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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[X] 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
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(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 $1,251,133,604 based on the closing price of such stock as of
March 26, 1998.
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 26, 1998
--------------------------------- ------------------
COMMON STOCK, $5 PAR VALUE 22,259,489
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for Annual Meeting of Shareholders to be held May 27,
1998 (Part III)
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TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS................... 3
ITEM 2. PROPERTIES................. 9
ITEM 3. LEGAL PROCEEDINGS.......... 10
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS... 10 *
PART II
ITEM 5. MARKET FOR REGISTRANT'S
COMMON STOCK AND RELATED
STOCKHOLDER MATTERS........ 10
ITEM 6. SELECTED FINANCIAL DATA.... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS................. 13
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA......... 30
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE... 60 *
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT. 60
ITEM 11. EXECUTIVE COMPENSATION..... 60
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............. 60
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS....... 60
PART IV
ITEM 14. EXHIBITS, FINANCIAL
STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K........ 61
* Not Applicable
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PART I
ITEM 1. BUSINESS
GENERAL
Cullen/Frost Bankers, Inc. ("Cullen/Frost" or "Company"), a Texas
business corporation incorporated in 1977 and headquartered in San Antonio,
Texas, is a bank holding company within the meaning of the Bank Holding Company
Act of 1956 ("the BHC Act") and as such is registered with the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). The New
Galveston Company, incorporated under the laws of Delaware, is a wholly owned
second tier bank holding company subsidiary which owns all banking and
non-banking subsidiaries with the exception of Cullen/Frost Capital Trust, a
Delaware statutory business trust and wholly-owned subsidiary of the
Corporation. At December 31, 1997, Cullen/Frost's principal assets consisted of
all of the capital stock of two national banks. Including the acquisition of
Harrisburg Bancshares, Inc., completed in the first quarter of 1998,
Cullen/Frost had 60 financial centers across Texas with 19 locations in the San
Antonio area, 20 in the Houston/Galveston area, five in Austin, ten in the
Corpus Christi area, three in San Marcos, two in McAllen and one in New
Braunfels. At December 31, 1997, Cullen/Frost had consolidated total assets of
$5,230,588,000 and total deposits of $4,483,911,000. Based on information from
the Federal Reserve Board, at September 30, 1997, Cullen/Frost was the largest
of the 93 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.
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, 1997, Frost Bank, which accounted for approximately 97 percent of
consolidated assets and 98 percent of loans and deposits of Cullen/Frost, was
the largest bank headquartered in San Antonio and South Texas. The Corporation's
other subsidiary bank is United States National Bank of Galveston which had $147
million in assets at December 31, 1997.
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, home equity 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
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(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 26 of this document.
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, 1997, trust assets with a market value of
approximately $9.1 billion were being administered by the subsidiary banks.
These assets were comprised of discretionary assets of $5.2 billion and
non-discretionary assets of $3.9 billion.
CORRESPONDENT BANKING
Frost Bank acts as correspondent for approximately 320 financial
institutions, primarily banks in Texas. These banks maintain deposits with Frost
Bank, which offers to the correspondents a full range of services including
check clearing, transfer of funds, loan participations, and securities custody
and clearance.
DISCOUNT BROKERAGE
Frost Brokerage Services was formed in March 1986 to provide discount
brokerage services and perform other transactions or operations related to the
sale and purchase of securities of all types. Frost Brokerage Services is a
subsidiary of Frost Bank.
SERVICES OFFERED BY THE CULLEN/FROST NON-BANKING SUBSIDIARIES
Main Plaza Corporation ("Main Plaza") is a wholly-owned non-banking
subsidiary. Main Plaza occasionally makes loans to qualified borrowers. Loans
are funded with borrowings against Cullen/Frost's current cash or borrowings
against credit lines.
Daltex General Agency, Inc. ("Daltex"), a wholly-owned non-banking
subsidiary, is a managing general insurance agency. Daltex provides vendor's
single interest insurance.
COMPETITION
The subsidiary banks encounter intense competition in their commercial
banking businesses, primarily from other banks located in their respective
service areas. The subsidiary banks also compete with insurance, finance and
mortgage companies, savings and loan institutions, credit unions, money market
funds and other financial institutions. In the case of some larger customers,
competition exists with institutions in other major metropolitan areas in Texas
and in the remainder of the United States, some of which are larger than the
Cullen/Frost subsidiary banks in terms of capital, resources and personnel.
SUPERVISION AND REGULATION
CULLEN/FROST
Cullen/Frost is a legal entity separate and distinct from its bank
subsidiaries and is a registered bank holding company under the BHC Act. The BHC
Act generally prohibits Cullen/Frost from engaging in any business activity
other than banking, managing and controlling banks, furnishing services to a
bank which it owns and controls or engaging in non-banking activities closely
related to banking.
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.
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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, United States National Bank of Galveston ("U.S. National Bank") is
registered with the Comptroller of the Currency as transfer agent and is subject
to certain reporting requirements of and regulatory control by the Comptroller
of the Currency. The bond department of Frost Bank is subject to regulation
under the Texas Securities Act.
The Comptroller of the Currency with respect to Cullen/Frost's bank
subsidiaries has authority to prohibit a bank from engaging in what, in such
agency's opinion, constitutes an unsafe or unsound practice in conducting its
business. It is possible, depending upon the financial condition of the bank in
question and other factors, that such agency could claim that the payment of
dividends or other payments might, under some circumstances, be such an unsafe
or unsound practice.
The principal source of Cullen/Frost's cash revenues is dividends from its
bank subsidiaries, and there are certain limitations on the payment of dividends
to Cullen/Frost by such bank subsidiaries. The prior approval of the Comptroller
of the Currency is required if the total of all dividends declared by a national
bank in any calendar year would exceed the bank's net profits, as defined, for
that year combined with its retained net profits for the preceding two calendar
years less any required transfers to surplus. In addition, a national bank may
not pay dividends in an amount in excess of its undivided profits less certain
bad debts. Although not necessarily indicative of amounts available to be paid
in future periods, Cullen/Frost's subsidiary banks had approximately $31,062,000
available for the payment of dividends, without prior regulatory approval, at
December 31, 1997.
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 eight
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
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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 losses.
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 27 and Note L "Capital" on page 43.
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 to depository institutions that do not
meet minimum capital requirements. FDICIA established five capital tiers: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized". Under the final rules
adopted by the Federal banking regulators relating to these capital tiers, an
institution is deemed to be: well capitalized if the institution has a total
risk-based capital ratio of 10.0 percent or greater, a Tier 1 risk-based capital
ratio of 6.0 percent or greater, and a leverage ratio of 5.0 percent or greater,
and the institution is not subject to an order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a specific
capital level for any capital measure; adequately capitalized if the institution
has a total risk-based capital ratio of 8.0 percent or greater, a Tier 1
risk-based capital ratio of 4.0 percent or greater, and a leverage ratio of 4.0
percent or greater (or a leverage ratio of 3.0 percent for bank holding
companies which meet certain specified criteria, including having the highest
regulatory rating); undercapitalized if the institution has a total risk-based
capital ratio that is less than 8.0 percent, a Tier 1 risk-based capital ratio
less than 4.0 percent or a leverage ratio less than 4.0 percent (or a leverage
ratio less than 3.0 percent if the institution is rated composite 1 in its most
recent report of examination, subject to appropriate Federal banking agency
guidelines); significantly undercapitalized if the institution has a total
risk-based capital ratio less than 6.0 percent, a Tier 1 risk-based capital
ratio less than 3.0 percent, or a leverage ratio less than 3.0 percent; and
critically undercapitalized if the institution has a ratio of tangible equity to
total assets equal to or less than 2.0 percent.
At December 31, 1997, the two subsidiaries of Cullen/Frost that are insured
depository institutions -- Frost Bank and U.S. National Bank -- were considered
"well capitalized".
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
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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.
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. See page 18 for a discussion of FDIC
premiums paid by Cullen/Frost.
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, 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
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 bank mergers in which the continuing bank is a national bank.
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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 conducts
due diligence activities in connection with possible acquisitions. As a result,
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, as of
June 1, 1997, IBBEA authorized 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 provided 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.
EMPLOYEES
At December 31, 1997, Cullen/Frost employed 2,546 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, recent business experience and positions or offices held
by each of the executive officers during 1997 of Cullen/Frost are as follows:
<TABLE>
<CAPTION>
AGE AS OF
NAME AND POSITIONS OR OFFICES 12/31/97 RECENT BUSINESS EXPERIENCE
- ------------------------------------- --------- ------------------------------------------------------
<S> <C> <C>
T.C. Frost 70 Officer and Director of Frost Bank since 1950.
Senior Chairman of the Board Chairman of the Board of Cullen/Frost from 1973 to
and Director October 1995. Member of the Executive Committee of
Cullen/Frost 1973 to present. Chief Executive Officer
of Cullen/Frost from July 1977 to October 1997. Senior
Chairman of Cullen/Frost from October 1995 to present.
Richard W. Evans, Jr. 51 Officer of Frost Bank since 1973. Executive Vice
Chairman of the Board, President of Frost Bank from 1978 to April 1985.
Chief Executive Officer President of Frost Bank from April 1985 to August
and Director 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 October 1997. Chairman of the
Board and Chief Executive Officer of Cullen/Frost from
October 1997 to present.
Patrick B. Frost 37 Officer of Frost Bank since 1985. President of Frost
President of Frost Bank Bank from August 1993 to present. Director of
and Director Cullen/Frost from May 1997 to present. Member of the
Executive Committee of Cullen/Frost from July 1997 to
present.
Phillip D. Green 43 Officer of Frost Bank since July 1980. Vice President
Executive Vice President and Controller of Frost Bank from January 1981 to
and Chief Financial Officer 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.
</TABLE>
Diane Jack, age 49, has been an officer of Frost Bank since 1984 and 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.
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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 of
litigation which have arisen in the normal 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
COMMON STOCK MARKET PRICES AND DIVIDENDS
The table below sets forth for each quarter the high and low sales prices
for Cullen/Frost's common stock and the dividends per share paid for each
quarter. The Company's common stock began trading on The New York Stock Exchange
("NYSE") on August 14, 1997 under the symbol: CFR. Therefore high and low
sales prices for the period August 14, 1997 through December 31, 1997 are as
reported by the NYSE. For the period 1996 through August 13, 1997 prices are as
reported through the NASDAQ National Market System. Prices quoted on the NASDAQ
National Market System reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and represent actual transactions.
1997 1996
-------------------- --------------------
MARKET PRICE (per share) HIGH LOW High Low
- ----------------------------------------------------------------------------
First Quarter................... $ 38.63 $ 32.63 $ 26.38 $ 23.38
Second Quarter.................. 43.25 33.75 28.38 23.75
Third Quarter................... 48.00 40.38 30.88 25.50
Fourth Quarter.................. 62.75 47.44 36.50 29.25
The number of record holders of common stock at February 20, 1998 was 2,355.
CASH DIVIDENDS (per share) 1997 1996
- -----------------------------------------------------------
First Quarter........................ $ .21 $ .18
Second Quarter....................... .25 .21
Third Quarter........................ .25 .21
Fourth Quarter....................... .25 .21
--------------------
Total........................... $ .96 $ .81
--------------------
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 on page 27 in Item 7 for
further discussion and Note K "Dividends" on page 43.
10
<PAGE>
ITEM_6.__SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
INTEREST INCOME:
<S> <C> <C> <C> <C> <C> <C>
Loans, including fees............ $ 217,432 $ 183,724 $ 150,497 $ 106,252 $ 90,756 $ 84,074
Securities....................... 95,444 99,562 98,862 95,109 91,145 99,188
Time deposits.................... 1 2 2 4 8
Federal funds sold and securities
purchased
under resale agreements........ 11,839 7,226 6,732 4,146 7,714 6,711
----------------------------------------------------------------
TOTAL INTEREST INCOME....... 324,715 290,513 256,093 205,509 189,619 189,981
INTEREST EXPENSE:
Deposits......................... 113,114 103,475 89,809 61,996 58,079 68,807
Federal funds purchased and
securities sold
under repurchase agreements.... 5,411 6,937 13,296 7,166 3,304 3,139
Guaranteed preferred beneficial
interests in the
Corporation's subordinated
debentures..................... 7,652
Long-term notes payable.......... 380 1,378
Other borrowings................. 1,294 1,019 733 30
----------------------------------------------------------------
TOTAL INTEREST EXPENSE...... 127,471 111,431 103,838 69,162 61,793 73,324
----------------------------------------------------------------
NET INTEREST INCOME......... 197,244 179,082 152,255 136,347 127,826 116,657
Provision (credit) for possible loan
losses............................. 7,900 7,300 6,272 (6,085) 5,498
----------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION
(credit) for Possible Loan
Losses.................... 189,344 171,782 145,983 136,347 133,911 111,159
NON-INTEREST INCOME:
Trust fees....................... 39,971 34,031 31,762 29,529 26,278 21,861
Service charges on deposit
accounts....................... 43,727 38,294 30,382 28,182 27,303 23,663
Other service charges, collection
and
exchange charges, commissions
and fees....................... 10,148 8,764 11,055 9,366 7,972 6,183
Net gain (loss) on securities
transactions................... 494 (980) (1,396) (4,038) 1,433 (232)
Other............................ 14,992 14,426 15,940 13,776 13,243 10,338
----------------------------------------------------------------
TOTAL NON-INTEREST INCOME... 109,332 94,535 87,743 76,815 76,229 61,813
NON-INTEREST EXPENSE:
Salaries and wages............... 81,816 71,788 58,177 52,986 53,654 46,184
Pension and other employee
benefits....................... 16,849 15,351 10,905 9,910 12,052 9,746
Net occupancy of banking
premises....................... 19,496 18,782 17,992 15,777 20,749 16,963
Furniture and equipment.......... 12,463 11,789 11,259 10,937 10,155 8,295
Provision for real estate
losses......................... 43 610 1,445 12,963
Restructuring costs.............. 400 830 10,285
Intangible amortization.......... 11,920 11,306 8,124 7,627 6,877 700
Other............................ 57,369 51,564 54,982 57,495 56,861 52,299
----------------------------------------------------------------
TOTAL NON-INTEREST
EXPENSE................... 199,956 180,580 162,449 155,562 172,078 147,150
----------------------------------------------------------------
INCOME BEFORE INCOME TAXES
(CREDITS), EXTRAORDINARY
CREDIT AND CUMULATIVE
EFFECT OF ACCOUNTING
CHANGE.................... 98,720 85,737 71,277 57,600 38,062 25,822
Income taxes (credits)............... 35,235 30,759 24,998 20,177 (735) 8,197
----------------------------------------------------------------
Income before extraordinary credit
and
cumulative effect of accounting
change............................. 63,485 54,978 46,279 37,423 38,797 17,625
Extraordinary credit-income tax
benefit............................ 6,497
Cumulative effect of change in
accounting for income taxes........ 8,439
----------------------------------------------------------------
NET INCOME.................. $ 63,485 $ 54,978 $ 46,279 $ 37,423 $ 47,236 $ 24,122
----------------------------------------------------------------
Net income per common share:
Basic............................ $ 2.84 $ 2.45 $ 2.07 $ 1.69 $ 2.16 $ 1.34
Diluted.......................... 2.75 2.40 2.04 1.67 2.12 1.13
Return on Average Assets............. 1.28% 1.22% 1.17% 1.02% 1.34% .79%
Return on Average Equity............. 16.06 15.32 14.32 13.04 19.00 12.56
</TABLE>
11
<PAGE>
SELECTED FINANCIAL DATA
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets..................... $ 5,230,588 $ 4,888,384 $ 4,200,211 $ 3,793,720 $ 3,639,047 $ 3,150,871
Guaranteed preferred beneficial
interest in the Corporation's
junior subordinated deferrable
interest debentures, net....... 98,403
Long-term notes payable.......... 13,400
Shareholders' equity............. 408,405 378,943 341,464 295,437 273,533 206,144
Average shareholders' equity to
average total assets........... 7.99% 7.98% 8.20% 7.85% 7.08% 6.29%
Tier 1 capital ratio............. 13.89 11.58 13.07 14.44 14.23 15.66
Total capital ratio.............. 15.14 12.83 14.32 15.69 15.49 17.52
PER COMMON SHARE DATA
Net income-basic................. $ 2.84 $ 2.45 $ 2.07 $ 1.69 $ 2.16* $ 1.34*
Net income-diluted............... 2.75 2.40 2.04 1.67 2.12* 1.13*
Cash dividends paid.............. .96 .81 .57 .34 .08
Shareholders' equity............. 18.34 16.86 15.24 13.28 12.43 9.90
LOAN PERFORMANCE INDICATORS
Non-performing assets............ $ 17,213 $ 12,371 $ 16,307 $ 19,975 $ 31,110 $ 51,303
Non-performing assets to:
Total loans plus foreclosed
assets.................... .65% .55% .90% 1.34% 2.47% 4.94%
Total assets................ .33 .25 .39 .53 .85 1.63
Allowance for possible loan
losses......................... $ 41,846 $ 37,626 $ 32,268 $ 26,002 $ 26,298 $ 31,897
Allowance for possible loan
losses to period-end loans..... 1.58% 1.67% 1.78% 1.75% 2.09% 3.10%
Net loan charge-offs
(recoveries)................... $ 5,785 $ 2,569 $ 436 $ (2,127) $ (486) $ 15,988
Net loan charge-offs (recoveries)
to average loans............... .23% .12% .03% (.16)% (.04)% 1.53%
COMMON STOCK DATA
Common shares outstanding at
period end..................... 22,265,270 22,482,113 22,398,900 22,246,124 22,018,396 20,824,368
Weighted average common shares... 22,368,744 22,443,915 22,308,718 22,118,794 22,843,770 18,500,832
Dilutive effect of stock
options........................ 696,508 461,827 366,930 327,028 457,806 3,447,828
Dividends as a percentage of net
income......................... 33.81% 32.87% 27.94% 20.12% 3.54%
NON-FINANCIAL DATA
Number of employees.............. 2,546 2,306 2,019 1,862 1,877 1,754
Shareholders of record........... 2,358 2,336 2,463 2,553 2,644 2,824
</TABLE>
*1993 basic and diluted earnings per share before cumulative effect of an
accounting change was $1.78 and $1.74, respectively.
1992 basic and diluted earnings per share before extraordinary credit was $.95
and $.80, respectively.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL REVIEW
Discussed below are the operating results for Cullen/Frost Bankers, Inc.
and Subsidiaries ("Cullen/Frost" or the "Corporation") for the years 1995
through 1997. 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.
ACQUISITIONS
On March 7, 1997, the Corporation paid approximately $32.2 million to
acquire Corpus Christi Bancshares, Inc., including its subsidiary Citizens State
Bank, based in Corpus Christi, Texas. Total intangibles associated with the
acquisition were approximately $20.9 million. The Corporation acquired loans of
approximately $108 million and deposits of approximately $184 million. This
acquisition did not 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 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 $16.0 million. These acquisitions did not
have a material impact on the Corporation's 1996 net income.
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.
These acquisitions did not have a material impact on the Corporation's 1995 net
income.
The acquisitions listed above were all accounted for as purchase
transactions and as such their results of operations are included from the date
of acquisition.
13
<PAGE>
RESULTS OF OPERATIONS
For the year ended December 31, 1997, the Corporation reported net income
of $63.5 million or $2.75 per diluted common share, an all-time high in the
129-year history of Cullen/Frost. Net income for 1996 was $55.0 million or $2.40
per diluted common share, compared with $46.3 million or $2.04 per diluted
common share for 1995. The Corporation's return on average assets for 1997 was
1.28 percent compared with 1.22 percent in 1996 and 1.17 percent in 1995, while
return on average equity was 16.06 percent in 1997 compared with 15.32 percent
in 1996 and 14.32 percent in 1995.
<TABLE>
<CAPTION>
1997 Change 1996 Change
EARNINGS SUMMARY 1997 From 1996 1996 From 1995 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Taxable-equivalent net interest
income............................. $ 198,367 $18,288 $ 180,079 $ 26,943 $ 153,136
Taxable-equivalent adjustment........ 1,123 126 997 116 881
---------------------------------------------------------------------
Net interest income.................. 197,244 18,162 179,082 26,827 152,255
Provision for possible loan losses... 7,900 600 7,300 1,028 6,272
Non-interest income:
Net gain (loss) on securities
transactions.................. 494 1,474 (980) 416 (1,396)
Other........................... 108,838 13,323 95,515 6,376 89,139
---------------------------------------------------------------------
Total non-interest
income.................. 109,332 14,797 94,535 6,792 87,743
Non-interest expense:
Intangible amortization......... 11,920 614 11,306 3,182 8,124
Other operating expenses........ 188,036 18,762 169,274 14,949 154,325
---------------------------------------------------------------------
Total non-interest
expense................. 199,956 19,376 180,580 18,131 162,449
---------------------------------------------------------------------
Income before income taxes........... 98,720 12,983 85,737 14,460 71,277
Income taxes......................... 35,235 4,476 30,759 5,761 24,998
---------------------------------------------------------------------
Net income........................... $ 63,485 $ 8,507 $ 54,978 $ 8,699 $ 46,279
---------------------------------------------------------------------
Per common share:
Net income-basic................ $ 2.84 $ .39 $ 2.45 $ .38 $ 2.07
Net income-diluted.............. 2.75 .35 2.40 .36 2.04
Return on Average Assets............. 1.28% .06% 1.22% .05% 1.17%
Return on Average Equity............. 16.06 .74 15.32 1.00 14.32
</TABLE>
NET INTEREST INCOME
Net interest income for 1997 was $197.2 million, an increase from $179.1
million recorded in 1996 and the $152.3 million recorded in 1995. The primary
reason for the yearly increase has been the consistent growth in loans. See
"Consolidated Average Balance Sheets" on pages 56 and 57 and "Rate Volume
Analysis" on page 58. The interest margin, was 4.74 percent for the year ended
December 31, 1997, compared to 4.76 percent and 4.56 percent for the years 1996
and 1995, respectively. The slight decrease in the net interest margin from a
year ago is reflective of higher deposit costs and interest expense related to
the $100 million Trust Preferred Capital Securities issued in early 1997, See
Note I "Borrowed Funds" on Page 41. The net interest margin increased in 1996
from 1995 due to higher loan volumes and lower deposit costs. Net interest
spread for 1997 decreased 7 basis points to 3.91 percent. This decrease is
largely the result of the $100 million Trust Preferred Capital Securities. Net
interest spread was 3.98 percent and 3.80 percent for 1996 and 1995,
respectively. The increase in net interest spread for 1996 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.
14
<PAGE>
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.
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------------------
Immediately Non-Rate
Rate Sensitive Rate Sensitive Within Sensitive
CUMULATIVE INTEREST RATE SENSITIVITY --------------- ---------------------------------- ----------
(PERIOD-END BALANCE) 0-30 Days 90 Days One Year Five Years >Five Years Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans............................... $1,462,302 $1,585,971 $1,881,332 $2,324,959 $318,563 $ 2,643,522
Securities.......................... 212,388 362,244 1,008,874 1,402,880 88,638 1,491,518
Federal funds sold and other short-
term investments.................. 190,000 190,000 190,000 190,000 190,000
-------------------------------------------------------------------------------
Total earning assets........... $1,864,690 $2,138,215 $3,080,206 $3,917,839 $407,201 $ 4,325,040
-------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Savings and Interest-on-Checking.... $ 766,416 $ 766,416 $ 766,416 $ 766,416 $ 766,416
Money market deposit accounts....... 996,110 996,110 996,110 996,110 996,110
Certificates of deposit and other
time accounts..................... 368,895 697,062 1,206,709 1,289,155 $ 93,407 1,382,562
Federal funds purchased and other
borrowings........................ 132,112 132,112 132,112 132,112 98,403 230,515
-------------------------------------------------------------------------------
Total interest-bearing
liabilities.................. $2,263,533 $2,591,700 $3,101,347 $3,183,793 $191,810 $ 3,375,603
-------------------------------------------------------------------------------
Interest sensitivity gap................ $(398,843) $(453,485) $ (21,141) $ 734,046 $215,391 $ 949,437
-------------------------------------------------------------------------------
Ratio of earning assets to
interest-bearing liabilities.......... .82 .83 .99 1.23
----------------------------------------------------
</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 $2,318,000. 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/floors further discussed on
page 25.
The Corporation utilizes an interest rate sensitivity model as the primary
quantitative tool in measuring the amount of interest rate risk that is present
at the end of each month. The model quantifies the effects of various interest
rate scenarios on the projected net interest income and net income over the
ensuing 12 month period. The model was used to measure the impact on net
interest income relative to a base case scenario, of rates increasing or
decreasing ratably 200 basis points over the next 12 months. These simulations
incorporate assumptions regarding balance sheet growth and mix, pricing and the
repricing and maturity characteristics of the existing and projected balance
sheet. Other interest rate-related risks such as prepayment, basis and option
risk are also considered. The resulting model simulations show that a 200 basis
point increase in rates will result in a positive variance in net interest
income of 1.3 percent relative to the base case over the next 12 months; while a
decrease of 200 basis points will result in a negative variance in net interest
income of 1.7 percent.
15
<PAGE>
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 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 Federal funds purchased and securities sold under
repurchase agreements from upstream banks.
NON-INTEREST INCOME
Non-interest income of $109,332,000 was reported for 1997, compared with
$94,535,000 for 1996 and $87,743,000 for 1995. Excluding securities
transactions, total non-interest income increased 13.9 percent from 1996. The
non-interest income growth in 1997 was favorably impacted by the acquisition of
Corpus Christi Bancshares, Inc., in the first quarter of 1997. The non-interest
income growth in 1996 was favorably impacted by the acquisitions of S.B.T.
Bancshares, Inc. and Park National Bank, in the first quarter of 1996.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- -------------------
PERCENT Percent Percent
NON-INTEREST INCOME AMOUNT CHANGE Amount Change Amount Change
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trust fees........................... $ 39,971 + 17.5% $34,031 + 7.1% $31,762 + 7.6%
Service charges on deposit
accounts........................... 43,727 + 14.2 38,294 +26.0 30,382 + 7.8
Other service charges, collection and
exchange charges, commissions and
fees............................... 10,148 + 15.8 8,764 - 20.7 11,055 +18.0
Net gain (loss) on securities
transactions....................... 494 +150.4 (980) +29.8 (1,396) +65.4
Other................................ 14,992 + 3.9 14,426 - 9.5 15,940 +15.7
-------- ------- -------
Total........................... $109,332 + 15.7 $94,535 + 7.7 $87,743 +14.2
-------- ------- -------
</TABLE>
Trust income was up $5.9 million or 17.5 percent during 1997 as the market
value of trust assets increased to $9.1 billion from $8.1 billion last year
primarily due to the increase in the number of accounts held and trust asset
growth resulting from the continued improvement in the stock and bond market.
The December 31, 1997 trust assets were comprised of discretionary assets of
$5.2 billion and non-discretionary assets of $3.9 billion compared to $4.2
billion and $3.9 billion last year, respectively. The $2.3 million or 7.1
percent increase in trust income from 1995 to 1996 is attributable to the
increase in the number of accounts held and trust asset growth resulting from
improvement in the stock and bond market. This increase was offset by lower
corporate trust income resulting from the sale of the Corporation's corporate
trust business in 1995.
Deposit service charges increased $5.4 million or 14.2 percent from 1996.
The increase is due mainly to higher service charges related to commercial
deposits, volumes processed for correspondent banks and overdraft charges.
Deposit service charges increased $7.9 million or 26.0 percent from 1995. The
increase was due mainly to higher volumes, primarily processing for
correspondent banks, and service charges on corporate and retail deposits. Other
service charges and fees increased $1.4 million or 15.8 percent when compared to
1996. This increase was primarily due to higher fees from accounts receivable
factoring, asset based lending and mutual fund fees offset by lower bankcard
discounts resulting from the Corporation's outsourcing of its bankcard
processing operations which was completed in May 1996. The outsourcing of
bankcard processing also accounted for the decrease of 20.7 percent in other
service charges from 1995 to 1996.
16
<PAGE>
During the fourth quarter of 1997, the Corporation sold a portion of its
available for sale investment portfolio resulting in a gain of $476,000. This
compares to a $980,000 and $1.4 million loss in 1996 and 1995, respectively,
which resulted primarily from the Corporation restructuring a portion of its
available for sale investment portfolio by replacing lower-yielding securities
with higher-yielding securities during the second quarter of 1996 and the fourth
quarter of 1995.
Other non-interest income increased $566,000 or 3.9 percent to $14,992,000
in 1997 compared to a 9.5 percent decrease in 1996. The increase in 1997 is
primarily due to gains recorded on the sale of student loans, mineral interest
income and Visa check card fees. These increases were offset by higher gains on
the disposition of certain loans and foreclosed assets recorded by the
Corporation in 1996. The decrease in 1996 from 1995 was primarily due to the
gain recognized on the sale of the Corporation's corporate trust business in
1995.
NON-INTEREST EXPENSE
Non-interest expense was $199,956,000 for 1997 compared with $180,580,000
for 1996 and $162,449,000 for 1995. The acquisition of Corpus Christi Bancshares
in the first quarter of 1997 impacted the growth in expenses and contributed to
the variances from 1996 discussed below. The acquisition of S.B.T. Bancshares,
Inc. and Park National Bank in the first quarter of 1996 impacted the growth in
expenses and contributed to the variances from 1995 discussed below.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
PERCENT Percent Percent
NON-INTEREST EXPENSE AMOUNT CHANGE Amount Change Amount Change
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and wages................... $ 81,816 +14.0% $ 71,788 +23.4% $ 58,177 + 9.8%
Pension and other employee benefits.. 16,849 + 9.8 15,351 +40.8 10,905 +10.0
Net occupancy of banking premises.... 19,496 + 3.8 18,782 + 4.4 17,992 +14.0
Furniture and equipment.............. 12,463 + 5.7 11,789 + 4.7 11,259 + 2.9
Intangible amortization.............. 11,920 + 5.4 11,306 +39.2 8,124 + 6.5
Other................................ 57,412 +11.3 51,564 - 7.9 55,992 - 4.0
-------- -------- --------
Total........................... $199,956 +10.7 $180,580 +11.2 $162,449 + 4.4
-------- -------- --------
</TABLE>
Salaries and wages increased by $10.0 million or 14.0 percent during 1997
primarily because of the impact of the acquisition and normal merit increases.
Salaries and wages increased by $13.6 million or 23.4 percent during 1996
primarily because of the acquisitions. Pension and other employee benefits
increased by $1.5 million or 9.8 percent during 1997 primarily due to the impact
of the 1997 acquisition on payroll taxes and medical insurance expense offset by
lower contributions to fund the employer match on the employee related stock
plans due to the use of forfeited shares. The 40.8 percent increase in pension
and other employee benefits from 1995 to 1996 was primarily due to higher
retirement plan expense, payroll taxes, and medical insurance expense related to
the 1996 acquisitions and the impact of an early retirement charge.
Net occupancy of banking premises increased $714,000 or 3.8 percent during
1997 primarily due to higher building maintenance costs, property taxes and
operating expenses, partially offset by higher tenant income. The 4.4 percent
increase in 1996 compared to 1995 was primarily due to higher lease, building
maintenance, and property tax expense related to the 1996 acquisitions.
Furniture and equipment costs increased $674,000 or 5.7 percent in 1997
primarily due to higher equipment rental and software related expenses. The
$530,000 increase in 1996 is mostly due to higher depreciation expense
associated with the acquisitions. Intangible amortization increased by $614,000
or 5.4 percent and by $3.2 million or 39.2 percent in 1997 and 1996,
respectively, due to the acquisitions.
Other non-interest expense increased $5.8 million or 11.3 percent during
1997 primarily due to expenses related to the Year 2000 compliance program, see
"Year 2000" on page 18, and higher operating
17
<PAGE>
expenses, such as, sales promotion, guard services, supplies, travel and
telephone, which were impacted by the acquisitions. Other non-interest expense
was down 7.9 percent in 1996 mostly due to lower FDIC insurance, franchise
taxes, and federal reserve service charges. The Corporation paid $510,000 in
FDIC insurance premiums in 1997 primarily relating to the premium imposed on all
banks to service the Financing Corporation (FICO) bonds compared to a minimal
amount in 1996 and $3.6 million in 1995. For 1996, the FDIC Board reduced the
insurance premiums to zero for banks in the lowest risk category. However,
legislation enacted in 1996 provided for assessments on banks (based on deposit
levels) to pay interest on 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 will be approximately 1.3 cents
for each $100 of qualified deposits. 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.
The Corporation's efficiency ratio of 65.1 percent for 1997 improved from
65.5 percent for 1996 and 66.8 percent for 1995. Excluding intangible
amortization, the efficiency ratio was 62.2 percent for 1997, an improvement
from the 62.6 percent for 1996 and 64.5 percent for 1995. The efficiency ratio
measures what percentage of bank revenue is absorbed by non-interest expense.
YEAR 2000
The Corporation's Year 2000 compliance program includes modifying or
replacing appropriate hardware and software utilized by the Corporation.
Currently, the Corporation estimates that the dollar amount to be spent on
incremental outside costs to remediate its Year 2000 issues will be
approximately $3 million over a three year period beginning in 1997, funded out
of its earnings. These costs are being expensed as incurred and were
approximately $900,000 for the year 1997. The cost of compliance and expected
completion dates are based upon management's best estimates which were derived
utilizing assumptions of future events including the continued availability of
certain resources, third party vendor remediation plans and other factors.
Management expects all mission critical systems to be installed and certified by
November 1998 and believes that its program is producing the appropriate level
of preparedness.
Regardless of the Year 2000 compliance of the Corporation's systems, there
is no complete assurance that the Corporation will not be adversely affected to
the extent other entities not affiliated with the Corporation are unsuccessful
in properly addressing this issue. In an effort to minimize this possibility,
active communication has been on-going between the Corporation and its external
service providers and intermediaries. In addition, a risk reduction program was
initiated in 1997 that addresses potential Year 2000 exposure in the loan
portfolio. Public awareness sessions have been hosted by the Corporation for
customers and suppliers in our marketplace during 1997, and such communication
is planned to continue throughout 1998.
INCOME TAXES
The Corporation recognized income tax expense of $35,235,000 in 1997,
compared to $30,759,000 in 1996, and $24,998,000 in 1995. The effective tax rate
in 1997 was 35.69 percent compared to 35.88 percent in 1996 and 35.07 percent in
1995. For a detailed analysis of the Corporation's income taxes see Note O
"Income Taxes" on page 49.
18
<PAGE>
CASH EARNINGS
Historically, the Corporation's acquisitions have been accounted for using
the purchase method of accounting which results 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 and acquisitions. The following table
reconciles reported earnings to net income excluding intangible amortization
("cash" earnings) for the three year period ending in 1997:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------- -------------------------------------- ---------
REPORTED INTANGIBLE "CASH" Reported Intangible "Cash" Reported
EARNING AMORTIZATION EARNINGS Earnings Amortization Earnings Earnings
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes........... $98,720 $ 11,920 $110,640 $85,737 $ 11,306 $97,043 $71,277
Income taxes......................... 35,235 3,144 38,379 30,759 3,267 34,026 24,998
---------------------------------------------------------------------------------------------
Net income........................... $63,485 $ 8,776 $ 72,261 $54,978 $ 8,039 $63,017 $46,279
---------------------------------------------------------------------------------------------
Net income per diluted common
share............................... $ 2.75 $ .38 $ 3.13 $ 2.40 $ .35 $ 2.75 $ 2.04
Return on assets..................... 1.28% 1.46 %* 1.22% 1.40%* 1.17%
Return on equity..................... 16.06 18.28 ** 15.32 17.56** 14.32
</TABLE>
Intangible "Cash"
Amortization Earnings
- -------------------------------------
Income before income taxes........... $8,124 $79,401
Income taxes......................... 2,495 27,493
Net income........................... $5,629 $51,908
Net income per diluted common
share............................... $ .25 $ 2.29
Return on assets..................... 1.32%*
Return on equity..................... 16.06**
* CALCULATED AS A/B
** CALCULATED AS A/C
- -------------------
1997 1996 1995
--------- --------- ---------
(A) Net income before intangible
amortization (including goodwill
and core deposit intangibles, net
of tax).......................... $ 72,261 $ 63,017 $ 51,908
(B) Total average assets............. 4,945,658 4,496,495 3,944,026
(C) Average shareholders' equity..... 395,304 358,837 323,288
SOURCES AND USES OF FUNDS
Average assets for 1997 of $4,945,658,000 increased by 10.0 percent from
1996 levels and increased 14.0 percent between 1995 and 1996. Funding sources in
1997 reflected an increase in borrowed funds as a result of the issuance of the
$100 million Trust Preferred Capital Securities discussed in Note I "Borrowed
Funds" on page 41, while time deposits and 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.
Percentage of Total Average
Assets
-------------------------------
SOURCES AND USES OF FUNDS 1997 1996 1995
- ----------------------------------------------------------------------
Sources of Funds:
Deposits:
Demand..................... 24.3% 23.9% 21.9%
Time....................... 61.7 62.8 61.6
Federal funds purchased............ 2.4 3.3 6.4
Equity capital..................... 8.0 8.0 8.2
Borrowed funds..................... 2.3 .4 .3
Other liabilities.................. 1.3 1.6 1.6
-------------------------------
Total........................... 100.0% 100.0% 100.0%
-------------------------------
Uses of Funds:
Loans.............................. 50.0% 46.4% 42.7%
Securities......................... 30.2 34.6 39.5
Federal funds sold................. 4.4 3.1 3.0
Non-earning assets................. 15.4 15.9 14.8
-------------------------------
Total...................... 100.0% 100.0% 100.0%
-------------------------------
19
<PAGE>
LOANS
Average loans for 1997 were $2,470,841,000, an increase of 18.4 percent
from 1996. This increase was driven by continued improved economic conditions in
the Texas markets the Corporation serves and the 1997 acquisition.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------
1997
---------------------------
LOAN PORTFOLIO ANALYSIS PERCENTAGE OF
(PERIOD-END BALANCES) AMOUNT TOTAL LOANS 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Construction.................... $ 116,100 4.4% $ 84,146 $ 54,168 $ 44,502 $ 32,297
Land............................ 54,142 2.0 50,208 37,695 36,805 32,317
Permanent Mortgages:
Commercial.................... 254,716 9.6 225,845 198,276 177,223 144,122
Residential................... 461,635 17.5 422,985 339,650 277,786 276,165
Other........................... 247,824 9.4 261,207 208,633 178,460 150,499
------------------------------------------------------------------------------------
Total real estate............... 1,134,417 42.9 1,044,391 838,422 714,776 635,400
Commercial and industrial............ 804,257 30.4 650,114 509,150 375,085 311,436
Consumer............................. 602,415 22.8 491,086 402,183 331,042 268,331
Financial institutions............... 3,767 .2 12,749 10,409 5,578 284
Foreign.............................. 72,911 2.8 45,562 43,847 45,290 31,763
Purchasing or carrying securities.... 788 1,812 1,711 1,884 1,204
Other................................ 27,285 1.0 8,908 13,068 13,386 17,797
Unearned discount.................... (2,318) (.1) (1,154) (1,337) (3,487) (8,456)
------------------------------------------------------------------------------------
Total........................... $ 2,643,522 100.0% $ 2,253,468 $ 1,817,453 $ 1,483,554 $ 1,257,759
------------------------------------------------------------------------------------
Percent change from previous year.... +17.3% +24.0% +22.5% +18.0% +22.1%
</TABLE>
Period-end loans increased to $2,643,522,000 at year-end 1997, up 17.3
percent from the previous year end. Most of the increase in period-end loans is
attributable to commercial and consumer loans which increased $154 million and
$111 million, respectively. Approximately 72 percent of the increase in loans
from a year ago resulted from internally generated growth.
Total real estate loans at December 31, 1997 were $1,134,417,000, up 8.6
percent from year-end 1996. Amortizing permanent mortgages represented 63.1
percent of the total real estate loan portfolio at year end. Residential
mortgages increased $38,650,000 or 9.1 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), which historically has resulted in a lower risk, provides
financial stability and is less susceptible to economic swings. See page 23 for
further discussion for the loan portfolio and "Loan Maturity and Sensitivity"
on page 58.
MEXICAN LOANS
At December 31, 1997, the Corporation's cross-border outstandings to
Mexico, excluding $24,314,000 in loans secured by liquid U.S. assets, totaled
$48,597,000, up from $29,932,000 last year. The increase from a year ago
represents the additional usage of lines of credit extended to Mexican banks to
support trade-related transactions. Of the trade-related credits, approximately
89 percent are related to companies exporting from Mexico. In addition, loans
insured by the Export Import Bank were made to Mexican
20
<PAGE>
businesses to purchase goods of the United States. At December 31, 1997, 1996
and 1995, none of the Mexican-related loans were on non-performing status.
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------------------------------
PERCENTAGE PERCENTAGE Percentage Percentage Percentage
OF TOTAL OF TOTAL of Total of Total of Total
MEXICAN LOANS AMOUNT LOANS ASSETS Amount Loans Assets Amount Loans
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial institutions............... $35,563 1.3% .7% $24,932 1.1% .5% $30,560 1.7%
Commercial and industrial............ 13,034 .5 .2 5,000 .2 .1 26
--------------------------------------------------------------------------------------------
Total.............................. $48,597 1.8% .9% $29,932 1.3% .6% $30,586 1.7%
--------------------------------------------------------------------------------------------
</TABLE>
Percentage
of Total
MEXICAN LOANS Assets
- -------------------------------------
Financial institutions............... .7%
Commercial and industrial............
Total.............................. .7%
The above table excludes $24,314,000, $15,630,000 and $13,261,000 in loans
secured by liquid assets held in the United States in 1997, 1996 and 1995,
respectively.
NON-PERFORMING ASSETS
Non-performing assets were $17,213,000 at December 31, 1997, compared with
$12,371,000 at December 31, 1996 and $16,307,000 at December 31, 1995.
Non-performing assets as a percentage of total loans and foreclosed assets were
.65 percent at December 31, 1997, up from .55 percent one year ago.
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------
NON-PERFORMING ASSETS 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual and restructured loans... $ 12,702 $ 10,129 $ 14,798 $ 16,664 $ 27,677
Foreclosed assets.................... 4,511 2,242 1,509 3,311 3,433
-----------------------------------------------------
Total............................ $ 17,213 $ 12,371 $ 16,307 $ 19,975 $ 31,110
-----------------------------------------------------
As a percentage of total assets...... .33% .25% .39% .53% .85%
As a percentage of total loans plus
foreclosed assets.................. .65 .55 .90 1.34 2.47
After-tax impact of lost interest per
common share....................... $ .04 $ .04 $ .05 $ .07 $ .10
Accruing loans 90 days past due:
Consumer........................... $ 3,378 $ 1,829 $ 1,276 $ 574 $ 765
All other.......................... 3,273 4,082 3,912 3,070 3,827
-----------------------------------------------------
Total............................ $ 6,651 $ 5,911 $ 5,188 $ 3,644 $ 4,592
-----------------------------------------------------
</TABLE>
Interest income that would have been recorded in 1997 on non-performing assets,
had such assets performed in accordance with their original contract terms, was
$1,131,000 on non-accrual and restructured loans and $218,000 on foreclosed
assets. During 1997, the amount of interest income actually recorded on
non-accrual and restructured loans was $564,000.
Loans 90 days past due include $50,000 in foreign loans.
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, 1997, the Corporation had $3,351,000 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 $41,846,000 or 1.58 percent of
period-end loans at December 31, 1997, compared to $37,626,000 or 1.67 percent
of period-end loans at year-end 1996. The allowance for possible loan losses as
a percentage of non-accrual and restructured loans was 329.4 percent at December
31, 1997, compared with 371.5 percent at December 31, 1996.
21
<PAGE>
The Corporation recorded a $7,900,000 provision for possible loan losses
during 1997, compared to $7,300,000 and $6,272,000 recorded during 1996 and
1995, respectively. The provision is reflective of the continued growth in the
loan portfolio.
The Corporation recorded net charge-offs of $5,785,000 for the year ended
December 31, 1997, compared to net charge-offs of $2,569,000 and $436,000 in
1996 and 1995, respectively. The Corporation's gross charge-offs in 1997
consisted primarily of consumer loans which increased $3.5 million to $7.2
million and commercial and industrial which decreased $4.4 million to $1.7
million. The Corporation's charge-offs in 1996 consisted primarily of commercial
and industrial loans which increased to $6.2 million from $654,000 in 1995 and
consumer loans which decreased slightly from 1995. 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 the previous year primarily as a result
of the increased loan volumes.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------
ALLOWANCE FOR POSSIBLE LOAN LOSSES 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding during
year, net of unearned discount..... $ 2,470,841 $ 2,086,816 $ 1,682,541 $ 1,339,656 $ 1,171,825
--------------------------------------------------------------------
Balance of allowance for possible
loan losses at beginning of year... $ 37,626 $ 32,268 $ 26,002 $ 26,298 $ 31,897
Provision (credit) for possible loan
losses............................. 7,900 7,300 6,272 (6,085)
Loan loss reserve of acquired
(disposed) institutions............ 2,105 627 430 (2,423)
Charge-offs:
Real estate........................ (644) (351) (228) (1,349) (3,481)
Commercial and industrial.......... (1,743) (6,176) (654) (316) (1,287)
Consumer........................... (7,163) (3,709) (3,797) (2,357) (3,369)
Other, including foreign........... (40) (9) (2) (63)
--------------------------------------------------------------------
Total charge-offs............... (9,590) (10,245) (4,681) (4,022) (8,200)
--------------------------------------------------------------------
Recoveries:
Real estate........................ 943 2,467 1,258 1,970 2,412
Commercial and industrial.......... 896 3,665 1,722 2,434 3,577
Consumer........................... 1,840 1,416 1,211 1,692 2,237
Other, including foreign........... 126 128 54 53 460
--------------------------------------------------------------------
Total recoveries................ 3,805 7,676 4,245 6,149 8,686
--------------------------------------------------------------------
Net (charge-offs) recoveries......... (5,785) (2,569) (436) 2,127 486
--------------------------------------------------------------------
Balance of allowance for possible
loan losses at end of year......... $ 41,846 $ 37,626 $ 32,268 $ 26,002 $ 26,298
--------------------------------------------------------------------
Net (charge-offs) recoveries as a
percentage of average loans
outstanding during year, net of
unearned discount.................. (.23)% (.12)% (.03)% .16% .04%
Allowance for possible loan losses as
a percentage of year-end loans, net
of unearned discount............... 1.58 1.67 1.78 1.75 2.09
</TABLE>
There were no foreign charge-offs in 1997-1993.
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
22
<PAGE>
by providing management and the board of directors with frequent reports related
to loan production, loan quality, concentrations of credit, 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 focusing on evaluating and understanding management's ability to
operate profitably and prudently expand their business. Once it is determined
management possess sound ethics and solid business acumen, current and projected
cash flows are examined to determine the ability to repay their obligations as
agreed upon. In addition, collateral must be of good quality and single purpose
projects are avoided. Underwriting standards are designed to promote
relationship banking rather than transactional banking. 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, 1997, 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 Corporation 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, 1997, 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 to have higher risks than
the other real estate loans due to their ultimate repayment being sensitive to
interest rate changes, general economic conditions and the availability of
long-term financing.
The consumer loan portfolio has three distinct segments -- indirect
consumer loans, which represent 59 percent of the consumer loan portfolio,
direct non-real estate consumer loans, which represent 26 percent of the
portfolio and direct real estate consumer loans, which represent 15 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 and residential lot financing
for future homesteads. In addition, on November 4, 1997, Texas voters approved a
constitutional amendment allowing for the existence of home equity loans in the
State of Texas. Effective January 1, 1998, the Corporation began offering home
equity loans up to 80 percent of the estimated value of the personal residence
of the borrower less the balances on existing mortgage and home improvement
loans. Home equity loans will be offered for a variety of purposes including:
education, business start-ups, debt consolidation and automobile financing. It
is anticipated this product will become another distinct segment of the consumer
portfolio before the end of the year. Primary growth of this product is expected
to be from existing customers. Underwriting standards for this product are
heavily influenced by the statute requirements, which include but are not
limited to; maximum loan-to-
23
<PAGE>
value percentage, collection remedies, the number of such loans a borrower can
have at one time and documentation requirements.
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. 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, consumer loan accounts are charged-off
automatically based on regulatory requirements.
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
------------------------------------------------------------------------------------------
1997 1996 1995 1994
----------------------- ------------------------ ------------------------ ----------
ALLOWANCE Allowance Allowance Allowance
FOR AS A for As a for As a for
POSSIBLE PERCENTAGE Possible Percentage Possible Percentage Possible
ALLOCATION OF ALLOWANCE LOAN OF TOTAL Loan of Total Loan of Total Loan
FOR POSSIBLE LOAN LOSSES LOSSES LOANS Losses Loans Losses Loans Losses
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial............ $10,868 .41% $ 6,897 .31% $ 8,151 .45% $ 4,291
Real estate.......................... 6,933 .26 7,564 .34 9,593 .53 8,842
Consumer............................. 17,391 .66 13,819 .61 12,124 .67 10,387
Purchasing or carrying securities.... 88 6 6 7
Financial institutions............... 60 44 32 28
Other, including foreign............. 371 .01 213 .01 167 .01 160
Not allocated........................ 6,135 .24 9,083 .40 2,195 .12 2,287
------------------------------------------------------------------------------------------
Total............................. $41,846 1.58% $ 37,626 1.67% $ 32,268 1.78% $ 26,002
------------------------------------------------------------------------------------------
</TABLE>
1993
------------------------
Allowance
As a for As a
Percentage Possible Percentage
ALLOCATION OF ALLOWANCE of Total Loan of Total
FOR POSSIBLE LOAN LOSSES Loans Losses Loans
- -------------------------------------
Commercial and industrial............ .29% $ 3,453 .27%
Real estate.......................... .60 10,432 .83
Consumer............................. .70 6,756 .54
Purchasing or carrying securities.... 3
Financial institutions............... 8
Other, including foreign............. .01 332 .03
Not allocated........................ .15 5,314 .42
Total............................. 1.75% $ 26,298 2.09%
Allocation of a portion of the allowance does not preclude its availability
to absorb losses in other categories. The unallocated portion of the allowance
represents an additional amount beyond that specifically reserved for specific
risks available to absorb unidentified losses in the current loan portfolio.
SECURITIES
Total securities, including securities available for sale, were
$1,491,518,000 at year-end 1997 compared to $1,476,424,000 a year ago.
Securities available for sale totaled $1,342,759,000 at December 31, 1997,
compared to $1,299,285,000 at year-end 1996. 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.
24
<PAGE>
The average yield of the securities portfolio for the year ended December
31, 1997 was 6.40 percent compared with 6.42 percent for 1996. See page 59
"Maturity Distribution and Securities Portfolio Yields."
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
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........................ $ 310,380 20.8% $ 231,351 15.7% $ 223,457 14.5%
U.S. Government agencies
and corporations................... 1,168,691 78.4 1,233,238 83.5 1,301,731 84.7
States and political subdivisions.... 5,093 .3 5,449 .4 5,527 .4
Other................................ 7,354 .5 6,386 .4 5,852 .4
--------------------------------------------------------------------------------
Total........................... $1,491,518 100.0% $1,476,424 100.0% $1,536,567 100.0%
--------------------------------------------------------------------------------
Average yield earned during the year
(taxable-equivalent basis)......... 6.40% 6.42% 6.36%
</TABLE>
INTEREST RATE SWAPS/FLOORS
During 1997, 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 their view of the interest rate sensitivity of the Corporation's
funding sources. The Corporation had 42 interest rate swaps at December 31, 1997
compared to 31 interest rate swaps at December 31, 1996. 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 $267 million and $251
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
counterparty 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 was not considered material in
1997 and 1996.
During 1997, the Corporation entered into three interest rate floor
agreements with a notional amount totaling $500 million for three years. The
interest rate floors were intended to hedge floating interest rate exposure in
commercial loan accounts in an environment of falling interest rates.
DEPOSITS
Total average demand deposits increased 11.8 percent from 1996. This can be
attributed to an increase in commercial and individual and correspondent bank
deposit levels of $103.4 million and $24.9 million, respectively. The increase
in commercial and individual is partially related to the 1997 acquisition. The
Corporation has made a strategic effort in growing its correspondent bank
relationships in the markets it serves. Reflective of this effort and continued
growth, the Corporation ranks 29th in the United States for correspondent bank
balances as of June 30, 1997.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- --------------------
AVERAGE PERCENT Average Percent Average Percent
DEMAND DEPOSITS BALANCE CHANGE Balance Change Balance Change
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and individual............ $ 935,779 +12.4% $ 832,356 +19.5% $ 696,499 +3.4%
Correspondent banks.................. 223,621 +12.5 198,750 +51.4 131,295 +5.5
Public funds......................... 43,177 - 3.9 44,923 +22.2 36,772 - 4.6
---------- ---------- ----------
Total........................... $1,202,577 +11.8 $1,076,029 +24.5 $ 864,566 +3.3
---------- ---------- ----------
</TABLE>
25
<PAGE>
Total average time deposits increased 8.1 percent from 1996 with the
largest increase coming from money market deposit accounts partially related to
the 1997 acquisition. 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>
1997 1996 1995
---------------------------- ----------------------------- --------------------
AVERAGE PERCENT Average Percent Average Percent
TIME DEPOSITS BALANCE CHANGE COST Balance Change Cost Balance Change
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings and Interest-on-Checking..... $ 736,174 + 1.9% 1.22% $ 722,518 + .3% 1.36 % $ 720,489 - 9.5%
Money market deposit accounts........ 974,341 +20.2 4.00 810,616 +31.4 3.93 616,931 +12.7
Time accounts of $100,000 or more.... 517,027 +12.3 5.12 460,196 + 2.0 4.95 450,959 +23.6
Time accounts under $100,000......... 568,001 - 3.2 4.76 586,675 +14.1 4.84 513,999 + 5.0
Public funds......................... 257,189 + 4.9 4.51 245,266 +94.7 4.36 125,971 +46.3
--------- --------- ---------
Total............................ $3,052,732 + 8.1 3.71 $2,825,271 +16.3 3.66 $2,428,349 + 6.3
--------- --------- ---------
</TABLE>
TIME DEPOSITS Cost
- -------------------------------------
Savings and Interest-on-Checking..... 1.76%
Money market deposit accounts........ 3.84
Time accounts of $100,000 or more.... 5.09
Time accounts under $100,000......... 4.87
Public funds......................... 4.33
Total............................ 3.70
The following table summarizes the certificates of deposits in amounts of
$100,000 or more as of December 31, 1997 by time remaining until maturity.
December 31
-------------------------
1997
REMAINING MATURITY OF PRIVATE -------------------------
CERTIFICATES OF DEPOSIT PERCENTAGE
OF $100,000 OR MORE AMOUNT OF TOTAL
- ----------------------------------------------------------------
Three months or less................. $ 63,431 11.6%
After three, within six months....... 117,141 21.4
After six, within twelve months...... 179,753 32.9
After twelve months.................. 186,255 34.1
-------------------------
Total........................... $ 546,580 100.0%
-------------------------
Percentage of total private time
deposits 19.1%
Other time deposits of $100,000 or more were $185,527,000 at December 31, 1997.
Of this amount 74.6 percent matures within three months, 6.5 percent matures
between three and six months and the remainder matures between six months and
one year.
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 5.9 percent from 1996. The Mexican economic
recovery and growth in manufacturing which began in 1996 continued to improve in
1997.
FOREIGN DEPOSITS 1997 1996 1995
- -------------------------------------------------------------------------
Average balance...................... $ 607,642 $ 573,583 $ 562,191
Percentage of total average
deposits........................... 14.3% 14.7% 17.1%
26
<PAGE>
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 increase in the net funds position in
1997 is a direct result of the Corporation's use of funds acquired from the
issuance of the $100 million Trust Preferred Capital Securities. In 1996, the
conversion of a repurchase agreement into a time deposit and an increase in
deposit levels resulted in an offset position for the Corporation in Federal
funds.
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- ---------------------
AVERAGE AVERAGE Average Average Average Average
FEDERAL FUNDS BALANCE RATE Balance Rate Balance Rate
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold................... $217,771 5.44% $138,811 5.21% $ 117,158 5.75%
Federal funds purchased and
securities sold under repurchase
agreements......................... 117,616 4.60 144,804 4.79 251,392 5.29
-------- -------- ---------
Net funds position................... $100,155 $ (5,993) $(134,234)
-------- -------- ---------
</TABLE>
FEDERAL FUNDS PURCHASED AND Year Ended December 31
SECURITIES ----------------------------------
SOLD UNDER REPURCHASE AGREEMENTS 1997 1996 1995
- -------------------------------------------------------------------------
Balance at year end.................. $ 132,112 $ 174,107 $ 111,395
Maximum month-end balance............ 144,748 226,867 367,154
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, 1997 and 1996.
GUARANTEED PREFERRED BENEFICIAL INTEREST IN CORPORATION'S JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES
During February 1997, the Corporation issued $100 million of its 8.42
percent Capital Securities, Series A which represent a beneficial interest in
Cullen/Frost Capital Trust I, a Delaware statutory business trust and
wholly-owned subsidiary of the Corporation. The Issuer Trust used the proceeds
of the sale of the Capital Securities to purchase Junior Subordinated Debentures
of Cullen/Frost. Of these proceeds, the Corporation used $55.3 million for the
acquisition of Harrisburg Bancshares, Inc. and $17.8 million for the repurchase
of shares of the Corporation. The $100 million Trust Preferred Capital
Securities are included in the Tier 1 capital of Cullen/Frost for regulatory
capital purposes and are reported as debt on the balance sheet. See Note I
"Borrowed Funds" on page 41.
CAPITAL
At December 31, 1997, shareholders' equity reached the highest level in the
Corporation's history, $408,405,000, an increase of 7.8 percent from
$378,943,000 at December 31, 1996. The increase in 1997 was due primarily to
earnings growth partially offset by $21.5 million of dividends paid and $17.8
million paid for the repurchase of shares of the Corporation. The Corporation
had an unrealized gain on securities available for sale, net of deferred taxes,
of $8.7 million as of December 31, 1997 compared to $7.6 million as of December
31, 1996. Currently, under regulatory requirements, the unrealized gain or loss
on securities available for sale is not included in the calculation of
risk-based capital and leverage ratios.
The Corporation paid a quarterly dividend of $.21 per common share during
the first quarter of 1997 increasing to $.25 per common share during the second,
third and fourth quarters of 1997. This equates to a dividend payout ratio of
33.8 percent compared to 32.9 percent in 1996. 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,
378,700 shares have been repurchased under this program at an average price of
$43.02 per share. The Corporation expects to rescind the stock repurchase
27
<PAGE>
program at its April 1998 Board of Directors meeting. The Corporation continues
to reissue treasury shares through its employee stock plans and has 282,581
treasury shares at March 20, 1998.
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, 1997 and 1996, see Note L "Capital" on page 43.
FORWARD-LOOKING STATEMENTS
The Corporation may from time to time make forward-looking statements
(within the meaning of the Private Securities Litigation Reform Act of 1995)
with respect to earnings per share, credit quality, expected Year 2000
compliance program, corporate objectives and other financial and business
matters. The Corporation cautions the reader that these forward-looking
statements are subject to numerous assumptions, risks 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.
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.
SUBSEQUENT EVENTS
PENDING ACQUISITION
On February 15, 1998, the Corporation signed a definitive agreement
providing for the merger of Overton Bancshares, Inc., in Fort Worth, Texas which
owns Overton Bank and Trust N.A., ("Overton") into the Corporation. The
merger, which is expected to be accounted for as a pooling-of-interests
transaction, will be the Corporation's first entry into Fort Worth, Texas and is
expected to be consummated in the second quarter of this year. The Corporation
will issue approximately 4.4 million common shares as part of this transaction.
Overton is a $732 million deposit bank with loans of $468 million, total assets
of $863 million and had the sixth largest market share in the Fort Worth MSA.
The Corporation expects to take a one-time charge of $7.7 million at the
consummation of the transaction. This transaction is expected to be slightly
dilutive to 1998 earnings and accretive thereafter.
COMPLETED ACQUISITION
On January 2, 1998, the Corporation paid approximately $55.3 million to
acquire Harrisburg Bancshares, Inc., including its subsidiary Harrisburg Bank
based in Houston, Texas. The total cash consideration was funded through
internal sources including funds provided by the issuance of the $100 million
Trust Preferred Capital Securities, see Note I "Borrowed Funds" on page 41.
The purchase method of accounting will be used to record the transaction and as
such the purchase price will be allocated to the underlying assets and
liabilities based on estimated fair values at the date of acquisition. Such
estimates may be subsequently revised. The Corporation acquired loans of
approximately $125 million and deposits of approximately $222 million. Total
intangibles associated with the acquisition amounted to approximately $34.2
million. This acquisition is not expected to have a material impact on the
Corporation's 1998 net income.
28
<PAGE>
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 internal controls 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/ RICHARD W. EVANS, JR. /s/ PHILLIP D. GREEN
Richard W. Evans, Jr. Phillip D. Green
Chairman Executive Vice President
and Chief Financial Officer
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31
--------------------------------
1997 1996 1995
- ------------------------------------------------------------------------
INTEREST INCOME:
Loans, including fees........... $217,432 $183,724 $150,497
Securities:
Taxable....................... 95,146 99,237 98,521
Tax-exempt.................... 298 325 341
--------------------------------
Total securities........... 95,444 99,562 98,862
Time deposits........................ 1 2
Federal funds sold and securities
purchased under resale agreements.. 11,839 7,226 6,732
--------------------------------
TOTAL INTEREST INCOME... 324,715 290,513 256,093
INTEREST EXPENSE:
Deposits........................ 113,114 103,475 89,809
Federal funds purchased and
securities sold under
repurchase agreements......... 5,411 6,937 13,296
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures....... 7,652
Other borrowings................ 1,294 1,019 733
--------------------------------
TOTAL INTEREST
EXPENSE............... 127,471 111,431 103,838
--------------------------------
NET INTEREST INCOME..... 197,244 179,082 152,255
Provision for possible loan losses... 7,900 7,300 6,272
--------------------------------
NET INTEREST INCOME
AFTER PROVISION FOR
POSSIBLE LOAN
LOSSES................ 189,344 171,782 145,983
NON-INTEREST INCOME:
Trust fees...................... 39,971 34,031 31,762
Service charges on deposit
accounts...................... 43,727 38,294 30,382
Other service charges,
collection and exchange
charges, commissions and
fees.......................... 10,148 8,764 11,055
Net gain (loss) on securities
transactions.................. 494 (980) (1,396)
Other........................... 14,992 14,426 15,940
--------------------------------
TOTAL NON-INTEREST
INCOME................ 109,332 94,535 87,743
NON-INTEREST EXPENSE:
Salaries and wages.............. 81,816 71,788 58,177
Pension and other employee
benefits...................... 16,849 15,351 10,905
Net occupancy of banking
premises...................... 19,496 18,782 17,992
Furniture and equipment......... 12,463 11,789 11,259
Intangible amortization......... 11,920 11,306 8,124
Other........................... 57,412 51,564 55,992
--------------------------------
TOTAL NON-INTEREST
EXPENSE............... 199,956 180,580 162,449
--------------------------------
INCOME BEFORE INCOME
TAXES................. 98,720 85,737 71,277
Income taxes......................... 35,235 30,759 24,998
--------------------------------
NET INCOME.............. $ 63,485 $ 54,978 $ 46,279
--------------------------------
Net income per share:
Basic........................... $ 2.84 $ 2.45 $ 2.07
Diluted......................... 2.75 2.40 2.04
Dividends per share.................. .96 .81 .57
See notes to consolidated financial statements.
30
<PAGE>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31
--------------------------
1997 1996
- -----------------------------------------------------------------
ASSETS
Cash and due from banks.............. $ 604,227 $ 872,028
Securities held to maturity (market
value: 1997 -- $153,337;
1996 -- $181,029).................. 148,759 177,139
Securities available for sale........ 1,342,759 1,299,285
Federal funds sold................... 190,000 52,850
Loans, net of unearned discount of
$2,318 in 1997 and $1,154 in
1996............................... 2,643,522 2,253,468
Less: Allowance for possible loan
losses.......................... (41,846) (37,626)
--------------------------
Net loans....................... 2,601,676 2,215,842
Banking premises and equipment....... 109,654 101,625
Accrued interest and other assets.... 233,513 169,615
--------------------------
TOTAL ASSETS.................. $ 5,230,588 $ 4,888,384
--------------------------
LIABILITIES
Demand deposits:
Commercial and individual.......... $ 1,101,862 $ 941,991
Correspondent banks................ 185,228 337,996
Public funds....................... 51,733 51,228
--------------------------
Total demand deposits......... 1,338,823 1,331,215
Time deposits:
Savings and Interest-on-Checking... 766,416 726,700
Money market deposit accounts...... 996,110 876,382
Time accounts...................... 1,102,184 1,026,547
Public funds....................... 280,378 281,750
--------------------------
Total time deposits........... 3,145,088 2,911,379
--------------------------
Total deposits................ 4,483,911 4,242,594
Federal funds purchased and
securities sold under repurchase
agreements......................... 132,112 174,107
Accrued interest and other
liabilities........................ 107,757 92,740
Guaranteed preferred beneficial
interest in the Corporation's
junior subordinated deferrable
interest debentures, net........... 98,403
--------------------------
TOTAL LIABILITIES............. 4,822,183 4,509,441
SHAREHOLDERS' EQUITY
Common stock, par value $5 per
share.............................. 112,710 112,410
Shares authorized:
1997 -- 60,000,000;
1996 -- 30,000,000
Shares issued:
1997 -- 22,541,991;
1996 -- 22,482,113
Surplus.............................. 65,931 63,480
Retained earnings.................... 233,412 195,451
Unrealized gain on securities
available for sale, net of tax....... 8,668 7,602
Treasury stock at cost (276,721
shares).............................. (12,316)
--------------------------
TOTAL SHAREHOLDERS' EQUITY.... 408,405 378,943
--------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY......... $ 5,230,588 $ 4,888,384
--------------------------
See notes to consolidated financial statements.
31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended December 31
-------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income........................... $ 63,485 $ 54,978 $ 46,279
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for possible loan
losses........................ 7,900 7,300 6,272
Provision for real estate
losses........................ 43 610
Credit for deferred taxes....... (6,382) (3,952) (1,150)
Accretion of discounts on
loans......................... (1,148) (970) (1,870)
Accretion of securities'
discounts..................... (11,769) (15,568) (17,031)
Amortization of securities'
premiums...................... 3,429 2,827 2,248
Net realized (gain) loss on
securities transactions....... (494) 980 1,396
Net gain on sale of assets...... (348) (1,292) (5,297)
Depreciation and amortization... 23,378 22,440 18,825
Increase in accrued interest
receivable.................... (6,356) (2,850) (3,092)
Increase in accrued interest
payable....................... 4,417 876 2,763
Net change in other assets and
liabilities................... (32,321) (78) 35,936
-------------------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 43,834 64,691 85,889
INVESTING ACTIVITIES
Proceeds from maturities of
securities held to maturity........ 29,078 33,339 106,424
Purchases of securities held to
maturity........................... (920) (833)
Proceeds from sales of securities
available for sale................. 423,942 215,983 147,468
Proceeds from maturities of
securities available for sale...... 864,269 545,960 677,915
Purchases of securities available for
sale............................... (1,276,661) (648,729) (806,723)
Net increase in loan portfolio....... (291,497) (232,375) (208,107)
Proceeds from sales of equipment..... 48 75 31
Purchases of premises and
equipment.......................... (14,981) (12,169) (6,352)
Proceeds from sales of repossessed
properties......................... 1,195 788 1,719
Net cash and cash equivalents
received from bank acquisitions.... 14,277 19,198 8,734
-------------------------------------
NET CASH USED BY INVESTING
ACTIVITIES.................... (251,250) (77,930) (79,724)
FINANCING ACTIVITIES
Net increase in demand deposits, IOC
accounts, and savings accounts..... 60,262 441,273 305,696
Net (decrease)/increase in
certificates of deposit............ (2,567) (182,067) 68,329
Net (decrease)/increase in Federal
funds purchased and securities sold
under repurchase agreements........ (41,995) 62,712 (267,565)
Net proceeds from issuance of
guaranteed preferred beneficial
interest in the Corporation's
subordinated debentures............ 98,353
Proceeds from employee stock purchase
plan and options................... 1,989 325 691
Purchase of treasury stock........... (17,814)
Dividends paid....................... (21,463) (18,073) (12,723)
-------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES.................... 76,765 304,170 94,428
-------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.............. (130,651) 290,931 100,593
Cash and cash equivalents at
beginning of year.................. 924,878 633,947 533,354
-------------------------------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR....................... $ 794,227 $ 924,878 $ 633,947
-------------------------------------
See notes to consolidated financial statements.
32
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Securities
Common Retained Available Treasury
Stock Surplus Earnings for Sale Stock Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995.............. $ 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 gain 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 1997................. 63,485 63,485
Proceeds from employee stock
purchase plan and options......... 300 437 (1,949) $ 3,201 1,989
Tax benefit related to exercise of
stock options..................... 1,492 1,492
Purchase of treasury stock.......... (17,814) (17,814)
Issuance of restricted stock........ 522 2,297 2,819
Restricted stock plan deferred
compensation, net................. (2,112) (2,112)
Adjustment to unrealized gain on
securities available for sale, net
of tax............................ 1,066 1,066
Cash dividend....................... (21,463) (21,463)
--------------------------------------------------------------------------
Balance at December 31, 1997............ $112,710 $ 65,931 $233,412 $ 8,668 $(12,316) $408,405
--------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, leasing, 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.
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 have taken
place.
34
<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 on an undiscounted basis. If impairment is indicated 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. The
Corporation continues to account for its stock option plans in accordance with
APB No. 25. 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 the 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 method of accounting had been applied.
STOCK SPLIT -- The number of shares outstanding, related earnings per share
amounts and dividends 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.
FINANCIAL DERIVATIVES -- 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 floors. 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 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 early 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
35
<PAGE>
recognized in net interest income over the expected remaining life of the
related asset or liability. In instances where the underlying instrument is
repaid, the cumulative change in the value of the associated derivative is
recognized immediately in earnings.
ACCOUNTING CHANGES -- The following is a brief discussion of the SFAS
pronouncements issued by the FASB in 1996 and 1997 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 were adopted by the
Corporation prospectively as of January 1, 1997 except for those provisions
relating to repurchase agreements, securities lending, and other similar
transactions and pledged collateral, which were delayed for one year by SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125, an amendment of FASB Statement No. 125" and adopted prospectively as
of January 1, 1998. The adoption of these statements did not and is not expected
to have a material impact on financial position or results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." The
statement replaces primary and fully-diluted earnings per share with basic and
diluted earnings per share in an effort to simplify the computation of these
measures and align them more closely with the methodology used internationally.
The statement requires dual presentation of basic and diluted earnings per share
on the face of the income statement and a reconciliation of the numerator and
denominator used in the basic and diluted earnings per share computations. Basic
earnings per share excludes dilution and is computed by dividing income by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share is similar to the previously reported fully diluted earnings
per share which includes potential dilution and is computed by dividing income
by the weighted-average number of common and common equivalent shares
outstanding during the period. The computations for the dilutive effect of
common stock options are based upon the average market price of common stock
during the reported period. Earnings per share amounts for all periods presented
have been restated.
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. Comprehensive income includes net income as well as
certain items that are reported directly within a separate component of
stockholders' equity and bypass net income. The provisions of SFAS No. 130 are
effective for fiscal years beginning after December 15, 1997. The adoption of
this statement will have no 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 Corporation is currently evaluating the impact of
this statement on the disclosures included in its annual and interim period
financial statements.
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
36
<PAGE>
assets and liabilities based on estimated fair value at the date of acquisition.
Results of operations are included from the date of acquisition.
1997 ACQUISITION
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. Goodwill associated with the transaction
amounted to approximately $13.8 million and will be amortized on a straight-line
basis over a 15-year life. Approximately $7.1 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 $108 million and deposits of approximately $184
million. Cullen/Frost's results of operations would not have been materially
impacted if the Corpus Christi Bancshares acquisition had occurred at the
beginning of 1997 or 1996.
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 basis
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 1995.
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 $8.4 million and will be amortized on a
straight-line basis 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 or 1995.
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 basis 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.
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 basis 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
37
<PAGE>
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.
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.
NOTE C -- CASH AND DUE FROM BANKS
Cullen/Frost subsidiary banks are required to maintain cash or non-interest
bearing reserves with the Federal Reserve Bank which are equal to specified
percentages of deposits. The average amounts of reserve and contractual balances
were $65,121,000 for 1997 and $73,813,000 for 1996.
NOTE D -- SECURITIES
A summary of the amortized cost and estimated fair value of securities is
presented below.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
------------------------------------------------ -----------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED Amortized Unrealized Unrealized
(in thousands) COST GAINS LOSSES FAIR VALUE Cost Gains Losses
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Securities Held to Maturity:
U.S. Government agencies and
corporations..................... $143,691 $ 4,244 $ 18 $ 147,917 $171,845 $ 3,642 $ 64
States and political
subdivisions..................... 5,043 352 5,395 5,269 312
Other.............................. 25 25 25
--------------------------------------------------------------------------------------
Total............................ $148,759 $ 4,596 $ 18 $ 153,337 $177,139 $ 3,954 $ 64
--------------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury...................... $310,441 $ 38 $ 98 $ 310,381 $231,326 $ 102 $ 77
U.S. Government agencies and
corporations..................... 1,011,603 16,097 2,701 1,024,999 1,049,722 16,058 4,387
State and political subdivisions... 50 50 180 3 4
Other.............................. 7,329 7,329 6,361 1
--------------------------------------------------------------------------------------
Total............................ $1,329,423 $ 16,135 $2,799 $1,342,759 $1,287,589 $ 16,164 $ 4,468
--------------------------------------------------------------------------------------
</TABLE>
Estimated
(in thousands) Fair Value
- -------------------------------------
Securities Held to Maturity:
U.S. Government agencies and
corporations..................... $ 175,423
States and political
subdivisions..................... 5,581
Other.............................. 25
Total............................ $ 181,029
Securities Available for Sale:
U.S. Treasury...................... $ 231,351
U.S. Government agencies and
corporations..................... 1,061,393
State and political subdivisions... 179
Other.............................. 6,362
Total............................ $1,299,285
The amortized cost and estimated fair value of securities at December 31,
1997 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, 1997
---------------------------------------------------
SECURITIES HELD TO SECURITIES AVAILABLE FOR
MATURITY SALE
----------------------- ------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
(in thousands) COST FAIR VALUE COST FAIR VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less.............. $ 55 $ 55 $ 310,491 $ 310,431
Due after one year through five
years................................ 260 263 25 25
Due after five years through ten
years................................ 1,958 1,994
Due after ten years.................. 2,795 3,107 7,304 7,304
----------------------- ------------------------
5,068 5,419 317,820 317,760
Mortgage-backed securities and
collateralized mortgage
obligations........................ 143,691 147,918 1,011,603 1,024,999
----------------------- ------------------------
Total........................... $ 148,759 $ 153,337 $1,329,423 $1,342,759
----------------------- ------------------------
</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
38
<PAGE>
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 1997 were
$423,942,000. During 1997, gross gains of $523,000 and gross losses of $29,000
were realized on those sales. 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.
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 $999,499,000 at December 31, 1997 and
$752,039,000 at December 31, 1996.
NOTE E -- LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of loans outstanding follows:
December 31
--------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------
Real estate:
Construction.................... $ 116,100 $ 84,146
Land............................ 54,142 50,208
Permanent mortgages:
Commercial................. 254,716 225,845
Residential................ 461,635 422,985
Other........................... 247,824 261,207
Commercial and industrial............ 804,257 650,114
Consumer............................. 602,415 491,086
Financial institutions............... 3,767 12,749
Foreign.............................. 72,911 45,562
Purchasing or carrying securities.... 788 1,812
Other................................ 27,285 8,908
Unearned discount.................... (2,318) (1,154)
--------------------------
Total loans................... $ 2,643,522 $ 2,253,468
--------------------------
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 $1,066,929,000 and
$48,671,000, respectively, at December 31, 1997. Commitments to extend credit
and standby letters of credit amounted to $851,342,000 and $43,293,000,
respectively, at December 31, 1996. Commercial and industrial loan commitments
represent approximately 74 percent and 77 percent of the total loan commitments
outstanding at December 31, 1997 and 1996, respectively.
The majority of the Corporation's real estate loans are secured by real
estate in San Antonio and Houston. Mortgage loans of approximately $6.5 million
and $4.4 million were held for sale by the Corporation and are included in
residential permanent mortgages at December 31, 1997 and 1996, respectively.
These loans are valued at the lower of cost or market, on an aggregate basis.
39
<PAGE>
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 $51,914,000 and $53,393,000 at December 31, 1997 and 1996,
respectively. During 1997, additions to these loans amounted to $51,921,000,
repayments totaled $51,590,000 and other changes totaled $1,810,000. 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 $692,000 and $684,000
at December 31, 1997 and 1996, respectively.
A summary of the changes in the allowance for possible loan losses follows:
Year Ended December 31
-------------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------
Balance at the beginning of the year.... $ 37,626 $ 32,268 $ 26,002
Provision for possible loan losses...... 7,900 7,300 6,272
Loan loss reserve of acquired
institutions.......................... 2,105 627 430
Net charge-offs:
Losses charged to the allowance.... (9,590) (10,245) (4,681)
Recoveries......................... 3,805 7,676 4,245
-------------------------------
Net charge-offs............... (5,785) (2,569) (436)
-------------------------------
Balance at the end of the year.......... $ 41,846 $ 37,626 $ 32,268
-------------------------------
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,
1997, 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 1997 and 1996 was $82,000 and $55,000, 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:
December 31
--------------------
(in thousands) 1997 1996
- --------------------------------------------------------------
Impaired loans with no valuation
reserve............................... $ 1,940 $ 4,333
Impaired loans with a valuation
reserve............................... 3,265
--------------------
Total recorded investment in impaired
loans................................. $ 5,205 $ 4,333
--------------------
Valuation reserve....................... $ 2,199
The average recorded investment in impaired loans was $5,500,000 and $7,290,000
for the years ended December 31, 1997 and 1996, respectively.
40
<PAGE>
NOTE F -- NON-PERFORMING ASSETS
A summary of non-performing assets follows:
December 31
--------------------
(in thousands) 1997 1996
- --------------------------------------------------------------
Non-accrual and restructured loans...... $ 12,702 $ 10,129
Foreclosed assets....................... 4,511 2,242
--------------------
$ 17,213 $ 12,371
--------------------
Cullen/Frost recognized interest income on non-accrual and restructured
loans of approximately $564,000, $292,000 and $165,000 in 1997, 1996 and 1995,
respectively. Had these reduced earning and non-earning loans performed
according to their original contract terms, Cullen/Frost would have recognized
additional interest income of approximately $1,131,000 in 1997, $1,182,000 in
1996 and $1,403,000 in 1995.
NOTE G -- BANKING PREMISES AND EQUIPMENT
A summary of banking premises and equipment follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------------------
1997 1996
-------------------------------------- --------------------------------------
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................................. $ 40,343 $ 40,343 $ 38,464 $ 38,464
Buildings............................ 50,858 $19,026 31,832 46,460 $17,291 29,169
Furniture and equipment.............. 83,841 64,940 18,901 77,664 60,363 17,301
Leasehold improvements............... 30,304 15,103 15,201 26,738 12,453 14,285
Construction in progress............. 3,377 3,377 2,406 2,406
-------------------------------------------------------------------------------
Total banking premises and
equipment..................... $ 208,723 $99,069 $109,654 $ 191,732 $90,107 $101,625
-------------------------------------------------------------------------------
</TABLE>
NOTE H -- DEPOSITS
A summary of deposits outstanding by category follows:
December 31
--------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------
Demand deposits...................... $ 1,338,823 $ 1,331,215
Savings and Interest-on-Checking..... 766,416 726,700
Money market deposit accounts........ 996,110 876,382
Time accounts of $100,000 or more.... 546,580 478,397
Time accounts under $100,000......... 555,604 548,150
Other................................ 280,378 281,750
--------------------------
Total deposits.................. $ 4,483,911 $ 4,242,594
--------------------------
Foreign deposits totaled $632,477,000 and $570,357,000 at December 31, 1997
and 1996, respectively.
NOTE I -- BORROWED FUNDS
Cullen/Frost has a $7,500,000 revolving credit facility with another
financial institution. The line of credit bears interest at prime. There were no
borrowings outstanding on this line at December 31, 1997 and 1996.
41
<PAGE>
The following table represents balances as they relate to securities sold
under repurchase agreements:
Year Ended December 31
----------------------
(in thousands) 1997 1996
- -------------------------------------------------------------
Balance at year end.................. $ 107,787 $ 88,782
Maximum month-end balance............ 107,787 105,992
For the year:
Average daily balance.............. 88,011 74,472
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 million 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 has used the majority of the proceeds of the sale of the
Junior Subordinated Debentures for acquisitions, see Note U "Subsequent
Events" on page 53, and the repurchase of the Corporation's common stock. 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, net
of deferred issuance costs. 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 million
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.
42
<PAGE>
NOTE J -- COMMON STOCK AND EARNINGS PER COMMON SHARE
In accordance with SFAS 128, the reconciliation of earnings per share for
1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerators for both basic and diluted
earnings per share, net income........ $ 63,485,000 $ 54,978,000 $ 46,279,000
-------------------------------------------
Denominators:
Denominators for basic earnings per
share, average outstanding common
shares................................ 22,368,744 22,443,915 22,308,718
Dilutive effect of stock options........ 696,508 461,827 366,930
-------------------------------------------
Denominator for diluted earnings per
share................................. 23,065,252 22,905,742 22,675,648
-------------------------------------------
Earnings per share:
Basic................................... $ 2.84 $ 2.45 $ 2.07
Diluted................................. 2.75 2.40 2.04
</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 $31,062,000
available for the payment of dividends to Cullen/Frost at December 31, 1997.
NOTE L -- CAPITAL
The table below reflects various measures of regulatory capital at year end
1997 and 1996 for the Corporation. As a result of the issuance of the $100
million Trust Preferred Capital Securities see (see Note I "Borrowed Funds")
all the regulatory capital ratios are up when compared to a year ago.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------- --------------------
(in thousands) AMOUNT Ratio Amount Ratio
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-Based
Tier 1 Capital.................. $ 426,480 13.89% $ 307,285 11.58%
Tier 1 Capital Minimum
requirement..................... 122,834 4.00 106,114 4.00
Total Capital................... $ 464,908 15.14% $ 340,485 12.83%
Total Capital Minimum
requirement..................... 245,668 8.00 212,228 8.00
Risk-adjusted assets, net of
goodwill...................... $ 3,070,854 $ 2,652,846
Leverage ratio....................... 8.45% 6.76%
Average equity as a percentage of
average assets..................... 7.99 7.98
</TABLE>
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. Effective December 16, 1992, federal
banking agencies adopted final rules relating to these tiers. At December 31,
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 Tier 1 leverage ratio of 5.0 percent or
greater and the institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive to meet and maintain a
specific capital level for any capital measure. The Corporation and its
subsidiary banks currently exceed all minimum capital requirements. Management
is
43
<PAGE>
not aware of any conditions or events that would have changed the Corporation's
capital rating since December 31, 1997.
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.
NOTE M -- LEASES AND RENTAL AGREEMENTS
Rental expense for all leases amounted to $11,048,000, $10,589,000 and
$9,842,000 for the years ended December 31, 1997, 1996 and 1995, 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, 1997 follows:
Total
(in thousands) Commitments
- ---------------------------------------------------
1998................................. $11,304
1999................................. 10,392
2000................................. 7,407
2001................................. 5,161
2002................................. 4,367
Subsequent to 2002................... 19,077
-----------
Total future minimum rental
commitments..................... $57,708
-----------
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.
44
<PAGE>
The funded status of the plans and the amounts recognized in Cullen/Frost's
consolidated balance sheets at December 31, 1997 and 1996 are presented below:
(in thousands) 1997 1996
- --------------------------------------------------------------
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$32,694 in 1997 and $28,432 in
1996.............................. $ 34,707 $ 29,934
--------------------
Projected benefit obligation for service
rendered to date...................... $ 51,776 $ 44,796
Plan assets at fair value (primarily
listed stocks and U.S. and corporate
bonds)................................ 42,356 31,676
--------------------
Projected benefit obligation in excess
of plan assets........................ 9,420 13,120
Unrecognized net loss from past
experience different from that assumedX
and effects of changes in
assumptions........................... (7,876) (7,608)
Unrecognized prior service cost......... (4,292) (4,849)
Unrecognized net transitional asset..... 590 690
--------------------
(Prepaid) accrued pension cost
included in other liabilities..... $ (2,158) $ 1,353
--------------------
Net pension cost included the following components:
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------
Service cost for benefits earned during
the year.............................. $ 2,741 $ 2,035 $ 1,731
Actual return on plan assets, net of
expenses.............................. (4,551) (2,755) (3,837)
Interest cost on projected benefit
obligation............................ 3,319 2,947 2,607
Net amortization and deferral........... 2,293 1,715 2,788
-------------------------------
Net pension cost................... $ 3,802 $ 3,942 $ 3,289
-------------------------------
The weighted-average discount rate used for calculating the pension
obligation at December 31, 1997 was 7.25 percent, and the assumed rate of future
compensation increases was 5 percent. These assumptions will be used for
calculating the 1998 net periodic pension cost. The weighted-average discount
rate used for calculating the pension obligation at December 31, 1996 and for
calculating the net periodic pension cost for 1997 was 7.5 percent and the
assumed rate of future compensation increases was 5 percent. The expected
long-term rate of return on plan assets for 1997, 1996, and 1995 was 9 percent.
The Corporation has 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 $2,346,000, $1,965,000 and $1,521,000 for 1997, 1996 and 1995,
respectively. During 1997, 1996 and 1995, the Corporation utilized forfeitures
of $308,000, $449,000 and $1,439,000, 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 $743,000,
$754,000 and $595,000 for 1997, 1996 and 1995, respectively.
45
<PAGE>
EXECUTIVE STOCK PLANS --
The Corporation has four executive stock plans and one outside director
stock plan; the 1983 Nonqualified Stock Option Plan ("1983 Plan"), the 1988
Nonqualified Stock Option Plan ("1988 Plan"), the Restricted Stock Plan, the
1992 Stock Plan and the 1997 Outside Directors Stock plan ("1997 Plan"). The
1992 Stock Plan is an all-inclusive plan, with an aggregate of 2,805,000 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 Corporation has
common stock reserved for future issuance upon the grant and exercise of options
of 2,752,493 shares.
The 1992 Stock Plan allows the Corporation to grant restricted stock,
incentive stock options, nonqualified stock options, stock appreciation rights,
or any combination thereof to certain key executives of the Corporation.
The 1997 Outside Directors Plan allows the Corporation to grant
nonqualified stock options to outside directors. The options may be awarded to
outside directors in such number, and upon such terms, and at any time and from
time to time as determined by the Compensation and Benefits Committee
("Committee"). Each award is evidenced by an award agreement that specifies
the option price, the duration of the option, the number of shares to which the
option pertains, and such other provisions as the Committee determines. The
option price for each grant is at least equal to the fair market value of a
share on the date of grant. Options granted expire at such time as the Committee
determines at the date of grant and in no event does the exercise period exceed
a maximum of ten years.
46
<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 Shares Weighted
Options Average Options Average Available Options Average
Outstanding Price Outstanding Price For Grant Outstanding Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, Dec. 31, 1994.................. 101,978 $ 4.92 269,250 $ 5.09 939,202 653,062 $17.08
Granted................................. (204,000 ) 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 (5,254) 16.05
------------------------------------------------------------------------------------
Balance, Dec. 31, 1995.................. 55,534 4.73 232,794 5.18 740,456 828,066 18.55
Granted................................. (403,000 ) 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 (21,234) 19.05
------------------------------------------------------------------------------------
Balance, Dec. 31, 1996.................. 36,630 4.83 178,048 5.20 358,690 1,170,926 22.56
Authorized.............................. 1,000,000
Granted................................. (176,000 ) 176,000 48.19
Exercised............................... (10,248) 5.46 (35,715) 5.05 (95,838) 18.30
Canceled................................ 9,380 (9,380) 22.66
------------------------------------------------------------------------------------
Balance, Dec. 31, 1997.................. 26,382 $ 4.58 142,333 $ 5.24 1,192,070 1,241,708 $26.52
------------------------------------------------------------------------------------
At Dec. 31, 1997 Per Share Price
Range................................. $3.41-$5.46 $3.01-$5.46 $12.73-$18.13*
$22.88-$30.25**
$48.19***
Weighted-Average Remaining Contractual
Life.................................. 2.2 Years 3.6 Years 6.2 Years*
8.3 Years**
9.8 Years***
</TABLE>
1997 Plan
-------------------------------------
Shares Weighted
Available Options Average
For Grant Outstanding Price
- ----------------------------------------
Balance, Dec. 31, 1994..................
Granted.................................
Exercised...............................
Canceled................................
Balance, Dec. 31, 1995..................
Granted.................................
Exercised...............................
Canceled................................
Balance, Dec. 31, 1996..................
Authorized.............................. 150,000
Granted................................. (18,000) 18,000 $ 45.13
Exercised...............................
Canceled................................
Balance, Dec. 31, 1997.................. 132,000 18,000 $ 45.13
At Dec. 31, 1997 Per Share Price
Range................................. $45.13
Weighted-Average Remaining Contractual
Life.................................. 9.6 Years
*Includes 493,488 options of which 328,179 are exercisable both with a
weighted-average exercise price of $17.23.
**Includes 572,220 options of which 135,084 are exercisable both with a
weighted-average exercise price of $27.87.
***Includes 176,000 options of which none are exercisable.
47
<PAGE>
There were 649,978, 533,473 and 405,916 options exercisable for 1997, 1996,
and 1995 with a weighted-average exercise price of $16.66, $12.43 and $10.39,
respectively.
In accounting for the impact of issuing stock options, the Corporation has
elected not to follow the recognition requirements of SFAS 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 25) and Related Interpretation. SFAS 123 requires disclosure of
pro forma net income and earnings per share information assuming that stock
options granted in 1995, 1996 and 1997 have been accounted for in accordance
with the fair value requirements of SFAS 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/outside director stock
options.
The following weighted-average assumptions were used for 1997, 1996 and
1995, respectively: risk-free interest rates of 5.37 percent, 6.50 percent and
6.33 percent; dividend yield of 2.00 percent for 1997 and 2.50 percent for 1996
and 1995; volatility factors of the expected market price of the Corporation's
common stock of 19 percent, 21 percent and 24 percent; and weighted-average
expected lives of the options of 8 years. The weighted-average grant-date fair
value of options granted during 1997, 1996 and 1995 was $13.18, $9.48 and $7.56,
respectively. For purposes of proforma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
The Corporation's proforma information as if compensation expense had been
recognized in accordance with SFAS 123 is summarized below:
(in thousands except for earnings per
share information) 1997 1996 1995
- ----------------------------------------------------------------------
Proforma net income*................. $ 62,783 $ 54,692 $ 46,231
Proforma earnings per common share
Basic........................... $ 2.81 $ 2.44 $ 2.07
Diluted......................... 2.80 2.44 2.07
*Because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its proforma effect is not necessarily indicative of its impact on
future years.
In 1997, restricted stock grants of 58,500 were awarded under the 1992
Stock Plan. Restricted stock grants awarded under the 1992 Stock Plan totaled
3,000 and 52,900 shares for 1996 and 1995, respectively. The weighted-average
price for these awards equaled the market price at the date of grant and was
$48.19, $26.75 and $22.88 for 1997, 1996 and 1995, respectively. Deferred
compensation expense related to the restricted stock was $707,000 in 1997,
$472,000 in 1996, and $213,000 in 1995. Restricted shares are generally awarded
under a three year cliff vesting. 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 19 of its executives.
Under seven 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 12 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 $9,675,000 at December 31, 1997.
48
<PAGE>
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, 1997,
1996, and 1995.
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------
Current income tax expense........... $ 41,617 $ 34,711 $ 26,148
Deferred income tax.................. (6,382) (3,952) (1,150)
-------------------------------
Income tax expense as reported....... $ 35,235 $ 30,759 $ 24,998
-------------------------------
The following is a reconciliation of the difference between income tax
expense as reported and the amount computed by applying the statutory income tax
rate to income before income taxes:
Year Ended December 31
-------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------
Income before income taxes........... $ 98,720 $ 85,737 $ 71,277
Statutory rate....................... 35% 35% 35%
-------------------------------
Income tax expense at the statutory
rate............................... 34,552 30,008 24,947
Effect of tax-exempt interest........ (736) (677) (565)
Amortization of goodwill............. 1,027 778 437
Other................................ 392 650 179
-------------------------------
Income tax expense as reported....... $ 35,235 $ 30,759 $ 24,998
-------------------------------
Tax (expense) benefits related to
security transactions.............. $ (173) $ 343 $ 489
-------------------------------
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1997, and 1996
are presented below:
(in thousands) 1997 1996
- -----------------------------------------------------------
Deferred tax assets:
Allowance for possible loan
losses......................... $ 14,733 $ 13,341
Building modification reserve... 1,592 1,592
Gain on sale of assets.......... 1,101 1,172
Net occupancy restructuring..... 211 801
Other........................... 1,615 1,458
--------------------
Total gross deferred tax
assets.................... 19,252 18,364
Deferred tax liabilities:
Prepaid expenses................ $ (598) $ (622)
Unrealized gain on securities
available for sale............. (4,667) (4,093)
Intangibles..................... (2,203) (1,659)
Other........................... (1,986) (1,342)
--------------------
Total gross deferred tax
liabilities............... (9,454) (7,716)
--------------------
Net deferred tax asset..... $ 9,798 $ 10,648
--------------------
At December 31, 1997 and 1996, no valuation allowance for deferred tax
assets was necessary because they were supported by recoverable taxes paid in
prior years.
49
<PAGE>
NOTE P -- NON-INTEREST EXPENSE
Significant components of other non-interest expense for the years ended
December 31, 1997, 1996, and 1995 are presented below:
Year Ended December 31
-------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------
Outside computer service............. $ 7,556 $ 7,546 $ 8,108
Other professional expenses.......... 4,786 3,760 2,729
Stationery, printing and supplies.... 4,585 4,103 3,394
FDIC insurance/FICO bonds............ 510 2 3,624
Other................................ 39,975 36,153 38,137
-------------------------------
Total........................... $ 57,412 $ 51,564 $ 55,992
-------------------------------
NOTE Q -- CASH FLOW DATA
For purposes of reporting cash flow, cash and cash equivalents include the
following:
December 31
----------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
Cash and due from banks................. $ 604,227 $ 872,028 $ 533,333
Time deposits........................... 64
Federal funds sold...................... 190,000 52,850 100,550
----------------------------------
Total.............................. $ 794,227 $ 924,878 $ 633,947
----------------------------------
Generally, Federal funds are sold for one-day periods and securities
purchased under resale agreements are held for less than thirty-five days.
Supplemental cash flow information is as follows:
Year Ended December 31
----------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
Cash paid:
Interest........................... $ 123,054 $ 110,555 $ 101,075
Income Taxes....................... 35,091 32,771 25,399
Non-cash items:
Loans originated to facilitate the
sale of foreclosed assets........ 90 848 2,059
Loan foreclosures.................. 3,740 2,883 1,883
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.
50
<PAGE>
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. The fair value of fixed-term certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities.
SHORT-TERM BORROWINGS: The carrying amount reported in the consolidated
balance sheet approximates the estimated fair value.
LOAN COMMITMENTS, STANDBY AND COMMERCIAL LETTERS OF CREDIT: The
Corporation's lending commitments have variable interest rates and "escape"
clauses if the customer's credit quality deteriorates. Therefore the amounts
committed approximate fair value.
GUARANTEED PREFERRED BENEFICIAL INTEREST IN CORPORATION'S JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES: The fair value of the Trust
Preferred Capital Securities is estimated based on the quoted market prices of
the instruments.
INTEREST RATE SWAPS/FLOORS: 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
----------------------------------------------------
1997 1996
----------------------------------------------------
ESTIMATED Estimated
CARRYING FAIR Carrying Fair
(in thousands) AMOUNT VALUE Amount Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents....... $ 794,227 $ 794,227 $ 924,878 $ 924,878
Securities...................... 1,491,518 1,496,096 1,476,424 1,480,314
Loans........................... 2,643,522 2,664,064 2,253,468 2,256,628
Allowance for loan losses....... (41,846) (37,626)
----------------------------------------------------
Net loans.................. 2,601,676 2,664,064 2,215,842 2,256,628
Financial liabilities:
Deposits........................ 4,483,911 4,483,279 4,242,594 4,240,979
Short-term borrowings........... 162,112 162,112 203,189 203,189
Guaranteed preferred beneficial
in the Corporation's junior
subordinated deferrable
interest debentures........... 98,403 107,420
Off-balance sheet instruments:
Interest rate swaps............. (1,836) (1,061)
Interest rate floors............ 692
</TABLE>
51
<PAGE>
NOTE S -- DERIVATIVE FINANCIAL INSTRUMENTS
During 1997, 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 42 interest rate swaps at December 31, 1997
with a notional amount of $267 million compared to 31 interest rate swaps at
December 31, 1996 with a notional amount of $251 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 counterparty to a
swap transaction has a credit rating that is investment grade. Additionally in
1997, the Corporation entered into three interest rate floor agreements with a
notional amount totaling $500 million for three years. The interest rate floors
were intended to hedge floating interest rate exposure in commercial loan
accounts in an environment of falling interest rates. The net amount payable or
receivable under these interest rate swaps/floors contracts is accrued as an
adjustment to interest income and is not considered material in 1997 or 1996.
The Corporation's credit exposure on interest rate swaps/floors is limited
to the net favorable value of all swaps/floors to each counterparty. In such
cases collateral is required from the counterparties involved if the net value
of the swaps/floors exceeds a nominal amount considered to be immaterial. At
December 31, 1997, the Corporation's credit exposure relating to interest rate
swaps/floors was immaterial.
Activity in the notional amounts of end-user derivatives for each of the
three years ended December 31, 1997, 1996 and 1995, is summarized as follows:
<TABLE>
<CAPTION>
Swaps Amortizing Interest Rate Total
(in millions) Receive Floating Floors Derivatives
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1994........... $ 34 $ 34
Additions....................... 115 115
Amortization and maturities..... 7 7
---------------------------------------------------
Balance, December 31, 1995........... 142 142
Additions....................... 168 168
Amortization and maturities..... 48 48
Terminations.................... 11 11
---------------------------------------------------
Balance, December 31, 1996........... 251 251
Additions....................... 125 $500 625
Amortization and maturities..... 89 89
Terminations.................... 20 20
---------------------------------------------------
Balance, December 31, 1997........... $ 267 $500 $767
---------------------------------------------------
</TABLE>
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.
52
<PAGE>
NOTE U -- SUBSEQUENT EVENTS (UNAUDITED)
1998 ACQUISITION
HARRISBURG BANCSHARES, INC.,--HOUSTON
On January 2, 1998, the Corporation paid approximately $55.3 million to
acquire Harrisburg Bancshares, Inc., including its subsidiary Harrisburg Bank in
Houston, Texas. This transaction will be accounted for as a purchase with total
cash consideration being funded through currently available funds, including
funds provided by the issuance of the $100 million Trust Preferred Capital
Securities, see Note I "Borrowed Funds" on page 41. The purchase price will be
allocated to the underlying assets and liabilities based on estimated fair value
at the date of acquisition. Such estimates may be subsequently revised. The
Corporation acquired loans of approximately $125 million and deposits of
approximately $222 million. Total intangibles associated with the acquisition
amounted to approximately $34.2 million. This acquisition is not expected to
have a material impact on the Corporation's 1998 net income.
DEFINITIVE AGREEMENT TO MERGE
OVERTON BANCSHARES, INC.,--FORT WORTH
On February 15, 1998, the Corporation signed a definitive agreement
providing for the merger of Overton Bancshares, Inc., in Fort Worth, Texas which
owns Overton Bank and Trust N.A., ("Overton") into the Corporation. The
merger, which is expected to be accounted for as a pooling-of-interests
transaction, will be the Corporation's first entry into the Fort Worth, Texas
market and is expected to be consummated in the second quarter of this year. The
merger is subject to approval by shareholders of Overton Bancshares, Inc.'s and
regulators. The Corporation will issue approximately 4.38 million common shares
as part of this transaction. At December 31, 1997, Overton had $732 million in
deposit, loans of $468 million, total assets of $863 million and had the sixth
largest market share in the Fort Worth MSA.
53
<PAGE>
NOTE V -- CONDENSED PARENT CORPORATION FINANCIAL STATEMENTS
Condensed financial information of the parent Corporation as of December
31, 1997 and 1996 and for each of the three years in the period ended December
31, 1997 follows:
Year Ended December 31
STATEMENT OF OPERATIONS (in -------------------------------
thousands) 1997 1996 1995
- ----------------------------------------------------------------------
INCOME:
Dividends from second tier bank
holding company subsidiary..... $ 21,996 $ 65,173 $ 56,631
Interest and other............... 5,075 713 1,101
-------------------------------
TOTAL INCOME................. 27,071 65,886 57,732
EXPENSES:
Salaries and employee benefits... 2,896 4,096 1,051
Interest expense................. 7,887
Other............................ 1,096 1,005 1,375
-------------------------------
TOTAL EXPENSES............... 11,879 5,101 2,426
-------------------------------
INCOME BEFORE INCOME TAX
CREDITS AND EQUITY IN
UNDISTRIBUTED NET INCOME OF
SUBSIDIARIES............... 15,192 60,785 55,306
Income tax credits................... 2,038 1,216 375
Equity in undistributed net income of
subsidiaries....................... 46,255 (7,023) (9,402)
-------------------------------
NET INCOME................... $ 63,485 $ 54,978 $ 46,279
-------------------------------
December 31
--------------------
BALANCE SHEETS (in thousands) 1997 1996
- -----------------------------------------------------------
ASSETS
Cash and time deposits............... $ 241 $ 454
Securities purchased under resale
agreements......................... 43,990 47,020
Loans to non-bank subsidiaries....... 52 212
Investments in second tier bank
holding company subsidiary........... 474,683 337,504
Other................................ 2,267 1,947
--------------------
TOTAL ASSETS................. $ 521,233 $ 387,137
--------------------
LIABILITIES
Other................................ $ 11,332 $ 8,194
Guaranteed preferred beneficial
interest in the Corporation's
junior subordinated deferrable
interest debentures................ 101,496
--------------------
TOTAL LIABILITIES............ 112,828 8,194
SHAREHOLDERS' EQUITY................. 408,405 378,943
--------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $ 521,233 $ 387,137
--------------------
Year Ended December 31
STATEMENTS OF CASH FLOWS (in -------------------------------
thousands) 1997 1996 1995
- ----------------------------------------------------------------------
OPERATING ACTIVITIES
Net income........................... $ 63,485 $ 54,978 $ 46,279
Adjustments to reconcile net income
to net cash provided by operating
activities:
Net income of subsidiaries....... (68,251) (58,150) (47,229)
Dividends from subsidiaries...... 21,996 65,173 56,631
Net change in other liabilities
and assets....................... 3,420 971 1,578
-------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES.......... 20,650 62,972 57,259
INVESTING ACTIVITIES
Capital contributions to
subsidiaries......................... (88,211) (53,386) (9,470)
Net decrease in loans................ 160 986 242
-------------------------------
NET CASH USED BY INVESTING
ACTIVITIES.................... (88,051) (52,400) (9,228)
FINANCING ACTIVITIES
Proceeds from issuance of guaranteed
preferred beneficial interest in
the Corporation's subordinated
debentures......................... 101,446
Purchase of treasury stock........... (17,814)
Proceeds from employee stock purchase
plans and options.................. 1,989 325 691
Cash dividends....................... (21,463) (18,073) (12,723)
-------------------------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES......... 64,158 (17,748) (12,032)
-------------------------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS......... (3,243) (7,176) 35,999
Cash and cash equivalents at
beginning of year.................. 47,474 54,650 18,651
-------------------------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR.................. $ 44,231 $ 47,474 $ 54,650
-------------------------------
54
<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, 1997 and 1996,
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, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Antonio, Texas
February 15, 1998
55
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS
(DOLLARS IN THOUSANDS--TAXABLE-EQUIVALENT BASIS)
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------
1997 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........................ $ 18 $ 1 2.93%
Securities:
U.S. Treasury.................... $ 270,424 $ 14,568 5.39% 282,692 15,049 5.32
U.S. Government agencies and
corporations................... 1,210,827 80,133 6.62 1,259,353 83,782 6.65
States and political
subdivisions:
Tax-exempt................... 5,034 474 9.41 5,470 517 9.45
Taxable......................
Other............................ 7,300 430 5.89 6,723 389 5.78
--------- -------- --------- --------
Total securities........... 1,493,585 95,605 6.40 1,554,238 99,737 6.42
Federal funds sold................... 217,771 11,839 5.44 138,811 7,226 5.21
Loans, net of unearned discount...... 2,470,841 218,394 8.84 2,086,816 184,546 8.84
--------- -------- --------- --------
TOTAL EARNING ASSETS AND AVERAGE
RATE EARNED.................... 4,182,197 325,838 7.79 3,779,883 291,510 7.71
Cash and due from banks.............. 502,451 486,798
Allowance for possible loan losses... (39,104) (34,977)
Banking premises and equipment....... 106,772 100,357
Accrued interest and other assets.... 193,342 164,434
--------- ---------
TOTAL ASSETS..................... $4,945,658 $4,496,495
--------- ---------
LIABILITIES:
Demand deposits:
Commercial and individual........ $ 935,779 $ 832,356
Correspondent banks.............. 223,621 198,750
Public funds..................... 43,177 44,923
--------- ---------
Total demand deposits...... 1,202,577 1,076,029
Time deposits:
Savings and
Interest-on-Checking........... 736,174 9,014 1.22 722,518 9,792 1.36
Money market deposit accounts.... 974,341 39,006 4.00 810,616 31,818 3.93
Time accounts.................... 1,085,028 53,497 4.93 1,046,871 51,180 4.89
Public funds..................... 257,189 11,597 4.51 245,266 10,685 4.36
--------- -------- --------- --------
Total time deposits........ 3,052,732 113,114 3.71 2,825,271 103,475 3.66
--------- ---------
Total deposits............. 4,255,309 3,901,300
Federal funds purchased and
securities sold under repurchase
agreements......................... 117,616 5,411 4.60 144,804 6,937 4.79
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures, net....... 88,745 7,652 8.62
Long-term notes payable..............
Other borrowings..................... 23,534 1,294 5.50 19,389 1,019 5.26
--------- -------- --------- --------
TOTAL INTEREST-BEARING FUNDS AND
AVERAGE RATE PAID.............. 3,282,627 127,471 3.88 2,989,464 111,431 3.73
-------- ------ -------- ------
Accrued interest and other
liabilities.......................... 65,150 72,165
--------- ---------
TOTAL LIABILITIES................ 4,550,354 4,137,658
SHAREHOLDERS' EQUITY................. 395,304 358,837
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........... $4,945,658 $4,496,495
--------- ---------
Net interest income.................. $198,367 $180,079
-------- --------
Net interest spread.................. 3.91% 3.98%
------ ------
Net interest income to total average
earning assets..................... 4.74% 4.76%
------ ------
</TABLE>
The above information is shown on a taxable-equivalent basis assuming a 35
percent tax rate for 1997 through 1993 and a 34 percent tax rate for 1992.
Non-accrual loans are included in the average loan amounts outstanding for these
computations.
56
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992
- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Interest Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost Balance Expense Cost
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 18 $ 2 3.80% $ 60 $ 2 3.43% $ 147 $ 4 2.68% $ 203 $ 8 4.10%
238,968 14,142 5.92 273,556 12,163 4.45 495,760 22,386 4.52 621,460 35,167 5.66
1,303,204 83,765 6.43 1,361,893 80,953 5.94 1,021,083 65,155 6.38 669,786 56,712 8.47
5,864 543 9.27 5,860 558 9.52 11,078 1,093 9.86 13,126 1,228 9.43
70 5 7.13 1,148 95 8.25 11,600 736 6.35
9,314 593 6.37 29,156 1,618 5.55 54,333 2,792 5.14 100,839 5,756 5.71
- --------- -------- --------- -------- --------- -------- --------- --------
1,557,350 99,043 6.36 1,670,535 95,297 5.70 1,583,402 91,521 5.78 1,416,811 99,599 7.03
117,158 6,732 5.75 108,762 4,146 3.81 255,613 7,714 3.02 195,398 6,711 3.43
1,682,541 151,197 8.99 1,339,656 106,706 7.97 1,171,825 91,263 7.79 1,045,883 84,792 8.11
- --------- -------- --------- -------- --------- -------- --------- --------
3,357,067 256,974 7.65 3,119,013 206,151 6.61 3,010,987 190,502 6.33 2,658,295 191,110 7.19
381,656 341,547 315,354 262,995
(28,468) (26,142) (31,127) (36,793)
90,674 89,430 87,085 80,794
143,097 134,339 129,864 89,953
- --------- --------- --------- ---------
$3,944,026 $3,658,187 $3,512,163 $3,055,244
- --------- --------- --------- ---------
$ 696,499 $ 673,764 $ 631,363 $ 495,199
131,295 124,416 143,008 136,487
36,772 38,531 42,075 33,842
- --------- --------- --------- ---------
864,566 836,711 816,446 665,528
720,489 12,660 1.76 796,178 14,425 1.81 750,386 14,840 1.98 541,191 13,486 2.49
616,931 23,675 3.84 547,237 15,709 2.87 534,814 13,426 2.51 477,877 14,838 3.11
964,958 48,024 4.98 854,601 29,364 3.44 907,125 27,693 3.05 946,480 36,775 3.89
125,971 5,450 4.33 86,132 2,498 2.90 74,979 2,120 2.83 79,621 3,708 4.66
- --------- -------- --------- -------- --------- -------- --------- --------
2,428,349 89,809 3.70 2,284,148 61,996 2.71 2,267,304 58,079 2.56 2,045,169 68,807 3.36
- --------- --------- --------- ---------
3,292,915 3,120,859 3,083,750 2,710,697
251,392 13,296 5.29 191,611 7,166 3.74 131,096 3,304 2.52 102,550 3,139 3.06
4,075 380 9.33 14,568 1,378 9.46
12,514 733 5.86 508 30 5.91
- --------- -------- --------- -------- --------- -------- --------- --------
2,692,255 103,838 3.85 2,475,759 69,162 2.79 2,402,983 61,793 2.57 2,162,287 73,324 3.39
-------- ------ -------- ------ -------- ------ -------- ------
63,917 58,712 44,184 35,398
- --------- --------- --------- ---------
3,620,738 3,371,182 3,263,613 2,863,213
323,288 287,005 248,550 192,031
- --------- --------- --------- ---------
$3,944,026 $3,658,187 $3,512,163 $3,055,244
- --------- --------- --------- ---------
$153,136 $136,989 $128,709 $117,786
-------- -------- -------- --------
3.80% 3.82% 3.76% 3.80%
------ ------ ------ ------
4.56% 4.39% 4.27% 4.43%
------ ------ ------ ------
</TABLE>
57
<PAGE>
FINANCIAL STATISTICS
(DOLLARS IN THOUSANDS)
The following unaudited schedules and statistics are presented for
additional information and analysis.
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
1997/1996 1996/1995
--------------------------------- ---------------------------------
INCREASE (DECREASE) Increase (Decrease)
DUE TO CHANGE IN TOTAL Due to Change in Total
------------------- OR NET ------------------- or Net
AVERAGE AVERAGE INCREASE Average Average Increase
RATE BALANCE (DECREASE) Rate Balance (Decrease)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Changes in interest earned on:
Time deposits................... $ (1) $ (1) $ (1) $ (1)
Securities:
U.S. Treasury.............. $ 178 (659) (481) (1,513) $ 2,420 907
U.S. Government agencies
and corporations........ (436 ) (3,213) (3,649) 2,884 (2,867) 17
States and political
subdivisions............ (2 ) (41) (43) 11 (37) (26)
Other................................ 7 34 41 (50) (154) (204)
Federal funds sold................... 334 4,279 4,613 (673) 1,167 494
Loans................................ (95 ) 33,943 33,848 (2,438) 35,787 33,349
----------------------------------------------------------------------
Total...................... (14 ) 34,342 34,328 (1,780) 36,316 34,536
Changes in interest paid on:
Savings, Interest-on-Checking... 960 (182) 778 2,903 (35) 2,868
Money market deposits accounts.. (645 ) (6,543) (7,188) (552) (7,591) (8,143)
Time accounts and public funds.. (821 ) (2,408) (3,229) 823 (9,214) (8,391)
Federal funds purchased and
securities sold under
repurchase agreements......... 266 1,260 1,526 1,156 5,203 6,359
Long-term notes payable and
other borrowings.............. (47 ) (7,880) (7,927) 82 (368) (286)
----------------------------------------------------------------------
Total...................... (287 ) (15,753) (16,040) 4,412 (12,005) (7,593)
----------------------------------------------------------------------
Changes in net interest income....... $ (301 ) $ 18,589 $ 18,288 $ 2,632 $ 24,311 $ 26,943
----------------------------------------------------------------------
</TABLE>
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.
LOAN MATURITY AND SENSITIVITY
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------
DUE IN AFTER ONE, AFTER
ONE YEAR BUT WITHIN FIVE
OR LESS FIVE YEARS YEARS TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate construction and land
loans.............................. $ 80,102 $ 63,451 $ 26,689 $ 170,242
Other real estate loans.............. 99,643 179,424 262,815 541,882
All other loans...................... 539,950 294,300 74,758 909,008
-------------------------------------------------
Total........................... $719,695 $ 537,175 $364,262 $1,621,132
-------------------------------------------------
Loans with fixed interest rates...... $240,475 $ 175,166 $130,130 $ 545,771
Loans with floating interest rates... 479,220 362,009 234,132 1,075,361
-------------------------------------------------
Total........................... $719,695 $ 537,175 $364,262 $1,621,132
-------------------------------------------------
</TABLE>
Loans for 1-4 family housing totaling $422,293,000 and consumer loans totaling
$602,415,000 and unearned income of $2,318,000 are not included in the amounts
in the table.
58
<PAGE>
MATURITY DISTRIBUTION AND SECURITIES PORTFOLIO YIELDS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------------------------
MATURITY
---------------------------------------------------------------------------------------------
WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS AFTER 10 YEARS
--------------------- --------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Government agencies and
corporations........................ $ 2,421 8.72% $ 141,270 7.11%
States and political subdivisions.... $ 55 4.42% $ 235 4.65% 1,958 5.76 2,795 6.44
Other................................ 25 7.88
---------------------------------------------------------------------------------------------
Total securities held to maturity... $ 55 4.42% $ 260 4.96% $ 4,379 7.40% $ 144,065 7.10%
---------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury........................ $ 310,381 5.56%
U.S. Government agencies and
corporations........................ 19,736 5.64 $ 401,759 6.09% $ 100,615 6.97% $ 502,889 7.08%
States and political subdivisions.... 50 4.99
Other................................ 25 8.98 7,304 6.00
---------------------------------------------------------------------------------------------
Total securities available for
sale.............................. $ 330,167 5.56% $ 401,784 6.09% $ 100,615 6.97% $ 510,193 7.06%
---------------------------------------------------------------------------------------------
</TABLE>
TOTAL CARRYING AMOUNT
---------------------
WEIGHTED
AVERAGE
AMOUNT YIELD
- -------------------------------------
Held to maturity:
U.S. Government agencies and
corporations........................ $ 143,691 7.14%
States and political subdivisions.... 5,043 6.07
Other................................ 25 7.88
Total securities held to maturity... $ 148,759* 7.10%
Available for sale:
U.S. Treasury........................ $ 310,381 5.56%
U.S. Government agencies and
corporations........................ 1,024,999 6.65
States and political subdivisions.... 50 4.99
Other................................ 7,329 6.01
Total securities available for
sale.............................. $1,342,759* 6.40%
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 $1,149,033,000 which are included in maturity
categories based on their stated maturity date.
QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1997 Three Months Ended 1996
(in thousands, except per share ------------------------------------------- -----------------------------------------
amounts) MAR 31 JUNE 30 SEPT 30 DEC 31 Mar 31 June 30 Sept 30 Dec 31
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income...................... $76,342 $81,642 $82,496 $ 84,235 $70,260 $72,131 $73,236 $ 74,886
Interest expense..................... 29,676 32,287 32,483 33,025 27,592 27,757 27,786 28,296
Net interest income.................. 46,666 49,355 50,013 51,210 42,668 44,374 45,450 46,590
Provision for possible loan losses... 1,625 2,275 2,000 2,000 1,875 1,325 2,300 1,800
Gain (loss) on securities
transactions....................... 20 (2 ) 476 (95 ) (903 ) 1 17
Non-interest income*................. 25,436 27,741 27,794 28,361 22,726 24,641 23,179 23,989
Non-interest expense................. 46,992 50,376 50,772 51,816 43,145 46,595 44,617 46,223
Income before income taxes........... 23,485 24,445 25,035 25,755 20,374 21,095 21,712 22,556
Income taxes......................... 8,422 8,814 8,889 9,110 7,299 7,577 7,727 8,156
Net income........................... 15,063 15,631 16,146 16,645 13,075 13,518 13,985 14,400
Net income per diluted common
share.............................. .65 .68 .70 .72 .57 .59 .61 .63
</TABLE>
* Includes gain (loss) on securities transactions.
59
<PAGE>
CULLEN/FROST BANKERS, INC. AND SUBSIDIARIES
BANK SUBSIDIARIES
(IN THOUSANDS)
- -------------------------------------------------------------------------------
DECEMBER 31, 1997
-------------------------------------
TOTAL TOTAL TOTAL
ASSETS LOANS DEPOSITS
-------------------------------------
Frost National Bank..................... $ 5,095,169 $ 2,583,081 $ 4,406,073
San Antonio, Austin, Corpus Christi,
Houston, McAllen, New Braunfels
and San Marcos
Main Office:
P. O. Box 1600, 100 West Houston
Street
San Antonio, Texas 78296 (210)
220-4011
United States National Bank............. 147,242 60,327 135,341
P. O. Box 179, 2201 Market Street
Galveston, Texas 77553 (409)
763-1151
ITEM_9.__CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 27, 1998.
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 27, 1998.
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 27, 1998.
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 27, 1998.
60
<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 -- Articles of Incorporation of
Cullen/Frost Bankers, Inc., as
amended through 1997
3.2 -- Amended By-Laws of Cullen/Frost
Bankers, Inc. (1995 Form 10-K/A,
Exhibit 3.2)(9)
4.1 -- Shareholder Protection Rights
Agreement dated as of August 1, 1996
between Cullen/Frost Bankers, Inc.
and The Frost National Bank, as
Rights Agent (1996) Form 8-A12G/A,
Exhibit 1)(10)
10.1 -- 1983 Non-qualified Stock Option Plan,
as amended (1989 Form S-8, Exhibit
4(g))(2)
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)(1)*
10.3 -- Form of Revised Change-In-Control
Agreements with four Executive
Officers (1989 Form 10-K, Exhibit
10.13(a))(4)*
10.4 -- 1988 Non-qualified Stock Option Plan
(1989 Form S-8, Exhibit 4(g))(3)
10.5 -- The 401(k) Stock Purchase Plan for
employees of Cullen/Frost Bankers,
Inc. and its Affiliates. (1990 Form
S-8, Exhibit 4(g))(5)*
10.6 -- 1991 Thrift Incentive Stock Purchase
Plan for Employees of Cullen/Frost
Bankers, Inc. and its Affiliates
(1991 Form S-8, Exhibit 4(g))(6)*
10.7 -- Cullen/Frost Bankers, Inc. Restricted
Stock Plan (1992 Form S-8, Exhibit
4(d))(7)*
10.8 -- Cullen/Frost Bankers, Inc.
Supplemental Executive Retirement
Plan (1994 Form 10-K, Exhibit
10.13)(8)
10.9 -- Form of Revised Change-In-Control
Agreements with one Executive Officer
(1994 Form 10-K, Exhibit 10.14)(8)
10.10 -- Retirement agreement with one
Executive Officer (1996 Form 10-K,
Exhibit 10.13)(11)
10.11 -- Cullen/Frost Bankers, Inc. 1997
Directors Stock Plan
10.12 -- Cullen/Frost Bankers, Inc. 1992 Stock
Plan, as amended
11 -- Statement re: computation of earnings
per share
11.1 -- Statement re: SFAS 128 restated
quarterly computation of earning per
share for years 1997 and 1996
19.1 -- Annual Report on Form 11-K for the
Year Ended December 31, 1997, for the
1991 Thrift Incentive Stock Purchase
Plan (filed pursuant to Rule 15d-21
of the Securities and Exchange Act of
1934)(12)
19.2 -- Annual Report on Form 11-K for the
Year Ended December 31, 1997, for the
401(k) Stock Purchase Plan (filed
pursuant to Rule 15d-21 of the
Securities and Exchange Act of
1934)(12)
21 -- Subsidiaries of Cullen/Frost
23 -- Consent of Independent Auditors
24 -- Power of Attorney
27 -- Financial Data Schedule
* 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, 1997.
61
<PAGE>
- ------------
(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,
1988 (File No. 0-7275)
(2) 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)
(3) 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)
(4) Incorporated herein by reference to the designated Exhibits to the
Cullen/Frost Annual Report on Form 10-K for the Year Ended December 31,
1989 (File No. 0-7275)
(5) 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)
(6) 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)
(7) 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)
(8) 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)
(9) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual Report on Form 10-K/A for the Year Ended December 31,
1995 (File No. 0-7275)
(10) 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)
(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,
1996 (File No. 0-7275)
(12) To be filed as an amendment.
62
<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 31, 1998 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 31, 1998.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------------------------ ------------------------------------- ---------------
<S> <C> <C>
T.C. FROST* Senior Chairman of the Board and
T.C. FROST Director
RICHARD W. EVANS, JR.* Chairman of the Board and Director
RICHARD W. EVANS, JR. (Principal Executive Officer)
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
BOB W. COLEMAN* Director
BOB W. COLEMAN
HARRY H. CULLEN* Director
HARRY H. CULLEN
Director
ROY H. CULLEN
EUGENE H. DAWSON, SR.* Director
EUGENE H. DAWSON, SR.
RUBEN M. ESCOBEDO* Director
RUBEN M. ESCOBEDO
W.N. FINNEGAN III* Director
W.N. FINNEGAN III
63
<PAGE>
SIGNATURES -- (CONTINUED)
SIGNATURES TITLE DATE
- ------------------------------------------------------ ------------------------------------- ---------------
PATRICK B. FROST* Director
PATRICK B. FROST
JOE FULTON* Director
JOE FULTON
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
ROBERT S. McCLANE* Director
ROBERT S. MCCLANE
IDA CLEMENT STEEN* Director
IDA CLEMENT STEEN
CURTIS VAUGHAN, JR.* Director
CURTIS VAUGHAN, JR.
HORACE WILKINS* Director
HORACE WILKINS
MARY BETH WILLIAMSON* Director
MARY BETH WILLIAMSON
*By: PHILLIP D. GREEN* Executive Vice President and Chief March 31, 1998
PHILLIP D. GREEN Financial Officer
(AS ATTORNEY-IN-FACT FOR
THE PERSONS INDICATED)
</TABLE>
64
EXHIBIT 3.1
ARTICLES OF INCORPORATION INCLUFDING ALL AMMENDMENTS THROUGH 1997
OF
CULLEN/FROST BANKERS, INC.
ARTICLE ONE: The name of the corporation is Cullen/Frost Bankers, Inc.
ARTICLE TWO: The period of its duration is perpetual.
ARTICLE THREE: The purpose for which the corporation is organized is
the transaction of any or all lawful business.
"ARTICLE FOUR: The aggregate number of shares the corporation shall
have authority to issue and the par value per share are as follows:
Number Par Value
Class of Shares Per Share
- --------------------- ---------- ---------
Common .............. 60,000,000 $5
Preferred ........... 10,000,000 $5
The corporation may purchase, directly or indirectly, its own shares to
the extent of the aggregate of its unrestricted capital surplus and unrestricted
reduction surplus available therefor.
PREFERRED SHARES. Authority is expressly vested in the Board of Directors
to divide the preferred shares into series and, within the following
limitations, to fix and determine the relative rights and preferences of the
shares of any series so established and to provide for the issuance thereof.
Each series shall be so designated as to distinguish the shares thereof from the
shares of all other series and classes. All shares of preferred stock shall be
identical except as to the following relative rights and preferences, as to
which there may be variations between different series:
1. The rate of dividend.
2. The price at and the terms and conditions on which shares may be
redeemed.
3. The amount payable upon shares in event of involuntary liquidation.
4. The amount payable upon shares in event of voluntary liquidation.
5. Sinking fund provisions for the redemption or purchase of shares.
<PAGE>
6. The terms and conditions on which shares may be converted, if the
shares of any series are issued with the privilege of conversion.
7. Voting rights.
Such series may have such other variations as may be permitted now or in
the future under the laws of the State of Texas.
Prior to the issuance of any shares of a series of preferred stock, the
Board of Directors shall establish such series by adopting a resolution setting
forth the designation and number of shares of the series and the relative rights
and preferences thereof, to the extent that variations are permitted by the
provisions hereof.
COMMON SHARES. The holder of the common shares shall, to the exclusion of
the holders of any other class of stock of the corporation, have the sole and
full power to vote for the election of directors and for all other purposes
without limitation except only (i) as otherwise provided in the statement of
serial designation for a particular series of preferred shares, and (ii) as
otherwise expressly provided by the then existing statutes of the State of
Texas. The holder of common shares shall have one vote for each share of common
stock held by them.
Subject to the provisions of the statement of serial designation for
series of preferred shares, the holders of shares of common stock shall be
entitled to receive dividends if, when and as declared by the Board of Directors
out of funds legally available therefor and to the net assets remaining after
payment of all liabilities upon voluntary or involuntary liquidation of the
corporation."
ARTICLE FIVE: The corporation has heretofore complied with the requirements of
law as to the initial minimum capital without which it could not commence
business under the Texas Business Corporation Act.
ARTICLE SIX: The street address of the corporation's registered office
is 100 W. Houston Street, San Antonio, Texas 78205, and the name of its
registered agent at such address is Robert S. McClane.
ARTICLE SEVEN: The current number of directors constituting the Board of
Directors is nineteen and the names and addresses of the persons who are
currently serving as Directors until the next annual meeting of shareholders or
until their successors are elected and qualified are:
Name Address
- ----- -------
Isaac Arnold, Jr. 601 Jefferson Street, Houston, Texas 77002
Holt Atherton P.O. Box 658, San Antonio, Texas 78293
Walter J. Berstrom 111 Cardinal Avenue, San Antonio, Texas 78209
<PAGE>
Cecil E. Burney P.O. Box 2487, Corpus Christi, Texas 78403
Clyde C. Crews 100 W. Houston Street, San Antonio, Texas 78205
Roy H. Cullen 601 Jefferson Street, Houston, Texas 77002
W. N. Finnegan III 2000 West Loop South, Suite 1900, Houston, Texas 77027
T. C. Frost, Jr. 100 W. Houston Street, San Antonio, Texas 78205
Robert G. Greer 600 Jefferson Street, Houston, Texas 77002
James L. Hayne 110 East Crockett Street, San Antonio, Texas 78205
Allan C. King 1021 Main Street, Houston, Texas 77002
Quincy Lee 3355 Cherry Ridge, Suite 202, San Antonio, Texas 78230
V. F. Neuhaus P.O. Box 1028, Mission, Texas 78572
William B. Osborn, Jr. P.O. Box 17968, San Antonio, Texas 78286
Corbin J. Robertson, Jr. 601 Jefferson Street, Houston, Texas 77002
C. Linden Sledge 100 W. Houston Street, San Antonio, Texas 78205
A. Frank Smith, Jr. 2100 First City National Bank Bldg., Houston, Texas
77002
Vivian L. Smith 2000 West Loop South, Suite 1900, Houston, Texas 77027
Edward M. Sweeney P.O. Box 721, San Antonio, Texas 78293
ARTICLE EIGHT: The names and addresses of the incorporators
are: (Omitted)
ARTICLE NINE: At each election of the Board of Directors of the
corporation, each shareholder of the corporation entitled to vote at such
election shall have the right to vote, in person or by proxy, the number of
shares owned by him for as many persons as there are Directors to be elected and
for whose election he has a right to vote. It is expressly prohibited for any
shareholder to cumulate his votes in any election of Directors or for any other
purpose.
ARTICLE TEN: No shareholder of the corporation shall be entitled as
a matter of right, preemptive or otherwise, to subscribe for or purchase any
part of any shares which the corporation shall have authority to issue, or
shares thereof held in the Treasury of the corporation, or securities
convertible into shares, whether issued for cash or other consideration, or by
way of dividend or otherwise.
"ARTICLE ELEVEN: To the fullest extent not prohibited by law, a
director of this corporation shall not be liable to the corporation or its
shareholders for monetary damages for an act or omission in the director's
capacity as a director, except that this articles does not eliminate or limit
the liability of a director for: (1) a breach of a director's duty of loyalty to
the corporation or its shareholders: (2) an act or omission not in good faith or
that involves intentional misconduct or a knowing violation of the law; (3) a
transaction from which a director received an improper benefit, whether or
<PAGE>
not the benefit resulted from an action taken within the scope of the director's
office; (4) an act or omission for which the liability of a director is
expressly provided for by statute; or (5) an act related to an unlawful stock
repurchase or payment of a dividend."
EXHIBIT 10.11
Cullen/Frost Bankers, Inc. 1997 Directors Stock Plan
<PAGE>
CULLEN/FROST BANKERS, INC. 1997 DIRECTOR STOCK PLAN
(EFFECTIVE AS OF MAY 28, 1997)
ARTICLE 1. ESTABLISHMENT, OBJECTIVES, AND DURATION
1.1. ESTABLISHMENT OF THE PLAN. Cullen/Frost Bankers, Inc., a Texas
corporation (hereinafter, together with its Subsidiaries and successors thereto
as provided in Article 10 herein, referred to as the "Company"), hereby
establishes an incentive compensation plan to be known as the "1997 Director
Stock Plan" (the "Plan"), as set forth in this document. The Plan permits the
grant of Nonqualified Stock Options.
Subject to approval by the Company's stockholders, the Plan shall become
effective as of May 28, 1997 (the "Effective Date") and shall remain in effect
as provided in Section 1.3 thereof.
1.2. OBJECTIVES OF THE PLAN. The objectives of the Plan are to link the
interests of Outside Directors to those of the Company's stockholders by
providing for the ability to pay some or all of the Outside Directors'
compensation through stock options and to optimize the profitability and growth
of the Company through incentives which are consistent with the Company's goals.
The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract, and retain the services of Outside Directors who
make significant contributions to the Company's success and to allow Outside
Directors to share in the success of the Company.
1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective Date,
as described in Section 1.1 hereof, and shall remain in effect, subject to the
right of the Committee to amend or terminate the Plan at any time pursuant to
Article 8 hereof, until all Shares subject to it shall have been purchased or
acquired according to the Plan's provisions.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set
forth below, and when the meaning is intended, the initial letter of the word
shall be capitalized:
2.1. "AWARD" means, individually or collectively, a grant under this Plan
of Nonqualified Stock Options.
2.2. "AWARD AGREEMENT" means an agreement entered into by the Company and
each Outside Director setting forth the terms and provisions applicable to
Awards granted under this Plan.
2.3. "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of
Cullen/Frost Bankers, Inc.
2.4. "CODE" means the Internal Revenue Code of 1986, as amended from
time to time.
2.5. "COMMITTEE" means the Compensation and Benefits Committee appointed
by the Board to administer Awards to Outside Directors, as specified in Article
3 herein. Any such Committee shall be comprised entirely of Outside Directors.
2.6. "DIRECTOR" means any individual who is a member of the Board of
Directors of Cullen/Frost Bankers, Inc.
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2.7. "EMPLOYEE" means any employee of the Company. Directors who are
employed by the Company shall be considered Employees under this Plan.
2.8. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor act thereto.
2.9. "FAIR MARKET VALUE" shall be determined for a relevant date on the
basis of the closing price of the Shares on the NASDAQ National Market, or any
other national stock exchange on which the Shares are traded, or if there is no
such sale on the relevant date, on the last preceding trading day on which such
Shares were traded.
2.10. "NONQUALIFIED STOCK OPTION" or "NQSO" means an option to purchase
Shares granted under Article 5 herein and which is not intended to meet the
requirements of Code Section 422.
2.11. "OPTION PRICE" means the price at which a Share may be purchased by
an Outside Director pursuant to an NQSO.
2.12. "OUTSIDE DIRECTOR" means an individual who is a member of the
Board of Directors, but who is not an Employee of the Company.
2.13. "SHARES" means the shares of Common Stock, par value $5 per
share, of the Company.
2.14. "SUBSIDIARY" means any corporation, partnership, joint venture, or
other entity in which the Company has a majority voting interest.
ARTICLE 3. ADMINISTRATION
3.1. GENERAL. The Plan shall be administered by the Committee. The members
of the Committee shall be appointed from time to time by, and shall serve at the
discretion of, the Board of Directors.
3.2. AUTHORITY OF THE COMMITTEE. Except as limited by law or by the
Certificate of Incorporation or Bylaws of the Company, and subject to the
provisions herein, the Committee shall have full power to determine the sizes
and types of Awards; determine the terms and conditions of Awards in a manner
consistent with the Plan; construe and interpret the Plan and any agreement or
instrument entered into under the Plan; establish, amend, or waive rules and
regulations for the Plan's administration; and (subject to the provisions of
Article 8 herein) amend the terms and conditions of any outstanding Award as
provided in the Plan. Further, the Committee shall make all other determinations
which may be necessary or advisable for the administration of the Plan. As
permitted by law, the Committee shall have the authority to delegate
administrative duties to officers or Directors of the Company, and the Committee
may otherwise delegate its authority as identified herein.
3.3. DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Committee shall be final, conclusive and binding on all
persons, including the Company, its stockholders, Directors, Employees, and
their estates and beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1. NUMBER OF SHARES AVAILABLE FOR GRANTS. Subject to adjustment as
provided in Section 4.2 herein, the number of Shares hereby reserved for
issuance to Outside Directors under the Plan shall be no more than one hundred
fifty thousand (150,000). The Committee shall determine the appropriate
methodology for calculating the number of shares issued pursuant to the Plan.
The maximum aggregate number of Shares that may be granted in the form of
Nonqualified Stock Options granted in any one fiscal year under the Plan to any
one Outside Director shall be five thousand (5,000).
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<PAGE>
4.2. ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change in
corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization (whether or
not such reorganization comes within the definition of such term in Code Section
368) or any partial or complete liquidation of the Company, such adjustment
shall be made in the number and class of Shares which may be delivered under
Section 4.1, and in the number and class of and/or price of Shares subject to
outstanding Awards granted under the Plan, as may be determined to be
appropriate and equitable by the Committee, in its sole discretion, to prevent
dilution or enlargement of rights; provided, however, that the number of Shares
subject to any Award shall always be a whole number.
ARTICLE 5. NONQUALIFIED STOCK OPTIONS
5.1. AWARD OF NQSOS. Subject to the terms and provisions of the Plan,
NQSOs may be awarded to Outside Directors in such number, and upon such terms,
and at any time and from time to time as shall be determined by the Committee.
5.2. AWARD AGREEMENT. Each NQSO Award shall be evidenced by an Award
Agreement that shall specify the Option Price, the duration of the Option, the
number of Shares to which the Option pertains, and such other provisions as the
Committee shall determine.
5.3. OPTION PRICE. The Option Price for each grant of an NQSO under this
Plan shall be at least equal to one hundred percent (100%) of the Fair Market
Value of a Share on the date the NQSO is granted.
5.4. DURATION OF OPTIONS. Each NQSO granted to an Outside Director shall
expire at such time as the Committee shall determine at the time of grant.
5.5. EXERCISE OF OPTIONS. NQSOs granted under this Article 5 shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, which need not be the same for
each grant or for each Outside Director. In no event should the exercise period
exceed a maximum of ten years.
5.6. PAYMENT. NQSOs granted under this Article 5 shall be exercised by the
delivery of a written notice of exercise to the Company, setting forth the
number of Shares with respect to which the NQSO is to be exercised, accompanied
by full payment for the Shares.
The Option Price upon exercise of any NQSO shall be payable to the Company
in full either: (a) in cash or its equivalent, or (b) by tendering previously
acquired Shares having an aggregate Fair Market Value at the time of exercise
equal to the total Option Price (provided that the Shares which are tendered
must have been held by the Outside Director for at least six (6) months prior to
their tender to satisfy the Option Price), or (c) by a combination of (a) and
(b).
The Committee also may allow cashless exercise as permitted under Federal
Reserve Board's Regulation T, subject to applicable securities law restrictions,
or by any other means which the Committee determines to be consistent with the
Plan's purpose and applicable law.
Subject to any governing rules or regulations, as soon as practicable
after receipt of a written notification of exercise and full payment, the
Company shall deliver to the Outside Director, in the Outside Director's name,
Share certificates in an appropriate amount based upon the number of Shares
purchased under the NQSO.
5.7. RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of an NQSO granted
under this Article 5 as it may deem advisable, including, without limitation,
restrictions under applicable federal securities laws, under the
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<PAGE>
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state securities laws applicable
to such Shares.
5.8. TERMINATION OF DIRECTORSHIP. Each Outside Director's Award Agreement
shall set forth the extent to which the Outside Director shall have the right to
exercise the NQSO following termination of the Outside Director's directorship
with the Company. Such provisions shall be determined in the sole discretion of
the Committee, shall be included in the Award Agreement entered into with each
Outside Director, need not be uniform among all NQSOs issued pursuant to this
Article 5, and may reflect distinctions based on the reasons for termination.
5.9. NONTRANSFERABILITY OF NQSOS. Except as otherwise provided by the
Committee, no NQSO granted under this Article 5 may be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated, other than by will or
by the laws of descent and distribution. Further, except as otherwise provided
in a Outside Director's Award Agreement, all NQSOs granted to a Outside Director
under this Article 5 shall be exercisable during his lifetime only by such
Outside Director.
ARTICLE 6. BENEFICIARY DESIGNATION
Each Outside Director under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of his or her death before
he or she receives any or all of such benefit. Each such designation shall
revoke all prior designations by the same Outside Director, shall be in a form
prescribed by the Company, and will be effective only when filed by the Outside
Director in writing with the Company during the Outside Director's lifetime. In
the absence of any such designation, benefits remaining unpaid at the Outside
Director's death shall be paid to the Outside Director's estate.
ARTICLE 7. RIGHTS OF DIRECTORS
Nothing in the Plan shall interfere with or limit in any way the right of
the Company's shareholders to terminate any Outside Director's service at any
time, nor confer upon any Outside Director any right to continue in the service
of the Company.
ARTICLE 8. AMENDMENT, MODIFICATION, AND TERMINATION
8.1. AMENDMENT, MODIFICATION, AND TERMINATION. Subject to the terms of the
Plan, the Committee may at any time and from time to time, alter, amend, suspend
or terminate the Plan in whole or in part.
8.2. ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR
NONRECURRING EVENTS. The Committee may make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events (including, without limitation, the events described in
Section 4.2 hereof) affecting the Company or the financial statements of the
Company or of changes in applicable laws, regulations, or accounting principles,
whenever the Committee determines that such adjustments are appropriate in order
to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan.
8.3. AWARDS PREVIOUSLY GRANTED. Notwithstanding any other provision of the
Plan to the contrary, no termination, amendment, or modification of the Plan
shall adversely affect in any material way any Award previously granted under
the Plan, without the written consent of the Outside Director holding such
Award.
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<PAGE>
ARTICLE 9. INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or of the
Board, shall be indemnified and held harmless by the Company against and from
any loss, cost, liability, or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit, or proceeding to which he or she may be a party or in which he or she may
be involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him or her in settlement thereof,
with the Company's approval, or paid by him or her in satisfaction of any
judgement in any such action, suit, or proceeding against him or her, provided
he or she shall give the Company an opportunity, at its own expense, to handle
and defend the same before he or she undertakes to handle and defend it on his
or her own behalf. The foregoing right of indemnification shall not be exclusive
of any other rights of indemnification to which such persons may be entitled
under the Company's Articles of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold them
harmless.
ARTICLE 10. SUCCESSORS
All obligations of the Company under the Plan with respect to Awards
granted hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the business
and/or assets of the Company.
ARTICLE 11. LEGAL CONSTRUCTION
11.1. GENDER AND NUMBER. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
11.2. SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
11.3. REQUIREMENTS OF LAW. The granting of Awards and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
11.4. SECURITIES LAW COMPLIANCE. Transactions under this Plan are intended
to comply with all applicable conditions of Rule 16b-3 or its successors under
the Exchange Act.
11.5. GOVERNING LAW. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Texas.
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EXHIBIT 10.12
Cullen/Frost Bankers , Inc. 1992 Stock Plan, as amended
<PAGE>
CULLEN/FROST BANKERS, INC.
1992 STOCK PLAN
SECTION 1. ESTABLISHMENT AND PURPOSE
1.1. ESTABLISHMENT. Cullen/Frost Bankers, Inc. hereby establishes an
incentive stock plan for key employees, as described herein, which shall be
known as the CULLEN/FROST BANKERS, INC. 1992 STOCK PLAN (hereinafter referred
to as the "Plan").
1.2. PURPOSE. The Purpose of the Plan is to enable the Company and its
subsidiaries and affiliates to retain and motivate key employees, and to
encourage stock ownership by such key employees, by providing them with a means
to acquire a proprietary interest, or to increase such interest, in the success
of the Company, subject to the terms and conditions of and in the manner
contemplated by this plan.
1.3. INCENTIVES. Incentives under the Plan may be granted in any one or a
combination of (A) Restricted Stock; (B) Incentive Stock Options; (C)
Nonqualified Stock Options; and (D) Stock Appreciation Rights.
1.4. EFFECTIVE DATE. This Plan shall become effective upon its adoption by
the Board of Directors; provided, however, that the validity of the Plan and any
Incentive provided hereunder is subject to approval of the Plan at the next
shareholders meeting following its adoption by the Board of Directors. If the
shareholders fail to timely approve the Plan, the Plan and any Incentive that
may be issued hereunder shall be null and void.
SECTION 2. DEFINITIONS
2.1. DEFINITIONS. Whenever used herein, the following terms shall have the
meanings set forth below:
(a) "Board of Directors" means the Board of Directors of the Company.
(b) "Change in Control" shall mean a change in control of the Company of a
nature that would be required to be reported (assuming such event has not
been "previously reported") in response to Item 1(a) of the Current Report
on Form 8-K, as in effect on the effective date of the Plan, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"); provided that, without limitation, such a Change in
Control shall be deemed to have occurred at such time as (a) any "person,"
within the meaning of Section 14(d) of the Exchange Act, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of 20 percent or more of the combined voting power
of the Company's outstanding securities ordinarily having the right to
vote for the election of directors (the "Voting Securities"); or (b)
individuals who constitute the Board of Directors on the effective date of
the Plan cease for any reason to constitute a majority thereof, provided
that any person becoming a director subsequent to the effective date of
the Plan whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least three quarters of the
directors comprising the Incumbent Board (either by a specific vote or by
approval of the proxy statement of the Company in which such person is
named as nominee for director, without
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<PAGE>
objection to such nomination) shall be, for purposes of this clause (b),
considered as though such person were a member of the Incumbent Board.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Compensation & Benefits Committee of the Board
of Directors.
(e) "Company" means Cullen/Frost Bankers, Inc., a Texas corporation.
(f) "Disability" means a total and permanent disability as defined in the
Company's basic retirement plan, as may be amended from time to time.
(g) "Employee" means any person employed by the Company or a subsidiary or
affiliate.
(h) "Incentive" means an Restricted Stock, Incentive Stock Option,
Nonqualified Stock Option, or Stock Appreciation Right granted pursuant to
the Plan.
(i) "Incentive Stock Option" means a Stock Option meeting the requirements
of Section 422 of the Code.
(j) "Nonqualified Stock Option" means any Stock Option, other than an
Incentive Stock Option, granted pursuant to the Plan.
(k) "Participant" means any Employee selected by the Committee to receive
a grant of an Incentive under the Plan.
(l) "Restricted Stock" means Stock granted to a Participant pursuant to
Section 6 of the Plan.
(m) Restriction Period" means that period of time determined by the
Committee during which the transfer of shares of Restricted Stock is
restricted and such shares of Restricted Stock are subject to forfeiture.
(n) "Retirement" shall be as defined in the Company's basic retirement
plan.
(o) "Stock" means the Common Stock, par value $5 per share, of the
Company.
(p) "Stock Appreciation Right" means the right to receive the appreciation
in the fair market value of shares of Stock granted pursuant to Section 8
of the Plan.
(q) "Stock Option: means any Incentive Stock Option or Nonqualified Stock
Option granted pursuant to the Plan.
2.2. GENDER AND NUMBER. Except when otherwise indicated by the context,
words in the masculine gender when used in the Plan also shall include the
feminine and neuter genders, the singular shall include the plural, and the
plural shall include the singular.
SECTION 3. ELIGIBILITY AND PARTICIPATION
3.1. ELIGIBLE EMPLOYEES. Employees, who, in the opinion of the Committee,
are from time to time materially responsible for the management, growth and
protection of a material part or all of the business or functions of the Company
or a subsidiary or affiliate of the Company shall be eligible to be granted
Incentives under the Plan.
SECTION 4. ADMINISTRATION
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<PAGE>
4.1. ADMINISTRATION. The Committee shall be responsible for the
administration and interpretation of the Plan. No member of the Committee shall
(i) be eligible to be granted Incentives under the Plan while serving on the
Committee or at any time within one year prior to his appointment to the
Committee, or (ii) receive an award of equity securities under any other plan of
the Company or any of its affiliates while serving on the Committee or at any
time within one year prior to his appointment to the Committee, except as
permitted by Rule 16b-3 under the Securities Exchange Act of 1934 without the
member being considered other than a disinterested person thereunder. The
Committee is authorized to interpret the Plan, to prescribe, amend and rescind
rules and regulations relating to the Plan, to provide for conditions and
assurance deemed necessary or advisable to protect the interest of the Company,
and to make all of the determinations necessary or advisable for the
administration of the Plan, but only to the extent not contrary to the express
provisions of the Plan. Determinations, interpretations or other actions made or
taken by the Committee pursuant to the provisions of the Plan shall be final and
binding and conclusive for all purposes and upon all persons whomsoever.
SECTION 5. STOCK SUBJECT TO THE PLAN
5.1. NUMBER. The total number of shares of Stock that may be granted under
the Plan may not exceed 800,000, subject to adjustment as provided in Section
5.3. Such shares may consist, in whole or in part, of authorized but unissued
shares of previously issued shares reacquired by the Company including shares
purchased on the open market and not reserved for any other purpose. In no event
may greater than 75,000 shares be available for issuance with respect to grants
of Restricted Stock under the Plan.
5.2. UNUSED STOCK. In the event any Incentive granted under the Plan
expires, terminates, is canceled or is forfeited and reacquired by the Company,
the shares of Stock subject to or reserved for such Incentive again shall be
available for issuance under the Plan.
5.3. RECAPITALIZATION ADJUSTMENT. In the event of a reorganization,
recapitalization, stock split, stock dividend, combination of shares, merger,
consolidation, rights offering, or any other change in the corporate structure
of shares of capital stock of the Company, the Committee shall, subject to the
provisions of Section 7.5, make such adjustment, if any, as it may deem
appropriate in the number and kind of shares authorized by the Plan; in the
number and kind of shares covered by Incentives granted; in the case of Stock
Options, in the option price; and in the case of Stock Appreciation Rights, in
the Stock Option purchase price, or fair market value, as appropriate.
SECTION 6. RESTRICTED STOCK
6.1. GRANT OF RESTRICTED STOCK. The Committee may, in its discretion,
grant Incentives to Participants from time to time in the form of Restricted
Stock and shall determine the number of shares of Restricted Stock which will be
granted to a Participant.
6.2. RESTRICTED STOCK AGREEMENT. Each grant of shares of Restricted Stock
shall be evidenced by a Restricted Stock Agreement and shall be subject to the
following terms and conditions and such other terms and conditions as the
Committee may prescribe.
6.3. RESTRICTION PERIOD. At the time of the grant of shares of Restricted
Stock, the Committee shall select the Restriction Period to apply to the shares
of Restricted Stock.
6.4. NONTRANSFERABILITY OF RESTRICTED STOCK. Prior to the lapse of
restrictions as provided in Section 6.5, shares of Restricted Stock may not be
sold, exchanged, transferred, pledged, assigned, or otherwise alienated,
hypothecated, whether voluntarily or involuntarily.
6.5. REMOVAL OF RESTRICTIONS. Except as otherwise provided in Section 6.9,
and subject to Section 6.6, shares of Restricted Stock covered by each
Restricted Stock grant made under this Plan shall become freely transferable by
the Participant after the expiration of the Restriction Period or upon
satisfaction of other conditions as specified by the Committee in its sole
discretion.
A-4
<PAGE>
6.6. OTHER RESTRICTIONS. The Company shall impose such other restrictions
on any shares granted pursuant to this Plan as it may deem advisable including,
without limitation, restrictions under applicable Federal laws, under the
requirements of any stock exchange or interdealer quotation system upon which
share of shares of the same class are then listed or quoted and under blue sky
or state securities laws applicable to such shares. The Company may legend the
certificates representing Restricted Stock to give appropriate notice of such
restrictions.
6.7. CERTIFICATE LEGEND. In addition to any legends placed on certificates
pursuant to Section 6.6 hereof, each certificate representing shares of
Restricted Stock granted pursuant to the Plan shall bear the following legend:
The sale or other transfer of the shares of stock represented by this
certificate, whether voluntary, involuntary, or by operation of law, is
subject to certain restrictions on transfer set forth in the Cullen/Frost
Bankers, Inc. 1992 Stock Plan, and a Restricted Stock Agreement dated
___________. A copy of the Plan, such rules, and the Restricted Stock
Agreement may be obtained from the Secretary of Cullen/Frost Bankers, Inc.
6.8. VOTING RIGHTS AND DIVIDENDS WITH RESPECT TO RESTRICTED STOCK. With
respect to shares of Restricted Stock, prior to the lapse of restrictions under
Section 6.5, each Participant shall generally have the rights and privileges of
a shareholder, including the right to vote the shares and to receive dividends
and other distributions made with respect to the shares; provided, however, that
the shares of Restricted Stock shall be subject to all the terms, conditions,
and restrictions of the Plan and the Restricted Stock Agreement, including,
without limitation, the provisions of this Section 6.
6.9. CHANGE IN CONTROL. In the event of a Change in Control, the
applicable Restriction Period with respect to all outstanding shares of
Restricted Stock shall automatically terminate.
SECTION 7. STOCK OPTIONS
7.1. GRANT OF STOCK OPTIONS. The Committee may, in its discretion, grant
Stock Options which are Incentive Stock Options or Nonqualified Options, and
such Stock Options shall be subject to the following terms and conditions and
such other terms and conditions as the Committee may prescribe.
7.2. OPTION AGREEMENTS. Each Stock Option shall be evidenced by an Option
Agreement and shall contain such terms and conditions as may be approved by the
Committee. Each Stock Option and all rights granted thereunder shall not be
transferable other than by will or the laws of descent and distribution, and
shall be exercisable during the optionee's lifetime only by the optionee or his
guardian or legal representative. If, upon the recommendation of the Committee,
the Board of Directors shall determine that, in order to carry out the purposes
of the Plan, it is necessary or desirable to reduce the purchase price of Stock
issued under any Option, then the Board of Directors may amend any Option (i) to
reduce the exercise price, provided that in no case shall such exercise price be
reduced below the fair market value (as determined by the Committee) of the
Stock subject to such Option at the time the Option is amended and (ii) to
reduce the number of shares of Stock for which such Option is exercisable,
provided, that no such reduction shall be made without consent of the Optionee.
7.3. OPTION PRICE; MEDIUM OF PAYMENT. The purchase price of Stock issued
under each Stock Option shall be determined by the Committee, but shall not be
less than the fair market value (as determined by the Committee) of the Stock
subject to the Stock Option at the time the Stock Option is granted. Payment of
such purchase price shall be made in cash or, if provided in the Option
Agreement, payment of such purchase price may be in shares of Stock which have
been held by the Participant for more than six months, or any combination of
both cash and shares of Stock; in such case, shares of Stock delivered to the
Company as payment for Stock issued upon exercise of an Option shall be valued
at their fair market value (as determined by the Committee) or their par value,
if higher.
A-5
<PAGE>
7.4. EXERCISE OF STOCK OPTION. The shares covered by a Stock Option may be
purchased in such installments and on such exercise dates as the Committee may
determine. Any shares not purchased on the applicable exercise date may be
purchased thereafter at any time prior to the expiration of the Stock Option.
7.5. MERGER OR CONSOLIDATION. If the Company merges or consolidates with
one or more corporations and the Company shall be the surviving corporation
(other than as a subsidiary of another corporation or other entity), thereafter
upon any exercise of a Stock Option theretofore granted the optionee shall be
entitled to purchase under such Stock Option, in lieu of the number of shares of
Stock as to which such Stock Option would be exercisable, the number and class
of shares of stock and securities to which the Participant would have been
entitled pursuant to the terms of the agreement of merger or consolidation if,
immediately prior to such merger or consolidation, the Participant had been the
holder of record of the number of shares of Stock as to which such Stock Option
would be exercisable. If the Company shall not be the surviving corporation in
any merger or consolidation or shall survive only as a wholly-owned subsidiary
of another corporation or other entity, or if the Company is to be dissolved or
liquidated, then unless the surviving corporation (or the parent corporation or
other entity if the Company shall survive only as a subsidiary) assumes or
substitutes new options for all Stock Options then outstanding, (i) the time at
which all Stock Options then outstanding, may be exercised shall be accelerated
and all such Stock Options shall become exercisable in full on or before a date
fixed by the Company prior to the effective date such merger or consolidation or
such dissolution or liquidation, and (ii) upon such effective date any
unexercised Stock Options shall expire.
7.6. CHANGE IN CONTROL. Any Option Agreement may provide that if at any
time there shall occur a Change in Control, then the time at which the Stock
Option evidenced thereby may be exercised shall be accelerated and the Stock
Option shall immediately become exercisable in full.
SECTION 8. STOCK APPRECIATION RIGHTS
8.1. GRANT OF STOCK APPRECIATION RIGHT. The Committee may, in its
discretion, grant Stock Appreciation Rights in tandem with a Stock Option, in
addition to a Stock Option or freestanding and unrelated to a Stock Option. If a
Stock Appreciation Right is granted otherwise than in tandem with a Stock
Option, the Committee shall determine the number of shares of Stock covered by
such Stock Appreciation Right. Stock Appreciation Rights shall be subject to the
following terms and conditions and such other terms and conditions as the
Committee may prescribe.
8.2. TIME AND PERIOD OF GRANT. If a Stock Appreciation Right is granted
with respect to a Stock Option, it may be granted at the time of the grant of
the Stock Option or at any time thereafter. If a Stock Appreciation Right is
granted in tandem with any Stock Option at the time the Stock Appreciation Right
is granted the Committee may limit the exercise period for such Stock
Appreciation Right. In no event shall the exercise period for a Stock
Appreciation Right in tandem with any Stock Option exceed the exercise period
for such Stock Option. If a Stock Appreciation Right is granted without being
related to an underlying Stock Option, the period for exercise of the Stock
Appreciation Right shall be set by the Committee at the time of grant.
8.3. VALUE OF STOCK APPRECIATION RIGHT. If a Stock Appreciation Right is
granted in tandem with a Stock Option, the Participant will be entitled to
surrender the Stock Option at any time such Stock Option is exercisable and
receive in exchange therefor an amount equal to (i) the excess of the fair
market value of one share of the Stock on the date the election to surrender is
received by the Company over the Stock Option purchase price, multiplied by (ii)
the number of shares of Stock covered by the Stock Option which is surrendered.
If a Stock Appreciation Right is granted otherwise than in tandem with a Stock
Option, the Participant will receive upon exercise of the Stock Appreciation
Right an amount equal to (i) the excess of the fair market value of one share of
the Stock on the date the election to exercise such Stock Appreciation Right is
received by the Company over the fair market value of one share of the Stock on
the date of grant, multiplied by (ii) the number of shares of Stock covered by
the Stock Appreciation Right.
A-6
<PAGE>
8.4. PAYMENT OF STOCK APPRECIATION RIGHT. Payment of a Stock Appreciation
Right shall be in the form of shares of Common Stock, cash, or any combination
of shares and cash. The form of payment upon exercise of such a right shall be
determined by the Committee either at the time of grant of the Stock
Appreciation Right or at the time of exercise of the Stock Appreciation Right.
8.5. CHANGE IN CONTROL. Any Stock Appreciation Right may provide that if
at any time there shall occur a Change in Control, then the time at which the
Stock Appreciation Right may be exercised shall be accelerated and the Stock
Appreciation Right shall immediately become exercisable in full.
SECTION 9. MISCELLANEOUS
9.1. NO RIGHT TO EMPLOYMENT. Nothing in the Plan or in the terms of any
Incentive granted under the Plan shall in any manner be construed to limit or
restrict in any way the right of the Company or its subsidiaries or affiliates
to terminate any Participant's employment at any time and without regard to the
effect of such termination on the Participant under the Plan, nor confer upon
any Participant any right to continue in the employ of the Company or its
subsidiaries or affiliates.
9.2. TAX WITHHOLDING. The Company shall have the right to deduct from all
payments any Federal, state, or local taxes required by law to be withheld with
respect to such payments, and the Participant or other person receiving shares
of Stock pursuant to the Plan may be required to pay the Company, as
appropriate, the amount of any such taxes which the Company is required to
withhold with respect to such Stock. A Participant may elect, subject to the
approval of the Committee, to have a portion of the shares of Stock which would
otherwise be transferred to the Participant under the Plan withheld by the
Company to satisfy the tax withholding requirement of this Section.
9.3. GOVERNING LAW. The Plan, and all agreements and other documents
delivered hereunder, shall be construed in accordance with and governed by the
laws of the State of Texas.
9.4. EXPENSE OF PLAN. The expenses of administering the Plan shall be
borne by the Company.
9.5. AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors in its
discretion may amend or terminate the Plan at any time; provided, that no
amendment or termination that shall affect any Incentive theretofore granted may
be made which would impair the rights of the Participant without the consent of
such Participant; and provided, further, that the Board of Directors may not
make any amendment without the approval of the shareholders of the Company if
such approval is necessary in order for the Plan to continue to comply with Rule
16b-3 under the Securities Exchange Act of 1934.
9.6. DURATION OF THE PLAN. Subject to the Board's right to earlier
terminate the Plan pursuant to Section 9.5 hereof, the Plan shall terminate not
later than ten (10) years after the date of adoption of the Plan by the Board
and no Incentives shall be granted after termination of the Plan; provided,
however, that termination of the Plan will not adversely affect any Incentives
granted prior to termination of the Plan.
A-7
EXHIBIT 11
Statement re: Computation of Earnings Per Share
<PAGE>
CULLEN/FROST BANKERS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
Basic and Diluted (Unaudited)
(in thousands, except per share amounts)
Basic Earnings Per Share 1997 1996 1995
======= ======= =======
Net Income .................................... $63,485 $54,978 $46,279
======= ======= =======
Weighted average number of common
shares outstanding .......................... 22,369 22,444 22,309
======= ======= =======
Basic earnings per common share ............... $ 2.84 $ 2.45 $ 2.07
Diluted Earnings Per Share 1997 1996 1995
======= ======= =======
Net Income .................................... $63,485 $54,978 $46,279
======= ======= =======
Weighted average number of common
shares outstanding .......................... 22,369 22,444 22,309
Addition from assumed exercise of
stock options ............................... 696 462 367
------- ------- -------
Weighted average number of common shares
outstanding, including dilutive effect
of stock options ............................ 23,065 22,906 22,676
======= ======= =======
Diluted earnings per common share ............. $ 2.75 $ 2.40 $ 2.04
EXHIBIT 11.1
Statement Re: SFAS 128 Restated Quarterly Computation of Earning Per Share For
Years 1997 and 1996
<PAGE>
CULLEN/FROST BANKERS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
Basic and Diluted (Unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1997 THREE MONTHS ENDED 1996
----------------------------------------- ----------------------------------------
BASIC EARNINGS PER SHARE MAR 31 JUNE 30 SEPT 30 DEC 31 MAR 31 JUNE 30 SEPT 30 DEC 31
======== ======== ======== ======== ======== ======== ======== =======
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income .................................. $ 15,063 $ 15,631 $ 16,146 $ 16,645 $ 13,075 $ 13,518 $ 13,985 $14,400
======== ======== ======== ======== ======== ======== ======== =======
Weighted average number of common shares
outstanding ............................... 22,499 22,483 22,261 22,235 22,421 22,433 22,450 22,471
======== ======== ======== ======== ======== ======== ======== =======
Basic earnings per common share ............. $ 0.67 $ 0.70 $ 0.73 $ 0.75 $ 0.58 $ 0.60 $ 0.62 $ 0.64
<CAPTION>
THREE MONTHS ENDED 1997 THREE MONTHS ENDED 1996
------------------------------------- -------------------------------------
DILUTED EARNINGS PER SHARE MAR 31 JUNE 30 SEPT 30 DEC 31 MAR 31 JUNE 30 SEPT 30 DEC 31
======= ======= ======= ======= ======= ======= ======= =======
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income ........................................... $15,063 $15,631 $16,146 $16,645 $13,075 $13,518 $13,985 $14,400
======= ======= ======= ======= ======= ======= ======= =======
Weighted average number of common shares outstanding . 22,499 22,483 22,261 22,235 22,421 22,433 22,450 22,471
Addition from assumed exercise of stock options ...... 594 624 717 807 408 427 467 533
------- ------- ------- ------- ------- ------- ------- -------
Weighted average number of common shares
outstanding, including dilutive effect of stock
options............................................. 23,093 23,107 22,978 23,042 22,829 22,860 22,917 23,004
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per common share .................... $ 0.65 $ 0.68 $ 0.70 $ 0.72 $ 0.57 $ 0.59 $ 0.61 $ 0.63
</TABLE>
EXHIBIT 21
Subsidiaries of Cullen/Frost
<PAGE>
Subsidiaries of the Registrant
As of March 31, 1998, 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
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-30776) pertaining to the Cullen/Frost Bankers, Inc. 1983
Nonqualified Stock Option Plan, the Registration Statement (Form S-8 No.
33-30777) pertaining to the Cullen/Frost Bankers, Inc. 1988 Nonqualified
Stock Option Plan, the Registration Statement (Form S-8 No. 33-37500)
pertaining to the 401(k) Stock Purchase Plan for Employees of Cullen/Frost
Bankers, Inc. and its Affiliates, the Registration Statement (Form S-8 No.
33-39478) pertaining to the 1991 Thrift Incentive Stock Purchase Plan for
Employees of Cullen/Frost Bankers, Inc. and its Affiliates, the Registration
Statement (Form S-8 No. 33-53492) pertaining to the Cullen/Frost Bankers,
Inc. Restricted Stock Plan, and the Registration Statement (Form S-8 No.
33-53622) pertaining to the Cullen/Frost Bankers, Inc. 1992 Stock Plan, of
our report dated February 15, 1998, with respect to the consolidated
financial statements of Cullen/Frost Bankers, Inc. included in this Annual
Report (Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG LLP
San Antonio, Texas
March 30, 1998
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Patrick B. 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, 1997, to
sign any and all amendments thereto, and to file such Annual Report and
amendments, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Signatures Title Date
/s/ T.C. FROST
- ---------------------- Senior Chairman of the Board January 27, 1998
(T.C. Frost)
and Director
/s/RICHARD W. EVANS, Jr
- ---------------------- Chairman of the Board January 27, 1998
(Richard W. Evans, Jr.) and Director
/s/Isaac Arnold, Jr.
- ---------------------- Director January 27, 1998
(Isaac Arnold, Jr.)
/s/ROYCE S. CALDWELL
- ---------------------- Director January 27, 1998
(Royce S. Caldwell)
/s/RUBEN R. CARDENAS
- ---------------------- Director January 27, 1998
(Ruben R. Cardenas)
/s/HENRY E. CATTO
- ---------------------- Director January 27, 1998
(Henry E. Catto)
/s/BOB W. COLEMAN
- ---------------------- Director January 27, 1998
(Bob W. Coleman)
/s/HARRY H. CULLEN
- ---------------------- Director January 27, 1998
(Harry H. Cullen)
- ---------------------- Director January 27, 1998
(Roy H. Cullen)
/s/EUGENE H. DAWSON, SR.
- ---------------------- Director January 27, 1998
(Eugene H. Dawson, Sr.)
/s/RUBEN M. ESCOBEDO
- ---------------------- Director January 27, 1998
(Ruben M. Escobedo)
<PAGE>
Signatures Title Date
/s/W.N. FINNEGAN III
- ---------------------- Director January 27, 1998
(W.N. Finnegan III)
/s/PATRICK B. FROST
- ---------------------- Director January 27, 1998
(Patrick B. Frost)
/s/JOE FULTON
- ---------------------- Director January 27, 1998
(Joe Fulton)
/s/JAMES W. GORMAN, JR.
- ---------------------- Director January 27, 1998
(James W. Gorman, Jr.)
/s/JAMES L. HAYNE
- ---------------------- Director January 27, 1998
(James L. Hayne)
/s/RICHARD M. KLEBERG, III
- ---------------------- Director January 27, 1998
(Richard M. Kleberg, III)
/s/ROBERT S. McCLANE
- ---------------------- Director January 27, 1998
(Robert S. McClane)
/s/IDA CLEMENT STEEN
- ---------------------- Director January 27, 1998
(Ida Clement Steen)
/s/CURTIS VAUGHAN, JR.
- ---------------------- Director January 27, 1998
(Curtis Vaughan, Jr.)
/s/HORACE WILKINS
- ---------------------- Director January 27, 1998
(Horace Wilkins)
/s/MARY BETH WILLIAMSON
- ---------------------- Director January 27, 1998
(Mary Beth Williamson)
/s/ Phillip D. Green
- ----------------------- Executive Vice President January 27, 1998
(Phillip D. Green) and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 604,227
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 190,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,342,759
<INVESTMENTS-CARRYING> 148,759
<INVESTMENTS-MARKET> 153,337
<LOANS> 2,643,522
<ALLOWANCE> 41,846
<TOTAL-ASSETS> 5,230,588
<DEPOSITS> 4,483,911
<SHORT-TERM> 132,112
<LIABILITIES-OTHER> 107,757
<LONG-TERM> 98,403
0
0
<COMMON> 112,710
<OTHER-SE> 295,695
<TOTAL-LIABILITIES-AND-EQUITY> 5,230,588
<INTEREST-LOAN> 217,432
<INTEREST-INVEST> 95,444
<INTEREST-OTHER> 11,839
<INTEREST-TOTAL> 324,715
<INTEREST-DEPOSIT> 113,114
<INTEREST-EXPENSE> 127,471
<INTEREST-INCOME-NET> 197,244
<LOAN-LOSSES> 7,900
<SECURITIES-GAINS> 494
<EXPENSE-OTHER> 199,956
<INCOME-PRETAX> 98,720
<INCOME-PRE-EXTRAORDINARY> 98,720
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,485
<EPS-PRIMARY> 2.84
<EPS-DILUTED> 2.75
<YIELD-ACTUAL> 7.79
<LOANS-NON> 12,702
<LOANS-PAST> 6,651
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,351
<ALLOWANCE-OPEN> 37,626
<CHARGE-OFFS> (9,590)
<RECOVERIES> 3,805
<ALLOWANCE-CLOSE> 41,846
<ALLOWANCE-DOMESTIC> 35,404
<ALLOWANCE-FOREIGN> 307
<ALLOWANCE-UNALLOCATED> 6,135
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<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> 2,253,468
<ALLOWANCE> 37,626
<TOTAL-ASSETS> 4,888,384
<DEPOSITS> 4,242,594
<SHORT-TERM> 174,107
<LIABILITIES-OTHER> 92,740
<LONG-TERM> 0
0
0
<COMMON> 112,410
<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> 2.45
<EPS-DILUTED> 2.40
<YIELD-ACTUAL> 7.71
<LOANS-NON> 10,129
<LOANS-PAST> 5,911
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,825
<ALLOWANCE-OPEN> 32,268
<CHARGE-OFFS> (10,245)
<RECOVERIES> 7,676
<ALLOWANCE-CLOSE> 37,626
<ALLOWANCE-DOMESTIC> 28,405
<ALLOWANCE-FOREIGN> 138
<ALLOWANCE-UNALLOCATED> 9,083
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 533,333
<INT-BEARING-DEPOSITS> 64
<FED-FUNDS-SOLD> 100,550
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,325,836
<INVESTMENTS-CARRYING> 210,731
<INVESTMENTS-MARKET> 214,962
<LOANS> 1,817,453
<ALLOWANCE> 32,268
<TOTAL-ASSETS> 4,200,211
<DEPOSITS> 3,645,733
<SHORT-TERM> 111,395
<LIABILITIES-OTHER> 101,619
<LONG-TERM> 0
0
0
<COMMON> 55,997
<OTHER-SE> 285,467
<TOTAL-LIABILITIES-AND-EQUITY> 4,200,211
<INTEREST-LOAN> 150,497
<INTEREST-INVEST> 98,862
<INTEREST-OTHER> 6,734
<INTEREST-TOTAL> 256,093
<INTEREST-DEPOSIT> 89,809
<INTEREST-EXPENSE> 103,838
<INTEREST-INCOME-NET> 152,255
<LOAN-LOSSES> 6,272
<SECURITIES-GAINS> (1,396)
<EXPENSE-OTHER> 162,449
<INCOME-PRETAX> 71,277
<INCOME-PRE-EXTRAORDINARY> 71,277
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,279
<EPS-PRIMARY> 2.07
<EPS-DILUTED> 2.04
<YIELD-ACTUAL> 7.65
<LOANS-NON> 14,798
<LOANS-PAST> 5,188
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 13,594
<ALLOWANCE-OPEN> 26,002
<CHARGE-OFFS> (4,681)
<RECOVERIES> 4,245
<ALLOWANCE-CLOSE> 32,268
<ALLOWANCE-DOMESTIC> 29,933
<ALLOWANCE-FOREIGN> 140
<ALLOWANCE-UNALLOCATED> 2,195
</TABLE>
