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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
___ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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.
---
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $816,829,125 based on the closing price of such stock as of
March 25, 1997.
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, 1997
-------------------------- --------------
Common Stock, $5 par value 22,507,928
DOCUMENTS INCORPORATED BY REFERENCE
(1) Annual Report to Shareholders for the Year Ended December 31, 1996 (Parts I
& II)
(2) Proxy Statement for Annual Meeting of Shareholders to be held May 28, 1997
(Part III)
<PAGE>
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
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 12
* Not Applicable
<PAGE>
PART I
Item 1. BUSINESS
- ------------------
General
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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, 1996, Cullen/Frost's principal assets consisted of all of the
capital stock of two national banks. Including acquisitions completed in the
first quarter of 1997, Cullen/Frost had 52 offices in six Texas banking markets
with 19 locations in San Antonio, 14 in the Houston/Galveston area, five in
Austin, ten in the Corpus Christi area, three in San Marcos and one in McAllen.
At December 31, 1996, Cullen/Frost had consolidated total assets of
$4,888,384,000 and total deposits of $4,242,594,000. Based on information from
the Federal Reserve Board, at December 31, 1996, Cullen/Frost was the largest
of the 91 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; and (iv) regulatory compliance.
Subsequent Event
- ----------------
Cullen/Frost Capital Trust, a Delaware statutory business trust (the
"Issuer Trust") and wholly-owned subsidiary of the Corporation, issued on
February 6, 1997 $100,000,000 of its 8.42 percent Capital Securities, Series A
(the "Capital Securities") which represent beneficial interests in the Issuer
Trust. Reference is made to footnote U on page 51 of the Cullen/Frost Annual
Report to Shareholders for the Year Ended December 31, 1996, which page is
incorporated herein by reference.
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, 1996, 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, 1996, as to
total assets, total loans and total deposits of each of the Cullen/Frost
subsidiary banks:
<TABLE>
<CAPTION>
Name of Bank and Location Total Assets Total Loans Total Deposits
- ------------------------- -------------- -------------- ----------------
<S> <C> <C> <C>
The Frost National Bank,
San Antonio, Corpus Christi,
Austin, Houston, McAllen and
San Marcos, Texas $4,761,806,000 $2,196,569,000 $4,120,973,000
United States National Bank of Galveston
Galveston, Texas 147,229,000 55,467,000 133,143,000
</TABLE>
<PAGE>
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
international basis.
Consumer Services
The subsidiary banks provide a full range of consumer banking services,
including checking accounts, savings programs, automated teller machines,
installment and real estate loans, drive-in and night deposit services, safe
deposit facilities, credit card services and discount brokerage services.
International Banking
Frost Bank provides international banking services to customers residing
in or dealing with businesses located in Mexico. Such services consist of
accepting deposits (in United States dollars only), making loans (in United
States dollars only), issuing letters of credit, handling foreign collections,
transmitting funds and, to a limited extent, dealing in foreign exchange.
Reference is made to pages 20 and 28 of the Cullen/Frost Annual Report to
Shareholders for the Year Ended December 31, 1996, 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, 1996, trust assets with a market value of
approximately $8.1 billion were being administered by the subsidiary banks.
These assets were comprised of discretionary assets of $4.2 billion and non-
discretionary assets of $3.9 billion.
Correspondent Banking
Frost Bank acts as correspondent for approximately 327 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
<PAGE>
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.
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. 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
<PAGE>
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 $6,476,000 available for payment of dividends, without prior
regulatory approval, at December 31, 1996.
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 28 and
Footnote L "Capital" on page 43 of the Cullen/Frost Annual Report to
Shareholders for the Year Ended December 31, 1996, which discussions are
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
<PAGE>
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, 1996, 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, 1996, the subsidiary banks
capital ratios were as follows:
Tier 1 Total
Leverage Risk Based Risk Based
Ratio Capital Ratio Capital Ratio
-------- -------------- -------------
Frost Bank 5.76% 9.78% 11.03%
U. S. National Bank 7.11 14.43 15.72
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 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 be entitled to a priority of payment.
<PAGE>
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, legislative action enacted in 1996 provides for
assessments on banks (based on deposit levels) to pay interest on Financing
Corporation (FICO) bonds, the proceeds of which were used in the bailout of the
Savings and Loan industry in the 1980's. For each of the three years beginning
in 1997, the assessment on banks is expected to be approximately 1.3 cents for
each $100 of qualified deposits. Based on year-end deposit levels, the
Corporations 1997 expense would be approximately $500,000.
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.
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
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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.
The Corporation regularly evaluates acquisition opportunities and
regularly conducts due diligence activities in connection with possible
acquisitions. As a result,
<PAGE>
acquisition discussions and, in some cases negotiations, regularly take place
and future acquisitions could occur.
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 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.
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 29,
pages 53 and 54 and pages 56 through 59 of the Cullen/Frost Annual Report to
Shareholders for the year ended December 31, 1996, which information is
incorporated herein by reference.
Employees
- ---------
At December 31, 1996, Cullen/Frost employed 2,306 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.
<PAGE>
Executive Officers of the Registrant
- ------------------------------------
The names, ages, recent business experience and positions or offices held
by each of the executive officers during 1996 of Cullen/Frost are as follows:
Name and Positions or Offices Age as of 12/31/96 Recent Business Experience
- ----------------------------- ------------------ --------------------------
T.C. Frost 69 Officer and director of
Senior Chairman of the Board, Frost Bank since 1950.
Chief Executive Officer, and 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. 50 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 57 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 42 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.
<PAGE>
Diane Jack, age 48, has been an officer of Frost Bank since 1984; Secretary of
Cullen/Frost from October 1993 to present.
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.
<PAGE>
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 55 and "Note K-Dividends"
on page 43 of the Cullen/Frost Annual Report to Shareholders for the Year Ended
December 31, 1996.
Item 6. SELECTED FINANCIAL DATA
- --------------------------------
The information called for by Item 6 is incorporated herein by reference
to "Selected Financial Data" on page 56 and "Consolidated Statements of
Operations" and "Consolidated Average Balance Sheets" on pages 58 through 59 of
the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31,
1996.
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 29, "Consolidated Statements of
Operations" and "Consolidated Average Balance Sheets" on pages 57 through 59 of
the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31,
1996.
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 30 through 52 and "Quarterly Results of Operations" on page
55, of the Cullen/Frost Annual Report to Shareholders for the Year Ended
December 31, 1996.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
---------------------
None.
<PAGE>
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 28, 1997.
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 28, 1997.
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 28, 1997.
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 28, 1997.
<PAGE>
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))(2)
3.2 Amended By-Laws of Cullen/Frost Bankers, Inc. (1995 Form 10-K/A,
Exhibit 3.2)(11)
4.1 Shareholder Protection Rights Agreement dated as of August 1, 1996
between Cullen/Frost Bankers, Inc. and The Bank of New York, as
Rights Agent (1996 Form 8-A12G/A, Exhibit 1)(13)
10.1 1983 Non-qualified Stock Option Plan, as amended (1989 Form S-8,
Exhibit 4(g))(4)
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)(3)*
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)(1)
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)(1)
10.5 Form of Revised Change-In-Control Agreements with four Executive
Officers (1989 Form 10-K, Exhibit 10.13(a))(6)*
10.6 1988 Non-qualified Stock Option Plan (1989 Form S-8, Exhibit
4(g))(5)
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))(7)*
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))(8)*
10.9 Cullen/Frost Bankers, Inc. Restricted Stock Plan (1992 Form S-8,
Exhibit 4(d))(9)*
10.10 Cullen/Frost Bankers, Inc. 1992 Stock Plan (1992 Form S-8, Exhibit
4(d))(10)
10.11 Cullen/Frost Bankers, Inc. Supplemental Executive Retirement Plan
(1994 Form 10-K, Exhibit 10.13)(12)
10.12 Form of Revised Change-In-Control Agreements with one Executive
Officer (1994 Form 10-K, Exhibit 10.14)(12)
10.13 Retirement agreement with one Executive Officer
11 Statement re: computation of earnings per share
13 The Cullen/Frost 1996 Annual Report to Shareholders for the Year
Ended December 31, 1996, (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, 1996,
for the 1991 Thrift Incentive Stock Purchase Plan (filed pursuant
to Rule 15d-21 of the Securities and Exchange Act of 1934)(14)
19.2 Annual Report on Form 11-K for the Year Ended December 31, 1996,
for the 401(k) Stock Purchase Plan (filed pursuant to Rule 15d-21
of the Securities and Exchange Act of 1934)(14)
<PAGE>
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, 1996.
______________________
(1) Incorporated herein by reference to the designated Exhibits to the
Cullen/Frost Annual Report on Form 10-K for the Year Ended December 31,
1987 (File No. 0-7275)
(2) 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)
(3) Incorporated herein by reference to the designated Exhibits to the
Cullen/Frost Annual Report on Form 10-K for the Year Ended December 31,
1988 (File No. 0-7275)
(4) 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)
(5) 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)
(6) 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)
(7) 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)
(8) 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)
(9) 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)
(10) 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)
(11) 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)
(12) 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)
(13) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Current Report on Form 8-A12G/A dated August 1, 1996
(File No. 0-7275)
(14) To be filed as an amendment.
<PAGE>
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 28, 1997 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 28, 1997
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)
ISAAC ARNOLD, JR.* Director
- ------------------------
(Isaac Arnold, Jr.)
ROYCE S. CALDWELL* Director
- ------------------------
(Royce S. Caldwell)
RUBEN R. CARDENAS* Director
- ------------------------
(Ruben R. Cardenas)
HENRY E. CATTO* Director
- ------------------------
(Henry E. Catto)
<PAGE>
Signatures Title Date
---------- ----- -----
HARRY H. CULLEN* Director
- ------------------------
(Harry H. Cullen)
ROY H. CULLEN Director
- ------------------------
(Roy H. Cullen)
EUGENE H. DAWSON, SR.* Director
- ------------------------
(Eugene H. Dawson, Sr.)
Director
- ------------------------
(Ruben M. Escobedo)
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)
IDA CLEMENT STEEN* Director
- ------------------------
(Ida Clement Steen)
CURTIS VAUGHAN, JR.* Director
- ------------------------
(Curtis Vaughan, Jr.)
MARY BETH WILLIAMSON* Director
- ------------------------
(Mary Beth Williamson)
Executive Vice President
*By:/s/ Phillip D. Green and Chief Financial Officer March 28, 1997
- --------------------------
(Phillip D. Green)
[as Attorney-in-Fact for
the persons indicated]
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------------------------------------------
10.13 Retirement agreement with one Executive Officer
11 Statement re: computation of earnings per share
13 The Cullen/Frost 1996 Annual Report to Shareholders for the Year Ended
December 31, 1996 (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
EXHIBIT 10.13
Retirement Agreement With One Executive Officer
<PAGE>
CULLEN/FROST BANKERS
A Family of Texas Banks
June 28, 1996
Mr. Robert S. McClane
Cullen/Frost Bankers, Inc.
100 West Houston Street
San Antonio, Texas 78205
Dear Bob:
Cullen/Frost Bankers, Inc., a Texas corporation (the "Company"), hereby
acknowledges the significant contributions you have made, and continue to make,
to both the Company and the community during your years with the Company. In
addition, the Company is excited that you have been elected to serve as the
Chairman of The Greater San Antonio Chamber of Commerce for this year and the
constructive community relations benefits that will flow to the Company as a
result of you serving in such position. Due to the recent reorganization
within the bank and your election to retire and enter into the Retirement Plan
(as hereinafter defined) effective June 1, 1999, and the Company's desire that
you continue to serve as President of the Company until the earlier of the 1997
meeting of the Company's shareholders or June 30, 1997, and, in view of your
contributions to and knowledge of the Company and its operations, the Company's
desire to be able to call upon you for consulting services and special projects
assistance after your term as President has ended and until you enter into the
Retirement Plan, this letter agreement, which has been approved by the
Compensation and Benefits Committee of the Board of Directors of the Company,
sets forth the terms of your employment until your retirement on June 1, 1999:
1. Employment, Consulting Services and Duties. Subject to the
------------------------------------------
terms and conditions of this Agreement, the Company agrees to employ you as its
President, and you accept such employment with the Company, from the date
hereof until the earlier of the 1997 meeting of the Company's shareholders or
June 30, 1997 (the "Initial Term"). During this Initial Term it is understood
that you will be serving as Chairman or Immediate Past-Chairman of The Greater
San Antonio Chamber of Commerce and will perform such other duties for the
Company as may be assigned and agreed upon between you and the Senior Chairman
of the Board. For the period commencing with the expiration of the Initial
Term through May 31, 1999 ("Consulting Term"), the Company and you mutually
agree that you will be employed by the Company: (a) as a consultant on
community and customer relations matters and issues reporting directly to the
Senior Chairman of the Board; and (b) as a consultant to work on special
projects as may be assigned and agreed upon between you and the Senior Chairman
or Chairman of the Board. It is further understood that during calendar year
1997 you will serve, as the immediate past-Chairman of The Greater San Antonio
Chamber of Commerce, on the Chamber's Executive Committee thereby continuing to
provide constructive community relations benefits to the Company. The Initial
Term and the Consulting Term are collectively referred to herein as the "Term."
During the Consulting Term, and subject to the provisions of Section 5 hereof,
---------
you will be able to pursue other business ventures, activities and investments
that are not in conflict with your obligations and duties, as defined herein,
as an employee of the Company. During the Consulting Term and until such time
as you reach age 70, you will be considered annually by the Board as a
candidate for re-election to the Board of the Company and The Frost National
Bank; provided,
<PAGE>
Cullen/Frost Bankers
however, that it is understood that whether or not you are nominated and/or re-
elected is solely and exclusively within the discretion of the Board. If you
are nominated and elected to serve as a member of either of such boards of
directors, you shall not be compensated in your capacity as a director so long
as you are receiving the monthly base salary set forth in Section 2.1 hereof.
-----------
2. Compensation and Benefits.
-------------------------
2.1 Monthly Base Salary. For all services rendered to the
-------------------
Company during the Term of this Agreement, the Company shall pay you a salary
of $25,000 per month, payable in accordance with the usual payroll practice of
the Company, less all required deductions.
2.2 Bonus. As additional compensation for services rendered
-----
under this Agreement, Employee shall receive a bonus of $90,000 to be paid not
later than March 31, 1997.
2.3 Benefits. You shall, in addition to the compensation
--------
provided for herein, be entitled to the following additional benefits during
the Term of this Agreement:
(a) Medical, Health, Life and Disability Benefits. You shall be
---------------------------------------------
entitled to receive all medical, health, life and disability benefits that may,
from time to time, be provided by the Company to senior management of the
Company as a group.
(b) Other Benefits. In addition to the normal benefits incident
--------------
to employment with the Company, you shall also be entitled to receive the
following additional benefits: (i) a car allowance of $6,000 per annum; (ii)
payment of dues for membership to the Argyle and San Antonio Country Club; and
(iii) payment for security at your residence.
2.4 Stock Options.
-------------
(a) Release of Unvested Options. As of the effective date of
---------------------------
this Agreement, you hold the following nonqualified stock options granted by
the Company subject to the terms of the applicable plan and option award
agreements (collectively, the "Unvested Options"): (i) 6,000 options granted on
October 20, 1994, which are scheduled to vest on October 20, 1999; and (ii)
6,800 options granted on September 28, 1995, 3,400 of which are scheduled to
vest on September 28, 1999 and 3,400 of which are scheduled to vest on
September 28, 2000. You have acknowledged that, in the absence of a change of
control of the Company, such Unvested Options shall, by their terms, expire
unvested as of your retirement on June 1, 1999.
In exchange for good and valuable consideration provided under this
Agreement, you have agreed and do hereby forfeit and release the Unvested
Options immediately upon the execution of this Agreement.
-2-
<PAGE>
Cullen/Frost Bankers
(b) Grant. In consideration for past and future services to the
-----
Company, you will receive a nonqualified stock option, subject to the terms of
the applicable plan and option award agreement as approved by the Company's
Compensation and Benefits Committee on June 26, 1996, of 15,000 options which
will be scheduled to vest on May 31, 1999, with a ten (10) year exercise
period from the date of grant.
2.5 Reimbursement of Expenses. During the Initial Term, the
-------------------------
Company shall reimburse you for all expenses reasonably incurred by you in
conjunction with the rendering of services at the Company's request, including
such entertainment, travel and other related incidental expenses reasonably
incurred by you in conjunction with your duties as Chairman or Immediate Past-
Chairman of the Greater San Antonio Chamber of Commerce or in support of
customer relations activities for the benefit of the Company, provided that
such expenses are incurred and submitted for reimbursement, with appropriate
receipts and itemization, in accordance with the prevailing practice and policy
of the Company. During the Consulting Term, the prior authorization or
approval by the Senior Chairman or Chairman of the Company shall also be
required for expense reimbursement.
2.6 Office. While employed as President during the Initial
------
Term, you will continue to occupy your current office and receive secretarial
and other office support appropriate to your position. Thereafter, until the
earlier of such time as you no longer request or regularly utilize such office
or you reach age 70, you will be provided with a private office and appropriate
office and secretarial support.
3. Termination.
-----------
3.1 Termination For Cause. Your employment under this Agreement
---------------------
may be terminated by the Company for "Cause" (hereinafter defined) upon written
notice thereof given by the Company to you. In the event of termination
pursuant to this Section 3.1, the Company shall pay you your monthly base
-----------
salary (subject to standard deductions) earned pro rata to the date of such
termination and the Company shall have no further obligations to you hereunder.
Termination by the Company of your employment for Cause shall mean termination
upon (a) the willful and continued failure by you to perform substantially your
duties with the Company (other than any such failure resulting from your
incapacity due to physical or mental illness) after a demand for substantial
performance is delivered to you by the Senior Chairman or the Chairman of the
Board which specifically identifies the manner in which such executive believes
that you have not substantially performed your duties, or (b) the willful
engaging by you in illegal conduct which is materially and demonstrably
injurious to the Company. For purposes of this Section 3.1, no
-----------
act, or failure to act, on your part shall be considered willful unless done,
or omitted to be done, by you in bad faith and without reasonable belief that
your action or omission was in, or not opposed to, the best interest of the
Company. Any act, or failure to act, based upon authority given pursuant to a
resolution duly adopted by the Board or based on advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by
you in good faith and in the best interest of the Company. Notwithstanding the
foregoing, you shall not be deemed to have been terminated for Cause unless and
until there shall have been delivered to you a copy of a resolution duly
-3-
<PAGE>
Cullen/Frost Bankers
adopted by the affirmative vote of not less than three quarters of the entire
membership of the Board at a meeting of the Board called and held for the
purpose (after reasonable notice to you and an opportunity for you, together
with your counsel, to be heard before the Board), finding that in the good
faith opinion of the Board you were guilty of the conduct set forth above in
(a) or (b) of this Section 3.1 and specifying the particulars thereof in
-----------
detail.
3.2 Termination Upon Death. This Agreement shall terminate upon
----------------------
your death.
3.3 Termination Upon Disability. In the event you become unable
---------------------------
to perform the essential functions of your duties hereunder, with or without
reasonable accommodation, on account of illness, disability or other reason
whatsoever for a period of more than 180 consecutive days, the Company may,
upon notice to you, terminate this Agreement. In the event of termination
pursuant to this Section 3.3, you shall be entitled to payment of a monthly
-----------
amount, that when added to the monthly amount to be received under all your
short-term and long-term disability benefits, is equal to your monthly base
salary. You shall receive such amount for the then remaining portion of the
Term of employment pursuant to this Agreement.
3.4 Survival of Provisions. The covenants and provisions of
----------------------
Section 5 and Section 8 hereof shall survive any termination of this Agreement
- --------- ---------
regardless of how such termination may be brought about.
4. Retirement Plan. Notwithstanding the foregoing, upon the
---------------
occurrence of the earlier of (i) the termination of this Agreement on May 31,
1999 (i.e., the last day of the Term), or (ii) the termination of this
Agreement for any reason other than for death or Cause (as defined in Section
-------
3.1), you shall enter into retirement pursuant to the Retirement Plan for
- ---
Employees of Cullen/Frost Bankers, Inc. and its Affiliates (or any successor or
substitute defined benefit pension plan or plans of the Company) (the
"Retirement Plan").
5. Confidential Information. You agree that during and
------------------------
subsequent to your Term of employment with the Company, you will not at any
time communicate or disclose to any unauthorized person without the written
consent of the Senior Chairman or Chairman of the Company, any proprietary
process or information of the Company, or any subsidiary or related entity, or
other confidential information concerning their business, financial affairs,
products, suppliers or customers which, if disclosed, would have a material
adverse effect upon the business or operation of the Company and its
subsidiaries, taken as a whole; it being understood, however, that the
obligations of this Section 5 shall not apply to the extent that the aforesaid
---------
matters (a) are disclosed in circumstances where you are legally required to do
so or (b) become generally known to and available for use by the public
otherwise than by your wrongful act or omission. The intent of this Section 5
---------
is not to create a non-compete agreement but to protect the rights of the
Company as provided above.
-4-
<PAGE>
Cullen/Frost Bankers
6. Successors; Binding Agreement.
-----------------------------
6.1 Upon your written request, the Company will seek to have any
Successor (as hereinafter defined), by agreement in form and substance
satisfactory to you, assent to the fulfillment by the Company of its
obligations under this Agreement. Failure of such person or entity to furnish
such assent by the later of (a) three business days prior to the time such
person or entity becomes a Successor or (b) two business days after such person
or entity receives a written request to so assent shall constitute a
termination by the Company without cause and shall entitle you to payment
within 30 days of such termination of a lump sum equal to (without discounting
to present value) your monthly base salary under Section 2.1 hereof for the
then remaining portion of the Term of employment pursuant to this Agreement and
immediately to the benefits provided in Section 4. In addition, the
---------
retirement benefits you shall receive under Section 4 hereof shall be those
---------
benefits you would have been entitled to had you remained in the employ of the
Company until the expiration of the Term of this Agreement. For purposes of
this Agreement, Successor shall mean any person or entity that succeeds to, or
has the practical ability to control (either immediately or with the passage of
time), the Company's business directly, by merger or consolidation, or
indirectly, by purchase of the Company's securities entitled to vote in the
election of directors, all or substantially all of its assets, or otherwise.
6.2 For purposes of this Agreement, the Company shall include any
corporation or other entity which is the surviving or continuing entity in
respect of any merger, consolidation or form of business combination in which
the Company ceases to exist.
6.3. This Agreement shall inure to the benefit of and be
enforceable by you and your personal or legal representatives and successors in
interest under this Agreement.
7. Taxes. The Company may withhold from any amounts payable
-----
under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or governmental regulation or ruling.
8. Arbitration. Any claim, dispute or controversy of any nature
-----------
whatsoever, including but not limited to tort claims or contract disputes,
between the parties to this Agreement or their respective heirs, executors,
administrators, legal representatives, successors and assigns, as applicable,
arising out of or relating to your employment or the termination of your
employment with the Company and/or the terms and conditions of this Agreement,
including the implementation, applicability and interpretation thereof, shall
be resolved as follows: upon the written request of one party served upon the
other, any such claim, dispute or controversy shall be submitted to and settled
by arbitration in accordance with the provisions of the Federal Arbitration
Act, 9 U.S.C. Sections 1-15, as amended; provided, however, that with respect
to the provisions of Section 5 of this Agreement dealing with confidential
---------
information, the Company reserves the right to petition a court directly for
injunctive or other relief. If arbitration is requested, each of the parties
to this Agreement shall appoint one person as an arbitrator to hear and
determine any such disputes, and if they should be unable to agree, then the
two arbitrators shall choose a third arbitrator from a panel made up of
-5-
<PAGE>
Cullen/Frost Bankers
experienced arbitrators selected pursuant to the procedures of the American
Arbitration Association (the "AAA") and, once chosen, the third arbitrator's
decision shall be final, binding and conclusive upon the parties to this
Agreement. Each party shall be responsible for the fees and expenses of its
arbitrator and the fees and expenses of the third arbitrator shall be shared
equally by the parties. The terms of the commercial arbitration rules of AAA
shall apply except to the extent they conflict with the provisions of this
paragraph. It is further agreed that any of the parties hereto may petition
the United States District Court for the Western District of Texas, San Antonio
Division, for a judgment to be entered upon any award entered through such
arbitration proceedings.
9. Release. You release, dismiss, acquit and discharge the
-------
Company and its affiliates, and their divisions, officers, directors, agents,
employees, consultants, independent contractors, attorneys, advisers,
successors and assigns, jointly and severally, from any and all claims, known
or unknown, which you, your heirs, successors and assigns have or may have
against any of such parties, whether denominated claims, demands, causes of
action, obligations, damages or liabilities arising from any and all bases,
however denominated, including but not limited to claims of discrimination
under the Age Discrimination in Employment Act; Title VII of the Civil Rights
Act of 1964, as amended; the Civil Rights Act of 1991; 42 U.S.C. Section 1981,
Section 1985; Americans With Disabilities Act; Equal Pay Act;
anti-discrimination laws; libel; slander; defamation; Fair Labor Standards Act;
Employee Retirement Income Security Act of 1974; Texas Commission on Human
Rights Act; art. 5221k, Tex. Rev. Civ. Stat. Ann. (Vernon Supp. 1985) or any
other U.S. federal, state or local law including, statutory, common law or
regulations. This release relates to claims arising from and during your
relationship with the Company and its affiliates or as a result of the
termination of such relationship, specifically including but not limited to
your retirement to be effective June 1, 1999. This release is for any relief,
no matter how denominated, including but not limited to wages, back pay, front
pay, compensatory damages or punitive damages. You further agree that you will
not file or permit to be filed on your behalf any such claim. This release is
not intended to apply to the obligations of the Company set forth in this
Agreement or to future claims based upon events or occurrences subsequent to
the effective date of this Agreement. You expressly acknowledge that the
benefits being offered to you in this Agreement constitute consideration for
the foregoing release that is in addition to anything of value to which you are
already entitled from the Company and its affiliates.
10. Notice. Written notices required or furnished under this
------
Agreement shall be sent to the following addresses:
to the Company: Attn: Senior Chairman of the Board
Cullen/Frost Bankers, Inc.
100 W. Houston Street
P.O. Box 1600
San Antonio, Texas 78296
-6-
<PAGE>
Cullen/Frost Bankers
to you: Robert S. McClane
132 Grant Avenue
San Antonio, Texas 78209
Notices shall be effective on the first business day following receipt thereof.
Notices sent by mail shall be deemed received on the date of delivery shown on
the return receipt.
11. TERMINATION OF PRIOR LETTER AGREEMENTS. THIS AGREEMENT IS
--------------------------------------
INTENDED TO REPLACE IN THE ENTIRETY THE LETTER AGREEMENTS DATED NOVEMBER 15,
1994 AND MARCH 2, 1990 (THE "PRIOR AGREEMENTS") REGARDING A CHANGE IN CONTROL
OF THE COMPANY. BY MUTUAL AGREEMENT, THE PRIOR AGREEMENTS ARE HEREBY DECLARED
NULL AND VOID. THE RESPECTIVE OBLIGATIONS AND THE BENEFITS PROVIDED IN THE
PRIOR AGREEMENTS ARE TERMINATED AND OF NO FURTHER EFFECT.
12. Miscellaneous. This Agreement constitutes the entire
-------------
understanding between you and the Company and its affiliates with respect to
the subject matter hereof, and supersedes all prior understandings, written or
oral. The terms of this Agreement may be changed, modified or discharged only
by an instrument in writing signed by you and the Senior Chairman or the
Chairman of the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or of compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time. Except to the extent that the terms and
provisions of this Agreement are governed by Federal law, this Agreement shall
be construed in accordance with the laws of the State of Texas. This Agreement
may be executed in any number of counterparts, each of which shall be deemed to
be original.
13. Representations and Warranties. You warrant that you are
------------------------------
over the age of twenty-one (21) and competent to execute this Agreement; that
in executing this Agreement, you are not relying on any statement,
representation, advice or counsel of the other party to this Agreement, but are
relying on your own judgment and/or that of your independent counsel; and that
the Agreement is the result of negotiation between the parties. You agree that
you have been encouraged to and have had an opportunity to consult with an
attorney of your own choosing regarding the Agreement, that it was executed
voluntarily without duress or coercion of any form. You further acknowledge
that you have been afforded a period of at least 21 days within which to
consider this Agreement and that you understand that for a period of seven (7)
days following the execution of this Agreement you may revoke the same, and
that the Agreement shall not become effective and enforceable until this
revocation period has expired.
-7-
<PAGE>
Cullen/Frost Bankers
If this letter correctly sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of this
letter which will then constitute our binding agreement on this subject.
Sincerely,
CULLEN/FROST BANKERS, LTD.
By:/s/T.C. Frost
--------------------------------------
T.C. Frost, Senior Chairman of the
Board of Directors
Agreed to this 28th day
----
of June 1996.
-----------
/s/ Robert S. McClane
- -----------------------
Robert S. McClane
-8-
EXHIBIT 11
Statement re: Computation of Earnings Per Share
<PAGE>
<TABLE>
<CAPTION>
CULLEN/FROST BANKERS, INC.
Computation or Earnings Per Common Share
Primary and Fully Diluted (Unaudited)
(in thousands, except per share amounts)
December 31
--------------------------
Primary Earnings Per Share 1996 1995 1994
- -------------------------- ------- ------- -------
<S> <C> <C> <C>
Income before cumulative effect of accounting change $54,978 $46,279 $37,423
======= ======= =======
Weighted average shares outstanding 22,444 22,308 22,118
Addition from assumed exercise of stock options 462 368 328
------- ------- -------
Weighted average number of common shares outstanding 22,906 22,676 22,446
======= ======= =======
Primary earnings per common share:
Net income $ 2.40 $ 2.04 $ 1.67
</TABLE>
<TABLE>
<CAPTION>
December 31
--------------------------
Fully Diluted Earnings Per Share 1996 1995 1994
- -------------------------------- ------- ------- -------
<S> <C> <C> <C>
Income before cumulative effect of accounting change $54,978 $46,279 $37,423
======= ======= =======
Weighted average shares outstanding 22,444 22,308 22,118
Addition from assumed exercise of stock options 573 472 328
------- ------- -------
Weighted average number of common shares outstanding 23,017 22,780 22,446
======= ======= =======
Fully diluted earnings per common share:
Net income $ 2.39 $ 2.03 $ 1.67
</TABLE>
EXHIBIT 13
The Cullen/Frost 1996 Annual Report to Shareholders for the
Year Ended December 31, 1996 (furnished for the information of
the Commission and not deemed to be "filed" except for the
portions 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 1994 through 1996. 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. The number of shares outstanding and related earnings per
share amounts have been restated to retroactively give effect for the two-for-
one stock split declared and distributed by the Corporation during the second
quarter of 1996.
Results Of Operations
For the year ended December 31, 1996, the Corporation reported net income
of $55.0 million or $2.40 per common share, an all-time high in the 128-year
history of Cullen/Frost. Net income after taxes for 1995 was $46.3 million or
$2.04 per common share, compared with $37.4 million or $1.67 per common share
for 1994. The Corporation's return on average assets for 1996 was 1.22 percent
compared with 1.17 percent in 1995 and 1.02 percent in 1994, while return on
average equity was 15.32 percent in 1996 compared with 14.32 percent in 1995
and 13.04 percent in 1994.
As noted in more detail below, the Corporation has historically used the
purchase method in accounting for its acquisitions which has resulted in the
creation of intangible assets. These intangible assets are deducted from
capital in the determination of regulatory capital. Thus, "cash" or "tangible"
earnings represents the regulatory capital generated during the year and can be
viewed as net income excluding intangible amortization, net of tax. While the
definition of "cash" or "tangible" earnings may vary by company, we believe
this definition is appropriate as it measures the per share growth of
regulatory capital, which impacts the amount available for dividends, stock
repurchases and acquisitions. The following table reconciles reported earnings
to net income excluding intangible amortization ("cash" earnings):
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------
Reported Intangible "Cash" Reported Intangible "Cash"
earnings Amortization earnings earnings Amortization earnings
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before income
taxes $85,737 $11,306 $97,043 $71,277 $8,124 $79,401
Income taxes 30,759 3,267 34,026 24,998 2,495 27,493
-----------------------------------------------------------------
Net income $54,978 $ 8,039 $63,017 $46,279 $5,629 $51,908
=================================================================
Net income per common
share $ 2.40 $ .35 $ 2.75 $ 2.04 $ .25 $ 2.29
Return on assets 1.22% 1.40%* 1.17% 1.32%*
Return on equity 15.32 17.56 ** 14.32 16.06**
* Calculated as A/B
** Calculated as A/C 1996 1995
----------------- ----------- -----------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 63,017 $ 51,908
(B) Total average assets 4,496,495 3,944,026
(C) Average shareholders' equity 358,837 323,288
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1994
- ---------------------------------------------------------------
Reported Intangible "Cash"
earnings Amortization earnings
- --------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $57,600 $7,627 $65,227
Income taxes 20,177 2,607 22,784
-------------------------------
Net income $37,423 $5,020 $42,443
===============================
Net income per common share $ 1.67 $ .22 $ 1.89
Return on assets 1.02% 1.16%*
Return on equity 13.04 14.79 **
* Calculated as A/B
** Calculated as A/C
1994
- -------------------- -----------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 42,443
(B) Total average assets 3,658,187
(C) Average shareholders' equity 287,005
</TABLE>
Acquisitions
On March 7, 1997, the Corporation paid approximately $32.2 million to
acquire Corpus Christi Bancshares, Inc., which owns the $184 million-deposit
Citizens State Bank, based in Corpus Christi, Texas. This transaction will be
accounted for as a purchase with total cash consideration being funded through
internal sources. Total intangibles associated with the acquisition were
approximately $21.4 million. This acquisition is expected to be slightly
accretive to the Corporation's 1997 net income.
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. The Corporation acquired deposits of
approximately $112 million. Total intangibles associated with the acquisition
were approximately $11.0 million. On February 15, 1996, the Corporation paid
approximately $33.5 million to acquire Park National Bank in Houston, Texas.
The Corporation acquired deposits of approximately $225 million. Total
intangibles associated with the acquisition were $16.8 million. The
acquisitions did not have a material impact on the Corporation's 1996 net
income.
<PAGE>
On April 4, 1995, the Corporation entered the Rio Grande Valley area with
the acquisition of Valley Bancshares, Inc., including its subsidiary, Valley
National Bank in McAllen, Texas with approximately $49 million in deposits.
Total intangibles associated with the acquisition were approximately $5.0
million. On May 19, 1995, the acquisition of National Commerce Bank in Houston
with its three branch locations and approximately $101 million in deposits was
completed. Total intangibles associated with the acquisition were
approximately $15.6 million. On July 21, 1995, the Corporation acquired the
two San Antonio branches of Comerica Bank Texas with approximately $34 million
in deposits. The acquisitions did not have a material impact on the
Corporation's 1996 and 1995 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. Total intangibles associated with the acquisition
were approximately $2.3 million.
<TABLE>
<CAPTION>
1996 Change 1995 Change
Earnings Summary 1996 From 1995 1995 From 1994 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Taxable-equivalent net interest income $180,079 $ 26,943 $153,136 $ 16,147 $136,989
Taxable-equivalent adjustment 997 116 881 239 642
---------------------------------------------
Net interest income 179,082 26,827 152,255 15,908 136,347
Provision for possible loan losses 7,300 1,028 6,272 6,272
Non-interest income:
Net loss on securities transactions (980) 416 (1,396) 2,642 (4,038)
Other 95,515 6,376 89,139 8,286 80,853
----------------------------------------------
Total non-interest income 94,535 6,792 87,743 10,928 76,815
Non-interest expense:
Intangible amortization 11,306 3,182 8,124 497 7,627
Other operating expenses 169,274 14,949 154,325 6,390 147,935
----------------------------------------------
Total non-interest expense 180,580 18,131 162,449 6,887 155,562
----------------------------------------------
Income before income taxes 85,737 14,460 71,277 13,677 57,600
Income taxes 30,759 5,761 24,998 4,821 20,177
----------------------------------------------
Net income $ 54,978 $ 8,699 $ 46,279 $ 8,856 $ 37,423
==============================================
Cash earnings* $ 63,017 $ 11,109 $ 51,908 $ 9,465 $ 42,443
Per common share
Net income-primary $ 2.40 $ .36 $ 2.04 $ .37 $ 1.67
Net income-fully diluted 2.39 .36 2.03 .36 1.67
Cash earnings-primary 2.75 .46 2.29 .40 1.89
Cash earnings-fully diluted 2.74 .46 2.28 .39 1.89
Return on Average Assets 1.22% .05% 1.17% .15% 1.02%
Cash earnings ROA 1.40 .08 1.32 .16 1.16
Return on Average Equity 15.32 1.00 14.32 1.28 13.04
Cash earnings ROE 17.56 1.50 16.06 1.27 14.79
* Net income before intangible amortization (including goodwill and core deposit
intangibles, net of tax)
</TABLE>
<PAGE>
Net Interest Income
Net interest margin, which represents the average net effective yield on
earning assets, calculated as net interest income on a taxable-equivalent basis
expressed as a percentage of average total earning assets, was 4.76 percent for
the year ended December 31, 1996, compared to 4.56 percent and 4.39 percent for
the years 1995 and 1994, respectively. The increase in net interest income and
net interest margin from a year ago is reflective of higher loan volumes and
lower deposit costs. Net interest spread for 1996 increased 18 basis points to
3.98 percent. Net interest spread was 3.80 percent and 3.82 percent for 1995
and 1994, respectively. The increase in net interest spread from 1995 is
primarily due to the Corporation's ability to maintain its earnings on funds
with higher loan volumes and the favorable impact of the acquisitions, while
deposit costs decreased.
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.
<TABLE>
<CAPTION>
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
- ------ ------------ ----------- ----- ------ -------- ------------
<S> <C> <C> <S> <C> <C> <C>
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
1996 180 4.76 1996 7.71 3.73 3.98
</TABLE>
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.
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans $1,267,775 $1,399,901 $1,635,098 $2,005,009 $247,141 $2,252,150
Securities 230,347 299,531 856,517 1,318,632 157,792 1,476,424
Federal funds
sold and other
short-term investments 52,850 52,850 52,850 52,850 52,850
------------------------------------------------------------------
Total earning assets $1,550,972 $1,752,282 $2,544,465 $3,376,491 $404,933 $3,781,424
==================================================================
Interest-Bearing
Liabilities:
Savings and Interest-
on-Checking $ 726,700 $ 726,700 $ 726,700 $ 726,700 $ 726,700
Money market deposit
accounts 876,382 876,382 876,382 876,382 876,382
Certificates of deposit
and other time accounts 349,935 684,129 1,169,674 1,220,555 $ 87,742 1,308,297
Federal funds purchased
and other borrowings 174,107 174,107 174,107 174,107 174,107
------------------------------------------------------------------
Total interest-bearing
liabilities $2,127,124 $2,461,318 $2,946,863 $2,997,744 $ 87,742 $3,085,486
==================================================================
Interest sensitivity gap$ (576,152) $ (709,036) $ (402,398) $ 378,747 $317,191 $ 695,938
==================================================================
Ratio of earning assets
to interest-bearing
liabilities .73 .71 .86 1.13
=============================================
</TABLE>
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 $1,154,000. 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
26.
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.
<PAGE>
Non-Interest Income
Non-interest income of $94,535,000 was reported for 1996, compared with
$87,743,000 for 1995 and $76,815,000 for 1994. Excluding securities
transactions, total non-interest income increased 7.2 percent from 1995.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------
1996 1995 1994
---------------- ------------------ ----------------
Percent Percent Percent
Non-Interest Income Amount Change Amount Change Amount Change
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trust department $34,031 + 7.1% $31,762 + 7.6% $29,529 + 12.4%
Service charges on
deposit accounts 38,294 + 26.0 30,382 + 7.8 28,182 + 3.2
Other service charges,
collection and
exchange charges,
commissions and fees 8,764 - 20.7 11,055 + 18.0 9,366 + 17.5
Net loss on securities
transactions (980) - 29.8 (1,396) - 65.4 (4,038) -381.8
Other 14,426 - 9.5 15,940 + 15.7 13,776 + 4.0
------- ------- -------
Total $94,535 + 7.7 $87,743 + 14.2 $76,815 + .8
======= ======= =======
</TABLE>
Trust income was up $2.3 million or 7.1 percent during 1996 due to higher
investment, employee benefit trust, and personal trust fees. This increase was
offset by lower corporate trust income resulting from the sale of the
Corporation's corporate trust business in 1995. At December 31, 1996, the
market value of trust assets totaled $8.1 billion compared to $6.9 billion, at
December 31, 1995, with the increase in the number of accounts held and the
rise in the stock market being the primary reasons for the increase. The
December 1996 trust assets were comprised of discretionary assets of $4.2
billion and non-discretionary assets of $3.9 billion. The $2.2 million or 7.6
percent increase in trust income from 1994 to 1995 is attributable primarily to
improved financial market conditions and increased fee structures that were
implemented in the second quarter of 1994.
Deposit service charges are up $7.9 million or 26.0 percent from 1995.
The increase is due mainly to higher volumes, primarily processing for
correspondent banks, and service charges on corporate and retail deposits.
Acquisitions account for approximately one-third of the increase. Other
service charges and fees decreased $2.3 million or 20.7 percent when compared
to 1995. This is primarily due to lower income from bankcard discounts as a
result of the Corporation's outsourcing of its bankcard processing operations
which was completed in May 1996. The 18.0 percent increase in other service
charges from 1994 to 1995 is primarily due to fees associated with higher
business volumes, bankcard discount, fees from the sale of mutual funds and
higher loan prepayment fees.
During the second quarter of 1996, the Corporation restructured a portion
of its available for sale investment portfolio resulting in losses of $903,000.
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 26. During the fourth quarter of
1995 and 1994, the Corporation restructured a portion of its available for sale
portfolio resulting in losses of approximately $1.5 million and $3.5 million,
respectively.
Other non-interest income decreased $1.5 million or 9.5 percent to
$14,426,000 in 1996 compared to a $2.2 million or 15.7 percent increase in
1995. The decrease in 1996 and the increase in 1995 are primarily due to the
gain recognized on the sale of the Corporation's corporate trust business in
1995.
<PAGE>
<TABLE>
<CAPTION>
Non-Interest Income
($ in thousands)
(Graphic material omitted)
Net Gain(Loss)
Year Service Other Service on Securities
Ended Trust Charges Charges Other Transactions
- ----- ---------- ------- ------------- ------- --------------
<S> <C> <C> <C> <C> <C>
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)
1996 34,031 38,294 8,764 14,426 (980)
</TABLE>
Non-Interest Expense
Non-interest expense was $180,580,000 for 1996 compared with $162,449,000
for 1995 and $155,562,000 for 1994. The primary reason for the increase in
non-interest expenses from a year ago was due to the acquisitions.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------
1996 1995 1994
---------------- ------------------ ---------------
Percent Percent Percent
Non-Interest Expense Amount Change Amount Change Amount Change
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and wages $ 71,788 +23.4% $ 58,177 + 9.8% $ 52,986 - 1.2%
Pension and other
employee benefits 15,351 +40.8 10,905 +10.0 9,910 -17.8
Net occupancy of
banking premises 18,782 + 4.4 17,992 +14.0 15,777 -24.0
Furniture and equipment 11,789 + 4.7 11,259 + 2.9 10,937 + 7.7
Intangible amortization 11,306 +39.2 8,124 + 6.5 7,627 +10.9
Other 51,564 - 7.9 55,992 - 4.0 58,325 -13.1
-------- -------- --------
Total $180,580 +11.2 $162,449 + 4.4 $155,562 - 9.6
======== ======== ========
</TABLE>
Salaries and wages increased by $13.6 million or 23.4 percent during 1996
primarily because of acquisitions. Pension and other employee benefits
increased by $4.4 million or 40.8 percent during 1996 primarily due to higher
retirement plan expense, payroll tax, and medical insurance expense related to
the acquisitions and the impact of an early retirement charge. The 10.0
percent increase in pension and other employee benefits from 1994 to 1995
reflects an adjustment which lowered medical insurance expense in 1994, higher
retirement plan expense and the impact of acquisitions. The 1994 adjustment to
medical insurance resulted from the implementation of a managed health care
network and favorable claims experience.
Net occupancy of banking premises increased $790,000 or 4.4 percent during
1996 primarily due to higher lease, building maintenance, and property tax
expense related to the acquisitions. The 14.0 percent increase during 1995 is
primarily because of higher property taxes, increased lease expense as a result
of acquisitions, and building maintenance expenses. Furniture and equipment
costs increased $530,000 or 4.7 percent in 1996 mostly due to higher
depreciation expense associated with the acquisitions. Intangible amortization
increased by $3.2 million or 39.2 percent from the same period one year ago due
to the acquisitions.
<PAGE>
Other non-interest expense decreased $4.4 million or 7.9 percent during
1996 primarily due to decreases in FDIC insurance, franchise taxes, and federal
reserve service charges. Other non-interest expense was down 4.0 percent in
1995 mostly due to lower FDIC insurance premiums and the timing of charitable
contributions. The Corporation paid a minimal FDIC insurance premium in 1996
compared to $3.6 million in 1995 and $6.9 million in 1994. 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, legislative action enacted in 1996 provides for assessments on banks
(based on deposit levels) to pay interest on Financing Corporation (FICO)
bonds, the proceeds of which were used in the bailout of the Savings and Loan
industry in the 1980's. For each of the three years beginning in 1997, the
assessment on banks is expected to be approximately 1.3 cents for each $100 of
qualified deposits. Based on year-end deposit levels, the 1997 expense would
be approximately $500,000.
During 1996, the Corporation did not take a provision for real estate
losses compared to a $610,000 provision for real estate losses in 1995 and no
provision in 1994. The Corporation's efficiency ratio of 65.5 percent for 1996
improved from 66.8 percent for 1995 and 71.4 percent for 1994. The efficiency
ratio measures what percentage of bank revenue is absorbed by non-interest
expense.
<TABLE>
<CAPTION>
Non-Interest Expense
($ in thousands)
(Graphic material omitted)
Net Occupancy Provision
Year Salaries, Wages & Furniture and Intangible for Real Estate
Ended and Benefits Equipment Amortization Other Losses
- ----- --------------- --------------- ------------ ------- ---------------
<S> <C> <C> <C> <C> <C>
1992 $55,930 $25,258 $ 700 $52,299 $12,963
1993 65,706 30,904 6,877 67,146 1,445
1994 62,896 26,714 7,627 58,325 0
1995 69,082 29,251 8,124 55,382 610
1996 87,139 30,571 11,306 51,564 0
</TABLE>
Income Taxes
The Corporation recognized income tax expense of $30,759,000 in 1996,
compared to $24,998,000 in 1995, and $20,177,000 in 1994. The effective tax
rate increased to 35.88 percent in 1996 from 35.07 percent in 1995 and 35.03
percent in 1994. For a detailed analysis of the Corporation's income taxes see
Note O "Income Taxes" on page 47.
<PAGE>
Sources and Uses Of Funds
Average assets for 1996 of $4,496,495,000 increased by 14.0 percent from
1995 levels and increased 7.8 percent between 1994 and 1995. Funding sources
in 1996 reflected an increase in deposits while Federal funds purchased were
reduced. The Corporation's uses of funds continued a trend which started in
1995 of replacing securities with loans as the largest component of earning
assets. This reflects the increases in loan volumes from a year ago.
<TABLE>
<CAPTION>
Percentage of Total Average Assets
----------------------------------
Sources and Uses of Funds 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Sources of Funds:
Deposits:
Demand 23.9% 21.9% 22.9%
Time 62.8 61.6 62.4
Federal funds purchased 3.3 6.4 5.2
Equity capital 8.0 8.2 7.9
Borrowed funds .4 .3
Other liabilities 1.6 1.6 1.6
-----------------------------
Total 100.0% 100.0% 100.0%
=============================
Uses of Funds:
Loans 46.4% 42.7% 36.6%
Securities 34.6 39.5 45.7
Federal funds sold 3.1 3.0 3.0
Non-earning assets 15.9 14.8 14.7
-----------------------------
Total 100.0% 100.0% 100.0%
=============================
</TABLE>
Loans
Average loans for 1996 were $2,086,816,000, an increase of 24.0 percent
from 1995. This was driven by continued improved economic conditions in the
Texas markets the Corporation serves and the result of the acquisitions.
<TABLE>
<CAPTION>
Total Average Loans and Yields
($ in millions)
(Graphic material omitted)
Average Loan
Year Average Loans Yield
- ---- ------------- ------------
<S> <C> <C>
1992 $1,046 8.11%
1993 1,172 7.79
1994 1,340 7.97
1995 1,683 8.99
1996 2,087 8.84
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------
1996
-----------------------
Loan Portfolio
Analysis Percentage of
(Period-End Balances) Amount Total Loans 1995 1994 1993 1992
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
Construction $ 84,091 3.7% $ 54,168 $ 44,502 $ 32,297 $ 26,632
Land 50,208 2.2 37,695 36,805 32,317 39,991
Permanent
Mortgages:
Commercial 225,845 10.0 198,276 177,223 144,122 77,347
Residential 422,787 18.8 339,576 277,725 276,165 253,471
Other 260,603 11.6 208,190 178,263 150,499 134,470
---------------------------------------------------------------
Total real estate 1,043,534 46.3 837,905 714,518 635,400 531,911
Commercial and
industrial 649,721 28.9 508,990 375,085 311,436 256,520
Consumer 491,072 21.8 402,169 331,039 268,331 217,232
Financial
institutions 12,749 .6 10,409 5,578 284 9,380
Foreign 45,562 2.0 43,847 45,290 31,763 17,871
Purchasing or
carrying
securities 1,812 .1 1,711 1,884 1,204 1,918
Other 8,854 .4 13,068 13,386 17,797 7,737
Unearned
discount (1,154) (.1) (1,337) (3,487) (8,456) (12,632)
----------------------------------------------------------------
Total $2,252,150 100.0% $1,816,762 $1,483,293 $1,257,759 $1,029,937
================================================================
Percent change
from previous
year +24.0% +22.5% +17.9% +22.1% -7.1%
</TABLE>
Period-end loans increased to $2,252,150,000 at year-end 1996, up 24.0
percent from the previous year end. Most of the increase in period-end loans
is attributable to real estate and commercial loans which increased $206
million and $141 million, respectively. Approximately one-half of the increase
in total loans from a year ago resulted from acquisitions.
Total real estate loans at December 31, 1996 were $1,043,534,000 up 24.5
percent from year-end 1995. Amortizing permanent mortgages represented 62.2
percent of the total real estate loan portfolio at year end. Residential
mortgages increased $83,211,000 or 24.5 percent. Real estate loans categorized
as "other" are primarily amortizing commercial and industrial loans with
maturities of less than five years. Approximately 62 percent of all commercial
real estate loans are owner occupied or have a major tenant (National or
Regional company) with a manageable risk level.
Mexican Loans
At December 31, 1996, the Corporation's cross-border outstandings to
Mexico, excluding $15,630,000 in loans secured by liquid U.S. assets, totaled
$29,932,000, down from $30,586,000 last year. Most 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 85 percent are related to companies
exporting from Mexico. At December 31, 1996, none of the Mexican-related loans
were on non-performing status.
<TABLE>
<CAPTION>
December 31
------------------------------------------
1996
------------------------------------------
Percentage of Percentage of
Mexican Loans Amount Total Loans Total Assets
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Financial institutions $24,932 1.1% .5%
Commercial and industrial 5,000 .2 .1
------------------------------------
Total $29,932 1.3% .6%
====================================
The above table excludes $15,630,000, $13,261,000 and $21,267,000 in loans secured by
liquid assets held in the United States in 1996, 1995 and 1994, respectively.
</TABLE>
<TABLE>
<CAPTION>
December 31
------------------------------------------
1995
------------------------------------------
Percentage of Percentage of
Mexican Loans Amount Total Loans Total Assets
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Financial institutions $30,560 1.7% .7%
Commercial and industrial 26
------------------------------------
Total $30,586 1.7% .7%
====================================
The above table excludes $15,630,000, $13,261,000 and $21,267,000 in loans secured by
liquid assets held in the United States in 1996, 1995 and 1994, respectively.
</TABLE>
<TABLE>
<CAPTION>
December 31
------------------------------------------
1994
------------------------------------------
Percentage of Percentage of
Mexican Loans Amount Total Loans Total Assets
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Financial institutions $23,999 1.6% .6%
Commercial and industrial 24
------------------------------------
Total $24,023 1.6% .6%
====================================
The above table excludes $15,630,000, $13,261,000 and $21,267,000 in loans secured by
liquid assets held in the United States in 1996, 1995 and 1994, respectively.
</TABLE>
<PAGE>
Non-Performing Assets
Non-performing assets decreased 25.9 percent to $11,966,000 at December
31, 1996, compared with $16,155,000 at December 31, 1995 and $19,938,000 at
December 31, 1994. Non-performing assets as a percentage of total loans and
foreclosed assets decreased to .53 percent at December 31, 1996, down from .89
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.
<TABLE>
<CAPTION>
December 31
---------------------------------------------------
Non-Performing Assets 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual and
restructured loans $ 9,724 $14,646 $16,627 $27,677 $41,851
Foreclosed assets 2,242 1,509 3,311 3,433 9,452
--------------------------------------------------
Total $11,966 $16,155 $19,938 $31,110 $51,303
==================================================
As a percentage of
total assets .24% .38% .53% .85% 1.63%
As a percentage of
total loans plus
foreclosed assets .53 .89 1.34 2.47 4.94
After-tax impact of lost
interest per common share $ .04 $ .05 $ .07 $ .10 $ .20
Accruing loans 90 days
past due:
Consumer $ 1,829 $ 1,276 $ 574 $ 765 $ 414
All other 4,082 3,912 3,070 3,827 1,431
--------------------------------------------------
Total $ 5,911 $ 5,188 $ 3,644 $ 4,592 $ 1,845
==================================================
Interest income that would have been recorded in 1996 on non-performing assets, had such
assets performed in accordance with their original contract terms, was $1,182,000 on non-
accrual and restructured loans and $138,000 on foreclosed assets. During 1996, the amount
of interest income actually recorded on non-accrual and restructured loans was $292,000.
There were no foreign loans 90 days past due.
</TABLE>
<TABLE>
<CAPTION>
Non-Performing Assets
($ in millions)
(Graphic material omitted)
Non-Accrual and Foreclosed
Year Restructured Loans Assets
- ---- ------------------ ----------
<S> <C> <C>
1992 $42 $9
1993 28 3
1994 17 3
1995 15 1
1996 10 2
</TABLE>
<PAGE>
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.
At December 31, 1996, the Corporation had $6,825,000 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 $36,308,000 or 1.61 percent of
period-end loans at December 31, 1996, compared to $31,577,000 or 1.74 percent
of period-end loans at year-end 1995. The allowance for possible loan losses
as a percentage of non-accrual and restructured loans was 373.4 percent at
December 31, 1996, up from 215.6 percent at December 31, 1995.
The Corporation recorded a $7,300,000 provision for possible loan losses
during 1996, compared to $6,272,000 recorded during 1995. No provision was
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.
The Corporation recorded net charge-offs of $2,569,000 for the year ended
December 31, 1996, compared to net charge-offs of $436,000 and net recoveries
of $2,127,000 for the years ended December 31, 1995 and 1994, respectively.
The Corporation's charge-offs in 1996 consisted primarily of commercial and
industrial loans which increased $5.5 million from $654,000 in 1995 and
consumer loans which decreased slightly from a year ago. 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.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
Allowance for ------------------------------------------------------
Possible Loan Losses 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding
during year, net of
unearned discount $2,086,816 $1,682,541 $1,339,656 $1,171,825 $1,045,883
======================================================
Balance of allowance
for possible loan
losses at beginning
of year $ 31,577 $ 25,741 $ 26,298 $ 31,897 $ 42,387
Provision (credit) for
possible loan losses 7,300 6,272 (6,085) 5,498
Changes related to
disposition of bank
subsidiary (2,684)
Charge-offs:
Real estate (351) (228) (1,349) (3,481) (11,073)
Commercial and industrial (6,176) (654) (316) (1,287) (5,641)
Consumer (3,709) (3,797) (2,357) (3,369) (3,293)
Other, including foreign (9) (2) (63) (3,828)
-----------------------------------------------------
Total charge-offs (10,245) (4,681) (4,022) (8,200) (23,835)
-----------------------------------------------------
Recoveries:
Real estate 2,467 1,258 1,970 2,412 2,034
Commercial and industrial 3,665 1,722 2,434 3,577 3,783
Consumer 1,416 1,211 1,692 2,237 1,852
Other, including foreign 128 54 53 460 178
------------------------------------------------------
Total recoveries 7,676 4,245 6,149 8,686 7,847
------------------------------------------------------
Net (charge-offs) recoveries (2,569) (436) 2,127 486 (15,988)
------------------------------------------------------
Balance of allowance for
possible loan losses
at end of year $ 36,308 $ 31,577 $ 25,741 $ 26,298 $ 31,897
======================================================
Net (charge-offs) recoveries
as a percentage of average
loans outstanding during
year, net of unearned discount (.12)% (.03)% .16% .04% (1.53)%
Allowance for possible loan
losses as a percentage of
year-end loans, net of
unearned discount 1.61 1.74 1.74 2.09 3.10
There were no foreign charge-offs in 1996-1993. 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 $2,684,000 related to
the exchange of Cullen/Frost Bank in Dallas for Texas Commerce Bank-Corpus Christi.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Allowance for Possible Loan Losses and Allowance to Year-End Loans
($ in thousands)
(Graphic material omitted)
Year Allowance for possible Allowance to Allowance to Non-
Ended loan losses year-end loans performing loans
- ----- ---------------------- --------------- -----------------
<S> <C> <C> <C>
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
1996 36,308 1.61 373.4
</TABLE>
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.
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, 1996, the
Corporation had no concentration of commercial and industrial loans in any
single industry that exceeded 10 percent 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, 1996, 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.
<PAGE>
The consumer loan portfolio has three distinct segments -- indirect
consumer loans, which represent 56 percent of the consumer loan portfolio,
direct non-real estate consumer loans, which represent 28 percent of the
portfolio and direct real estate consumer loans, which represent 16 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, competitive, 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.
<TABLE>
<CAPTION>
December 31
-----------------------
1996
-----------------------
Allowance As a
for Percentage
Possible of
Allocation of Allowance Loan Total
for Possible Loan Losses Losses Loans
- --------------------------------------------------------
<S> <C> <C>
Commercial and industrial $ 6,504 .29%
Real estate 6,707 .30
Consumer 13,805 .61
Purchasing or carrying securities 6
Financial institutions 44
Other, including foreign 159 .01
Not allocated 9,083 .40
-------------------
Total $36,308 1.61%
===================
December 31
-----------------------------------------------
1995 1994
----------------------- -----------------------
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
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial $ 7,991 .44% $ 4,291 .29%
Real estate 9,076 .50 8,584 .58
Consumer 12,110 .67 10,384 .70
Purchasing or carrying securities 6 7
Financial institutions 32 28
Other, including foreign 167 .01 160 .01
Not allocated 2,195 .12 2,287 .16
--------------------------------------------
Total $31,577 1.74% $25,741 1.74%
============================================
December 31
-----------------------------------------------
1993 1992
----------------------- -----------------------
Allowance As a Allowance As a
for Percentage for Percentage
Possible of Possible of
Allocation of Allowance Loan Total Loan Total
for Possible Loan Losses Losses Loans Losses Loans
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial $ 3,453 .27% $ 3,752 .36%
Real estate 10,432 .83 14,069 1.37
Consumer 6,756 .54 5,238 .51
Purchasing or carrying securities 3 59 .01
Financial institutions 8 123 .01
Other, including foreign 332 .03 498 .05
Not allocated 5,314 .42 8,158 .79
--------------------------------------------
Total $26,298 2.09% $31,897 3.10%
============================================
</TABLE>
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.
<PAGE>
Securities
Total securities, including securities available for sale, were
$1,476,424,000 at year-end 1996 compared to $1,536,567,000 a year ago. In the
second quarter of 1996, the Corporation restructured a portion of its available
for sale investment portfolio resulting in losses of $903,000. 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 $1,299,285,000 at December
31, 1996, compared to $1,325,836,000 at year-end 1995. 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, 1996 was 6.42 percent compared with 6.36 percent for 1995.
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Period-end Percentage Period-end Percentage Period-end Percentage
Securities Balance of Total Balance of Total Balance of Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 231,351 15.7% $ 223,457 14.5% $ 241,625 15.2%
U.S. Government
agencies and
corporations 1,233,238 83.5 1,301,731 84.7 1,325,070 83.1
States and political
subdivisions 5,449 .4 5,527 .4 5,683 .3
Other 6,386 .4 5,852 .4 21,664 1.4
---------------------------------------------------------------
Total $1,476,424 100.0% $1,536,567 100.0% $1,594,042 100.0%
===============================================================
Average yield
earned during
the year (taxable-
equivalent basis) 6.42% 6.36% 5.70%
</TABLE>
Interest Rate Swaps
During 1996, the Corporation continued its strategy of entering into off-
balance sheet interest rate swaps to hedge its interest rate risk by
essentially converting fixed-rate loans into synthetic variable-rate
instruments. These swap transactions allow management to structure the
interest rate sensitivity of the asset side of the Corporation's balance sheet
to more closely match it's view of the interest rate sensitivity of the
Corporation's funding sources. The Corporation had 31 interest rate swaps at
December 31, 1996 compared to 12 interest rate swaps at December 31, 1995.
Each swap was a hedge against a specific commercial fixed-rate loan or against
a specific pool of consumer fixed-rate loans, with a notional amount of $251
million and $143 million, respectively. In each case, the amortization of the
interest rate swap generally matches the expected amortization of the
underlying loan or pool of loans and was a hedge against either a specific
commercial loan or a specific pool of consumer loans with lives ranging from
two to ten years. Each counterpart to a swap transaction has a credit rating
that is investment grade. The net amount payable or receivable under these
interest rate swap contracts is accrued as an adjustment to interest income and
is not considered material in 1996 and 1995.
<PAGE>
Deposits
<TABLE>
<CAPTION>
Total Average Deposits
(Graphic material omitted)
Average Average Average
Year Demand Time Total Cost of Time
Ended Deposits Deposits Deposits Deposits
- ----- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
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
1996 1,076,029 2,825,271 3,901,300 3.66
</TABLE>
Total average demand deposits increased 24.5 percent from 1995. This can
be attributed to an increase in commercial and individual and correspondent
bank deposit levels of $135.9 million and $67.5 million, respectively. The
increase in commercial and individual is partially related to the acquisitions.
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ -------------------
Average Percent Average Percent Average Percent
Demand Deposits Balance Change Balance Change Balance Change
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and
individual $ 832,356 +19.5% $696,499 + 3.4% $673,764 + 6.7%
Correspondent
banks 198,750 +51.4 131,295 + 5.5 124,416 -13.0
Public funds 44,923 +22.2 36,772 - 4.6 38,531 - 8.4
---------- -------- --------
Total $1,076,029 +24.5 $864,566 + 3.3 $836,711 + 2.5
========== ======== ========
</TABLE>
Total average time deposits increased 16.3 percent from 1995, partially
due to the acquisitions, with the largest dollar increase coming from money
market deposit accounts. Public funds in 1996 increased 94.7 percent from 1995
levels to $245.3 million primarily due to the conversion of a repurchase
agreement into a time deposit in 1996 as well as an increase in deposits by a
taxing authority.
<TABLE>
<CAPTION>
1996 1995
------------------------ -----------------------
Average Percent Average Percent
Time Deposits Balance Change Cost Balance Change Cost
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Savings and Interest-
on-Checking $ 722,518 + .3% 1.36% $ 720,489 - 9.5% 1.76%
Money market
deposit accounts 810,616 +31.4 3.93 616,931 +12.7 3.84
Time accounts of
$100,000 or more 460,196 + 2.0 4.95 450,959 +23.6 5.09
Time accounts under
$100,000 586,675 +14.1 4.84 513,999 + 5.0 4.87
Public funds 245,266 +94.7 4.36 125,971 +46.3 4.33
---------- ----------
Total $2,825,271 +16.3 3.66 $2,428,349 + 6.3 3.70
========== ==========
1994
-------------------------
Average Percent
Time Deposits Balance Change Cost
- -------------------------------------------------
<S> <C> <C> <C>
Savings and Interest-
on-Checking $ 796,178 + 6.1% 1.81%
Money market
deposit accounts 547,237 + 2.3 2.87
Time accounts of
$100,000 or more 364,997 - 2.8 3.35
Time accounts under
$100,000 489,604 - 7.9 3.50
Public funds 86,132 +14.9 2.90
----------
Total $2,284,148 + .7 2.71
==========
</TABLE>
<PAGE>
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 increased 2.0 percent from 1995. The turbulent
economic conditions which started with the peso devaluation in December 1994
have begun to stabilize somewhat in 1996 and the Mexican economic recovery and
growth in manufacturing is expected to continue in 1997.
<TABLE>
<CAPTION>
Foreign Deposits 1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Average balance $573,583 $562,191 $592,233
Percentage of total average deposits 14.7% 17.1% 19.0%
</TABLE>
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. The conversion of a repurchase
agreement into a time deposit in 1996 and deposit levels increasing during the
year resulted in an offset position for the Corporation in Federal funds during
the year.
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ---------------- ----------------
Average Average Average Average Average Average
Federal Funds Balance Rate Balance Rate Balance Rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and
securities purchased
under resale agreements $ 138,811 5.21% $ 117,158 5.75% $108,762 3.81%
Federal funds purchased
and securities sold
under repurchase
agreements 144,804 4.79 251,392 5.29 191,611 3.74
--------- --------- --------
Net funds position $ (5,993) $(134,234) $(82,849)
========= ========= ========
</TABLE>
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, 1996 and 1995.
Long-Term Borrowings
During February 1997, the Corporation issued $100,000,000 of its 8.42
percent Capital Securities, Series A which represents a beneficial interest in
Cullen/Frost Capital Trust I, a Delaware statutory business trust and wholly-
owned subsidiary of the Corporation. The Issuer Trust will use the proceeds of
the offering of the Capital Securities to purchase Junior Subordinated
Debentures of Cullen/Frost. The Corporation will use the proceeds of the
offering of the Junior Subordinated Debentures for general corporate purposes,
which may include the reduction of short-term indebtedness, investments at the
holding company level, investments in the capital of, or extensions of credit
to, the Corporation's subsidiaries, acquisitions, and the repurchase of the
Corporation's common stock. The Capital Securities will be included in the
Tier 1 capital of Cullen/Frost for regulatory capital purposes and will be
reported as debt on the balance sheet. See Note U "Subsequent Events" on page
51.
Capital
At December 31, 1996, shareholders' equity reached the highest level in
the Corporation's history, $378,943,000, an increase of 11.0 percent from
$341,464,000 at December 31, 1995. The increase in 1996 was due primarily to
earnings growth partially offset by $18.1 million of dividends paid. The
Corporation had an unrealized gain on securities available for sale, net of
deferred taxes, of $7.6 million as of December 31, 1996 compared to $8.5
million as of December 31, 1995. 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.
During the second quarter of 1996, the Corporation declared and
distributed a two-for-one stock split and raised its cash dividend 20 percent
to $.21 per common share compared to $.175 per common share in the first
quarter of 1996. In addition, the Corporation announced that its Board of
Directors had authorized it to repurchase up to 500,000 shares of its common
stock from time to time. As of the date hereof, no shares have been
repurchased. The Corporation paid a quarterly dividend of $.11 per common
share during the first two quarters of 1995 increasing to $.175 per common
share during the third and fourth quarters.
<PAGE>
The Federal Reserve 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. For the Corporation's capital
ratios at December 31, 1996 and 1995, see Note L "Capital" on page 43.
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 43.
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 for
Cullen/Frost subsidiary banks. The New Galveston Company is a wholly-owned
second tier bank holding company subsidiary which holds all shares of each
banking and non-banking subsidiary.
Management's Responsibility For Financial Reporting
The management of Cullen/Frost Bankers, Inc. is responsible for the
preparation of the financial statements, related financial data and other
information in this annual report. The consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
include amounts based on management's estimates and judgment where appropriate.
Financial information appearing throughout this annual report is consistent
with the financial statements.
In meeting its responsibility both for the integrity and fairness of these
financial statements and information, management depends on the accounting
systems and related internal accounting controls that are designed to provide
reasonable assurances that transactions are authorized and recorded in
accordance with established procedures and that assets are safeguarded and that
proper and reliable records are maintained.
The concept of reasonable assurance is based on the recognition that the
cost of a system of internal controls should not exceed the related benefits.
As an integral part of the system of internal controls, Cullen/Frost maintains
an internal audit staff which monitors compliance with and evaluates the
effectiveness of the system of internal controls and coordinates audit coverage
with the independent auditors.
The Audit Committee of Cullen/Frost's Board of Directors, which is
composed entirely of directors independent of management, meets regularly with
management, regulatory examiners, internal auditors, the asset review staff and
independent auditors to discuss financial reporting matters, internal controls,
regulatory reports, internal auditing and the nature, scope and results of the
audit efforts. Internal Audit and Asset Review report directly to the Audit
Committee. The banking regulators, internal auditors and independent auditors
have direct access to the Audit Committee.
The consolidated financial statements have been audited by Ernst & Young
LLP, independent auditors, who render an independent opinion on management's
financial statements. Their appointment was recommended by the Audit Committee
and approved by the Board of Directors and by the shareholders. The audit by
the independent auditors provides an additional assessment of the degree to
which Cullen/Frost's management meets its responsibility for financial
reporting. Their opinion on the financial statements is based on auditing
procedures, which include their consideration of the internal control structure
and performance of selected tests of transactions and records, as they deem
appropriate. These auditing procedures are designed to provide an additional
reasonable level of assurance that the financial statements are fairly
presented in 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
<PAGE>
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, 1996 and 1995,
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, 1996. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Antonio, Texas
February 7, 1997 except for Note U as to which date is March 13, 1997
<PAGE>
Cullen/Frost Bankers, Inc. and Subsidiaries
Graphic Picture Omitted
Cullen/Frost Bankers, Inc. sunburst logo is across the middle of the
page in an oblong shape slanted to the right.
Consolidated Financial Statements and
Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements Of Operations
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands, except per share amounts)
Year Ended December 31
-----------------------------
1996 1995 1994
------------------------------
<S> <C> <C> <C>
Interest income:
Loans, including fees $183,724 $150,497 $106,252
Securities:
Taxable 99,237 98,521 94,760
Tax-exempt 325 341 349
------------------------------
Total securities 99,562 98,862 95,109
Time deposits 1 2 2
Federal funds sold and securities
purchased under resale agreements 7,226 6,732 4,146
------------------------------
Total Interest Income 290,513 256,093 205,509
Interest expense:
Deposits 103,475 89,809 61,996
Federal funds purchased and securities
sold under repurchase agreements 6,937 13,296 7,166
Long-term notes payable and other borrowings 1,019 733
------------------------------
Total Interest Expense 111,431 103,838 69,162
------------------------------
Net Interest Income 179,082 152,255 136,347
Provision for possible loan losses 7,300 6,272
------------------------------
Net Interest Income After Provision
For Possible Loan Losses 171,782 145,983 136,347
Non-interest income:
Trust fees 34,031 31,762 29,529
Service charges on deposit accounts 38,294 30,382 28,182
Other service charges, collection and
exchange charges, commissions and fees 8,764 11,055 9,366
Net loss on securities transactions (980) (1,396) (4,038)
Other 14,426 15,940 13,776
------------------------------
Total Non-Interest Income 94,535 87,743 76,815
Non-interest expense:
Salaries and wages 71,788 58,177 52,986
Pension and other employee benefits 15,351 10,905 9,910
Net occupancy of banking premises 18,782 17,992 15,777
Furniture and equipment 11,789 11,259 10,937
Intangible amortization 11,306 8,124 7,627
Other 51,564 55,992 58,325
------------------------------
Total Non-Interest Expense 180,580 162,449 155,562
------------------------------
Income Before Income Taxes 85,737 71,277 57,600
Income taxes 30,759 24,998 20,177
------------------------------
Net Income $ 54,978 $ 46,279 $ 37,423
==============================
Net income per common share
Primary $ 2.40 $ 2.04 $ 1.67
Fully diluted 2.39 2.03 1.67
Dividends .81 .57 .34
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands, except per share amounts)
December 31
-----------------------
1996 1995
-----------------------
<S> <C> <C>
Assets
Cash and due from banks $ 872,028 $ 533,333
Time deposits 64
Securities held to maturity (market value:
1996-$181,029; 1995-$214,962) 177,139 210,731
Securities available for sale 1,299,285 1,325,836
Federal funds sold and securities purchased under
resale agreements 52,850 100,550
Loans, net of unearned discount of $1,154 in 1996
and $1,337 in 1995 2,252,150 1,816,762
Less: Allowance for possible loan losses (36,308) (31,577)
----------------------
Net loans 2,215,842 1,785,185
Banking premises and equipment 101,625 89,493
Accrued interest and other assets 169,615 155,019
----------------------
Total Assets $4,888,384 $4,200,211
======================
Liabilities
Demand deposits:
Commercial and individual $ 941,991 $ 792,879
Correspondent banks 337,996 127,549
Public funds 51,228 71,581
----------------------
Total demand deposits 1,331,215 992,009
Time deposits:
Savings and Interest-on-Checking 726,700 718,582
Money market deposit accounts 876,382 711,865
Time accounts 1,026,547 998,738
Public funds 281,750 224,539
----------------------
Total time deposits 2,911,379 2,653,724
----------------------
Total deposits 4,242,594 3,645,733
Federal funds purchased and securities sold under
repurchase agreements 174,107 111,395
Accrued interest and other liabilities 92,740 101,619
----------------------
Total Liabilities 4,509,441 3,858,747
Shareholders' Equity
Common stock, par value $5 per share 112,410 55,997
Shares authorized: 1996-30,000,000; 1995-30,000,000
Shares outstanding: 1996-22,482,113; 1995-22,398,900
Surplus 63,480 118,418
Retained earnings 195,451 158,563
Unrealized gain on securities available for sale,
net of tax 7,602 8,486
----------------------
Total Shareholders' Equity 378,943 341,464
----------------------
Total Liabilities and Shareholders' Equity $4,888,384 $4,200,211
======================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements Of Cash Flows
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands)
Year Ended December 31
-------------------------------
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 54,978 $ 46,279 $ 37,423
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision (credit) for possible loan losses 7,300 6,272
Provision for real estate losses 610
Provision (credit) for deferred taxes (3,952) (1,150) 2,106
Accretion of discounts on loans (970) (1,870) (4,563)
Accretion of securities' discounts (15,568) (17,031) (11,624)
Amortization of securities' premiums 2,827 2,248 3,385
Net realized loss on securities
transactions 980 1,396 4,038
Net gain on sale of assets (1,292) (5,297) (2,074)
Depreciation and amortization 22,440 18,825 18,448
Increase in accrued interest receivable (2,850) (3,092) (2,603)
Increase in accrued interest payable 876 2,763 1,629
Net change in other assets and liabilities (78) 35,936 974
------------------------------
Net cash provided by operating activities 64,691 85,889 47,139
Investing Activities
Proceeds from maturities of securities
held to maturity 33,339 106,424 145,609
Purchases of securities held to maturity (833) (209,773)
Proceeds from sales of securities
available for sale 215,983 147,468 170,894
Proceeds from maturities of securities
available for sale 545,960 677,915 343,330
Purchases of securities available for sale (648,729) (806,723) (451,883)
Net increase in loan portfolio (232,375) (208,107) (207,741)
Proceeds from sales of equipment 75 31 4,458
Purchases of premises and equipment (12,169) (6,352) (16,403)
Proceeds from sales of repossessed properties 788 1,719 2,912
Net cash and cash equivalents received from
bank acquisitions 19,198 8,734 (22,536)
------------------------------
Net cash used by investing activities (77,930) (79,724) (241,133)
Financing Activities
Net increase (decrease) in demand deposits,
IOC accounts, and savings accounts 441,273 305,696 (34,165)
Net increase (decrease) in certificates of deposit (182,067) 68,329 (25,210)
Net increase (decrease) in Federal funds purchased
and securities sold under repurchase agreements 62,712 (267,565) 206,116
Proceeds from employee stock purchase plan
and options 325 691 3,061
Dividends paid (18,073) (12,723) (7,415)
------------------------------
Net cash provided by financing activities 304,170 94,428 142,387
------------------------------
Increase (decrease) in cash and
cash equivalents 290,931 100,593 (51,607)
Cash and cash equivalents at beginning of year 633,947 533,354 584,961
------------------------------
Cash and cash equivalents at end of year $924,878 $633,947 $533,354
==============================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ 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)
Adjustment to unrealized loss on
securities available for sale, net of tax (11,702) (11,702)
Cash dividend (7,415) (7,415)
---------------------------------------------
Balance at December 31, 1994 55,615 116,362 126,038 (2,578) 295,437
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
stock options 503 503
Issuance of restricted stock 132 1,078 1,210
Restricted stock plan deferred
compensation, net (997) (997)
Adjustment to unrealized gain 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
Net Income for 1996 54,978 54,978
Proceeds from employee stock purchase
plan and options 300 434 (409) 325
Tax benefit related to exercise of
stock options 661 661
Issuance of restricted stock 15 65 80
Restricted stock plan deferred
compensation, net 392 392
Adjustment to unrealized loss on
securities available for sale, net of tax (884) (884)
Cash dividend (18,073) (18,073)
Two-for-one stock split 56,098 (56,098)
----------------------------------------------
Balance at December 31, 1996 $112,410 $ 63,480 $195,451 $ 7,602 $378,943
==============================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
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
Securities are classified as held to maturity and carried at amortized
cost when the Corporation has the intent and ability to hold the securities
until maturity. 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.
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. On January 1, 1995, 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." The allowance for possible loan losses related to loans that are
impaired 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. Income on impaired loans is recognized in accordance with
SFAS No. 118 which 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. 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.
<PAGE>
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.
On January 1, 1996, the Company adopted 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. The adoption did not have a
material impact on financial position or results of operations.
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 generally not exceeding twenty-five 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. Deferred tax assets and liabilities are recognized
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.
Stock Option Plans
On January 1, 1996 the Corporation adopted SFAS No. 123, "Accounting for
Stock Based Compensation." The statement allows the continued use of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," (APB No. 25) and related Interpretations. Under APB No. 25,
because the exercise price of the Corporation's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized. SFAS No. 123 also allows for fair value method of
accounting for employees stock options. The continued use of APB No. 25
requires pro forma disclosures of net income and earnings per share
as if the fair value based method of accounting had been applied.
Stock Split
The number of shares outstanding and related earnings per share amounts
have been restated to retroactively give effect for the two-for-one stock
split declared and distributed by the Corporation during the second
quarter of 1996.
Accounting Changes
The following is a brief discussion of the SFAS pronouncements issued
by the FASB in 1996 which apply to the Corporation.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings
based on a control-oriented "financial-components" approach. Under this
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and liabilities it has incurred,
derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. The provisions of SFAS No. 125 are
effective for transactions occurring after December 31, 1996, except those
provisions relating to repurchase agreements, securities lending, and other
similar transactions and pledged collateral, which have been delayed until
after December 31, 1997 by SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125, an amendment of FASB Statement
No. 125." The adoption of these statements is not expected to have a material
impact on financial position or results of operations.
<PAGE>
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. 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 $6.5 million and will be amortized on a straight-line
method over a 15-year life. Approximately $4.5 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. Cullen/Frost's results of operations would not have been materially
impacted if the S.B.T. Bancshares acquisition had occurred at the beginning of
1996, 1995 or 1994.
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 $9.2 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. Cullen/Frost's results of operations would not
have been materially impacted if the Park National Bank acquisition had
occurred at the beginning of 1996, 1995 or 1994.
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 operations 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 $10.5 million and is being amortized on a
straight-line method over a 15-year life. Approximately $5.1 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.
<PAGE>
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.
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 and contractual balances were $73,813,000 for 1996
and $37,397,000 for 1995.
Note D - Securities
Securities
A summary of the amortized cost and estimated fair value of securities is
presented below.
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------
Amortized Unrealized Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Held to
Maturity:
U.S. Government
agencies and
corporations $ 171,845 $ 3,642 $ 64 $ 175,423
States and political
subdivisions 5,269 312 5,581
Other 25 25
------------------------------------------------
Total $ 177,139 $ 3,954 $ 64 $ 181,029
================================================
December 31, 1996
------------------------------------------------
Amortized Unrealized Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available
for Sale:
U.S. Treasury $ 231,326 $ 102 $ 77 $ 231,351
U.S. Government
agencies and
corporations 1,049,722 16,058 4,387 1,061,393
States and political
subdivisions 180 3 4 179
Other 6,361 1 6,362
------------------------------------------------
Total $1,287,589 $ 16,164 $ 4,468 $1,299,285
================================================
December 31, 1995
------------------------------------------------
Amortized Unrealized Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Held to
Maturity:
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
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
State 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
==============================================
</TABLE>
<PAGE>
The amortized cost and estimated fair value of securities at December 31, 1996
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.
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------
Securities Held to Maturity Securities Available for Sale
-------------------------------------------------------------
Amortized Estimated Amortized Estimated
(in thousands) Cost Fair Value Cost Fair Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 50 $ 50 $ 193,355 $ 193,379
Due after one year through
five years 135 136 38,146 38,148
Due after five years through
ten years 1,832 1,849 30 29
Due after ten years 3,277 3,571 6,336 6,336
------------------------- ------------------------
5,294 5,606 237,867 237,892
Mortgage-backed securities and
collateralized mortgage 171,845 175,423 1,049,722 1,061,393
obligations ------------------------- ------------------------
Total $ 177,139 $ 181,029 $1,287,589 $1,299,285
========================= ========================
</TABLE>
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 the securities at the time of the transfer
was $2,351,000.
Proceeds from sales of securities available for sale during 1996 were
$215,983,000. During 1996, gross gains of $42,000 and gross losses of
$1,022,000 were realized on those sales. 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.
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 $752,039,000 at December 31, 1996 and
$342,003,000 at December 31, 1995.
Note E - Loans and Allowance for Possible Loan Losses
A summary of loans outstanding follows:
<TABLE>
<CAPTION>
December 31
-------------------------
(in thousands) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Real estate:
Construction $ 84,091 $ 54,168
Land 50,208 37,695
Permanent mortgages:
Commercial 225,845 198,276
Residential 422,787 339,576
Other 260,603 208,190
Commercial and industrial 649,721 508,990
Consumer 491,072 402,169
Financial institutions 12,749 10,409
Foreign 45,562 43,847
Purchasing or carrying securities 1,812 1,711
Other 8,854 13,068
Unearned discount (1,154) (1,337)
------------------------
Total loans $2,252,150 $1,816,762
========================
</TABLE>
<PAGE>
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
$851,342,000 and $43,293,000, respectively, at December 31, 1996. Commitments
to extend credit and standby letters of credit amounted to $631,887,000 and
$39,911,000, respectively, at December 31, 1995. Commercial and industrial
loan commitments represent approximately 77 percent and 78 percent of the total
loan commitments outstanding at December 31, 1996 and 1995, respectively.
The majority of the Corporation's real estate loans are secured by real
estate in San Antonio. Mortgage loans of approximately $4.4 million and $7.3
million were held for sale by the Corporation and are included in residential
permanent mortgages at December 31, 1996 and 1995, 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 $53,393,000 and $57,692,000 at December 31, 1996 and 1995,
respectively. During 1996, additions to these loans amounted to $54,848,000,
repayments totaled $57,336,000 and other changes totaled $1,811,000. 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 $684,000 and
$1,386,000 at December 31, 1996 and 1995, respectively.
A summary of the changes in the allowance for possible loan losses
follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at the beginning of the year $31,577 $25,741 $26,298
Provision for possible loan losses 7,300 6,272
Changes related to disposition of bank
subsidiary (2,684)
Net charge-offs:
Losses charged to the allowance (10,245) (4,681) (4,022)
Recoveries 7,676 4,245 6,149
---------------------------------
Net (charge-offs) recoveries (2,569) (436) 2,127
---------------------------------
Balance at the end of the year $36,308 $31,577 $25,741
=================================
</TABLE>
A loan within the scope of SFAS No. 114 is considered impaired when, based
on current information and events, it is probable that the Corporation will be
unable to collect all amounts due according to the contractual terms of the
loan agreement, including scheduled principal and interest payments. At
December 31, 1996, the majority of the impaired loans were real estate loans
and collectability was measured based on the fair value of the collateral.
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. Interest revenue recognized on impaired loans
for 1996 and 1995 was $55,000 and $46,000, respectively. The total allowance
for possible loan losses includes activity related to allowances calculated in
accordance with SFAS No. 114 and activity related to other loan loss allowances
determined in accordance with SFAS No. 5.
The following is a summary of loans considered to be impaired:
<TABLE>
<CAPTION>
December 31
--------------------
(in thousands) 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with no valuation reserve $4,333 $4,565
Impaired loans with a valuation reserve 4,547
--------------------
Total recorded investment in impaired loans $4,333 $9,112
====================
Valuation reserve 712
The average recorded investment in impaired loans was $7,290,000 and $9,312,000
for the years ended December 31, 1996 and 1995, respectively.
</TABLE>
<PAGE>
Note F - Non-Performing Assets
A summary of non-performing assets follows:
<TABLE>
<CAPTION>
December 31
---------------------
(in thousands) 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Non-accrual and restructured loans $ 9,724 $14,646
Foreclosed assets 2,242 1,509
---------------------
$11,966 $16,155
=====================
</TABLE>
Cullen/Frost recognized interest income on non-accrual and restructured
loans of approximately $292,000, $165,000 and $247,000 in 1996, 1995 and 1994,
respectively. Had these reduced earning and non-earning loans performed
according to their original contract terms, Cullen/Frost would have recognized
interest income of approximately $1,182,000 in 1996, $1,403,000 in 1995 and
$1,082,000 in 1994.
Note G - Banking Premises and Equipment
A summary of banking premises and equipment follows:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------
1996 1995
----------------------------- ------------------------------
Accumulated Accumulated
Depreciation Net Depreciation Net
and Carrying and Carrying
(in thousands) Cost Amortization Value Cost Amortization Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Land $ 38,464 $ 38,464 $ 35,468 $35,468
Buildings 46,460 $17,291 29,169 40,443 $17,100 23,343
Furniture and equipment 77,664 60,363 17,301 71,505 56,258 15,247
Leasehold improvements 26,738 12,453 14,285 29,776 15,950 13,826
Construction in progress 2,406 2,406 1,609 1,609
-------------------------------------------------------------
Total banking premises
and equipment $191,732 $90,107 $101,625 $178,801 $89,308 $89,493
=============================================================
</TABLE>
Note H - Deposits
A summary of deposits outstanding by category follows:
<TABLE>
<CAPTION>
December 31
----------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Demand deposits $1,331,215 $ 992,009
Savings and Interest-on-Checking 726,700 718,582
Money market deposit accounts 876,382 711,865
Time accounts of $100,000 or more 478,397 467,652
Time accounts under $100,000 548,150 531,086
Other 281,750 224,539
--------------------------------
Total deposits $4,242,594 $3,645,733
================================
Foreign deposits totaled $570,357,000 and $557,968,000 at December 31, 1996 and 1995,
respectively.
</TABLE>
<PAGE>
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, 1996 and 1995.
The following table represents balances as they relate to securities sold
under repurchase agreements:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
(in thousands) 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Balance at year end $ 88,782 $ 60,946
Maximum month-end balance 105,992 312,054
For the year:
Average daily balance 74,472 178,538
</TABLE>
Note J - Common Stock and Earnings Per Common Share
The weighted average number of shares used to compute per common share
earnings for the years ended December 31, 1996, 1995 and 1994, including common
stock equivalents where applicable, were:
<TABLE>
<CAPTION>
December 31
----------------------------------
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Primary 22,905,742 22,675,648 22,445,822
Fully diluted 23,016,734 22,779,660 22,445,822
</TABLE>
Note K - Dividends
In the ordinary course of business Cullen/Frost is 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
regulations. Without prior regulatory approval, the subsidiary banks had
approximately $6,476,000 available for the payment of dividends to Cullen/Frost
at December 31, 1996.
Note L - Capital
The table below reflects various measures of regulatory capital at year
end:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- ------------------
(in thousands) Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-Based
Tier 1 Capital $ 307,285 11.58% $ 281,334 13.07%
Tier 1 Capital Minimum requirement 106,114 4.00 86,126 4.00
Total Capital $ 340,485 12.83% $ 308,306 14.32%
Total Capital Minimum requirement 212,228 8.00 172,252 8.00
Risk-adjusted assets, net of goodwill $2,652,846 $2,153,155
Leverage ratio 6.76% 6.94%
Average equity as a percentage
of average assets 7.98 8.20
</TABLE>
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, 1996 and 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
<PAGE>
subject to an order, written agreement, capital directive or prompt corrective
action directive to meet and maintain a specific capital level for any capital
measure.
The Corporation is subject to the regulatory capital requirements
administered by the Federal Reserve Bank. Regulators can initiate certain
mandatory actions, if the Corporation fails to meet the minimum requirements,
that could have a direct material effect on the Corporation's financial
statements. The Corporation and its subsidiary banks currently exceed all
minimum capital requirements.
Note M - Leases and Rental Agreements
Rental expense for all leases amounted to $10,589,000, $9,842,000 and
$8,822,000 for the years ended December 31, 1996, 1995 and 1994, 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, 1996 follows:
<TABLE>
<CAPTION>
Total
(in thousands) Commitments
- ------------------------------------------------------------------------------
<S> <C>
1997 $10,745
1998 10,288
1999 9,266
2000 6,258
2001 4,062
Subsequent to 2001 18,273
-------
Total future minimum rental commitments $58,892
=======
</TABLE>
It is expected that certain leases will be renewed, or equipment replaced
with new leased equipment, as these leases expire.
Note N - 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. 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, 1996 and 1995 are
presented below:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $28,432 in 1996 and $25,441 in 1995 $29,934 $26,638
=================
Projected benefit obligation for service rendered
to date $44,796 $39,808
Plan assets at fair value (primarily listed stocks and
U.S. and corporate bonds) 31,676 24,991
-----------------
Projected benefit obligation in excess of plan assets 13,120 14,817
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions (7,608) (7,775)
Unrecognized prior service cost (4,849) (5,407)
Unrecognized net transitional asset 690 790
-----------------
Accrued pension cost included in other liabilities $ 1,353 $ 2,425
=================
</TABLE>
<PAGE>
Net pension cost included the following components:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during the year $2,035 $1,731 $1,444
Actual return on plan assets, net of expenses (2,755) (3,837) 388
Interest cost on projected benefit obligation 2,947 2,607 2,306
Net amortization and deferral 1,715 2,788 (1,326)
---------------------------
Net pension cost $3,942 $3,289 $2,812
===========================
</TABLE>
The weighted-average discount rate used for calculating the pension
obligation at December 31, 1995 and for calculating the net periodic pension
cost for 1996 was 7.5 percent, and the assumed rate of future compensation
increases was 5 percent. The discount rate used for calculating the pension
obligation at December 31, 1996 was 7.5 percent, and the assumed rate of future
compensation increases was 5 percent. These assumptions will be used for
calculating the 1997 net periodic pension cost. The expected long-term rate of
return on plan assets for 1996, 1995, and 1994 was 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 percent of eligible compensation. Cullen/Frost makes
matching contributions to the 401(k) Plan based on the amount of each
participant's contributions up to a maximum of six percent of eligible
compensation. Eligible employees must complete 90 days of service to be
eligible for enrollment and vest in the Corporation's matching contributions
over a five-year period. The Corporation's gross expenses related to the
401(k) Plan were $1,965,000, $1,521,000 and $1,296,000 for 1996, 1995 and 1994,
respectively. During 1996, 1995 and 1994, the Corporation utilized forfeitures
of $449,000, $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. The
Corporation's expenses related to the 1991 Stock Purchase Plan were $754,000,
$595,000 and $574,000 for 1996, 1995 and 1994, respectively.
Executive Stock Plans -
The Corporation has four 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 1,760,000 shares of common
stock authorized for award. The 1992 Stock Plan has replaced all other
previously approved executive stock plans. In general, options awarded have a
ten-year life with a five-year vesting period. 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.
<PAGE>
The following is a summary of option transactions in each of the last three
years.
<TABLE>
<CAPTION>
1983 Plan 1988 Plan 1992 Plan
----------------- ----------------- ----------------
Weighted Weighted Weighted
Options Average Options Average Options Average
Price Price Price
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, Dec. 31, 1993 124,056 $4.92 320,912 $5.05 351,144 $16.49
Granted 321,000 18.06
Exercised 22,078 4.93 33,768 4.63 2,738 12.73
Canceled 17,894 5.31 16,344 15.37
------------------------------------------------------
Balance, Dec. 31, 1994 101,978 4.92 269,250 5.09 653,062 17.08
Granted 204,000 22.88
Exercised 43,936 5.12 34,652 4.46 23,742 15.77
Canceled 2,508 5.46 1,804 5.46 5,254 16.05
------------------------------------------------------
Balance, Dec. 31, 1995 55,534 4.73 232,794 5.18 828,066 18.55
Granted 403,000 30.14
Exercised 13,036 4.14 53,958 5.14 38,906 17.73
Canceled 5,868 5.46 788 5.46 21,234 19.05
------------------------------------------------------
Balance, Dec. 31, 1996 36,630 $4.83 178,048 $5.20 1,170,926 $22.56
======================================================
At Dec. 31, 1996
Per Share Price Range $3.41-$5.46 $3.01-$5.46 $12.73-$18.13*
22.88- 30.25**
Weighted-Average Remaining
Contractual Life 3.7 Years 4.5 Years 7.2 Years*
9.2 Years**
* Includes 574,926 options of which 200,000 are exercisable both with a weighted-average
exercise price of $17.14.
**Includes 596,000 options of which 100,000 are exercisable both with a weighted-average
exercise price of $27.79.
</TABLE>
There were 533,473, 405,916 and 308,520 shares exercisable for 1996, 1995,
and 1994 with a weighted-average exercise price of $12.43, $10.39 and $7.72,
respectively.
In accounting for the impact of issuing stock options, the Corporation has
elected not to follow the recognition requirements of SFAS No. 123, which
requires fair value accounting, but will rather continue to follow the
requirements of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25) and related Interpretation.
SFAS No. 123 requires disclosure of pro forma net income and earnings per share
information assuming that stock options granted in 1995 and 1996 have been
accounted for in accordance with the fair value requirements of SFAS No. 123.
The fair value for these options was estimated at the date of grant using
a Black-Scholes option pricing model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options which have
characteristics which are different from the Corporation's employee stock
options. In addition, option valuation models require the input of highly
subjective assumptions which can significantly impact the estimated fair value.
As such, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of employee stock options.
The following weighted-average assumptions were used for 1996 and 1995,
respectively: risk-free interest rates of 6.50 percent and 6.33 percent;
dividend yield of 2.50 percent; volatility factors of the expected market price
of the Corporation's common stock of 21 percent and 24 percent and weighted-
average expected lives of the options of 8 years. For purposes of proforma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period.
<PAGE>
The Corporation's proforma information as if compensation expense had been
recognized in accordance with SFAS No. 123 is summarized below:
<TABLE>
<CAPTION>
(in thousands except for earnings per share information) 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Proforma Net income* $54,692 $46,231
Proforma earnings per common share
Primary $ 2.44 $ 2.07
Fully diluted 2.43 2.07
*Because SFAS No. 123 is applicable only to options granted subsequent to December 31, 1994,
its proforma effect on 1996 is not necessarily indicative of its impact on future years.
</TABLE>
In 1996, restricted stock grants of 3,000 shares were awarded under the
1992 Stock Plan. Restricted stock grants awarded under the 1992 Stock Plan
totaled 52,900 and 12,750 shares for 1995 and 1994, respectively. Deferred
compensation expense related to the restricted stock was $472,000 in 1996,
$213,000 in 1995, and $111,000 in 1994. 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 18 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 ten 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
$8,454,000 at December 31, 1996.
The Corporation has no material liability for post-retirement or post-
employment benefits other than pensions.
Note O - 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, 1996,
1995, and 1994.
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense $34,711 $26,148 $18,071
Deferred income tax (3,952) (1,150) 2,106
--------------------------------
Income tax expense as reported $30,759 $24,998 $20,177
================================
</TABLE>
The following is a rconciliation 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:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $85,737 $71,277 $57,600
Statutory rate 35% 35% 35%
----------------------------
Income tax expense at the statutory rate 30,008 24,947 20,160
Effect of tax-exempt interest (677) (565) (406)
Amortization of goodwill 778 437 151
Other 650 179 272
----------------------------
Income tax expense as reported $30,759 $24,998 $20,177
============================
Tax benefits related to security transactions $ 343 $ 489 $ 1,413
============================
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1996, and 1995
are presented below:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $13,341 $11,432
Building modification reserve 1,592 1,592
Gain on sale of assets 1,172 1,289
Intangibles 1,280
Net occupancy restructuring 801 1,197
Other 1,458 1,658
-------------------
Total gross deferred tax assets 18,364 18,448
Deferred tax liabilities:
Bank premises and equipment $ (352) $ (871)
Prepaid expenses (622) (670)
Unrealized gain on securities available for sale (4,093) (4,570)
Intangibles (1,659)
Other (990) (700)
-------------------
Total gross deferred tax liabilities (7,716) (6,811)
-------------------
Net deferred tax asset $10,648 $11,637
===================
</TABLE>
At December 31, 1996 and 1995, no valuation allowance for deferred tax assets
was necessary because they were supported by recoverable taxes paid in prior
years.
Note P - Non-Interest Expense
Significant components of other non-interest expense for the years ended
December 31, 1996, 1995, and 1994 are presented below:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------
Other Non-Interest Expense (in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Outside computer service $ 7,546 $ 8,108 $ 8,918
FDIC insurance 2 3,624 6,926
Other professional expenses 3,760 2,729 2,920
Armored motor service 3,098 2,722 2,220
Stationery printing and supplies 4,103 3,394 2,722
Postage and express 2,856 2,390 2,183
Management fee expense 2,364 2,071 1,816
Telephone 2,452 1,985 1,767
Other 25,383 28,969 28,853
-----------------------------
Total $51,564 $55,992 $58,325
=============================
</TABLE>
<PAGE>
Note Q - Cash Flow Data
For purposes of reporting cash flow, cash and cash equivalents include the
following:
<TABLE>
<CAPTION>
December 31
------------------------------
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and due from banks $872,028 $533,333 $365,792
Time deposits 64 12
Federal funds sold and securities purchased
under resale agreements 52,850 100,550 167,550
------------------------------
$924,878 $633,947 $533,354
==============================
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid:
Interest $110,555 $101,075 $ 67,533
Income Taxes 32,771 25,399 17,020
Non-cash items:
Loans originated to facilitate the sale of
foreclosed assets 848 2,059 1,717
Loan foreclosures 2,883 1,883 422
Swap of C/F Dallas for Texas Commerce Bank-
Corpus Christi 2,599
</TABLE>
Note R - 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 in the
consolidated balance sheet for cash and short-term investments approximate
their fair value.
Interest-bearing deposits in other banks: The carrying amount reported in
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
<PAGE>
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 of the existing agreements
are based on quoted market prices.
The estimated fair values of the Corporation's financial instruments are
as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------
1996 1995
-------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 924,878 $ 924,878 $ 633,883 $ 633,883
Interest-bearing deposits in
other banks 64 64
Securities 1,476,424 1,480,314 1,536,567 1,540,798
Loans 2,252,150 2,256,628 1,816,762 1,822,864
Allowance for loan losses (36,308) (31,577)
-------------------------------------------------
Net loans 2,215,842 2,256,628 1,785,185 1,822,864
Financial liabilities:
Deposits 4,242,594 4,240,979 3,645,733 3,645,935
Short-term borrowings 203,189 203,189 134,741 134,741
Off-balance sheet instruments:
Interest rate swaps (1,061) (3,824)
</TABLE>
Note S - Derivative Financial Instruments
During 1996, the Corporation continued its strategy of entering into off-
balance sheet interest rate swaps to hedge its interest rate risk by
essentially converting fixed-rate loans into synthetic variable-rate
instruments. These swap transactions allow management to structure the
interest rate sensitivity of the asset side of the Corporation's balance sheet
to more closely match its view of the interest rate sensitivity of the
Corporation's funding sources. The Corporation had 31 interest rate swaps at
December 31, 1996 with a notional amount of $251 million compared to 12
interest rate swaps at December 31, 1995 with a notional amount of $143
million. Each swap was a hedge against a specific commercial fixed-rate loan
or against a specific pool of consumer fixed-rate loans with lives ranging from
two to ten years where the Corporation pays a fixed rate and receives a
floating rate. In each case, the amortization of the interest rate swap
generally matches the expected amortization of the underlying loan or pool of
loans. Each counterpart to a swap transaction has a credit rating that is
investment grade. The net amount payable or receivable under these interest
rate swap contracts is accrued as an adjustment to interest income and is not
considered material in 1996 or 1995.
The Corporation's credit exposure on interest rate swaps is limited to the
net favorable value of all swaps to each counterparty. In such cases
collateral is required from the counterparties involved if the net value of the
swaps exceeds a nominal amount considered to be immaterial. At December 31,
1996, the Corporation's credit exposure relating to interest rate swaps was
immaterial.
Note T - 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.
<PAGE>
Note U - Subsequent Events
Capital Securities
Cullen/Frost Capital Trust I, a Delaware statutory business trust (the
"Issuer Trust") and wholly-owned subsidiary of the Corporation, issued on
February 6, 1997 $100,000,000 of its 8.42 percent Capital Securities, Series A
(the "Capital Securities"), which represent beneficial interests in the Issuer
Trust in an offering exempt from registration under the Securities Act of 1933
pursuant to Rule 144A. The Capital Securities will mature on February 1, 2027
and are redeemable in whole or in part at the option of the Corporation at any
time after February 1, 2007 with the approval of the Federal Reserve and in
whole at any time upon the occurrence of certain events affecting their tax or
regulatory capital treatment. The Issuer Trust used the proceeds of the
offering of the Capital Securities to purchase Junior Subordinated Debentures
of the Corporation which constitute its only assets and which have terms
substantially similar to the Capital Securities. The Capital Securities are
guaranteed on a subordinated basis in certain limited respects by the
Corporation pursuant to a Guarantee. The Corporation has also entered into an
Agreement as to Expenses and Liabilities with the Issuer Trust pursuant to
which it has agreed on a subordinated basis to pay any costs, expenses or
liabilities of the Issuer Trust other than those arising under the Capital
Securities. The obligations of the Corporation under the Junior Subordinated
Debentures, the related Indenture, the trust agreement establishing the Issuer
Trust, the Guarantee and the Agreement as to Expenses and Liabilities, in the
aggregate, constitute a full and unconditional guarantee by the Corporation of
the Issuer Trust's obligations under the Capital Securities.
The Corporation will use the proceeds of the offering of the Junior
Subordinated Debentures for general corporate purposes, which may include the
reduction of short-term indebtedness, investments at the holding company level,
investments in the capital of, or extensions of credit to, the Corporation's
subsidiaries, acquisitions and the repurchase of the Corporation's common
stock. The Capital Securities will be included in the Tier 1 capital of the
Corporation for regulatory capital purposes and will be reported as debt on the
balance sheet. The Corporation will record distributions payable on the
Capital Securities as interest expense. The Corporation has the right to defer
payments of interest on the Junior Subordinated Debentures at any time or from
time to time for a period of up to ten consecutive semi-annual periods with
respect to each deferral period. Under the terms of the Junior Subordinated
Debentures, in the event that under certain circumstances there is an event of
default under the Junior Subordinated Debentures or the Corporation has elected
to defer interest on the Junior Subordinated Debentures, the Corporation may
not, with certain exceptions, declare or pay any dividends or distributions on
its capital stock or purchase or acquire any of its capital stock.
On March 13, 1997, the Corporation and Cullen/Frost Capital Trust I, filed
a Registration Statement (S-4) with the Securities and Exchange Commission to
register under the Securities Act of 1933 the exchange of up to $100,000,000
aggregate Liquidation Amount of "new" 8.42 percent Capital Securities, Series
A. Under the S-4, the "old" Capital Securities, Series A described above may
be tendered for exchange in whole or in part in a liquidation amount of
$100,000 or any integral multiple of $1,000 in excess thereof for "new" Capital
Securities, Series A. The "new" Capital Securities, Series A will have the
same terms as the "old" Capital Securities, Series A. This exchange will
enhance the transferability of the Capital Securities and will have no impact
on redemption of the Capital Securities, the Junior Subordinated Debentures
issued by the Company, the Company's guarantee of the Capital Securities, or
other matters described above.
1997 Acquisitions
Corpus Christi Bancshares, Inc. - Corpus Christi
On March 7, 1997, the Corporation paid approximately $32.2 million to
acquire Corpus Christi Bancshares, Inc., including its subsidiary, Citizens
State Bank in Corpus Christi, Texas. Total intangible assets associated with
the transaction amounted to approximately $21.4 million. The Corporation
acquired loans of approximately $108 million and deposits of approximately $184
million.
<PAGE>
Note V - Condensed Parent Corporation Financial Statements
Condensed financial information of the parent Corporation as of December
31, 1996 and 1995 and for each of the three years in the period ended December
31, 1996 follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
Statement of Operations (in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from second tier
bank holding company subsidiary $65,173 $56,631 $21,373
Interest and other 713 1,101 537
-------------------------------
Total Income 65,886 57,732 21,910
Expenses:
Salaries and employee benefits 4,096 1,051 2,450
Other 1,005 1,375 2,025
-------------------------------
Total Expenses 5,101 2,426 4,475
Income Before Income Tax Credits
and Equity in Undistributed Net
Income of Subsidiaries 60,785 55,306 17,435
Income tax credits 1,216 375 678
Equity in undistributed net income
of subsidiaries (7,023) (9,402) 19,310
-------------------------------
Net Income $54,978 $46,279 $37,423
===============================
December 31
------------------------
Balance Sheets (in thousands) 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and time deposits $ 454 $ 350
Securities purchased under resale agreements 47,020 54,300
Loans to non-bank subsidiaries 212 1,198
Investments in second tier bank holding company subsidiary 337,504 292,026
Other 1,947 1,308
------------------------
Total Assets $387,137 $349,182
========================
Liabilities
Other $ 8,194 $ 7,718
------------------------
Total Liabilities 8,194 7,718
Shareholders' Equity 378,943 341,464
------------------------
Total Liabilities and Shareholders' Equity $387,137 $349,182
========================
Year Ended December 31
--------------------------------
Statements of Cash Flows (in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 54,978 $ 46,279 $ 37,423
Adjustments to reconcile net income to net cash
provided by operating activities:
Net income of subsidiaries (58,150) (47,229) (40,683)
Dividends from subsidiaries 65,173 56,631 21,373
Net change in other liabilities and assets 971 1,578 2,893
-------------------------------
Net cash provided by operating activities 62,972 57,259 21,006
Investing Activities
Capital contributions to subsidiaries (53,386) (9,470) (1,239)
Net decrease in loans 986 242 758
-------------------------------
Net cash used by investing activities (52,400) (9,228) (481)
Financing Activities
Proceeds from employee stock purchase plans and options 325 691 3,061
Cash dividends (18,073) (12,723) (7,415)
-------------------------------
Net cash used by financing activities (17,748) (12,032) (4,354)
-------------------------------
Increase (decrease) in cash and cash equivalents (7,176) 35,999 16,171
Cash and cash equivalents at beginning of year 54,650 18,651 2,480
-------------------------------
Cash and cash equivalents at end of year $ 47,474 $ 54,650 $ 18,651
===============================
</TABLE>
<PAGE>
Financial Statistics
Cullen/Frost Bankers, Inc. and Subsidiaries
(in thousands)
The following unaudited schedules and statistics are presented for
additional information and analysis.
<TABLE>
<CAPTION>
1996/1995
--------------------------------
Increase (Decrease)
Due to Change in Total
------------------- or Net
Average Average Increase
Rate/Volume Analysis Rate Balance (Decrease)
- -------------------------------------------------------------------------------------
<S> <C> <C>
Changes in interest earned on:
Time deposits $ (1) $ (1)
Securities:
U.S. Treasury (1,513) $ 2,420 907
U.S. Government agencies and corporations 2,884 (2,867) 17
States and political subdivisions
Tax-exempt 11 (37) (26)
Taxable
Other (50) (154) (204)
Federal funds sold and securities purchased
under resale agreements (673) 1,167 494
Loans (2,438) 35,787 33,349
-------------------------------
Total (1,780) 36,316 34,536
Changes in interest paid on:
Savings, Interest-on-Checking 2,903 (35) 2,868
Money market deposits accounts (552) (7,591) (8,143)
Time accounts and public funds 823 (9,214) (8,391)
Federal funds purchased and securities sold
under repurchase agreements 1,156 5,203 6,359
Long-term notes payable and other borrowings 82 (368) (286)
-------------------------------
Total 4,412 (12,005) (7,593)
-------------------------------
Changes in net interest income $ 2,632 $ 24,311 $ 26,943
===============================
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.
</TABLE>
<TABLE>
<CAPTION>
1995/1994
--------------------------------
Increase (Decrease)
Due to Change in Total
------------------- or Net
Average Average Increase
Rate/Volume Analysis Rate Balance (Decrease)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Changes in interest earned on:
Time deposits $ 1 $ (1)
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.
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------
Due in After One, After
One Year but Within Five
Loan Maturity and Sensitivity or Less Five Years Years Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate construction and land loans $ 62,258 $ 52,720 $ 19,321 $ 134,299
Other real estate loans 119,512 179,788 228,390 527,690
All other loans 385,604 265,363 67,731 718,698
---------------------------------------------
Total $567,374 $497,871 $315,442 $1,380,687
=============================================
Loans with fixed interest rates $176,919 $161,115 $135,236 $ 473,270
Loans with floating interest rates 390,455 336,756 180,206 907,417
---------------------------------------------
Total $567,374 $497,871 $315,442 $1,380,687
=============================================
Loans for 1-4 family housing totaling $381,545,000 and consumer loans totaling
$491,072,000 and unearned income of $1,154,000 are not included in the amounts in the
table.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Maturity Distribution and Securities Portfolio Yields
(dollars in thousands) December 31, 1996
- ------------------------------------------------------------------------------------------
Maturity
----------------------------------------------------------------------
Within 1 Year 1-5 Years 5-10 Years
--------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Amount Average Yield Amount Average Yield Amount Average Yield
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Government
agencies and
corporations $ 2,633 8.31%
States and
political
subdivisions $ 50 4.50% $ 110 4.50% 1,833 6.20
Other 25 7.88
------------------------------------------------------------------
Total securities
held to maturity $ 50 4.50% $ 135 5.13% $ 4,466 7.44%
==================================================================
Available for sale:
U.S. Treasury $193,279 5.25% $ 38,072 5.69%
U.S. Government
agencies and
corporations 367,493 5.83 $186,018 6.42%
States and
political
subdivisions 100 5.37 51 5.00 28 5.62
Other 25 5.12
------------------------------------------------------------------
Total securities
available for
sale $193,379 5.25% $405,641 5.82% $186,046 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, 1996
- -----------------------------------------------------------------
Maturity
---------------------------------------------
After 10 Years Total Carrying Amount
--------------------- ----------------------
Weighted Weighted
Amount Average Yield Amount Average Yield
---------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Government
agencies and
corporations $169,212 7.08% $ 171,845 7.10%
States and
political
subdivisions 3,276 6.41 5,269 6.28
Other 25 7.87
------------------------------------------
Total securities
held to maturity $172,488 7.07% $ 177,139* 7.08%
==========================================
Available for sale:
U.S. Treasury $ 231,351 5.32%
U.S. Government
agencies and
corporations $507,882 7.15% 1,061,393 6.56
States and
political
subdivisions 179 5.30
Other 6,337 6.00 6,362 6.01
------------------------------------------
Total securities
available for
sale $514,219 7.13% $1,299,285* 6.34%
==========================================
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 $1,233,238,000 which are included in maturity categories based on their
stated maturity date.
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
Federal Funds Purchased and Securities -----------------------------------
Sold Under Repurchase Agreements 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at year end $174,107 $111,395 $370,235
Maximum month-end balance 226,867 367,154 370,235
For the year:
Average daily balance 144,804 251,392 191,611
Average interest rate 4.79% 5.29% 3.74%
</TABLE>
<TABLE>
<CAPTION>
December 31
------------------------------------------
1996 1995
Remaining Maturity of Private ------------------- -------------------
Certificates of Deposit Percentage Percentage
of $100,000 or More Amount of Total Amount of Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Three months or less $ 40,014 8.4% $ 52,512 11.2%
After three, within six months 114,983 24.0 123,588 26.4
After six, within twelve months 164,166 34.3 164,722 35.3
After twelve months 159,234 33.3 126,830 27.1
----------------------------------------
Total $478,397 100.0% $467,652 100.0%
========================================
Percentage of total private time deposits 18.2% 19.3%
Other time deposits of $100,000 or more were $192,234,000 at December 31, 1996. Of this
amount 70.8 percent matures within three months, 12.8 percent matures between three and
six months and the remainder matures between six months and one year.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarterly Results of Operations
Cullen/Frost Bankers, Inc. and Subsidiaries
Three Months Ended 1996
-------------------------------------
(in thousands, except per share amounts) Mar 31 June 30 Sept 30 Dec 31
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $70,260 $72,131 $73,236 $74,886
Interest expense 27,592 27,757 27,786 28,296
Net interest income 42,668 44,374 45,450 46,590
Provision for possible loan losses 1,875 1,325 2,300 1,800
Gain (loss) on securities transactions (95) (903) 1 17
Non-interest income* 22,726 24,641 23,179 23,989
Non-interest expense 43,145 46,595 44,617 46,223
Income before income taxes 20,374 21,095 21,712 22,556
Income taxes 7,299 7,577 7,727 8,156
Net income 13,075 13,518 13,985 14,400
Net income per common share .57 .59 .61 .63
Three Months Ended 1995
-------------------------------------
(in thousands, except per share amounts) Mar 31 June 30 Sept 30 Dec 31
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
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 .47 .50 .52 .55
* Includes gain (loss) on securities transactions.
</TABLE>
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,
1997 was 2,322.
<TABLE>
<CAPTION>
1996 1995
------------- ----------------
Market Price (per share) High Low High Low
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $26.38 $23.38 $18.50 $14.88
Second Quarter 28.38 23.75 20.38 17.63
Third Quarter 30.88 25.50 24.13 20.25
Fourth Quarter 36.50 29.25 25.75 22.88
</TABLE>
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.
<TABLE>
<CAPTION>
Cash Dividends (per share) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
First Quarter $ .18 $ .11
Second Quarter .21 .11
Third Quarter .21 .17
Fourth Quarter .21 .18
---------------------
Total $ .81 $ .57
=====================
</TABLE>
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 28) in the Financial
Review for further discussion.
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Data
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands, except per share amounts)
Year Ended December 31
---------------------------------------
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Balance Sheet Data
Total assets $ 4,888,384 $ 4,200,211 $ 3,793,720
Long-term notes payable
Shareholders' equity 378,943 341,464 295,437
Average shareholders' equity to average
total assets 7.98% 8.20% 7.85%
Tier 1 capital ratio (1992 rules) 11.58 13.07 14.44
Total capital ratio (1992 rules) 12.83 14.32 15.69
Per Common Share Data
Net income* $ 2.40 $ 2.04 $ 1.67
Cash dividends paid .81 .57 .34
Shareholders' equity 16.86 15.24 13.28
Loan Performance Indicators
Non-performing assets $ 11,966 $ 16,155 $ 19,938
Non-performing assets to:
Total loans plus foreclosed assets .53% .89% 1.34%
Total assets .24 .38 .53
Allowance for possible loan losses $ 36,308 $ 31,577 $ 25,741
Allowance for possible loan losses
to period-end loans 1.61% 1.74% 1.74%
Net loan charge-offs (recoveries) $ 2,569 $ 436 $ (2,127)
Net loan charge-offs (recoveries) to
average loans .12% .03% (.16)%
Common Stock Data
Common shares outstanding at period end 22,482,113 22,398,900 22,246,124
Weighted average common and common
equivalent shares outstanding 22,905,742 22,675,648 22,445,822
Dividends as a percentage of net income 32.87% 27.94% 20.12%
Non-Financial Data
Number of employees 2,306 2,019 1,862
Shareholders of record 2,336 2,463 2,553
* Fully diluted net income per share was $2.39 and $2.03 for 1996 and 1995, respectively.
1993 primary and fully diluted earnings per share before cumulative effect of an
accounting change was $1.74. 1992 primary and fully diluted earnings per share before
extraordinary credit was $.83. Fully diluted net income per share for 1992 was $1.13.
Year Ended December 31
--------------------------------------
1993 1992 1991
---------------------------------------
<S> <C> <C> <C>
Balance Sheet Data
Total assets $ 3,639,047 $ 3,150,871 $ 3,078,986
Long-term notes payable 13,400 14,668
Shareholders' equity 273,533 206,144 176,222
Average shareholders' equity to average
total assets 7.08% 6.29% 5.67%
Tier 1 capital ratio (1992 rules) 14.23 15.66 12.98
Total capital ratio (1992 rules) 15.49 17.52 15.04
Per Common Share Data
Net income* $ 2.12 $ 1.13 $ .01
Cash dividends paid .08
Shareholders' equity 12.43 9.90 8.78
Loan Performance Indicators
Non-performing assets $ 31,110 $ 51,303 $ 100,642
Non-performing assets to:
Total loans plus foreclosed assets 2.47% 4.94% 8.85%
Total assets .85 1.63 3.27
Allowance for possible loan losses $ 26,298 $ 31,897 $ 42,387
Allowance for possible loan losses
to period-end loans 2.09% 3.10% 3.82%
Net loan charge-offs (recoveries) $ (486) $ 15,988 $ 26,383
Net loan charge-offs (recoveries) to
average loans (.04)% 1.53% 2.22%
Common Stock Data
Common shares outstanding at period end 22,018,396 20,824,368 20,087,688
Weighted average common and common
equivalent shares outstanding 22,301,576 21,948,658 20,150,526
Dividends as a percentage of net income 3.54%
Non-Financial Data
Number of employees 1,877 1,754 1,737
Shareholders of record 2,644 2,824 3,547
* Fully diluted net income per share was $2.39 and $2.03 for 1996 and 1995, respectively.
1993 primary and fully diluted earnings per share before cumulative effect of an
accounting change was $1.74. 1992 primary and fully diluted earnings per share before
extraordinary credit was $.83. Fully diluted net income per share for 1992 was $1.13.
</TABLE>
<TABLE>
<CAPTION>
Bank Subsidiaries
(in thousands)
December 31, 1996
----------------------------------
Total Total Total
Assets Loans Deposits
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Frost National Bank $4,761,806 $2,196,569 $4,120,973
San Antonio, Austin, Corpus Christi, Houston,
McAllen, and San Marcos
Main Office:
P. O. Box 1600, 100 West Houston Street
San Antonio, Texas 78296 (210)220-4011
United States National Bank 147,229 55,467 133,143
P. O. Box 179, 2201 Market Street
Galveston, Texas 77553 (409)763-1151
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
Cullen/Frost Bankers, Inc. and Subsidiaries
(in thousands, except per share amounts)
Year Ended December 31
--------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans, including fees $183,724 $150,497 $106,252
Securities 99,562 98,862 95,109
Time deposits 1 2 2
Federal funds sold and securities purchased
under resale agreements 7,226 6,732 4,146
------------------------------
Total Interest Income 290,513 256,093 205,509
Interest expense:
Deposits 103,475 89,809 61,996
Federal funds purchased and securities sold
under repurchase agreements 6,937 13,296 7,166
Long-term notes payable 1,019 733
Other borrowings
------------------------------
Total Interest Expense 111,431 103,838 69,162
------------------------------
Net Interest Income 179,082 152,255 136,347
Provision (credit) for possible loan losses 7,300 6,272
------------------------------
Net Interest Income After
Provision (Credit) for Possible
Loan Losses 171,782 145,983 136,347
Non-interest income:
Trust department 34,031 31,762 29,529
Service charges on deposit accounts 38,294 30,382 28,182
Other service charges, collection and
exchange charges, commissions and fees 8,764 11,055 9,366
Net gain (loss) on securities transactions (980) (1,396) (4,038)
Other 14,426 15,940 13,776
------------------------------
Total Non-Interest Income 94,535 87,743 76,815
Non-interest expense:
Salaries and wages 71,788 58,177 52,986
Pension and other employee benefits 15,351 10,905 9,910
Net occupancy of banking premises 18,782 17,992 15,777
Furniture and equipment 11,789 11,259 10,937
Provision for real estate losses 610
Restructuring costs 400 830
Intangible Amortization 11,306 8,124 7,627
Other 51,564 54,982 57,495
------------------------------
Total Non-Interest Expense 180,580 162,449 155,562
------------------------------
Income Before Income Taxes (Credits),
Extraordinary Credit and Cumulative
Effect of Accounting Change 85,737 71,277 57,600
Income taxes (credits) 30,759 24,998 20,177
------------------------------
Income before extraordinary credit and
cumulative effect of accounting change 54,978 46,279 37,423
Extraordinary Credit-income tax benefit
Cumulative effect of change in accounting
for income taxes
------------------------------
Net Income $ 54,978 $46,279 $37,423
==============================
Net income per common share-primary $ 2.40 $ 2.04 $ 1.67
==============================
Return on average assets 1.22% 1.17% 1.02%
Return on average equity 15.32 14.32 13.04
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
Cullen/Frost Bankers, Inc. and Subsidiaries
(in thousands, except per share amounts)
Year Ended December 31
--------------------------------
1993 1992 1991
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 90,756 $ 84,074 $108,617
Securities 91,145 99,188 111,132
Time deposits 4 8 13
Federal funds sold and securities purchased
under resale agreements 7,714 6,711 11,478
------------------------------
Total Interest Income 189,619 189,981 231,240
Interest expense:
Deposits 58,079 68,807 115,286
Federal funds purchased and securities sold
under repurchase agreements 3,304 3,139 5,913
Long-term notes payable 410 1,378 1,502
Other borrowings 25
------------------------------
Total Interest Expense 61,793 73,324 122,726
------------------------------
Net Interest Income 127,826 116,657 108,514
Provision (credit) for possible loan losses (6,085) 5,498 23,166
------------------------------
Net Interest Income After
Provision (Credit) for Possible
Loan Losses 133,911 111,159 85,348
Non-interest income:
Trust department 26,278 21,861 20,030
Service charges on deposit accounts 27,303 23,663 20,455
Other service charges, collection and
exchange charges, commissions and fees 7,972 6,183 6,748
Net gain (loss) on securities transactions 1,433 (232) 2,022
Other 13,243 10,338 8,227
-----------------------------
Total Non-Interest Income 76,229 61,813 57,482
Non-interest expense:
Salaries and wages 53,654 46,184 44,154
Pension and other employee benefits 12,052 9,746 9,058
Net occupancy of banking premises 20,749 16,963 16,460
Furniture and equipment 10,155 8,295 7,726
Provision for real estate losses 1,445 12,963 7,653
Restructuring costs 10,285
Intangible Amortization 6,877 700 198
Other 56,861 52,299 56,743
-----------------------------
Total Non-Interest Expense 172,078 147,150 141,992
-----------------------------
Income Before Income Taxes (Credits),
Extraordinary Credit and Cumulative
Effect of Accounting Change 38,062 25,822 838
Income taxes (credits) (735) 8,197 633
-----------------------------
Income before extraordinary credit and
cumulative effect of accounting change 38,797 17,625 205
Extraordinary Credit-income tax benefit 6,497
Cumulative effect of change in accounting for
income taxes 8,439
-----------------------------
Net Income $47,236 $24,122 $ 205
=============================
Net income per common share - primary $ 2.12 $ 1.13 $ .01
=============================
Return on average assets 1.34% .79% .01%
Return on average equity 19.00 12.56 .12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets
Cullen/Frost Bankers, Inc. and Subsidiaries
(in thousands - taxable-equivalent basis)
Year Ended December 31
------------------------------
1996
------------------------------
Interest
Average Income/ Yield/
Balance Expense Cost
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Time deposits $ 18 $ 1 2.93%
Securities:
U.S. Treasury 282,692 15,049 5.32
U.S. Government agencies and corporations 1,259,353 83,782 6.65
States and political subdivisions:
Tax-exempt 5,470 517 9.45
Taxable
Other 6,723 389 5.78
---------- --------
Total securities 1,554,238 99,737 6.42
Federal funds sold and securities purchased
under resale agreements 138,811 7,226 5.21
Loans, net of unearned discount 2,086,816 184,546 8.84
---------- --------
Total Earning Assets and Average Rate Earned 3,779,883 291,510 7.71
Cash and due from banks 486,798
Allowance for possible loan losses (34,977)
Banking premises and equipment 100,357
Accrued interest and other assets 164,434
----------
Total Assets $4,496,495
==========
Liabilities:
Demand deposits:
Commercial and individual $ 832,356
Correspondent banks 198,750
Public funds 44,923
----------
Total demand deposits 1,076,029
Time deposits:
Savings and Interest-on-Checking 722,518 9,792 1.36
Money market deposit accounts 810,616 31,818 3.93
Time accounts 1,046,871 51,180 4.89
Public funds 245,266 10,685 4.36
---------- --------
Total time deposits 2,825,271 103,475 3.66
----------
Total deposits 3,901,300
Federal funds purchased and securities sold
under repurchase agreements 144,804 6,937 4.79
Long-term notes payable
Other borrowings 19,389 1,019 5.26
---------- --------
Total Interest-Bearing Funds and
Average Rate Paid 2,989,464 111,431 3.73
Accrued interest and other liabilities 72,165 -------- ----
----------
Total Liabilities 4,137,658
Shareholders' Equity 358,837
----------
Total Liabilities and Shareholders' Equity $4,496,495
==========
Net interest income $180,079
========
Net interest spread 3.98%
====
Net interest income to total average earning assets 4.76%
====
The above information is shown on a taxable-equivalent basis assuming a 35 percent tax
rate for 1996 through 1993 and a 34 percent tax rate for 1992 through 1991. Non-accrual
loans are included in the average loan amounts outstanding for these computations.
</TABLE>
<TABLE>
<CAPTION>
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
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
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 1996 through 1993 and a 34 percent tax rate for 1992 through 1991. Non-accrual
loans are included in the average loan amounts outstanding for these computations.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
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 1996 through 1993 and a 34 percent tax rate for 1992 through 1991. Non-accrual
loans are included in the average loan amounts outstanding for these computations.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
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 1996 through 1993 and a 34 percent tax rate for 1992 through 1991. Non-accrual
loans are included in the average loan amounts outstanding for these computations.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
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 1996 through 1993 and a 34 percent tax rate for 1992 through 1991. Non-accrual
loans are included in the average loan amounts outstanding for these computations.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
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 1996 through 1993 and a 34 percent tax rate for 1992 through 1991. Non-accrual
loans are included in the average loan amounts outstanding for these computations.
</TABLE>
EXHIBIT 21
Subsidiaries of Cullen/Frost
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
------------------------------
As of March 25, 1997, 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%
Cullen/Frost Capital Trust I Delaware 100%
EXHIBIT 23
Consent of Independent Auditors
<PAGE>
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 February 7, 1997, except for
Note U, as to which the date is March 13, 1997, included in the 1996 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, the
Registration Statement (Form S-8 No. 33-53622) pertaining to the Cullen/Frost
Bankers, Inc. 1992 Stock Plan, and the Registration Statement (Form S-4 No.
333-23225 and Form S-4 No. 333-23225-01) pertaining to the registration and
exchange of $100,000,000 in Capital Securities, Series A, of our report dated
February 7, 1997, except for Note U, as to which the date is March 13, 1997,
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, 1996.
/s/Ernst & Young LLP
ERNST & YOUNG LLP
San Antonio, Texas
March 27, 1997
EXHIBIT 24
Power of Attorney
<PAGE>
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, 1996, 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.
<PAGE>
Signatures Title Date
- ------------------------------- ---------------------------- ------------------
/s/T.C. Frost Senior Chairman of the Board January 28, 1997
- ------------------------------- Chief Executive Officer and ----------------
(T.C. Frost) Director
/s/Richard W. Evans, Jr. Chairman of the Board and January 28, 1997
- ------------------------------- Director ----------------
(Richard W. Evans, Jr.)
/s/Robert S. McClane President and Director January 28, 1997
- ------------------------------- ----------------
(Robert S. McClane)
/s/Isaac Arnold, Jr. Director January 28, 1997
- ------------------------------- ----------------
(Isaac Arnold, Jr.)
/s/Royce S. Caldwell Director January 28, 1997
- ------------------------------- ----------------
(Royce S. Caldwell)
/s/Ruben R. Cardenas Director January 28, 1997
- ------------------------------- ----------------
(Ruben R. Cardenas)
/s/Henry E. Catto Director January 28, 1997
- ------------------------------- ----------------
(Henry E. Catto)
/s/Harry H. Cullen Director January 28, 1997
- ------------------------------- ----------------
(Harry H. Cullen)
/s/Roy H. Cullen Director January 28, 1997
- ------------------------------- ----------------
(Roy H. Cullen)
/s/Eugene H. Dawson, Sr. Director January 28, 1997
- ------------------------------- ----------------
(Eugene H. Dawson, Sr.)
Director January 28, 1997
- ------------------------------- ----------------
(Ruben M. Escobedo)
<PAGE>
Signatures Title Date
- ------------------------------- ---------------------------- ------------------
/s/W.N. Finnegan, III Director January 28, 1997
- ------------------------------- ----------------
(W.N. Finnegan III)
/s/James W. Gorman, Jr. Director January 28, 1997
- ------------------------------- ----------------
(James W. Gorman, Jr.)
/s/James L. Hayne Director January 28, 1997
- ------------------------------- ----------------
(James L. Hayne)
/s/Richard M. Kleberg, III Director January 28, 1997
- ------------------------------- ----------------
(Richard M. Kleberg, III)
/s/Ida Clement Steen Director January 28, 1997
- ------------------------------- ----------------
(Ida Clement Steen)
/s/Curtis Vaughan, Jr. Director January 28, 1997
- ------------------------------- ----------------
(Curtis Vaughan, Jr.)
/s/Mary Beth Williamson Director January 28, 1997
- ------------------------------- ----------------
(Mary Beth Williamson)
/s/Phillip D. Green Executive Vice President January 28, 1997
- ------------------------------- and Chief Financial Officer ----------------
(Phillip D. Green)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 872,028
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 52,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,299,285
<INVESTMENTS-CARRYING> 177,139
<INVESTMENTS-MARKET> 181,029
<LOANS> 2,252,150
<ALLOWANCE> 36,308
<TOTAL-ASSETS> 4,888,384
<DEPOSITS> 4,242,594
<SHORT-TERM> 174,107
<LIABILITIES-OTHER> 92,740
<LONG-TERM> 0
0
0
<COMMON> 122,410
<OTHER-SE> 266,533
<TOTAL-LIABILITIES-AND-EQUITY> 4,888,384
<INTEREST-LOAN> 183,724
<INTEREST-INVEST> 99,562
<INTEREST-OTHER> 7,227
<INTEREST-TOTAL> 290,513
<INTEREST-DEPOSIT> 103,475
<INTEREST-EXPENSE> 111,431
<INTEREST-INCOME-NET> 179,082
<LOAN-LOSSES> 7,300
<SECURITIES-GAINS> (980)
<EXPENSE-OTHER> 180,580
<INCOME-PRETAX> 85,737
<INCOME-PRE-EXTRAORDINARY> 85,737
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,978
<EPS-PRIMARY> 2.40
<EPS-DILUTED> 2.39
<YIELD-ACTUAL> 7.71
<LOANS-NON> 9,724
<LOANS-PAST> 5,911
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,825
<ALLOWANCE-OPEN> 31,577
<CHARGE-OFFS> (10,245)
<RECOVERIES> 7,676
<ALLOWANCE-CLOSE> 36,308
<ALLOWANCE-DOMESTIC> 27,087
<ALLOWANCE-FOREIGN> 138
<ALLOWANCE-UNALLOCATED> 9,083
</TABLE>
