Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1997 Commission file number 0-7275
Cullen/Frost Bankers, Inc.
(Exact name of registrant as specified in its charter)
Texas 74-1751768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 W. Houston Street, San Antonio, Texas 78205
(Address of principal executive offices) (Zip code)
(210) 220-4011
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X. No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At November 7, 1997, there
were 22,223,204 shares of Common Stock, $5 par value, outstanding.
<PAGE>
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $55,693 $47,229 $160,110 $135,080
Securities:
Taxable 23,468 24,451 71,662 75,405
Tax-exempt 61 81 226 244
------- ------- -------- --------
Total Securities 23,529 24,532 71,888 75,649
Time deposits 10
Federal funds sold 3,274 1,475 8,482 4,888
------- ------- -------- --------
Total Interest Income 82,496 73,236 240,480 215,627
INTEREST EXPENSE
Deposits 28,747 25,962 83,932 77,025
Federal funds purchased and securities
sold under repurchase agreements 1,262 1,517 3,987 5,350
Long-term notes payable and other borrowings 2,474 307 6,527 760
------- ------- -------- --------
Total Interest Expense 32,483 27,786 94,446 83,135
------- ------- -------- --------
Net Interest Income 50,013 45,450 146,034 132,492
Provision for possible loan losses 2,000 2,300 5,900 5,500
------- ------- -------- --------
Net Interest Income After Provision
For Possible Loan Losses 48,013 43,150 140,134 126,992
NON-INTEREST INCOME
Trust fees 10,632 8,652 29,991 25,368
Service charges on deposit accounts 11,152 9,825 32,353 28,266
Other service charges, collection and
exchange charges, commissions and fees 2,729 2,053 7,485 6,835
Net gain (loss) on securities transactions (2) 1 18 (997)
Other 3,283 2,648 11,124 11,074
------- ------- -------- --------
Total Non-Interest Income 27,794 23,179 80,971 70,546
NON-INTEREST EXPENSE
Salaries and wages 21,199 18,086 60,633 53,073
Pension and other employee benefits 4,022 3,764 12,747 11,720
Net occupancy of banking premises 4,927 4,736 14,365 14,262
Furniture and equipment 3,080 2,895 9,006 8,587
Intangible amortization 3,062 2,857 8,891 8,375
Other 14,482 12,279 42,498 38,340
------- ------- -------- --------
Total Non-Interest Expense 50,772 44,617 148,140 134,357
------- ------- -------- --------
Income Before Income Taxes 25,035 21,712 72,965 63,181
Income Taxes 8,889 7,727 26,125 22,603
------- ------- -------- --------
Net Income $16,146 $13,985 $ 46,840 $ 40,578
======= ======= ======== ========
Net Income per common share:
Primary $ .70 $ .61 $ 2.03 $ 1.77
Fully Diluted .70 .61 2.02 1.77
Dividends per share .25 .21 .71 .60
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)
September 30 December 31 September 30
1997 1996 1996
---------- ----------- ----------
<S> <C> <C> <C>
Assets
Cash and due from banks $ 724,181 $ 872,028 $ 442,706
Securities held to maturity 155,451 177,139 183,829
Securities available for sale 1,315,466 1,299,285 1,304,698
Federal funds sold 154,650 52,850 108,625
Loans, net of unearned discount of $2,569 at
September 30, 1997; $1,154 at December 31, 1996
and $1,585 at September 30, 1996 2,549,191 2,253,468 2,184,256
Less: Allowance for possible loan losses (41,716) (37,626) (37,548)
---------- ---------- ----------
Net Loans 2,507,475 2,215,842 2,146,708
Banking premises and equipment 108,391 101,625 101,820
Accrued interest and other assets 191,884 169,615 168,191
---------- ---------- ----------
Total Assets $5,157,498 $4,888,384 $4,456,577
========== ========== ==========
Liabilities
Demand Deposits:
Commercial and individual $ 970,283 $ 941,991 $ 870,253
Correspondent banks 406,143 337,996 171,076
Public funds 41,224 51,228 57,494
---------- ---------- ----------
Total demand deposits 1,417,650 1,331,215 1,098,823
Time Deposits:
Savings and Interest-on-Checking 715,833 726,700 694,895
Money market deposit accounts 1,034,378 876,382 835,784
Time accounts 1,105,482 1,026,547 1,053,330
Public funds 205,033 281,750 201,517
---------- ---------- ----------
Total time deposits 3,060,726 2,911,379 2,785,526
---------- ---------- ----------
Total deposits 4,478,376 4,242,594 3,884,349
Federal funds purchased and securities
sold under repurchase agreements 99,749 174,107 115,893
Accrued interest and other liabilities 84,361 92,740 94,961
Guaranteed Preferred Beneficial Interest in
Corporation's Junior Subordinated Deferrable
Interest Debentures 98,390
---------- ---------- ----------
Total Liabilities 4,760,876 4,509,441 4,095,203
Shareholders' Equity
Common stock, par value $5 per share 112,673 112,410 112,286
Shares authorized: 60,000,000
Shares issued: 22,534,705;
22,482,113; and 22,457,313
Surplus 64,499 63,480 63,077
Retained earnings 226,141 195,451 185,760
Unrealized gain on securities available
for sale, net of tax 9,602 7,602 251
Treasury stock at cost (378,700 shares) (16,293)
---------- ---------- ----------
Total Shareholders' Equity 396,622 378,943 361,374
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity $5,157,498 $4,888,384 $4,456,577
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands)
Unrealized
Gain (Loss)
on
Securities
Common Retained Available Treasury
Stock Surplus Earnings for Sale Stock Total
-------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 55,997 $118,418 $158,563 $8,486 $341,464
Net income for the year ended
December 31, 1996 54,978 54,978
Exercise of employee stock
options and related tax benefit 300 1,095 (409) 986
Issuance of restricted stock 15 65 80
Restricted stock plan deferred
compensation expense, net 392 392
Adjustment to unrealized gain
(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
Net income for the nine months
ended September 30, 1997 46,840 46,840
Exercise of employee stock
options and related tax benefit 263 1,019 (610) $ 1,111 1,783
Purchase of treasury stock (17,404) (17,404)
Restricted stock plan deferred
compensation expense, net 360 360
Adjustment to unrealized gain
(loss) on securities available
for sale, net of tax 2,000 2,000
Cash dividend (15,900) (15,900)
-------- -------- -------- ------ -------- --------
Balance at September 30, 1997 $112,673 $ 64,499 $226,141 $9,602 $(16,293) $396,622
======== ======== ======== ====== ======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands)
Nine Months Ended
September 30
------------------
1997 1996
------- -------
<S> <C> <C>
Operating Activities
Net income $ 46,840 $ 40,578
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 5,900 5,500
Credit for deferred taxes (3,486) (3,763)
Accretion of discounts on loans (981) (1,257)
Accretion of securities' discounts (9,874) (11,948)
Amortization of securities' premiums 2,304 2,203
Net (gain) loss on securities transactions (18) 997
Net gain on sale of assets (298) (1,358)
Depreciation and amortization 17,370 16,794
Decrease (increase) in interest receivable 371 (2,882)
Increase in interest payable 2,762 365
Net change in other assets and liabilities (22,243) 9,827
--------- --------
Net cash provided by operating activities 38,647 55,056
Investing Activities
Proceeds from maturities of securities held to maturity 21,532 26,695
Proceeds from sales of securities available for sale 199,839 103,026
Proceeds from maturities of securities available for sale 352,297 474,074
Purchases of securities available for sale (513,169) (483,667)
Net increase in loans (194,476) (160,776)
Net increase in bank premises and equipment (10,687) (9,533)
Proceeds from sales of repossessed properties 1,022 724
Net cash and cash equivalents received from acquisitions 14,277 19,198
--------- ---------
Net cash used by investing activities (129,365) (30,259)
Financing Activities
Net increase in demand deposits,
IOC accounts, and savings accounts 51,429 56,245
Net increase (decrease) in certificates of deposits 731 (155,284)
Net increase (decrease) in short-term borrowings (74,358) 4,498
Proceeds from issuance of guaranteed preferred beneficial
interest in Corporation's subordinated debentures 98,390
Proceeds from employee stock purchase
plan and options 1,783 480
Purchase of treasury stock (17,404)
Dividends paid (15,900) (13,352)
--------- --------
Net cash provided (used) by financing activities 44,671 (107,413)
--------- --------
Decrease in cash and cash equivalents (46,047) (82,616)
Cash and cash equivalents at beginning of year 924,878 633,947
--------- --------
Cash and cash equivalents at the end
of the period $878,831 $551,331
========= ========
Supplemental information:
Interest paid $ 97,208 $ 27,420
Loans originated to facilitate the sale
of repossessed properties 848
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Cullen/Frost Bankers, Inc. and Subsidiaries
(tables in thousands)
Basis of Presentation
The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
consolidated financial statements have not been audited by independent
accountants, but in the opinion of management, reflect all adjustments
necessary for a fair presentation of the financial position and results of
operations. All such adjustments were of a normal and recurring nature. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Corporation's annual report on Form 10-K for
the year ended December 31, 1996. The balance sheet at December 31, 1996 has
been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. Certain
reclassifications have been made to make prior periods comparable.
Allowance for Possible Loan Losses
An analysis of the transactions in the allowance for possible loan losses
is presented below. The amount charged to operating expense is based on
management's assessment of the adequacy of the allowance to absorb future
possible loan losses.
Nine Months Ended
September 30
--------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------
Balance at beginning of the period $37,626 $32,268
Provision for possible loan losses 5,900 5,500
Loan loss reserve of acquired institutions 2,105 627
Net charge-offs:
Losses charged to the allowance (6,733) (6,967)
Recoveries 2,818 6,120
------- -------
Net charge-offs (3,915) (847)
------- -------
Balance at the end of period $41,716 $37,548
======= =======
Impaired Loans
A loan within the scope of SFAS No. 114 is considered impaired when, based
on current information and events, it is probable that 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
September 30, 1997, the majority of the impaired loans were real estate loans
and collectibility was measured based on the fair value of the collateral.
Interest payments on impaired loans are typically applied to principal unless
collectibility of the principal amount is fully assured, in which case interest
is recognized on the cash basis. Interest revenue recognized on impaired loans
as of September 30, 1997 and 1996 was $14,000 and $247,000, 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.
<PAGE>
The following is a summary of loans considered to be impaired:
<TABLE>
<CAPTION>
September 30
-------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with no valuation reserve $1,348 $3,513
Impaired loans with a valuation reserve 3,053 2,137
------ ------
Total recorded investment in impaired loans $4,401 $5,650
====== ======
Average recorded investment in impaired loans $5,551 $8,051
Valuation reserve 1,833 1,300
</TABLE>
Earnings Per Common Share
The weighted average number of shares used to compute per common share
earnings, including common stock equivalents where applicable, were:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
1997 1996 1997 1996
----------------------- -----------------------
<S> <C> <C> <C> <C>
Primary 22,978,048 22,917,828 23,065,138 22,871,025
Fully Diluted 23,011,492 22,956,738 23,176,097 22,954,535
</TABLE>
Repurchases of common stock were made during the third quarter of 1997 in
connection with the Company's stock repurchase program approved in the second
quarter of 1996 which allowed for the repurchase of up to 500,000 shares. The
repurchased shares are being accounted for under the cost method where the
gross cost of the shares reacquired is debited to a treasury shares account.
As of September 30, 1997, 378,700 shares had been repurchased under this
program at an average price of $43.02 per share.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Corporation will be required to change
the method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options will be excluded. The impact is
expected to result in an immaterial increase in primary earnings per share for
the third quarter ended September 30, 1997 and September 30, 1996 and for the
nine months ended September 30, 1997 and 1996. Statement 128 is not expected to
have an impact on the calculation of fully diluted earnings per share for these
quarters.
Capital
The table below reflects various measures of regulatory capital at
September 30, 1997 and 1996. As a result of the issuance of the $100,000,000
Trust Preferred Capital Securities discussed in the "Capital and Liquidity"
section found on page 18, all the regulatory capital ratios are up when
compared to the third quarter of 1996.
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
------------------- -------------------
Capital Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-Based
Tier 1 Capital $ 409,414 13.90% $ 294,211 11.84%
Tier 1 Capital Minimum requirement 117,821 4.00 99,373 4.00
Total Capital $ 446,294 15.15% $ 325,329 13.10%
Total Capital Minimum requirement 235,643 8.00 198,745 8.00
Risk-adjusted assets, net of goodwill $2,945,533 $2,484,315
Leverage ratio 8.38% 6.65%
Average equity as a percentage
of average assets 8.01 7.96
</TABLE>
<PAGE>
The FDIC Improvement Act of 1991 ("FDICIA") established five capital tiers
for depository institutions and final rules relating to these tiers were
adopted by the federal banking agencies. At September 30, 1997 and 1996, 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 leverage ratio of 5.0 percent or greater, and the institution is
not subject to an order, written agreement, capital directive or prompt
corrective action directive to meet and maintain a specific level for any
capital measure.
The Corporation is subject to the regulatory capital requirements
administered by the Federal Reserve Board. 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.
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. Payments of distributions on
the Capital Securities and payments on liquidation or redemption of the Capital
Securities are guaranteed by the Corporation on a limited basis 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 sale 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, see "Pending Acquisitions" on page 9. The Capital Securities are
included in the Tier 1 capital of the Corporation for regulatory capital
purposes and are reported as debt on the balance sheet. The Corporation
records 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 the Issuer Trust, filed a
Registration Statement on Form 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
for the then outstanding Capital Securities. On April 25, 1997, the
Corporation exchanged all of the outstanding Capital Securities for registered
Capital Securities. The "new" Capital Securities have the same terms as the
"old" Capital Securities. This exchange enhanced 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.
<PAGE>
Income Taxes
The tax expense for the third quarter of 1997 was $8,889,000. This amount
consisted of current tax expense of $10,457,000 and deferred tax benefit of
$1,568,000. Year-to-date tax expense is $26,125,000, consisting of current tax
expense of $29,611,000 and deferred tax benefit of $3,486,000. Net deferred
tax assets were $6,382,000 as of September 30, 1997 with no valuation
allowance. The deferred tax assets were supported by taxes paid in prior
years. The tax expense for the third quarter of 1996 was $7,727,000. Income
tax payments for the first nine months of 1997 and 1996 were $24,041,000 and
$23,440,000, respectively.
Acquisitions
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. The purchase price has been allocated to
the underlying assets and liabilities based on estimated fair value at the date
of acquisition. Such estimates may be subsequently revised. 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. The acquisition did not have a material impact on
the third quarter net income and is not expected to have a material impact on
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 loans of approximately
$51 million and deposits of approximately $112 million. On February 15, 1996,
the Corporation paid approximately $33.5 million to acquire Park National Bank
in Houston, Texas. The Corporation acquired loans of approximately $157
million and deposits of approximately $225 million.
Pending Acquisitions
On October 15, 1997, the Corporation entered into a definitive agreement
to acquire Harrisburg Bancshares, Inc. of Houston, Texas and its subsidiary
Harrisburg Bank which has deposits of approximately $207 million. The
Corporation agreed to pay approximately $258 per fully diluted share or 2.2
times book value or approximately $55.3 million. The acquisition is expected
to be completed in early 1998 following shareholder and regulatory approval.
This transaction will be accounted for as a purchase with total cash
consideration being funded through internal sources.
Other Accounting Changes
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." The statement provides that all items that are required to be
recognized under accounting standards as comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The provisions of SFAS No. 130 are effective for fiscal
years beginning after December 15, 1997. The adoption of this statement is not
expected to have a material impact on financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The statement establishes standards
for the method that public entities use to report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographical areas and major
customers. The provisions of SFAS No. 131 are effective for fiscal years
beginning after December 15, 1997. Adoption in interim financial statements is
not required until the year after initial adoption; however, comparative prior
year information is required. The adoption of this statement is not expected
to have a significant financial effect on the Corporation.
<PAGE>
Derivative Financial Instruments
Derivatives are used to hedge interest rate exposure by modifying the
interest rate characteristics of related balance sheet instruments. The
specific criteria required for derivatives used for these purposes are
described below. Derivatives that do not meet these criteria are carried at
market value with changes in value recognized currently in earnings.
Derivatives used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at
the inception of the derivative contract. Derivatives currently used for
hedging purposes include swaps and purchased options. The fair value of
derivative contracts are carried off-balance sheet and the unrealized gains and
losses on derivative contracts are generally deferred. The interest component
associated with derivatives used as hedges or to modify the interest rate
characteristics of assets and liabilities is recognized over the life of the
contract in net interest income. Upon contract settlement or termination, the
cumulative change in the market value of such derivatives is recorded as an
adjustment to the carrying value of the underlying asset or liability and
recognized in net interest income over the expected remaining life of the
related asset or liability. In instances where the underlying instrument is
sold, the cumulative change in the value of the associated derivative is
recognized immediately in earnings.
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Review
Cullen/Frost Bankers, Inc. and Subsidiaries
(taxable-equivalent basis - tables in thousands)
Results of Operations
The results of operations are included in the material that follows. The
Corporation completed one acquisition during the first quarter of 1997 and two
for the entire year of 1996. These acquisitions, which are outlined in the
footnotes to the financial statements on page nine, were accounted for as
purchase transactions, and as such, their related results of operations are
included in the financial information that follows from the date of
acquisition.
Certain reclassifications have been made to make prior periods comparable.
All balance sheet figures are presented in averages unless otherwise noted.
<TABLE>
<CAPTION>
Summary of Operations
--------------------------------------------------
Three Months Ended
Nine Months Ended ---------------------------
September 30 1997 1996
------------------ ------------------ -------
1997 1996 Sept 30 June 30 Sept 30
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Taxable-equivalent net
interest income $146,867 $133,226 $50,306 $49,627 $45,688
Taxable-equivalent adjustment 833 734 293 272 238
-------- -------- ------- ------- -------
Net interest income 146,034 132,492 50,013 49,355 45,450
Provision for possible loan losses 5,900 5,500 2,000 2,275 2,300
Non-Interest income:
Net gain (loss) on securities
transactions 18 (997) (2) 20 1
Other 80,953 71,543 27,796 27,721 23,178
-------- -------- ------- ------- -------
Total non-interest income 80,971 70,546 27,794 27,741 23,179
Non-Interest expense:
Intangible amortization 8,891 8,375 3,062 3,119 2,857
Other 139,249 125,982 47,710 47,257 41,760
-------- -------- ------- ------- -------
Total non-interest expense 148,140 134,357 50,772 50,376 44,617
-------- -------- ------- ------- -------
Income before income taxes 72,965 63,181 25,035 24,445 21,712
Income Taxes 26,125 22,603 8,889 8,814 7,727
-------- -------- ------- ------- -------
Net Income $ 46,840 $ 40,578 $16,146 $15,631 $13,985
======== ======== ======= ======= =======
Cash Earnings* $ 53,370 $ 46,569 $18,413 $17,934 $16,039
Net income per common share:
Primary $ 2.03 $ 1.77 $ .70 $ .68 $ .61
Fully diluted 2.02 1.77 .70 .67 .61
Cash earnings per common share 2.31 2.04 .80 .77 .70
Return on Average Assets 1.28% 1.22% 1.29% 1.27% 1.24%
Cash earnings ROA 1.46 1.39 1.47 1.46 1.42
Return on Average Equity 15.97 15.33 16.09 16.02 15.55
Cash earnings ROE 18.20 17.69 18.35 18.38 17.84
* Net income before intangible amortization (including goodwill and core deposit
intangibles, net of tax).
</TABLE>
Cullen/Frost Bankers, Inc. reported net income of $16,146,000 or $.70 per
common share for the quarter ended September 30, 1997 compared to $13,985,000
or $.61 per common share for the third quarter of 1996 and net income of
$15,631,000 or $.68 per common share for the second quarter of 1997. Net
income for the nine months ended September 30, 1997 was $46,840,000 or $2.03
per common share compared to $40,578,000 or $1.77 per common share for
<PAGE>
the same period of 1996. Return on average assets and average equity increased
to 1.29 percent and 16.09 percent for the third quarter of 1997. This compares
to 1.27 percent and 16.02 percent for the third quarter of 1996. Return on
average assets and average equity for the nine months ended September 30, 1997
increased to 1.28 percent and 15.97 percent compared to 1.22 percent and 15.33
percent for 1996.
The Corporation has historically paid cash and thus used the purchase
method of 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 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>
Nine Months Ended
--------------------------------------------------------------
September 1997 September 1996
- -----------------------------------------------------------------------------------------
Reported Intangible "Cash" Reported Intangible "Cash"
earnings Amortization earnings earnings Amortization earnings
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before income
taxes $72,965 $ 8,891 $81,856 $63,181 $8,375 $71,556
Income taxes 26,125 2,361 28,486 22,603 2,384 24,987
------- ------- ------- ------- ------ -------
Net income $46,840 $ 6,530 $53,370 $40,578 $5,991 $46,569
======= ======= ======= ======= ====== =======
Net income per common
share $ 2.03 $ .28 $ 2.31 $ 1.77 $ .27 $ 2.04
Return on assets 1.28% 1.46%* 1.22% 1.39%*
Return on equity 15.97 18.20 ** 15.33 17.69**
* Calculated as A/B
** Calculated as A/C Sept 1997 Sept 1996
----------------- ---------- ----------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 53,370 $ 46,569
(B) Total average assets 4,881,073 4,460,210
(C) Average shareholders' equity 392,086 353,640
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
September 1997 June 1997
- -----------------------------------------------------------------------------------------
Reported Intangible "Cash" Reported Intangible "Cash"
earnings Amortization earnings earnings Amortization earnings
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before income
taxes $25,035 $ 3,062 $28,097 $24,445 $3,119 $27,564
Income taxes 8,889 795 9,684 8,814 816 9,630
------- ------- ------- ------- ------ -------
Net income $16,146 $ 2,267 $18,413 $15,631 $2,303 $17,934
======= ======= ======= ======= ====== =======
Net income per common
share $ .70 $ .10 $ .80 $ .68 $ .09 $ .77
Return on assets 1.29% 1.47%* 1.27% 1.46%*
Return on equity 16.09 18.35 ** 16.02 18.38**
* Calculated as A/B
** Calculated as A/C Sept 1997 June 1997
----------------- ---------- ----------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 18,413 $ 17,934
(B) Total average assets 4,968,394 4,922,916
(C) Average shareholders' equity 398,067 391,439
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
September 1996
- --------------------------------------------------------------
Reported Intangible "Cash"
earnings Amortization earnings
- --------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $21,712 $2,857 $24,569
Income taxes 7,727 803 8,530
------- ------ -------
Net income $13,985 $2,054 $16,039
======= ====== =======
Net income per common share $ .61 $ .09 $ .70
Return on assets 1.24% 1.42%*
Return on equity 15.55 17.84**
* Calculated as A/B
** Calculated as A/C
Sept 1996
---------
(A) Net income before intangible amortization (including
goodwill and core deposit intangibles, net of tax) $ 16,039
(B) Total average assets 4,494,317
(C) Average shareholders' equity 357,743
</TABLE>
Net Interest Income
Net interest margin was 4.74 percent for the third quarter of 1997
compared to 4.75 percent and 4.83 percent for the second quarter of 1997 and
third quarter of 1996, respectively. The decrease in net interest margin from
the third quarter of last year is reflective of the favorable impact of the
acquisition and higher loan volumes offset by higher deposit costs and interest
expense related to the $100 million Trust Preferred Capital Securities, see
"Capital and Liquidity" on page 18. Net interest spread of 3.88 percent
decreased three basis points from the second quarter of 1997 and 15 basis
points from the third quarter of 1996. The net interest spread decrease from a
year ago was primarily because of the increase in deposit costs and interest
expense related to the Trust Preferred Capital Securities.
<TABLE>
<CAPTION>
Change in Net Interest Income
--------------------------------------------
Third Quarter Third Quarter Year-to-Date
1997 1997 1997
vs. vs. vs.
Third Quarter Second Quarter Year-to-Date
1996 1997 1996
--------------------------------------------
Amount Amount Amount
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due to volume $ 4,811 $ 799 $13,645
Due to interest rate spread (193) (120) (4)
------- ------- -------
$ 4,618 $ 679 $13,641
======= ======= =======
</TABLE>
<PAGE>
The Corporation acquired Corpus Christi Bancshares, Inc. in the first
quarter of 1997 the results of which is impacting the variance explanations of
non-interest income and expense that follow.
Non-Interest Income
<TABLE>
<CAPTION>
Three Months Ended
Nine Months Ended ------------------------------
September 30 1997 1996
------------------ -------------------- -------
Non-Interest Income 1997 1996 Sept 30 June 30 Sept 30
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust fees $29,991 $25,368 $10,632 $ 9,716 $ 8,652
Service charges on deposit accounts 32,353 28,266 11,152 10,911 9,825
Other service charges, collection
and exchange charges, commissions
and fees 7,485 6,835 2,729 2,627 2,053
Net gain (loss) on securities
transactions 18 (997) (2) 20 1
Other 11,124 11,074 3,283 4,467 2,648
------- ------- ------- ------- -------
Total $80,971 $70,546 $27,794 $27,741 $23,179
======= ======= ======= ======= =======
</TABLE>
For the third quarter 1997...
Total non-interest income was flat compared to the second quarter of 1997
as increases in trust fees and service charges were offset by lower other
income. Total non-interest income was up $4.6 million, or 19.9 percent
compared to the third quarter of 1996 as a result of higher trust fees and
service charge income.
Trust fee income increased $916,000 or 9.4 percent compared to last
quarter and increased $2.0 million or 22.9 percent from the third quarter of
1996. The increase from the second quarter and the third quarter of 1996 is
attributable to the increase in the number of accounts held and trust asset
growth resulting from improvement in the stock and bond markets.
Service charges on deposit accounts increased 2.2 percent from the second
quarter of this year and $1.3 million or 13.5 percent from the third quarter of
1996. The majority of the increase from the previous quarter and third quarter
a year ago is primarily a result of higher service charges related to
commercial deposits and overdraft charges in addition to higher volumes
processed for correspondent banks from the third quarter a year ago. Other
service charges were up 3.9 percent and 32.9 percent compared to the second
quarter of 1997 and the third quarter of 1996, respectively. The increase from
the second quarter was primarily due to higher volumes and mutual fund fees
offset somewhat by lower loan prepayment fees. The increase from a year ago
was primarily due to higher volumes, mutual fund fees and loan prepayment fees.
Other non-interest income decreased $1.2 million or 26.5 percent from the
second quarter of this year and increased $635,000 or 24.0 percent compared to
the third quarter of 1996. The decrease from the second quarter is mainly due
to a refund of franchise taxes received in the second quarter. Most of the
increase from the third quarter of 1996 is due to mineral interest royalties,
gains on the disposition of certain loans and foreclosed assets and brokerage
commissions.
For the nine months ended September 30, 1997...
Non-interest income increased $10.4 million or 14.8 percent compared to
the same period last year. Trust income increased $4.6 million or 18.2 percent
and is attributable to the increase in the number of accounts held and trust
asset growth resulting from improvement in the stock market. Service charges
on deposit accounts increased $4.1 million or 14.5 percent compared to the same
period one year ago. The increase is mainly due to higher service charges
related to commercial deposits, volumes processed for correspondent banks and
overdraft charges. An immaterial gain on securities transactions was realized
for the 1997 period compared to a loss of $997,000 a year ago. Other income is
flat compared to the same period last year.
<PAGE>
Non-Interest Expense
<TABLE>
<CAPTION>
Three Months Ended
Nine Months Ended ------------------------------
September 30 1997 1996
------------------ ------------------- -------
Non-Interest Expense 1997 1996 Sept 30 June 30 Sept 30
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and wages $ 60,633 $ 53,073 $21,199 $20,200 $18,086
Pension and other employee benefits 12,747 11,720 4,022 4,332 3,764
Net occupancy of banking premises 14,365 14,262 4,927 4,680 4,736
Furniture and equipment 9,006 8,587 3,080 3,060 2,895
Intangible amortization 8,891 8,375 3,062 3,119 2,857
Other 42,498 38,340 14,482 14,985 12,279
-------- -------- ------- ------- -------
Total $148,140 $134,357 $50,772 $50,376 $44,617
======== ======== ======= ======= =======
</TABLE>
For the third quarter 1997...
Non-interest expense was flat compared to last quarter and increased $6.2
million or 13.8 percent compared to the third quarter of 1996. The increase
from the third quarter of 1996 results primarily from higher salary costs and
operating expenses.
Salaries and wages increased $1.0 million or 4.9 percent from the second
quarter of 1997 and $3.1 million or 17.2 percent from the third quarter of 1996
primarily as a result of the acquisitions, normal merit increases and
additional bonus incentives recorded in the third quarter of 1997. Pension and
employee benefits decreased 7.2 percent compared to last quarter and increased
6.9 percent compared to the third quarter of 1996. The decrease from the
second quarter is primarily a result of the use of forfeited shares to fund the
employer match on the 401(k) plan and lower payroll taxes. The increase from a
year ago is due to higher payroll taxes and medical insurance offset by lower
contributions to the employee related stock plan by the use of forfeited shares
and lower workers compensation insurance expense.
Net occupancy of banking premises expense increased 5.3 percent from the
second quarter of 1997 and 4.0 percent from the third quarter of 1996. The
increase from the second quarter is primarily due to higher utility costs and
operating expenses and the increase from a year ago is primarily due to higher
utility costs and property taxes, offset by higher tenant income. Furniture
and equipment expense was flat compared to the second quarter of 1997 and
increased 6.4 percent from the same quarter last year mostly due to equipment
rental and software amortization.
Amortization of intangibles was flat compared to the second quarter of
1997 and increased 7.2 percent from the third quarter of 1996 due to the 1997
acquisition. Other non-interest expenses decreased $503,000 or 3.4 percent
from the second quarter and increased $2.2 million or 17.9 percent from the
third quarter last year. The decrease from the second quarter is primarily due
to lower advertising, travel and check printing charges and the increase from a
year ago is due to higher operating expenses. In addition, included in other
expenses for the third quarter of 1997 is approximately $361,000 related to
Year 2000 compliance program.
For the nine months ended September 30, 1997...
Total non-interest expense was up $13.8 million or 10.3 percent compared
to the same period one year ago. Salaries and wages were up $7.6 million or
14.2 percent compared to the same period one year ago primarily because of the
acquisitions and normal merit increases. Pension and other benefits increased
$1 million or 8.8 percent from the same period last year as the acquisitions
affected payroll tax and contributions to the employee related stock plans.
Net occupancy of banking premises was flat compared to a year ago. Furniture
and equipment expense increased $419,000, or 4.9 percent due to higher
equipment rental cost and software related expenses. Intangible amortization
increased $516,000 or 6.2 percent from the same period one year ago due to
acquisitions. Other non-interest expenses increased $4.2 million or 10.8
percent, primarily due to higher operating expenses, including acquisition
related costs. Included in other expenses for 1997 were approximately $612,000
related to the Year 2000 compliance program. Currently, the Corporation
estimates the total cost of this program over a three year period to be
approximately $3 million. The efficiency ratio measures what percentage of
bank revenue is absorbed by non-interest expense. The Corporation's year-to-
date efficiency ratio was 65.0 percent compared to 65.6 percent in 1996.
<PAGE>
Income Taxes
The Corporation's effective tax rate for the second and third quarters of
1997 and 1996 approximated the statutory rate of 35 percent.
Balance Sheet
Average assets of $4,968,394,000 were flat with the previous quarter and
up 10.5 percent from the third quarter of 1996. The increase from a year ago
was primarily because of the acquisitions and the $100 million Trust Preferred
Capital Securities, see "Capital and Liquidity" on page 18. Total deposits
averaged $4,280,990,000 for the current quarter, flat with the previous quarter
and up 9.6 percent when compared to the third quarter of 1996. Average loans
for the third quarter of 1997 were $2,514,945,000. This represents an increase
in average loans of 2.3 percent from the second quarter of 1997 and an increase
in average loans of 17.4 percent from the third quarter of last year.
Loans
<TABLE>
<CAPTION>
1997 1996
---------------------- ---------------------------
Loan Portfolio Percentage
Period-End Balances September 30 of Total December 31 September 30
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 774,176 30.4% $ 650,114 $ 632,828
Consumer 582,129 22.8 491,086 465,588
Real estate 1,129,184 44.3 1,044,391 1,018,276
Other 66,271 2.6 69,031 69,149
Unearned discount (2,569) (.1) (1,154) (1,585)
---------- ----- ---------- ----------
Total Loans $2,549,191 100.0% $2,253,468 $2,184,256
========== ===== ========== ==========
</TABLE>
At September 30, 1997, period-end loans totaled $2,549,191,000 up 1.4
percent from the previous quarter and up 16.7 percent from the same period last
year. Approximately 70 percent of the increase in loans from a year ago
resulted from internally generated growth.
Real Estate Loans
Real estate loans at September 30, 1997, were $1,129,184,000 or 44.3
percent of period-end loans compared to 46.6 percent a year ago. Residential
permanent mortgage loans at September 30, 1997, were $456,681,000 compared to
$443,914,000 at June 30, 1997, and $415,650,000 at September 30, 1996. Real
estate loans classified as "other" are essentially amortizing commercial and
industrial loans with maturities of less than five years secured by real
property.
At September 30, 1997, real estate loans 90 days past due (excluding non-
accrual and restructured loans) were $2,427,000, compared with $2,038,000 at
June 30, 1997, and $2,772,000 at September 30, 1996.
<TABLE>
<CAPTION>
1997 1996
------------------------ --------
Real Estate Loans Percentage
Period-End Balances Sept 30 of Total Sept 30
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Construction $ 119,447 10.6% $ 66,802
Land 54,913 4.9 47,577
Permanent mortgages:
Commercial 251,271 22.2 233,623
Residential 456,681 40.4 415,650
Other 246,872 21.9 254,624
---------- ----- ----------
$1,129,184 100.0% $1,018,276
========== ===== ==========
Non-accrual and restructured $ 6,788 .6% $ 6,919
</TABLE>
<PAGE>
Mexico
The Corporation's cross border outstandings to Mexico, excluding
$21,776,000 in loans secured by assets held in the United States, totaled
$22,343,000 at September 30, 1997, or .9 percent of total loans down from
$34,426,000 at June 30, 1997 and $30,434,000 at September 30, 1996. 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 65.7 percent are
related to companies exporting from Mexico. As of September 30, 1997, none of
the Mexican related loans were on non-performing status.
<TABLE>
<CAPTION>
MEXICAN LOANS
-----------------------
Percentage of
September 30, 1997 Amount Total Loans
- ----------------------------------------------------------------------
<S> <C> <C>
Loans to financial institutions $18,597 .7%
Loans to private firms or individuals 3,746 .2
------- ----
$22,343 .9%
======= ====
</TABLE>
Non-Performing Assets
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
--------------------------
Real
September 30, 1997 Estate Other Total
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual and restructured loans $ 6,788 $4,938 $11,726
Foreclosed assets 2,838 767 3,605
------- ------ -------
Total $ 9,626 $5,705 $15,331
======= ====== =======
As a percentage of total
non-performing assets 62.8% 37.2% 100.0%
</TABLE>
Non-performing assets totaled $15,331,000 at September 30, 1997 down 3.7
percent and .9 percent, respectively, from $15,924,000 at June 30, 1997 and
$15,478,000 at September 30, 1996. Non-performing assets as a percentage of
total loans and foreclosed assets decreased to .60 percent at September 30,
1997 from .62 percent one year ago.
Foreclosed assets consist of property which has been formally repossessed.
Foreclosed assets are valued at the lower of the loan balance or estimated fair
value, less estimated selling costs, at the time of foreclosure. Write-downs
occurring at acquisition are charged against the allowance for possible loan
losses. On an ongoing basis, properties are appraised as required by market
indications and applicable regulations. Write-downs are provided for
subsequent declines in value. Expenses related to maintaining foreclosed
properties are included in other non-interest expense.
The after-tax impact (assuming a 35 percent marginal tax rate) of lost
interest from non-performing assets was $232,000 or $.01 per common share for
the third quarter of 1997, compared to approximately $225,000 or $.01 per
common share for the second quarter of 1997 and $203,000 or $.01 per common
share for the third quarter of 1997. For the nine months ended September 30,
1997, the after-tax impact (assuming a 35 percent marginal tax rate) was
approximately $637,000 or $.03 per common share, compared with approximately
$673,000 or $.03 per common share for the comparable period last year. Total
loans 90 days past due (excluding non-accrual and restructured loans) were
$8,038,000 at September 30, 1997, compared to $5,589,000 at June 30, 1997, and
$5,497,000 at September 30, 1996.
<PAGE>
Allowance for Possible Loan Losses
The allowance for possible loan losses was $41,716,000 or 1.64 percent of
period-end loans at September 30, 1997, compared to $37,548,000 or 1.72 percent
at September 30, 1996 and $41,080,000 or 1.63 percent at June 30, 1997. The
allowance for possible loan losses as a percentage of non-accrual and
restructured loans was 355.8 percent at September 30, 1997, compared to 324.5
percent at September 30, 1996 and 304.8 percent at the end of the second
quarter of 1997.
The Corporation recorded a $2,000,000 provision for possible loan losses
during the third quarter of 1997. This compares to $2,300,000 provision for
possible loan losses during the third quarter of 1996 and $2,275,000 for the
second quarter of 1997. Net charge-offs in the third quarter of 1997 totaled
$1,364,000, compared to a net charge-offs of $1,105,000 and $1,242,000 for the
third quarter of 1996 and the second quarter of 1997, respectively.
<TABLE>
<CAPTION>
NET CHARGE-OFFS (RECOVERIES)
----------------------------
1997 1996
------------------ -------
Third Second Third
Quarter Quarter Quarter
- -------------------------------------------------------------------
<S> <C> <C> <C>
Real estate $ 29 $ (294) $ (414)
Commercial and industrial 79 387 1,345
Consumer 1,247 1,051 288
Other, including foreign 9 98 (114)
------- ------- -------
$ 1,364 $ 1,242 $ 1,105
======= ======= =======
Provision for possible loan losses $ 2,000 $ 2,275 $ 2,300
Allowance for possible loan losses 41,716 41,080 36,230
</TABLE>
Capital and Liquidity
At September 30, 1997, shareholders' equity was $396,622,000 compared to
$361,374,000 at September 30, 1996 and $396,473,000 at June 30, 1997. The
Corporation had an unrealized gain on securities available for sale, net of
deferred taxes, of $9.6 million as of September 30, 1997 compared to $251,000
as of September 30, 1996. The unrealized gain is primarily due to the decrease
in market interest rates in 1997. Under regulatory requirements, the
unrealized gain or loss on securities available for sale is not included in the
calculation of risk-based capital and leverage ratios.
The Corporation paid a cash dividend of $.25 per common share in the third
and second quarters of 1997 compared to $.21 per common share for the third
quarter a year ago. This equates to a dividend payout ratio of 34.4 percent,
36.0 percent and 33.7 percent for the third and second quarters of 1997 and the
third quarter of 1996, respectively.
Funding sources available at the holding company level include a
$7,500,000 short-term line of credit. There were no borrowings outstanding from
this source at September 30, 1997.
During February 1997, Cullen/Frost Capital Trust I, a Delaware statutory
business trust and wholly-owned subsidiary of the Corporation (The Trust),
issued $100,000,000 of its 8.42 percent Capital Securities, Series A which
represents a beneficial interest in The Trust. For additional information
regarding the foregoing see the footnotes to the financial statements on page
8.
Asset liquidity is provided by cash and assets which are readily
marketable or which will mature in the near future. These include cash, time
deposits in banks, securities available for sale, maturities and cash flow from
securities held to maturity, and Federal funds sold and securities purchased
under resale agreements. Liability liquidity is provided by access to funding
sources, principally core deposits and Federal funds purchased. Additional
sources of liability liquidity include brokered deposits and securities sold
under agreement to repurchase. The liquidity position of the Corporation is
continuously monitored and adjustments are made to the balance between sources
and uses of funds as deemed appropriate.
<PAGE>
Forward-Looking Statements
The Corporation may from time to time make forward-looking statements with
respect to earnings per share, credit quality, corporate objectives and other
financial and business matters. The Corporation cautions the reader that these
forward-looking statements are subject to numerous assumptions, risk and
uncertainties, including economic conditions; actions taken by the Federal
Reserve Board; legislative and regulatory actions and reforms; competition; as
well as other reasons, all of which change over time. Actual results may
differ materially from forward-looking statements.
NYSE Listing
The Corporation's common stock began trading on the New York Stock
Exchange on August 14, 1997 under the symbol "CFR".
<PAGE>
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets and Interest Income Analysis-Year-to-Date
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands - taxable-equivalent basis*)
September 30, 1997 September 30, 1996
--------------------------- ---------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
---------- -------- ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Time deposits $ 20 $ 1 3.50%
Securities:
U.S. Treasury $ 270,764 $ 10,831 5.35% 287,358 11,421 5.31
U.S. Government agencies
and corporations 1,214,334 60,501 6.64 1,277,994 63,680 6.64
States and political subdivisions 5,034 359 9.50 5,478 388 9.45
Other 7,281 318 5.82 6,830 292 5.69
--------- -------- --------- --------
Total securities 1,497,413 72,009 6.41 1,577,660 75,781 6.41
Federal funds sold 211,223 8,482 5.30 122,653 4,888 5.24
Loans, net of unearned discount 2,426,526 160,822 8.86 2,045,473 135,691 8.86
--------- -------- ---------- --------
Total Earning Assets and
Average Rate Earned 4,135,162 241,313 7.79 3,745,806 216,361 7.71
Cash and due from banks 492,279 482,272
Allowance for possible loan losses (38,198) (34,337)
Banking premises and equipment 106,228 99,648
Accrued interest and other assets 185,602 166,821
--------- ----------
Total Assets $4,881,073 $4,460,210
========== ==========
LIABILITIES
Demand deposits:
Commercial and individual $ 917,034 $ 820,404
Correspondent banks 220,714 189,710
Public funds 42,988 43,966
--------- ---------
Total demand deposits 1,180,736 1,054,080
Time deposits:
Savings and Interest-on-Checking 731,482 6,829 1.25 729,156 7,499 1.37
Money market deposit accounts 957,774 28,771 4.02 793,210 23,193 3.91
Time accounts 1,078,900 39,684 4.92 1,050,864 38,488 4.89
Public funds 254,814 8,648 4.54 236,075 7,845 4.44
--------- -------- --------- --------
Total time deposits 3,022,970 83,932 3.71 2,809,305 77,025 3.66
--------- ---------
Total Deposits 4,203,706 3,863,385
Federal funds purchased and securities
sold under repurchase agreements 116,753 3,987 4.50 145,862 5,350 4.82
Guaranteed preferred beneficial
interests in Corporation's
subordinated debentures 85,494 5,533 8.65
Other borrowings 23,992 994 5.54 19,509 760 5.21
--------- -------- ---------- --------
Total Interest-Bearing Funds
and Average Rate Paid 3,249,209 94,446 3.88 2,974,676 83,135 3.73
--------- -------- ---- ---------- -------- ----
Accrued interest and other liabilities 59,042 77,814
--------- ----------
Total Liabilities 4,488,987 4,106,570
SHAREHOLDERS' EQUITY 392,086 353,640
--------- ----------
Total Liabilities and
Shareholders' Equity $4,881,073 $4,460,210
========== ==========
Net interest income $146,867 $133,226
======== ========
Net interest spread 3.91% 3.98%
===== =====
Net interest income to total average earning assets 4.74% 4.75%
===== =====
*Taxable-equivalent basis assuming a 35% tax rate.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands - taxable-equivalent basis*)
September 30, 1997 June 30, 1997
--------------------------- ------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
--------- ------- ----- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury $ 273,215 $ 3,727 5.41% $ 283,467 $ 3,778 5.35%
U.S. Government agencies
and corporations 1,187,824 19,625 6.61 1,229,527 20,510 6.67
States and political subdivisions 4,171 99 9.50 4,599 106 9.21
Other 7,354 110 5.99 7,760 111 5.70
---------- ------- ---------- -------
Total securities 1,472,564 23,561 6.39 1,525,353 24,505 6.43
Federal funds sold 231,214 3,274 5.54 200,752 2,806 5.53
Loans, net of unearned discount 2,514,945 55,954 8.83 2,458,990 54,603 8.91
---------- ------- ---------- -------
Total Earning Assets and
Average Rate Earned 4,218,723 82,789 7.80 4,185,095 81,914 7.84
Cash and due from banks 488,397 471,513
Allowance for possible loan losses (41,191) (36,256)
Banking premises and equipment 108,565 106,908
Accrued interest and other assets 193,900 195,656
---------- ----------
Total Assets $4,968,394 $4,922,916
========== ==========
LIABILITIES
Demand deposits:
Commercial and individual $ 958,705 $ 927,391
Correspondent banks 219,614 210,002
Public funds 42,673 41,294
---------- ----------
Total demand deposits 1,220,992 1,178,687
Time deposits:
Savings and Interest-on-Checking 728,792 2,229 1.21 746,782 2,321 1.25
Money market deposit accounts 1,016,082 10,256 4.00 961,751 9,755 4.07
Time accounts 1,098,291 13,698 4.95 1,092,292 13,406 4.92
Public funds 216,833 2,564 4.69 261,920 3,016 4.62
---------- ------- ---------- -------
Total time deposits 3,059,998 28,747 3.73 3,062,745 28,498 3.73
---------- ------- ---------- -------
Total Deposits 4,280,990 4,241,432
Federal funds purchased and securities
sold under repurchase agreements 106,069 1,262 4.65 109,140 1,327 4.81
Guaranteed preferred beneficial
interests in Corporation's
subordinated debentures 98,381 2,118 8.54 98,372 2,144 8.74
Other borrowings 24,997 356 5.65 22,657 318 5.64
---------- ------- ---------- -------
Total Interest-Bearing Funds
and Average Rate Paid 3,289,445 32,483 3.92 3,292,914 32,287 3.93
---------- ------- ----- ---------- ------- ----
Accrued interest and other liabilities 59,890 59,876
---------- ----------
Total Liabilities 4,570,327 4,531,477
SHAREHOLDERS' EQUITY 398,067 391,439
---------- ----------
Total Liabilities and
Shareholders' Equity $4,968,394 $4,922,916
========== ==========
Net interest income $50,306 $49,627
======= =======
Net interest spread 3.88% 3.91%
===== =====
Net interest income to total average earning assets 4.74% 4.75%
===== =====
*Taxable-equivalent basis assuming a 35% tax rate.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands - taxable-equivalent basis*)
March 31, 1997 December 31, 1996
---------------------------- ---------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
--------- -------- ------ --------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury $ 255,412 $ 3,326 5.28% $ 268,794 $ 3,629 5.37%
U.S. Government agencies
and corporations 1,226,336 20,365 6.64 1,203,835 20,102 6.68
States and political subdivisions 6,356 154 9.68 5,447 128 9.44
Other 6,459 98 6.08 6,405 97 6.05
---------- ------- ---------- -------
Total securities 1,494,563 23,943 6.42 1,484,481 23,956 6.45
Federal funds sold 201,373 2,402 4.77 186,933 2,338 4.90
Loans, net of unearned discount 2,303,330 50,265 8.85 2,209,951 48,855 8.80
---------- ------- ---------- ------
Total Earning Assets and
Average Rate Earned 3,999,266 76,610 7.74 3,881,365 75,149 7.71
Cash and due from banks 517,232 500,288
Allowance for possible loan losses (37,103) (36,883)
Banking premises and equipment 103,153 102,466
Accrued interest and other assets 173,661 170,443
---------- ----------
Total Assets $4,756,209 $4,617,679
========== ==========
LIABILITIES
Demand deposits:
Commercial and individual $ 863,967 $ 867,955
Correspondent banks 232,669 225,671
Public funds 45,021 47,770
----------- ----------
Total demand deposits 1,141,657 1,141,396
Time deposits:
Savings and Interest-on-Checking 718,760 2,279 1.29 702,749 2,293 1.30
Money market deposit accounts 894,150 8,761 3.97 862,455 8,625 3.98
Time accounts 1,045,539 12,580 4.88 1,034,977 12,692 4.88
Public funds 286,454 3,067 4.34 272,639 2,840 4.14
---------- ------- ---------- -------
Total time deposits 2,944,903 26,687 3.68 2,872,820 26,450 3.66
---------- ------- ---------- -------
Total Deposits 4,086,560 4,014,216
Federal funds purchased and securities
sold under repurchase agreements 135,371 1,398 4.13 141,654 1,587 4.38
Guaranteed preferred beneficial
interests in Corporation's
subordinated debentures 59,299 1,271 8.69
Other borrowings 24,316 320 5.34 19,031 259 5.41
---------- ------- ---------- ------
Total Interest-Bearing Funds
and Average Rate Paid 3,163,889 29,676 3.80 3,033,505 28,296 3.71
---------- ------- ---- ---------- ------- ----
Accrued interest and other
liabilities 64,037 68,461
---------- -----------
Total Liabilities 4,369,583 4,243,362
SHAREHOLDERS' EQUITY 386,626 374,317
---------- ----------
Total Liabilities and
Shareholders' Equity $4,756,209 $4,617,679
========== ==========
Net interest income $46,934 $46,853
======= =======
Net interest spread 3.94% 4.00%
===== =====
Net interest income to total average earning assets 4.73% 4.81%
===== =====
* Taxable-equivalent basis assuming a 35% tax rate.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
Cullen/Frost Bankers, Inc. and Subsidiaries
(dollars in thousands - taxable-equivalent basis*)
September 30, 1996
---------------------------
Interest
Average Income/ Yield/
Balance Expense Cost
---------- ------- -----
<S> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury $ 273,301 $ 3,692 5.37%
U.S. Government agencies
and corporations 1,235,556 20,660 6.69
States and political subdivisions 5,457 129 9.45
Other 6,672 95 5.67
---------- -------
Total securities 1,520,986 24,576 6.46
Federal funds sold 107,189 1,475 5.38
Loans, net of unearned discount 2,142,038 47,423 8.81
---------- -------
Total Earning Assets and
Average Rate Earned 3,770,213 73,474 7.76
Cash and due from banks 486,938
Allowance for possible loan losses (35,541)
Banking premises and equipment 101,290
Accrued interest and other assets 171,417
----------
Total Assets $4,494,317
==========
LIABILITIES
Demand deposits:
Commercial and individual $ 844,418
Correspondent banks 208,050
Public funds 46,949
----------
Total demand deposits 1,099,417
Time deposits:
Savings and Interest-on-Checking 711,562 2,373 1.33
Money market deposit accounts 824,565 8,321 4.01
Time accounts 1,062,842 12,938 4.84
Public funds 207,093 2,330 4.48
---------- -------
Total time deposits 2,806,062 25,962 3.68
---------- -------
Total Deposits 3,905,479
Federal funds purchased and securities
sold under repurchase agreements 127,292 1,517 4.66
Guaranteed preferred beneficial
interests in Corporation's
subordinated debentures
Other borrowings 23,376 307 5.23
---------- -------
Total Interest-Bearing Funds
and Average Rate Paid 2,956,730 27,786 3.73
---------- -------
Accrued interest and other liabilities 80,427
----------
Total Liabilities 4,136,574
SHAREHOLDERS' EQUITY 357,743
----------
Total Liabilities and
Shareholders' Equity $4,494,317
==========
Net interest income $45,688
=======
Net interest spread 4.03%
=====
Net interest income to total average earning assets 4.83%
=====
*Taxable-equivalent basis assuming a 35% tax rate.
</TABLE>
<PAGE>
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement regarding Computation of Earnings per Share
27 Statement regarding Financial Data Schedule (EDGAR Version)
(b) Reports on Form 8-K
None
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cullen/Frost Bankers, Inc.
(Registrant)
Date: November 14, 1997 By:/s/Phillip D. Green
-----------------------
Phillip D. Green
Executive Vice President
and Chief Financial Officer
(Duly Authorized Officer and
Principal Accounting Officer)
<PAGE>
Cullen/Frost Bankers, Inc.
Form 10-Q
Exhibit Index
Exhibit Description
- ------- -----------
11 Statement re: Computation of Earnings per Share
27 Statement re: Financial Data Schedule (EDGAR Version)
Exhibit 11
<TABLE>
<CAPTION>
Cullen/Frost Bankers, Inc.
Computation of Earnings Per Common Share
Primary and Fully Diluted (Unaudited)
(in thousands, except per share amounts)
Nine Months Ended Three Months Ended
September 30 September 30
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
Primary Earnings per Share
- --------------------------
<S> <C> <C> <C> <C>
Net income applicable to common stock $46,840 $40,578 $16,146 $13,985
======= ======= ======= =======
Weighted average shares outstanding 22,414 22,435 22,261 22,451
Addition from assumed exercise of
stock options 651 436 717 467
------- ------- ------- -------
Weighted average number of common
shares outstanding 23,065 22,871 22,978 22,918
======= ======= ======= =======
Primary earnings per common share $ 2.03 $ 1.77 $ .70 $ .61
Nine Months Ended Three Months Ended
September 30 September 30
------------------- -------------------
Fully Diluted Earnings per Share 1997 1996 1997 1996
- -------------------------------- ------- ------- ------- -------
Net income applicable to common stock $46,840 $40,578 $16,146 $13,985
======= ======= ======= =======
Weighted average shares outstanding 22,414 22,435 22,261 22,451
Addition from assumed exercise of
stock options 762 520 750 506
------- ------- ------- -------
Weighted average number of common
shares outstanding 23,176 22,955 23,011 22,957
======= ======= ======= =======
Fully diluted earnings per common share $ 2.02 $ 1.77 $ .70 $ .61
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 724,181
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 154,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,315,466
<INVESTMENTS-CARRYING> 155,451
<INVESTMENTS-MARKET> 160,617
<LOANS> 2,549,191
<ALLOWANCE> 41,716
<TOTAL-ASSETS> 5,157,498
<DEPOSITS> 4,478,376
<SHORT-TERM> 99,749
<LIABILITIES-OTHER> 84,361
<LONG-TERM> 98,390
0
0
<COMMON> 112,673
<OTHER-SE> 283,949
<TOTAL-LIABILITIES-AND-EQUITY> 5,157,498
<INTEREST-LOAN> 160,110
<INTEREST-INVEST> 71,888
<INTEREST-OTHER> 8,482
<INTEREST-TOTAL> 240,480
<INTEREST-DEPOSIT> 83,932
<INTEREST-EXPENSE> 94,446
<INTEREST-INCOME-NET> 146,034
<LOAN-LOSSES> 5,900
<SECURITIES-GAINS> 18
<EXPENSE-OTHER> 148,140
<INCOME-PRETAX> 72,965
<INCOME-PRE-EXTRAORDINARY> 72,965
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,840
<EPS-PRIMARY> 2.03
<EPS-DILUTED> 2.02
<YIELD-ACTUAL> 7.79
<LOANS-NON> 11,726
<LOANS-PAST> 8,038
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,951
<ALLOWANCE-OPEN> 37,626
<CHARGE-OFFS> (6,733)
<RECOVERIES> 2,818
<ALLOWANCE-CLOSE> 41,716
<ALLOWANCE-DOMESTIC> 35,236
<ALLOWANCE-FOREIGN> 155
<ALLOWANCE-UNALLOCATED> 6,325
</TABLE>
