to the Committee, renders him permanently unable to perform the duties of his usual course of employment. (f) Death Benefit. A Eligible Participant who dies while in active employment with the Employer or its Controlled Group Members after completing 5 years of Vesting Service shall be entitled to have 50 percent of his benefit as determined under Section 4.1 paid to his Beneficiary. If an Eligible Participant who is eligible for a benefit under this Plan dies after his termination of employment and before he receives his distribution, his Beneficiary shall be entitled to receive 100 percent of such benefit. (g) No Benefit. An Eligible Participant who does not complete at least 5 years of Vesting Service and satisfy one of the eligibility provisions of Section 4.2(a)-(f)above shall not be entitled to receive any benefit under the Plan. (h) Forfeiture for Misconduct. Notwithstanding any Plan provisions to the contrary, an Eligible Participant (or his Beneficiary) shall have no right to a benefit under this Plan if the Committee or the Company determines that the Eligible Participant engaged in a willful, deliberate, or gross act of commission or omission which is injurious to the finances or reputation of the Company or any of its Controlled Group Members. 4.3 Payment of Benefits. (a) Form of Payment. An Eligible Participant or designated Beneficiary who is eligible to receive a distribution as provided in Section 4.2 shall receive such distribution in the form of a lump sum payment. (b) Distribution Date. Any Eligible Participant who becomes eligible for a benefit as determined under the provisions of Section -10- 4.2 shall receive a distribution of the balance credited to his Account on or as soon as practicable following the date of his termination of employment with the Employer and its Controlled Group Members; provided, however, that no benefit shall be paid before the Eligible Participant would have attained age 55 unless the distribu- tion is triggered by a Change in Control as provided in Section 4.2(b). -11- Article V. Administration -------------------------- 5.1 Administration. This Plan shall be administered by the Committee appointed pursuant to the terms of the Retirement Plan. The Committee shall administer this Plan in a manner consistent with the administration of the Retirement Plan, except that this Plan shall be administered as an unfunded plan which is not intended to meet the qualification requirements of Code section 401. The Committee shall have the same rights and authority granted to it under the Retirement Plan, which shall include the full power and authority to interpret, construe and administer this Plan. The Committee shall establish and maintain such accounts or records as the Committee may from time to time consider necessary. Members of the Committee shall not participate in any action or determination regarding their own benefits under the Plan. 5.2 Finality of Determination. The determination of the Committee as to any disputed questions arising under this Plan, including questions of construction and interpretation shall be final, binding, and conclusive upon all persons. 5.3 Expenses. The expenses of administering this Plan shall be borne by the Employers in the proportions determined by the Committee. 5.4 Indemnification and Exculpation. The members of the Committee, its agents, and officers, directors, and employees of the Company or any other Employer shall be indemnified and held harmless by the Employer against and from any and all loss, cost, liability, or expense that may be imposed upon or reasonably incurred by them in connection with or resulting from any claim, action, suit, or proceeding to which they may be a party or in which they may be involved by reason of any action taken or failure to act under this Plan and against and from any and all amounts paid by them in settlement (with the Company's written -12- approval) or paid by them in satisfaction of a judgment in any such action, suit, or proceeding. The foregoing provision shall not be applicable to any person if the loss, cost, liability, or expense is due to such person's gross negligence or willful mis conduct. -13- Article VI. Funding of the Plan -------------------------------- 6.1 Funding. All amounts paid under this Plan shall be paid from the general assets of the participating Employers. Benefits shall be reflected on the accounting records of the Employers, but neither this Plan nor the maintenance of such accounting records shall be construed to create, or require the creation of a trust, custodial account, or escrow account with respect to any Eligible Participant. No Eligible Participant shall have any right, title, or interest whatsoever in or to any investment reserves, accounts, or funds, that the Employers may purchase, establish, or accumulate to aid in providing the unfunded benefit payments described in the Plan. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall create, or be construed to create, a trust or fiduciary relationship of any kind between an Employer or the Committee and an Eligible Participant or any other person. Eligible Participants shall not acquire any interest under the Plan greater than that of an unsecured general creditor of an Employer. The Trust Fund of the Retirement Plan shall not be liable for any benefits accrued under this Plan. -14- Article VII. Amendment and Termination --------------------------------------- 7.1 Amendment and Termination. The Board of Directors of the Company may amend, modify, or terminate this Plan at any time and in any manner. Such actions by the Board of Directors of the Company shall be binding upon all other Employers. In addition, this Plan shall automatically terminate at the time of the termination of the Retirement Plan, and any benefit payment obli- gation under this Plan shall be measured with respect to the benefits which are payable from the Retirement Plan irrespective of whether such benefits are actually paid due to an insufficiency of assets to pay such benefits. In the event of a termination of the Plan pursuant to this Section 7.1, no further benefits shall accrue under this Plan, and amounts which are then payable shall continue to be an obligation of the Employer and shall be paid as scheduled; provided, however, that the Company reserves the right, in its sole discretion, to accelerate payments to the affected Eligible Participants in the event of a complete or partial termination of the Plan. Notwithstanding any Plan provision to the contrary, in the event of a Change in Control, the Plan may not be amended, or otherwise changed, with respect to current Eligible Participants, during the two-year period that commences with the Change in Control, except to-- (a) comply with the law in a manner which has the least adverse impact upon Eligible Participants; (b) increase the Plan's benefit accrual levels or accelerate the rate of benefit accrual under the Plan; (c) add Plan provisions which will apply only at the individual Eligible Participant's election; or (d) execute a Plan amendment authorized prior to the Change in Control. -15- Article VIII. Adoption Procedure --------------------------------- 8.1 Adoption Procedure. With the consent of the Company, any other organization which satisfies the definition of Employer under the Retirement Plan and this Plan and which is eligible by the law to do so may adopt this Plan for the benefit of its Employees who are or who become Eligible Participants under the Retirement Plan, on express condition that the Company assumes no liability as a result of any such adoption of this Plan by any other organization. Such other organization may adopt this Plan by-- (a) executing an adoption instrument adopting the Plan, and agreeing to be bound as a participating Employer by all the terms, provisions, conditions, and limitations of the Plan; and (b) compiling and submitting all information required by the Company with reference to persons in its employment eligible for membership in the Plan. The participating Employers under the Plan shall be listed at the end of the Plan. The adoption instrument shall specify the effective date of such adoption of the Plan and shall become, as to such organization and persons in its employment, a part of this Plan. The participating Employers under the Plan shall be listed at the end of the Plan. 8.2 Withdrawal of Participating Employer. Any participating Employer may withdraw from the Plan by giving 60 days' notice in writing of its intention to withdraw to the Company, unless a shorter notice shall be agreed to by the Company. -16- Article IX. General Provisions ------------------------------- 9.1 Nonalienation. No benefit payable at any time under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, garnishment, or encumbrance of any kind, and shall not be subject to or reached by any legal or equitable process (including execution, garnish- ment, attachment, pledge, or bankruptcy) in satisfaction of any debt, liability, or obligation, prior to receipt. Any attempt to alienate, sell, transfer, assign, pledge, or otherwise encumber any such benefit, whether presently or thereafter payable, shall be void. Notwithstanding the foregoing provisions of this Section 9.1, no benefit amount payable under the Plan shall be payable until and unless any and all amounts representing debts or other obligations owed to the Company or other Employer by the Eligible Participant with respect to whom such amount would otherwise be payable shall have been fully paid. 9.2 Effect on Other Benefit Plans. Amounts credited or paid under this Plan shall not be considered to be compensation for the purposes of the Retirement Plan or any other plans maintained by an Employer. The treatment of such amounts under other employee benefit plans shall be determined pursuant to the provisions of such plans. 9.3 Severability. In the event any provision of this Plan shall be held invalid or illegal for any reason, any illegality or invalidity shall not affect the remaining parts of this Plan, but this Plan shall be construed and enforced as if the illegal or invalid provision had never been inserted, and the Company shall have the privilege and opportunity to correct and remedy such questions of illegality or invalidity by amendment as provided in this Plan. 9.4 Applicable Law. This Plan shall be governed and construed in accordance with the laws of the State of Texas. -17- 9.5 Employer-Employee Relationship. The establishment of this Plan shall not be construed as conferring any legal or other rights upon any Employee or any person for a continuation of employment, nor shall it interfere with the rights of an Employer to discharge any Employee or otherwise act with relation to the Employee. An Employer may take any action (including discharge) with respect to any Employee or other person and may treat such person without regard to the effect which such action or treatment might have upon such person as an Eligible Participant under this Plan. 9.6 Incompetence. Every person receiving or claiming benefits under the Plan shall be conclusively presumed to be mentally competent until the date on which the Committee receives a written notice, in a form and manner acceptable to the Committee, that such person is incompetent, and that a guardian, conservator, or other person legally vested with the care of such person's person or estate has been appointed; provided, however, that if the Committee shall find that any person to whom a benefit is payable under the Plan is unable to care for such person's affairs because of incompetency, any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) may be paid as provided in the Retirement Plan. Any such payment so made shall be a complete discharge of liability therefor under the Plan. 9.7 Binding on Employer, Eligible Participants and Their Successors. This Plan shall be binding upon and inure to the benefit of the Employers, their successors and assigns and the Eligible Participants, their heirs, executors, administrators and legal representatives. The provisions of this Plan shall be applicable with respect to each Employer separately, and amounts payable hereunder shall be paid by the Employer of the particular Eligible Participant. In the event any Eligible Participant becomes entitled to a benefit under the Retirement Plan based on service with more than one Employer, the benefit obligations -18- under this Plan shall be apportioned among such Employers as determined by the Committee. 9.8 Tax Liability. An Employer may withhold from any payment of benefits hereunder any taxes required to be withheld and such sum as the Employer may reasonably estimate to be necessary to cover any taxes for which the Employer may be liable and which may be assessed with regard to such payment. 9.9 Beneficiary Designation. An Eligible Participant shall designate a Beneficiary or Beneficiaries who, upon his death, are to receive payments that otherwise would have been paid to him under the Plan. All Beneficiary designations shall be in writing and on a form prescribed by the Committee for such purpose, and any such designation shall only be effective if and when delivered to the Committee during the lifetime of the Eligible Participant. A Eligible Participant may from time to time during his lifetime change a designated Beneficiary or Beneficiaries by filing a new Beneficiary designation form with the Committee. If a designated Beneficiary dies after the Eligible Participant, but before all death benefit payments relating to such Beneficiary have been paid, the remainder of such death benefit payments shall be continued to such Beneficiary's estate. In the event an Eligible Participant shall fail to designate a Beneficiary or Beneficiaries with respect to any death benefit payments, or if for any reason such designation shall be ineffective, in whole or in part, or if no designated Beneficiary survives the Eligible Participant, any payment that otherwise would have been paid to such Eligible Participant shall be paid to his estate, and in such event, his estate shall be his Beneficiary with respect to such payments. * * * * * * * * * * -19- IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its duly authorized officers effective as of January 1, 1994. CULLEN/FROST BANKERS, INC. By:/s/Robert S. McClane ---------------------- ATTEST: Its: President ------------------- By:/s/Diane Jack ----------------- Its: Secretary -------------- -20- PARTICIPATING EMPLOYERS UNDER THE CULLEN/FROST BANKERS, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The following employers are participating Employers under the Cullen/Frost Bankers, Inc. Supplemental Executive Retirement Plan as of January 1, 1994, unless a later participation date is designated: Cullen/Frost Bankers, Inc. -21- APPENDIX A TO THE CULLEN/FROST BANKERS, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The following individuals are designated as "Eligible Employees" in accordance with and under the Cullen/Frost Bankers, Inc. Supplemental Executive Retirement Plan: Richard W. Evans, Jr. Robert S. McClane -22- EX-10.14 3 CHANGE-IN-CONTROL AGREEMENT EXHIBIT 10.14 Form of Revised Change-in-Control Agreement with one Executive Officer May 13, 1994 Mr. Phillip D. Green Cullen/Frost Bankers, Inc. 100 West Houston Street San Antonio, Texas 78205 Dear Phillip: Cullen/Frost Bankers, Inc., a Texas corporation (the "Company"), considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interest of the Company and its shareholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a "Change in Control" (as hereinafter defined) may arise and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders. Accordingly, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in circumstances arising from the possibility of a Change in Control of the Company. In particular, the Board believes it important, should the Company or its shareholders receive a proposal for transfer of control of the Company, that you be able to assess and advise the Board whether such proposal would be in the best interests of the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. In order to induce you to remain in the employ of the Company, this letter agreement, which has been approved by the Board, sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a Change in Control of the Company under the circumstances described below. 1. Agreement to Provide Services; Right to Terminate. -------------------------------------------------- (i) Except as otherwise provided in paragraph (ii) below, the Company or you may terminate your employment at any time, subject to the Company's providing the benefits hereinafter specified in accordance with the terms hereof. Mr. Phillip D. Green Page 2 May 13, 1994 (ii) In the event a tender offer or exchange offer is made by a Person (as hereinafter defined) for more than 20 percent of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors ("Voting Securities"), including shares of Common Stock ($5 par value) of the Company (the "Company Shares"), you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement, as such terms are hereinafter defined) and will render the services contemplated in the recitals to this Agreement until such tender offer or exchange offer has been abandoned or terminated or a Change in Control of the Company, as defined in Section 3 hereof, has occurred and the Company agrees that it will not terminate your employ- ment with the Company for any reason other than "Cause" as hereinafter defined during that period. For purposes of this Agreement, the term Person shall mean and include any individual, corporation, partnership, group, association or other person, as such term is used in Section 14(d) of the Securities Exchange Act of 1934 (the Exchange Act), other than the Company, a wholly owned subsidiary of the Company or any employee benefit plan(s) sponsored by the Company. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until December 31, 1994; provided, however, that commencing on January 1, 1995 and each January thereafter, the term of this Agreement shall automatically be extended for one additional year unless at least 90 days prior to such January 1st date, the Company or you shall have given notice that this Agreement shall not be extended; and provided, further, that this Agreement shall continue in effect for a period of twenty-four (24) months beyond the term provided herein if a Change in Control of the Company, as defined in Section 3 hereof, shall have occurred during such term. Notwithstanding anything in this Section 2 to the contrary, this Agreement shall terminate if you or the Company terminate your employment prior to a Change in Control of the Company, as defined in Section 3 hereof. 3. Change in Control. For purposes of this Agreement, a Change in Control of the Company shall mean a change in control of a nature that would be required to be reported (assuming such event has not been previously Mr. Phillip D. Green Page 3 May 13, 1994 reported) in response to Item 1(a) of the Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Exchange Act; provided that, without limitation, such a Change in Control shall be deemed to have occurred at such time as (a) any Person is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20 percent or more of the combined voting power of the Company's Voting Securities; or (b) individuals who constitute the Board on the date hereof (the Incumbent Board) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three quarters of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (b), considered as though such person were a member of the Incumbent Board. Notwithstanding anything in the foregoing to the contrary, no Change in Control shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in you, or a group of Persons which includes you, acquiring, directly or indirectly, 20 percent or more of the combined voting power of the Company's Voting Securities. 4. Termination Following Change in Control. If any of the events described in Section 3 hereof constituting a Change in Control of the Company shall have occurred, you shall be entitled to the benefits provided in paragraphs (iii) and (iv) of Section 5 hereof upon the termination of your employment within twenty-four (24) months after such event, unless such termination is (a) because of your death or Retirement, (b) by the Company for Cause or Disability or (c) by you other than for Good Reason (as all such capitalized terms are hereinafter defined). (i) Disability. Termination by the Company of your employment based on Disability shall mean termination because of your absence from your duties with the Company on a full time basis for one hundred eighty (180) consecutive days as a result of your incapacity due to Mr. Phillip D. Green Page 4 May 13, 1994 physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given to you following such absence you shall have returned to the full time performance of your duties. (ii) Retirement. Termination by you or by the Company of your employment based on Retirement shall mean termination on or after your normal retirement date under the terms of the Retirement Plan for Employees of Cullen/Frost Bankers, Inc. and its Affiliates (or any successor or substitute defined benefit pension plan or plans of the Company put into effect prior to a Change in Control) or The 401(k) Stock Purchase Plan for Employees of Cullen/Frost Bankers, Inc. and Its Affiliates (or any successor or substitute defined contri- bution pension plan or plans of the Company put into effect prior to a Change in Control), if there is no defined benefit pension plan in effect prior to a Change in Control (the Retirement Plan). (iii) Cause. Termination by the Company of your employment for Cause shall mean termination upon (a) the willful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a demand for substantial performance is delivered to you by the Chairman of the Board or President of the Company which specifically identifies the manner in which such executive believes that you have not substantial- ly performed you duties, or (b) the willful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For purposes of this paragraph (iii), no act, or failure to act, on your part shall be considered willful unless done, or omitted to be done, by you in bad faith and without reasonable belief that your action or omission was in, or not opposed to, the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the Mr. Phillip D. Green Page 5 May 13, 1994 affirmative vote of not less than three quarters of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in (a) or (b) of this paragraph (iii) and specifying the particulars thereof in detail. (iv) Good Reason. For purposes of this Agreement, termination by you of your employment for "Good Reason" shall mean, during the ninety (90) day period following a Change in Control of the Company, termination based on a good faith determination by you that, as a result of such Change in Control, you are not able to discharge your duties effectively. Also, for purposes of this Agreement, termination by you of your em- ployment for "Good Reason" shall mean termination based on: (A) an adverse change in your status or position(s) as an executive officer of the Company as in effect immedi- ately prior to the Change in Control, including, with- out limitation, any adverse change in your status or position as a result of a material diminution in your duties or responsibilities (other than, if applicable, any such change directly attributable to the fact that the Company is no longer publicly owned) or the assign- ment to you of any duties or responsibilities which, in any of such cases is inconsistent with such status or position(s) in your reasonable judgment, or any removal of you from or any failure to reappoint or reelect you to such position(s) (except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason); (B) a reduction by the Company in your base salary as in effect immediately prior to the Change in Control; (C) the failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are par- ticipating at the time of the Change in Control of the Company (or Plans providing you Mr. Phillip D. Green Page 6 May 13, 1994 with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the Change in Control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the Change in Control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the Change in Control; (D) the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Company's normal vacation policy as in effect immediately prior to the Change in Control; (E) the Company's requiring you to be based anywhere other than where your office is located immediately prior to the Change in Control except for required travel on the Company's business to an extent substantially consis- tent with the business travel obligations which you undertook on behalf of the Company prior to the Change in Control; (F) the failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 6 hereof; or (G) any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (v) below (and, if applicable, paragraph (iii) above); and for purposes of this Agreement, no such purported termination shall be effective. For purposes of this Agreement, Plan shall mean any compensation plan such as an incentive, stock option or restricted stock plan or any employee benefit plan such as a thrift, pension, profit sharing, medical, disability, accident, life insurance plan or a relocation plan or policy or any other plan, program or policy of the Company intended to benefit employees. Mr. Phillip D. Green Page 7 May 13, 1994 (v) Notice of Termination. Any purported termination by the Company or by you following a Change in Control shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a Notice of Termination shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon. (vi) Date of Termination. Date of Termination following a Change in Control shall mean (a) if your employment is to be terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have re- turned to the performance of your duties on a full-time basis during such thirty (30) day period), (b) if your employment is to be terminated by the Company for Cause or by you pursuant to Sections 4(iv)(F) and 6 hereof or for any other Good Reason, the date specified in the Notice of Termination, which in no event shall be a date earlier than the date on which a Notice of Termination is given, or (c) if your employment is to be terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which in no event shall be a date earlier than ninety (90) days after the date on which a Notice of Termination is given, unless an earlier date has been expressly agreed to by you in writing either in advance of, or after, receiving such Notice of Termination. In the case of termination by the Company of your employment for Cause, if you have not previously expressly agreed in writing to the termination, then within thirty (30) days after receipt by you of the Notice of Termination with respect thereto, you may notify the Company that a dispute exists concerning the termination, in which event the Date of Termination shall be the date set either by mutual written agreement of the parties or by the arbitrators in a proceeding as provided in Section 13 hereof. During the pendency of any such dispute, the Company will continue to pay you your full compensation in effect just prior to the time the Notice of Termination is given and until the dispute is resolved in accordance with Section 13. 5. Compensation Upon Termination or During Disability; Other Agreements. --------------------------------------------------------------------- (i) During any period following a Change in Control that you fail to Mr. Phillip D. Green Page 8 May 13, 1994 perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your salary at the rate then in effect and any benefits or awards under any Plans shall continue to accrue during such period, to the extent not inconsistent with such Plans, until your employment is terminated pursuant to and in accordance with paragraphs 4(i) and 4(vi) hereof. Thereafter, your benefits shall be determined in accordance with the Plans then in effect. (ii) If your employment shall be terminated for Cause following a Change in Control of the Company, the Company shall pay you your salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been paid to you. Thereupon the Company shall have no further obligations to you under this Agreement. (iii) Subject to Section 8 hereof, if, within twenty-four (24) months after a Change in Control of the Company shall have occurred, as defined in Section 3 above, your employment by the Company shall be terminated (a) by the Company other than for Cause, Disability or Retirement, or (b) by you for Good Reason then, by no later than the fifth day following the Date of Termination (except as otherwise provided), you shall be entitled, without regard to any contrary provisions of any Plan, to the benefits as provided below: (A) the Company shall pay your salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock compo- nents) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you (including amounts which previously had been deferred at your request); and (B) as severance pay and in lieu of any further salary for periods subsequent to the Date of Termination, the Company shall pay to you an amount in cash equal to two and 99/100 (2.99) times Mr. Phillip D. Green Page 9 May 13, 1994 your annualized includible compensation for the base period (as defined in Section 280G(d)(1) of the Internal Revenue Code of 1986 (the Code) and any regulations issued thereunder). (iv) Following a Change in Control of the Company, unless you are terminated for Cause, Disability or Retirement or you terminate your employment other than for Good Reason, the Company shall maintain in full force and effect, for the continued benefit of you, your spouse, and your dependents for a period terminating on the earliest of (a) the commencement date of equivalent benefits from a new employer or (b) your normal retirement date under the terms of the Retirement Plan, all insured and self-insured employee welfare benefit Plans in which you were entitled to participate immediately prior to the Date of Termination, provided that your continued participation is possible under the general terms and provisions of such Plans (and any applicable funding media) and you continue to pay an amount equal to your regular contribution under such Plans for such participation as adjusted for any increases in contributions or premiums in the same manner as other participants in the Plans. If you reach your normal retirement date as defined in the Retirement Plan and you have not previously received or are not then receiving equivalent benefits from a new employer, the Company shall arrange, at its sole cost and expense, to enable you to convert your, your spouse's, and your dependents' coverage under such Plans to individual policies or programs upon the same terms as employees of the Company may apply for such conversions. In the event that your participation in any such Plan is barred, the Company, at its sole cost and expense, shall arrange to have issued for the benefit of you, your spouse, and your dependents individual policies of insurance providing benefits substantially similar (on an after-tax basis) to those which you otherwise would have been entitled to receive under such Plans pursuant to this paragraph (iv) or, if such insurance is not available at a reasonable cost to the Company, the Company shall otherwise provide you and your dependents equivalent benefits (on an after-tax basis). You shall not be required to pay any premiums or other charges in an amount greater than that which you would have Mr. Phillip D. Green Page 10 May 13, 1994 paid in order to participate in such Plans as adjusted to reflect increased charges in the same manner as adjusted for other participants in the Plans. (v) Except as specifically provided in paragraph (iv) above, the amount of any payment provided for in this Section 5 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termina- tion, or otherwise. 6. Successors; Binding Agreement. ------------------------------ (i) Upon your written request, the Company will seek to have any Successor (as hereinafter defined), by agreement in form and substance satisfactory to you, assent to the fulfillment by the Company of its obligations under this Agreement. Failure of such Person to furnish such assent by the later of (A) three business days prior to the time such Person becomes a Successor or (B) two business days after such Person receives a written request to so assent shall constitute Good Reason for termination by you of your employment and, if a Change in Control of the Company occurs or has occurred, shall entitle you immediately to the benefits provided in paragraphs (iii) and (iv) of Section 5 hereof upon delivery by you of a Notice of Termination. For purposes of this Agreement, Successor shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase of the Company's Voting Securities, all or substantially all of its assets, or otherwise. (ii) This Agreement shall inure to the benefit of and be enforce- able by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. Mr. Phillip D. Green Page 11 May 13, 1994 (iii) For purposes of this Agreement, the Company shall include any corporation or other entity which is the surviving or continuing entity in respect of any merger, consolidation or form of business combination in which the Company ceases to exist. 7. Fees and Expenses; Mitigation. ------------------------------ (i) The Company shall pay all reasonable legal fees and related expenses incurred by you in connection with the Agreement following a Change in Control of the Company, including, without limitation, (a) all such fees and expenses, if any, incurred in contesting or disputing any such termination or incurred by you in seeking advice with respect to the matters set forth in Section 8 hereof or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement; provided, however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non-appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. (ii) You shall not be required to mitigate the amount of any payment the Company becomes obligated to make to you in connection with this Agreement, by seeking other employment or otherwise. 8. Taxes. ------ (i) All payments to be made to you under this Agreement will be subject to required withholding of federal, state and local income and employment taxes. (ii) Notwithstanding anything in the foregoing to the contrary, if any of the payments provided for in this Agreement, together with any other payments which you have the right to receive from the Company or any corporation which is a member of an affiliated group (as defined in Section 1504(a) of the Code without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute a parachute payment (as defined in Section 280G(b)(2) of the Code), the payments pursuant to this Agreement shall be reduced (reducing first Mr. Phillip D. Green Page 12 May 13, 1994 the payments under Section 5(iii) (B)) to the largest amount as will result in no portion of such payments being subject to the excise tax imposed by Section 4999 of the Code; provided, however, that the determination as to whether any reduction in the payments under this Agreement pursuant to this proviso is necessary shall be made by you in good faith, and such determination shall be conclusive and binding on the Company with respect to its treatment of the payment for tax reporting purposes. 9. Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 13 and 14 of this Agreement shall survive any termination of this Agreement following a Change in Control. 10. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employee, to the address set forth below his signature, provided that all notices to the Company shall be directed to the attention of the Chairman of the Board or President of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by you and the Chairman of the Board or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. Notwithstanding any provisions to the contrary, the Board Mr. Phillip D. Green Page 13 May 13, 1994 reserves the right to provide you with additional benefits, including, but not limited to, providing benefits hereunder in excess of the limitations described in Section 8, which the Board determines are appropriate in its sole discretion. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas. 12. Governing Law; Validity. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Texas. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Arbitration. Any dispute or controversy arising under or in connec- tion with this Agreement shall be settled exclusively by arbitration in the nearest local office of the American Arbitration Association (AAA) in accordance with the rules of the AAA then in effect or by three arbitrators who have been selected by mutual agreement of the parties who proceed in accordance with the rules of the AAA then in effect. Judgment may be entered on the arbitrators' award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section 13. 14. Employee's Commitment. You agree that subsequent to your period of employment with the Company, you will not at any time communicate or disclose to any unauthorized person without the written consent of the Company, any proprietary processes of the Company or any subsidiary or other confidential information concerning their business, affairs, products, suppliers or customers which, if disclosed, would have a material adverse effect upon the business or operations of the Company and its subsidiaries, taken as a whole; it being understood, however, that the obligations of this Section 14 shall not apply to the extent that the aforesaid matters (a) are disclosed in circumstances where you are legally required to do so or (b) become generally known to and available for use by the public otherwise than by your wrongful act or omission. The intent of this Section 14 is not to create a non-compe- tition agreement but to protect the rights of the Company as provided above. Mr. Phillip D. Green Page 14 May 13, 1994 15. Related Agreements. To the extent that any provision of any other agreement between the Company or any of its subsidiaries and you shall limit, qualify or be inconsistent with any provision of this Agree- ment, then for purposes of this Agreement, while the same shall remain in force, the provision of this Agreement shall control and such provision of such other agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose. 16. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. TERMINATION OF PRIOR LETTER AGREEMENT. THIS AGREEMENT IS INTENDED TO REPLACE IN ITS ENTIRETY THE LETTER AGREEMENT DATED MARCH 2, 1990 ("PRIOR AGREEMENT") REGARDING A CHANGE IN CONTROL OF THE COMPANY. BY MUTUAL AGREEMENT, THE PRIOR AGREEMENT IS HEREBY DECLARED NULL AND VOID. THE RESPECTIVE OBLIGATIONS AND THE BENEFITS PROVIDED IN THE PRIOR AGREEMENT ARE TERMINATED. Mr. Phillip D. Green Page 15 May 13, 1994 If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, Cullen/Frost Bankers, Inc. By:/s/ Robert S. McClane --------------------- Robert S. McClane President Agreed to this 23 day of May 1994. /s/ Phillip D. Green -------------------- Employee Signature Printed Name: Phillip D. Green ----------------------- Address: 4 Inwood Knoll ----------------------- San Antonio, Tx. 78248 ----------------------- EX-11 4 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 Statement re: Computation of Earnings Per Share CULLEN/FROST BANKERS, INC. Computation of Earnings per Common Share Primary and Fully Diluted (Unaudited) (in thousands)
December 31 ---------------------------- Primary Earnings per Share 1994 1993 1992 ------------------------------------------------ -------- ------- ------- Income before extraordinary credit and cumulative effect of accounting change $ 37,423 $38,797 $17,625 Elimination of interest on 9.75% convertible subordinated debentures due 1996, net of tax 54 643 -------- ------- ------- Income applicable to common stock before extraordinary credit and cumulative effect of accounting change 37,423 38,851 18,268 Extraordinary credit 6,497 Cumulative effect of accounting change 8,439 ------- ------- ------- Net income applicable to common stock $37,423 $47,290 $24,765 ======= ======= ======= Weighted average shares outstanding 11,059 10,922 10,175 Addition from assumed exercise of stock options 164 189 284 Addition of assumed conversion of 9.75% convertible subordinated debentures due 1996 40 515 ------- ------- ------- Weighted average number of common shares outstanding 11,223 11,151 10,974 ======= ======= ======= Primary earnings per common share: Income before extraordinary credit and cumulative effect of accounting change $3.33 $3.48 $1.66 Net income 3.33 4.24 2.26
December 31 ---------------------------- Fully Diluted Earnings per Share 1994 1993 1992 ------------------------------------------------ -------- ------- ------- Income before extraordinary credit and cumulative effect of accounting change $37,423 $38,797 $17,625 Elimination of interest on 9.75% convertible subordinated debentures due 1996, net of tax 54 643 ------- ------- ------ Income applicable to common stock before extraordinary credit and cumulative effect of accounting change 37,423 38,851 18,268 Extraordinary credit 6,497 Cumulative effect of accounting change 8,439 ------- ------- ------ Net income applicable to common stock $37,423 $47,290 $24,765 ======= ======= ======= Weighted average shares outstanding 11,059 10,922 10,175 Addition from assumed exercise of stock options 164 189 325 Addition of assumed conversion of 9.75% convertible subordinated debentures due 1996 40 515 ------- ------- ------ Weighted average number of common shares outstanding 11,223 11,151 11,015 ======= ======= ======= Fully diluted earnings per common share: Income before extraordinary credit and cumulative effect of accounting change $3.33 $3.48 $1.66 Net income 3.33 4.24 2.25
EX-13 5 CULLEN/FROST 1994 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 The Cullen/Frost 1994 Annual Report to Shareholders for the Year Ended December 31, 1994 (furnished for the information of the Commission and not deemed to be "filed" except for the portion expressly incorporated by reference) FINANCIAL REVIEW Cullen/Frost Bankers, Inc. and Subsidiaries The accompanying audited consolidated financial statements of Cullen/Frost Bankers, Inc. and Subsidiaries ("Cullen/Frost" or the "Corporation") present the Corporation's results of operations for the years 1992 through 1994. All balance sheet amounts presented in the following financial review are averages unless otherwise indicated. Earnings and other per share amounts have been restated to give effect to a ten percent stock dividend declared and paid by the Corporation during the first quarter of 1993. Taxable-equivalent adjustments assume a 35 percent federal tax rate for 1994 and 1993 and a 34 percent federal income tax rate for 1992. Dollar amounts in tables are stated in thousands, except for per share amounts. Amounts reported for 1993 include the February 13, 1993 acquisition, from the Federal Deposit Insurance Corporation, of New First City offices in San Antonio and Austin, Texas which added approximately $458 million in assets and $446 million in deposits. The acquisition was accounted for as a purchase, and as such the results of operations are included from the date of acquisition. RESULTS OF OPERATIONS Pre-tax income for 1994 was $57.6 million, compared to $38.1 million for 1993, an all-time high in the 126-year history of Cullen/Frost. Despite the improvement in pre-tax operating earnings, net income after taxes for 1994 was $37,423,000 or $3.33 per common share, compared with $47,236,000 or $4.24 per common share for 1993 and $24,122,000 or $2.26 per common share for 1992. Net income for 1994 was lower than 1993 net income primarily due to the significant differences in the Corporation's effective tax rate and because of the cumulative effect benefit of $8.4 million related to the adoption of Statement of Financial Accounting Standards No. 109 ("SFAS 109"). For 1994, the Corporation recognized income tax expense that approximates the statutory rate. At the beginning of 1993, the Corporation had a valuation allowance for deferred tax assets of $13.6 million. This valuation allowance was reduced to zero by the end of 1993 and resulted in an income tax benefit of $735,000 for 1993 compared with income tax expense of $20,177,000 for 1994. The 1994 improved operating results include an increase of $8.5 million in net interest income, a decrease of $16.5 million in non-interest expense and no provision for possible loan losses or real estate losses. During 1994, Cullen/Frost made or agreed to make several acquisitions. In April 1994, the Corporation acquired Texas Commerce Bank- Corpus Christi in exchange for Cullen/Frost Bank of Dallas, N.A. No gain or loss resulted from this transaction. The Corporation expanded its product line in December 1994 with the acquisition of Creekwood Capital Corporation, an asset-based lender headquartered in Houston. Cullen/Frost will enter the Rio Grande Valley area with the November 1994 agreement to acquire Valley Bancshares, Inc. and its Valley National Bank in McAllen, Texas. In December 1994, Cullen/Frost agreed to acquire the two Comerica Bank Texas branches in San Antonio and agreed to purchase National Commerce Bank, which has three locations in Houston. These three pending acquisitions will add a total of approximately $204 million in deposits and $122 million in loans. They are expected to be completed in mid-1995 following shareholder action and regulatory approval and are not expected to have a material impact on the Corporation's 1995 operating results. The results for 1993 when compared to 1992 were impacted by an improvement in asset quality which resulted in a net credit for possible loan and real estate losses of $4.6 million in 1993 compared to a net expense for these combined provisions of $18.5 million in 1992. The 1993 results also include the operating impact of the New First City acquisition and non-recurring items: (i) $6.7 million in restructuring costs related to bank premises resulting from downsizing of office space and valuations on owned buildings, resulting from the decision to sell, (ii) $3.6 million in combined early retirement incentive and job restructuring costs, (iii) $5.0 million in non-recurring costs related to the acquisition of New First City offices, and (iv) a one-time benefit of $8.4 million related to a required change in the method of accounting for income taxes. PAGE 8
1994 Change 1993 Change Earnings Summary 1994 From 1993 1993 From 1992 1992 -------------------------------------------------------------------------------------- Taxable-equivalent net interest income $136,989 $ 8,280 $128,709 $ 10,923 $117,786 Taxable-equivalent adjustment 642 (241) 883 (246) 1,129 ------- ------- ------- -------- ------- Net interest income 136,347 8,521 127,826 11,169 116,657 Provision (credit) for possible loan losses --- 6,085 (6,085) (5,235) (850) Non-interest income: Net gain (loss) on securities transactions (4,038) (5,471) 1,433 1,665 (232) Other 80,853 6,057 74,796 12,751 62,045 -------- -------- -------- -------- --------- Total non-interest income 76,815 586 76,229 14,416 61,813 Non-interest expense: Provision for real estate losses --- (1,445) 1,445 (17,866) 19,311 Restructuring costs 830 (9,455) 10,285 10,285 Other operating expenses 154,732 (5,616) 160,348 26,161 134,187 -------- -------- -------- -------- --------- Total non-interest expense 155,562 (16,516) 172,078 18,580 153,498 -------- -------- -------- -------- --------- Income before income taxes (credits), extraordinary credit and cumulative effect of accounting change 57,600 19,538 38,062 12,240 25,822 Income taxes (credits) 20,177 20,912 (735) (8,932) 8,197 -------- -------- -------- -------- --------- Income before extraordinary credit and cumulative effect of accounting change 37,423 (1,374) 38,797 21,172 17,625 Extraordinary Credit - income tax benefit --- --- --- (6,497) 6,497 Cumulative effect of change in accounting for income taxes --- (8,439) 8,439 8,439 -------- -------- -------- -------- --------- Net income $ 37,423 $ (9,813) $47,236 $23,114 $ 24,122 ======== ======== ======== ======= ======== Per share Net income-primary $ 3.33 $ (.91) $ 4.24 $ 1.98 $ 2.26 Net income-fully diluted 3.33 (.91) 4.24 1.99 2.25
NET INTEREST INCOME The increase in net interest income from 1993 is primarily due to increased loan volumes. Average loans for 1994 were 15.0 percent higher than in 1993. Net interest margin was 4.40 percent for the year ended December 31, 1994, compared to 4.29 percent and 4.47 percent for the years 1993 and 1992, respectively. Net interest spread for 1994 increased five basis points to 3.83 percent. Net interest spread was 3.78 percent and 3.86 percent for 1993 and 1992, respectively. The increase in net interest spread for 1994 is primarily due to yields on earning assets rising faster than the cost of deposits. Net interest spread for 1993 declined eight basis points compared to 1992 primarily because of lower yields on securities. Net interest income has been favorably impacted by the significant decrease in non-performing assets during 1994 and 1993. Net interest income increased during 1993 compared to 1992 primarily related to an increase in demand deposits and larger business volumes resulting from the New First City acquisition. The net interest spread as well as the net interest margin could be impacted by future changes in short-and long-term interest rate levels.
Net Interest Income and Net Interest Margin Net InterestSpread ($ in millions - taxable-equivalent) (taxable-equivalent) (Graphic Material omitted) (Graphicmaterial omitted) Year Net Interest Net Interest Year Earnings Cost of Net Interest Ended Income Margin Ended on Funds Funds Spread ------ ------------ ----------- ----- -------- -------- ------------ 1990 $ 113 3.93% 1990 9.60 % 6.54 % 3.06 % 1991 111 4.13 1991 8.70 5.35 3.35 1992 118 4.47 1992 7.25 3.39 3.86 1993 129 4.29 1993 6.35 2.57 3.78 1994 137 4.40 1994 6.62 2.79 3.83
PAGE 9 INTEREST RATE SENSITIVITY 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. As the accompanying table indicates, the Corporation is liability sensitive on a cumulative basis at both the three- month and one- year time periods. The Corporation 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.
Immediately Non-Rate Cumulative Interest Rate Sensitive Rate Sensitive Within Sensitive Rate Sensitivity -------------- ------------------------------ --------- (Period-End Balances) 0-30 Days 90 Days One Year Five Years >Five Years Total -------------------------------------------------------------------------------------------- Earning Assets: Loans $ 663,989 $ 754,475 $ 980,356 $1,330,299 $147,670 $1,477,969 Securities 203,202 309,342 993,245 1,258,315 335,727 1,594,042 Federal funds sold and other short-term investments 167,550 167,562 167,562 167,562 167,562 ---------- ---------- ---------- --------- --------- ---------- Total earning assets $1,034,741 $1,231,379 $2,141,163 $2,756,176 $483,397 $3,239,573 =========== ========== ========== ========== ======== ========== Interest-Bearing Liabilities: Savings and Interest- on-Checking $ 763,300 $ 763,300 $ 763,300 $ 763,300 $ 763,300 Money market deposit accounts 559,153 559,153 559,153 559,153 559,153 Certificates of deposit and other time accounts 229,390 512,672 811,735 876,451 $ 56,755 933,206 Federal funds purchased and other borrowings 370,235 370,235 370,235 370,235 370,235 ---------- ---------- ---------- ---------- --------- --------- Total interest-bearing liabilities $1,922,078 $2,205,360 $2,504,423 $2,569,139 $ 56,755 $2,625,894 ========== =========== ========== ========== ======== ========== Interest sensitivity gap$ (887,337) $ (973,981) $ (363,260)$ 187,037 $426,642 $ 613,679 ========== =========== ========== ========== ======== ========== Ratio of earning assets to interest-bearing liabilities .54 .56 .85 1.07 ========== =========== ========== ========== In developing the classifications used for this analysis, it was necessary to make certain assumptions and approximations in assigning assets and liabilities to different maturity categories. For example, savings and Interest-on-Checking are subject to immediate withdrawal and as such are presented as repricing within the earliest period presented even though their balances have historically not shown significant sensitivity to changes in interest rates. Consumer loans are included net of unearned discount of $3,487,000. Consumer loans are distributed in the immediately rate-sensitive category for those tied to market rates or to other categories according to the repayment schedule. The above table does not reflect interest rate swaps further discussed on page 20.
LIQUIDITY Asset liquidity is provided by cash and assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash, short-term investments in time deposits in banks, Federal funds sold and securities purchased under resale agreements and securities available for sale. Liquidity is also provided by access to funding sources. These include core depositors and correspondent banks in the Corporation's natural trade area which maintain accounts with and sell Federal funds to subsidiary banks of the Corporation, as well as brokered deposits and Federal funds purchased and securities sold under repurchase agreements from upstream banks. PAGE 10 NON-INTEREST INCOME Non-interest income of $76,815,000 was reported for 1994, compared with $76,229,000 for 1993 and $61,813,000 for 1992. Excluding securities transactions, total non-interest income increased 8.1 percent from 1993.
Year Ended December 31 -------------------------------------------------------- 1994 1993 1992 ---------------- ------------------ ------------------ Percent Percent Percent Non-Interest Income Amount Change Amount Change Amount Change -------------------------------------------------------------------------------- Trust department $29,529 + 12.4% $26,278 + 20.2% $21,861 + 9.1% Service charges on deposit accounts 25,890 + 2.0 25,386 + 15.6 21,958 + 16.1 Other service charges, collection and exchange charges, commissions and fees 11,658 + 17.9 9,889 + 25.4 7,888 - 4.8 Net gain(loss) on securities transactions (4,038) -381.8 1,433 +717.7 (232) -111.5 Other 13,776 + 4.0 13,243 + 28.1 10,338 + 25.7 ------- -------- -------- Total $76,815 + .8 $76,229 + 23.3 $61,813 + 7.5 ======= ======= =======
Trust income was up 12.4 percent during 1994. This is attributable primarily to an increase in investment fee income resulting from growth in the number of accounts and increased fee structure. At December 31, 1994, the market value of trust assets totaled $10.4 billion compared to $11.1 billion at December 31, 1993. The December 1994 trust assets were comprised of corporate assets of $5.0 billion, agencies of $2.4 billion, personal assets of $1.8 billion, and employee benefits of $1.2 billion. The 20.2 percent increase in trust income from 1992 to 1993 reflects the increase in the number of accounts held and assets under management and the acquisition of additional trust customers from New First City, Texas- Austin. Other service charges increased 17.9 percent when compared to 1993. This is primarily due to fees associated with greater business volumes and bankcard discount. In 1993, deposit service charges, up 15.6 percent, and other service charges, up 25.4 percent, were both impacted by an increase in activity levels and additional volumes resulting from the New First City acquisition. During the fourth quarter of 1994, the Corporation restructured a portion of its available for sale securities portfolio resulting in a $3.5 million loss on the transactions. Certain lower-yielding securities were sold and replaced with higher-yielding investments which will enhance future earnings. In anticipation of implementing Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Corporation sold certain securities in December 1993 resulting in a gain of $1.4 million. Other non-interest income increased 4.0 percent to $13,776,000 in 1994 compared to a 28.1 percent increase in 1993. The increase in 1994 is primarily due to income related to other real estate related recoveries. The 1993 increase was primarily due to gains on the sale of foreclosed assets and commissions for sales of mutual funds.
Non-Interest Income ($ in thousands) (Graphic material omitted) Net Gain(Loss) Year Trust Service Other Service Other on Securities Ended Department Charges Charges Transactions ----- ---------- ------- ------------- ------- -------------- 1990 $18,777 $15,146 $ 7,304 $ 9,236 $ 129 1991 20,030 18,915 8,288 8,227 2,022 1992 21,861 21,958 7,888 10,338 (232) 1993 26,278 25,386 9,889 13,243 1,433 1994 29,529 25,890 11,658 13,776 (4,038)
PAGE 11 NON-INTEREST EXPENSE Excluding the provision for real estate losses, non-interest expense was $155,562,000 for 1994 compared with $170,633,000 for 1993 and $134,187,000 for 1992. Results in 1993 include non-recurring charges of $5.0 million relating to the acquisition of New First City (costs of interim data processing services, temporary staffing and related costs). In addition, restructuring charges in 1993 totaled $10.3 million. These costs included $6.7 million in net-occupancy restructuring related to banking office downsizing and valuations of certain banking premises owned resulting from the decision to sell such premises and $3.6 million related to an early retirement incentive program and job restructurings. The restructure of banking offices reflects primarily the conversion to branching which has been put into place following changes in Texas banking law. The $3.6 million charge in salaries and benefits includes $1.9 million for an early retirement incentive program and severance associated with job eliminations and restructurings. Both the retirement incentive program and job restructurings portions were paid and completed by December 31, 1994. During the fourth quarter of 1993, the Corporation accrued $2.4 million for leases to be abandoned. At December 31, 1994, this accrual balance was $2.0 million. The decrease is primarily due to lease payments, net of sub-lease payments, that were applied against the restructuring accrual. The incomplete portions of the restructuring plan deal principally with the sale of three buildings with an aggregate net carrying value of $3.4 million. These buildings have been written down to their net realizable values. The Corporation has active marketing plans in place to sell these buildings.
Year Ended December 31 ----------------------------------------------------- 1994 1993 1992 ---------------- ------------------ --------------- Percent Percent Percent Non-Interest Expense Amount Change Amount Change Amount Change ----------------------------------------------------------------------------- Salaries and wages $ 52,986 - 1.2% $ 53,654 + 16.2% $ 46,184 + 4.6% Pension and other employee benefits 9,910 - 17.8 12,052 + 23.7 9,746 + 7.6 Net occupancy of banking premises 15,777 - 24.0 20,749 + 22.3 16,963 + 3.1 Furniture and equipment 10,937 + 7.7 10,155 + 22.4 8,295 + 7.4 Intangible amortization 7,627 + 10.9 6,877 +882.4 700 +17.3 Restructuring costs 830 - 91.9 10,285 Other 57,495 + 1.1 56,861 + 8.7 52,299 - 7.2 -------- -------- -------- 155,562 - 8.8 170,633 + 27.2 134,187 - .1 Provision for real estate losses --- 1,445 - 92.5 19,311 - 7.2 -------- -------- -------- Total $155,562 - 9.6 $172,078 + 12.1 $153,498 - 1.1 ======== ======== ========
Salaries and wages decreased by 1.2 percent primarily because of the restructuring actions taken in 1993. Combined salaries and employee benefits increased 17.5 percent during 1993, excluding the $3.6 million restructuring charge. The number of full time equivalent employees increased seven percent during 1993 when compared to 1992, primarily because of staff needed to support the acquired New First City customer base. Pension and other employee benefits decreased by 17.8 percent during 1994 primarily due to an adjustment to medical insurance expense, the result of implementing a managed health care network and favorable claims experience. The pension and other employee benefits increase during 1993 was related to higher expenses for payroll taxes, medical insurance and retirement expenses. The Corporation adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," in the first quarter of 1993. The adoption of this statement did not have a material impact on the financial position or operations of the Corporation. Net occupancy of banking premises decreased 24.0 percent during 1994 primarily because of the restructuring actions taken in 1993 and decreases in building lease expense related to renegotiated and canceled leases primarily related to the New First City acquisition. During 1994, the Corporation recorded an additional $830,000 restructuring charge, primarily an adjustment to market valuations associated with banking premises held for sale. Net occupancy increased 22.3 percent in 1993 due to costs of operating the additional locations obtained in the New First City acquisition. Furniture and equipment costs increased 7.7 percent in 1994. This increase resulted from higher depreciation, service contracts, and software maintenance and amortization. The increase in furniture and equipment of 22.4 percent in 1993 can be attributed to the increase in depreciation expense relating to the New First City acquisition which required the re-equipping of work stations in the additional offices. PAGE 12 No provision for real estate losses was necessary for the year ended December 31, 1994, compared with $1,445,000 and $19,311,000 in 1993 and 1992, respectively. The reductions are driven by improving asset quality, a declining volume of foreclosed assets and improving real estate values. See "Non-Performing Assets," page 16. Other non-interest expense was flat when compared with December 31, 1993. Excluding those expenses associated with the acquisition of New First City in 1993, other non-interest expense increased 8.1 percent in 1994. This is due to the timing of charitable contributions, litigation expense (primarily a settlement) and state sales and use taxes. Other non- interest expense increased 8.7 percent in 1993. Excluding the acquisition and operating expenses of the New First City offices and non-recurring costs incurred in acquiring these locations, other non-interest expenses were flat when compared to 1992. Intangible amortization increased $750,000 and $6.2 million in 1994 and 1993, respectively. This results from a full year's amortization of goodwill and other intangibles associated with the acquisition of New First City during February 1993.
Non-Interest Expense Excluding Non-recurring Items ($ in thousands) (Graphic material omitted) Net Occupancy Provision Year Salaries, Wages & Furniture and for Real Estate Ended and Pensions Equipment Other Losses ----- --------------- --------------- ------- --------------- 1990 $52,167 $24,757 $48,531 $11,172 1991 53,212 24,186 51,541 20,799 1992 55,930 25,258 52,999 19,311 1993 64,494 30,904 60,050 1,445 1994 62,896 25,884 63,722 ---
INCOME TAXES The Corporation recognized income tax expense of $20,177,000 in 1994 compared to an income tax benefit of $735,000 in 1993. The effective rate for 1993 was affected by the $13.6 million reduction of the valuation allowance for deferred tax assets established at the beginning of 1993 with the adoption of Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." The one-time cumulative effect of adopting FAS 109 was $8.4 million which favorably impacted net income for 1993. The Corporation's effective tax rate for 1994 approximates the statutory rate of 35 percent. PAGE 13 SOURCES AND USES OF FUNDS Average assets for 1994 of $3,658,187,000 increased by 4.2 percent from 1993 levels and increased 15.0 percent between 1992 and 1993. Funding sources in 1994 changed little from the previous year except for a shift of approximately 2.2 percent from time deposits to federal funds purchased and equity capital. Securities continue to be the largest component of earning assets; however, loans increased 3.4 percent from 1993 levels due to greater loan volumes.
Percentage of Total Average Assets ---------------------------------- Sources and Uses of Funds 1994 1993 1992 ------------------------- ------- ------ ------ Sources of Funds: Deposits: Demand 22.9% 23.2% 21.8% Time 62.4 64.6 66.9 Federal funds purchased 5.2 3.7 3.4 Equity capital 7.9 7.1 6.3 Borrowed funds --- .1 .5 Other liabilities 1.6 1.3 1.1 ------ ------ ------ Total 100.0% 100.0% 100.0% ====== ====== ====== Uses of Funds: Loans 36.4% 33.0% 33.5% Securities 45.7 45.1 46.4 Federal funds sold 3.0 7.3 6.4 Non-earning assets 14.9 14.6 13.7 ------ ------ ------ Total 100.0% 100.0% 100.0% ====== ====== ======
LOANS Average loans for 1994 were $1,331,793,000, an increase of 15.0 percent from 1993. Loan volume increased to $1.48 billion at year-end 1994, up 18.4 percent from the previous year. This was driven by continued improvements in economic activity in the cities the Corporation serves.
Total Average Loans and Yields ($ in millions) (Graphic material omitted) Average Loan Year Average Loans Yield ---- ------------- ------------ 1990 $1,315 10.30% 1991 1,149 9.54 1992 1,025 8.27 1993 1,158 7.88 1994 1,332 8.01
PAGE 14
December 31 --------------------------------------------------------------- 1994 ----------------------- Loan Portfolio Analysis Percentage of Period-End Balances Amount Total Loans 1993 1992 1991 1990 ----------------------------------------------------------------------------------- Real estate: Construction $ 44,502 3.0% $ 32,297 $ 26,632 $ 24,620 $ 39,316 Land 31,481 2.1 22,990 21,288 26,474 62,850 Permanent mortgages: Commercial 177,223 12.0 144,122 77,347 64,605 86,934 Residential 277,725 18.8 276,148 253,471 258,303 246,101 Other 178,263 12.1 150,499 134,470 161,439 192,330 ------- ---- ------- ------- ------- ------- Total real estate 709,194 48.0 626,056 513,208 535,441 627,531 Commercial and industrial 375,085 25.4 310,830 256,520 283,074 354,136 Consumer 331,039 22.4 268,331 217,232 198,521 215,231 Financial institutions 5,578 .4 284 9,380 14,819 18,056 Foreign 45,290 3.0 31,763 17,871 31,988 29,647 Purchasing or carrying securities 1,884 .1 1,204 1,918 3,389 5,127 Other 13,386 .9 17,797 7,737 21,019 35,350 Unearned discount (3,487) (.2) (8,456) (12,632) (14,854) (16,858) ----------- ------ ---------- ---------- ----------- -------- Total $1,477,969 100.0% $1,247,809 $1,011,234 $1,073,397 $1,268,220 =========== ====== ========== ========== ========== ========== Percent change from previous year +18.4% +23.4% -5.8% -15.4% -7.4%
Total real estate loans at December 31, 1994 were $709,194,000 up 13.3 percent from year-end 1993. Commercial mortgages increased $33,101,000 or 23 percent. Real estate loans categorized as "other" are primarily amortizing commercial and industrial loans with maturities of less than five years. Most are collateralized by completed, owner-occupied commercial real estate properties. As part of the New First City acquisition, certain commercial and commercial real estate loans of the Austin operation are protected by a loss-sharing arrangement with the Federal Deposit Insurance Corporation (the "FDIC"). Losses are shared 80 percent to the FDIC and 20 percent to the Corporation. At December 31, 1994, these loans approximated $24 million. Of the real estate loans outstanding at year end, the geographic concentrations were San Antonio, 73 percent; Houston/Galveston, 14 percent; Austin, 7 percent; and Corpus Christi, 6 percent. Amortizing permanent mortgages represented 64.2 percent of the total real estate loan portfolio at year end.
December 31 ---------------------------------------------------- 1994 1993 ---------------------------------------------------- Real Estate Loans Percentage of Percentage of Period-End Balances Amount Real Estate Loans Amount Real Estate Loans ---------------------------------------------------------------------------- Construction $ 44,502 6.3% $ 32,297 5.2% Land 31,481 4.4 22,990 3.7 Permanent mortgages: Commercial 177,223 25.0 144,122 23.0 Residential 277,725 39.2 276,148 44.1 Other 178,263 25.1 150,499 24.0 -------- ------ -------- ------ Total $709,194 100.0% $626,056 100.0% ======== ====== ======== ======
December 31 -------------------------- 1992 -------------------------- Real Estate Loans Percentage of Period-End Balances Amount Real Estate Loans -------------------------------------------------- Construction $ 26,632 5.2% Land 21,288 4.1 Permanent mortgages: Commercial 77,347 15.1 Residential 253,471 49.4 Other 134,470 26.2 -------- ------ Total $513,208 100.0% ======== ======
MEXICAN LOANS At December 31, 1994, the Corporation's cross-border outstandings, excluding $21,267,000 in loans secured by liquid U.S. assets, totaled $24,023,000 up from $15,437,000 last year. This growth reflects expansion in trade-related debt in connection with increased commerce with Mexico. The recent devaluation of the peso will likely lower the demand for trade- related cross-border loans, except for those Mexican companies dealing in export trade. All of the Corporation's Mexican loans are either secured by liquid U.S. assets or are used to finance international trade transactions. Of the trade related credits, approximately 75 percent are related to companies exporting from Mexico. As of February 28, 1995, none of the Mexican related loans were on non-performing status. PAGE 15 During the first quarter of 1992, the Corporation sold its $9,694,000 par bonds which had been received in 1990 under the Brady Mexican debt exchange. The par bonds were sold for $6,017,000 and resulted in a charge- off of $3,677,000.
December 31 ------------------------------------------ 1994 ------------------------------------------ Percentage of Percentage of Mexican Loans Amount Total Loans Total Assets ---------------------------------------------------------------------- Financial institutions $23,999 1.6% .6% Commercial and industrial 24 ------ --- --- Total $24,023 1.6% .6% ====== === ===
December 31 ------------------------------------------ 1993 ------------------------------------------ Percentage of Percentage of Mexican Loans Amount Total Loans Total Assets ---------------------------------------------------------------------- Financial institutions $ 15,384 1.2% .4% Commercial and industrial 53 -------- ---- ---- Total $ 15,437 1.2% .4% ======== ==== ====
December 31 ------------------------------------------ 1992 ------------------------------------------ Percentage of Percentage of Mexican Loans Amount Total Loans Total Assets ---------------------------------------------------------------------- Financial institutions $ 1,000 .1% Commercial and industrial 301 ------- --- --- Total $ 1,301 .1% ======== === ===
The above tables exclude $21,267,000, $16,326,000 and $16,570,000 in loans secured by liquid assets held in the United States in 1994, 1993 and 1992, respectively. NON-PERFORMING ASSETS Non-performing assets decreased 35.9 percent to $19,938,000 at December 31, 1994, compared with $31,110,000 at December 31, 1993. The balance at December 31, 1992 was $51,303,000. Non-performing assets as a percentage of total loans and foreclosed assets decreased to 1.34 percent at December 31, 1994, down from 2.47 percent one year ago. As part of the acquisition of New First City-Austin, certain commercial and commercial real estate loans of that bank are protected by a loss-sharing arrangement with the FDIC whereby losses are shared 80 percent to the FDIC and 20 percent to the Corporation. At December 31, 1994, non- performing assets covered by the loss-sharing arrangement totaled $2,001,000. These assets are included in total non-performing assets at $306,000 which represents the carrying value net of loss-sharing coverage and associated discounts.
December 31 --------------------------------------------------- Non-Performing Assets 1994 1993 1992 1991 1990 ----------------------------------------------------------------------------- Non-accrual and restructured loans $11,303 $ 17,727 $ 23,148 $ 36,485 $ 52,735 Foreclosed assets 8,635 13,383 28,155 64,157 69,130 ------- -------- -------- -------- ------- Total $19,938 $ 31,110 $ 51,303 $100,642 $121,865 ======= ======== ======== ======== ======== As a percentage of total assets .53% .85% 1.63% 3.27% 3.74% As a percentage of total loans plus foreclosed assets 1.34% 2.47% 4.94% 8.85% 9.11% After-tax impact of lost interest per common share $ .13 $ .20 $ .39 $ .78 $ .92 Accruing loans 90 days past due: Consumer $ 574 $ 765 $ 414 $ 1,378 $ 1,403 All other 3,070 3,827 1,431 7,177 4,410 ------- -------- -------- -------- ------- Total $ 3,644 $ 4,592 $ 1,845 $ 8,555 $ 5,813 ======= ======== ======== ======== ======== Interest income that would have been recorded in 1994 on non-performing assets had such assets performed in accordance with their original contract terms, was $1,082,000 on non-accrual and restructured loans and $1,187,000 on foreclosed assets. During 1994, the amount of interest income actually recorded on non-accrual and restructured loans was $7,000.
Non-Performing Assets ($ in millions) (Graphic material omitted) Non-Accrual and Foreclosed Year Restructured Assets ---- --------------- ---------- 1990 $ 53 $69 1991 37 64 1992 23 28 1993 18 13 1994 11 9
PAGE 16 Real estate related non-performing assets were $18,245,000 (91.5 percent of total non-performing assets) at December 31, 1994, compared with $28,938,000 (93.0 percent of total non-performing assets) at December 31, 1993. Non-performing real estate assets represented 2.5 percent of all real estate loans and foreclosed real estate assets at December 31, 1994 compared to 4.5 percent at the end of 1993.
December 31, 1994 ---------------------------------- Non-Performing Assets Classified by Industry Real Estate Other Total ---------------------------------------------------------------------------- Non-accrual and restructured loans $ 9,637 $1,666 $11,303 Foreclosed assets 8,608 27 8,635 ------- ------ ------- Total $18,245 $1,693 $19,938 ======= ====== ======= Accruing loans 90 days past due $ 2,412 $1,232 $ 3,644 Loans 90 days past due in the "other" category include $117,000 in foreign loans. Foreclosed assets include $5,324,000 of in-substance foreclosures at December 31, 1994.
Loans to a customer whose financial condition has deteriorated are considered for non-accrual status whether or not the loan is 90 days or more past due. All non-consumer loans 90 days or more past due are classified as non-accrual unless the loan is well secured and in the process of collection. When a loan is placed on non-accrual status, interest income is not recognized until collected, and any previously accrued but uncollected interest is reversed. Classification of an asset in the non-performing category does not preclude ultimate collection of loan principal or interest. Restructured loans have been modified as to original terms, resulting in a reduction or deferral of principal and/or interest as a concession to the debtor and are accounted for in accordance with Statement of Financial Accounting Standards No. 15. Foreclosed assets consist of property which has been formally repossessed and those considered in-substance foreclosed even though formal repossession has not occurred. An in-substance foreclosure will generally occur when all of the following conditions are met:(1) the debtor has little or no equity in the collateral, (2) repayment proceeds can only be expected from the operation or sale of the collateral, and (3) the debtor has either formally or effectively abandoned control of the collateral or it is doubtful the debtor will be able to build equity in the collateral or otherwise repay the loan. Beginning in 1995, the Corporation adopted Statement of Financial Accounting Standards No. 114, as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan" (SFAS 114 and 118). In accordance with the SFAS 114 and 118, a loan is classified in-substance foreclosure when the Corporation has taken possession of the collateral regardless of whether formal foreclosure proceedings take place. Loans previously classified as in-substance foreclosure but for which the Corporation had not taken possession of the collateral will be reclassified to loans. When property is acquired through foreclosure, it is valued at the lower of the loan balance or its estimated fair value less estimated costs to sell. Write-downs occurring at acquisition are charged against the allowance for possible loan losses. On an on-going basis, properties are appraised as required by applicable regulations. Write-downs are provided for subsequent declines in value.
Year Ended December 31 --------------------------------- Foreclosed Assets 1994 1993 1992 ---------------------------------------------------------------------------- Foreclosed assets $ 8,635 $13,383 $28,155 Provision for real estate losses --- 1,445 19,311 Foreclosed assets expense 1,454 3,102 5,666 Foreclosed assets expenses include operating expenses such as property taxes, insurance, maintenance costs, and allocations for salaries and benefits, net occupancy, and furniture and fixtures and are included in non- interest expense.
At December 31, 1994, the Corporation had $5,199,000 in loans to borrowers experiencing financial difficulties which had not been included in either non-accrual, restructured or 90 days past due loans. Management monitors such loans closely and reviews their performance on a regular basis. PAGE 17 ALLOWANCE FOR POSSIBLE LOAN LOSSES Despite the growth in loans, no provision for possible loan losses was recorded during 1994 due to continued improvements in economic activity in the cities served by the Corporation, improved credit quality and real estate values and net recoveries of $2.1 million. In 1993, the Corporation booked a credit to the provision for possible loan losses of $6,085,000 primarily reflecting improvements in credit quality and better real estate market conditions. In 1992, a credit of $850,000 was recorded because of decreases in net charge-offs and improvements in asset quality. The Corporation recorded net recoveries of loans previously charged off of $2,127,000 for the year ended December 31, 1994, compared to net recoveries of $486,000 for 1993, and net charge-offs of $9,640,000 for 1992.
Year Ended December 31 Allowance for ------------------------------------------------------ Possible Loan Losses 1994 1993 1992 1991 1990 ------------------------------------------------------------------------------- Average loans outstanding during year, net of unearned discount $1,331,793 $1,158,057 $1,024,885 $1,149,233 $1,314,907 ========== ========== ========== ========== ========== Balance of allowance for possible loan losses at beginning of year $ 26,298 $ 31,897 $ 42,387 $ 45,604 $ 42,282 Provision (credit) for possible loan losses --- (6,085) (850) 10,020 31,993 Changes related to disposition of bank subsidiary (2,684) Charge-offs: Real estate (1,349) (3,481) (6,381) (10,587) (12,664) Commercial and industrial (316) (1,287) (4,057) (5,625) (13,499) Energy (4) (56) Consumer (2,357) (3,369) (3,217) (3,395) (3,602) Other, including foreign (63) (3,828) (1,973) (5,230) ----------- ---------- --------- ---------- ---------- Total charge-offs (4,022) (8,200) (17,487) (21,636) (34,995) ----------- ---------- --------- ---------- ---------- Recoveries: Real estate 1,970 2,412 2,034 2,530 1,641 Commercial and industrial 2,434 3,567 3,634 3,633 2,182 Energy 10 149 58 722 Consumer 1,692 2,237 1,852 1,389 1,147 Other, including foreign 53 460 178 789 632 ---------- ---------- ---------- ---------- ---------- Total recoveries 6,149 8,686 7,847 8,399 6,324 ---------- ---------- ---------- ---------- ---------- Net (charge-offs) recoveries 2,127 486 (9,640) (13,237) (28,671) ---------- ---------- ---------- ---------- ---------- Balance of allowance for possible loan losses at end of year $ 25,741 $ 26,298 $ 31,897 $ 42,387 $ 45,604 ========== ========= ========= ========== ========= Net (charge-offs) recoveries as a percentage of average loans outstanding during the year, net of unearned discount .16% .04% (0.94)% (1.15)% (2.18)% Allowance for possible loan losses as a percentage of year-end loans, net of unearned discount 1.74% 2.11% 3.15% 3.95% 3.60% There were no foreign charge-offs in 1994, 1993 or 1991. There were $3,677,000 in foreign charge-offs in 1992 all relating to Brady Bonds (see page 16). Foreign activity includes net recoveries of $379,000 in 1990. Other charge-offs for 1990 of $5,230,000 included $4,833,000 in bank stock charge-offs. The 1994 allowance for possible loan losses includes a reduction of $2,684,000 related to the exchange of Cullen/Frost Bank in Dallas for Texas Commerce Bank-Corpus Christi.
PAGE 18
Allowance for Possible Loan Losses and Allowance to Year-End Loans ($ in thousands) (Graphic material omitted) Year Allowance For Possible Allowance to Allowance to Non- Ended Loan Losses Year-End Loans Performing Loans ----- ---------------------- --------------- ----------------- 1990 $45,604 3.60% 86.5% 1991 42,387 3.95 116.2 1992 31,897 3.15 137.8 1993 26,298 2.11 148.3 1994 25,741 1.74 227.7
There were no provision expenses for possible loan losses and real estate valuations made during 1994. The combined net provision for possible loan losses and real estate losses for 1993 was a credit of $4,640,000 compared with a provision of $18,461,000 for the year ended December 31, 1992. During 1993, the provision for real estate losses decreased $17,866,000 or 92.5 percent from 1992 because the number and dollar value of foreclosed properties had been reduced. Additionally, real estate values began to stabilize. During May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 114, as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan." These standards specify how allowances for certain impaired loans should be determined and the accounting for in-substance foreclosures. These standards are effective for fiscal years beginning after December 15, 1994. The Corporation has adopted these standards effective January 1, 1995. Adoption of these standards did not have a material impact on the Corporation's financial statements. Management has established credit policies and procedures designed to manage exposure to credit risks. These are monitored through periodic reviews of individual credits in light of economic conditions, business trends, and the risks in specific industries and individual loans. Formal internal loan review examinations are also conducted by the Corporation. Compliance with concentration levels and standards, policies and procedures is also monitored. Loans identified as losses by management, internal loan review and/or bank examiners are charged-off. Exceptions are installment and credit card loans which are charged-off based on past-due status. An allowance for possible loan losses is maintained in an amount which, in management's judgment, provides an adequate reserve to absorb possible loan losses. Industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, the impact of rising interest rates, experience level and effectiveness of employees, economic, political and regulatory conditions and other pertinent factors are all considered in determining the adequacy of the allowance. An audit committee of non-management directors reviews the adequacy of the allowance for possible loan losses quarterly. PAGE 19
December 31, 1994 ----------------------- Allowance As a for Percentage Possible of Allocation of Allowance Loan Total for Possible Loan Losses Losses Loans -------------------------------------------------------- Commercial and industrial $ 4,291 .29% Real estate 8,584 .58 Consumer 10,384 .70 Purchasing or carrying securities 7 Financial institutions 28 Other, including foreign 160 .01 Not allocated 2,287 .16 ------- ----- Total $25,741 1.74% ======= =====
December 31 ------------------------------------------------ 1993 1992 ----------------------- ------------------------ Allowance As a Allowance As a for Percentage for Percentage Possible of Possible of Allocation of Allowance Loan Total Loan Total for Possible Loan Losses Losses Loans Losses Loans --------------------------------------------------------------------------------- Commercial and industrial $ 3,453 .28% $ 3,752 .37% Real estate 10,432 .84 14,069 1.39 Consumer 6,756 .54 5,238 .52 Purchasing or carrying securities 3 59 Financial institutions 8 123 .01 Other, including foreign 332 .03 498 .05 Not allocated 5,314 .42 8,158 .81 --------- ------ -------- ----- Total $26,298 2.11% $31,897 3.15% ========= ====== ======== =====
December 31 ------------------------------------------------ 1991 1990 ----------------------- ------------------------ Allowance As a Allowance As a for Percentage for Percentage Possible of Possible of Allocation of Allowance Loan Total Loan Total for Possible Loan Losses Losses Loans Losses Loans --------------------------------------------------------------------------------- Commercial and industrial $ 4,970 .46% $11,238 .89% Real estate 17,725 1.65 13,985 1.10 Consumer 3,212 .30 5,284 .42 Purchasing or carrying securities 7 201 .02 Financial institutions 197 .02 1,300 .10 Other, including foreign 1,152 .11 364 .03 Not allocated 15,124 1.41 13,232 1.04 ------- ----- ------- ----- Total $42,387 3.95% $45,604 3.60% ======= ===== ======= =====
Allocation of a portion of the allowance does not preclude its availability to absorb losses in other categories. The unallocated portion of the allowance represents an additional amount beyond that specifically reserved for specific risks available to absorb unidentified losses in the current loan portfolio. SECURITIES Total securities including securities available for sale were $1,594,042,000 at year-end 1994. Securities available for sale totaled $542,797,000 at December 31, 1994. These securities consist primarily of U.S. Treasury securities and obligations of U.S. Government agencies. The remaining securities, also consisting primarily of U.S. Treasury and U.S. Government agency obligations, are classified as securities held to maturity and are carried at amortized cost. Debt securities are classified as held to maturity when the Corporation has the positive intent and ability to hold the securities to maturity. Available for sale securities are stated at fair value, with unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. The average yield of the securities portfolio for the year ended December 31, 1994 was 5.70 percent compared with 5.78 percent for 1993. At December 31, 1993, the Corporation adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The standard addresses the accounting for and reporting of investments in debt securities and requires classification and accounting treatment for securities as held to maturity, trading securities and securities available for sale. The adoption of this standard did not impact earnings but had the effect of increasing shareholders' equity by $9.1 million at December 31, 1993.
December 31 ----------------------------------------------------------------- 1994 1993 1992 --------------------- --------------------- --------------------- Period-end Percentage Period-end Percentage Period-end Percentage Securities Balance of Total Balance of Total Balance of Total ------------------------------------------------------------------------------------ U.S. Treasury $ 241,625 15.2% $ 285,068 17.7% $ 666,133 47.1% U.S. Government agencies and corporations 1,325,070 83.1 1,280,915 79.5 665,222 47.0 States and political subdivisions 5,683 .3 7,216 .4 13,670 1.0 Other 21,664 1.4 38,672 2.4 68,940 4.9 ---------- ------ ---------- ------ ---------- ------ Total $1,594,042 100.0% $1,611,871 100.0% $1,413,965 100.0% ========== ====== ========== ====== ========== ====== Average yield earned during the year (taxable- equivalent basis) 5.70% 5.78% 7.03%
INTEREST RATE SWAPS During 1994, the Corporation entered into several off-balance sheet interest rate swaps to hedge its interest rate risk by converting fixed rate loans into synthetic variable rate instruments. At December 31, 1994, the Corporation had five interest rate swaps, each as a hedge against a specific fixed rate loan, with an original total notional amount of $39.8 million. These swaps are all amortizing swaps that amortize in conjunction with the loans which have lives ranging from five to ten years. The net amount payable or receivable from interest rate swap agreements is accrued as an adjustment to interest income and was not material in 1994. PAGE 20 DEPOSITS
Total Average Deposits ($ in millions) (Graphic material omitted) Average Average Average Year Demand Time Total Cost of Time Ended Deposits Deposits Deposits Deposits ----- -------- -------- ---------- ------------ 1990 $576,348 $2,291,367 $2,867,715 6.43% 1991 599,439 2,158,481 2,757,920 5.34 1992 665,528 2,045,169 2,710,697 3.36 1993 816,446 2,267,304 3,083,750 2.56 1994 836,711 2,284,148 3,120,859 2.71
1994 1993 1992 ------------------ ------------------ ------------------- Average Percent Average Percent Average Percent Demand Deposits Balance Change Balance Change Balance Change ----------------------------------------------------------------------------- Commercial and individual $673,764 + 6.7% $631,363 +27.5% $495,199 + 8.3% Correspondent banks 124,416 -13.0 143,008 + 4.8 136,487 +22.4 Public funds 38,531 - 8.4 42,075 +24.3 33,842 +10.5 -------- -------- -------- Total $836,711 + 2.5 $816,446 +22.7 $665,528 +11.0 ======== ======== ========
Correspondent bank deposits have decreased 13 percent from 1993. In the rising interest rate environment, account analysis earnings credit rates have increased resulting in lower balances required to pay for services provided to correspondent banks.
1994 1993 1992 ------------------ ------------------ ------------------- Average Percent Average Percent Average Percent Time Deposits Balance Change Balance Change Balance Change ----------------------------------------------------------------------------- Savings and Interest- on-Checking $ 796,178 + 6.1% $ 750,386 +38.7% $ 541,191 +14.3% Money market deposit accounts 547,237 + 2.3 534,814 +11.9 477,877 +10.8 Time accounts of $100,000 or more 364,997 - 2.8 375,322 -19.0 463,509 -21.7 Time accounts under $100,000 489,604 - 7.9 531,803 +10.1 482,971 -12.8 Public funds 86,132 +14.9 74,979 - 5.8 79,621 -26.4 ---------- ---------- ---------- Total $2,284,148 + .7 $2,267,304 +10.9 $2,045,169 - 5.2 ========== ========== ==========
Mexico is a part of the natural trade territory of the banking offices of Cullen/Frost; thus dollar-denominated foreign deposits from Mexican sources have traditionally been a significant source of funding. The Corporation does not anticipate any negative impact on foreign deposits due to the recent devaluation of the peso which has led to turbulent economic conditions in Mexico. It is expected that higher interest rates and increasing inflation in Mexico will result in reduced real wage earnings for the Mexican people and slow its economic growth. However, those businesses engaged in exports should benefit. The Corporation's Mexican deposit levels are stable and have historically increased during economic crises in Mexico.
Foreign Deposits 1994 1993 1992 -------------------------------------------------------------------------- Average balance $521,413 $505,746 $529,018 Percentage of total average deposits 16.7% 16.4% 19.5%
PAGE 21 SHORT-TERM BORROWINGS The Corporation's primary source of short-term borrowings is Federal funds purchased from correspondent banks and securities sold under repurchase agreements in the natural trade territories of the Cullen/Frost subsidiary banks, as well as from upstream banks.
1994 1993 1992 ---------------- ---------------- ---------------- Average Average Average Average Average Average Federal Funds Balance Rate Balance Rate Balance Rate ----------------------------------------------------------------------------- Federal funds sold and securities purchased under resale agreements $108,762 3.81% $255,613 3.02% $195,398 3.43% Federal funds purchased and securities sold under repurchase agreements 191,611 3.74 131,096 2.52 102,550 3.06 -------- -------- -------- Net funds position $(82,849) $124,517 $ 92,848 ======== ======== ========
Other funding sources include a $7,500,000 short-term line of credit to the parent Corporation used for short-term liquidity needs. There were no borrowings outstanding from this source at December 31, 1994 and 1993. CAPITAL At December 31, 1994, shareholders' equity reached the highest level in the Corporation's history, $295,437,000, an increase of 8.0 percent from $273,533,000 at December 31, 1993. The increase in 1994 was due primarily to earnings growth, partially offset by an $11.7 million change in unrealized losses, net of taxes, on securities available for sale, and $7.4 million of dividends paid. The Corporation had an unrealized loss on securities available for sale, net of deferred taxes, of $2.6 million as of December 31, 1994 compared to a $9.1 million unrealized gain as of December 31, 1993, reflecting a change of $11.7 million during 1994. This unrealized loss is primarily due to an increase in market interest rates. Currently, under regulatory requirements, the unrealized gain or loss on securities available for sale is not included in the calculation of risk-based capital and leverage ratios. The Corporation paid a quarterly dividend of $.15 per common share during the first three quarters of 1994 increasing to $.22 per common share during the fourth quarter. During the first quarter of 1993, the Corporation paid a 10% stock dividend and in the fourth quarter of 1993 paid a cash dividend of $.15 per common share. Cash dividends had been suspended since the first quarter of 1987. The Federal Reserve Board ("the Board") utilizes capital guidelines designed to measure Tier 1 and Total Capital and take into consideration the risk inherent in both on-balance sheet and off-balance sheet items.
December 31, 1994 December 31, 1993 ----------------- ------------------ Risk-Based Capital Amount Ratio Amount Ratio ------------------------------------------------------------------------------------- Tier 1 Capital $ 256,552 14.44% $ 221,436 14.23% Tier 1 Capital Minimum requirement 71,075 4.00 62,232 4.00 Total Capital $ 278,806 15.69% $ 240,968 15.49% Total Capital Minimum requirement 142,149 8.00 124,463 8.00 Risk-adjusted assets, net of goodwill $1,776,863 $1,555,789 Leverage ratio 6.99% 6.24%
The Federal Reserve Board guidelines also require a leverage capital ratio which measures Tier 1 capital against quarterly average total assets, net of goodwill. A leverage ratio of 3.0 percent is the minimum requirement for only the most highly rated banking organizations and all other institutions are required to maintain a leverage ratio of 3 to 5 percent. The leverage ratio for the Corporation was 6.99 percent and 6.24 percent at December 31, 1994 and December 31, 1993, respectively. In December of 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital tiers. Effective December 16, 1992, federal banking agencies adopted final rules relating to these tiers. At December 31, 1994 the Corporation was "well capitalized" as defined by FDICIA, the highest rating. A financial institution is deemed to be well capitalized if the institution has a total risk-based capital ratio of 10.0 percent or greater, a Tier 1 risk-based capital ratio of 6.0 percent or greater, and a leverage ratio of 5.0 percent or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. PAGE 22 PARENT CORPORATION Historically, a large portion of the parent Corporation's income which provides funds for the payment of dividends to shareholders and for other corporate purposes has been derived from Cullen/Frost's investments in subsidiaries. Dividends received from the subsidiaries are based upon each bank's earnings and capital position. See Note K-Dividends on page 34. Management fees are not assessed. NON-BANKING SUBSIDIARIES Cullen/Frost has three principal non-banking subsidiaries. Main Plaza Corporation holds real estate for future expansion of Cullen/Frost's bank subsidiaries and occasionally makes loans to qualified borrowers. Such loans are typically funded with borrowings against Cullen/Frost's current cash or borrowing against credit lines. Daltex General Agency, Inc., a managing general insurance agency, provides vendor's single interest insurance for Cullen/Frost subsidiary banks. The New Galveston Company is a wholly-owned second tier bank holding company subsidiary which holds all shares of each banking and non-banking subsidiary. MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of Cullen/Frost Bankers, Inc. is responsible for the preparation of the financial statements, related financial data and other information in this annual report. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgment where appropriate. Financial information appearing throughout this annual report is consistent with the financial statements. In meeting its responsibility both for the integrity and fairness of these financial statements and information, management depends on the accounting systems and related internal accounting controls that are designed to provide reasonable assurances that transactions are authorized and recorded in accordance with established procedures and that assets are safeguarded and that proper and reliable records are maintained. The concept of reasonable assurance is based on the recognition that the cost of a system of internal controls should not exceed the related benefits. As an integral part of the system of internal controls, Cullen/Frost maintains an internal audit staff which monitors compliance with and evaluates the effectiveness of the system of internal controls and coordinates audit coverage with the independent auditors. The Audit Committee of Cullen/Frost's Board of Directors, which is composed entirely of directors independent of management, meets regularly with management, regulatory examiners, internal auditors, the asset review staff and independent auditors to discuss financial reporting matters, internal controls, regulatory reports, internal auditing and the nature, scope and results of the audit efforts. Internal Audit and Asset Review report directly to the Audit Committee. The banking regulators, internal auditors and independent auditors have direct access to the Audit Committee. The consolidated financial statements have been audited by Ernst & Young LLP, independent auditors, who render an independent opinion on management's financial statements. Their appointment was recommended by the Audit Committee and approved by the Board of Directors and by the shareholders. The audit by the independent auditors provides an additional assessment of the degree to which Cullen/Frost's management meets its responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures, which include their consideration of the internal control structure and performance of selected tests of transactions and records, as they deem appropriate. These auditing procedures are designed to provide an additional reasonable level of assurance that the financial statements are fairly presented in all material respects. /s/ T.C. FROST /s/ ROBERT S. McCLANE T.C. Frost Robert S. McClane Chairman President and Chief Administrative Officer /s/ RICHARD W. EVANS, JR. /s/ PHILLIP D. GREEN Richard W. Evans, Jr. Phillip D. Green Chief Banking Officer Executive Vice President and Treasurer and Chairman, Frost National Bank PAGE 23
Consolidated Statements of Operations Cullen/Frost Bankers, Inc. and Subsidiaries (dollars in thousands, except per share amounts) Year Ended December 31 ----------------------------- 1994 1993 1992 -------- -------- -------- Interest income: Loans, including fees $106,252 $ 90,756 $ 84,074 Securities: Taxable 94,760 90,447 98,389 Tax-exempt 349 698 799 -------- -------- -------- Total Securities 95,109 91,145 99,188 Time deposits 2 4 8 Federal funds sold and securities purchased under resale agreements 4,146 7,714 6,711 -------- -------- -------- Total Interest Income 205,509 189,619 189,981 Interest expense: Deposits 61,996 58,079 68,807 Federal funds purchased and securities sold under repurchase agreements 7,166 3,304 3,139 Long-term notes payable and other borrowings --- 410 1,378 -------- -------- -------- Total Interest Expense 69,162 61,793 73,324 -------- -------- -------- Net Interest Income 136,347 127,826 116,657 Provision (credit) for possible loan losses --- (6,085) (850) -------- -------- -------- Net Interest Income After Provision (Credit) For Possible Loan Losses 136,347 133,911 117,507 Non-interest income: Trust department 29,529 26,278 21,861 Service charges on deposit accounts 25,890 25,386 21,958 Other service charges, collection and exchange charges, commissions and fees 11,658 9,889 7,888 Net gain (loss) on securities transactions (4,038) 1,433 (232) Other 13,776 13,243 10,338 -------- -------- -------- Total Non-Interest Income 76,815 76,229 61,813 Non-interest expense: Salaries and wages 52,986 53,654 46,184 Pension and other employee benefits 9,910 12,052 9,746 Net occupancy of banking premises 15,777 20,749 16,963 Furniture and equipment 10,937 10,155 8,295 Provision for real estate losses --- 1,445 19,311 Restructuring costs 830 10,285 Other 65,122 63,738 52,999 -------- -------- -------- Total Non-Interest Expense 155,562 172,078 153,498 -------- -------- -------- Income Before Income Taxes (Credits), Extraordinary Credit and Cumulative Effect of Accounting Change 57,600 38,062 25,822 Income taxes (Credits) 20,177 (735) 8,197 -------- -------- -------- Income before extraordinary credit and cumulative effect of accounting change 37,423 38,797 17,625 Extraordinary Credit-income tax benefit 6,497 Cumulative effect of change in accounting for income taxes --- 8,439 -------- -------- -------- Net Income $ 37,423 $ 47,236 $ 24,122 ======== ======== ======== Per share Income before extraordinary credit and cumulative effect of accounting change- Primary $ 3.33 $ 3.48 $ 1.66 Fully diluted 3.33 3.48 1.66 Net income- Primary 3.33 4.24 2.26 Fully diluted 3.33 4.24 2.25 See notes to consolidated financial statements.
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Consolidated Balance Sheets Cullen/Frost Bankers, Inc. and Subsidiaries (dollars in thousands, except per share amounts) December 31 ----------------------- 1994 1993 ---------- ---------- Assets Cash and due from banks $ 365,792 $ 334,564 Time deposits 12 147 Securities held to maturity (market value: 1994-$981,801;1993-$1,013,712) 1,051,245 997,395 Securities available for sale 542,797 614,476 Federal funds sold and securities purchased under resale agreements 167,550 250,250 Loans, net of unearned discount of $3,487 in 1994 and $8,456 in 1993 1,477,969 1,247,809 Less: Allowance for possible loan losses (25,741) (26,298) ---------- ---------- Net loans 1,452,228 1,221,511 Banking premises and equipment 88,667 86,676 Accrued interest and other assets 125,429 134,028 ---------- ---------- Total Assets $3,793,720 $3,639,047 ========== ========== Liabilities Demand deposits: Commercial and individual $ 710,138 $ 705,786 Correspondent banks 77,425 129,106 Public funds 44,740 46,200 ---------- ---------- Total demand deposits 832,303 881,092 Time deposits: Savings and Interest-on-Checking 763,300 800,161 Money market deposit accounts 559,153 527,230 Time accounts 842,520 860,642 Public funds 90,686 80,303 ---------- ---------- Total time deposits 2,255,659 2,268,336 ---------- ---------- Total deposits 3,087,962 3,149,428 Federal funds purchased and securities sold under repurchase agreements 370,235 166,519 Accrued interest and other liabilities 40,086 49,567 ---------- --------- Total Liabilities 3,498,283 3,365,514 Shareholders' Equity Common stock, par value $5 per share 55,615 55,046 Shares authorized: 1994-30,000,000;1993-30,000,000 Shares outstanding: 1994-11,123,062;1993-11,009,198 Surplus 116,362 113,385 Retained earnings 126,038 95,978 Unrealized gain (loss) on securities available for sale (2,578) 9,124 ---------- ---------- Total Shareholders' Equity 295,437 273,533 ---------- ---------- Total Liabilities and Shareholders' Equity $3,793,720 $3,639,047 ========== ========== See notes to consolidated financial statements.
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Consolidated Statements of Cash Flows Cullen/Frost Bankers, Inc. and Subsidiaries (dollars in thousands) Year Ended December 31 ------------------------------ 1994 1993 1992 --------- --------- --------- Operating Activities Net Income $ 37,423 $ 47,236 $ 24,122 Adjustments to reconcile net income to net cash provided by operating activities: Provision (credit) for possible loan losses (6,085) (850) Provision for real estate losses 1,445 19,311 Provision (credit) for deferred taxes 2,106 (6,364) Extraordinary credit from utilization of net operating loss carryforward --- (6,497) Accretion of discounts on loans (4,563) (8,615) (9,329) Accretion of securities' discounts (11,624) (2,602) (2,853) Amortization of securities' premiums 3,385 5,678 5,819 Net realized loss(gain) on securities transactions 4,038 (1,433) 232 Net gain on sale of assets (2,074) (3,443) (1,846) Depreciation and amortization 18,448 16,766 8,797 (Increase) decrease in accrued interest receivable (2,603) 1,624 6,325 Increase (decrease)in accrued interest payable 1,629 160 (3,434) Restructuring accrual (1,695) 7,715 Cumulative effect of change in accounting principle (8,439) Net change in other assets and liabilities 2,669 (634) 15,110 --------- --------- --------- Net cash provided by operating activities 47,139 43,009 54,907 Investing Activities Proceeds from sales of securities held to maturity 101,309 62,846 Proceeds from maturities of securities held to maturity 145,609 483,153 778,924 Purchases of securities held to maturity (209,773) (900,825) (819,507) Proceeds from sales of securities available for sale 170,894 101,181 Proceeds from maturities of securities available for sale 343,330 778,066 Purchases of securities available for sale (451,883) (688,504) Net (increase) decrease in loan portfolio (207,741) (64,638) 60,155 Proceeds from sales of equipment 4,458 4,167 1,500 Purchases of premises and equipment (16,403) (13,326) (11,679) Proceeds from sales of repossessed properties 2,912 4,775 6,594 Net cash and cash equivalents received from acquisition (22,536) 183,131 --------- --------- --------- Net cash provided (used) by investing activities (241,133) (11,511) 78,833 Financing Activities Net increase (decrease) in demand deposits, IOC accounts, and savings accounts (34,165) 108,968 198,183 Net decrease in certificates of deposit (25,210) (175,267) (194,725) Net increase in Federal funds purchased and securities sold under repurchase agreement 206,116 43,605 34,165 Principal payments on long-term debt (3,400) (1,268) Proceeds from employee stock purchase plan and options 3,061 2,154 3,875 Dividends paid (7,415) (1,650) --------- --------- --------- Net cash provided (used) by financing activities 142,387 (25,590) 40,230 --------- --------- --------- Increase (decrease) in cash and cash equivalents (51,607) 5,908 173,970 Cash and cash equivalents at beginning of year 584,961 579,053 405,083 --------- --------- --------- Cash and cash equivalents at end of year $ 533,354 $ 584,961 $ 579,053 ========= ========= ========= See notes to consolidated financial statements.
PAGE 26
Consolidated Statement of Changes in Shareholders' Equity Cullen/Frost Bankers, Inc. and Subsidiaries (dollars in thousands) Unrealized Gain (Loss) on Securities Common Retained Available Stock Surplus Earnings for Sale Total ------- -------- --------- -------- -------- Balance at January 1, 1992 $45,654 $ 66,688 $63,880 $176,222 Net Income for 1992 24,122 24,122 Proceeds from employee stock purchase plan and options 1,674 2,201 (69) 3,806 Tax benefit related to exercise of stock options 1,680 1,680 Loan payments from employee stock ownership plan 200 200 Restricted stock plan deferred compensation expense 114 114 Effect of ten percent stock dividend 4,733 31,473 (36,206) ------- -------- ------- ------- -------- Balance at December 31, 1992 52,061 102,042 52,041 206,144 Net Income for 1993 47,236 47,236 Proceeds from employee stock purchase plan and options 387 1,767 2,154 Tax benefit related to exercise of stock options 207 207 Issuance of restricted stock 25 152 177 Loan payments from employee stock ownership plan 200 200 Restricted stock plan deferred compensation, net (59) (59) Conversion of subordinated debentures 2,339 7,661 10,000 Unrealized gain on securities available for sale, net of tax $ 9,124 9,124 Cash dividend (1,650) (1,650) Effect of ten percent stock dividend 234 1,556 (1,790) ------- -------- ------- ------ -------- Balance at December 31, 1993 55,046 113,385 95,978 9,124 273,533 Net Income for 1994 37,423 37,423 Proceeds from employee stock purchase plan and options 537 2,553 (29) 3,061 Tax benefit related to exercise of stock options 256 256 Issuance of restricted stock 32 168 200 Loan payments from employee stock ownership plan 170 170 Restricted stock plan deferred compensation, net (89) (89) Unrealized gain (loss) on securities available for sale, net of tax (11,702) (11,702) Cash dividend (7,415) (7,415) ------- -------- ------- ------ --------- Balance at December 31, 1994 $55,615 $116,362 $126,038 $(2,578) $295,437 ======= ======== ======= ======== ========= See notes to consolidated financial statements.
PAGE 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cullen/Frost Bankers, Inc. and Subsidiaries NOTE A - SUMMARY OF ACCOUNTING POLICIES The accounting and reporting policies followed by Cullen/Frost Bankers, Inc. and Subsidiaries ("Cullen/Frost" or the "Corporation") are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. The more significant accounting and reporting policies are summarized below. Basis of Presentation The consolidated financial statements include the accounts of Cullen/Frost and its wholly-owned subsidiaries. Condensed parent company financial state- ments reflect investments in subsidiaries using the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to make prior years comparable. Securities Effective December 31, 1993, the Corporation adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"). Under this pronouncement, management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date. If the securities are purchased with the intent and the Corporation has the ability to hold the securities until maturity, they are classified as securities held to maturity and carried at amortized cost. Securities to be held for indefinite periods of time are classified as available for sale and stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. The adjusted carrying value of the specific security sold is used to compute gain or loss on the sale of securities. Declines in value other than temporary declines are adjusted against the security with a charge to operations. Prior to the adoption of SFAS 115, securities available for sale were carried at the lower of cost or market value. The adoption of this standard did not impact earnings but had the effect of increasing shareholders' equity by $9.1 million at December 31, 1993. Loans Interest on loans is accrued and accreted to operations based on the principal amount outstanding. Interest on certain consumer loans is recognized over their respective terms using a method which approximates the interest method. Generally, loans are placed on a non-accrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be in question. Once interest accruals are discontinued, uncollected interest is charged to current year operations. Loans which are determined to be uncollectible are charged to the allowance for possible loan losses. The collectability of loans is continually reviewed by management. Allowance for Possible Loan Losses The allowance for possible loan losses is established through a provision for possible loan losses charged to current operations. The amount maintained in the allowance reflects management's continuing assessment of the potential losses inherent in the portfolio based on evaluations of industry concentra- tions, specific credit risks, loan loss experience, current loan portfolio quality, and anticipated economic, political and regulatory conditions. The Corporation adopted Statement of Financial Accounting Standards No. 114 ("SFAS 114"), "Accounting by Creditors for Impairment of a Loan," as amended by SFAS 118 effective January 1, 1995. As a result of applying the new standard, the 1995 allowance for possible loan losses related to impaired loans that are identified in accordance with SFAS 114 will be based on discounted cash flows using the loan's effective interest rate or the fair value of the collateral for certain collateral dependent loans. The adoption of the standard did not have a material impact on the Corporation's financial position or results of operations. Foreclosed Assets Foreclosed assets consist of property which has been formally repossessed and that which is considered in-substance foreclosed even though formal repossession has not occurred. An in-substance foreclosure will occur when all of the following conditions are met: (1) the debtor has little or no equity in the collateral, (2) repayment proceeds can only be expected from the operation or sale of the collateral, and (3) the debtor has either formally or effectively abandoned control of the collateral or it is doubtful the debtor will be able to build equity in the collateral or otherwise repay the loan. In-substance foreclosures are accounted for in the same manner as property which has been formally repossessed. Collateral obtained through foreclosure or loans considered to be in-substance foreclosures are recorded at the lower of fair value less estimated selling costs or the underlying loan amounts. Write-downs are provided for subsequent declines in value. The Corporation adopted SFAS 114 effective January 1, 1995. In accordance with SFAS 114, a loan is classified as in-substance foreclosure when the Corporation has taken possession of the collateral regardless of whether formal foreclosure proceedings take place. In accordance with SFAS 114, loans previously classified as in-substance foreclosure but for which the Corporation had not taken possession of the collateral will be reclassified to loans effective January 1, 1995. This reclassification will not impact the Company's financial condition or results of operations. PAGE 28 Banking Premises and Equipment Banking premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are generally computed on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are generally amortized over the lesser of the term of the respective leases or the estimated useful lives of the improvements. Iintangible Assets The excess of cost over fair value of net assets of businesses acquired (goodwill) is amortized on a straight-line and accelerated basis (as appropriate) over periods not exceeding fifteen years. Core deposit and other intangibles are amortized on an accelerated basis over the estimated remaining lives. Federal Income Taxes Cullen/Frost files a consolidated federal income tax return which includes the taxable income of all of its principal subsidiaries. Applicable federal income taxes of the individual subsidiaries are generally determined on a separate return basis. Effective January 1, 1993, deferred federal income taxes are recognized under Statement of Financial Accounting Standards No. 109 ("SFAS 109") which requires use of the liability method. The liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting bases and the tax bases of assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. For 1992 and prior years, the Corporation accounted for income taxes under APB 11. Stock Dividends All share and per share amounts for 1992 have been retroactively adjusted for a ten percent stock dividend paid March 2, 1993. NOTE B - ACQUISITIONS Texas Commerce Bank-Corpus Christi On April 15, 1994, the Corporation acquired Texas Commerce Bank in Corpus Christi in exchange for Cullen/Frost Bank of Dallas, N.A. ("C/F Dallas"). The banks exchanged were of comparable asset size. C/F Dallas represented 4.6 percent of the Corporation's total assets at March 31, 1994. No gain or loss was recognized on this transaction. The exchange did not have a material effect on the operating results of the Corporation. Creekwood Capital Corporation - Houston Frost National Bank, lead bank of Cullen/Frost, acquired all of the capital stock of Creekwood Capital Corporation ("Creekwood") on December 2, 1994. Creekwood provides financing to small-and medium-sized companies in the form of senior, asset-based loans. This transaction added approximately $23 million in loans. The transaction was accounted for as a purchase with the total cash consideration and direct acquisition costs being funded through internal sources. Goodwill recorded as a result of the transaction approximated $2.2 million and will be amortized over ten years using the straight-line method. Cullen/Frost's results of operations would not have been materially impacted if the Creekwood acquisition had occurred at the beginning of 1994 or 1993. Acquisition of New First City - San Antonio and New First City - Austin On February 13, 1993, the Corporation acquired certain assets and assumed certain liabilities of New First City, Texas - San Antonio, N.A. and New First City, Texas - Austin, N.A. (collectively referred to as First City). These two First City banks were bridge banks established by the Federal Deposit Insurance Corporation (FDIC) following the closing of the banks owned by First City Bancorporation of Texas, Inc. Under the terms of the acquisition agreement, the Corporation agreed to pay the FDIC a $38 million premium over the book value of assets acquired less liabilities assumed. This transaction was funded through internal sources. The acquisition has been accounted for as a purchase, whereby the purchase price has been allocated to the assets acquired and liabilities assumed based on their respective fair values as of the date of acquisition. Goodwill associated with the transaction amounted to approximately $23.2 million and is being amortized on accelerated and straight-line methods over lives ranging from 9-15 years. Other intangibles associated with the acquisition of approximately $20.2 million are being amortized over their estimated lives ranging from five to ten years on an accelerated method. The Corporation acquired loans of $158 million, investment securities and Federal funds sold of $225 million, and deposits of $446 million. These amounts represent the estimated fair values at First City as of the date of acquisition. Under the acquisition agreement, during the first five years after the acquisition by the Corporation, the FDIC is required to reimburse the Corporation quarterly for 80 percent of all net charge-offs and certain related expenses on commercial and certain real estate loans acquired by the Corporation from New First City, Texas - Austin, N.A. This reimbursement increases to 95 percent as to such charge-offs and certain related expenses in excess of $5,344,000. Pro-forma financial information has not been presented, as the Corporation believes that such information would not be meaningful or indicative of the operating results of the combined company. The First City acquisition involved financial assistance from the FDIC. In addition, there have been significant changes to the management structure, assets, liabilities, and operations of First City subsequent to the acquisition. PAGE 29 PENDING ACQUISITIONS Valley Bancshares, Inc. - McAllen On November 17, 1994, the Corporation entered into a definitive agreement to acquire Valley Bancshares, Inc., which owns the $50 million- deposit Valley National Bank in McAllen, Texas. This acquisition is expected to be completed in the first half of 1995 following normal shareholder action and regulatory review and will become branch offices of the Corporation's lead bank, Frost National Bank. This transaction will be accounted for as a purchase with the total cash consideration being funded through internal sources. National Commerce Bank - Houston On December 20, 1994, Cullen/Frost Bankers, Inc. entered into a definitive agreement to acquire National Commerce Bank in Houston, Texas. National Commerce Bank is a $115 million-deposit bank with three locations. This acquisition is expected to be completed in mid-1995 following normal shareholder action and regulatory review and will become branch offices of the Corporation's lead bank, Frost National Bank. This transaction will be accounted for as a purchase with the total cash consideration being funded through internal sources. Comerica Bank branches - San Antonio On December 21, 1994, Frost National Bank entered into a definitive agreement to acquire the two San Antonio branches of Comerica Bank Texas. This acquisition is expected to be completed in mid-1995 following regulatory review. This transaction is expected to add approximately $37 million in deposits. This transaction will be accounted for as a purchase with the total cash consideration being funded through internal sources. NOTE C - CASH AND DUE FROM BANKS Cullen/Frost subsidiary banks are required to maintain reserves with the Federal Reserve Bank which are equal to specified percentages of deposits. The average amounts of reserve balances were $47,302,000 for 1994 and $45,783,000 for 1993. NOTE D - SECURITIES Securities A summary of the amortized cost and estimated fair value of securities is presented below.
December 31, 1994 ------------------------------------------------ Amortized Unrealized Unrealized Estimated (in thousands) Cost Gains Losses Fair Value ---------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury $ 660 $ 660 U.S. Government agencies and corporations 1,038,890 $ 3,353 $ 72,677 969,566 States and political subdivisions 5,683 10 79 5,614 Other 6,012 28 79 5,961 --------- --------- ---------- ----------- Total $1,051,245 $ 3,391 $ 72,835 $ 981,801 ========= ========= ========== =========== Securities Available for Sale: U.S. Treasury $ 241,186 $ 36 $ 257 $ 240,965 U.S. Government agencies and corporations 290,019 2,561 6,400 286,180 Other 15,558 100 6 15,652 --------- --------- ---------- ----------- Total $ 546,763 $ 2,697 $ 6,663 $ 542,797 ========= ========= ========== ===========
December 31, 1993 ------------------------------------------------ Amortized Unrealized Unrealized Estimated (in thousands) Cost Gains Losses Fair Value ---------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury $ 6,080 $ 1 $ 6,081 U.S. Government agencies and corporations 964,483 17,527 $ 1,838 980,172 States and political subdivisions 7,216 412 7,628 Other 19,616 216 1 19,831 ---------- ------- ------- ---------- Total $ 997,395 $18,156 $ 1,839 $1,013,712 ========== ======= ======== ========== Securities Available for Sale: U.S. Treasury $ 277,955 $ 1,081 $ 48 $ 278,988 U.S Government agencies and corporations 303,643 13,190 401 316,432 Other 18,840 216 19,056 -------- ------- ------- -------- Total $ 600,438 $14,487 $ 449 $ 614,476 ======== ======= ======= ========
PAGE 30 The amortized cost and estimated fair value of securities at December 31, 1994 are presented below by contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
December 31, 1994 ------------------------------------------------------------- Securities Held to Maturity Securities Available for Sale ------------------------------------------------------------- Amortized Estimated Amortized Estimated (in thousands) Cost Fair Value Cost Fair Value ------------------------------------------------------------------------------------------ Due in one year or less $ 710 $ 710 $241,186 $240,965 Due after one year through five years 6,386 6,325 Due after five years through ten years 830 825 Due after ten years 4,429 4,375 4,460 4,460 ---------- --------- -------- -------- 12,355 12,235 245,646 245,425 Mortgage-backed securities and collateralized mortgage 1,038,890 969,566 301,117 297,372 obligations --------- --------- -------- -------- Total $1,051,245 $ 981,801 $546,763 $542,797 ========== ========== ======== ========
Proceeds from sales of securities available for sale during 1994 were $170,894,000. During 1994, gross gains of $226,000 and gross losses of $4,264,000 were realized on those sales. Proceeds from sales of debt securities during 1993 were $202,490,000. During 1993, securities were sold in anticipation of adopting Statement of Financial Accounting Standards No. 115. During 1993, gross gains of $1,502,000 and gross losses of $69,000 were realized on those sales. Proceeds from sales of debt securities during 1992 were $62,846,000. During 1992, gross gains of $639,000 and gross losses of $871,000 were realized. The carrying value of securities pledged to secure public funds, trust deposits, securities sold under repurchase agreements and for other purposes as required or permitted by law amounted to $833,034,000 at December 31, 1994 and $578,095,000 at December 31, 1993. NOTE E - LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES A summary of loans outstanding follows:
December 31 ------------------------- (in thousands) 1994 1993 ------------------------------------------------------------------------------ Real Estate: Construction $ 44,502 $ 32,297 Land 31,481 22,990 Permanent mortgages: Commercial 177,223 144,122 Residential 277,725 276,148 Other 178,263 150,499 Commercial and industrial 375,085 310,830 Consumer 331,039 268,331 Financial institutions 5,578 284 Foreign 45,290 31,763 Purchasing or carrying securities 1,884 1,204 Other 13,386 17,797 Unearned discount (3,487) (8,456) ---------- ---------- Total loans $1,477,969 $1,247,809 ========== ==========
In the normal course of business, in order to meet the financial needs of its customers, the Corporation is a party to financial instruments with off-balance sheet risk. These include commitments to extend credit and standby letters of credit which commit the Corporation to make payments on behalf of customers when certain specified future events occur. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Corporation's normal credit policies. Collateral is obtained based on management's credit assessment of the customer. No material losses are anticipated as a result of these commitments. Commitments to extend credit and standby letters of credit amounted to $504,183,000 and $43,035,000, respectively, at December 31, 1994. Commitments to extend credit and standby letters of credit amounted to $381,386,000 and $31,322,000, respectively, at December 31, 1993. Commercial and industrial loan commitments represent approximately 72 percent and 74 percent of the total loan commitments outstanding at December 31, 1994 and 1993, respectively. PAGE 31 The majority of the Corporation's real estate loans are secured by real estate in San Antonio and Austin. Mortgage loans of approximately $4.9 million and $9.0 million were held for sale by the Corporation and are included in residential permanent mortgages at December 31, 1994 and 1993, respectively. These loans are valued at the lower of cost or market on an aggregate basis. In the normal course of business, Cullen/Frost subsidiary banks make loans to directors and officers of both Cullen/Frost and its subsidiaries. These loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. Loans made to directors and executive officers of Cullen/Frost and its significant subsidiaries, including loans made to their associates, amounted to $33,802,000 and $44,985,000 at December 31, 1994 and 1993, respectively. During 1994, additions to these loans amounted to $54,338,000, repayments totaled $54,429,000 and other changes totaled $11,092,000. These other changes consist primarily of changes in related-party status. Standby letters of credit extended to directors and executive officers of Cullen/Frost and its significant subsidiaries and their associates amounted to $1,363,000 and $1,611,000 at December 31, 1994 and 1993, respectively. A summary of the changes in the allowance for possible loan losses follows:
Year Ended December 31 ---------------------------------- (in thousands) 1994 1993 1992 --------------------------------------------------------------------------------- Balance at the beginning of the year $ 26,298 $ 31,897 $ 42,387 Provision (credit) for possible loan losses --- (6,085) (850) Changes related to disposition of bank subsidiary (2,684) Net charge-offs: Losses charged to the allowance (4,022) (8,200) (17,487) Recoveries 6,149 8,686 7,847 -------- -------- -------- Net (charge-offs) recoveries 2,127 486 (9,640) -------- -------- -------- Balance at the end of the year $ 25,741 $ 26,298 $ 31,897 ======== ======== ========
The Corporation adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures" ("SFAS 118"), effective January 1, 1995. Under the new standards, subsequent to January 1, 1995, the allowance for possible loan losses related to impaired loans that are identified in accordance with SFAS 114 is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. The total allowance for possible loan losses will include activity related to allowances calculated in accordance with SFAS 114 and activity related to other loan loss allowances determined in accordance with Statement of Financial Accounting Standards No. 5. The adoption of this standard did not have a material impact on the Corporation's financial position or the results of operations. NOTE F - NON-PERFORMING ASSETS A summary of non-performing assets follows:
December 31, ------------------- (in thousands) 1994 1993 --------------------------------------------------------------------------------- Non-accrual and restructured loans $11,303 $17,727 Foreclosed assets 8,635 13,383 ------- ------- $19,938 $31,110 ======= =======
Cullen/Frost recognized interest income on non-accrual and restructured loans of approximately $7,000, $57,000 and $117,000 in 1994, 1993 and 1992, respectively. Had these reduced earning and non-earning loans performed according to their original contract terms, Cullen/Frost would have recognized interest income of approximately $1,082,000 in 1994, $1,394,000 in 1993 and $2,818,000 in 1992. Net income (expense) related to foreclosed assets approximated $1.1 million, $1.2 million and ($19.3) million for 1994, 1993 and 1992, respectively. These expenses include the provision for real estate losses, operating expenses such as property taxes, insurance, maintenance costs and allocations for salaries and benefits, net occupancy, and furniture and fixtures. PAGE 32 NOTE G - BANKING PREMISES AND EQUIPMENT A summary of banking premises and equipment follows:
December 31 ------------------------------------------------------------- 1994 1993 ----------------------------- ----------------------------- Accumulated Accumulated Depreciation Net Depreciation Net and Carrying and Carrying (in thousands) Cost Amortization Value Cost Amortization Value -------------------------------------------------------------------------------------- Land $ 34,319 --- $34,319 $ 34,918 $34,918 Buildings 38,409 $17,680 20,729 38,663 $17,495 21,168 Furniture and equipment 67,050 50,398 16,652 64,553 47,983 16,570 Leasehold improvements 26,150 12,600 13,550 24,211 10,864 13,347 Construction in progress 3,417 --- 3,417 673 673 -------- ------- ------- -------- ------- ------- Total banking premises and equipment $169,345 $80,678 $88,667 $163,018 $76,342 $86,676 ======== ======= ======= ======== ======= =======
NOTE H - DEPOSITS A summary of deposits outstanding by category follows:
December 31 (in thousands) 1994 1993 ------------------------------------------------------------------------- Demand deposits $ 832,303 $ 881,092 Savings and Interest-on-Checking 763,300 800,161 Money market deposit accounts 559,153 527,230 Time accounts of $100,000 or more 370,739 349,103 Time accounts under $100,000 471,781 511,539 Other 90,686 80,303 ----------- ---------- Total deposits $3,087,962 $3,149,428 ========== ========== Foreign deposits totaled $531,343,000 and $492,936,000 at December 31, 1994 and 1993, respectively.
NOTE I- BORROWED FUNDS Cullen/Frost has a $7,500,000 revolving credit facility with another financial institution. The line of credit bears interest at prime. There were no borrowings outstanding on this line at December 31, 1994 and 1993. During January 1993, Cullen/Frost called its $10,000,000 convertible 9.75 percent subordinated debentures which were scheduled to mature in 1996. On February 1, 1993, the holders chose to convert such debentures into Cullen/Frost common stock. The debentures were converted into common stock based on the original contractual terms at $21.37 per share and resulted in the issuance of 467,836 additional shares of common stock. During the fourth quarter of 1993, Frost National Bank ("Frost Bank") made its required minimum annual payment of $600,000 and exercised its option to prepay the remaining balance of its 8.75 percent subordinated notes of $2,800,000. NOTE J-COMMON STOCK AND EARNINGS PER COMMON SHARE The weighted average numbers of shares outstanding used to compute primary and fully diluted earnings per share were 11,222,911 and 11,150,788 for the years ended December 31, 1994 and 1993, respectively. The weighted average numbers of shares outstanding used to compute primary and fully diluted earnings per common share were 10,974,329 and 11,015,590, respectively, for the year ended December 31, 1992. Earnings per share calculations for the years ended December 31, 1994 and 1993 and 1992 include the effect of common stock equivalents applicable to the convertible subordinated debentures and stock option contracts, where applicable. The number of shares outstanding and related earnings per share amounts for 1992 have been restated to retroactively give effect to a ten percent stock dividend declared and paid by the Corporation during the first quarter of 1993. During the first quarter of 1993, the Corporation's $10,000,000 convertible subordinated debentures were converted into Cullen/Frost common stock resulting in the issuance of 467,836 additional shares of common stock. For purposes of calculating 1992 earnings per share, the convertible debentures were treated as common stock equivalents and accordingly, the conversion had no effect on 1992 earnings per share calculations. PAGE 33 NOTE K- DIVIDENDS Cullen/Frost is primarily dependent upon dividends from its subsidiary banks to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. The amount of dividends that subsidiary banks may declare is subject to regulatory regulations. The subsidiary banks had approximately $45,095,000 available for the payment of dividends to Cullen/Frost at December 31, 1994. NOTE L- LEASES AND RENTAL AGREEMENTS Rental expense for all leases amounted to $8,822,000, $11,699,000 and $8,850,000 for the years ended December 31, 1994, 1993 and 1992, respectively. The Corporation's lead bank, Frost National Bank, leases an office building and parking garage from separate partnerships in which a member of a Bank director's immediate family is a principal investor. The Bank's director has no direct financial interest in the transaction. The lease expense for the building and parking garage was $4,368,000, $4,688,000 and $4,652,000 for 1994, 1993 and 1992, respectively. The leases for the building and garage expire in 2000 and 1999, respectively. A summary of the total future minimum rental commitments due under non- cancelable equipment leases and long-term agreements on banking premises at December 31, 1994 follows:
Total (in thousands) Commitments ------------------------------------------------------------------------------ 1995 $ 9,650 1996 9,895 1997 7,843 1998 7,598 1999 7,223 Subsequent to 1999 22,698 ------- Total future minimum rental commitments $64,907 =======
It is expected that certain leases will be renewed, or equipment replaced with new leased equipment, as these leases expire. NOTE M- EMPLOYEE BENEFIT PLANS Retirement Plans Cullen/Frost has a non-contributory defined benefit plan which covers substantially all employees who have completed at least one year of service and have attained the age of 21. Defined benefits are provided based on an employee's final average compensation, age at retirement and years of service. Cullen/Frost's funding policy is to contribute quarterly an amount necessary to satisfy the Employee Retirement Income Security Act (ERISA) funding standards. An eligible employee's right to receive benefits under the plan becomes fully vested upon the earlier of the date on which such employee has completed five years of service or the date on which such employee attains 65 years of age. Retirement benefits under the plan are paid to vested employees upon their (i) normal retirement at age 65 or later or (ii) early retirement at or after age 55, but before age 65. In addition, Cullen/Frost has a Restoration of Retirement Income Plan (providing benefits in excess of the limits under Section 415 of the Internal Revenue Code of 1986, as amended) for eligible employees which is designed to comply with the requirements of ERISA and the entire cost of which is provided by Cullen/Frost contributions. Effective January 1, 1993, the Corporation amended its retirement plans including changing the formula for determining monthly pension benefits. Both plans, as amended, provide for the payment of monthly retirement income pursuant to a formula based on an eligible employee's highest three consecutive years of final average compensation during the last ten consecutive years of employment. PAGE 34 The funded status of the plans and the amounts recognized in Cullen/Frost's consolidated balance sheets at December 31, 1994 and 1993 are presented below:
(in thousands) 1994 1993 --------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $ 21,290 in 1994 and $20,295 in 1993 $21,991 $20,755 ======= ======= Projected benefit obligation for service rendered to date $31,659 $29,593 Plan assets at fair value (primarily listed stocks and U.S. and corporate bonds) 18,384 16,195 ------- ------- Projected benefit obligation in excess of plan assets 13,275 13,398 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (6,729) (5,943) Unrecognized prior service cost (4,519) (4,965) Unrecognized net transitional asset 890 990 ------- ------- Accrued pension cost included in other liabilities $ 2,917 $ 3,480 ======= =======
Net pension cost included the following components:
(in thousands) 1994 1993 1992 -------------------------------------------------------------------------------- Service cost for benefits earned during the year $ 1,444 $1,172 $2,073 Actual return on plan assets, net of expenses 388 (567) (260) Interest cost on projected benefit obligation 2,306 2,135 1,431 Net amortization and deferral (1,326) (345) (706) ------- ------ ------- Net pension cost $ 2,812 $2,395 $2,538 ======= ====== =======
The weighted-average discount rate used for calculating the pension obligation at December 31, 1993 and for calculating the net periodic pension cost for 1994 was 7.75 percent; the assumed rate of future compensation increases was 5 percent. The discount rate used for calculating the pension obligation at December 31, 1994 was 8 percent, and the assumed rate of future compensation increases was 5 percent; these assumptions will be used for calculating the 1995 net periodic pension cost. The expected long-term rate of return on plan assets is 9 percent. Effective January 1, 1994, the Corporation adopted a supplemental executive retirement plan ("SERP") for certain key executives. The plan provides for target retirement benefits, as a percentage of pay, beginning at age 55. The target percentage is 45 percent of pay at age 55, increasing to 60 percent at age 60 and later. Benefits under the SERP are reduced, dollar-for-dollar, by benefits received under the Retirement and Restoration Plans, described above, and any social security benefits. Savings Plans The Corporation maintains a 401(k) stock purchase plan (the "401(k) Plan"). The 401(k) Plan permits each participant to make before- or after-tax contribu- tions up to 16% of eligible compensation. Cullen/Frost makes matching contribu- tions to the 401(k) Plan based on the amount of each participants' contributions up to a maximum of six percent of eligible compensation. All eligible employees as of December 31, 1990 became participants in the 401(k) Plan and are 100 percent vested in the Corporation's matching contributions. Eligible employees hired on or after January 1, 1991 must complete 90 days of service to be eligible for enrollment and vest in the Corporation's matching contributions over a five-year period. Shares issued under the 401(k) Plan totaled 62,626 during 1994 and 43,018 during 1993. The Corporation's expenses related to the 401(k) Plan were $1,296,000 and $1,244,000 and $982,000 for 1994, 1993 and 1992, respectively. Effective January 1, 1991, the 1986 Thrift Incentive Stock Purchase Plan was amended and restated into the 1991 Thrift Incentive Stock Purchase Plan ("1991 Stock Purchase Plan"). The 1991 Stock Purchase Plan was adopted to offer those employees whose participation in the 401(k) Plan is limited, an alternative means of receiving comparable benefits. Cullen/Frost shares issued under this plan totaled 17,051 during 1994 and 17,909 during 1993. The Corporation's expenses related to the 1991 Stock Plan were $574,000, $541,000 and $545,000 for 1994, 1993 and 1992, respectively. PAGE 35 Executive Stock Plans The Corporation has four principal executive stock plans, the 1983 Nonqualified Stock Option Plan ("1983 Plan"), the 1988 Nonqualified Stock Option Plan ("1988 Plan"), the Restricted Stock Plan, and the 1992 Stock Plan. The 1992 Stock Plan is an all-inclusive plan, with an aggregate of 880,000 shares of common stock authorized for award. The 1992 Stock Plan has replaced all other previously approved executive stock plans. These plans which were approved by shareholders were established to enable the Corporation to retain and motivate key employees. A committee of non-participating directors has sole authority to select the employees, establish the awards to be issued, and approve the terms and conditions of each award contract. The 1992 Stock Plan allows the Corporation to grant restricted stock, incentive stock options, nonqualified stock options, stock appreciation rights, or any combination thereof to certain key executives of the Corporation. The following is a summary of options transactions in each of the last three years.
1983 Plan 1988 Plan 1992 Stock Plan --------------------- ---------------------- -------------------- Option Price Option Price Option Price Options Per Share Options Per Share Options Per Share ------------------------------------------------------------------------------------------- Balance, Dec. 31, 1991 344,696 $6.03-$20.68 216,044 $6.03-$10.91 Granted 62,948 $25.45 Exercised 270,271 6.03- 20.68 33,151 6.03- 10.91 Canceled 499 6.03 ------- ------------- ------- ------------- ------- ------------- Balance, Dec. 31, 1992 74,425 6.82- 14.09 182,394 6.03- 10.91 62,948 25.45 Granted 116,660 35.50 Exercised 11,404 6.82- 14.09 9,871 6.03- 10.91 Canceled 993 6.82 12,067 6.03- 10.91 4,036 25.45 ------- ------------- ------- ----------- ------- ------------- Balance, Dec. 31, 1993 62,028 6.82- 14.09 160,456 6.03- 10.91 175,572 25.45-$35.50 Granted 160,500 31.38- 36.25 Exercised 11,039 6.82- 14.09 16,884 6.03- 10.91 1,369 25.45 Canceled 8,947 6.03- 10.91 8,172 25.45- 35.50 ------- ------------- ------- ----------- ------- ------------- Balance, Dec. 31, 1994 50,989 $6.82-$14.09 134,625 $6.03-$10.91 326,531 $25.45-$36.25 ======= ============= ======= =========== ======= =============
The Restricted Stock Plan, approved by the Corporation's shareholders in May of 1990, provides for periodic awards of Cullen/Frost Common Stock to key employees, subject to certain transfer restrictions and forfeiture provisions. Under this plan, an aggregate of 100,000 shares of common stock may be awarded. Shares of common stock totaling 21,137 and 17,687 were awarded during 1991 and 1989, respectively. In 1994, restricted stock grants of 6,375 were awarded under the 1992 Stock Plan. In 1993, restricted stock grants were awarded under the 1992 Stock Plan totaling 4,988 shares. Deferred compensation expense related to the restricted stock was $111,000 in 1994, $117,000 in 1993, and $114,000 in 1992. The market value of restricted shares at the date of grant is expensed over the restriction period. The Corporation has change-in-control agreements with 13 of its executives. Under eight of these agreements, as revised, each covered person could receive in the event of a change in control, one-half of his base compensation upon the effectiveness of the change in control, and one and one-half times up to 2.49 times (depending on the executive) of his average annual W-2 compensation during the previous five years if such person is constructively terminated or discharged for reasons other than cause within two years following the change in control. Under the remaining five agreements, each covered person could receive two times up to 2.99 times (depending on the executive) of his average W-2 compensation during the previous five years if such person is constructively terminated or discharged for reasons other than cause within two years following the change in control. These agreements, other than certain instances of stock appreciation and SERPS, limit payments to avoid being considered "parachute payments" as defined by the Internal Revenue Code. The maximum contingent liability under these agreements approximated $6,884,000 at December 31, 1994. The Corporation adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" on January 1, 1993. The adoption of this statement did not have a material impact on the financial position or operations of the Corporation. The Financial Accounting Standards Board issued Statement of Financial Standards No. 112, "Employers' Accounting for Post Employment Benefits" effective for calendar year 1994. This statement requires accrual accounting for certain benefits other than pensions that were previously accounted for on a cash basis. The adoption of this statement did not have a material effect on the Corporation's financial statements. PAGE 36 NOTE N- INCOME TAXES Cullen/Frost adopted as of January 1, 1993, Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). As permitted by SFAS 109, Cullen/Frost elected not to restate the financial statements for years prior to adoption. The cumulative effect of the change increased net income $8,439,000 in 1993. The Corporation recorded tax expense of $20,177,000 in 1994 compared to a tax benefit of $735,000 in 1993. The effective tax rate in 1993 was affected by the reduction of the valuation allowance for deferred tax assets established at the beginning of 1993 by $13.6 million. The reduction of the valuation allowance was based mainly on the level of earnings obtained in 1993 and projected future earnings. In 1993, no valuation allowance was considered necessary because Cullen/Frost had $5,600,000 in recoverable taxes paid in prior years, the future reversal of approximately $8,900,000 in taxable temporary differences, and future income. At December 31, 1994, no valuation allowance for deferred tax assets was necessary because they are supported by $20,900,000 in recoverable taxes paid in prior years and the future reversal of approximately $4,300,000 in taxable temporary differences. The Corporation recorded an extraordinary credit of $6,497,000 for the year ended December 31, 1992. This credit represents the utilization of net operating loss carryforwards for financial reporting purposes. The following is an analysis of the Corporation's income taxes included in the consolidated statements of operations for the years ended December 31, 1994, 1993 and 1992.
(in thousands) 1994 1993 1992 -------------- ------ ------ ------ Current income tax expense $18,071 $5,629 $4,114 Deferred income tax 2,106 7,196 4,083 Decrease in deferred tax valuation allowance --- (13,560) --- ------- ------- ------- Income tax expense (credit) as reported $20,177 $ (735) $8,197 ======= ======= =======
The following is a reconciliation of the difference between income tax expense as reported and the amount computed by applying the statutory income tax rate to income before income taxes, extraordinary credit and cumulative effect of accounting change:
Year Ended December 31, (in thousands) 1994 1993 1992 -------------- ------------------------------- Income before income taxes, extraordinary credit, and cumulative effect of accounting change $ 57,600 $38,062 $25,822 Statutory rate 35% 35% 34% -------- ------- ------- Income tax expense at the statutory rate 20,160 13,322 8,780 Effect of tax-exempt interest (406) (574) (745) Change in deferred tax valuation allowance --- (13,560) --- Other 423 77 162 -------- ------- ------- Income tax expense (credit) as reported $ 20,177 $ (735) $ 8,197 ======== ======== =======
Cullen/Frost recognized a tax benefit of $1,413,000 related to securities transactions in 1994. Cullen/Frost recognized a tax expense of $501,000 and a tax benefit of $79,000 related to securities transactions in 1993 and 1992, respectively. PAGE 37 The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 1994 and 1993 are presented below:
(in thousands) 1994 1993 -------------- -------- ------- Deferred tax assets: Allowance for possible loan losses $ 9,010 $10,452 Other real estate and repossessed collateral 1,844 3,964 Building modification reserve 1,592 1,592 Gain on sale of assets 1,402 1,416 Amortization of intangibles 2,633 1,316 Net occupancy restructuring 1,988 2,334 Unrealized loss on securities available for sale 1,388 --- Other 1,338 2,943 ------- ------- Total gross deferred tax assets 21,195 $24,017 Deferred tax liabilities: Depreciation and amortization $ (882) $(2,129) Prepaid expenses (631) (880) Unrealized gain on securities available for sale --- (4,913) Other (462) (1,070) ------- -------- Total gross deferred tax liabilities (1,975) (8,992) ------- -------- Net deferred tax asset $19,220 $15,025 ======= ========
The components of the provision for deferred income taxes for the year ended December 31, 1992 are as follows:
(in thousands) -------------- 1992 ------ Deferred federal income taxes: Provision for possible loan losses $3,925 Gain on sale of assets 152 Contributions (89) Retirement plan contributions 331 Depreciation and amortization (309) Repossessed collateral adjustments 73 ------ Provision for deferred income taxes $4,083 =======
NOTE O- NON-INTEREST EXPENSE Significant components of other non-interest expense for the years ended December 31, 1994, 1993 and 1992 are presented below:
Year Ended December 31 ----------------------------- Other Non-Interest Expense (in thousands) 1994 1993 1992 --------------------------------------------------------------------------- Outside computer service $ 8,918 $10,611 $ 7,403 FDIC insurance 6,926 6,793 6,115 Other professional expenses 2,920 3,953 2,852 Intangible amortization 4,381 3,865 270 Amortization of goodwill 3,246 3,012 430 Stationery printing and supplies 2,722 2,890 2,349 Attorneys' expenses 1,683 1,787 2,131 Other 34,326 30,827 31,449 ------- ------- ------- Total $65,122 $63,738 $52,999 ======= ======= =======
PAGE 38 NOTE P- CASH FLOW DATA For purposes of reporting cash flow, cash and cash equivalents include the following:
December 31 ------------------------------ (in thousands) 1994 1993 1992 --------------------------------------------------------------------------- Cash and due from banks $365,792 $334,564 $296,270 Time deposits 12 147 153 Federal funds sold and securities purchased under resale agreements 167,550 250,250 282,630 -------- -------- -------- $533,354 $584,961 $579,053 ======== ======== ========
Generally, Federal funds are sold for one-day periods and securities purchased under resale agreements are held for less than thirty-five days. Supplemental cash flow information is as follows:
Year Ended December 31 --------------------------------- (in thousands) 1994 1993 1992 ------------------------------------------------------------------------------------ Cash paid: Interest $ 67,533 $ 61,633 $ 76,758 Income Taxes 17,020 6,695 2,675 Non-cash items: Loans originated to facilitate the sale of foreclosed assets 1,717 5,275 9,037 Loan foreclosures (including in-substance foreclosures) 1,777 1,440 10,934 Conversion of long-term debt to common stock 10,000 Swap of C/F Dallas for Texas Commerce Bank- Corpus Christi 2,599
NOTE Q-FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures about Fair Value of Financial Instruments" requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments. Cash and cash equivalents: The carrying amounts reported on the balance sheet for cash and short-term investments approximate their fair value. Interest-bearing deposits in other banks: The carrying amount reported on the balance sheet approximates the estimated fair value. Securities: Estimated fair values are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair value for other loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximated its fair value. Deposits: SFAS 107 defines the fair value of demand deposits as the amount payable on demand, and prohibits adjusting fair value for any deposit base intangible. The deposit base intangible is not considered in the fair value amounts. The carrying amounts for variable-rate money market accounts approximate their fair value. Fixed-term certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities. Short-term borrowings: The carrying amount reported in the consolidated balance sheet approximates the estimated fair value. Loan commitments, standby and commercial letters of credit: The Corporation's lending commitments have variable interest rates and "escape" clauses if the customer's credit quality deteriorates. Therefore the amounts committed approximate fair value. Interest rate swaps: The estimated fair value is based on the cost to enter into a similar agreement. PAGE 39 The estimated fair values of the Corporation's financial instruments are as follows:
December 31 ---------------------------------------------------------------------------------------- 1994 1993 --------------------------------------------------------------- ------------------------ Estimated Estimated Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value ----------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 533,342 $ 533,342 $ 584,814 $ 584,814 Interest-bearing deposits in other banks 12 12 147 147 Securities 1,594,042 1,524,598 1,611,871 1,628,188 Loans 1,477,969 1,453,328 1,247,809 1,258,000 Financial liabilities: Deposits 3,087,962 3,081,447 3,149,428 3,150,540 Short-term borrowings 370,235 370,235 166,519 166,519 Off-balance-sheet instruments: Loan commitments 504,183 504,183 381,386 381,386 Standby letters of credit 43,035 43,035 31,322 31,322 Interest rate swaps --- 492 --- ---
NOTE R - DERIVATIVE FINANCIAL INSTRUMENTS During 1994, the Corporation entered into several off-balance sheet interest rate swaps to hedge its interest rate risk by converting fixed rate loans into synthetic variable rate instruments. At December 31, 1994, the Corporation had five interest rate swaps each as a hedge against a specific fixed rate loan, with an original total notional amount of $39.8 million. These swaps are all amortizing swaps that amortize in conjunction with the loans which have lives ranging from five to ten years. The net amount payable or receivable from interest-rate swap agreements is accrued as an adjustment to interest income and was not material in 1994. The Corporation's current credit exposure on swaps is limited to the value of interest-rate swaps that have become favorable to the Corporation. NOTE S - CONTINGENCIES Certain subsidiaries of Cullen/Frost are defendants in various matters in litigation which have arisen in the normal course of conducting a commercial banking business. In the opinion of management, the disposition of such pending litigation will not have a material effect on Cullen/Frost's consolidated financial position. NOTE T - RESTRUCTURING CHARGES During 1993, the Corporation recorded restructuring charges of $10.3 million. Included in the charges were $6.7 million related to downsizing office space used to provide banking services, $1.9 million for a retirement incentive program and $1.7 million in related job eliminations and restructurings. Of the $6.7 million net occupancy restructuring charge, a portion ($2.4 million) was for leased space and the remainder for valuations on owned buildings resulting from the decision to sell. At December 31, 1994, the accrual for leased space is $2.0 million. The reduction is due primarily to lease payments, net of sub-lease payments, that were applied against the restructuring accrual. The Corporation has three buildings held for sale with a net carrying value of $3.4 million. These buildings have been written down to their net realizable values. The Corporation has active marketing plans in place to sell these buildings. The retirement incentive program was paid and completed in 1993. The job restructurings were paid and completed in 1994. During 1994, the Corporation recorded an additional $830,000 restructuring charge, primarily an adjustment to market valuations associated with banking premises held for sale. PAGE 40 NOTE U - CONDENSED PARENT CORPORATION FINANCIAL STATEMENTS Condensed financial information of the parent Corporation as of December 31, 1994 and 1993 and for each of the three years in the period ending December 31, 1994 follows:
Year Ended December 31 -------------------------------- Statement of Operations (in thousands) 1994 1993 1992 ------------------------------------------------------------------------------ Income: Dividends from subsidiaries $21,373 $21,692 $ 3,388 Interest and other 537 220 631 ------- ------- ------- Total Income 21,910 21,912 4,019 Expenses: Salaries and employee benefits 2,450 812 897 Interest --- 111 975 Other 2,025 1,553 1,679 ------- ------- ------- Total Expenses 4,475 2,476 3,551 Income Before Income Tax Credits and Equity in Undistributed Net Income of Subsidiaries 17,435 19,436 468 Income tax credits 678 22,351 3,388 Equity in undistributed net income of subsidiaries 19,310 5,449 20,266 ------- -------- ------- Net Income $37,423 $47,236 $24,122 ======= ======== =======
December 31 ------------------------ Balance Sheets (in thousands) 1994 1993 ----------------------------------------------------------------------------- Assets Cash and time deposits $ 251 $ 180 Securities purchased under resale agreements 18,400 2,300 Loans to non-bank subsidiaries 1,440 2,028 Investments in subsidiaries 280,894 272,047 Other 1,495 2,484 -------- -------- Total Assets $302,480 $279,039 ======== ======== Liabilities Other $ 7,043 $ 5,506 -------- -------- Total Liabilities 7,043 5,506 Shareholders' Equity 295,437 273,533 -------- -------- Total Liabilities and Shareholders' Equity $302,480 $279,039 ======== ========
Year Ended December 31 -------------------------------- Statements of Cash Flows (in thousands) 1994 1993 1992 ----------------------------------------------------------------------------------------- Operating Activities Net income $ 37,423 $ 47,236 $ 24,122 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net income of subsidiaries (19,310) (5,449) (20,266) Decrease (increase) in interest receivable (59) 189 (136) Decrease in interest payable (2) (83) (3) Net change in other liabilities and assets 2,954 (19,199) (1,007) -------- ------- ------- Net cash provided by operating activities 21,006 22,694 2,710 Investing Activities Capital contributions to subsidiaries (1,239) (33,025) (625) Net (increase) decrease in loans 758 (132) 263 -------- ------- ------- Net cash used by investing activities (481) (33,157) (362) Financing Activities Proceeds from employee stock purchase plans and options 3,061 2,154 3,875 Cash dividends (7,415) (1,650) -------- ------- ------- Net cash (used)provided by financing activities (4,354) 504 3,875 -------- ------- ------- Increase (Decrease) in cash and cash equivalents 16,171 (9,959) 6,223 Cash and equivalents at beginning of year 2,480 12,439 6,216 -------- ------- ------- Cash and cash equivalents at end of year $ 18,651 $ 2,480 $ 12,439 ======== ======== ========
PAGE 41 REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS SHAREHOLDERS AND BOARD OF DIRECTORS CULLEN/FROST BANKERS, INC. We have audited the accompanying consolidated balance sheets of Cullen/Frost Bankers, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cullen/Frost Bankers, Inc. and Subsidiaries at December 31, 1994 and 1993 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Notes A and N to the financial statements, in 1993 the Corporation changed its method of accounting for certain investments in debt securities and changed its method of accounting for income taxes. ERNST & YOUNG LLP San Antonio, Texas January 31, 1995 PAGE 42
FINANCIAL STATISTICS Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands) The following unaudited schedules and statistics are presented for additional information and analysis. 1994/1993 -------------------------------- Increase (Decrease) Total Due to Change in or Net ------------------- Average Average Increase Rate/Volume Analysis Rate Balance (Decrease) ------------------------------------------------------------------------------------- Changes in interest earned on: Time deposits $ 1 $ (3) $ (2) Securities: U.S. Treasury (338) (9,885) (10,223) U.S. Government agencies and corporations (4,714) 20,512 15,798 States and political subdivisions Tax-exempt (37) (498) (535) Taxable (11) (79) (90) Other 208 (1,382) (1,174) Federal funds sold and securities purchased under resale agreements 1,664 (5,232) (3,568) Loans 1,545 13,898 15,443 --------- --------- -------- Total (1,682) 17,331 15,649 Changes in interest paid on: Savings, Interest-on-Checking 1,289 (874) 415 Money market deposits accounts (1,965) (318) (2,283) Time accounts and public funds (3,198) 1,149 (2,049) Federal funds purchased and securities sold under repurchase agreements (1,976) (1,886) (3,862) Long-term notes payable and other borrowings 205 205 410 --------- --------- -------- Total (5,645) (1,724) (7,369) --------- --------- -------- Changes in net interest income $ (7,327) $ 15,607 $ 8,280 ========= ========= ======== The allocation of the rate/volume variance has been made on a pro-rata basis assuming absolute values. The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1994 and 1993 and a 34 percent tax rate in 1992.
1993/1992 -------------------------------- Increase (Decrease) Totsl Due to Change in or Net -------------------- Average Average Increase Rate/Volume Analysis Rate Balance (Decrease) ------------------------------------------------------------------------------------- Changes in interest earned on: Time deposits $ (2) $ (2) $ (4) Securities: U.S. Treasury (6,386) (6,395) (12,781) U.S. Government agencies and corporations (16,316) 24,759 8,443 States and political subdivisions Tax-exempt 63 (198) (135) Taxable 173 (814) (641) Other (527) (2,437) (2,964) Federal funds sold and securities purchased under resale agreements (885) 1,888 1,003 Loans (4,163) 10,634 6,471 --------- --------- --------- Total 28,043 27,435 (608) Changes in interest paid on: Savings, Interest-on-Checking 3,158 (4,512) (1,354) Money market deposits accounts 3,049 (1,637) 1,412 Time accounts and public funds 8,989 1,681 10,670 Federal funds purchased and securities sold under repurchase agreements 614 (779) (165) Long-term notes payable and other borrowings 71 897 968 --------- --------- --------- Total 15,881 (4,350) 11,531 --------- --------- --------- Changes in net interest income $(12,162) $ 23,085 $ 10,923 ========= ========= ========= The allocation of the rate/volume variance has been made on a pro-rata basis assuming absolute values. The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate in 1994 and 1993 and a 34 percent tax rate in 1992 and 1991.
December 31, 1994 --------------------------------------------- Due in After One, After One Year but Within Five Loan Maturity and Sensitivity or Less Five Years Years Total ------------------------------------------------------------------------------------------ Real estate construction and land loans $ 53,968 $ 16,321 $ 5,745 $ 76,034 Other real estate loans 86,221 157,408 142,850 386,479 All other loans 280,717 134,701 24,351 439,769 -------- -------- -------- -------- Total $420,906 $308,430 $172,946 $902,282 ======== ======== ======== ======== Loans with fixed interest rates $136,900 $108,925 $113,947 $359,772 Loans with floating interest rates 284,006 199,505 58,999 542,510 -------- -------- -------- -------- Total $420,906 $308,430 $172,946 $902,282 ======== ======== ======== ======== Loans for 1-4 family housing totaling $248,118,000 and consumer loans totaling $331,056,000 are not included in the amounts in the table.
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Maturity Distribution and Securities Portfolio Yields (dollars in thousands) December 31, 1994 ------------------------------------------------------------------------------------------ Maturity ---------------------------------------------------------------------- Within 1 Year 1-5 Years 5-10 Years --------------------- ---------------------- ----------------------- Weighted Weighted Weighted Amount Average Yield Amount Average Yield Amount Average Yield -------- ------------- -------- ------------- --------------------- Held to maturity: U.S. Treasury $ 660 5.36% U.S. Government agencies and corporations --- --- $ 169 5.31% $523,009 5.66% States and political subdivisions 50 4.74 $ 400 4.86 805 6.09 Other --- --- 5,987 5.28 25 7.50 -------- ----- ------- ---- -------- ---- Total securities held to maturity $ 710 5.32% $ 6,556 5.26% $523,839 5.66% ======== ===== ======= ==== ======== ==== Available for sale: U.S. Treasury $240,965 5.21% U.S. Government agencies and corporations --- --- $ 148 8.42% $ 44,877 7.51% Other -------- ----- ------- ---- -------- ---- Total securities available for sale $240,965 5.21% $ 148 8.42% $ 44,877 7.51% ======== ==== ======= ==== ======== ==== Weighted average yields have been computed on a fully taxable-equivalent basis assuming a tax rate of 35%.
Maturity Distribution and Securities Portfolio Yields (dollars in thousands) December 31, 1994 ----------------------------------------------------------------- Maturity --------------------------------------------- After 10 Years Total Carrying Amount --------------------- ---------------------- Weighted Weighted Amount Average Yield Amount Average Yield -------- ------------- -------- ------------- Held to maturity: U.S. Treasury $ 660 5.36% U.S. Government agencies and corporations $515,712 6.06% 1,038,890 5.86 States and political subdivisions 4,428 6.36 5,683 6.20 Other 6,012 5.29 -------- ----- --------- ---- Total securities held to maturity $520,140 6.07% $1,051,245* 5.86% ======== ===== ========== ==== Available for sale: U.S. Treasury $ 240,965 5.21% U.S. Government agencies and corporations $241,155 6.84% 286,180 6.95 Other 15,652 6.11 15,652 6.11 -------- ----- --------- ---- Total securities available for sale $256,807 6.80% $ 542,797* 6.15% ======== ==== ========= ==== Weighted average yields have been computed on a fully taxable-equivalent basis assuming a tax rate of 35%. * Included in the totals are mortgage-backed securities and collateralized mortgage obligations of $1,336,263 which are included in maturity categories based on their stated maturity date.
Year Ended December 31 Federal Funds Purchased and Securities ---------------------------------- Sold Under Repurchase Agreements 1994 1993 1992 ------------------------------------------------------------------------------------------ Balance at year end $370,235 $166,519 $122,221 Maximum month-end balance 370,235 168,198 126,230 For the year: Average daily balance 191,611 131,096 102,550 Average interest rate 3.74% 2.52% 3.06% Weighted average daily interest rate 4.06 2.86 3.32
December 31 ------------------------------------------ 1994 1993 Remaining Maturity of Private ------------------- ------------------- Certificates of Deposit Percentage Percentage of $100,000 or More Amount of Total Amount of Total ------------------------------------------------------------------------------------------ Three months or less $ 46,581 12.6% $ 58,314 16.7% After three, within six months 129,560 34.9 123,486 35.4 After six, within twelve months 120,261 32.4 108,643 31.1 After twelve months 74,337 20.1 58,660 16.8 -------- ----- -------- ----- Total $370,739 100.0% $349,103 100.0% ======== ===== ======== ===== Percentage of total private time deposits 17.1% 16.0% Other time deposits of $100,000 or more were $39,512,000 at December 31, 1994. Of this amount 40.1 percent matures within three months, 10.6 percent matures between three and six months and the remainder matures between six months and one year.
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QUARTERLY RESULTS OF OPERATIONS Cullen/Frost Bankers, Inc. and Subsidiaries Three Months Ended 1994 (in thousands, except per share amounts) March 31 June 30 Sept 30 Dec 31 ------------------------------------------------------------------------------------ Interest income $47,741 $50,037 $52,670 $55,061 Interest expense 14,793 16,179 17,867 20,323 Net interest income 32,948 33,858 34,803 34,738 Provision (credit) for possible loan losses --- --- --- --- Gain (loss) on securities transactions 6 (446) 51 (3,547) Non-interest income 19,336 18,951 21,453 17,075 Restructuring costs --- --- 830 --- Non-interest expense 38,420 38,606 41,484 37,052 Income before income taxes (credits) and cumulative effect of accounting change 13,864 14,203 14,722 14,761 Income taxes (credits) 4,766 4,961 5,278 5,172 Net income 9,098 9,242 9,494 9,589 Per share Income before cumulative effect of accounting change-- Primary .81 .82 .84 .85 Fully diluted .81 .82 .84 .85 Net income-- Primary .81 .82 .84 .85 Fully diluted .81 .82 .84 .85
Three Months Ended 1993 (in thousands, except per share amounts) March 31 June 30 Sept 30 Dec 31 ------------------------------------------------------------------------------------ Interest income $46,155 $48,985 $47,095 $47,384 Interest expense 15,175 16,151 15,205 15,262 Net interest income 30,980 32,834 31,890 32,122 Provision (credit) for possible loan losses (590) --- (2,251) (3,244) Gain (loss) on securities transactions 8 (3) 3 1,425 Non-interest income 17,683 18,822 18,846 20,878 Restructuring costs 1,958 -- 591 7,736 Non-interest expense 41,308 40,711 40,850 49,209 Income before income taxes (credits) 7,945 10,945 12,137 7,035 Income taxes (credits) 160 218 160 (1,273) Cumulative effect of accounting change 8,439 Net income 16,224 10,727 11,977 8,308 Per share Income before cumulative effect of accounting change- Primary .71 .96 1.07 .74 Fully diluted .71 .96 1.07 .74 Net income Primary 1.47 .96 1.07 .74 Fully diluted 1.46 .96 1.07 .74
COMMON STOCK MARKET PRICES AND DIVIDENDS The Company's common stock trades on The NASDAQ Stock Market under the symbol: CFBI. The number of record holders of the common stock at February 21, 1995 was 2,548.
1994 1993 ------------- ---------------- Market Price (per share)* High Low High Low ------------------------------------------------------------------------------ First Quarter $36.25 $32.75 $40.25 $29.50 Second Quarter 39.25 33.75 39.75 31.00 Third Quarter 39.00 35.25 39.25 33.75 Fourth Quarter 38.13 28.50 38.75 30.25 *Market prices have not been restated for effect of the ten percent stock dividend.
Market prices shown above are high and low sales prices as reported through NASDAQ National Market System. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commissions and represent actual transactions.
Cash Dividends (per share) 1994 1993 ------------------------------------------------------------------------------- First Quarter $.15 -- Second Quarter .15 -- Third Quarter .15 -- Fourth Quarter .22 $.15 ----- ----- Total $.67 $.15 ===== =====
During the fourth quarter of 1993 the Company resumed its quarterly dividend and paid $.15 per share on December 15, 1993. See "Capital" section (page 22) in the Financial Review for further discussion. PAGE 45 SELECTED FINANCIAL DATA Cullen/Frost Bankers, Inc. and Subsidiaries (dollars in thousands, except per share amounts)
Year Ended December 31 --------------------------------------- 1994 1993 1992 ---------- ----------- ---------- Balance Sheet Data Total assets $ 3,793,720 $ 3,639,047 $ 3,150,871 Long-term notes payable --- --- 13,400 Shareholders' equity 295,437 273,533 206,144 Average shareholders' equity to average total assets 7.85% 7.08% 6.29% Tier 1 capital ratio (1992 rules) 14.44 14.23 15.66 Total capital ratio (1992 rules) 15.69 15.49 17.52 Per Common Share Data Net income (loss)** $ 3.33 $ 4.24 $ 2.26 Cash dividends paid .67 .15 - Shareholders' equity 26.56 24.85 19.80 Loan Performance Indicators Non-performing assets $ 19,938 $ 31,110 $ 51,303 Non-performing assets to: Total loans plus foreclosed assets 1.34% 2.47% 4.94% Total assets .53 .85 1.63 Allowance for possible loan losses $ 25,741 $ 26,298 $ 31,897 Allowance for possible loan losses to period-end loans 1.74% 2.11% 3.15% Net loan charge-offs (recoveries) $ (2,127) $ (486) $ 9,640 Net loan charge-offs (recoveries) to average loans (.16)% (.04)% .94% Common Stock Data Common shares outstanding at period end 11,123,062 11,009,198 10,412,184 Weighted average common and common equivalent shares outstanding 11,222,911 11,150,788 10,974,329 Dividends as a percentage of net income 20.12% 3.54% -- Non-Financial Data Number of employees 1,862 1,877 1,754 Shareholders of record 2,553 2,644 2,824 *Risk-based capital ratios are effective for years beginning December 31, 1990. ** 1993 primary and fully diluted earnings per share before cumulative effect of an accounting change was $3.48. 1992 primary and fully diluted earnings per share before extraordinary credit was $1.66. Fully diluted net income per share for 1992 was $2.25.
Year Ended December 31 -------------------------------------- 1991 1990 1989 ----------- ----------- ---------- Balance Sheet Data Total assets $ 3,078,986 $ 3,254,744 $ 3,505,038 Long-term notes payable 14,668 16,280 17,450 Shareholders' equity 176,222 173,442 179,313 Average shareholders'equity to average total assets 5.67% 5.42% 5.14% Tier 1 capital ratio (1992 rules) 12.98 10.93 * Total capital ratio (1992 rules) 15.04 13.05 * Per Common Share Data Net income (loss)** $ .02 $ (.85) $ .28 Cash dividends paid - - - Shareholders' equity 17.55 17.79 18.92 Loan Performance Indicators Non-performing assets $ 100,642 $ 121,865 $ 131,733 Non-performing assets to: Total loans plus foreclosed assets 8.85% 9.11% 9.24% Total assets 3.27 3.74 3.76 Allowance for possible loan losses $ 42,387 $ 45,604 $ 42,282 Allowance for possible loan losses to period-end loans 3.95% 3.60% 3.09% Net loan charge offs (recoveries) $ 13,237 $ 28,671 $ 28,132 Net loan charge-offs (recoveries) to average loans 1.15% 2.18% 2.00% Common Stock Data Common shares outstanding at period end 10,043,844 9,751,234 9,479,026 Weighted average common and common equivalent shares outstanding 10,075,263 9,651,942 9,516,321 Dividends as a percentage of net income -- -- -- Non-Financial Data Number of employees 1,737 1,755 1,869 Shareholders of record 3,547 4,136 4,088 *Risk-based capital ratios are effective for years beginning December 31, 1990. ** 1993 primary and fully diluted earnings per share before cumulative effect of an accounting change was $3.48. 1992 primary and fully diluted earnings per share before extraordinary credit was $1.66. Fully diluted net income per share for 1992 was $2.25.
CULLEN/FROST BANKERS, INC. AND SUBSIDIARIES Bank Subsidiaries (in thousands) --------------------------------------------------------------------------------------- December 31, 1994 ---------------------------------- Total Total Total Assets Loans Deposits ---------- ---------- ---------- Frost National Bank $3,683,317 $1,424,062 $2,970,245 San Antonio, Houston, Austin and Corpus Christi Main Office: P. O. Box 1600, 100 West Houston Street San Antonio, Texas 78296 (210)220-4011 United States National Bank 138,222 53,703 125,904 P. O. Box 179 2201 Market Street Galveston, Texas 77553 (409)763-1151
PAGE 46
CONSOLIDATED STATEMENTS OF OPERATIONS Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands, except per share amounts) Year Ended December 31 -------------------------------- 1994 1993 1992 -------- -------- -------- Interest Income: Loans, including fees $106,252 $ 90,756 $ 84,074 Securities 95,109 91,145 99,188 Time deposits 2 4 8 Federal funds sold and securities purchased under resale agreements 4,146 7,714 6,711 -------- -------- -------- Total Interest Income 205,509 189,619 189,981 Interest expense: Deposits 61,996 58,079 68,807 Federal funds purchased and securities sold under repurchase agreements 7,166 3,304 3,139 Long-term notes payable --- 410 1,378 Other borrowings --- --- --- -------- -------- -------- Total Interest Expense 69,162 61,793 73,324 -------- -------- -------- Net Interest Income 136,347 127,826 116,657 Provision (credit) for possible loan losses --- (6,085) (850) -------- -------- -------- Net Interest Income After Provision (Credit) for Possible Loan Losses 136,347 133,911 117,507 Non-interest income: Trust department 29,529 26,278 21,861 Service charges on deposit accounts 25,890 25,386 21,958 Other service charges, collection and exchange charges, commissions and fees 11,658 9,889 7,888 Net gain (loss) on securities transactions (4,038) 1,433 (232) Other 13,776 13,243 10,338 -------- ------- ------- Total Non-Interest Income 76,815 76,229 61,813 Non-interest expense: Salaries and wages 52,986 53,654 46,184 Pension and other employee benefits 9,910 12,052 9,746 Net occupancy of banking premises 15,777 20,749 16,963 Furniture and equipment 10,937 10,155 8,295 Provision for real estate losses --- 1,445 19,311 Restructuring costs 830 10,285 --- Other 65,122 63,738 52,999 -------- ------- ------- Total Non-Interest Expense 155,562 172,078 153,498 -------- ------- ------- Income (Loss) Before Income Taxes (Credits), Extraordinary Credit and Cumulative Effect of Accounting Change 57,600 38,062 25,822 Income Taxes 20,177 (735) 8,197 -------- ------- ------- Income (Loss) before extraordinary credit and cumulative effect of accounting change 37,423 38,797 17,625 Extraordinary Credit-income tax benefit --- --- 6,497 Cumulative effect of change in accounting for income taxes --- 8,439 --- -------- ------- ------- Net Income (Loss) $ 37,423 $47,236 $24,122 ======== ======= ======= Net income (loss) per common share $ 3.33 $ 4.24 $ 2.26 ======== ======= ======= Return on average assets 1.02% 1.34% .79% Return on average equity 13.04 19.00 12.56
PAGE 47
CONSOLIDATED STATEMENTS OF OPERATIONS Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands, except per share amounts) Year Ended December 31 -------------------------------- 1991 1990 1989 -------- -------- -------- Interest Income: Loans, including fees $108,617 $134,217 $150,550 Securities 111,132 115,452 101,424 Time deposits 13 82 1,814 Federal funds sold and securities purchased under resale agreements 11,478 23,130 45,578 -------- -------- -------- Total Interest Income 231,240 272,881 299,366 Interest expense: Deposits 115,286 147,399 160,536 Federal funds purchased and securities sold under repurchase agreements 5,913 13,805 27,892 Long-term notes payable 1,502 1,630 1,709 Other borrowings 25 3 2,269 -------- -------- -------- Total Interest Expense 122,726 162,837 192,406 -------- -------- -------- Net Interest Income 108,514 110,044 106,960 Provision (credit) for possible loan losses 10,020 31,993 28,902 -------- -------- -------- Net Interest Income After Provision (Credit) for Possible Loan Losses 98,494 78,051 78,058 Non-interest income: Trust department 20,030 18,777 16,211 Service charges on deposit accounts 18,915 15,146 13,290 Other service charges, collection and exchange charges, commissions and fees 8,288 7,304 6,293 Net gain (loss) on securities transactions 2,022 129 516 Other 8,227 9,236 14,170 ------- ------- ------- Total Non-Interest Income 57,482 50,592 50,480 Non-interest expense: Salaries and wages 44,154 43,019 43,361 Pension and other employee benefits 9,058 9,148 8,567 Net occupancy of banking premises 16,460 16,690 16,080 Furniture and equipment 7,726 8,067 8,690 Provision for real estate losses 20,799 11,172 8,131 Restructuring costs -- -- -- Other 56,941 48,531 40,836 ------- ------- ------- Total Non-Interest Expense 155,138 136,627 125,665 ------- ------- ------- Income (Loss) Before Income Taxes (Credits), Extraordinary Credit and Cumulative Effect of Accounting Change 838 (7,984) 2,873 Income Taxes (credits) 633 236 200 ------- ------- ------- Income (Loss) before extraordinary credit and cumulative effect of accounting change 205 (8,220) 2,673 Extraordinary Credit-income tax benefit -- -- -- Cumulative effect of change in accounting for income taxes -- -- -- ------- ------- ------- Net Income (Loss) $ 205 $(8,220) $ 2,673 ======== ======= ======= Net income (loss) per common share $ .02 $ (.85) $ .28 ======== ======= ======= Return on average assets .01% N/M .08% Return on average equity .12 N/M 1.51
CONSOLIDATED AVERAGE BALANCE SHEETS Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands - taxable-equivalent basis) Year Ended December 31 ------------------------------- 1994 ------------------------------- Interest Average Income/ Yield/ Balance Expense Cost ---------------------------------------------------------------------------------- Assets: Time deposits $ 60 $ 2 3.43% Securities: U.S. Treasury 273,556 12,163 4.45 U.S. Government agencies and corporations 1,361,893 80,953 5.94 States and political subdivisions: Tax-exempt 5,860 558 9.52 Taxable 70 5 7.13 Other 29,156 1,618 5.55 ---------- ------- Total securities 1,670,535 95,297 5.70 Federal funds sold and securities purchased under resale agreements 108,762 4,146 3.81 Loans, net of unearned discount 1,331,793 106,706 8.01 ---------- ------- Total Earning Assets and Average Rate Earned 3,111,150 206,151 6.62 Cash and due from banks 341,547 Allowance for possible loan losses (26,142) Banking premises and equipment 89,430 Accrued interest and other assets 142,202 ---------- Total Assets $3,658,187 ========== Liabilities: Demand deposits: Commercial and individual $ 673,764 Correspondent banks 124,416 Public funds 38,531 ---------- Total demand deposits 836,711 Time deposits: Savings and Interest-on-Checking 796,178 14,425 1.81 Money market deposit accounts 547,237 15,709 2.87 Time accounts 854,601 29,364 3.44 Public funds 86,132 2,498 2.90 ---------- ------- Total time deposits 2,284,148 61,996 2.71 ---------- Total deposits 3,120,859 Federal funds purchased and securities sold under repurchase agreements 191,611 7,166 3.74 Long-term notes payable Other borrowings ---------- ------- Total Interest-Bearing Funds and Average Rate Paid 2,475,759 69,162 2.79 ------- ---- Accrued interest and other liabilities 58,712 ---------- Total Liabilities 3,371,182 Shareholders' Equity 287,005 ---------- Total Liabilities and Shareholders' Equity $3,658,187 ========== Net interest income $136,989 ======== Net interest spread 3.83% ==== Net interest income to total average earning assets 4.40% ==== Net interest income to total average earning assets- with federal funds net 4.56% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1994 and 1993 and a 34 percent tax rate for 1992 through 1989. Non-accrual loans are included in the average loan amounts outstanding for these computations.
CONSOLIDATED AVERAGE BALANCE SHEETS Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands - taxable-equivalent basis) Year Ended December 31 ------------------------------ 1993 ------------------------------ Interest Average Income/ Yield/ Balance Expense Cost --------------------------------------------------------------------------------- Assets: Time deposits $ 147 $ 4 2.68% Securities: U.S. Treasury 495,760 22,386 4.52 U.S. Government agencies and corporations 1,021,083 65,155 6.38 States and political subdivisions: Tax-exempt 11,078 1,093 9.86 Taxable 1,148 95 8.25 Other 54,333 2,792 5.14 ---------- -------- Total securities 1,583,402 91,521 5.78 Federal funds sold and securities purchased under resale agreements 255,613 7,714 3.02 Loans, net of unearned discount 1,158,057 91,263 7.88 ---------- -------- Total Earning Assets and Average Rate Earned 2,997,219 190,502 6.35 Cash and due from banks 315,354 Allowance for possible loan losses (31,127) Banking premises and equipment 87,085 Accrued interest and other assets 143,632 ---------- Total Assets $3,512,163 ========== Liabilities: Demand deposits: Commercial and individual $ 631,363 Correspondent banks 143,008 Public funds 42,075 ---------- Total demand deposits 816,446 Time deposits: Savings and Interest-on-Checking 750,386 14,840 1.98 Money market deposit accounts 534,814 13,426 2.51 Time accounts 907,125 27,693 3.05 Public funds 74,979 2,120 2.83 ---------- ------- Total time deposits 2,267,304 58,079 2.56 ---------- ------- Total deposits 3,083,750 Federal funds purchased and securities sold under repurchase agreements 131,096 3,304 2.52 Long-term notes payable 4,075 380 9.33 Other borrowings 508 30 5.91 ---------- ------- Total Interest-Bearing Funds and Average Rate Paid 2,402,983 61,793 2.57 ------- ---- Accrued interest and other liabilities 44,184 ---------- Total Liabilities 3,263,613 Shareholders' Equity 248,550 ---------- Total Liabilities and Shareholders' Equity $3,512,163 ========== Net interest income $128,709 ======== Net Interest spread 3.78% ==== Net interest income to total average earning assets 4.29% ==== Net interest income to total average earning assets- with federal funds net 4.49% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1994 and 1993 and a 34 percent tax rate for 1992 through 1989. Non-accrual loans are included in the average loan amounts outstanding for these computations.
PAGE 48
CONSOLIDATED AVERAGE BALANCE SHEETS Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands - taxable-equivalent basis) Year Ended December 31 ------------------------------ 1992 ------------------------------ Interest Average Income/ Yield/ Balance Expense Cost --------------------------------------------------------------------------------- Assets: Time deposits $ 203 $ 8 4.10% Securities: U.S. Treasury 621,460 35,167 5.66 U.S. Government agencies and corporations 669,786 56,712 8.47 States and political subdivisions: Tax-exempt 13,126 1,228 9.43 Taxable 11,600 736 6.35 Other 100,839 5,756 5.71 ---------- -------- Total securities 1,416,811 99,599 7.03 Federal funds sold and securities purchased under resale agreements 195,398 6,711 3.43 Loans, net of unearned discount 1,024,885 84,792 8.27 ---------- -------- Total Earning Assets and Average Rate Earned 2,637,297 191,110 7.25 Cash and due from banks 262,995 Allowance for possible loan losses (36,793) Banking premises and equipment 80,794 Accrued interest and other assets 110,951 ---------- Total Assets $3,055,244 ========== Liabilities: Demand deposits: Commercial and individual $ 495,199 Correspondent banks 136,487 Public funds 33,842 ---------- Total demand deposits 665,528 Time deposits: Savings and Interest-on-Checking 541,191 13,486 2.49 Money market deposit accounts 477,877 14,838 3.11 Time accounts 946,480 36,775 3.89 Public funds 79,621 3,708 4.66 ---------- -------- Total time deposits 2,045,169 68,807 3.36 ---------- Total deposits 2,710,697 Federal funds purchased and securities sold under repurchase agreements 102,550 3,139 3.06 Long-term notes payable 14,568 1,378 9.46 Other borrowings ---------- -------- Total Interest-Bearing Funds and Average Rate Paid 2,162,287 73,324 3.39 Accrued interest and other liabilities 35,398 -------- ---- ---------- Total Liabilities 2,863,213 Shareholders' Equity 192,031 ---------- Total Liabilities and Shareholders' Equity $3,055,244 ========== Net interest income $117,786 ======== Net Interest spread 3.86% ==== Net interest income to total average earning assets 4.47% ==== Net interest income to total average earning assets- with federal funds net 4.65% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1994 and 1993 and a 34 percent tax rate for 1992 through 1989. Non-accrual loans are included in the average loan amounts outstanding for these computations.
Year Ended December 31 ------------------------------ 1991 ------------------------------ Interest Average Income/ Yield/ Balance Expense Cost --------------------------------------------------------------------------------- Assets: Time deposits $ 212 $ 13 6.30% Securities: U.S. Treasury 352,698 25,486 7.23 U.S. Government agencies and corporations 818,174 73,899 9.03 States and political subdivisions: Tax-exempt 37,742 3,469 9.19 Taxable 16,717 1,356 8.11 Other 109,231 8,082 7.40 ---------- -------- Total securities 1,334,562 112,292 8.41 Federal funds sold and securities purchased under resale agreements 197,467 11,478 5.81 Loans, net of unearned discount 1,149,233 109,597 9.54 ---------- -------- Total Earning Assets and Average Rate Earned 2,681,474 233,380 8.70 Cash and due from banks 250,412 Allowance for possible loan losses (44,483) Banking premises and equipment 74,014 Accrued interest and other assets 143,236 ---------- Total Assets $3,104,653 ========== Liabilities: Demand deposits: Commercial and individual $ 457,266 Correspondent banks 111,542 Public funds 30,631 ---------- Total demand deposits 599,439 Time deposits: Savings and Interest-on-Checking 473,485 19,377 4.09 Money market deposit accounts 431,141 20,077 4.66 Time accounts 1,145,725 68,528 5.98 Public funds 108,130 7,304 6.75 ---------- ------- Total time deposits 2,158,481 115,286 5.34 ---------- Total deposits 2,757,920 Federal funds purchased and securities sold under repurchase agreements 116,281 5,913 5.08 Long-term notes payable 16,064 1,502 9.35 Other borrowings 266 25 9.54 ---------- ------- Total Interest-Bearing Funds and Average Rate Paid 2,291,092 122,726 5.35 ------- ---- Accrued interest and other liabilities 38,123 ---------- Total Liabilities 2,928,654 Shareholders' Equity 175,999 ---------- Total Liabilities and Shareholders' Equity $3,104,653 ========== Net interest income $110,654 ======== Net Interest spread 3.35% ==== Net interest income to total average earning assets 4.13% ==== Net interest income to total average earning assets- with federal funds net 4.31% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1994 and 1993 and a 34 percent tax rate for 1992 through 1989. Non-accrual loans are included in the average loan amounts outstanding for these computations.
CONSOLIDATED AVERAGE BALANCE SHEETS Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands - taxable-equivalent basis) Year Ended December 31 ------------------------------ 1990 ------------------------------ Interest Average Income/ Yield/ Balance Expense Cost --------------------------------------------------------------------------------- Assets: Time deposits $ 878 $ 82 9.34% Securities: U.S. Treasury 211,096 18,384 8.71 U.S. Government agencies and corporations 874,229 82,118 9.39 States and political subdivisions: Tax-exempt 54,078 4,935 9.13 Taxable 17,510 1,417 8.09 Other 119,022 10,243 8.61 ---------- -------- Total securities 1,275,935 117,097 9.18 Federal funds sold and securities purchased under resale agreements 281,628 23,130 8.21 Loans, net of unearned discount 1,314,907 135,451 10.30 ---------- -------- Total Earning Assets and Average Rate Earned 2,873,348 275,760 9.60 Cash and due from banks 257,929 Allowance for possible loan losses (42,608) Banking premises and equipment 71,902 Accrued interest and other assets 128,539 ---------- Total Assets $3,289,110 ========== Liabilities: Demand deposits: Commercial and individual $ 455,325 Correspondent banks 100,542 Public funds 20,481 ---------- Total demand deposits 576,348 Time deposits: Savings and Interest-on-Checking 432,280 20,933 4.84 Money market deposit accounts 435,332 21,703 4.99 Time accounts 1,290,617 94,986 7.36 Public funds 133,138 9,777 7.34 ---------- -------- Total time deposits 2,291,367 147,399 6.43 ---------- Total deposits 2,867,715 Federal funds purchased and securities sold under repurchase agreements 181,620 13,805 7.60 Long-term notes payable 17,424 1,630 9.35 Other borrowings 37 3 8.28 ---------- -------- Total Interest-Bearing Funds and Average Rate Paid 2,490,448 162,837 6.54 Accrued interest and other liabilities 44,003 -------- ---- ---------- Total Liabilities 3,110,799 Shareholders' Equity 178,311 ---------- Total Liabilities and Shareholders' Equity $3,289,110 ========== Net interest income $112,923 ======== Net Interest spread 3.06% ==== Net interest income to total average earning assets 3.93% ==== Net interest income to total average earning assets- with federal funds net 4.20% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1994 and 1993 and a 34 percent tax rate for 1992 through 1989. Non-accrual loans are included in the average loan amounts outstanding for these computations.
CONSOLIDATED AVERAGE BALANCE SHEETS Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands - taxable-equivalent basis) Year Ended December 31 ------------------------------ 1989 ------------------------------ Interest Average Income/ Yield/ Balance Expense Cost --------------------------------------------------------------------------------- Assets: Time deposits $ 19,407 $ 1,814 9.35% Securities: U.S. Treasury 253,326 21,058 8.31 U.S. Government agencies and corporations 676,778 61,865 9.14 States and political subdivisions: Tax-exempt 68,234 6,133 8.99 Taxable 22,232 2,303 10.36 Other 132,745 12,150 9.15 ---------- -------- Total securities 1,153,315 103,509 8.97 Federal funds sold and securities purchased under resale agreements 491,073 45,578 9.28 Loans, net of unearned discount 1,406,773 152,051 10.81 ---------- -------- Total Earning Assets and Average Rate Earned 3,070,568 302,952 9.87 Cash and due from banks 256,228 Allowance for possible loan losses (42,328) Banking premises and equipment 67,061 Accrued interest and other assets 103,589 ---------- Total Assets $3,455,118 ========== Liabilities: Demand deposits: Commercial and individual $ 442,697 Correspondent banks 83,194 Public funds 16,234 ---------- Total demand deposits 542,125 Time deposits: Savings and Interest-on-Checking 378,739 19,015 5.02 Money market deposit accounts 472,333 24,215 5.13 Time accounts 1,336,139 107,416 8.04 Public funds 133,204 9,890 7.42 ---------- -------- Total time deposits 2,320,415 160,536 6.92 ---------- Total deposits 2,862,540 Federal funds purchased and securities sold under repurchase agreements 323,854 27,892 8.61 Long-term notes payable 18,536 1,709 9.22 Other borrowings 21,221 2,269 10.69 ---------- -------- Total Interest-Bearing Funds and Average Rate Paid 2,684,026 192,406 7.17 Accrued interest and other liabilities 51,452 -------- ---- ---------- Total Liabilities 3,277,603 Shareholders' Equity 177,515 ---------- Total Liabilities and Shareholders' Equity $3,455,118 ========== Net interest income $110,546 ======== Net Interest spread 2.70% ==== Net interest income to total average earning assets 3.60% ==== Net interest income to total average earning assets- with federal funds net 4.02% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1994 and 1993 and a 34 percent tax rate for 1992 through 1989. Non-accrual loans are included in the average loan amounts outstanding for these computations.
PAGE 49 EX-21 6 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiaries of Cullen/Frost SUBSIDIARIES OF THE REGISTRANT ------------------------------ As of March 24, 1995, Cullen/Frost owned directly, or indirectly through wholly owned subsidiaries, the following subsidiaries. PERCENTAGES OF ORGANIZED VOTING SECURITIES UNDER OWNED BY LAWS OF CULLEN/FROST ---------- ----------------- The Frost National Bank of United States 100% San Antonio United States National Bank United States 100% of Galveston Main Plaza Corporation Texas 100% Daltex General Agency, Inc. Texas 100% The New Galveston Company, Inc. Delaware 100% EX-23 7 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 Consent of Independent Auditors CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Cullen/Frost Bankers, Inc. of our report dated January 31, 1995, included in the 1994 Annual Report to Shareholders of Cullen/Frost Bankers, Inc. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-30776) pertaining to the Cullen/Frost Bankers, Inc. 1983 Nonqualified Stock Option Plan, the Registration Statement (Form S-8 No. 33-30777) pertaining to the Cullen/Frost Bankers, Inc. 1988 Nonqualified Stock Option Plan, the Registration Statement (Form S-8 (No. 33-37500) pertaining to the 401(k) Stock Purchase Plan for employees of Cullen/Frost Bankers, Inc. and its Affiliates, the Registration Statement (Form S-8 No. 33-39478) pertaining to the 1991 Thrift Incentive Stock Purchase Plan for Employees of Cullen/Frost Bankers, Inc. and its Affiliates, the Registration Statement (Form S-8 No. 33-53492) pertaining to the Cullen/Frost Bankers, Inc. Restricted Stock Plan,, and the Registration Statement (Form S-8 No. 33-53622) pertaining to the Cullen/Frost Bankers, Inc. 1992 Stock Plan, of our report dated January 31, 1994 with respect to the consolidated financial statements of Cullen/Frost Bankers, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1994. /s/ ERNST & YOUNG ------------------- ERNST & YOUNG San Antonio, Texas March 30, 1995 EX-24 8 POWER OF ATTORNEY EXHIBIT 24 Power of Attorney POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints T.C. Frost, Robert S. McClane and Phillip D. Green, and each of them, his true and lawful attorneys-in-fact and agents, and with power of substitution and resubstitution, for him and in his name, place and stead, and in any and all capacities, to sign the Annual Report on Form 10-K of Cullen/Frost Bankers, Inc. for the fiscal year ended December 31, 1994, to sign any and all amendments thereto, and to file such Annual Report and amendments, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Signatures Title Date -------------------------- ------------------------ ---------------- Chairman of the Board and Director (Principal) /s/ T.C. FROST Executive Officer) February 7, 1995 -------------------------- ---------------- (T.C. Frost) President and /s/ ROBERT S. McCLANE Director February 7, 1995 -------------------------- ---------------- (Robert S. McClane /s/ ISAAC ARNOLD, JR. Director February 7, 1995 -------------------------- ---------------- (Isaac Arnold, Jr.) /s/ ROYCE S. CALDWELL Director February 7, 1995 -------------------------- ---------------- (Royce S. Caldwell) /s/ RUBEN R. CARDENAS Director February 7, 1995 -------------------------- ---------------- (Ruben R. Cardenas) /s/ HENRY E. CATTO Director February 7, 1995 -------------------------- ---------------- (Henry E. Catto) /s/ HARRY H. CULLEN Director February 7, 1995 -------------------------- ---------------- (Harry H. Cullen) /s/ ROY H. CULLEN Director February 7, 1995 -------------------------- ---------------- (Roy H. Cullen) /s/ RICHARD W. EVANS, JR. Director February 7, 1995 -------------------------- ---------------- (Richard W. Evans, Jr.) /s/ W. N. FINNEGAN, III Director February 7, 1995 -------------------------- ---------------- (W. N. Finnegan, III) Signatures Title Date -------------------------- --------------------- ----------------- Director -------------------------- (Joseph H. Frost) Director -------------------------- (James W. Gorman, Jr.) /s/ JAMES L.HAYNE Director February 7, 1995 -------------------------- ---------------- (James L. Hayne) Director -------------------------- (Harris L. Kempner, Jr.) /s/ RICHARD M. KLEBERG, III Director February 7, 1995 -------------------------- ---------------- (Richard M. Kleberg, III) /s/ QUINCY LEE Director February 7, 1995 -------------------------- ---------------- (Quincy Lee) /s/ J. GORDON MUIR, JR. Director February 7, 1995 -------------------------- ---------------- (J. Gordon Muir, Jr.) /s/ W.B. OSBORN, JR. Director February 7, 1995 -------------------------- ---------------- (W.B. Osborn, Jr.) /s/ ROBERT G. POPE Director February 7, 1995 -------------------------- ---------------- (Robert G. Pope) Director -------------------------- (Herman Richter) Signature Title Date -------------------------- ------------------------ ------------------- /s/ CURTIS VAUGHAN, JR. Director February 7, 1995 -------------------------- ---------------- (Curtis Vaughan, Jr.) Executive Vice /s/ PHILLIP D. GREEN President and February 7, 1995 -------------------------- Treasurer ---------------- (Phillip D. Green) EX-27 9
9 YEAR DEC-31-1994 DEC-31-1994 365,792 12 167,550 0 542,797 1,051,245 981,800 1,477,969 (25,741) 3,793,720 3,087,962 370,235 40,086 0 55,615 0 0 239,822 3,793,720 106,252 95,109 4,148 205,509 61,996 69,162 136,347 0 (4,038) 155,562 57,600 57,600 0 0 37,423 3.33 3.33 6.62 11,303 3,644 0 5,199 26,298 (4,022) 6,149 25,741 25,595 146 2,287