<PAGE> 1
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1996
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
-------------- ----------------
Commission File No. 0-13668
CORPUS CHRISTI BANCSHARES, INC.
-------------------------------------------------------
(Exact name of Registrant as specified in its charter.)
Texas 74-2351663
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2402 Leopard Street, Corpus Christi, Texas 78408
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(512) 887-3000
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past twelve months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 12, 1996
- --------------------------------------------------------------------------------
COMMON STOCK, $5.00 PAR VALUE 1,600,200
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
1
<PAGE> 2
CORPUS CHRISTI BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX PAGE
NUMBER
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1996 and
December 31, 1995 3
Consolidated Statements of Income -
Three months and nine months ended September 30, 1996 and September 30, 1995 5
Consolidated Statements of Changes in Shareholders'
Equity - Nine months ended September 30, 1996 and September 30,1995 6
Consolidated Statements of Cash Flows -
Three months and nine months ended September 30, 1996 and September 30, 1995 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
</TABLE>
2
<PAGE> 3
Part I. Financial Information
Item 1. Financial Statements
CORPUS CHRISTI BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
ASSETS: (Unaudited) (Audited)
=================================================
<S> <C> <C>
Cash and due from banks $ 16,640,780 $ 18,568,553
Interest bearing deposits with Federal Home Loan Bank 86,357 114,615
Federal funds sold 31,750,000 6,000,000
Securities available for sale: (Note 3)
U.S. Treasury securities 26,178,594 40,597,190
Mortgage pass-through and related securities 44,471,193 40,061,876
Other securities 763,300 610,150
-------------------------------------------------
Total securities available for sale 71,413,087 81,269,216
Securities held to maturity: (Note 4)
U.S. Government agencies 1,001,787 1,003,210
Obligations of states and political subdivisions 4,011,800 4,859,314
-------------------------------------------------
Total securities held to maturity 5,013,587 5,862,524
Loans (Note 5) 111,959,837 108,978,196
Less: Unearned discount (3,771,234) (4,444,346)
Less: Allowance for loan losses (Note 6) (2,111,153) (2,542,513)
-------------------------------------------------
Net loans 106,077,450 101,991,337
Bank premises and equipment, net 4,693,618 5,213,133
Accrued interest receivable 1,498,769 1,842,287
Intangible assets 1,709,299 1,781,854
Other real estate 297,464 529,560
Other assets 953,685 694,284
-------------------------------------------------
Total assets $ 240,134,096 $ 223,867,363
=================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
3
<PAGE> 4
CORPUS CHRISTI BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited) (Audited)
=================================================
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 51,411,373 $ 58,790,068
Interest bearing transaction accounts (Note 7) 91,879,480 72,494,574
Savings 15,280,204 15,600,520
Certificates of deposit (Note 8) 60,111,592 54,012,748
-------------------------------------------------
Total deposits 218,682,649 200,897,910
Securities sold with agreements to repurchase 3,199,000 5,459,000
Accrued interest payable 338,280 370,369
Dividends payable 120,030 100,000
Other liabilities 929,521 985,387
-------------------------------------------------
Total liabilities 223,269,480 207,812,666
-------------------------------------------------
SHAREHOLDERS' EQUITY:
Common stock, $5.00 par value;
4,000,000 shares authorized; 1,600,200
shares issued and outstanding 8,004,000 8,000,000
Retained earnings 9,356,221 8,032,273
Unrealized gains (losses) on securities available for sale (492,605) 22,424
-------------------------------------------------
Total shareholders' equity 16,864,616 16,054,697
-------------------------------------------------
Total liabilities and shareholders' equity $ 240,134,096 $ 223,867,363
=================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
4
<PAGE> 5
CORPUS CHRISTI BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
Interest income: 1996 1995 1996 1995
========================================================================
<S> <C> <C> <C> <C>
Interest on loans $ 2,358,618 $ 2,215,244 $ 7,089,874 $ 6,421,031
Interest on deposits with other banks 3,708 1,376 7,812 3,050
Interest on federal funds sold 110,071 221,378 146,208 554,763
Interest and dividends on securities available for
sale:
U.S Treasury securities 405,823 396,439 1,404,973 1,308,833
Mortgage pass-through and related securities 671,241 170,072 2,007,280 290,251
Other securities 10,518 8,884 29,385 25,812
Interest on securities held to maturity:
U.S. Government agencies 23,401 37,134 70,202 186,935
State and Political subdivisions 70,461 64,856 225,731 225,929
------------------------------------------------------------------------
Total interest income 3,653,841 3,115,383 10,981,465 9,016,604
------------------------------------------------------------------------
Interest expense:
Interest on deposits:
Interest bearing transaction accounts 565,480 435,589 1,521,179 1,398,281
Savings 127,605 123,039 365,504 383,955
Certificates of deposit 758,929 598,042 2,123,544 1,581,879
Federal funds purchased 13,214 ---- 57,445 ----
Securities sold with agreements to repurchase 41,382 29,360 159,861 51,245
------------------------------------------------------------------------
Total interest expense 1,506,610 1,186,030 4,227,533 3,415,360
------------------------------------------------------------------------
Net interest income 2,147,231 1,929,353 6,753,932 5,601,244
Provision for loan losses ---- ---- ---- (400,000)
Net interest income after provision for loan ------------------------------------------------------------------------
losses 2,147,231 1,929,353 6,753,932 6,001,244
------------------------------------------------------------------------
Other income:
Trust department income 273,859 276,395 838,937 881,519
Service charges 294,036 257,305 850,502 755,165
Credit card fees 56,217 53,140 139,289 140,327
Brokerage fees 58,790 57,260 239,838 172,544
Other income 204,632 124,129 480,102 310,274
------------------------------------------------------------------------
Total other income 887,534 768,229 2,548,668 2,259,829
------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits 1,083,425 1,006,696 3,243,118 2,981,158
Net occupancy expenses 263,748 222,620 791,489 704,381
Furniture and equipment expenses 179,732 163,667 554,280 513,567
Amortization of intangible assets 30,760 ---- 91,365 ----
Net cost to operate other real estate 864 48,575 39,639 100,767
Legal and professional fees 256,854 202,840 668,555 533,063
Insurance expenses 26,441 17,613 67,747 215,469
Advertising expenses 63,441 64,535 98,657 148,533
Other operating expenses 404,252 312,313 1,182,567 1,085,369
------------------------------------------------------------------------
Total other expense 2,309,517 2,038,859 6,737,417 6,282,307
------------------------------------------------------------------------
Income before income taxes 725,248 658,723 2,565,183 1,978,766
Applicable income taxes 251,147 228,324 881,205 683,000
------------------------------------------------------------------------
Net income $ 474,101 $ 430,399 $ 1,683,978 $ 1,295,766
========================================================================
Weighted average of common stock and common
stock equivalents outstanding 1,704,296 1,695,118 1,705,205 1,685,271
========================================================================
Net income per common share $ .28 $ .25 $ .99 $ .77
========================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
5
<PAGE> 6
CORPUS CHRISTI BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Gains(Losses) on
Securities
Common Retained Available for
Stock Earnings Sale Total
=======================================================================
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ 8,000,000 $ 6,497,204 $ (1,058,743) $ 13,438,461
Net income for nine months
ended September 30, 1995 ---- 1,295,766 ---- 1,295,766
Cash dividends, declared,
$.1875 per share ---- (300,000) ---- (300,000)
Net change in unrealized gains
on securities available for sale
for the nine months ended
September 30, 1995 ---- ---- 916,627 916,627
=======================================================================
Balance at September 30, 1995 $ 8,000,000 $ 7,492,970 $ (142,116) $ 15,350,854
=======================================================================
Balance at January 1, 1996 $ 8,000,000 $ 8,032,273 $ 22,424 $ 16,054,697
Net income for nine months
ended September 30, 1996 ---- 1,683,978 ---- 1,683,978
Stock options exercised 1,000 ---- ---- 1,000
Cash dividends, declared,
$.2250 per share ---- (360,030) ---- (360,030)
Net change in unrealized losses
on securities available for sale
for the nine months ended
September 30, 1996 ---- ---- (515,029) (515,029)
-----------------------------------------------------------------------
Balance at September 30, 1996 $ 8,001,000 $ 9,356,221 $ (492,605) $ 16,864,616
=======================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
6
<PAGE> 7
CORPUS CHRISTI BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1996 1995 1996 1995
========================================================================
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 474,101 $ 430,399 $ 1,683,978 $ 1,295,766
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 164,060 164,822 498,739 488,397
Provision for loan losses ---- ---- ---- (400,000)
Deferred federal income tax benefit (14,931) (427,428) (27,873) (266,798)
Loss (gain) on sale of property and equipment 4,518 ---- (9,774) ----
Gain on sale of securities available for sale ---- ---- ---- ----
Gain on sale of other real estate (21,897) ---- (21,897) (18,344)
Net amortization of investment securities available
for sale and securities held to maturity 109,938 94,356 408,360 322,424
Valuation provisions for other real estate ---- 30,000 20,000 90,000
Decrease (increase) in accrued interest receivable 295,552 61,788 343,518 157,334
Decrease (increase) in other assets (313,539) 82,351 (186,846) (179,447)
Increase (decrease) in accrued interest payable 13,547 55 (32,089) 28,620
Increase (decrease) in other liabilities 86,869 164,828 237,207 695,102
------------------------------------------------------------------------
Net cash provided by operating activities 798,218 601,171 2,913,323 2,213,054
------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease (increase) in federal funds sold (31,650,000) 8,050,000 (25,750,000) (1,500,000)
Proceeds from sales of securities available for ---- ---- ---- ----
sale
Proceeds from maturities of securities available 6,993,188 794,402 19,576,926 13,560,230
for sale
Proceeds from maturities of securities held to 665,000 3,039,999 795,000 3,039,999
maturity
Purchase of securities available for sale (5,084,720) (17,236,442) (10,855,449) (19,231,192)
Purchase of securities held to maturity ---- ---- ---- ----
Net decrease (increase) in loans 264,525 (1,699,041) (4,725,198) (8,277,358)
Recoveries of charged-off loans 289,071 197,534 639,085 703,378
Purchase of bank premises and equipment (23,721) (76,102) (133,885) (306,292)
Proceeds from sale of bank premises and equipment 141,245 ---- 164,435 ----
Proceeds from sale of other real estate 70,000 42,788 233,993 136,777
------------------------------------------------------------------------
Net cash used by investing activities (28,335,412) (6,886,862) (20,055,093) (11,874,458)
------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in demand, interest bearing
transaction and savings accounts 31,155,461 (1,325,396) 11,685,895 (4,473,997)
Net increase (decrease) in certificates of deposit 7,877,174 1,736,417 6,098,844 5,478,771
Net increase (decrease) in federal funds purchased (5,825,000) ---- ---- ----
Net increase (decrease) in securities sold with
agreements to repurchase (266,000) 4,132,071 (2,260,000) 6,604,000
Proceeds from issuance of common stock 1,000 ---- 1,000 ----
Dividends paid (120,000) (100,000) (340,000) (300,000)
------------------------------------------------------------------------
Net cash provided (used) by financing activities 32,822,635 4,443,092 15,185,739 7,308,774
------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 5,285,441 (1,842,599) (1,956,031) (2,352,630)
Cash and cash equivalents at beginning of period 11,441,696 14,650,986 18,683,168 15,161,017
------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 16,727,137 $ 12,808,387 $ 16,727,137 $ 12,808,387
========================================================================
Supplementary information:
Interest paid $ 1,493,063 $ 1,185,975 $ 4,259,622 $ 3,386,740
========================================================================
Income taxes paid $ 130,000 $ 120,000 $ 1,009,007 $ 380,000
========================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
7
<PAGE> 8
CORPUS CHRISTI BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The Consolidated Financial Statements herein have been prepared by Corpus
Christi Bancshares, Inc. (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. The
consolidated financial statements include all adjustments (including normal
recurring accruals) which, in the opinion of management, are necessary for
the fair presentation of the results of the periods presented. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these financial
statements be read in conjunction with the consolidated financial statements
and the notes thereto in the Company's latest Annual Report on Form 10-KSB.
2. Principles of Consolidation
The consolidated financial statements for the Company include the accounts
of Corpus Christi Bancshares, Inc. and its wholly owned subsidiaries,
C.S.B.C.C., Inc. and Citizens State Bank ("Bank"), consolidated in
accordance with generally accepted accounting principles. All major items of
income and expense are recorded on the accrual basis of accounting, and all
significant intercompany accounts and transactions have been eliminated. In
the opinion of management, the consolidated financial statements present
fairly the results of the periods presented. These statements have not been
examined by independent public accountants and are subject to year-end audit
and adjustments.
Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company
considers cash, due from bank accounts and interest bearing deposits with
the Federal Home Loan Bank to be cash equivalent accounts.
Net Income Per Common Share
Primary net income per common share is computed on the weighted average
number of shares of common stock outstanding, including common stock assumed
outstanding to reflect the potential dilutive effect of common stock
options. Fully diluted net income per common share is computed on the
weighted average number of shares of common stock outstanding, including the
common stock assumed outstanding to reflect the maximum dilutive effect of
common stock options. Fully diluted net income per common share was not
applicable for the periods presented because the effect is not significant.
3. Securities Available for Sale
Management determines the appropriate classification of securities at the
time of purchase. Securities to be held for sale for indefinite periods of
time and not intended to be held to maturity or on a long-term basis are
classified as securities available for sale and are carried at market value.
The securities available for sale portfolio provides the Company with an
additional measure of liquidity and added flexibility in managing the
Company's asset liability management strategy and such securities may be
sold in
8
<PAGE> 9
response to changes in interest rates, resultant prepayment risk and other
factors related to interest rate and resultant risk changes.
Included in securities classified as securities available for sale are
mortgage pass-through and related securities which represent participating
interests in pools of long-term first mortgage loans originated and serviced
by the issuers of the securities. Mortgage pass-through and related
securities are carried at fair value. Market interest rate fluctuations can
affect both the timing of prepayments of principal and the yield on the
securities. Other securities include investments in the Federal Home Loan
Bank of $700,300, Texas Independent Bank of $62,750 and the Corpus Christi
Development Corporation of $250 at September 30, 1996. Premiums and
discounts are amortized using the straight-line method over the remaining
period to contractual maturity. The net unrealized gains or losses on
securities available for sale are recorded as a separate component of
shareholders' equity.
The amortized cost and market value of securities available for sale at
September 30, 1996 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
September 30, 1996
======================================================================
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
======================================================================
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 26,134,400 $ 72,587 $ (28,393) $ 26,178,594
Mortgage pass-through and
related securities 45,016,365 15,076 (560,248) 44,471,193
Other securities 763,300 -- -- 763,300
----------------------------------------------------------------------
$ 71,914,065 $ 87,663 $ (588,641) $ 71,413,087
======================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
======================================================================
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
======================================================================
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 40,429,105 $ 210,918 $ (42,833) $ 40,597,190
Mortgage pass-through and
related securities 39,950,710 187,002 (75,836) 40,061,876
Other securities 610,150 -- -- 610,150
----------------------------------------------------------------------
$ 80,989,965 $ 397,920 $ (118,669) $ 81,269,216
======================================================================
</TABLE>
Securities available for sale with market values of $60,916,654 at September
30, 1996 and $6,599,170 at December 31, 1995 were pledged to secure public
deposits and for other purposes required or permitted by law.
9
<PAGE> 10
4. Securities Held to Maturity
Securities held to maturity are stated at cost adjusted for amortization of
premium and accretion of discounts which are recognized as adjustments to
interest income. Management determines the appropriate classification of
securities at the time of purchase. Securities held to maturity are acquired
for long-term investment purposes. Management is of the opinion that the
Company has the intention and ability to hold securities classified as
securities held to maturity until maturity.
The amortized cost and approximate market value of securities classified as
held to maturity at September 30, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
September 30, 1996
======================================================================
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
======================================================================
<S> <C> <C> <C> <C>
U.S. Government agencies $ 1,001,787 $ 31,026 $ -- $ 1,032,813
Obligations of states and
political subdivisions 4,011,800 100,824 (7,029) 4,105,595
----------------------------------------------------------------------
$ 5,013,587 $ 131,850 $ (7,029) $ 5,138,408
======================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
======================================================================
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
======================================================================
<S> <C> <C> <C> <C>
U.S. Government agencies $ 1,003,210 $ 61,790 $ -- $ 1,065,000
Obligations of states and
political subdivisions 4,859,314 177,768 (6,387) 5,030,695
----------------------------------------------------------------------
$ 5,862,524 $ 239,558 $ (6,387) $ 6,095,695
======================================================================
</TABLE>
Securities held to maturity with amortized costs of $1,165,536 at September
30, 1996 and $2,355,126 at December 31, 1995 were pledged to secure public
and trust-fund deposits and for other purposes required or permitted by law.
5. Loans
Major classifications of loans as of September 30, 1996 and December 31,
1995 are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
=======================================
<S> <C> <C>
Commercial and industrial $ 28,152,123 $ 28,481,910
Energy 1,579,358 1,691,571
Installment 41,698,696 36,670,868
Real estate construction 2,192,074 1,172,986
Real estate mortgage 35,482,362 37,835,935
Agricultural 2,808,550 3,102,465
Other 46,674 22,461
---------------------------------------
111,959,837 108,978,196
Unearned discount (3,771,234) (4,444,346)
---------------------------------------
108,188,603 104,533,850
Allowance for loan losses (2,111,153) (2,542,513)
---------------------------------------
$ 106,077,450 $ 101,991,337
=======================================
</TABLE>
10
<PAGE> 11
6. Allowance for Loan Losses
Transactions in the allowance for loan losses for the nine months ending
September 30, 1996, and for the year ended December 31, 1995 are summarized
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
=========================================
<S> <C> <C>
Balance at beginning of period $ 2,542,513 $ 1,990,638
Loans charged-off (1,070,445) (475,134)
Recoveries on loans 639,085 1,369,464
-----------------------------------------
Net loans recovered (charged-off) (431,360) 894,330
Provisions charged to operating expenses -- (600,000)
Allowance acquired in purchase transaction -- 257,545
-----------------------------------------
Balance at end of period $ 2,111,153 $ 2,542,513
=========================================
</TABLE>
7. Federal, Treasury and Tax Deposits
Included in interest bearing transaction account deposits are Federal,
Treasury and Tax deposits aggregating $21,918,253 at September 30, 1996.
Interest expense on Federal, Treasury and Tax deposits amounted to $61,434
for the nine months ended September 30, 1996. On May 22, 1996, the Bank
entered into a Treasury, Tax and Loan Note Agreement ("Agreement") with the
Federal Reserve Bank of Dallas, Texas. The Agreement sets a maximum cap of
$25 million in deposits for which the Bank can act as a depository of these
funds.
8. Certificates of Deposit
Included in certificates of deposits are certificates of deposits in
denominations of $100,000 or more aggregating $15,956,669 and $15,156,682 at
September 30, 1996 and December 31, 1995, respectively. Interest expense on
certificates of deposits in denominations of $100,000 or more amounted to
$608,181 and $426,076 for the nine months ended September 30, 1996 and
September 30, 1995, respectively.
9. Nonqualified Stock Option Plan
On October 20, 1993, the Board of Directors authorized 160,000 shares of
Company common stock for issuance under a nonqualified stock option plan for
directors and key officers who the Board of Directors believe have a
significant impact on the profitability of the Company. The options were
granted in 1993 at an option price of $5 per common share, the estimated
market value per common share on the date of the grant. As of September 30,
1996, options for 148,428 shares of Company common stock were outstanding
(options for 200 shares had been previously exercised and options for 11,372
shares had previously lapsed) all of which are currently exercisable. The
options expire ten (10) years from the date of each grant.
11
<PAGE> 12
Item 2.
CORPUS CHRISTI BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion highlights the major changes affecting the
operations and condition of the Company for the quarter and nine months
ended September 30, 1996 as compared to the same periods of 1995.
Overall Performance:
The Company had third quarter 1996 net income of $474,101, or $.28 net
income per share, up $43,702, compared to $430,399, or $.25 net income per
share for the same quarter of 1995.
The Company's net income for the nine months ended September 30, 1996 was
$1,683,978, or $.99 net income per share, up $388,212, compared to
$1,295,766, or $.77 net income per share, for the same period of 1995. The
increase in net income for the nine months period ended September 30, 1996
compared to the same period of 1995 is attributable in large part to the
increase in net interest income totaling $1,152,688 and to an increase in
noninterest income totaling $288,839.
Provision for Loan Losses
The Company had no provisions for loan losses during the third quarter of
1996 nor the nine months ended September 30, 1996. This compares to no
provision made by the Company during the third quarter of 1995 and to
"negative" provisions of $400,000 for the nine months ended September 30,
1995. The "negative" provisions made by the Company during 1995 were the
result of increased recoveries on previously loans charged-off. The Company
had net charge-offs totaling $431,360 for the nine months ended September
30, 1996 compared to net recoveries totaling $428,090 for the same period
in 1995.
The allowance for loan losses is established through charges to operations
in the form of provisions for loan losses. Loan losses (or recoveries) are
charged (or credited) directly to the allowance for loan losses. The
provision for loan losses is determined by management, based upon
considerations of several factors including: (1) a continuing review by
management of the portfolio with particular emphasis on problem loans; (2)
regular examination of the loan portfolio; (3) loss experience on various
types of loans in relation to outstanding loans; and (4) an ongoing
assessment of current and anticipated economic conditions in the market
place served by the subsidiary bank.
The Company's Credit Review Committee ("CRC"), independent consultants, and
Federal and State regulators, conduct periodic examinations of the
Company's subsidiary bank to make evaluations of the subsidiary bank's loan
portfolio. In addition, appropriate regulatory authorities and independent
consultants make evaluations of the effectiveness of the Company's loan
review and administrative functions and make periodic reports to the
Company's Board of Directors.
As the Company's CRC examines the loan portfolio, loans are assigned a risk
grading which is used to determine the reserve requirements for each loan.
In addition to these specific allocations of reserves, an appropriate
amount is set aside to recognize the likelihood that there are unidentified
additional risks in the portfolio.
While there is no precise method of predicting loan losses, it is the
judgment of the Company's management that the allowance for loan losses at
September 30, 1996, was adequate to absorb possible losses from the loans
in the portfolio at that date.
12
<PAGE> 13
Nonperforming assets and past-due accounts were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
===================================================
<S> <C> <C>
Nonperforming assets:
Nonaccrual loans $ 1,264,262 $ 1,185,565
Other real estate 297,464 529,560
---------------------------------------------------
$ 1,561,726 $ 1,715,125
===================================================
Accruing loans past due 90 days or more $ 95,828 $ 134,350
===================================================
</TABLE>
Generally, the accrual of income is discontinued when the full collection
of principal and interest is in doubt, or when the payment of principal or
interest has become contractually 90 days past due unless the obligation is
well- secured and in the process of collection. Loans are not restored to
full earnings status until the borrower's ability to make payments of
principal and interest at original or prevailing market terms has been
demonstrated through substantial performance on the loan over an extended
period of time. At September 30, 1996, nonaccrual loans totaled $1,264,262
compared to $1,185,565 and $1,186,000 at December 31, 1995 and September
30, 1995, respectively. Further information regarding the balance of
nonaccrual loans at September 30, 1996, and related interest payment
information, is as follows:
<TABLE>
<CAPTION>
Book Contractual
Balance Balance
=====================================================
<S> <C> <C>
Nonaccrual loans at December 31, 1995 $ 1,185,565 $ 1,289,548
Additions 506,619 507,906
Reductions-principal payments (107,065) (94,451)
Reductions-interest payments (57,266) ----
Charge-offs (263,591) (264,110)
-----------------------------------------------------
Nonaccrual loans at September 30, 1996 $ 1,264,262 $ 1,438,893
=====================================================
</TABLE>
The Company considers a nonaccrual loan to have substantial performance if
eighty percent (80%) of principal payment and interest is collected.
<TABLE>
<CAPTION>
Cash interest payments in 1996
applied as:
Book Balance Contractual -------------------------------------------------
at Balance at Recoveries of
September 30, September 30, Interest Prior Partial Reduction of
1996 1996 Income Charge-offs Principal
===========================================================================================
<S> <C> <C> <C> <C> <C>
Contractually past due with
substantial performance $ 1,193,580 $ 1,329,968 $ ---- $ ---- $ 50,411
Contractually current, however
payment in full of principal
or interest in doubt 70,682 108,925 ---- ---- 6,855
-------------------------------------------------------------------------------------------
$ 1,264,262 $ 1,438,893 $ ---- $ ---- $ 57,266
===========================================================================================
</TABLE>
13
<PAGE> 14
Total nonperforming assets decreased to $1,561,726 at September 30, 1996,
down $153,399, compared to $1,715,125 at December 31, 1995. Nonperforming
assets at September 30, 1995 totaled $1,830,411.
The recorded investments in loans for which an impairment has been
recognized and the related allowance for loan losses at September 30, 1996
were $1,740,458 and $353,640, respectively. The average recorded investment
in impaired loans during the nine months ended September 30, 1996 was
$2,099,230. Interest recognized on impaired loans during the nine months
ended September 30, 1996 was $39,389.
As part of the CRC process, loans are graded according to risk. Loans
having a greater degree of risk, but not necessarily a greater potential
for loss, are placed on a watchlist. Such loans are performing and are
either considered to be collateralized or higher reserves are allocated for
unsecured exposures. The total amount of such loans at September 30, 1996
and December 31, 1995 not classified as nonaccrual, restructured, or past
due 90 days and still accruing in the above table totaled $3,626,555 and
$3,062,924, respectively. Such loans totaled $3,085,706 at September 30,
1995.
In addition, a substantial amount of the Company's nonperforming assets are
attributable to other real estate located in the Corpus Christi, Texas
area. Other real estate at September 30, 1996 was $297,464, down $232,096,
compared to $529,560 at December 31, 1995. Other real estate totaled
$644,411 at September 30, 1995. Other real estate has been adjusted to
estimated fair value less estimated selling costs, if lower than cost, and
includes some income producing property.
With respect to other real estate, management of the Company believes it
has made appropriate valuations, using independent appraisers, of these
properties based on strict appraisal guidelines. The carrying value of
other real estate is reviewed at least annually and the valuation allowance
is revised through subsequent valuation provisions charged to other
operating expenses. During the third quarter ended September 30, 1996, the
Company made no valuation provisions for other real estate compared to
$30,000 for the same quarter of 1995. For the nine months ended September
30, 1996, the Company made valuation provisions for other real estate
totaling $20,000 compared to $90,000 for the same period of 1995. In the
opinion of management, this appraisal process results in values which
represent current market conditions at September 30, 1996 and 1995.
Net Interest Income
Net interest income (the difference between interest income and interest
expense) for the quarter ended September 30, 1996 was $2,147,231, up
$217,878, compared to $1,929,353 for the same quarter of 1995. Net interest
income for the nine months ended September 30, 1996 was $6,753,932, up
$1,152,688, compared to $5,601,244 for the same period of 1995. The
increase for the third quarter and the nine months ended September 30, 1996
was largely attributable to the increase in the volume of earning assets as
a result of the acquisition of The First National Bank of Taft, Texas
("Taft Acquisition") on October 31, 1995.
Earning assets at September 30, 1996 were $215.2 million, up $52.3 million,
compared to $162.9 million at September 30, 1995. The yield on earning
assets at September 30, 1996 was 7.2% compared to 7.9% for the same period
last year. Interest-bearing liabilities at September 30, 1996 were $170.5
million, up $51.3 million, compared to $119.2 million at September 30,
1995. The yield on interest-bearing liabilities was 4.1% at September 30,
1996 compared to 3.8% at September 30, 1995. Net interest income as a
percentage of average earning assets ("net interest margin") was 4.1% at
September 30, 1996 compared to 5.1% at September 30, 1995. The net interest
margin averaged 4.7% in 1995.
14
<PAGE> 15
Noninterest Income
Noninterest income for the nine months ended September 30, 1996 was
2,548,668, up $288,839, compared to $2,259,829 for the same period of 1995.
Trust fees for the nine months ended September 30, 1996 were $838,937, down
$42,582, compared to $881,519 for the same period in 1995. The decrease was
largely attributable to non-recurring estate and stock transfer fees
collected during 1995 totaling approximately $50,000. Service charges on
deposit accounts were $850,502 for the nine months ended September 30,
1996, up $95,337, compared to $755,165 for the same period in 1995. The
increase was largely attributable to an increase in nonsufficient fund
charges totaling $77,335. Credit card fees were $139,289 for the nine
months ended September 30, 1996, down $1,038 compared to $140,327 for the
same period last year. Brokerage fees were $239,838 for the nine months
ended September 30, 1996, up $67,294, compared to $172,544 for the same
period in 1995. Other income totaled $480,102 for the nine months ended
September 30, 1996, up $169,828, compared to $310,274 for the same period
in 1995. The increase in other income for the first nine months of 1996 was
largely attributable to increases in automated teller machine interchange
fees totaling $124,338. The increase in automated teller machine
interchange fees was due in part to the addition of three automated teller
machines in 1995 acquired in the Taft Acquisition and to increased ATM fees
during 1996.
Noninterest income for the third quarter ended September 30, 1996 was
$887,534, up $119,305, compared to $768,229 for the same quarter of 1995.
The following table details the changes in noninterest income for the nine
months ended September 30, 1996 as compared with the same period of 1995.
<TABLE>
<CAPTION>
Change for the
Nine Months Ended
Sept. 30, Sept. 30, September 30, 1996
1996 1995 Amount Percentage
==========================================================================
<S> <C> <C> <C> <C>
Trust department income $ 838,937 $ 881,519 $ (42,582) (4.8)%
Service charges 850,502 755,165 95,337 12.6%
Credit card fees 139,289 140,327 (1,038) (.7)%
Brokerage fees 239,838 172,544 67,294 39.0%
Other income 480,102 310,274 169,828 54.7%
--------------------------------------------------------------------------
Total noninterest income $ 2,548,668 $ 2,259,829 $ 288,839 12.8%
==========================================================================
</TABLE>
Noninterest expenses
The Company's noninterest expenses were $6,737,417 for the nine months
ended September 30, 1996, up $455,110, compared to $6,282,307 for the same
period of 1995. Salaries and employee benefits for the nine months ended
September 30, 1996 were $3,243,118, up $261,960, compared to $2,981,158 for
the same period of 1995. The increase in salaries and employee benefits was
primarily attributable to salaries and benefits related to the Taft
Acquisition totaling $163,938, increases in medical insurance totaling
$45,062, and a 3% merit increase during 1995. Full-time equivalent
employees at September 30, 1996 were 136 compared to 131 employees at
September 30, 1995. Net occupancy expenses were $791,489 for the nine
months ended September 30, 1996, up $87,108, compared to $704,381 for the
same period in 1995. Furniture and equipment expenses totaled $554,280 for
the nine months ended September 30, 1996, up $40,713, compared to $513,567
for the same period in 1995. The increase in net occupancy expenses and
furniture and equipment expenses for the nine months ended September
30,1996 compared to the same period of 1995 was largely attributable to
depreciation expenses related to assets acquired in the Taft Acquisition
totaling $52,931 and $58,032, respectively. Amortization of intangible
assets related to the Taft Acquisition totaled $91,365 during the nine
months ended September 30, 1996. Net cost to operate other real estate was
$39,639 for the nine months ended September 30, 1996, down $61,128,
compared to $100,767 for the same
15
<PAGE> 16
period of 1995. The decrease in net cost to operate other real estate was
primarily attributable to a decrease in valuation provisions on other real
estate in 1996 totaling $70,000. Legal and professional fees were $668,555
for the nine months ended September 30, 1996, up $135,492, compared to
$533,063 for the same period in 1995. The increase was largely attributable
to an increase in legal fees totaling $145,088 in 1996. Insurance expenses
for the nine months ended September 30, 1996 were $67,747, down $147,722,
compared to $215,469 for the same period in 1995. The decrease in
insurance expenses was the result of lower Federal Deposit Insurance
Corporation (FDIC) insurance assessment fees totaling approximately
$155,755. Advertising expenses totaled $98,657 at September 30, 1996, down
$49,876, compared to $148,533 for the same period in 1995. Other operating
expenses totaled $1,182,567 for the nine months ended September 30, 1996,
up $97,198, compared to $1,085,369 for the same period in 1995. The
increase in other operating expenses was primarily increases in bank
examination expense, franchise tax expense and telephone expense totaling
$40,495, $25,380 and $25,563, respectively.
Noninterest expenses for the third quarter ended September 30, 1996 were
$2,309,517, up $270,658, compared to $2,038,859 for the same period in
1995.
The following table details the changes in noninterest expenses for the
nine months ended September 30,1996 as compared to the same period of 1995.
<TABLE>
<CAPTION>
Percent of
Percent of Net Change for the
Net Interest Interest Nine Months Ended
and and September 30, 1996
Sept.30, Noninterest Sept. 30, Noninterest ------------------------
1996 Income 1995 Income Amount Percentage
===================================================================================
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 3,243,118 34.9% $ 2,981,158 37.9% $ 261,960 8.8%
Net occupancy expenses 791,489 8.5% 704,381 9.0% 87,108 12.4%
Furniture and equipment expenses 554,280 5.9% 513,567 6.5% 40,713 7.9%
Amortization of intangible assets 91,365 1.0% ---- ---- 91,365 100.0%
Net cost to operate other real estate 39,639 .4% 100,767 1.3% (61,128) (60.7)%
Legal and professional fees 668,555 7.2% 533,063 6.8% 135,492 25.4%
Insurance expenses 67,747 .7% 215,469 2.7% (147,722) (68.6)%
Advertising expenses 98,657 1.1% 148,533 1.9% (49,876) (33.6)%
Other operating expenses 1,182,567 12.7% 1,085,369 13.8% 97,198 9.0%
-----------------------------------------------------------------------------------
Total noninterest expenses $ 6,737,417 72.4% $ 6,282,307 79.9% $ 455,110 7.2%
===================================================================================
</TABLE>
Liquidity
Generally, the Company's largest source of funds is deposits. Total
deposits at September 30, 1996 were $218.7 million, up $17.8 million,
compared to $200.9 million at December 31, 1995. The increase in deposits
during the nine months ended September 30, 1996 is primarily due to federal
government deposits totaling $21.9 million at September 30, 1996 pursuant
to a Treasury, Tax and Loan Note Agreement entered into by the Bank on May
22, 1996 with the Federal Reserve Bank of Dallas, Texas. The Agreement sets
a maximum cap of $25 million in deposits for which the Bank can act as a
depository of these funds. Total deposits at September 30, 1995 were $158.7
million. In addition, at September 30, 1996 and at December 31, 1995, the
Company had approximately $31.8 million and $6.0 million, respectively, in
federal funds sold that could be readily converted to cash. Another source
of liquidity, if the need arises, could come from the liquidation of
securities available for sale totaling $71.4 million at September 30, 1996.
Funds are also generated through loan payoffs and maturities of investment
securities. Currently, management believes that it has an adequate level of
liquidity to meet its financial obligations that will arise during the
normal course of business in the coming year.
16
<PAGE> 17
One principal ratio measurement used by regulatory authorities to measure
liquidity is the ratio of net loans to total deposits. At September 30,
1996, the Company's ratio of net loans to total deposits was 48.5%,
compared to 50.8% at December 31, 1995. The Company's ratio of net loans to
total deposits at September 30, 1995 was 63.0%. At September 30, 1996, the
Company's net loans to total deposits ratio of 48.5% compared favorably to
peer banking institutions in Texas with similar asset sizes which had net
loans to total deposit ratios with a low of 41%, median of 52% and a high
of 65% at December 31, 1995. The Company's long-term planning targets a
loan to deposit ratio of 65% to 70%.
Capital Resources
The Company and the Bank are required by federal regulations to meet
certain minimum regulatory capital guidelines utilizing a risk-based
capital framework that became effective on December 31, 1992. The Company
and the Bank must have a minimum ratio of Tier 1 capital to total
risk-adjusted assets of not less than 4%, a ratio of combined Tier 1 and
Tier 2 capital to total risk-adjusted assets of not less than 8% and a
leverage ratio of not less than 4%. For the purposes of these ratios,
shareholders' equity does not include unrealized gains or losses on
securities available for sale or intangible assets in accordance with
regulatory guidelines. At September 30, 1996, the Company and the Bank each
had a Tier 1 capital ratio of 12.3%, combined Tier 1 and Tier 2 capital
ratio of 13.6% and leverage ratio of 6.5%. At December 31, 1995, the
Company and the Bank each had a Tier 1 capital ratio of 12.0%, combined
Tier 1 and Tier 2 capital ratio of 13.3% and leverage ratio of 6.4%.
The Company's equity to assets ratio is one indicator that management uses
to monitor capital adequacy. At September 30, 1996, the Company's equity to
assets ratio was 6.5% compared to 6.4% at December 31, 1995. The Company's
equity to asset ratio at September 30, 1995 was 8.5%. The decrease in the
Company's equity to assets ratio of 6.5% at September 30, 1996 compared to
8.5% at September 30, 1995 was a direct result of the Taft Acquisition.
At September 30, 1996, the Company's subsidiary bank had an equity ratio of
6.5%, which exceeds the minimum requirement guideline of 6.0% by the Texas
Department of Banking.
Other Matters
The Company, Cullen/Frost Bankers, Inc., a Texas corporation
("Cullen/Frost"), and its wholly owned subsidiary, R.E. Holding Corporation,
a Texas corporation ("R.E. Holding"), have entered into an Agreement and
Plan of Merger dated September 30, 1996 (the "Merger Agreement") whereby
Cullen/Frost has agreed to acquire the Company for a cash purchase price of
$18.84 per outstanding share of the Company's common stock.
Consummation of the acquisition is subject to a number of conditions
including approval of the acquisition by the shareholders of CCB and
regulatory review. Subject to the satisfaction of such conditions, the
acquisition is expected to be completed in the first quarter of 1997. The
Merger Agreement provides for the payment of a termination fee of
$1,150,000 by the Company to Cullen/Frost under certain circumstances.
The Merger Agreement was filed with the Securities and Exchange Commission
by the Company as an exhibit to Form 8-K on October 16, 1996.
17
<PAGE> 18
PART II
OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits: See Index to Exhibits, Page 21.
(b) The Company was not required to file any report on Form 8-K during
the nine-month period ending September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPUS CHRISTI BANCSHARES, INC.
-------------------------------
REGISTRANT
Date: November 12, 1996 /s/John T. Wright, III
-------------------------------------
John T. Wright, III
Chairman of the Board
Date: November 12, 1996 /s/R. Jay Phillips
-------------------------------------
R. Jay Phillips
President and Chief Executive Officer
Date: November 12, 1996 /s/Jimmy M. Knioum
-------------------------------------
Jimmy M. Knioum
Treasurer
18
<PAGE> 19
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
EXHIBITS
TO
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
-------------------
For the Quarter Ended September 30, 1996
Commission File Number 0-13668
-------------------
CORPUS CHRISTI BANCSHARES, INC.
19
<PAGE> 20
CORPUS CHRISTI BANCSHARES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1 - Agreement and Plan of Merger dated as of 30th day of September, 1996 by and
among Cullen/Frost Bankers, Inc., R.E. Holding Corporation, and Corpus
Christi Bancshares, Inc. (incorporated herein by reference to Exhibit 2.1
of the Company's Form 8-K, Current Report, filed with the Securities and
Exchange Commission on October 16, 1996.
27 - Financial Data Schedule
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1996
<CASH> 16,640,780
<INT-BEARING-DEPOSITS> 86,357
<FED-FUNDS-SOLD> 31,750,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 71,413,087
<INVESTMENTS-CARRYING> 5,013,587
<INVESTMENTS-MARKET> 5,138,408
<LOANS> 108,188,603
<ALLOWANCE> 2,111,153
<TOTAL-ASSETS> 240,134,096
<DEPOSITS> 218,682,649
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,587,801
<LONG-TERM> 0
0
0
<COMMON> 8,000,000
<OTHER-SE> 8,863,646
<TOTAL-LIABILITIES-AND-EQUITY> 240,134,096
<INTEREST-LOAN> 7,089,874
<INTEREST-INVEST> 3,883,774
<INTEREST-OTHER> 7,812
<INTEREST-TOTAL> 10,981,465
<INTEREST-DEPOSIT> 4,010,227
<INTEREST-EXPENSE> 4,227,533
<INTEREST-INCOME-NET> 6,753,932
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,737,417
<INCOME-PRETAX> 2,565,183
<INCOME-PRE-EXTRAORDINARY> 1,683,978
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,683,978
<EPS-PRIMARY> .99
<EPS-DILUTED> .99
<YIELD-ACTUAL> .041
<LOANS-NON> 1,264,262
<LOANS-PAST> 95,828
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,626,555
<ALLOWANCE-OPEN> 2,542,513
<CHARGE-OFFS> 1,070,445
<RECOVERIES> 639,085
<ALLOWANCE-CLOSE> 2,111,153
<ALLOWANCE-DOMESTIC> 2,111,153
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
