-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MsoRIPgm0dH4Aa+xToBxxp9qwePuJ2qChsQhF2inUkotZLYDCGr1cak9vYqaOBx2 vzloOvpdKFvyL7PO8gTlmw== 0000039263-96-000007.txt : 19960401 0000039263-96-000007.hdr.sgml : 19960401 ACCESSION NUMBER: 0000039263-96-000007 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CULLEN FROST BANKERS INC CENTRAL INDEX KEY: 0000039263 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 741751768 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-07275 FILM NUMBER: 96541511 BUSINESS ADDRESS: STREET 1: 100 W HOUSTON ST STREET 2: P O BOX 1600 CITY: SAN ANTONIO STATE: TX ZIP: 78205 BUSINESS PHONE: 2102204841 FORMER COMPANY: FORMER CONFORMED NAME: FROST BANK CORP DATE OF NAME CHANGE: 19770823 10-K405 1 10-K405 ELECTRONIC SUBMISSION 12/31/95 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, 1995 ___ 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 (with attached rights) -------------------------- (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 to file 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 $532,348,838 based on the closing price of such stock as of March 25, 1996. 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 25, 1996 -------------------------- -------------- Common Stock, $5 par value 11,213,693 DOCUMENTS INCORPORATED BY REFERENCE (1) Annual Report to Shareholders for the Year Ended December 31, 1995 (Parts I & II) (2) Proxy Statement for Annual Meeting of Shareholders to be held May 29, 1996 (Part III) TABLE OF CONTENTS PART I Page - ------ ---- ITEM 1. BUSINESS 1 ITEM 2. PROPERTIES 9 ITEM 3. LEGAL PROCEEDINGS 9 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 10 ITEM 6. SELECTED FINANCIAL DATA 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 10 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE * PART III - -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 11 ITEM 11. EXECUTIVE COMPENSATION 11 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 11 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 11 PART IV - ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 12 * 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 BHC 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 subsidiary which owns all banking and non-banking subsidiaries. At December 31,1995, Cullen/Frost's principal assets consisted of all of the capital stock of two national banks. Including acquisitions completed in the first quarter of 1996, Cullen/Frost had 46 offices in six Texas banking markets with 18 locations in San Antonio, 14 in the Houston/Galveston area, five in Austin, five in the Corpus Christi area, three in San Marcos and one in McAllen. At December 31, 1995, Cullen/Frost had consolidated total assets of $4,200,211,000 and total deposits of $3,645,733,000. Based on information from the Federal Reserve Board, at December 31, 1995, Cullen/Frost was the largest of the 97 unaffiliated bank holding companies headquartered in Texas. Cullen/Frost provides policy direction to the Cullen/Frost subsidiary banks in, among others, the following areas: (i) asset and liability management; (ii) accounting, budgeting, planning and insurance; (iii) capitalization; (iv) 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, 1995, Frost Bank, which accounted for approximately 97 percent of consolidated assets, loans, and deposits of Cullen/Frost, was the largest bank headquartered in San Antonio and South Texas. The following table provides information as of December 31, 1995, 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 $4,079,624,000 $1,760,242,000 $3,525,602,000 United States National Bank of Galveston Galveston, Texas 137,505,000 56,113,000 125,470,000
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, accounts receivable, leverage buyouts and recapitalizations and turnaround situations. Frost Bank provides financial services to business clients on both a national and interna- tional basis. 1 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 19,20 and 25 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1995, 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, 1995, trust assets with a market value of approximately $6.9 billion were being administered by the subsidiary banks. 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 Frost Brokerage Services 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. Frost Brokerage Services 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 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. 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 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 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. 2 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 certain assets of any company (including a bank) or to merge or consolidate with another bank holding company. 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. 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. 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 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. 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 undivided profits less certain bad debts. Although not necessarily indicative of amounts available to be paid in future periods, Cullen/Frost's subsidiary banks had approximately $18,846,000 available for payment of dividends at December 31, 1995. 3 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 allowance for loan and lease loss. In addition, bank regulators have 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 bank regulators have not advised Cullen/Frost or any bank subsidiary 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 26 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1995, which discussion is incorporated herein by reference. FDICIA The Federal Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA"), among other things, requires the Federal banking agencies to take "prompt corrective action" in respect of depository institutions that do not meet minimum capital requirements. FDICIA established five capital tiers: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". Under the final rules adopted by the Federal banking regulators relating to these capital tiers, an 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; 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 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, 1995, 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, 1995, the subsidiary banks capital ratios were as follows:
Leverage Tier 1 Capital Total Capital Ratio Ratio Ratio -------- -------------- ------------- Frost Bank 5.58% 10.43% 11.68% U. S. National Bank 8.06 16.39 17.66 4
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. Undercapitalized institutions are subject to growth limitations and are required 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. "Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized", requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator. 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 have issued standards establishing loan-to-value limitations on real estate lending. These standards have not had a significant effect on Cullen/Frost and are not expected to have a significant effect in the future. Any equity loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. 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 risk-based assessment system imposes insurance premiums based upon a matrix that takes into account a bank's capital level and supervisory rating. For the second half of 1995, the FDIC assessment rate imposed on banks ranged from four 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). This was a decrease from the previous assessment range of 23 cents to 31 cents for those respective categories for each $100 of domestic deposits. For 1996, the FDIC Board reduced the insurance premiums to range from zero, with a minimum of $2,000 per year for banks in the lowest risk category, to 27 cents for each $100 of domestic deposits. However, various legislative proposals are being considered which could result in banks paying a higher rate reported to be approximately 2.4 cents per $100 of domestic deposits to help address the shortfall in the savings and loan insurance fund. 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 - -------------------- Deposits and certain claims for administrative expenses and employee compensation against an insured depository institution are 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 or bank holding company. 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. Interstate Banking and Branching Legislation - -------------------------------------------- The Riegle-Neal Interstate Branching Efficiency Act of 1994 ("IBBEA"), authorizes interstate acquisitions of banks and bank holding companies without geographic limitation beginning one year after enactment. In addition, beginning June 1, 1997, IBBEA authorizes a bank to merge with a bank in another state long as long as neither of the states has opted out of interstate branching between the date of enactment of IBBEA and May 31, 1997. IBBEA further provides that states may enact laws permitting interstate bank merger transactions prior to June 1, 1997. A bank may establish a de novo branch in a state in which the bank does not maintain a branch if the state expressly permits de novo branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. If a state opts out of interstate branching within the specified time period, no bank in any other state may establish a branch in the opting out state, whether through an acquisition or de novo. On August 28, 1995, Texas enacted legislation opting out of interstate branching. Regulatory Economic Policies - ---------------------------- 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. 6 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 12 through 27, pages 47 and 48 and pages 50 through 53 of the Cullen/Frost Annual Report to Shareholders for the year ended December 31, 1995, which information is incorporated herein by reference. Employees - --------- At December 31, 1995, Cullen/Frost employed 2,019 full-time equivalent employees. 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. 7 Executive Officers of the Registrant - ------------------------------------ The names, ages, recent business experience and positions or offices held by each of the executive officers during 1995 of Cullen/Frost are as follows: Name and Positions or Offices Age as of 12/31/95 Recent Business Experience - ----------------------------- ------------------ -------------------------- T.C. Frost 68 Officer and director of Senior Chairman of the Board, Frost Bank since 1950. Chief Executive Officer, Chairman of the Board Director of Cullen/Frost 1973 to October 1995. Member of the Executive Committee of Cullen/Frost 1973 to present. Chief Executive Officer of Cullen/Frost July 1977 to present. Senior Chairman of Cullen/Frost from October 1995 to present. Richard W. Evans, Jr. 49 Officer of Frost Bank Chairman of the Board, Chief since 1973. Executive Operating Officer, and Director Vice President of Frost Bank from 1978 to April 1985. President of Frost Bank from April 1985 to August 1993. Chairman of the Board and Chief Executive Officer of Frost Bank from August 1993 to present. Director and Member of the Executive Committee of Cullen\Frost from August 1993 to present. Chairman of the Board and Chief Operating Officer of Cullen/Frost from October 1995 to present. Robert S. McClane 56 Officer of Frost Bank President and Director since 1962. Senior Vice President of Cullen/Frost from November 1973 to April 1978, Secretary from May 1973 to April 1985. Executive Vice President from April 1978 to April 1985. Chief Administrative Officer of Cullen/Frost from 1993 to October 1995. President and Director of Cullen/Frost from April 1985 to present. Phillip D. Green 41 Officer of Frost Bank Executive Vice President, since July 1980. Vice and Chief Financial Officer President 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 Treasurer of Cullen/Frost from July 1985 to April 1989. Executive Vice President and Treasurer of Cullen/ Frost from May 1989 to October 1995. Executive Vice President and Chief Financial Officer of Cullen/Frost from January 1996 to present. Diane Jack, age 47, has been an officer of Frost Bank since 1984; Secretary of Cullen/Frost from October 1993 to present. 8 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 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. 9 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 49 and "Note K-Dividends" on page 37 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1995. Item 6. SELECTED FINANCIAL DATA - -------------------------------- The information called for by Item 6 is incorporated herein by reference to "Selected Financial Data" on page 50 and "Consolidated Statements of Operations" and "Consolidated Average Balance Sheets" on pages 51 through 53 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1995. 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 12 through 27, "Consolidated Statements of Operations" and "Consolidated Average Balance Sheets" on pages 51 through 53 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1995. 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 28 through 46 and "Quarterly Results of Operations" on page 49, of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1995. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------ None. 10 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 29, 1996. 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 29, 1996. 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 29, 1996. 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 29, 1996. 11 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 ------- 3.1 Restated Articles of Incorporation, as amended (1988 Form S-8, Exhibit 4(a))(3) 3.2 Amended By-Laws of Cullen/Frost Bankers, Inc. (1994 Form 10-K, Exhibit 3.2)(13) 4.1 Guaranty, dated April 27, 1981, by Cullen/Frost Bankers, Inc. to Colonial/Citizens Associates (1985 Form S-8, Exhibit 4(e))(1) 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)(5) 10.1 1983 Non-qualified Stock Option Plan, as amended (1989 Form S-8, Exhibit 4(g))(6) 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)(4)* 10.3 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)(2) 10.4 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)(2) 10.5 Form of Revised Change-In-Control Agreements with four Executive Officers (1989 Form 10-K, Exhibit 10.13(a))(8)* 10.6 1988 Non-qualified Stock Option Plan (1989 Form S-8, Exhibit 4(g))(7) 10.7 The 401(k) Stock Purchase Plan for employees of Cullen/Frost Bankers, Inc. and its Affiliates (1990 Form S-8, Exhibit 4(g))(9)* 10.8 1991 Thrift Incentive Stock Purchase Plan for Employees of Cullen/Frost Bankers, Inc. and its Affiliates (1991 Form S-8, Exhibit 4(g))(10)* 10.9 Cullen/Frost Bankers, Inc. Restricted Stock Plan (1992 Form S-8, Exhibit 4(d))(11)* 10.10 Cullen/Frost Bankers, Inc. 1992 Stock Plan (1992 Form S-8, Exhibit 4(d))(12) 10.11 Cullen/Frost Bankers, Inc. Supplemental Executive Retirement Plan (1994 Form 10-K, Exhibit 10.13)(14) 10.12 Form of Revised Change-in-Control Agreements with one Executive Officer (1994 Form 10-K, Exhibit 10.14)(14) 11 Statement re: computation of earnings per share 13 The Cullen/Frost 1995 Annual Report to Shareholders for the Year Ended December 31, 1995, (furnished for the information of the Commission and not deemed to be "filed" except for the portion expressly incorporated by reference) 19.1 Annual Report on Form 11-K for the Year Ended December 31, 1995, for the 1991 Thrift Incentive Stock Purchase Plan (filed pursuant to Rule 15d-21 of the Securities and Exchange Act of 1934)(15) 12 19.2 Annual Report on Form 11-K for the Year Ended December 31, 1995, 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, 1995. ______________________ (1) 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) (2) 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) (3) 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) (4) 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) (5) 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) (6) 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) (7) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed September 5, 1989 (File No. 33-30777) (8) 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) (9) 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) (10) 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) (11) 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) (12) 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) (13) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Annual Report on Form 10-K for the Year-Ended December 31, 1994 (File No. 0-7275) (14) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Annual Report on Form 10-K for the Year-Ended December 31, 1994 (File No. 0-7275) (15) To be filed as an amendment. 13 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 29, 1996 CULLEN/FROST BANKERS, INC. (Registrant) By:/s/ Phillip D. Green ------------------------ Phillip D. Green Executive Vice President and Chief Financial Officer 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 29, 1996 Signatures Title Date ---------- ----- ----- Senior Chairman of the Board and Director (Principal Executive T.C. FROST* Officer) - ------------------------ (T.C. Frost) Chairman of the Board RICHARD W. EVANS, Jr* and Director - -------------------------- (Richard W. Evans, Jr.) ROBERT S. McCLANE* President and Director - ------------------------ (Robert S. McClane) Director - ------------------------ (Isaac Arnold, Jr.) 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) 14 Signatures Title Date ---------- ----- ----- Director - ------------------------ (Roy H. Cullen) W.N. FINNEGAN III* Director - ------------------------ (W.N. Finnegan III) JAMES W. GORMAN, JR.* Director - ------------------------ (James W. Gorman, Jr.) JAMES L. HAYNE* Director - ------------------------ (James L. Hayne) RICHARD M. KLEBERG, III* Director - ------------------------ (Richard M. Kleberg, III) Director - ------------------------ (W.B. Osborn, Jr.) Director - ------------------------ (Robert G. Pope) Director - ------------------------ (Herman J. Richter) CURTIS VAUGHAN, JR.* Director - ------------------------ (Curtis Vaughan, Jr.) Executive Vice President *By:/s/ Phillip D. Green and Treasurer March 29, 1996 - -------------------------- (Phillip D. Green) [as Attorney-in-Fact for the persons indicated] 15 EXHIBIT INDEX Exhibit Number Description of Exhibits - ------------------------------------------ 11 Statement re: computation of earnings per share 13 The Cullen/Frost 1995 Annual Report to Shareholders for the Year Ended December 31, 1995 (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-11 2 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, except per share amounts)
December 31 - ---------------------------------------------------------------------------------- Primary Earnings Per Share 1995 1994 1993 - ------------------------------------------------------- ------- ------- ------- Income before Cumulative effect of accounting change $46,279 $37,423 $38,797 Elimination of interest on 9.75% convertible subordinated debentures due 1996, net of tax 54 ------- ------- ------- Income applicable to common stock before cumulative effect of accounting change 46,279 37,423 38,851 Cumulative effect of accounting change 8,439 ------- ------- ------- Net Income applicable to common stock $46,279 $37,423 $47,290 ======= ======= ======= Weighted average share outstanding 11,154 11,059 10,922 Addition from assumed exercise of stock options 184 164 189 Addition from assumed conversion of 9.75% convertible subordinated debentures due 1996 40 ------- ------- ------- Weighted average number of common shares outstanding 11,338 11,223 11,151 ======= ======= ======= Primary earnings per common share: Income before cumulative effect of accounting change $4.08 $3.33 $3.48 Net income 4.08 3.33 4.24
December 31 - ---------------------------------------------------------------------------------- Fully Diluted Earnings Per Share 1995 1994 1993 - ------------------------------------------------------- ------- ------- ------- Income before Cumulative effect of accounting change $46,279 $37,423 $38,797 Elimination of interest on 9.75% convertible subordinated debentures due 1996, net of tax 54 ------- ------- ------- Income applicable to common stock before cumulative effect of accounting change 46,279 37,423 38,851 Cumulative effect of accounting change 8,439 ------- ------- ------- Net Income applicable to common stock $46,279 $37,423 $47,290 ======= ======= ======= Weighted average share outstanding 11,154 11,059 10,922 Addition from assumed exercise of stock options 236 164 189 Addition from assumed conversion of 9.75% convertible subordinated debentures due 1996 40 ------- ------- ------- Weighted average number of common shares outstanding 11,390 11,223 11,151 ======= ======= ======= Primary earnings per common share: Income before cumulative effect of accounting change $4.06 $3.33 $3.48 Net income 4.06 3.33 4.24
EX-13 3 CULLEN/FROST 1995 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 The Cullen/Frost 1995 Annual Report to Shareholders for the Year Ended December 31, 1995 (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 1993 through 1995. All balance sheet amounts presented in the following financial review are averages unless otherwise indicated. Certain reclassifications have been made to make prior periods comparable. Taxable-equivalent adjustments assume a 35 percent federal tax rate. Dollar amounts in tables are stated in thousands, except for per share amounts. RESULTS OF OPERATIONS Pre-tax income for 1995 was $71.3 million, an all-time high in the 127- year history of Cullen/Frost. This compares to $57.6 million for 1994. Net income after taxes for 1995 was $46.3 million or $4.08 per common share, compared with $37.4 million or $3.33 per common share for 1994, an increase of 23.7 percent. The Corporation's return on average assets was 1.17 percent compared with 1.02 percent in 1994, while return on average equity was 14.32 percent compared with 13.04 percent in 1994. Net income for 1993 was higher than 1995 and 1994 primarily due to the one-time cumulative effect benefit of $8.4 million related to the adoption of Statement of Financial Accounting Standards No. 109 ("SFAS No. 109") in 1993 and the differences in the Corporation's effective tax rate. For 1995 and 1994, the Corporation recognized income tax expense that approximates the statutory rate while in 1993 an income tax benefit of $735,000 was recognized. See "Income Taxes" on page 17. Pretax income for 1993 was $38.1 million while net income was $47.2 million or $4.24 per common share. Return on average assets for 1993 was 1.34 percent and return on average equity was 19.0 percent. ACQUISITIONS On April 4, 1995, the Corporation entered the Rio Grande Valley area completing the acquisition of Valley Bancshares, Inc., including its subsidiary, Valley National Bank in McAllen, Texas ("Valley") with approximately $49 million in deposits. On May 19, 1995, the acquisition of National Commerce Bank in Houston ("NCB") with its three branch locations and approximately $101 million in deposits was completed. On July 21, 1995, the Corporation acquired the two San Antonio branches of Comerica Bank Texas with approximately $34 million in deposits. These acquisitions were accounted for as purchase transactions, and as such, the results of operations are included in the financial information that follows from the date of acquisition. The acquisitions did not have a material impact on the Corporation's 1995 net income. In addition, during the third quarter of 1995, the Corporation entered into definitive agreements to acquire S.B.T. Bancshares, Inc., which owns State Bank and Trust Company, of San Marcos, Texas with approximately $112 million in deposits and Park National Bank of Houston, Texas, with approximately $225 million in deposits. These acquisitions, which were accounted for as purchase transactions, were completed in the first quarter of 1996 and are not expected to have a material impact on the Corporation's 1996 net income. During 1994, Cullen/Frost made two 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. 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.
1995 Change 1994 Change Earnings Summary 1995 From 1994 1994 From 1993 1993 - ---------------------------------------------------------------------------------------- Taxable-equivalent net interest income $153,136 $ 16,147 $136,989 $ 8,280 $128,709 Taxable-equivalent adjustment 881 239 642 (241) 883 -------- -------- -------- --------- -------- Net interest income 152,255 15,908 136,347 8,521 127,826 Provision (credit) for possible loan losses 6,272 6,272 6,085 (6,085) Non-interest income: Net gain (loss) on securities transactions (1,396) 2,642 (4,038) (5,471) 1,433 Other 89,139 8,286 80,853 6,057 74,796 -------- -------- -------- -------- --------- Total non-interest income 87,743 10,928 76,815 586 76,229 Non-interest expense: Provision for real estate losses 610 610 (1,445) 1,445 Restructuring costs 400 (430) 830 (9,455) 10,285 Other operating expenses 161,439 6,707 154,732 (5,616) 160,348 -------- -------- -------- -------- --------- Total non-interest expense 162,449 6,887 155,562 (16,516) 172,078 -------- -------- -------- -------- --------- Income before income taxes (credits) and cumulative effect of accounting change 71,277 13,677 57,600 19,538 38,062 Income taxes (credits) 24,998 4,821 20,177 20,912 (735) -------- -------- -------- -------- --------- Income before cumulative effect of accounting change 46,279 8,856 37,423 (1,374) 38,797 Cumulative effect of change in accounting for income taxes (8,439) 8,439 -------- -------- -------- -------- --------- Net income $ 46,279 $ 8,856 $ 37,423 $(9,813) $ 47,236 ======== ======== ======== ======== ========= Per share Net income-primary $ 4.08 $ .75 $ 3.33 $ (.91) $ 4.24 Net income-fully diluted 4.06 .73 3.33 (.91) 4.24 Return on Average Assets 1.17% .15% 1.02% (.32)% 1.34% Return on Average Equity 14.32 1.28 13.04 (5.96) 19.00
NET INTEREST INCOME The increase in net interest income from 1994 is primarily due to increased loan volumes and the favorable impact of the acquisitions. Average loans for 1995 were 25.6 percent higher than in 1994. See "Loans" page 18. The higher loan volumes favorably impacted the interest margin which was 4.56 percent for the year ended December 31, 1995, compared to 4.39 percent and 4.27 percent for the years 1994 and 1993, respectively. The net interest spread was stable for 1995 at 3.80 percent. The net interest spread was 3.82 percent and 3.76 percent for 1994 and 1993, respectively. Net interest spread for 1994 increased six basis points compared to 1993 primarily because of yields on earning assets rising faster than the cost of deposits. 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 Interest Spread ($ in millions - taxable equivalent) (taxable-equivalent) (Graphic Material omitted) (Graphic material omitted) Year Net Interest Net Interest Year Earnings Cost of Net Interest Ended Income Margin Ended on Funds Funds Spread - ------ ------------ ----------- ----- ------ -------- ------------ 1991 $111 4.07% 1991 8.57% 5.35% 3.22% 1992 118 4.43 1992 7.19 3.39 3.80 1993 129 4.27 1993 6.33 2.57 3.76 1994 137 4.39 1994 6.61 2.79 3.82 1995 153 4.56 1995 7.65 3.85 3.80
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 time periods of one year or less. 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.
December 31, 1995 ------------------------------------------------------------------ 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 >5 Years Total - ----------------------------------------------------------------------------------------- Earning Assets: Loans $ 852,994 $ 946,516 $1,214,710 $1,655,877 $160,885 $1,816,762 Securities 257,733 286,819 978,504 1,349,933 186,634 1,536,567 Federal funds sold and other short-term investments 100,614 100,614 100,614 100,614 100,614 ---------- ---------- ---------- --------- -------- ---------- Total earning assets $1,211,341 $1,333,949 $2,293,828 $3,106,424 $347,519 $3,453,943 =========== ========== ========== ========== ======== ========== Interest-Bearing Liabilities: Savings and Interest- on-Checking $ 718,582 $ 718,582 $ 718,582 $ 718,582 $ 718,582 Money market deposit accounts 711,865 711,865 711,865 711,865 711,865 Certificates of deposit and other time accounts 341,108 649,997 1,061,558 1,156,701 $ 66,576 1,223,277 Federal funds purchased and other borrowings 134,741 134,741 134,741 134,741 134,741 ---------- ---------- ---------- ---------- -------- ---------- Total interest-bearing liabilities $1,906,296 $2,215,185 $2,626,746 $2,721,889 $ 66,576 $2,788,465 ========== =========== ========== ========== ======== ========== Interest sensitivity gap$ (694,955) $ (881,236) $ (332,918)$ 384,535 $280,943 $ 665,478 ========== =========== ========== ========== ======== ========== Ratio of earning assets to interest-bearing liabilities .64 .60 .87 1.14 ========== =========== ========== ========== 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. Loans are included net of unearned discount of $1,337,000. 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 24.
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 which include core depositors and correspondent banks in the Corporation's natural trade area which maintain accounts with and sell Federal funds to subsidiary banks of the Corporation, as well as brokered deposits and Federal funds purchased and securities sold under repurchase agreements from upstream banks. NON-INTEREST INCOME Non-interest income of $87,743,000 was reported for 1995, compared with $76,815,000 for 1994 and $76,229,000 for 1993. Excluding securities transactions, total non-interest income increased 10.2 percent from 1994.
Year Ended December 31 ------------------------------------------------------ 1995 1994 1993 ---------------- ------------------ ---------------- Percent Percent Percent Non-Interest Income Amount Change Amount Change Amount Change - ------------------------------------------------------------------------------ Trust department $31,762 + 7.6% $29,529 + 12.4% $26,278 + 20.2% Service charges on deposit accounts 30,382 + 7.8 28,182 + 3.2 27,303 + 15.4 Other service charges, collection and exchange charges, commissions and fees 11,055 + 18.0 9,366 + 17.5 7,972 + 28.9 Net gain(loss) on securities transactions (1,396) - 65.4 (4,038) -381.8 1,433 +717.7 Other 15,940 + 15.7 13,776 + 4.0 13,243 + 28.1 ------- -------- -------- Total $87,743 + 14.2 $76,815 + .8 $76,229 + 23.3 ======= ======= =======
Trust income was up 7.6 percent during 1995. This is attributable primarily to improved financial market conditions and increased fee structures that were implemented in the second quarter of 1994. Increased income from investment fees, agency account fees and employee benefit trust fees helped offset lower corporate trust income. The lower corporate trust income results from the sale of the Corporation's municipal bond administration business to The Bank of New York in the second quarter of 1995. At December 31, 1995, the market value of trust assets totaled $6.9 billion compared to $10.4 billion, at December 31, 1994, with the sale of the municipal bond administration business being the reason for the decrease. The $10.4 billion in assets at December 31, 1994 included assets for which the Corporation acted as administrative agent. The December 1995 trust assets were comprised of agencies of $3.0 billion, personal assets of $2.2 billion, and employee benefits of $1.7 billion. The 12.4 percent increase in trust income from 1993 to 1994 reflects an increase in investment fee income resulting from growth in the number of accounts and increased fee structures. Deposit service charges are up 7.8 percent from 1994 mostly as a result of higher volumes. Other service charges increased 18.0 percent when compared to 1994. This is primarily due to fees associated with higher business volumes, bankcard discount, fees from the sale of mutual funds and higher loan prepayment fees. The 17.5 percent increase in other service charges from 1993 to 1994 is also primarily due to higher volumes and bankcard discount. During the fourth quarter of 1995 and 1994, the Corporation restructured a portion of its investment portfolio resulting in losses of approximately $1.5 million and $3.5 million, respectively. This portfolio restructuring of replacing lower-yielding securities with higher-yielding securities should have a favorable impact on net interest income in the future. See "Securities," page 23. 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 15.7 percent to $15,940,000 in 1995 compared to a 4.0 percent increase in 1994. The increase in 1995 is primarily due to the gain recognized on the sale of the Corporation's municipal bond administration business. The 1994 increase was primarily due to income from other real estate related recoveries.
Non-Interest Income ($ in thousands) (Graphic material omitted) Net Gain(Loss) Year Service Other Service on Securities Ended Trust Charges Charges Other Transactions - ----- ---------- ------- ------------- ------- -------------- 1991 $20,030 $20,455 $ 6,748 $ 8,227 $2,022 1992 21,861 23,663 6,183 10,338 (232) 1993 26,278 27,303 7,972 13,243 1,433 1994 29,529 28,182 9,366 13,776 (4,038) 1995 31,762 30,382 11,055 15,940 (1,396)
NON-INTEREST EXPENSE Excluding the provision for real estate losses, non-interest expense was $161,839,000 for 1995 compared with $155,562,000 for 1994 and $170,633,000 for 1993. Expenses 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) and $10.3 million in restructuring costs.
Year Ended December 31 ----------------------------------------------------- 1995 1994 1993 ---------------- ------------------ --------------- Percent Percent Percent Non-Interest Expense Amount Change Amount Change Amount Change - ----------------------------------------------------------------------------- Salaries and wages $ 58,177 + 9.8% $ 52,986 - 1.2% $ 53,654 +16.2% Pension and other employee benefits 10,905 +10.0 9,910 - 17.8 12,052 +23.7 Net occupancy of banking premises 17,992 +14.0 15,777 - 24.0 20,749 +22.3 Furniture and equipment 11,259 + 2.9 10,937 + 7.7 10,155 +22.4 Intangible amortization 8,124 + 6.5 7,627 + 10.9 6,877 +882.4 Restructuring costs 400 -51.8 830 - 91.9 10,285 Other 54,982 - 4.4 57,495 + 1.1 56,861 + 8.7 -------- -------- -------- 161,839 + 4.0 155,562 - 8.8 170,633 +27.2 Provision for real estate losses 610 1,445 -88.9 -------- -------- -------- Total $162,449 + 4.4 $155,562 - 9.6 $172,078 +16.9 ======== ======== ========
Salaries and wages increased by 9.8 percent during 1995 primarily because of acquisitions. Pension and other employee benefits increased by 10.0 percent during 1995 primarily due to an adjustment which lowered medical insurance expense in 1994, higher retirement plan expense and the impact of acquisitions. The 1994 adjustment to medical insurance, which was the result of implementing a managed health care network and favorable claims experience, is also responsible for the majority of the 17.8 percent decrease in the "Pension and other employee benefits" category in 1994. Net occupancy of banking premises increased 14.0 percent during 1995 primarily because of higher property taxes, increased lease expense as a result of acquisitions, and building maintenance expenses. The 24.0 percent decrease during 1994 is primarily due to 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. 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 incomplete portion of the 1993 restructuring plan deals principally with the sale of two properties with an aggregate net carrying value of $1.4 million. These properties have been written down to their net realizable value. The Corporation has marketing plans in place to sell these properties. Furniture and equipment costs increased 2.9 percent in 1995 as a result of the acquisitions. The increase in furniture and equipment cost of 7.7 percent in 1994 can be attributed to higher depreciation, service contracts, software maintenance and amortization. Intangible amortization of $8,124,000 increased $497,000 in 1995 due to the acquisitions. During 1994, intangible amortization increased $750,000 as a result of a full year's amortization of goodwill and other intangibles associated with the acquisition of New First City during February 1993. Other non-interest expense was down 4.4 percent in 1995 mostly due to lower FDIC insurance premiums and the timing of charitable contributions. The Corporation paid FDIC insurance premiums of $3.6 million in 1995 compared to $6.9 million in 1994 and $6.8 million in 1993. For the second half of 1995, the FDIC assessment rate imposed on banks ranged from 4 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). This was a decrease from the previous assessment range of 23 cents to 31 cents for those respective categories, for each $100 of domestic deposits. For 1996, the FDIC Board reduced the insurance premiums to zero for banks in the lowest risk category. However, various legislative proposals are pending which could result in banks paying a higher rate, reported to be approximately up to 2.4 cents per $100 of domestic deposits, to help address the shortfall in the savings and loan insurance fund. Other non-interest expense in 1994 was flat when compared to 1993. However, excluding those expenses associated with the acquisition of New First City in 1993, other non-interest expense increased 8.1 percent in 1994, due to the timing of charitable contributions, litigation expense (primarily a settlement) and state sales taxes. During 1995, the Corporation took a $610,000 provision for real estate losses compared with no provision in 1994 and $1,445,000 in 1993. The Corporation's efficiency ratio of 66.8 percent for 1995 improved from 71.4 percent for 1994 and 76.4 percent for 1993. The efficiency ratio measures what percentage of bank revenue is absorbed by non-interest expense. For the calculation of the 1993 ratio, the Corporation has excluded the $5.0 million in transition costs associated with the New First City acquisition and $10.3 million in restructuring costs as these were not part of the Corporation's normal operating costs.
Non-Interest Expense Excluding Non-recurring Items ($ in thousands) (Graphic material omitted) Net Occupancy Provision Year Salaries, Wages & Furniture and for Real Estate Ended and Benefits Equipment Other Losses - ----- --------------- --------------- ------- --------------- 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 26,714 65,122 0 1995 69,082 29,251 63,106 610
INCOME TAXES The Corporation recognized income tax expense of $24,998,000 in 1995, $20,177,000 in 1994 and a tax benefit of $735,000 in 1993. 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 the tax benefit. The valuation allowance for deferred tax assets was established at the beginning of 1993 with the adoption of Statement of Financial Accounting Standards No. 109(SFAS No. 109), "Accounting for Income Taxes." The one-time cumulative effect of adopting SFAS No. 109 was $8.4 million which favorably impacted net income for 1993. The Corporation's effective tax rates for 1995 and 1994 approximate the statutory rate of 35 percent. SOURCES AND USES OF FUNDS Average assets for 1995 of $3,944,026,000 increased by 7.8 percent from 1994 levels and increased 4.2 percent between 1993 and 1994. Funding sources in 1995 were basically unchanged from the previous year, while the Corporation's uses of funds changed significantly. Loans replaced securities as the largest component of earning assets. This change reflects the increases in loan volumes from a year ago.
Percentage of Total Average Assets ---------------------------------- Sources and Uses of Funds 1995 1994 1993 - ------------------------- ------- ------ ------ Sources of Funds: Deposits: Demand 21.9% 22.9% 23.2% Time 61.6 62.4 64.6 Federal funds purchased 6.4 5.2 3.7 Equity capital 8.2 7.9 7.1 Borrowed funds .3 .1 Other liabilities 1.6 1.6 1.3 ------ ------ ------ Total 100.0% 100.0% 100.0% ====== ====== ====== Uses of Funds: Loans 42.7% 36.6% 33.4% Securities 39.5 45.7 45.1 Federal funds sold 3.0 3.0 7.3 Non-earning assets 14.8 14.7 14.2 ------ ------ ------ Total 100.0% 100.0% 100.0% ====== ====== ======
LOANS Average loans for 1995 were $1,682,541,000, an increase of 25.6 percent from 1994 while period-end loans increased to $1,816,762,000 at year-end 1995, up 22.5 percent from the previous year. Most of the increase in period-end loans is attributable to commercial and real estate loans which increased $134 million and $123 million, respectively. This was driven by continued improved economic conditions in the Texas markets the Corporation serves. Approximately one third of the increase in total loans from a year ago resulted from acquisitions.
Total Average Loans and Yields ($ in millions) (Graphic material omitted) Average Loan Year Average Loans Yield - ---- ------------- ------------ 1991 $1,190 9.21% 1992 1,046 8.11 1993 1,172 7.79 1994 1,340 7.97 1995 1,683 8.99
December 31 --------------------------------------------------------------- 1995 ----------------------- Loan Portfolio Analysis Percentage of Period-End Balances Amount Total Loans 1994 1993 1992 1991 - ----------------------------------------------------------------------------------- Real estate: Construction $ 54,168 3.0% $ 44,502 $ 32,297 $ 26,632 $ 24,620 Land 37,695 2.1 36,805 32,317 39,991 61,436 Permanent Mortgages: Commercial 198,276 10.9 177,223 144,122 77,347 64,605 Residential 339,576 18.7 277,725 276,165 253,471 258,303 Other 208,190 11.4 178,263 150,499 134,470 161,439 ------- ---- ------- ------- ------- ------- Total Real estate 837,905 46.1 714,518 635,400 531,911 570,403 Commercial and industrial 508,990 28.0 375,085 311,436 256,520 283,074 Consumer 402,169 22.2 331,039 268,331 217,232 198,521 Financial institutions 10,409 .6 5,578 284 9,380 14,819 Foreign 43,847 2.4 45,290 31,763 17,871 31,988 Purchasing or carrying securities 1,711 .1 1,884 1,204 1,918 3,389 Other 13,068 .7 13,386 17,797 7,737 21,019 Unearned discount (1,337) (.1) (3,487) (8,456) (12,632) (14,854) ----------- ------ ---------- ---------- ---------- ---------- Total $1,816,762 100.0% $1,483,293 $1,257,759 $1,029,937 $1,108,359 =========== ====== ========== ========== ========== ========== Percent change from previous year +22.5% +17.9% +22.1% -7.1% -14.7%
Total real estate loans at December 31, 1995 were $837,905,000 up 17.3 percent from year-end 1994. Amortizing permanent mortgages represented 64.2 percent of the total real estate loan portfolio at year end. Residential mortgages increased $61,434,000 or 22.1 percent. Real estate loans categorized as "other" are primarily amortizing commercial and industrial loans with maturities of less than five years. Approximately two thirds of all real estate loans are owner occupied or have a major tenant (National or Regional company) with a low or manageable risk level.
December 31 ---------------------------------------------------- 1995 1994 ---------------------------------------------------- Real Estate Loans Percentage of Percentage of Period-End Balances Amount Real Estate Loans Amount Real Estate Loans - ---------------------------------------------------------------------------- Construction $ 54,168 6.5% $44,502 6.2% Land 37,695 4.5 36,805 5.2 Permanent mortgages: Commercial 198,276 23.7 177,223 24.8 Residential 339,576 40.5 277,725 38.9 Other 208,190 24.8 178,263 24.9 -------- ------ -------- ------ Total $837,905 100.0% $714,518 100.0% ======== ====== ======== ======
December 31 -------------------------- 1993 -------------------------- Real Estate Loans Percentage of Period-End Balances Amount Real Estate Loans - -------------------------------------------------- Construction $ 32,297 5.1% Land 32,317 5.1 Permanent mortgages: Commercial 144,122 22.7 Residential 276,165 43.4 Other 150,499 23.7 -------- ------ Total $635,400 100.0% ======== ======
MEXICAN LOANS At December 31, 1995, the Corporation's cross-border outstandings to Mexico, excluding $13,261,000 in loans secured by liquid U.S. assets, totaled $30,586,000 up from $24,023,000 last year. This growth reflects expansion in trade-related debt in connection with increased commerce with Mexico. All of the Corporation's Mexican loans are either secured by liquid U.S. assets or are unsecured loans to major financial institutions to finance international trade transactions. Of the trade related credits, approximately 94 percent are related to companies exporting from Mexico. At December 31, 1995, none of the Mexican related loans were on non-performing status.
December 31 ------------------------------------------ 1995 ------------------------------------------ Percentage of Percentage of Mexican Loans Amount Total Loans Total Assets - ---------------------------------------------------------------------- Financial institutions $30,560 1.7% .7% Commercial and industrial 26 ------- ---- ---- Total $30,586 1.7% .7% ======= ==== ====
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% ======== ==== ==== The above table exclude $13,261,000, $21,267,000 and $16,326,000 in loans secured by liquid assets held in the United States in 1995, 1994 and 1993, respectively.
NON-PERFORMING ASSETS Non-performing assets decreased 19.0 percent to $16,155,000 at December 31, 1995, compared with $19,938,000 at December 31, 1994 and $31,110,000 at December 31, 1993. Non-performing assets as a percentage of total loans and foreclosed assets decreased to .89 percent at December 31, 1995, down from 1.34 percent one year ago. Non-performing asset levels continued their steady decline from their high in 1989, which resulted from the dramatic economic downturn in Texas during the 1980's. The recovery of the Texas economy since that period created a demand for real estate and improved financial conditions in general enabling the Corporation to significantly reduce the levels of non- performing assets. Since 1990, non-performing assets have been reduced by charge-offs, sales of Other Real Estate Owned, and the resolution of problem loans.
December 31 --------------------------------------------------- Non-Performing Assets 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------- Non-accrual and restructured loans $14,646 $ 16,627 $ 27,677 $ 41,851 $ 71,447 Foreclosed assets 1,509 3,311 3,433 9,452 29,195 ------- -------- -------- -------- ------- Total $16,155 $ 19,938 $ 31,110 $ 51,303 $100,642 ======= ======== ======== ======== ======== As a percentage of total assets .38% .53% .85% 1.63% 3.27% As a percentage of total loans plus foreclosed assets .89% 1.34% 2.47% 4.94% 8.85% After-tax impact of lost interest per common share $ .10 $ .13 $ .20 $ .39 $ .78 Accruing loans 90 days past due: Consumer $ 1,276 $ 574 $ 765 $ 414 $ 1,378 All other 3,912 3,070 3,827 1,431 7,177 ------- -------- -------- -------- ------- Total $ 5,188 $ 3,644 $ 4,592 $ 1,845 $ 8,555 ======= ======== ======== ======== ======== Interest income that would have been recorded in 1995 on non-performing assets, had such assets performed in accordance with their original contract terms, was $1,403,000 on non-accrual and restructured loans and $290,000 on foreclosed assets. No interest income was recorded on non-accrual and restructured loans during 1995. Loans 90 days past due include $50,000 in foreign loans.
Non-Performing Assets ($ in millions) (Graphic material omitted) Non-Accrual and Foreclosed Year Restructured Loans Assets - ---- ------------------ ---------- 1991 $ 72 $29 1992 42 9 1993 28 3 1994 17 3 1995 15 1
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. 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. Classification of an asset in the non-performing category does not preclude ultimate collection of loan principal or interest. Consumer loan delinquencies have increased slightly from last year as a result of the increased loan volumes; however, they remain below the national average. At December 31, 1995, the Corporation had $13,594,000 in loans to borrowers experiencing financial difficulties which had not been included in either of the non-accrual, restructured or 90 days past due loan categories. Management monitors such loans closely and reviews their performance on a regular basis. ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses was $31,577,000 or 1.74 percent of period-end loans at December 31, 1995, compared to $25,741,000 or 1.74 percent of period-end loans at year-end 1994. The allowance for possible loan losses as a percentage of non-accrual and restructured loans was 215.6 percent at December 31, 1995, up from 154.8 percent at December 31, 1994. The Corporation recorded a $6,272,000 provision for possible loan losses during 1995, compared to no provision recorded during 1994. The provision is reflective of the continued growth in the loan portfolio. Despite the growth in loans in 1994, no provision for possible loan losses was recorded 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. The Corporation recorded net charge-offs of $436,000 for the year ended December 31, 1995, compared to net recoveries of $2,127,000 and $486,000 for the years ended December 31, 1994 and 1993, respectively. The Corporation's charge-offs in 1995 consisted primarily of consumer loan charge-offs, which increased to $3.8 million in 1995 from $2.4 million in 1994 primarily as a result of the increased loan volumes.
Year Ended December 31 Allowance for ------------------------------------------------------ Possible Loan Losses 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------------- Average loans outstanding during year, net of unearned discount $1,682,541 $1,339,656 $1,171,825 $1,045,883 $1,189,565 ========== ========== ========== ========== ========== Balance of allowance for possible loan losses at beginning of year $ 25,741 $ 26,298 $ 31,897 $ 42,387 $ 45,604 Provision (credit) for possible loan losses 6,272 (6,085) 5,498 23,166 Changes related to disposition of bank subsidiary (2,684) Charge-offs: Real estate (228) (1,349) (3,481) (11,073) (18,459) Commercial and industrial (654) (316) (1,287) (5,641) (10,955) Consumer (3,797) (2,357) (3,369) (3,293) (3,395) Other, including foreign (2) (63) (3,828) (1,973) ----------- ---------- --------- ---------- ---------- Total charge-offs (4,681) (4,022) (8,200) (23,835) (34,782) ----------- ---------- --------- ---------- ---------- Recoveries: Real estate 1,258 1,970 2,412 2,034 2,530 Commercial and industrial 1,722 2,434 3,577 3,783 3,691 Consumer 1,211 1,692 2,237 1,852 1,389 Other, including foreign 54 53 460 178 789 ---------- ---------- ---------- ---------- ---------- Total recoveries 4,245 6,149 8,686 7,847 8,399 ---------- ---------- ---------- ---------- ---------- Net (charge-offs) recoveries (436) 2,127 486 (15,988) (26,383) ---------- ---------- ---------- ---------- ---------- Balance of allowance for possible loan losses at end of year $ 31,577 $ 25,741 $ 26,298 $ 31,897 $ 42,387 ========== ========= ========= ========= ========= Net (charge-offs) recoveries as a percentage of average loans outstanding during the year, net of unearned discount (.03)% .16% .04% (1.53)% (2.22)% Allowance for possible loan losses as a percentage of year-end loans, net of unearned discount 1.74 1.74 2.09 3.10 3.82 There were no foreign charge-offs in 1995-1993 or 1991. During 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 foreign charge-off of $3,677,000. The 1994 allowance for possible loan losses includes a reduction of $2,684,000 related to the exchange of Cullen/Frost Bank in Dallas for Texas Commerce Bank- Corpus Christi.
Allowance for Possible Loan Losses and Allowance to Year-End Loans ($ in thousands) (Graphic material omitted) Year Allowance for possible Allowance to Allowance to Non- Ended loan losses year-end loans performing loans - ----- ---------------------- --------------- ----------------- 1991 $42,387 3.82% 59.3% 1992 31,897 3.10 76.2 1993 26,298 2.09 95.0 1994 25,741 1.74 154.8 1995 31,577 1.74 215.6
On January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosure" ("SFAS No. 118"). These standards specify how allowances for certain impaired loans should be determined and the accounting for in-substance foreclosures. Adoption of these standards did not have a material impact on the Corporation's results of operations. Loans previously classified as in-substance foreclosures but for which the Corporation had not taken possession of the collateral have been reclassified to loans for all periods presented. The Corporation has certain lending policies and procedures in place which are designed to maximize loan income within an acceptable level of risk. These policies and procedures, some of which are described below, are reviewed regularly by senior management. A reporting system supplements this review process by providing management and the board of directors with frequent reports related to loan production, loan quality, loan delinquencies and non- performing and potential problem loans. Commercial and industrial loans are a diverse group of loans to small, medium and large businesses. The purpose of these loans vary from supporting seasonal working capital needs to term financing of equipment. These loans are underwritten after obtaining an understanding and analyzing the management and the financial condition of the business, including its ability to generate sufficient cash flow to repay the debt according to scheduled terms. While some short-term loans may be made on an unsecured basis, most are secured by the assets being financed with appropriate collateral margins. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. At December 31, 1995, the Corporation had no concentration of commercial and industrial loans in any single industry that exceeded 10% of total loans. The diversity of the commercial real estate portfolio allows the Corporation to reduce the impact of a decline in a single market or industry. In addition to monitoring and evaluating commercial real estate loans based on collateral, geography and risk grade criteria, management closely tracks its level of owner-occupied commercial real estate loans versus non-owner occupied loans. Additionally, the bank utilizes the knowledge of third party experts to provide insight and guidance about the economic conditions and dynamics of the markets served by the Corporation. Within the commercial real estate loan category, the Corporation's primary focus has been the growth of loans secured by owner-occupied properties. At December 31, 1995, a majority of the Corporation's commercial real estate loans were secured by owner-occupied properties. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Consequently, these loans must withstand the analysis of a commercial loan and the underwriting process of a commercial real estate loan. Loans secured by non-owner occupied commercial real estate are made to developers and builders who have a relationship with the Corporation and who have a proven record of success. These loans are underwritten through the use of feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Sources of repayment for these types of loans may be pre- committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Corporation. These loans are closely monitored by on-site inspections and are considered more risky than the other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. The consumer loan portfolio has three distinct segments. Indirect consumer loans, which represent 62 percent of the consumer loan portfolio, direct non-real estate consumer loans, which represent 26 percent of the portfolio and direct real estate consumer loans, which represent 12 percent. The indirect segment is composed almost exclusively of new and used automobile financing. Non-real estate direct loans include automobile loans, unsecured revolving credit products, personal loans secured by cash and cash equivalents, and other similar types of credit facilities. The direct real estate loans are primarily extended for home improvement purposes. A computer based credit scoring analysis is used to supplement the consumer loan underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes the risk of any major charge-offs. Additionally, trend and outlook reports are provided to senior management on a frequent basis to aid in planning. The Corporation has an independent Loan Review Division that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to senior management and the board of directors. Loan Review's function complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel as well as the Corporation's policies and procedures. Loans identified as losses by management, internal loan review and/or bank examiners are charged-off. Furthermore, installment and credit card loans are charged-off automatically 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.
December 31 ----------------------- 1995 ----------------------- Allowance As a for Percentage Possible of Allocation of Allowance Loan Total for Possible Loan Losses Losses Loans - -------------------------------------------------------- Commercial and industrial $ 7,991 .44% Real estate 9,076 .50 Consumer 12,110 .67 Purchasing or carrying securities 6 Financial institutions 32 Other, including foreign 167 .01 Not allocated 2,195 .12 ------- ----- Total $31,577 1.74% ======= =====
December 31 ------------------------------------------------ 1994 1993 ----------------------- ------------------------ 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 $ 4,291 .29% $ 3,453 .27% Real estate 8,584 .58 10,432 .83 Consumer 10,384 .70 6,756 .54 Purchasing or carrying securities 7 3 Financial institutions 28 8 Other, including foreign 160 .01 332 .03 Not allocated 2,287 .16 5,314 .42 ------- ----- ------- ----- Total $25,741 1.74% $26,298 2.09% ======= ===== ======= =====
December 31 ------------------------------------------------ 1992 1991 ----------------------- ------------------------ 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 $ 3,752 .36% $ 4,970 .45% Real estate 14,069 1.37 17,725 1.60 Consumer 5,238 .51 3,212 .29 Purchasing or carrying securities 59 .01 7 Financial institutions 123 .01 197 .02 Other, including foreign 498 .05 1,152 .10 Not allocated 8,158 .79 15,124 1.36 ------- ---- ------- ---- Total $31,897 3.10% $42,387 3.82% ======= ==== ======= ====
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 $1,536,567,000 at year-end 1995. During the fourth quarter of 1995, the Financial Accounting Standards Board granted a one-time reassessment of the classification of all securities. The Corporation took advantage of this opportunity and reclassified $733,206,000 in securities from held to maturity to available for sale. Subsequently, in December 1995, the Corporation sold $79,075,000 in securities from its available for sale portfolio resulting in securities losses of approximately $1.5 million. This portfolio restructuring of replacing lower-yielding securities with higher-yielding securities should have a favorable impact on net interest income in the future. Securities available for sale totaled $1,325,836,000 at December 31, 1995, compared to $542,797,000 at year-end 1994. These securities consist primarily of U.S. Treasury securities and obligations of U.S. Government agencies. The remaining securities, consisting primarily of 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, 1995 was 6.36 percent compared with 5.70 percent for 1994.
December 31 ----------------------------------------------------------------- 1995 1994 1993 --------------------- --------------------- --------------------- Period-end Percentage Period-end Percentage Period-end Percentage Securities Balance of Total Balance of Total Balance of Total - --------------------------------------------------------------------------------------- U.S. Treasury $ 223,457 14.5% $ 241,625 15.2% $ 285,068 17.7% U.S. Government agencies and corporations 1,301,731 84.7 1,325,070 83.1 1,280,915 79.5 States and political subdivisions 5,527 .4 5,683 .3 7,216 .4 Other 5,852 .4 21,664 1.4 38,672 2.4 ---------- ------ ---------- ------ ---------- ------ Total $1,536,567 100.0% $1,594,042 100.0% $1,611,871 100.0% ========== ====== ========== ====== ========== ====== Average yield earned during the year (taxable- equivalent basis) 6.36% 5.70% 5.78%
INTEREST RATE SWAPS During 1995, the Corporation continued its strategy of entering into off- balance sheet interest rate swaps to hedge its interest rate risk by converting fixed rate loans into synthetic variable rate instruments. The Corporation had 12 interest rate swaps at December 31, 1995. Seven swaps, with an original total notional amount of $59 million, were each a hedge against a specific commercial fixed rate loan. The remaining five swaps, with an original total notional amount of $91 million, were each a hedge against a specific pool of consumer fixed rate loans. These swaps are all amortizing swaps that amortize in conjunction with the specific loan or specific pool of loans which have lives ranging from two to ten years and were entered into with counterparts which have a long-term debt rating that is investment grade. 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 were all amortizing swaps that amortized in conjunction with the loans which had 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 1995 and 1994.
DEPOSITS Total Average Deposits (Graphic material omitted) Average Average Average Year Demand Time Total Cost of Time Ended Deposits Deposits Deposits Deposits - ----- -------- ---------- ---------- ------------ 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 1995 864,566 2,428,349 3,292,915 3.70
1995 1994 1993 ------------------ ------------------ ------------------- Average Percent Average Percent Average Percent Demand Deposits Balance Change Balance Change Balance Change - ----------------------------------------------------------------------------- Commercial and individual $696,499 +3.4% $673,764 + 6.7% $631,363 +27.5% Correspondent banks 131,295 +5.5 124,416 -13.0 143,008 + 4.8 Public funds 36,772 -4.6 38,531 - 8.4 42,075 +24.3 -------- -------- -------- Total $864,566 +3.3 $836,711 + 2.5 $816,446 +22.7 ======== ======== ========
Total average time deposits increased 6.3 percent from 1994, with the largest dollar increase coming from time accounts under $100,000. All other categories of time deposits showed strong increases, except for savings and Interest-on-Checking, which were down 9.5 percent with virtually all of the decrease coming from passbook savings primarily due to the low rate environment.
1995 1994 ------------------------ ----------------------- Average Percent Average Percent Time Deposits Balance Change Cost Balance Change Cost - --------------------------------------------------------------------------- Savings and Interest- on-Checking $ 720,489 - 9.5% 1.76% $ 796,178 + 6.1% 1.81% Money market deposit accounts 616,931 +12.7 3.84 547,237 + 2.3 2.87 Time accounts of $100,000 or more 450,959 +23.6 5.09 364,997 - 2.8 3.35 Time accounts under $100,000 513,999 + 5.0 4.87 489,604 - 7.9 3.50 Public funds 125,971 +46.3 4.33 86,132 +14.9 2.90 ---------- ---------- Total $2,428,349 + 6.3 3.70 $2,284,148 + .7 2.71 ========== ==========
1993 ------------------------- Average Percent Time Deposits Balance Change Cost - ------------------------------------------------- Savings and Interest- on-Checking $ 750,386 +38.7% 1.98% Money market deposit accounts 534,814 +11.9 2.51 Time accounts of $100,000 or more 375,322 -19.0 2.77 Time accounts under $100,000 531,803 +10.1 3.25 Public funds 74,979 - 5.8 2.83 ---------- Total $2,267,304 +10.9 2.56 ==========
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's average foreign deposits declined 4.4 percent from 1994. The turbulent economic conditions which started with the peso devaluation in December 1994 continued in 1995. The Mexican economy is expected to generate positive growth in 1996; however, the country is not expected to fully regain the jobs and production that were lost in 1995. Financial and political uncertainty, high interest rates, reduced real wages, and financial system difficulties will continue to restrain economic growth. This economic restraint is not expected to have a significant impact on the Corporation's level of foreign deposits.
Foreign Deposits 1995 1994 1993 - ----------------------------------------------------------------------- Average balance $498,610 $521,413 $505,746 Percentage of total average deposits 15.1% 16.7% 16.4%
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.
1995 1994 1993 ---------------- ---------------- ---------------- Average Average Average Average Average Average Federal Funds Balance Rate Balance Rate Balance Rate - ----------------------------------------------------------------------------- Federal funds sold and securities purchased under resale agreements $117,158 5.75% $108,762 3.81% $255,613 3.02% Federal funds purchased and securities sold under repurchase agreements 251,392 5.29 191,611 3.74 131,096 2.52 -------- -------- -------- Net funds position (134,234) $(82,849) $124,517 ======== ======== ========
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, 1995 and 1994. CAPITAL At December 31, 1995, shareholders' equity reached the highest level in the Corporation's history, $341,464,000, an increase of 15.6 percent from $295,437,000 at December 31, 1994. The increase in 1995 was due primarily to earnings growth and an $11.1 million change in unrealized gains, net of taxes, on securities available for sale, partially offset by $12.7 million of dividends paid. The Corporation had an unrealized gain on securities available for sale, net of deferred taxes, of $8.5 million as of December 31, 1995 compared to a $2.6 million unrealized loss as of December 31, 1994, reflecting the change of $11.1 million during 1995. The unrealized gain is primarily due to the decline 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 $.22 per common share during the first two quarters of 1995 increasing to $.35 per common share during the third and fourth quarters. 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. 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, 1995 December 31, 1994 ----------------- ------------------ Capital Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------- Risk-Based Tier 1 Capital $ 281,334 13.07% $ 256,552 14.44% Tier 1 Capital Minimum requirement 86,126 4.00 71,075 4.00 Total Capital $ 308,306 14.32% $ 278,806 15.69% Total Capital Minimum requirement 172,252 8.00 142,149 8.00 Risk-adjusted assets, net of goodwill $2,153,155 $1,776,863 Leverage ratio 6.94% 6.99% Average equity as a percentage of average assets 8.20 7.85
In December of 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital tiers for depository institutions. Effective December 16, 1992, federal banking agencies adopted final rules relating to these tiers. At December 31, 1995, the Corporation's subsidiary banks were considered "well capitalized" as defined by FDICIA, the highest rating, and the Corporation's capital ratios were in excess of "well capitalized" levels. A financial institution is deemed to be well capitalized if the institution has a total risk-based capital ratio of 10.0 percent or greater, a Tier 1 risk-based capital ratio of 6.0 percent or greater, and a Tier 1 leverage ratio of 5.0 percent or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. 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 37. Management fees are not assessed. NON-BANKING SUBSIDIARIES Cullen/Frost has three principal non-banking subsidiaries. Main Plaza Corporation 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. 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 accordance with generally accepted accounting principles in all material respects. /s/ T.C. FROST T.C. Frost Senior Chairman and Chief Executive Officer /s/ RICHARD W. EVANS, JR. Richard W. Evans, Jr. Chairman and Chief Operating Officer /s/ PHILLIP D. GREEN Phillip D. Green Executive Vice President and Chief Financial Officer
CONSOLIDATED STATEMENTS OF OPERATIONS CULLEN/FROST BANKERS, INC. AND SUBSIDIARIES (dollars in thousands, except per share amounts) Year Ended December 31 ----------------------------- 1995 1994 1993 -------- -------- -------- Interest income: Loans, including fees $150,497 $106,252 $ 90,756 Securities: Taxable 98,521 94,760 90,447 Tax-exempt 341 349 698 -------- -------- -------- Total Securities 98,862 95,109 91,145 Time deposits 2 2 4 Federal funds sold and securities purchased under resale agreements 6,732 4,146 7,714 -------- -------- -------- Total Interest Income 256,093 205,509 189,619 Interest expense: Deposits 89,809 61,996 58,079 Federal funds purchased and securities sold under repurchase agreements 13,296 7,166 3,304 Long-term notes payable and other borrowings 733 410 -------- -------- -------- Total Interest Expense 103,838 69,162 61,793 -------- -------- -------- Net Interest Income 152,255 136,347 127,826 Provision (credit) for possible loan losses 6,272 (6,085) -------- -------- -------- Net Interest Income After Provision (Credit) for Possible Loan Losses 145,983 136,347 133,911 Non-interest income: Trust department 31,762 29,529 26,278 Service charges on deposit accounts 30,382 28,182 27,303 Other service charges, collection and exchange charges, commissions and fees 11,055 9,366 7,972 Net gain (loss) on securities transactions (1,396) (4,038) 1,433 Other 15,940 13,776 13,243 -------- -------- -------- Total Non-Interest Income 87,743 76,815 76,229 Non-interest expense: Salaries and wages 58,177 52,986 53,654 Pension and other employee benefits 10,905 9,910 12,052 Net occupancy of banking premises 17,992 15,777 20,749 Furniture and equipment 11,259 10,937 10,155 Provision for real estate losses 610 1,445 Restructuring costs 400 830 10,285 Other 63,106 65,122 63,738 -------- -------- -------- Total Non-Interest Expense 162,449 155,562 172,078 -------- -------- -------- Income Before Income Taxes (Credits) and Cumulative Effect of Accounting Change 71,277 57,600 38,062 Income taxes (credits) 24,998 20,177 (735) -------- -------- -------- Income before cumulative effect of accounting change 46,279 37,423 38,797 Cumulative effect of change in accounting for income taxes 8,439 -------- -------- -------- Net Income $ 46,279 $ 37,423 $ 47,236 ======== ======== ======== Per Share Income before cumulative effect of accounting change- Primary $ 4.08 $ 3.33 $ 3.48 Fully diluted 4.06 3.33 3.48 Net income- Primary 4.08 3.33 4.24 Fully diluted 4.06 3.33 4.24 Dividends 1.14 .67 .15 See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS CULLEN/FROST BANKERS, INC. AND SUBSIDIARIES (dollars in thousands, except per share amounts) December 31 ----------------------- 1995 1994 ---------- ---------- Assets Cash and due from banks $ 533,333 $ 365,792 Time deposits 64 12 Securities held to maturity (market value: 1995-$214,962; 1994-$981,801) 210,731 1,051,245 Securities available for sale 1,325,836 542,797 Federal funds sold and securities purchased under resale agreements 100,550 167,550 Loans, net of unearned discount of $1,337 in 1995 and $3,487 in 1994 1,816,762 1,483,293 Less: Allowance for possible loan losses (31,577) (25,741) ---------- ---------- Net loans 1,785,185 1,457,552 Banking premises and equipment 89,493 88,667 Accrued interest and other assets 155,019 120,105 ---------- ---------- Total Assets $4,200,211 $3,793,720 ========== ========== Liabilities Demand deposits: Commercial and individual $ 792,879 $ 710,138 Correspondent banks 127,549 77,425 Public funds 71,581 44,740 ---------- ---------- Total demand deposits 992,009 832,303 Time deposits: Savings and Interest-on-Checking 718,582 763,300 Money market deposit accounts 711,865 559,153 Time accounts 998,738 842,520 Public funds 224,539 90,686 ---------- ---------- Total time deposits 2,653,724 2,255,659 ---------- ---------- Total deposits 3,645,733 3,087,962 Federal funds purchased and securities sold under repurchase agreements 111,395 370,235 Accrued interest and other liabilities 101,619 40,086 ---------- ---------- Total Liabilities 3,858,747 3,498,283 Shareholders' Equity Common stock, par value $5 per share 55,997 55,615 Shares authorized: 1995-30,000,000;1994-30,000,000 Shares outstanding: 1995-11,199,450;1994-11,123,062 Surplus 118,418 116,362 Retained earnings 158,563 126,038 Unrealized gain (loss) on securities available for sale, net of tax 8,486 (2,578) ---------- ---------- Total Shareholders' Equity 341,464 295,437 ---------- ---------- Total Liabilities and Shareholders' Equity $4,200,211 $3,793,720 ========== ========== See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS CULLEN/FROST BANKERS, INC. AND SUBSIDIARIES (dollars in thousands) Year Ended December 31 ------------------------------ 1995 1994 1993 --------- --------- --------- Operating Activities Net income $ 46,279 $ 37,423 $ 47,236 Adjustments to reconcile net income to net cash provided by operating activities: Provision (credit) for possible loan losses 6,272 (6,085) Provision for real estate losses 610 1,445 Provision (credit) for deferred taxes (1,150) 2,106 (6,364) Accretion of discounts on loans (1,870) (4,563) (8,615) Accretion of securities' discounts (17,031) (11,624) (2,602) Amortization of securities' premiums 2,248 3,385 5,678 Net realized loss(gain) on securities transactions 1,396 4,038 (1,433) Net gain on sale of assets (5,297) (2,074) (3,443) Depreciation and amortization 18,825 18,448 16,766 (Increase )decrease in accrued interest receivable (3,092) (2,603) 1,624 Increase in accrued interest payable 2,763 1,629 160 Restructuring accrual (561) (1,695) 7,715 Cumulative effect of change in accounting principle (8,439) Net change in other assets and liabilities 36,497 2,669 (634) --------- --------- ---------- Net cash provided by operating activities 85,889 47,139 43,009 Investing Activities Proceeds from sales of securities held to maturity 101,309 Proceeds from maturities of securities held to maturity 106,424 145,609 483,153 Purchases of securities held to maturity (833) (209,773) (900,825) Proceeds from sales of securities available for sale 147,468 170,894 101,181 Proceeds from maturities of securities available for sale 677,915 343,330 778,066 Purchases of securities available for sale (806,723) (451,883) (688,504) Net increase in loan portfolio (208,107) (207,741) (64,638) Proceeds from sales of equipment 31 4,458 4,167 Purchases of premises and equipment (6,352) (16,403) (13,326) Proceeds from sales of repossessed properties 1,719 2,912 4,775 Net cash and cash equivalents received from bank acquisition 8,734 (22,536) 183,131 --------- --------- ---------- Net cash used by investing activities (79,724) (241,133) (11,511) Financing Activities Net increase (decrease) in demand deposits, IOC accounts, and savings accounts 305,696 (34,165) 108,968 Net increase (decrease) in certificates of deposit 68,329 (25,210) (175,267) Net increase (decrease) in Federal funds purchased and securities sold under repurchase agreements (267,565) 206,116 43,605 Principal payments on long-term debt (3,400) Proceeds from employee stock purchase plan and options 691 3,061 2,154 Dividends paid (12,723) (7,415) (1,650) --------- -------- --------- Net cash provided (used) by financing activities 94,428 142,387 (25,590) --------- -------- --------- Increase (decrease) in cash and cash equivalents 100,593 (51,607) 5,908 Cash and cash equivalents at beginning of year 533,354 584,961 579,053 --------- -------- --------- Cash and cash equivalents at end of year $ 633,947 $ 533,354 $ 584,961 ========= ========= ========= See notes to consolidated financial statements.
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, 1993 $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 expense (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 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 Net Income for 1995 46,279 46,279 Proceeds from employee stock purchase plan and options 250 475 (34) 691 Tax benefit related to exercise of 503 503 stock options Issuance of restricted stock 132 1,078 1,210 Restricted stock plan deferred compensation, net (997) (997) Unrealized gain (loss) on securities available for sale, net of tax 11,064 11,064 Cash dividend (12,723) (12,723) ------- -------- -------- ------ -------- Balance at December 31, 1995 $55,997 $118,418 $158,563 $8,486 $341,464 ======= ======== ======== ====== ======== See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CULLEN/FROST BANKERS, INC. AND SUBSIDIARIES NOTE A - SUMMARY OF ACCOUNTING POLICIES Cullen/Frost Bankers, Inc., ("Cullen/Frost" or "the Corporation") through its wholly- owned subsidiary banks provides a broad array of products and services throughout central and south Texas. In addition to general commercial banking, other products and services offered include trust and investment management, mortgage banking, asset based lending, treasury management and item processing. The accounting and reporting policies followed by Cullen/Frost 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 statements 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. Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Securities - Effective December 31, 1993, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 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. During the fourth quarter of 1995, the Financial Accounting Standards Board ("FASB") granted a one-time reassessment of the classification of all securities. 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 but accrued 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 concentrations, specific credit risks, loan loss experience, current loan portfolio quality, and anticipated economic, political and regulatory conditions. The Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosure", effective January 1, 1995. As a result of applying the new standard, the 1995 allowance for possible loan losses related to loans that are identified in accordance with SFAS No. 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 and the income recognized in accordance with SFAS No. 118 is based on the collectability of the principal amount. The adoption of the standard did not have a material impact on the Corporation's financial position or results of operation. Foreclosed Assets - Foreclosed assets consist of property which has been formally repossessed. Collateral obtained through foreclosure is 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. In accordance with SFAS No. 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 No. 114, loans previously classified as in-substance foreclosure but for which the Corporation had not taken possession of the collateral have been reclassified to loans. Reclassifications related to in-substance have been made to make prior years comparable. These reclassifications did not impact the Company's financial condition or results of operations. 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. Intangible 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 forty years. Core deposit and other intangibles are amortized on an accelerated basis over their estimated remaining lives. Intangible assets are included in other assets. All such intangible assets are periodically evaluated as to the recoverability of their carrying value. 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 SFAS No. 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. Accounting Changes - The following is a brief discussion of the SFAS pronouncements issued by the FASB in 1995 which apply to the Corporation. Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of: In March 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the present value of expected future cash flows from the use of the asset and its eventual disposition are less than the carrying amount of the asset, an impairment loss is recognized. This statement will be adopted in the first quarter of 1996. The adoption is not expected to have a material impact on financial position or results of operations. Accounting for Mortgage Servicing Rights: In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights." This statement requires that corporations recognize rights to service mortgage loans for others as separate assets, whether those rights are acquired through loan origination activities or through purchase activities. Additionally, the Corporation must periodically assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. This standard will be adopted in the first quarter of 1996. The adoption is not expected to have a material impact on financial position or results of operations. Accounting for Stock-Based Compensation: In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123, effective for fiscal years beginning after December 31, 1995, defines a fair value-based method of accounting and establishes financial accounting and reporting standards for stock-based employee compensation plans. Under the fair value-based method, compensation cost is measured at the grant date based upon the value of the award and is recognized over the service period. SFAS No. 123 allows for the election to continue to measure stock-based compensation cost using the intrinsic value method of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB No. 25). The election of this option requires a pro forma disclosure of net income and earnings per share as if the fair value-based method of accounting, as defined by SFAS No. 123, had been applied. Currently, the Corporation expects to continue to follow APB No. 25 and will adopt the required disclosures for financial statements beginning in 1996. NOTE B - ACQUISITIONS The transactions listed below have been accounted for as purchase transactions with the total cash consideration funded through internal sources. The purchase price has been allocated to the underlying assets and liabilities based on estimated fair value at the date of acquisition. Such estimates may be subsequently revised. Results of operations are included from the date of acquisition. 1996 ACQUISITIONS S.B.T. Bancshares, Inc. - San Marcos On January 5, 1996, the Corporation paid approximately $17.7 million to acquire S.B.T. Bancshares, Inc., including its subsidiary, State Bank and Trust Company in San Marcos, Texas. Goodwill associated with the transaction amounted to approximately $6.6 million and will be amortized on a straight-line method over a 15-year life. Approximately $4.6 million of other intangibles associated with the acquisition will be amortized over their estimated lives ranging from five to ten years on an accelerated method. The Corporation acquired loans of approximately $51 million and deposits of approximately $112 million. Park National Bank - Houston On February 15, 1996, the Corporation paid approximately $33.5 million to acquire Park National Bank in Houston, Texas. Goodwill associated with the transaction amounted to approximately $9.9 million and will be amortized on a straight-line method over a 15-year life. Approximately $7.6 million of other intangibles associated with the acquisition will be amortized over their estimated lives ranging from five to ten years on an accelerated method. The Corporation acquired loans of approximately $157 million and deposits of approximately $225 million. 1995 ACQUISITIONS Valley Bancshares, Inc. - McAllen On April 4, 1995, the Corporation paid approximately $9.2 million to acquire Valley Bancshares, Inc., including its subsidiary, Valley National Bank in McAllen, Texas. Goodwill associated with the transaction amounted to approximately $1.7 million and is being amortized on a straight-line method over a 15-year life. Approximately $3.3 million of other intangibles associated with the acquisition are being amortized over their estimated lives ranging from six to ten years on an accelerated method. The Corporation acquired loans of approximately $28 million and deposits of approximately $49 million. Cullen/Frost's results of operation would not have been materially impacted if the Valley Bancshares acquisition had occurred at the beginning of 1995 or 1994. National Commerce Bank - Houston On May 19, 1995, the Corporation paid approximately $24.2 million to acquire National Commerce Bank in Houston, Texas. Goodwill associated with the transaction amounted to approximately $9.6 million and is being amortized on a straight-line method over a 15-year life. Approximately $6.3 million of other intangibles associated with the acquisition are being amortized over their estimated lives ranging from six to eleven years on an accelerated method. The Corporation acquired loans of approximately $95 million and deposits of approximately $101 million. Cullen/Frost's results of operations would not have been materially impacted if the National Commerce acquisition had occurred at the beginning of 1995 or 1994. Comerica Bank branches - San Antonio On July 21, 1995, the Corporation acquired the two San Antonio branches of Comerica Bank Texas. The Corporation acquired loans of approximately $2 million and deposits of approximately $34 million. 1994 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, paid approximately $5.1 million to acquire 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. Goodwill recorded as a result of the transaction approximated $2.3 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. 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 $37,397,000 for 1995 and $47,302,000 for 1994. NOTE D - SECURITIES Securities A summary of the amortized cost and estimated fair value of securities is presented below.
December 31, 1995 ------------------------------------------------ Amortized Unrealized Unrealized Estimated (in thousands) Cost Gains Losses Fair Value - ---------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury U.S. Government agencies and corporations $ 205,364 $ 4,014 $ 79 $ 209,299 States and political subdivisions 5,342 296 5,638 Other 25 25 --------- --------- ---------- ---------- Total $ 210,731 $ 4,310 $ 79 $ 214,962 ========= ========= ========== ==========
December 31, 1995 ------------------------------------------------ Amortized Unrealized Unrealized Estimated (in thousands) Cost Gains Losses Fair Value - ---------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury $ 223,263 $ 194 $ 223,457 U.S. Government agencies and corporations 1,083,509 17,777 $ 4,919 1,096,367 States and political subdivisions 184 3 2 185 Other 5,824 5 2 5,827 --------- --------- ---------- ---------- Total $1,312,780 $ 17,979 $ 4,923 $1,325,836 ========= ========= ========== ==========
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 ========== ======= ======= ==========
December 31, 1994 ------------------------------------------------ Amortized Unrealized Unrealized Estimated (in thousands) Cost Gains Losses Fair Value - ---------------------------------------------------------------------------- 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 ======== ======= ====== ========
The amortized cost and estimated fair value of securities at December 31, 1995 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, 1995 ------------------------------------------------------------- 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 $ 50 $ 50 $ 223,488 $ 223,682 Due after one year through five years 185 186 1,013 1,017 Due after five years through ten years 723 743 34 34 Due after ten years 4,409 4,684 4,736 4,736 ---------- ---------- ---------- ---------- 5,367 5,663 229,271 229,469 Mortgage-backed securities and collateralized mortgage 205,364 209,299 1,083,509 1,096,367 obligations ---------- ---------- ---------- ---------- Total $ 210,731 $ 214,962 $1,312,780 $1,325,836 ========== ========== ========== ==========
On November 15, 1995, the FASB staff issued a special report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." In accordance with provisions in this report, the Corporation took advantage of a one-time reassessment of the classification of all securities and reclassified securities with an amortized cost of $733,206,000 from the held to maturity category to the available for sale category. The unrealized loss on those securities at the time of the transfer was $2,351,000. Proceeds from sales of securities available for sale during 1995 were $147,468,000. During 1995, gross gains of $100,000 and gross losses of $1,496,000 were realized on those sales. 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. 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 $342,003,000 at December 31, 1995 and $833,034,000 at December 31, 1994. NOTE E - LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES A summary of loans outstanding follows:
December 31 ------------------------- (in thousands) 1995 1994 - ------------------------------------------------------------------------------ Real Estate: Construction $ 54,168 $ 44,502 Land 37,695 36,805 Permanent mortgages: Commercial 198,276 177,223 Residential 339,576 277,725 Other 208,190 178,263 Commercial and industrial 508,990 375,085 Consumer 402,169 331,039 Financial institutions 10,409 5,578 Foreign 43,847 45,290 Purchasing or carrying securities 1,711 1,884 Other 13,068 13,386 Unearned discount (1,337) (3,487) ---------- ---------- Total loans $1,816,762 $1,483,293 ========== ==========
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 $631,887,000 and $39,911,000, respectively, at December 31, 1995. Commitments to extend credit and standby letters of credit amounted to $504,183,000 and $43,035,000, respectively, at December 31, 1994. Commercial and industrial loan commitments represent approximately 78 percent and 72 percent of the total loan commitments outstanding at December 31, 1995 and 1994, respectively. The majority of the Corporation's real estate loans are secured by real estate in San Antonio. Mortgage loans of approximately $7.3 million and $4.9 million were held for sale by the Corporation and are included in residential permanent mortgages at December 31, 1995 and 1994, 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 $57,692,000 and $33,802,000 at December 31, 1995 and 1994, respectively. During 1995, additions to these loans amounted to $82,331,000, repayments totaled $57,805,000 and other changes totaled $636,000. 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 $1,386,000 and $1,363,000 at December 31, 1995 and 1994, respectively. A summary of the changes in the allowance for possible loan losses follows:
Year Ended December 31 ---------------------------------- (in thousands) 1995 1994 1993 - --------------------------------------------------------------------------------- Balance at the beginning of the year $25,741 $26,298 $31,897 Provision (credit) for possible loan losses 6,272 (6,085) Changes related to disposition of bank subsidiary (2,684) Net charge-offs: Losses charged to the allowance (4,681) (4,022) (8,200) Recoveries 4,245 6,149 8,686 ------- ------- ------- Net (charge-offs) recoveries (436) 2,127 486 ------- ------- ------- Balance at the end of the year $31,577 $25,741 $26,298 ======= ======= =======
At December 31, 1995, the recorded investment in impaired loans totaled $9,112,000, of which $4,565,000 related to loans with no valuation reserve and $4,547,000 related to loans with a valuation reserve of $712,000. The majority of the impaired loans were real estate loans and collectability was measured based on the fair value of the collateral. The average recorded investment in the impaired loans during 1995 was approximately $9,312,000. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is fully assured, in which case interest is recognized on the cash basis. There was no interest revenue recognized on impaired loans by the Corporation during 1995. The total allowance for possible loan losses includes activity related to allowances calculated in accordance with SFAS No. 114 and activity related to other loan loss allowances determined in accordance with SFAS No. 5. NOTE F - NON-PERFORMING ASSETS A summary of non-performing assets follows:
December 31 --------------------- (in thousands) 1995 1994 - --------------------------------------------------------------------------- Non-accrual and restructured loans $14,646 $16,627 Foreclosed assets 1,509 3,311 ------- ------- $16,155 $19,938 ======= =======
There was no interest income recognized on non-accrual and restructured loans by Cullen/Frost in 1995. The Corporation recognized approximately $7,000 in interest income on non-accrual and restructured loans in 1994 compared with approximately $57,000 in 1993. Had these reduced earning and non-earning loans performed according to their original contract terms, Cullen/Frost would have recognized interest income of approximately $1,403,000 in 1995, $1,082,000 in 1994 and $1,394,000 in 1993. NOTE G - BANKING PREMISES AND EQUIPMENT A summary of banking premises and equipment follows:
December 31 -------------------------------------------------------------- 1995 1994 ----------------------------- ------------------------------ Accumulated Accumulated Depreciation Net Depreciation Net And Carrying And Carrying (in thousands) Cost Amortization Value Cost Amortization Value - --------------------------------------------------------------------------------------- Land $ 35,468 $35,468 $ 34,319 $34,319 Buildings 40,443 $17,100 23,343 38,409 $17,680 20,729 Furniture and equipment 71,505 56,258 15,247 67,050 50,398 16,652 Leasehold improvements 29,776 15,950 13,826 26,150 12,600 13,550 Construction in progress 1,609 1,609 3,417 3,417 -------- ------- ------- ------- ------- ------- Total banking premises and equipment $178,801 $89,308 $89,493 $169,345 $80,678 $88,667 ======== ======= ======= ======== ======= =======
NOTE H - DEPOSITS A summary of deposits outstanding by category follows:
December 31 ---------------------------------- (in thousands) 1995 1994 - ------------------------------------------------------------------------------ Demand deposits $ 992,009 $ 832,303 Savings and Interest-on-Checking 718,582 763,300 Money market deposit accounts 711,865 559,153 Time accounts of $100,000 or more 467,652 370,739 Time accounts under $100,000 531,086 471,781 Other 224,539 90,686 ---------- ---------- Total deposits $3,645,733 $3,087,962 ========== ==========
Foreign deposits totaled $494,872,000 and $531,343,000 at December 31, 1995 and 1994, 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, 1995 and 1994. NOTE J-COMMON STOCK AND EARNINGS PER COMMON SHARE The weighted-average number of shares outstanding used to compute primary and fully diluted earnings per common share were 11,337,824 and 11,389,830, respectively, for the year ended December 31, 1995. The weighted-average number 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. Earnings per share calculations for the years ended December 31, 1995, 1994, and 1993 include the effect of common stock equivalents applicable to the stock option contracts. 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 $18,846,000 available for the payment of dividends to Cullen/Frost at December 31, 1995. NOTE L- LEASES AND RENTAL AGREEMENTS Rental expense for all leases amounted to $9,842,000, $8,822,000 and $11,699,000 for the years ended December 31, 1995, 1994 and 1993, 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 $4,404,000, $4,368,000 and $4,688,000 for 1995, 1994 and 1993, 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, 1995 follows:
Total (in thousands) Commitments - ------------------------------------------------------------------------------ 1996 $10,902 1997 9,102 1998 8,355 1999 7,612 2000 4,780 Subsequent to 2000 18,424 ------- Total future minimum rental commitments $59,175 =======
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. The funded status of the plans and the amounts recognized in Cullen/Frost's consolidated balance sheets at December 31, 1995 and 1994 are presented below:
(in thousands) 1995 1994 - --------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $25,441 in 1995 and $21,290 in 1994 $26,638 $21,991 ======= ======= Projected benefit obligation for service rendered to date $39,808 $31,659 Plan assets at fair value (primarily listed stocks and U.S. and corporate bonds) 24,991 18,384 ------- ------- Projected benefit obligation in excess of plan assets 14,817 13,275 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (7,775) (6,729) Unrecognized prior service cost (5,407) (4,519) Unrecognized net transitional asset 790 890 ------- ------- Accrued pension cost included in other liabilities $ 2,425 $ 2,917 ======= =======
Net pension cost included the following components:
(in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------- Service cost for benefits earned during the year $ 1,731 $1,444 $1,172 Actual return on plan assets, net of expenses (3,837) 388 (567) Interest cost on projected benefit obligation 2,607 2,306 2,135 Net amortization and deferral 2,788 (1,326) (345) ------- ------ ------ Net pension cost $ 3,289 $2,812 $2,395 ======= ====== ======
The weighted-average discount rate used for calculating the pension obligation at December 31, 1994 and for calculating the net periodic pension cost for 1995 was 8 percent; the assumed rate of future compensation increases was 5 percent. The discount rate used for calculating the pension obligation at December 31, 1995 was 7.5 percent, and the assumed rate of future compensation increases was 5 percent; these assumptions will be used for calculating the 1996 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 contributions up to 16% of eligible compensation. Cullen/Frost makes matching contributions 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 55,434 during 1995, 62,626 during 1994 and 43,018 during 1993. The Corporation's gross expenses related to the 401(k) Plan were $1,521,000 and $1,296,000 for 1995, 1994 and 1993, respectively. During 1995 and 1994, the Corporation utilized forfeitures of $1,439,000 and $539,000, respectively, to offset this expense. The 1991 Thrift Incentive Stock Purchase Plan ("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 14,903 during 1995, 17,051 during 1994 and 17,909 during 1993. The Corporation's expenses related to the 1991 Stock Plan were $595,000, $574,000 and $541,000 for 1995, 1994 and 1993, respectively. 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 option 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, 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 Granted 102,000 45.75 Exercised 21,968 6.82- 14.09 17,326 6.03- 10.91 11,871 25.45- 36.25 Canceled 1,254 10.91 902 10.91 2,627 25.45- 35.50 ------- ------------- ------- ----------- ------- ------------- Balance, Dec. 31, 1995 27,767 $ 6.82-$14.09 116,397 $6.03-$10.91 414,033 $25.45-$45.75 ======= ============== ======= ============ ======= =============
In 1995, restricted stock grants of 26,450 were awarded under the 1992 Stock Plan. Restricted stock grants awarded under the 1992 Stock Plan totaled 6,375 and 4,988 shares for 1994 and 1993, respectively. Deferred compensation expense related to the restricted stock was $213,000 in 1995, $111,000 in 1994, and $117,000 in 1993. 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 16 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 from 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 eight agreements, each covered person could receive from 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 $8,458,000 at December 31, 1995. The Corporation adopted SFAS 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 FASB issued SFAS 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. NOTE N- INCOME TAXES The following is an analysis of the Corporation's income taxes included in the consolidated statements of operations for the years ended December 31, 1995, 1994, and 1993.
(in thousands) 1995 1994 1993 - ---------------- ------- ------- ------ Current income tax expense $26,148 $18,071 $ 5,629 Deferred income tax (1,150) 2,106 7,196 Decrease in deferred tax valuation allowance (13,560) -------- ------- ------- Income tax expense (credit) as reported $24,998 $20,177 $ (735) ======= ======= ========
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) 1995 1994 1993 - -------------- ------------------------------ Income before income taxes and cumulative effect of accounting change $71,277 $57,600 $38,062 Statutory rate 35% 35% 35% -------- ------- ------- Income tax expense at the statutory rate 24,947 20,160 13,322 Effect of tax-exempt interest (565) (406) (574) Change in deferred tax valuation allowance (13,560) Other 616 423 77 -------- ------- ------- Income tax expense (credit) as reported $24,998 $20,177 $ (735) ======== ======= =======
Cullen/Frost adopted SFAS No. 109, "Accounting for Income Taxes," as of January 1, 1993. As permitted by SFAS No. 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 $24,998,000 in 1995 compared to a tax expense of $20,177,000 in 1994 and 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. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The reduction of the valuation allowance was based mainly on the level of earnings obtained in 1993 and projected future earnings. At December 31, 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 were 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. At December 31, 1995, no valuation reserve is necessary because deferred tax assets are supported by $43,000,000 in recoverable taxes paid in prior years and the future reversal of approximately $5,100,000 in taxable temporary differences. Cullen/Frost recognized a tax benefit of $489,000 and $1,413,000 related to securities transactions in 1995 and 1994, respectively. Cullen/Frost recognized a tax expense of $501,000 related to securities transactions in 1993. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 1995, 1994 and 1993 are presented below:
(in thousands) 1995 1994 1993 - ----------------------------------------------------- -------- ------- ------- Deferred tax assets: Allowance for possible loan losses $11,432 $ 9,010 $10,452 Other real estate and repossessed collateral 662 1,844 3,964 Building modification reserve 1,592 1,592 1,592 Gain on sale of assets 1,289 1,402 1,416 Intangibles 1,280 2,633 1,316 Net occupancy restructuring 1,197 1,988 2,334 Unrealized loss on securities available for sale 1,388 Other 996 1,338 2,943 ------- ------- ------- Total gross deferred tax assets 18,448 21,195 24,017 Deferred tax liabilities: Depreciation and amortization $ (871) $ (882) $(2,129) Prepaid expenses (670) (631) (880) Unrealized gain on securities available for sale (4,570) (4,913) Other (700) (462) (1,070) ------- ------- ------- Total gross deferred tax liabilities (6,811) (1,975) (8,992) ------- ------- ------- Net deferred tax asset $11,637 $19,220 $15,025 ======= ======= =======
NOTE O- NON-INTEREST EXPENSE Significant components of other non-interest expense for the years ended December 31, 1995, 1994, and 1993 are presented below:
Year Ended December 31 ----------------------------- Other Non-Interest Expense (in thousands) 1995 1994 1993 - --------------------------------------------------------------------------- Outside computer service $ 8,108 $ 8,918 $10,611 FDIC insurance 3,624 6,926 6,793 Other professional expenses 2,729 2,920 3,953 Intangible amortization 4,339 4,381 3,865 Amortization of goodwill 3,785 3,246 3,012 Stationery printing and supplies 3,394 2,722 2,890 Other 37,127 36,009 32,614 ------- ------- ------- Total $63,106 $65,122 $63,738 ======= ======= =======
NOTE P- CASH FLOW DATA For purposes of reporting cash flow, cash and cash equivalents include the following:
December 31 ------------------------------ (in thousands) 1995 1994 1993 - --------------------------------------------------------------------------- Cash and due from banks $533,333 $365,792 $334,564 Time deposits 64 12 147 Federal funds sold and securities purchased under resale agreements 100,550 167,550 250,250 -------- -------- -------- $633,947 $533,354 $584,961 ======== ======== ========
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) 1995 1994 1993 - ------------------------------------------------------------------------------------ Cash paid: Interest $101,075 $ 67,533 $ 61,633 Income Taxes 25,399 17,020 6,695 Non-cash items: Loans originated to facilitate the sale of foreclosed assets 2,059 1,717 5,275 Loan foreclosures 1,883 422 1,090 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 Fair Values of Financial Instruments - SFAS No. 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 No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. This disclosure does not and is not intended to represent the fair value of the Corporation. 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 consolidated 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, 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 No. 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. The estimated fair values of the Corporation's financial instruments are as follows:
December 31 ------------------------------------------------- 1995 1994 ------------------------------------------------- Estimated Estimated Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value - ----------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 633,883 $ 633,883 $ 533,342 $ 533,342 Interest-bearing deposits in other banks 64 64 12 12 Securities 1,536,567 1,540,798 1,594,042 1,524,598 Loans 1,816,762 1,822,864 1,483,293 1,458,160 Allowance for loan losses (31,577) (25,741) 1,458,160 ----------- ---------- ---------- ---------- Net loans 1,785,185 1,822,864 1,457,552 1,458,160 Financial liabilities: Deposits 3,645,733 3,645,935 3,087,962 3,081,447 Short-term borrowings 134,741 134,741 370,235 370,235 Off-balance sheet instruments: Interest rate swaps (3,824) 492
NOTE R - DERIVATIVE FINANCIAL INSTRUMENTS During 1995, the Corporation continued its strategy of entering into off- balance sheet interest rate swaps to hedge its interest rate risk by converting fixed rate loans into synthetic variable rate instruments. The Corporation had 12 interest rate swaps at December 31, 1995. Seven swaps, with an original total notional amount of $59 million, were each a hedge against a specific commercial fixed rate loan. The remaining five swaps, with an original total notional amount of $91 million, were each a hedge against a specific pool of consumer fixed rate loans. These swaps are all amortizing swaps that amortize in conjunction with the specific loan or specific pool of loans which have lives ranging from two to ten years and were entered into with counterparts which have a long-term debt rating that is investment grade. 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 were all amortizing swaps that amortized in conjunction with the loans which had 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 1995 or 1994. The Corporation's credit exposure on swaps is limited to the value of interest rate swaps that have become favorable to the Corporation. At December 31, 1995, the Corporation had no credit exposure to our interest rate swap counterparts. NOTE S - CONTINGENCIES Certain subsidiaries of Cullen/Frost are defendants in various matters of 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, 1995, the accrual for leased space is $1.0 million. The reduction is due primarily to lease payments, net of sublease payments, that were applied against the restructuring accrual. The incomplete portion of the 1993 restructuring plan deals principally with the sale of two properties with an aggregate net carrying value of $1.4 million. These properties have been written down to their net realizable values. The Corporation has marketing plans in place to sell these properties. NOTE U - CONDENSED PARENT CORPORATION FINANCIAL STATEMENTS Condensed financial information of the parent Corporation as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 follows:
Year Ended December 31 -------------------------------- Statement of Operations (in thousands) 1995 1994 1993 - --------------------------------------------------------------------------------------- Income: Dividends from second tier bank holding company subsidiary $56,631 $21,373 $21,692 Interest and other 1,101 537 220 ------- ------- -------- Total Income 57,732 21,910 21,912 Expenses: Salaries and employee benefits 1,051 2,450 812 Interest 111 Other 1,375 2,025 1,553 ------- ------- ------- Total Expenses 2,426 4,475 2,476 ------- ------- ------- Income Before Income Tax Credits and Equity in Undistributed Net Income of Subsidiaries 55,306 17,435 19,436 Income tax credits 375 678 22,351 Equity in undistributed net income of subsidiaries (9,402) 19,310 5,449 ------- -------- ------- Net Income $46,279 $37,423 $47,236 ======= ======== =======
December 31 ------------------------ Balance Sheets (in thousands) 1995 1994 - -------------------------------------------------------------------------------------- Assets Cash and time deposits $ 350 $ 251 Securities purchased under resale agreements 54,300 18,400 Loans to non-bank subsidiaries 1,198 1,440 Investments in second tier bank holding company subsidiary 292,026 280,894 Other 1,308 1,495 -------- -------- Total Assets $349,182 $302,480 ======== ======== Liabilities Other $ 7,718 $ 7,043 -------- -------- Total Liabilities 7,718 7,043 Shareholders' Equity 341,464 295,437 -------- -------- Total Liabilities and Shareholders' Equity $349,182 $302,480 ======== ========
Year Ended December 31 ------------------------------- Statements of Cash Flows (in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------- Operating Activities Net income $ 46,279 $ 37,423 $ 47,236 Adjustments to reconcile net income to net cash provided by operating activities: Net income of subsidiaries (47,229) (40,683) (27,141) Dividends from subsidiaries 56,631 21,373 21,692 Decrease (increase) in interest receivable 2 (59) 189 Decrease in interest payable (2) (83) Net change in other liabilities and assets 1,576 2,954 (19,199) -------- ------- ------- Net cash provided by operating activities 57,259 21,006 22,694 Investing Activities Capital contributions to subsidiaries (9,470) (1,239) (33,025) Net (increase) decrease in loans 242 758 (132) -------- ------- ------- Net cash used by investing activities (9,228) (481) (33,157) Financing Activities Proceeds from employee stock purchase plans and options 691 3,061 2,154 Cash dividends (12,723) (7,415) (1,650) -------- ------- ------- Net cash (used) provided by financing activities (12,032) (4,354) 504 -------- ------- ------- Increase (Decrease) in cash and cash equivalents 35,999 16,171 (9,959) Cash and cash equivalents at beginning of year 18,651 2,480 12,439 -------- ------- ------- Cash and cash equivalents at end of year $ 54,650 $ 18,651 $ 2,480 ======== ======= =======
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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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, 1996 FINANCIAL STATISTICS CULLEN/FROST BANKERS, INC. AND SUBSIDIARIES (in thousands) The following unaudited schedules and statistics are presented for additional information and analysis.
1995/1994 -------------------------------- Increase (Decrease) Due to Change in Total ------------------- or Net Average Average Increase Rate/Volume Analysis Rate Balance (Decrease) - ------------------------------------------------------------------------------------- Changes in interest earned on: Time deposits $ 1 $ (1) $ 0 Securities: U.S. Treasury 3,659 (1,680) 1,979 U.S. Government agencies and corporations 6,400 (3,588) 2,812 States and political subdivisions Tax-exempt (14) (1) (15) Taxable (5) (5) Other 211 (1,236) (1,025) Federal funds sold and securities purchased under resale agreements 2,245 341 2,586 Loans 14,844 29,647 44,491 --------- --------- --------- Total 27,346 23,477 50,823 Changes in interest paid on: Savings, Interest-on-Checking 426 1,339 1,765 Money market deposits accounts (5,780) (2,186) (7,966) Time accounts and public funds (16,010) (5,602) (21,612) Federal funds purchased and securities sold under repurchase agreements (3,497) (2,633) (6,130) Long-term notes payable and other borrowings (733) (733) --------- --------- --------- Total (24,861) (9,815) (34,676) --------- --------- --------- Changes in net interest income $ 2,485 $ 13,662 $ 16,147 ========= ========= ========= 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.
1994/1993 -------------------------------- Increase (Decrease) Due to Change in Total ------------------- 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.
December 31, 1995 --------------------------------------------- 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 $ 53,814 $ 28,326 $ 9,723 $ 91,863 Other real estate loans 81,826 194,608 159,865 436,299 All other loans 365,497 173,210 39,318 578,025 -------- -------- -------- ---------- Total $501,137 $396,144 $208,906 $1,106,187 ======== ======== ======== ========== Loans with fixed interest rates $165,084 $146,178 $116,931 $ 428,193 Loans with floating interest rates 336,053 249,966 91,975 677,994 -------- -------- -------- ---------- Total $501,137 $396,144 $208,906 $1,106,187 ======== ======== ======== ========== Loans for 1-4 family housing totaling $309,743,000 and consumer loans totaling $402,169,000 and unearned income of $1,337,000 are not included in the amounts in the table.
Maturity Distribution and Securities Portfolio Yields (dollars in thousands) December 31, 1995 - ------------------------------------------------------------------------------------------ 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 U.S. Government agencies and corporations $ 256 8.24% States and political subdivisions $ 50 4.50% $ 160 4.50% 723 6.20 Other 25 8.25 -------- ----- ------- ---- -------- ---- Total securities held to maturity $ 50 4.50% 185 5.01% $ 979 6.73% ======== ===== ======= ==== ======== ==== Available for sale: U.S. Treasury $223,457 5.49% U.S. Government agencies and corporations $235,050 5.54% $294,288 6.42% States and political subdivisions 151 5.18 34 5.34 Other 225 5.27 866 5.59 -------- ---- ------- ---- -------- ---- Total securities available for sale $223,682 5.49% $236,067 5.54% $294,322 6.42% ======== ==== ======== ==== ======== ==== 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, 1995 - ----------------------------------------------------------------- Maturity --------------------------------------------- After 10 Years Total Carrying Amount --------------------- ---------------------- Weighted Weighted Amount Average Yield Amount Average Yield -------- ------------- -------- ------------- Held to maturity: U.S. Government agencies and corporations $205,108 6.98% $ 205,364 6.98% States and political subdivisions 4,409 6.36 5,342 6.26 Other 25 8.25 -------- ----- --------- ---- Total securities held to maturity $209,517 6.96% $ 210,731* 6.96% ======== ===== ========== ==== Available for sale: U.S. Treasury $ 223,457 5.49% U.S. Government agencies and corporations $567,029 7.20% 1,096,367 6.63 States and political subdivisions 185 5.21 Other 4,736 6.00 5,827 5.91 -------- ----- --------- ---- Total securities available for sale $571,765 7.19% $1,325,836* 6.44% ======== ==== ========= ==== 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 $1,302,000 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 1995 1994 1993 - ------------------------------------------------------------------------------------------ Balance at year end $111,395 $370,235 $166,519 Maximum month-end balance 367,154 370,235 168,198 For the year: Average daily balance 251,392 191,611 131,096 Average interest rate 5.29% 3.74% 2.52% Weighted average daily interest rate 5.68 4.06 2.86
December 31 ------------------------------------------ 1995 1994 Remaining Maturity of Private ------------------- ------------------- Certificates of Deposit Percentage Percentage of $100,000 or More Amount of Total Amount of Total - ------------------------------------------------------------------------------------------ Three months or less $ 52,512 11.2% $ 46,581 12.6% After three, within six months 123,588 26.4 129,560 34.9 After six, within twelve months 164,722 35.3 120,261 32.4 After twelve months 126,830 27.1 74,337 20.1 -------- ----- -------- ----- Total $467,652 100.0% $370,739 100.0% ======== ===== ======== ===== Percentage of total private time deposits 18.9% 17.1% Other time deposits of $100,000 or more were $163,176,000 at December 31, 1995. Of this amount 85.3 percent matures within three months, 7.0 percent matures between three and six months and the remainder matures between six months and one year.
QUARTERLY RESULTS OF OPERATIONS CULLEN/FROST BANKERS, INC. AND SUBSIDIARIES Three Months Ended 1995 ------------------------------------- (in thousands, except per share amounts) Mar 31 June 30 Sept 30 Dec 31 - ------------------------------------------------------------------------------------ Interest income $58,988 $63,915 $66,416 $66,774 Interest expense 22,776 26,564 27,278 27,220 Net interest income 36,212 37,351 39,138 39,554 Provision for possible loan losses 500 2,772 1,500 1,500 Gain (loss) on securities transactions 93 (1,489) Non-interest income 20,417 22,743 21,066 23,518 Restructuring costs 400 Non-interest expense 39,770 39,932 40,309 42,438 Income before income taxes 16,359 17,390 18,395 19,134 Income taxes 5,720 6,167 6,442 6,670 Net income 10,639 11,223 11,953 12,464 Net income per common share .94 .99 1.05 1.09
Three Months Ended 1994 ------------------------------------- (in thousands, except per share amounts) Mar 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 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 13,864 14,203 14,772 14,761 Income taxes 4,766 4,961 5,278 5,172 Net income 9,098 9,242 9,494 9,589 Net income per common share .81 .82 .84 .85
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 common stock at February 20, 1996 was 2,441.
1995 1994 ------------- ---------------- Market Price (per share) High Low High Low - ------------------------------------------------------------------------------ First Quarter $37.00 $29.75 $36.25 $32.75 Second Quarter 40.75 35.25 39.25 33.75 Third Quarter 48.25 40.50 39.00 35.25 Fourth Quarter 51.50 45.75 38.13 28.50
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) 1995 1994 - ----------------------------------------------------------------------------- First Quarter $ .22 $.15 Second Quarter .22 .15 Third Quarter .35 .15 Fourth Quarter .35 .22 ----- ---- Total $1.14 $.67 ===== ====
The Corporation's management is committed to the continuation of the payment of regular cash dividends, however there is no assurance as to future dividends because they are dependent on future earnings, capital requirements and financial conditions. See "Capital" section (page 26) in the Financial Review for further discussion.
SELECTED FINANCIAL DATA CULLEN/FROST BANKERS, INC. AND SUBSIDIARIES (dollars in thousands, except per share amounts) Year Ended December 31 --------------------------------------- 1995 1994 1993 ---------- ------------ ---------- Balance Sheet Data Total assets $ 4,200,211 $ 3,793,720 $ 3,639,047 Long-term notes payable Shareholders' equity 341,464 295,437 273,533 Average shareholders' equity to average total assets 8.20% 7.85% 7.08% Tier 1 capital ratio (1992 rules) 13.07 14.44 14.23 Total capital ratio (1992 rules) 14.32 15.69 15.49 Per Common Share Data Net income (loss)* $ 4.08 $ 3.33 $ 4.24 Cash dividends paid 1.14 .67 .15 Shareholders' equity 30.49 26.56 24.85 Loan Performance Indicators Non-performing assets $ 16,155 $ 19,938 $ 31,110 Non-performing assets to: Total loans plus foreclosed assets .89% 1.34% 2.47% Total assets .38 .53 .85 Allowance for possible loan losses $ 31,577 $ 25,741 $ 26,298 Allowance for possible loan losses to period-end loans 1.74% 1.74% 2.09% Net loan charge-offs (recoveries) $ 436 $ (2,127) $ (486) Net loan charge-offs (recoveries) to average loans .03% (.16)% (.04)% Common Stock Data Common shares outstanding at period end 11,199,450 11,123,062 11,009,198 Weighted average common and common equivalent shares outstanding 11,337,824 11,222,911 11,150,788 Dividends as a percentage of net income 27.94% 20.12% 3.54% Non-Financial Data Number of employees 2,019 1,862 1,877 Shareholders of record 2,463 2,553 2,644
Year Ended December 31 -------------------------------------- 1992 1991 1990 ----------- ----------- ---------- Balance Sheet Data Total assets $ 3,150,871 $ 3,078,986 $ 3,254,744 Long-term notes payable 13,400 14,668 16,280 Shareholders' equity 206,144 176,222 173,442 Average shareholders' equity to average total assets 6.29% 5.67% 5.42% Tier 1 capital ratio (1992 rules) 15.66 12.98 10.93 Total capital ratio (1992 rules) 17.52 15.04 13.05 Per Common Share Data Net income (loss)* $ 2.26 $ .02 $ (.85) Cash dividends paid Shareholders' equity 19.80 17.55 17.79 Loan Performance Indicators Non-performing assets $ 51,303 $ 100,642 $ 121,865 Non-performing assets to: Total loans plus foreclosed assets 4.94% 8.85% 9.11% Total assets 1.63 3.27 3.74 Allowance for possible loan losses $ 31,897 $ 42,387 $ 45,604 Allowance for possible loan losses to period-end loans 3.10% 3.82% 3.51% Net loan charge offs (recoveries) $ 15,988 $ 26,383 $ 29,551 Net loan charge-offs (recoveries) to average loans 1.53% 2.22% 2.21% Common Stock Data Common shares outstanding at period end 10,412,184 10,043,844 9,751,234 Weighted average common and common equivalent shares outstanding 10,974,329 10,075,263 9,651,942 Dividends as a percentage of net income Non-Financial Data Number of employees 1,754 1,737 1,755 Shareholders of record 2,824 3,547 4,136 * 1995 fully dilutive net income per share was $4.06. 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, 1995 ---------------------------------- Total Total Total Assets Loans Deposits ---------- ---------- ---------- Frost National Bank $4,079,624 $1,760,242 $3,525,602 San Antonio, Houston, Austin and Corpus Christi and McAllen Main Office: P. O. Box 1600, 100 West Houston Street San Antonio, Texas 78296 (210)220-4011 United States National Bank 137,505 56,113 125,470 P. O. Box 179, 2201 Market Street Galveston, Texas 77553 (409) 763-1151
CONSOLIDATED STATEMENTS OF OPERATIONS CULLEN/FROST BANKERS, INC. AND SUBSIDIARIES (in thousands, except per share amounts) Year Ended December 31 -------------------------------- 1995 1994 1993 -------- -------- -------- Interest Income: Loans, including fees $150,497 $106,252 $ 90,756 Securities 98,862 95,109 91,145 Time deposits 2 2 4 Federal funds sold and securities purchased under resale agreements 6,732 4,146 7,714 -------- -------- -------- Total Interest Income 256,093 205,509 189,619 Interest expense: Deposits 89,809 61,996 58,079 Federal funds purchased and securities sold under repurchase agreements 13,296 7,166 3,304 Long-term notes payable 733 410 Other borrowings -------- -------- -------- Total Interest Expense 103,838 69,162 61,793 -------- -------- -------- Net Interest Income 152,255 136,347 127,826 Provision (credit) for possible loan losses 6,272 (6,085) -------- -------- -------- Net Interest Income After Provision (Credit) for Possible Loan Losses 145,983 136,347 133,911 Non-interest income: Trust department 31,762 29,529 26,278 Service charges on deposit accounts 30,382 28,182 27,303 Other service charges, collection and exchange charges, commissions and fees 11,055 9,366 7,972 Net gain (loss) on securities transactions (1,396) (4,038) 1,433 Other 15,940 13,776 13,243 -------- ------- ------- Total Non-Interest Income 87,743 76,815 76,229 Non-interest expense: Salaries and wages 58,177 52,986 53,654 Pension and other employee benefits 10,905 9,910 12,052 Net occupancy of banking premises 17,992 15,777 20,749 Furniture and equipment 11,259 10,937 10,155 Provision for real estate losses 610 1,445 Restructuring costs 400 830 10,285 Other 63,106 65,122 63,738 -------- ------- ------- Total Non-Interest Expense 162,449 155,562 172,078 -------- ------- ------- Income (Loss) Before Income Taxes (Credits), Extraordinary Credit and Cumulative Effect of Accounting Change 71,277 57,600 38,062 Income taxes (credits) 24,998 20,177 (735) -------- ------- ------- Income (Loss) before extraordinary credit and cumulative effect of accounting change 46,279 37,423 38,797 Extraordinary Credit-income tax benefit Cumulative effect of change in accounting for income taxes 8,439 -------- ------- ------- Net Income (Loss) $ 46,279 $37,423 $47,236 ======== ======= ======= Net income (loss) per common share-primary $ 4.08 $ 3.33 $ 4.24 ======== ======= ======= Return on average assets 1.17% 1.02% 1.34% Return on average equity 14.32 13.04 19.00
CONSOLIDATED STATEMENTS OF OPERATIONS CULLEN/FROST BANKERS, INC. AND SUBSIDIARIES (in thousands, except per share amounts) Year Ended December 31 -------------------------------- 1992 1991 1990 -------- -------- -------- Interest Income: Loans, including fees $ 84,074 $108,617 $134,217 Securities 99,188 111,132 115,452 Time deposits 8 13 82 Federal funds sold and securities purchased under resale agreements 6,711 11,478 23,130 -------- -------- -------- Total Interest Income 189,981 231,240 272,881 Interest expense: Deposits 68,807 115,286 147,399 Federal funds purchased and securities sold under repurchase agreements 3,139 5,913 13,805 Long-term notes payable 1,378 1,502 1,630 Other borrowings 25 3 -------- -------- -------- Total Interest Expense 73,324 122,726 162,837 -------- -------- -------- Net Interest Income 116,657 108,514 110,044 Provision (credit) for possible loan losses 5,498 23,166 32,873 -------- -------- -------- Net Interest Income After Provision (Credit) for Possible Loan Losses 111,159 85,348 77,171 Non-interest income: Trust department 21,861 20,030 18,777 Service charges on deposit accounts 23,663 20,455 16,412 Other service charges, collection and exchange charges, commissions and fees 6,183 6,748 6,038 Net gain (loss) on securities transactions (232) 2,022 129 Other 10,338 8,227 9,236 ------- ------- ------- Total Non-Interest Income 61,813 57,482 50,592 Non-interest expense: Salaries and wages 46,184 44,154 43,019 Pension and other employee benefits 9,746 9,058 9,148 Net occupancy of banking premises 16,963 16,460 16,690 Furniture and equipment 8,295 7,726 8,067 Provision for real estate losses 12,963 7,653 10,292 Restructuring costs Other 52,999 56,941 48,531 ------- ------- ------- Total Non-Interest Expense 147,150 141,992 135,747 ------- ------- ------- Income (Loss) Before Income Taxes (Credits), Extraordinary Credit and Cumulative Effect of Accounting Change 25,822 838 (7,984) Income taxes (credits) 8,197 633 236 ------- ------- ------- Income (Loss) before extraordinary credit and cumulative effect of accounting change 17,625 205 (8,220) Extraordinary Credit-income tax benefit 6,497 Cumulative effect of change in accounting for income taxes ------- ------- ------- Net Income (Loss) $24,122 $ 205 $(8,220) ======== ======= ======= Net income (loss) per common share $ 2.26 $ .02 $ (.85) ======== ======= ======= Return on average assets .79% .01% N/M Return on average equity 12.56 .12 N/M
CONSOLIDATED AVERAGE BALANCE SHEETS CULLEN/FROST BANKERS, INC. AND SUBSIDIARIES (in thousands - taxable-equivalent basis) Year Ended December 31 ------------------------------ 1995 ------------------------------ Interest Average Income/ Yield/ Balance Expense Cost - --------------------------------------------------------------------------------- Assets: Time deposits $ 18 $ 2 3.80% Securities: U.S. Treasury 238,968 14,142 5.92 U.S. Government agencies and corporations 1,303,204 83,765 6.43 States and political subdivisions: Tax-exempt 5,864 543 9.27 Taxable Other 9,314 593 6.37 ---------- -------- Total securities 1,557,350 99,043 6.36 Federal funds sold and securities purchased under resale agreements 117,158 6,732 5.75 Loans, net of unearned discount 1,682,541 151,197 8.99 ---------- -------- Total Earning Assets and Average Rate Earned 3,357,067 256,974 7.65 Cash and due from banks 381,656 Allowance for possible loan losses (28,468) Banking premises and equipment 90,674 Accrued interest and other assets 143,097 ---------- Total Assets $3,944,026 ========== Liabilities: Demand deposits: Commercial and individual $ 696,499 Correspondent banks 131,295 Public funds 36,772 ---------- Total demand deposits 864,566 Time deposits: Savings and Interest-on-Checking 720,489 12,660 1.76 Money market deposit accounts 616,931 23,675 3.84 Time accounts 964,958 48,024 4.98 Public funds 125,971 5,450 4.33 ---------- -------- Total time deposits 2,428,349 89,809 3.70 ---------- Total deposits 3,292,915 Federal funds purchased and securities sold under repurchase agreements 251,392 13,296 5.29 Long-term notes payable Other borrowings 12,514 733 5.86 ---------- -------- Total Interest-Bearing Funds and Average Rate Paid 2,692,255 103,838 3.85 Accrued interest and other liabilities 63,917 -------- ---- ---------- Total Liabilities 3,620,738 Shareholders' Equity 323,288 ---------- Total Liabilities and Shareholders' Equity $3,944,026 ========== Net interest income $153,136 ======== Net interest spread 3.80% ==== Net interest income to total average earning assets 4.56% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1995 through 1993 and a 34 percent tax rate for 1992 through 1990. 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 ------------------------------ 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 1,339,656 106,706 7.97 ---------- ------- Total Earning Assets and Average Rate Earned 3,119,013 206,151 6.61 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 134,339 ---------- 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 3.82% ==== Net interest income to total average earning assets 4.39% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1995 through 1993 and a 34 percent tax rate for 1992 through 1990. 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 1,171,825 91,263 7.79 ---------- -------- Total Earning Assets and Average Rate Earned 3,010,987 190,502 6.33 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 129,864 ---------- 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 3.76% ==== Net interest income to total average earning assets 4.27% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1995 through 1993 and a 34 percent tax rate for 1992 through 1990. 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 ------------------------------ 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 1,045,883 84,792 8.11 ---------- -------- Total Earning Assets and Average Rate Earned 2,658,295 191,110 7.19 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 89,953 ---------- 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 3.80% ==== Net interest income to total average earning assets 4.43% ===== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1995 through 1993 and a 34 percent tax rate for 1992 through 1990. 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 ------------------------------ 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 1,189,565 109,597 9.21 ---------- -------- Total Earning Assets and Average Rate Earned 2,721,806 233,380 8.57 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 102,904 ---------- 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 3.22% ==== Net interest income to total average earning assets 4.07% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1995 through 1993 and a 34 percent tax rate for 1992 through 1990. 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 1,339,421 135,451 10.11 ---------- -------- Total Earning Assets and Average Rate Earned 2,897,862 275,760 9.52 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 104,025 ---------- 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 2.98% ==== Net interest income to total average earning assets 3.90% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1995 through 1993 and a 34 percent tax rate for 1992 through 1990. Non-accrual loans are included in the average loan amounts outstanding for these computations.
EX-21 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiaries of Cullen/Frost SUBSIDIARIES OF THE REGISTRANT ------------------------------ As of March 25, 1996, Cullen/Frost owned directly, or indirectly through wholly owned subsidiaries, the following subsidiaries. PERCENTAGE OF ORGANIZED VOTING SECURITIES UNDER OWNED BY LAWS OF CULLEN/FROST ------------- ----------------- The Frost National Bank United States 100% United States National Bank of Galveston United States 100% Main Plaza Corporation Texas 100% Daltex General Agency, Inc. Texas 100% The New Galveston Company, Inc. Delaware 100% EX-23 5 CONSENT OF INDEPENDENT AUDITOR 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, 1996, included in the 1995 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, 1996 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, 1995. /s/ERNST & YOUNG LLP ---------------- ERNST & YOUNG LLP San Antonio, Texas March 27, 1996 EX-24 6 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, Richard W. Evans, Jr. 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, 1995, 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 -------------------- -------------------------------- ---------------- Senior Chairman of the Board and Director (Principal Executive /s/T.C. FROST* Officer) February 1, 1996 - ------------------------ ---------------- (T.C. Frost) Chairman of the Board /s/RICHARD W. EVANS, Jr* and Director February 1, 1996 - -------------------------- (Richard W. Evans, Jr.) /s/ROBERT S. McCLANE* President and Director February 1, 1996 - ------------------------ (Robert S. McClane) Director February , 1996 - ------------------------ (Isaac Arnold, Jr.) Director February , 1996 - ------------------------ (Royce S. Caldwell) /s/RUBEN R. CARDENAS* Director February 1, 1996 - ------------------------ (Ruben R. Cardenas) /s/HENRY E. CATTO* Director February 1, 1996 - ------------------------ (Henry E. Catto) /s/HARRY H. CULLEN* Director February 1, 1996 - ------------------------ (Harry H. Cullen) Director February , 1996 - ------------------------ (Roy H. Cullen) /s/W.N. FINNEGAN III* Director February 1, 1996 - ------------------------ (W.N. Finnegan III) Signatures Title Date -------------------- -------------------------------- ---------------- /s/JAMES W. GORMAN, JR.* Director February 1, 1996 - ------------------------ (James W. Gorman, Jr.) /s/JAMES L. HAYNE* Director February 1, 1996 - ------------------------ (James L. Hayne) /s/RICHARD M. KLEBERG, III* Director February 1, 1996 - ------------------------ (Richard M. Kleberg, III) Director February , 1996 - ------------------------ (W.B. Osborn, Jr.) Director February , 1996 - ------------------------ (Robert G. Pope) Director February , 1996 - ------------------------ (Herman J. Richter) /s/CURTIS VAUGHAN, JR.* Director February 1, 1996 - ------------------------ (Curtis Vaughan, Jr.) Executive Vice President /s/ Phillip D. Green and Treasurer February 1, 1996 - -------------------------- (Phillip D. Green) [as Attorney-in-Fact for the persons indicated] EX-27 7 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1995 DEC-31-1995 533,333 64 100,550 0 1,325,836 210,731 214,962 1,816,762 31,577 4,200,211 3,645,733 111,395 101,619 0 0 0 55,997 285,467 4,200,211 150,497 98,862 6,734 256,093 89,809 103,838 152,255 6,272 (1,396) 162,449 71,277 71,277 0 0 46,279 4.08 4.06 7.65 14,646 5,188 0 13,594 25,741 (5,478) 5,042 31,577 31,437 140 1,472
-----END PRIVACY-ENHANCED MESSAGE-----