<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
Cullen/Frost Bankers, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[CULLEN/FROST BANKERS, INC. LOGO]
- --------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 28, 1997
- --------------------------------------------------------------------------------
To the Shareholders of
CULLEN/FROST BANKERS, INC.:
The Annual Meeting of Shareholders of Cullen/Frost Bankers, Inc.
("Cullen/Frost") will be held in the Commanders Room at The Frost National Bank,
100 West Houston Street, San Antonio, Texas, on Wednesday, May 28, 1997, at
10:00 a.m., San Antonio time, for the following purposes:
1. To elect seven directors to serve until the 2000 Annual Meeting of
Shareholders, one director to serve until the 1998 Annual Meeting of
Shareholders and two directors to serve until the 1999 Annual Meeting of
Shareholders;
2. To consider and vote upon a proposed resolution to amend the
Articles of Incorporation to increase the authorized shares of Common Stock
par value $5 per share from 30,000,000 to 60,000,000 shares;
3. To consider and vote upon amendments to the 1992 Stock Plan,
including an increase of 1,100,000 available shares;
4. To consider and vote upon the 1997 Directors Stock Plan with
150,000 authorized shares for outside directors;
5. To ratify the selection of Ernst & Young LLP to act as independent
auditors of Cullen/Frost for the fiscal year that commenced January 1,
1997; and
6. To transact such other business as may properly come before the
meeting or any adjournments thereof.
Only stockholders of record at the close of business on April 4, 1997, are
entitled to notice of and to vote at the Annual Meeting or any adjournments
thereof.
HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES MUST BE PRESENT EITHER IN
PERSON OR BY PROXY IN ORDER TO HOLD THE MEETING AND THE PROPOSAL TO AMEND THE
ARTICLES OF INCORPORATION REQUIRES THE AFFIRMATIVE VOTE OF TWO-THIRDS OF ALL OF
THE OUTSTANDING SHARES OF COMMON STOCK. TO ENSURE YOUR REPRESENTATION AT THE
ANNUAL MEETING, PLEASE PROMPTLY MARK, SIGN, DATE, AND MAIL THE ENCLOSED PROXY IN
THE POSTAGE PREPAID ENVELOPE PROVIDED FOR THIS PURPOSE.
All shareholders are cordially invited to attend the annual meeting.
By Order of the Board of Directors
/s/ DIANE JACK
DIANE JACK
Corporate Secretary
Dated: April 17, 1997
- --------------------------------------------------------------------------------
<PAGE> 3
LOGO
- --------------------------------------------------------------------------------
PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 28, 1997
- --------------------------------------------------------------------------------
SOLICITATION AND REVOCATION OF PROXY
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Cullen/Frost Bankers, Inc. ("Cullen/Frost" or the
"Company") of proxies to be used at the Annual Meeting of Shareholders. The
meeting is scheduled to be held on May 28, 1997, in accordance with the attached
notice. This Proxy Statement and the accompanying proxy card are being mailed to
shareholders beginning on or about April 17, 1997.
Cullen/Frost will bear the cost of solicitation of proxies for the Annual
Meeting. In addition to solicitation by mail, the directors, officers, and
employees of Cullen/Frost may solicit proxies by telephone, telegram, facsimile,
or in person. Cullen/Frost also has retained Georgeson & Co., Inc. to assist in
the solicitation of proxies, for a fee of approximately $8,500 plus
out-of-pocket expenses. Brokers, nominees, fiduciaries, and other custodians
have been requested to forward proxy soliciting material to the beneficial
owners of Cullen/Frost Common Stock, and Cullen/Frost will reimburse them for
their out-of-pocket expenses.
All shares of Cullen/Frost Common Stock represented by properly executed
proxies, if returned in time, will be voted at the meeting in accordance with
the instructions indicated thereon. If no direction is given, proxies will be
voted for the election as directors of the nominees referred to in Item 1 of the
Proxy Statement; in favor of the proposal to amend the Articles of Incorporation
to increase the authorized shares of common stock as described in Item 2 of the
Proxy Statement; in favor of the amendments to the 1992 Stock Plan as described
in Item 3 of the Proxy Statement; in favor of the 1997 Directors Stock Plan as
described in Item 4 of the Proxy Statement; in favor of the proposal to approve
the selection of Ernst & Young LLP as independent auditors described in Item 5
of the Proxy Statement; and in the discretion of persons named on the proxy in
connection with any other business that may properly come before the meeting.
Shares represented by properly executed proxies, if returned in time, will be
counted for purposes of determining the number of shares present at the meeting,
even if authority to vote on any particular matter is withheld. A shareholder
may revoke a proxy at any time before it is voted by delivering a written
revocation notice at the Company's principal executive office to the Secretary
of Cullen/Frost, Ms. Diane Jack, 100 West Houston Street, San Antonio, Texas
78205. A shareholder who attends the meeting may vote by ballot at the meeting
if desired, and such vote will cancel any proxy vote previously given.
VOTING OF SECURITIES
The only class of voting securities of Cullen/Frost outstanding and
entitled to vote at the meeting is Common Stock, par value $5.00 per share. On
April 4, 1997, the record date for determining shareholders of Cullen/Frost
entitled to vote at the meeting, there were outstanding 22,507,928 shares of
Common Stock, each entitled to one vote. Directors are elected by a plurality of
the votes cast by the holders of shares of Common Stock. Action to be taken on
Item 2 requires the affirmative vote of at least two-thirds of the outstanding
shares. Action to be taken on Items 3, 4 and 5 will be determined by a majority
of the shares of Common Stock present. Because abstentions are considered shares
present, proxies which are marked "abstain" will be the equivalent of a negative
vote in determining whether a majority vote was obtained for Item 3, 4 and 5.
- --------------------------------------------------------------------------------
1
<PAGE> 4
- --------------------------------------------------------------------------------
ELECTION OF DIRECTORS
(ITEM 1 ON PROXY CARD)
The Corporation's Bylaws provide for a classified Board of Directors under
which there are three classes of directors, all of which are as equal in number
as possible. The class to which each director has been assigned is designated as
Class I, Class II, or Class III. The term of office of Class I will expire at
this 1997 Annual Meeting, Class II at the 1998 Annual Meeting and Class III at
the 1999 Annual Meeting.
The six current directors assigned to Class I have been nominated to stand
for re-election as directors at the Annual Meeting in 1997 for a three-year
term. In addition, there are four new nominees, Bob Coleman, Patrick Frost,
Joseph Fulton and Horace Wilkins, Jr. who stand for election. Each of the four
new nominees are currently members of The Frost National Bank Board. Although
Cullen/Frost management does not contemplate that any nominee will be unable to
serve, if such a situation arises prior to or at the meeting, the persons named
in the accompanying proxy will vote in accordance with their best judgment
unless otherwise instructed.
Below is biographical information about each nominee and each director
whose term continues after the meeting, including age, recent business
experience and/or position with the Company. Also included is the Class in which
such director will serve and information on the nominees' and directors'
ownership of Cullen/Frost Common stock.
<TABLE>
<CAPTION>
SHARES OWNED(1)
-----------------------
AMOUNT AND
NATURE
DIRECTOR OF BENEFICIAL
NOMINEE AGE PRINCIPAL OCCUPATION SINCE OWNERSHIP PERCENT
------- --- -------------------- -------- ------------- -------
<S> <C> <C> <C> <C> <C>
NOMINEES FOR TERM EXPIRING IN 2000:
Class I
- -------
Isaac Arnold, Jr............... 61 Oil, real estate, investments 1977 56,356(4) .25
Harry H. Cullen................ 61 Oil, real estate, investments 1993 (2) 141,974(5) .63
Roy H. Cullen.................. 67 Oil, real estate, investments 1977 57,098(6) .25
Patrick B. Frost............... 36 President, The Frost National (3) 49,251(7) .22
Bank, a Cullen/Frost Subsidiary
James L. Hayne................. 63 Managing partner of Catto & Catto 1977 9,798 .04
(insurance agency)
Robert S. McClane.............. 57 President of Cullen/Frost 1985 117,941(7) .52
Mary Beth Williamson........... 63 Education (Consultant) 1996 440 .00
NOMINEE FOR TERM EXPIRING IN 1998:
Class II
- --------
Horace Wilkins, Jr............. 46 Regional President Southwestern (3) 200 .00
Bell Telephone Co.
NOMINEES FOR TERM EXPIRING IN 1999:
Class III
- ---------
Bob W. Coleman................. 65 President and Chief Executive (3) 1,000 .00
Officer Texace Corporation
Joe R. Fulton.................. 62 President, Fulton Construction (3) 1,300 .01
Corporation
(Table continued on following page)
</TABLE>
- --------------------------------------------------------------------------------
2
<PAGE> 5
<TABLE>
<CAPTION>
SHARES OWNED(1)
-----------------------
AMOUNT AND
NATURE
DIRECTOR OF BENEFICIAL
NOMINEE AGE PRINCIPAL OCCUPATION SINCE OWNERSHIP PERCENT
------- --- -------------------- -------- ------------- -------
<S> <C> <C> <C> <C> <C>
DIRECTORS WHOSE TERM EXPIRES IN 1998:
Class II
- --------
Royce S. Caldwell.............. 58 President, Southwestern Bell 1994 400 .00
Operations SBC Communications,
Inc.
Ruben R. Cardenas.............. 66 Attorney, Cardenas, Whitis, 1995 1,000 .00
Stephen, Corcoran, & McLain
Henry E. Catto................. 66 Partner, Catto & Catto Insurance 1993 11,000 .05
Agency; former Director, U. S.
Information Agency; former U. S.
Ambassador to Great Britain, and
former Vice Chairman, H&C
Communications
Richard W. Evans, Jr........... 50 Chairman of the Board and Chief 1993 134,373(7) .59
Operating Officer of Cullen/Frost;
Chairman of the Board and Chief
Executive Officer of Frost
National Bank, a Cullen/Frost
Subsidiary
James W. Gorman, Jr............ 66 Oil, real estate, and investments 1987 10,000 .04
Richard M. Kleberg, III........ 54 Banking and investments 1992 4,200 .02
DIRECTORS WHOSE TERM EXPIRES IN 1999:
Class III
- ---------
Eugene H. Dawson, Sr........... 62 President, Pape-Dawson Consulting 1996 15,200 .07
Engineers
Ruben M. Escobedo.............. 59 Certified Public Accountant 1996 600 .00
W. N. Finnegan, III............ 71 Attorney; former President, R. E. 1977 22,310 .10
Smith Interests, Inc.
T. C. Frost.................... 69 Senior Chairman of the Board and 1966 746,747(7) 3.28
Chief Executive Officer of
Cullen/Frost
Ida Clement Steen.............. 44 Investments 1996 440 .00
Curtis Vaughan, Jr............. 69... Chairman of the Board of Vaughan & 1980 10,712 .05
Sons, Inc. (Distributor of lumber
and other building materials and
real estate development)
</TABLE>
- ---------------
(Notes on following page)
- --------------------------------------------------------------------------------
3
<PAGE> 6
- --------------------------------------------------------------------------------
(1) Unless otherwise indicated, beneficial ownership is as of December 31, 1996,
and the owners have sole voting and investment power for the shares of
Cullen/Frost Common Stock reported. Beneficial ownership includes shares
which the individual had a right to acquire pursuant to employee stock
options exercisable within sixty (60) days from December 31, 1996, as
follows -- Mr. T. C. Frost 115,880, Mr. Evans 59,766, Mr. Patrick Frost
25,624, and Mr. McClane 44,456. The number of shares of Cullen/Frost Common
Stock beneficially owned by all directors, nominees and named executive
officers as a group is disclosed on page 14 of this Proxy Statement.
(2) Also served as a director of Cullen Bank, a former Cullen/Frost subsidiary,
from 1969 to 1993.
(3) Messrs. Bob Coleman and Patrick Frost have served as directors of The Frost
National Bank, a Cullen/Frost Subsidiary, since 1993. Mr. Joe Fulton has
served as a director of The Frost National Bank since 1994. Mr. Horace
Wilkins has served as a director of The Frost National Bank since 1996.
(4) Includes 42,372 shares for which Mr. Arnold has shared voting and investment
power with others.
(5) Includes 53,064 shares for which Mr. Harry Cullen has shared voting and
investment power with Mr. Roy Cullen and others.
(6) Includes 53,064 shares for which Mr. Roy Cullen has shared voting and
investment power with Mr. Harry Cullen and others. Also includes 2,608
shares for which Mr. Roy Cullen has shared voting and shared investment
power with others.
(7) Includes the following shares allocated under the 401(k) Stock Purchase Plan
for Employees of Cullen/Frost Bankers, Inc., for which the beneficial owners
have sole voting but no investment power Mr. T. C. Frost 20,929, Mr. Evans
14,955, Mr. Patrick Frost, 5,943, and Mr. McClane 581. In addition, the
number of shares reported for Mr. T. C. Frost includes 28,092 shares held in
the Pat and Tom Frost Foundation Trust for which Mr. T. C. Frost disclaims
beneficial ownership. The number of shares reported for Mr. McClane includes
8,638 shares held in a Charitable Remainder Trust for which Mr. McClane
disclaims beneficial ownership.
Except for the relationships noted in the preceding table or below, no
nominee has had any other principal occupation or employment with Cullen/Frost
or any of its subsidiaries within the last five years. Most nominees have been
engaged in the above principal occupations for at least five years.
The following are directorships held by nominees and directors in companies
(other than Cullen/Frost) with a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended, or subject to the
requirements of Section 15(d) of such Act or registered as an investment company
under the Investment Company Act of 1940, as amended; Mr. Arnold -- Nuevo Energy
Company; Mr. Caldwell -- SBC Communications Inc.; Mr. Cardenas -- SBC
Communications Inc.; Mr. Harry Cullen -- Pennzoil Co.; Mr. Escobedo -- Valero
Energy Corporation; and Mr. Kleberg -- Abraxas Petroleum Corporation.
There are no arrangements or understandings between any nominee or director
of Cullen/Frost and any other person pursuant to which he was or is to be
selected as a director nominee.
The only family relationships among the directors or executive officers of
Cullen/Frost which are first cousin or closer are those of Messrs. T. C. Frost
and Patrick Frost, who are father and son; Mr. Henry Catto and Mrs. James L.
Hayne, who are first cousins; Messrs. Harry Cullen and Roy Cullen who are
brothers; and the Cullen brothers and Mr. Arnold who are first cousins.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and NASDAQ. A delinquent Form 5 -- Annual Statement of Beneficial
Ownership -- was filed for Mr. W. N. Finnegan, III with respect to acquisitions
pursuant to reinvestment of cash dividends for the year 1995. A delinquency was
also reported for Mr. Vaughan in connection with his resignation as trustee of a
trust that benefits a member of his immediate family during the year 1996. In
addition, the May 1996 Form 3 -- Initial Statement of Beneficial
Ownership -- filed for Mr. Eugene Dawson was amended to include an additional
2,000 shares (post 2-for-1 stock split) purchased by his spouse prior to Mr.
Dawson's election as a Cullen/Frost Director.
- --------------------------------------------------------------------------------
4
<PAGE> 7
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE BOARD OF DIRECTORS
The Cullen/Frost Board of Directors has four regularly scheduled, quarterly
meetings each year. The Board has Executive, Audit, Compensation and Benefits,
and Strategic Planning Committees. The Committees' functions and current members
are:
Executive Committee: This Committee acts for the Board of Directors
between meetings of the Board, except to the extent limited by resolutions of
the Board, by the Bylaws of Cullen/Frost, or Texas law. Current members are T.
C. Frost and Richard W. Evans, Jr.
Audit Committee: The Audit Committee is composed of outside (non-employee)
directors. It reviews the scope and results of the annual audit by the
independent auditors Ernst & Young LLP, and it also reviews their performance of
non-audit services and considers whether the performance of such services will
have any effect on their independence. The Committee recommends its choice for
independent auditors to the Board of Directors. The Committee also monitors
regulatory examinations, the level of criticized assets, adequacy of loan loss
reserves, and the reports of internal audit and loan review at each subsidiary
of Cullen/Frost. It also reviews the financial reporting practices and the
internal audit, loan review, compliance, and appraisal functions for
Cullen/Frost. Current members are Isaac Arnold, Jr., Royce S. Caldwell, Ruben R.
Cardenas, Eugene W. Dawson, Sr., W. N. Finnegan, III, and Richard M. Kleberg,
III.
Compensation and Benefits Committee: The Compensation and Benefits
Committee is composed of outside (non-employee) directors. It makes
recommendations to the Board of Directors about compensation for certain
officers of Cullen/Frost. (See the "Board Compensation and Benefits Committee
Report on Executive Compensation" below.) In addition, to ensure consistent
administration of company-wide employee benefit plans, the Committee functions
as the administrative committee of (i) the Retirement Plan, (ii) the 1983 and
1988 Non-qualified Stock Option Plans, (iii) the Restricted Stock Plan, (iv) the
401(k) Stock Purchase Plan, (v) the 1991 Stock Purchase Plan, (vi) the 1992
Stock Plan, (vii) the Pre-Tax Benefit Plan, and (viii) the Group Medical and
Life Insurance Plan. Current members are Roy H. Cullen, Ruben M. Escobedo, James
W. Gorman, Jr., and Curtis Vaughan, Jr. In addition, there is one member, David
Straus, from The Frost National Bank Board, who participates and votes on
committee matters. John C. Korbell, an Advisory Director of Cullen/Frost, also
serves as an Advisory Director to the Compensation and Benefits Committee.
Strategic Planning Committee: The Strategic Planning Committee was
appointed to analyze strategic directions for Cullen/Frost in light of
competitive conditions, to monitor the corporate mission statement and capital
planning, and to review short- and long-term goals. Current members are T. C.
Frost, Isaac Arnold, Jr., Richard W. Evans, Jr., James L. Hayne, and Curtis
Vaughan, Jr.
Directors' fees are paid by Cullen/Frost on the basis of an annual retainer
of $5,000 per calendar year, plus $1,250 for each meeting attended. Cullen/Frost
also pays a fee of $750 per director for participation in any meeting of a
committee to which he has been appointed, except for the Chairman of the Audit
Committee, W. N. Finnegan, III, who receives $1,500 for each Audit Committee
meeting he attends. Directors of Cullen/Frost who also are officers of
Cullen/Frost or any of its subsidiaries receive no fees for serving on the Board
of Directors or any of its committees.
During 1996, there were seven meetings of the Board of Directors, two
meetings of the Executive Committee, four meetings of the Audit Committee, three
meetings of the Compensation and Benefits Committee, and four meetings of the
Strategic Planning Committee. During 1996, all of the current directors attended
at least 75 percent of the aggregate of the meetings of the Board of Directors
and the committees on which they served except for Henry Catto, Roy H. Cullen,
Ida Clement Steen, and Mary Beth Williamson.
- --------------------------------------------------------------------------------
5
<PAGE> 8
- --------------------------------------------------------------------------------
EXECUTIVE COMPENSATION AND RELATED INFORMATION
1. BOARD COMPENSATION AND BENEFITS COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation and Benefits Committee of the Board of Directors (the
"Committee") is committed to maintaining compensation programs for the Company's
executive officers which further the Company's mission. We, therefore, adhere to
the following compensation policies which are intended to facilitate the
achievement of the Company's business strategies:
- Compensation levels for each element of pay should be targeted at rates
that are reflective of the median levels of current market practices
prevalent in comparable financial organizations. Offering
market-comparable pay opportunities allows the Company to attract and
maintain a stable, successful management team.
- Executives' total compensation packages should strengthen the
relationship between pay and performance with variable, at-risk
compensation that is dependent upon the level of success in meeting
specified Company and individual performance goals.
- Ownership of the Company's Common Stock by executives should be
encouraged to further align executives' interests with those of
shareholders and the Company and to promote a continuing focus on
building profitability and shareholder value.
- Sustained superior performance by individual executives over a period of
years, including actions to increase revenues, reduce expenses, enhance
service and product quality, improve market share and thereby enhancing
shareholder value, should be rewarded.
To preserve objectivity in the achievement of its goals, the Committee is
comprised of five independent, nonemployee directors and one independent,
non-employee advisory director. It is the Committee's overall goal to develop
compensation policies that are consistent with and linked to strategic business
objectives and Company values. The Committee approves the design of, assesses
the effectiveness of, and administers compensation programs in support of
compensation policies. The Committee also reviews all salary arrangements and
other remuneration for a group of senior executives, including all those named
in the Summary Compensation table on page 10.
Each year a comprehensive analysis of competitive market data is provided
by an independent compensation consultant engaged by, and responsible to, the
Committee. The data provided compares the Company's compensation practices and
programs to a group of comparator companies. This group of comparator companies
is comprised of companies who have business operations, total assets, market
capitalizations, and lines of business similar to the Company.
These companies include, but are not limited to, the companies included in
the Standard & Poor's ("S&P's") Major Regional Bank Index. The Committee has
chosen not to use the S&P's Major Regional Bank Index as its comparator group
for compensation purposes since detailed data for all senior executives at the
banks comprising the index is not available.
The S&P's Major Regional Bank Index was used for comparison of total
shareholder return shown in the Performance Graph on page 15.
The key elements of the Company's executive compensation are base salary,
annual incentives, and long-term compensation. These key elements are addressed
separately below. In determining compensation, the Committee considers all
elements of an executive's total compensation package, including severance
plans, insurance, and other benefits.
- --------------------------------------------------------------------------------
6
<PAGE> 9
- --------------------------------------------------------------------------------
BASE SALARIES
Base salaries constituted approximately 69% of total executive compensation
for 1996. The Committee believes that the demonstration of superior abilities
and performance by individual employees should be rewarded, in part, through
salary reviews. The Committee reviews the base salary of each of the four
highest-paid executives on an annual basis.
Base salaries may be adjusted after an evaluation of each executives'
performance in conjunction with a review of the median base pay received by
other individuals holding similar positions in the Company's comparator group.
Following the determination of the market-based pay, each officer's individual
performance, achievements, and contributions to the growth of the Company are
evaluated subjectively in determining the individual's base salary. Finally, the
overall performance and needs of the Company are examined and salaries may be
adjusted in response to the need to attract and retain appropriate officers. The
Company places no specific weights on the factors used in determining base
salary levels.
Based on the factors listed above, base salaries approximated median market
levels of comparator companies in 1996, and merit increases were made at a rate
comparable to the increases provided at other companies.
Effective July 1, 1994, Mr. Frost activated his retirement benefits while
continuing as Chief Executive Officer of the Company. Accordingly, his base
salary was reduced from $400,000 to $140,000. In determining Mr. Frost's base
salary for 1997, the Committee considered the Company's overall financial
performance for the year, Mr. Frost's individual performance and long-term
contributions to the success of the Company, and base salaries of CEOs at
comparator companies. Based on these factors, the Committee elected to increase
Mr. Frost's base salary to $200,000 which, in conjunction with his retirement
income, closely approximates a competitive level of base pay.
ANNUAL INCENTIVES
Beginning in 1994, the Company initiated a formal annual incentive plan for
executives. Based on competitive target incentives at comparator companies, the
Committee determined target incentives by position and initiated a three-year
phase-in to these levels. The year 1996 was the final year of the three-year
plan. The Company must achieve a predetermined budget or target level of
financial performance before any bonuses are paid out. No bonus pool is
established if performance is below the targeted level, and only the target
bonus has been paid for performance at or above the targeted level. The
Committee has the authority to adjust payout as measured against financial
objectives up or down by 20 percent.
In 1996, annual incentives accounted for approximately 14% of total
compensation earned by executives. The purpose of the annual incentive is to
promote and reward teamwork as measured by overall corporate performance while
recognizing individual contributions.
The annual incentive target established for Mr. Frost is based on his
combined base salary and retirement income of $460,000, which closely
approximates the median base salary of CEOs at comparator companies. In
determining the annual incentive payment for Mr. Frost for 1996, the Committee
reviewed the financial results for the year and determined that the budgeted
level of performance, as measured by net income, had been exceeded. The
Committee then considered his leadership and contributions to the success of the
Company, and awarded Mr. Frost a bonus of $250,000. All other proxy reported
executive officers were awarded their target bonuses.
For 1997, the Committee, in conjunction with management, reviewed the
current target bonus levels versus competitive market data (as measured by the
Comparator Group) and internal equity. The result was targets increased by
approximately 5% for selected positions. The Committee also elected to establish
an additional bonus pool for performance above the targeted level. The amount of
the pool will be determined by the Committee.
- --------------------------------------------------------------------------------
7
<PAGE> 10
- --------------------------------------------------------------------------------
LONG-TERM INCENTIVES
The Committee believes that executive compensation should be dependent upon
the performance of the Company as a whole, as well as the performance of
individual executives. Long-term incentives are provided pursuant to the
Company's 1992 Stock Plan approved by the shareholders.
In keeping with the Company's commitment to provide a total compensation
package which includes at-risk components of pay, long-term incentives
constituted approximately 17% of an executive's total compensation package in
1996.
When awarding long-term incentives, the Committee considers executives'
levels of responsibility, prior experience, individual performance, and
compensation practices at comparator companies. The Committee's objective is to
provide executives with targeted long-term incentive opportunities that
approximate median levels at comparator companies. Current stock holdings and
the magnitude of outstanding long-term incentives are not considered in making
current awards.
STOCK OPTIONS
Non-qualified stock options are granted at an option price not less than
the fair market value of the Common Stock on the date of grant. Accordingly, the
value of stock options is tied to appreciation in the stock price from the date
the options are granted. This design focuses executives on the creation of
shareholder value over the long term and encourages equity ownership in the
Company. Stock options are used as the primary long-term incentive vehicle.
The size of stock option grants is determined based on a percentage of
annualized base salary. The size of the award can be adjusted based on the
Committee's subjective valuation of individual factors and historical award
data. The Compensation and Benefits Committee's objective is to deliver a
competitive award opportunity based on the dollar value of the award granted. As
a result, the number of stock options awarded varies from year to year and is
dependent on the stock price on the date of grant.
In 1996, Mr. Frost received options to purchase 62,000 shares with an
exercise price of $30.25 as is detailed in the table on page 11. The grant
approximated the median level of comparator companies. Without giving effect to
such grants, Mr. Frost now has beneficial ownership of 746,747 shares of the
Company's common stock which includes 115,880 shares for which he has a right to
receive pursuant to presently exercisable employee stock options. With the 1996
grant, Mr. Frost holds options to purchase an additional 137,122 shares. Mr.
Frost's stock option grant was in keeping with the Committee's intent to place
emphasis on long-term compensation which is tied directly to the success of the
Company and, correspondingly, that of shareholders.
RESTRICTED STOCK
Restricted stock provides executives with an immediate link to shareholder
interests and, due to vesting requirements, enhances the Company's ability to
maintain a stable executive team, focused on the Company's long-term success.
The Company has historically granted restricted stock every other year, with the
last grant of restricted stock occurring in 1995. No restricted stock was
granted to the named executives in 1996.
INTERNAL REVENUE CODE SECTION 162(M)
Section 162(m) of the Internal Revenue Code generally limits the annual
corporate tax deduction for compensation paid to the Chief Executive Officer and
the four other most highly compensated executive officers unless the
compensation is performance-based. One condition to qualify compensation as
performance-based is to establish the amount of the award on an objective
formula that precludes any discretion, other than to adjust awards downward.
- --------------------------------------------------------------------------------
8
<PAGE> 11
- --------------------------------------------------------------------------------
The Committee continues to review the impact of this tax code provision on
the Company's incentive plans and has determined that Section 162(m) is
currently inapplicable because no named executive officer receives compensation
in excess of $1 million. In addition, the amendments to the 1992 Stock Plan
which are being submitted for shareholder approval (see item 3) will, if
approved, exclude compensation resulting from awards under the Plan, and which
would otherwise satisfy the requirements of Section 162(m) from being subject to
the limitation. The Committee also believes it is the Company's and
shareholders' best interests to retain the discretionary evaluation of
individual performance as provided in the annual incentive plan.
CONCLUSION
The Committee believes these executive compensation policies and programs
serve the interests of shareholders and the Company effectively and that the
various pay vehicles offered are appropriately balanced to provide increased
motivation for executives to contribute to the Company's overall future
successes, thereby enhancing the value of the Company for the shareholders'
benefit.
The Committee will continue to monitor the effectiveness of the Company's
total compensation program to meet the current needs of the Company.
Roy H. Cullen
Ruben M. Escobedo
James W. Gorman, Jr.
John C. Korbell (Advisory Director)
David Straus (Member of The Frost National Bank Board)
Curtis Vaughan, Jr., Chairman
2. COMPENSATION AND BENEFITS COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS.
During 1996, a loan originally established in the ordinary course of
business with a subsidiary bank and related to a director had subsequently been
reclassified as other assets. Summit Joint Venture II, of which Mr. Vaughan, a
Cullen/Frost director, is a limited partner, had debt to The Frost National Bank
which was originated to finance the purchase and development of real estate. The
largest amount outstanding during 1996 was $1,727,956. The debt was satisfied in
full on May 17, 1996. Interest charged was dependent upon debt repayment
amounts. Debt repayment was based on asset sales during the year.
In the opinion of management, the above described transaction was effected
on terms comparable to those available to unaffiliated parties.
- --------------------------------------------------------------------------------
9
<PAGE> 12
- --------------------------------------------------------------------------------
3. SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
Shown below is information about annual and long-term compensation for the
past three fiscal years for services in all capacities to Cullen/Frost and its
subsidiaries of the Chief Executive Officer and the other three most highly
compensated executive officers (the "named executive officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- ------------------------------------
SECURITIES
UNDERLYING
OTHER RESTRICTED OPTIONS ALL OTHER
ANNUAL STOCK /SARS COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS(2) (SHARES)(3) SATION(4)
--------------------------- ---- ------ ----- --------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
T. C. Frost 1996 $150,000 $250,000 $41,590 $ 0 62,000 $50,212
Senior Chairman and CEO of 1995 $140,000 $170,000 $40,372 $228,750 34,000 $49,234
Cullen/Frost 1994 $270,000 $150,000 $31,274 $ 0 55,000 $71,912
Richard W. Evans, Jr. 1996 $308,333 $122,500 $12,567 $ 0 31,000 $23,828
Chairman of the Board and Chief 1995 $300,000 $ 90,000 $12,367 $114,375 17,000 $21,260
Operating Officer of Cullen/Frost 1994 $283,333 $ 75,000 $11,504 $ 0 30,000 $20,274
Robert S. McClane 1996 $300,000 $ 90,000 $12,140 $ 0 15,000 $26,010
President of Cullen/Frost 1995 $300,000 $ 90,000 $12,293 $114,375 17,000 $25,860
1994 $283,333 $ 75,000 $10,312 $ 0 30,000 $24,897
Phillip D. Green 1996 $171,667 $ 54,000 $ 5,049 $ 0 14,000 $11,575
Executive Vice President and Chief 1995 $161,667 $ 42,500 $ 4,659 $ 38,888 7,000 $10,942
Financial Officer of Cullen/Frost 1994 $151,667 $ 32,000 $ 3,281 $ 0 12,000 $10,330
</TABLE>
- ---------------
(1) Represents payments to compensate the employee for income taxes on elective
deferrals and Company matching contributions to Cullen/Frost's 1991 Thrift
Incentive Stock Purchase Plan ("1991 Thrift Plan") and comparable benefits
to the Company's 401(k) Plan for all employees whose participation in the
401(k) is limited by the IRS rules. This is approximately 115 employees for
1996. Mr. Frost's values also include $21,681 to reimburse him for Medicare
and income taxes on life insurance premiums paid for by the Company.
(2) Represents the dollar value of restricted stock awards, based on the closing
market price of Cullen/Frost stock on grant date. The total number of
restricted shares held and their aggregate market value at December 31, 1996
were: Mr. Frost, 10,780 shares valued at $358,435; Mr. Evans, 5,550 shares
valued at $184,538; Mr. McClane 5,550 shares valued at $184,358; and Mr.
Green, 1,920 shares valued at $63,840. Aggregate market value is based on a
fair market value of $33.25 at December 31, 1996. Dividends are paid on the
restricted shares at the same time and at the same rate as dividends paid to
shareholders of unrestricted shares. Stock awarded in 1995 vests at the end
of 3 years.
(3) Reflects adjustment for the 2-for-1 stock split in 1996.
(4) Represents total and/or imputed income from certain insurance premiums paid
by Cullen/Frost and Company's contributions to the 1991 Thrift Plan. The
amounts for insurance premiums and/or imputed income for 1996 and 1995 were
$54,385 and $51,756, respectively. The Company's contribution to the 1991
Thrift Plan was $57,240 in 1996 and $55,540 in 1995.
- --------------------------------------------------------------------------------
10
<PAGE> 13
- --------------------------------------------------------------------------------
Cullen/Frost has employee stock option plans under which options to
purchase Common Stock are granted to executive officers and other key employees.
The table below shows grants during the past year of stock options under the
Cullen/Frost Bankers, Inc. 1992 Stock Plan to the named executive officers:
OPTION GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS/SARS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES FOR OPTION TERM
OPTIONS/SARS IN FISCAL EXERCISE EXPIRATION -----------------------------------
NAME GRANTED YEAR(1) PRICE(3) DATE 0% 5% 10%
---- ------------ ------------ -------- ---------- -- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
T. C. Frost.......... 62,000 15.4% $30.25 10/03/2006 $0 $ 1,179,492 $ 2,989,064
Richard W. Evans,
Jr................. 31,000 7.7% $30.25 10/03/2006 $0 $ 589,746 $ 1,494,532
Robert S. McClane.... 15,000 3.7% $27.25 06/25/2006 $0 $ 257,061 $ 651,442
Phillip D. Green..... 14,000 3.5% $30.25 10/03/2006 $0 $ 266,337 $ 674,950
All
shareholders(2).... N/A N/A $30.25 N/A $0 $427,701,122 $1,083,878,617
</TABLE>
- ---------------
(1) Based on 403,000 options granted to all employees in 1996.
(2) Shows potential realizable value at assumed annual rates for all
shareholders based on 22,482,113 shares outstanding as of December 31, 1996.
Gains on "All Shareholders" assume a base price of $30.25.
Shown below is information on stock options exercised during 1996 by each
of the named executive officers and the market value at fiscal year-end for
remaining options:
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
TOTAL NUMBER OF
SECURITIES TOTAL VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
SHARES FISCAL YEAR-END(1) HELD AT FISCAL YEAR-END(2)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
T. C. Frost..................... -- -- 115,880 137,122 $2,516,062 $1,215,795
Richard W. Evans, Jr............ -- -- 59,766 71,716 $1,265,259 $ 655,904
Robert S. McClane............... 13,510 $515,450 44,456 43,722 $ 814,846 $ 463,207
Phillip D. Green................ -- -- 23,860 30,136 $ 510,738 $ 264,620
</TABLE>
- ---------------
(1) Reflects adjustment for 10% stock dividend in 1993 and 2-for-1 stock split
in 1996.
(2) Total value of options based on a fair market value of Company Stock of
$33.25 as of December 31, 1996.
4. OTHER PLANS AND AGREEMENTS
Retirement Plan and Restoration Plan
Cullen/Frost has a non-contributory Retirement Plan and Trust for Employees
of Cullen/Frost Bankers, Inc. and its Affiliates for eligible employees which is
designed to comply with the requirements of the Employee Retirement Income
Security Act of 1974. It also has a Restoration Plan which provides benefits in
excess of the limits under Section 415 of the Internal Revenue Code and in
excess of limits on eligible earnings set by the Tax Reform Act of 1986;
benefits are provided in connection with both the Retirement Plan and a previous
employee stock ownership plan. The entire cost of the Retirement and Restoration
Plans is provided by Cullen/Frost and its subsidiaries.
- --------------------------------------------------------------------------------
11
<PAGE> 14
- --------------------------------------------------------------------------------
The attached Pension Plan Table shows the anticipated annual benefit,
computed on a straight line basis, payable under the Retirement Plan and
Restoration Plan upon the normal retirement of a vested executive officer of
Cullen/Frost at age 65 after 15, 20, 25, 30, 35, 40, 45 and 50 years of credited
service at specified annual compensation levels.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------------------------------------
REMUNERATION 15 20 25 30 35 40 45 50
- ------------ -------- -------- -------- -------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$125,000 $ 39,004 $ 46,102 $ 50,361 $ 60,170 $ 70,198 $ 77,073 $ 83,948 $ 90,823
150,000 47,401 56,141 61,386 73,295 85,510 93,760 102,010 110,260
175,000 55,797 66,180 72,411 86,420 100,823 110,448 120,073 129,698
200,000 64,193 76,220 83,436 99,545 116,135 127,135 138,135 149,135
225,000 72,590 86,259 94,460 112,670 131,448 143,823 156,198 168,573
250,000 80,986 96,298 105,485 125,795 146,760 160,510 174,260 188,010
300,000 97,779 116,377 127,535 152,045 177,385 193,885 210,385 226,885
400,000 131,364 156,533 171,635 204,545 238,635 260,635 282,635 304,635
450,000 148,157 176,612 193,685 230,795 269,260 294,010 318,760 343,510
500,000 164,949 196,690 215,735 257,045 299,885 327,385 354,885 382,385
</TABLE>
The Retirement Plan was revised effective January 1, 1993 to provide a
monthly benefit based on a percentage of an eligible employee's final average
Compensation based on the highest three years of compensation during the last
ten years of service. An eligible employee's Retirement Benefit will be the
greater of the employee's benefits accrued under the prior provisions of the
plan up to December 31, 1992 or the benefits determined by the new formula
effective January 1, 1993. Included in "Compensation" according to the
Retirement Plan are Salary, Overtime, Bonuses, Commissions and Wages deferred
for the Company 401(k) Plan or used to pay health care premiums and expenses
which are not reimbursable under the company Pre Tax Plan (IRS section 125
Plan). Participants in the Plan are fully vested in their accrued benefits under
the Plan upon attaining age 65 or after five years of service, whichever occurs
first. Death benefits are provided to married participants who have completed
five years of service. Normal retirement is at age 65 but early retirement is
available starting at age 55. Early Retirement benefits are reduced on an
actuarial basis. The benefit amounts listed in the table represent amounts
payable from the plans and are not subject to any additional deduction for
social security benefits or other offset amounts.
The years of credited service under the Retirement Plan as of December 31,
1996 for each person named in the Summary Compensation Table on page 10 are: Mr.
T. C. Frost -- 47 years; Mr. Evans -- 26 years (40 years at age 65); Mr.
McClane -- 34 years (41 years at age 65); and Mr. Green -- 16 years (39 years at
age 65). Mr. Frost activated his retirement benefit effective July 1, 1994, but
still remains an active employee. Each year, his retirement benefits will be
recalculated based on his earnings for that year.
The Company also maintains a supplemental executive retirement plan
("SERP"). The plan provides for target retirement benefits, as a percentage of
annual cash compensation, beginning at age 55. The target percentage is 45% of
annual cash compensation at age 55, increasing to 60% 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. Current participants in the SERP are Messrs. Evans and
McClane. At current salary levels, at age 60, Mr. Evans would receive $70,000
annually and Mr. McClane would receive $64,000 annually.
- --------------------------------------------------------------------------------
12
<PAGE> 15
- --------------------------------------------------------------------------------
Agreements
Cullen/Frost has change-in-control agreements with two of the four named
executives, Messrs. Evans and Green, above and other key employees. The main
purposes of these agreements are (i) to help executives evaluate objectively
whether a potential change-in-control is in the best interests of shareholders,
(ii) to help protect against the departure of executives, thus assuring
continuity of management, in the event of an actual or threatened merger or
change-in-control, and (iii) to maintain compensation and benefits comparable to
those available from competing employers. "Change-in-control" is defined as an
acquisition of 20 percent or more of Cullen/Frost Common Stock by an individual,
corporation, partnership, group, association or other person; certain changes in
the composition of the Board of Directors by 50 percent or more; or certain
changes in control which must be reported to the Securities and Exchange
Commission.
Messrs. Evans and Green could receive 2.99 times their average annual
compensation during the previous five years if their position is terminated
within two years following the change-in-control either by Cullen/Frost, if the
termination is for reasons other than cause, disability or retirement, or either
if he terminates his employment for good reason. "Good reason" is defined as a
significant reduction or change in responsibility, involuntary transfer to a new
location, a reduction in compensation or benefits, the failure of any successor
to Cullen/Frost to assent to such change-in-control agreement, any purported
termination by Cullen/Frost of the covered person without providing such person
a proper written notice of termination or, in the case of the two executives,
their good faith determination, within 90 days of a change-in-control, that as a
result of the change-in-control they are not able to discharge their duties
effectively. The agreements also provide for a continuation of certain employee
benefits for qualifying executives upon a change-in-control.
Assuming that a change-in-control of Cullen/Frost had occurred effective
December 31, 1996 and that termination of employment also had occurred on that
date, the maximum amounts that could be payable to the named executives are: Mr.
Evans $1,524,128; and Mr. Green $717,373.
The Company has entered into an agreement with Mr. McClane in connection
with his planned retirement from the Company on June 1, 1999 that provides for
his employment as President of the Company through the 1997 Annual Meeting of
Stockholders, his being employed as a consultant with the Company thereafter
until May 31, 1999 and his continuing to be considered for nomination and
reelection to the Board of Directors of the Company until such time as he
reaches age 70. The agreement provides for a salary of $25,000 per month through
the term of the agreement, a $90,000 bonus payable by March 31, 1997 and certain
medical, health, life, disability and other benefits similar to those provided
to other members of senior management. The agreement also provides for the
cancellation of 12,800 stock options previously granted Mr. McClane that would
not otherwise vest until after his retirement and the grant of an additional
15,000 stock options at an exercise price of $27.25 per share which vest on May
31, 1999. The agreement may be terminated for cause and provides for continued
payments in the event of disability.
- --------------------------------------------------------------------------------
13
<PAGE> 16
- --------------------------------------------------------------------------------
5. EXECUTIVE OWNERSHIP
The following table lists the number of shares of Cullen/Frost Common Stock
beneficially owned by each of the named executive officers and by all directors,
nominees and executive officers of Cullen/Frost as a group:
<TABLE>
<CAPTION>
SHARES OWNED(1)
------------------------
AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP(2) PERCENT
------------ --------
<S> <C> <C>
T. C. Frost................................................. 746,747(3) 3.28%
Richard W. Evans, Jr........................................ 134,373 .59
Robert S. McClane........................................... 117,947(4) .52
Phillip D. Green............................................ 39,705 .17
All directors, nominees and executive officers as group (25
persons, including two advisory directors)................ 1,592,033(5) 7.00
</TABLE>
- ---------------
(1) Beneficial ownership is as of December 31, 1996. Beneficial ownership
includes shares for which the individual had a right to acquire pursuant to
employee stock options exercisable within sixty (60) days from December 31,
1996, as follows -- Mr. T. C. Frost 115,880, Mr. Evans 59,766, Mr. McClane
44,456, Mr. Green 23,860, and all executive officers and directors as a
group 269,586.
(2) Includes the following shares allocated under the 401(k) Stock Purchase Plan
for which the beneficial owners have sole voting but no investment
power -- Mr. T. C. Frost 20,929, Mr. Evans 14,955, Mr. McClane 581, and Mr.
Green 8,715.
(3) Includes 28,092 shares held in the Pat and Tom Frost Foundation Trust for
which Mr. T. C. Frost disclaims beneficial ownership.
(4) Includes 8,638 shares held in a Charitable Remainder Trust for which Mr.
McClane disclaims beneficial ownership.
(5) Includes 51,123 shares for which directors, nominees and named executive
officers have sole voting but no investment power, 95,436 shares with shared
voting and shared investment power with others, and 159,988 shares owned by
two advisory directors.
- --------------------------------------------------------------------------------
14
<PAGE> 17
- --------------------------------------------------------------------------------
[PERFORMANCE GRAPH]
Below is a performance graph comparing the cumulative total shareholder
return on Cullen/Frost Common Stock with the cumulative total return of
companies on the Standard & Poor's 500 Stock Index and the Standard & Poor's
Major Regional Bank Index.
<TABLE>
<CAPTION>
S&P Major
Measurement Period Cullen/Frost Regional Bank
(Fiscal Year Covered) Bankers, Inc. S&P 500 Index
--------------------- ------------- ------- -------------
<S> <C> <C> <C>
1991 100 100 100
1992 205 108 127
1993 257 118 135
1994 230 120 128
1995 382 165 201
1996 523 203 274
</TABLE>
ASSUMES $100 INVESTED ON 12/31/91. DIVIDENDS ARE REINVESTED.
- --------------------------------------------------------------------------------
15
<PAGE> 18
- --------------------------------------------------------------------------------
PRINCIPAL SHAREHOLDERS
At December 31, 1996, the only shareholder known by the management of
Cullen/Frost to own beneficially more than five percent of the outstanding
shares of Cullen/Frost Common Stock was:
<TABLE>
<CAPTION>
AMOUNT, NATURE
OF BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
------------------------------------ -------------- --------
<S> <C> <C>
Cullen/Frost Bankers, Inc.
P. O. Box 1600
San Antonio, Texas 78296................................ 2,211,173(1) 9.80%
</TABLE>
- ---------------
(1) On December 31, 1996, Cullen/Frost owned no securities of Cullen/Frost for
its own account. However, The Frost National Bank and United States National
Bank of Galveston held of record in various fiduciary capacities an
aggregate of 2,211,173 shares. The Frost National Bank and United States
National Bank of Galveston had sole voting power for 1,646,798 shares and
132,126 shares, respectively. United States National Bank of Galveston had
shared voting power for 2,984 shares. The Frost National Bank and United
States National Bank of Galveston had sole investment power for 175,844
shares and 133,126 shares, respectively, and shared investment power for
25,328 shares and 3,984 shares, respectively. The Frost National Bank and
United States National Bank of Galveston had both sole voting and investment
power for 154,359 shares and 130,686 shares, respectively. All of the shares
are held by Cullen/Frost subsidiary banks, each of which has reported that
the securities, registered in its name as fiduciary or in the names of
various of its nominees, are owned by many separate accounts, each of which
is governed by a separate instrument which sets forth the powers of the
fiduciary with regard to the securities held.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Since January 1, 1996, some of the executive officers and directors of
Cullen/Frost, and some of their associates, are and have been customers of one
or more of the Cullen/Frost subsidiary banks and have had transactions with
these banks in the ordinary course of business. Other transactions have
included, in addition to borrowings from the subsidiary banks, the following:
1. Cullen/Frost and some of its subsidiaries have policies of
insurance written through Catto & Catto, an insurance agency of which Mr.
Catto and Mr. Hayne, Cullen/Frost directors, are partners. Fees paid by
Cullen/Frost and its subsidiaries aggregated less than five percent of the
total gross revenues of Catto & Catto for its fiscal year ended December
31, 1996.
2. Mr. Eugene Dawson, Sr., owns 28.35% of Jesse A. Baker Investments,
Inc. (JAB). JAB has a $600,000 line of credit with The Frost National Bank.
During 1996, JAB had draws of $610,000 and repayments of $899,863. The
balance of the line at December 31, 1996 was $375,000. In addition, JAB has
a loan for land development purposes. Principal payments on this loan
totaled $165,200 and interest payments totaled $67,110 during 1996. The
balance of the loan at December 31, 1996 was $825,000. The principal and
interest payments required by the terms of the Notes for 1997 are
anticipated to exceed 5% of JAB's gross revenues.
All of the foregoing transactions were on substantially the same terms,
including interest rates and collateral to the extent applicable, as those
prevailing at the time for comparable transactions with other persons and did
not involve more than normal risk of collectibility or present other unfavorable
features. Additional transactions in the future may be expected to take place
with the subsidiary banks in the ordinary course of business.
- --------------------------------------------------------------------------------
16
<PAGE> 19
- --------------------------------------------------------------------------------
Also, a loan originally established in the ordinary course of business with
a subsidiary bank and related to a director, Mr. Vaughan, had subsequently been
reclassified as other assets. The debt was satisfied in full on May 17, 1996.
This transaction is described on page 9, "Compensation and Benefits Committee
Interlocks and Insider Participation in Compensation Decisions."
In the opinion of management, all of the above described transactions were
effected on terms comparable to those available to unaffiliated parties.
PROPOSED RESOLUTION TO AMEND ARTICLES OF INCORPORATION
(ITEM 2 ON PROXY CARD)
Cullen/Frost is presently authorized under its Articles of Incorporation to
issue not more than 30,000,000 shares of Common Stock, par value $5 per share.
As of April 4, 1997, there were 22,507,928 of shares of Common Stock outstanding
and 1,795,826 shares of Common Stock reserved for issue under various employee
benefit plans.
The Board of Directors has proposed, and there will be submitted to a vote
of the shareholders at the meeting, a resolution to amend the Articles of
Incorporation to increase the authorized shares of Common Stock, par value $5
per share, from 30,000,000 to 60,000,000 shares. Authorized shares of Common
Stock may be issued on such terms and for such corporate purposes as the Board
of Directors may determine, and without further action by the shareholders
unless such action is required by applicable law or by the rules of any stock
exchange or securities quotation system on which the Common stock may then be
listed or quoted. As a condition to the Common Stock's designation and quotation
as a National Market System security by the National Association of Securities
Dealers, certain issuance's of Common Stock require prior shareholder approval,
including issuances in connection with new stock option plans and certain
issuance's of 20% or more of the Common Stock outstanding (before the issuance's
of such shares).
The text of the proposed resolution is as follows:
RESOLVED, that Article Four of Cullen/Frost's Articles of
Incorporation be amended to increase the aggregate number of shares of
Common Stock, par value $5 per share, the Company has authority to issue to
60,000,000.
The Board of Directors believes that it is important to have the additional
shares of Common stock available for issuance as and when needed in order to
avoid the delay and expense incident to obtaining shareholder approval at a
later date or dates and to provide Cullen/Frost greater flexibility in the
consideration of future stock dividends or stock splits, sales of Common Stock
or convertible securities to enhance capital and liquidity, possible future
acquisitions and other corporate purposes. As of the date hereof, Cullen/Frost
has no specific plan to utilize the remaining or the proposed new authorized
shares.
A potential effect of the proposed increase in the authorized Common Stock
could be a dilution of present shareholders' interest in Cullen/Frost if it
issues additional shares. In addition, any issuance of additional shares of
Common Stock could have the effect of diluting the earnings per share and book
value per share of existing shares of Common Stock.
The Board of Directors has not proposed the increase in authorized shares
of Common Stock with the intention of using such shares for anti-takeover
purposes although the availability of such shares (either alone or with the
attached Preferred Stock purchase rights) may theoretically be utilized to
render more difficult or discourage an attempt to acquire control of
Cullen/Frost.
Holders of Common Stock have one vote per share, may not cumulate votes in
the election of directors and have no preemptive rights to subscribe for or
purchase from Cullen/Frost any additional shares of
- --------------------------------------------------------------------------------
17
<PAGE> 20
- --------------------------------------------------------------------------------
Common stock. Holders of Common Stock do not have any dissenters' or appraisal
rights in connection with this proposal.
The affirmative vote of the holders of two-thirds of all of the outstanding
shares of Common Stock entitled to vote thereon is required to approve the
proposed amendment to the Company's Articles. The Board of Directors recommends
that shareholders vote "FOR" the amendment. Proxies, unless indicated to the
contrary, will be voted "FOR" the amendment.
APPROVAL OF THE AMENDMENT TO THE 1992 STOCK PLAN
(ITEM 3 ON PROXY CARD)
In 1992, the shareholders approved the establishment of the Cullen/Frost
Bankers, Inc., 1992 Stock Plan. The complete text of the 1992 Stock Plan is
attached as Annex A. The Plan's purpose is to enable Cullen/Frost and its
affiliates to retain and motivate key employees and to encourage their ownership
of Cullen/Frost stock, providing them a way to acquire or increase a proprietary
interest in the Company's success.
The Board of Directors believes the Plan is a key element of Cullen/Frost's
executive compensation program because stock-based incentive compensation ties
executive compensation directly to stock value. As a result of recent regulatory
changes, it has become necessary to take certain steps in order to preserve the
deductibility of certain compensation paid by Cullen/Frost. In order to address
these recent regulatory changes and to enhance flexibility under the Plan, the
Board of Directors has unanimously approved, subject to shareholder approval, an
amendment to the 1992 Stock Plan (the "Amendment"). The complete text of the
Amendment is attached as Annex B.
Four types of incentives may be granted under the Plan -- restricted stock,
incentive stock options, nonqualified stock options, and/or stock appreciation
rights. Each type of incentive is more fully described below. Shares granted
under the Plan may be authorized but unissued shares or previously issued shares
reacquired by Cullen/Frost, including shares purchased on the open market and
not reserved for any other purposes.
The Board of Director's Compensation and Benefits Committee, composed of
five outside directors and one outside advisory director, administer the Plan,
select participants, and determine the type, number, and conditions of incentive
awards. Eligible employees are those who, in the Committee's opinion, are
materially responsible for the management, growth, and protection of significant
parts of the business or functions of the Company and/or its subsidiaries or
affiliates. Since the Plan contemplates grants to future as well as present
employees, Cullen/Frost cannot currently predict the total number of
participants.
SUMMARY DESCRIPTION OF THE AMENDMENT TO THE 1992 STOCK PLAN
The following summarizes the material terms of the Amendment to the 1992
Stock Plan. If adopted by shareholders, the Amendment will be effective as of
May 28, 1997.
INCREASE IN SHARE AUTHORIZATION
The Plan currently authorizes 1,760,000 shares for issuance, of which
410,222 shares remain available for grant. In order to ensure that there will be
sufficient shares available for grant under the Plan in future years, the
Amendment increases the total number of shares of Common Stock authorized for
issuance under the Plan by 1,100,000 shares. Of the 2,860,000 total shares
authorized under the Plan pursuant to the Amendment, no more than 265,000 shares
may be granted in the form of restricted stock.
- --------------------------------------------------------------------------------
18
<PAGE> 21
- --------------------------------------------------------------------------------
INDIVIDUAL AWARD LIMIT
In order to exempt future awards from the tax deductibility limitations of
Internal Revenue Code Section 162(m), the Amendment to the 1992 Stock Plan
provides that no more than four hundred thousand (400,000) shares under Options
and no more than four hundred thousand (400,000) shares in the form of stock
appreciation rights may be granted to any Participant in any one fiscal year and
that no more than one hundred fifty thousand (150,000) shares will be paid out
under any Restricted Stock award in any one fiscal year, to any Participant.
This Amendment is not intended to increase future award sizes or otherwise alter
the Compensation and Benefits Committee's (the "Committee's") general practices
in determining award sizes.
PERFORMANCE MEASURES
The Performance Measures on which awards qualifying for an exemption under
Section 162(m) are based shall be chosen from among the following: return on
equity, earnings per share, operating cash flow, gross revenue, income before
taxes, net income, return on revenue, and stock price appreciation. This
provision will allow the Committee flexibility in establishing performance goals
while maintaining an exemption to the tax deductibility limitations imposed by
Section 162(m).
TRANSFERABILITY OF NONQUALIFIED STOCK OPTIONS
As a result of recent revisions to Section 16 of the Securities Exchange
Act of 1934 and in order to enhance flexibility in the design of nonqualified
stock options under the Plan, the Amendment permits the transferability of
nonqualified stock options in the Committee's discretion.
POOLING OF INTERESTS
Certain actions with respect to equity-based compensation can prevent a
company from utilizing pooling of interests accounting in connection with
business combinations. In order to preserve Cullen/Frost's ability to use
pooling of interests accounting, the Amendment contains a provision which
permits the Board of Directors to take any action necessary with respect to the
Plan in order to preserve Cullen/Frost's ability to use pooling of interests
accounting.
SUMMARY DESCRIPTION OF THE EXISTING PLAN
Restricted Stock: When it awards restricted stock, the Committee will have
established a restriction period during which shares awarded may not be sold,
exchanged, transferred, pledged, or otherwise encumbered by the participant;
however, during the restriction period, the participant shall generally have all
shareholder rights including voting, dividends and other distributions.
Incentive and Nonqualified Stock Options: The purchase price of stock
issued under both types of stock options will be determined by the Committee,
but will not be less than the fair market value of Common Stock subject to the
option at the time the option is granted. Incentive Stock Options will not be
transferable other than by will or laws of descent and distribution. As provided
in the Amendment, Nonqualified Stock Options generally will not be transferable
other than by will or laws of descent and distribution except as may be
permitted at the discretion of the Committee. As provided in current plans, the
Board of Directors may, upon recommendation of the Committee and to carry out
purposes of this plan, amend options to reduce the exercise price and number of
shares.
Stock Appreciation rights (SARs): The Committee may grant SARs either in
tandem with stock options or freestanding and unrelated to options. In either
case, the form of payment of a SAR will be determined by the Committee either at
grant time or when exercised, and may be in shares of Common Stock, cash, or a
combination of the two: (i) if granted other than in tandem, the Committee will
determine the
- --------------------------------------------------------------------------------
19
<PAGE> 22
- --------------------------------------------------------------------------------
number of shares of Common Stock covered by and the exercise period for the SAR.
Upon exercise of the SAR, the participant will receive an amount equal to the
excess of the fair market value of one share of stock on the date the exercise
is received by the Company over the fair market value of one share of the stock
on the grant date, multiplied by the number of shares of stock covered by the
SAR; (ii) if granted in tandem with an option, a SAR may be awarded when the
option is granted or any time thereafter, the Committee may limit the exercise
period of the SAR except that the SAR's exercise period may not exceed that of
the option. The participant may exercise the SAR when the option is exercisable,
surrender the option, and receive on exercise an amount equal to the excess of
fair market value of one share of stock on the date the election to surrender is
received by the Company over the option purchase price, multiplied by the number
of shares of stock covered by the surrender option.
FEDERAL INCOME TAX CONSEQUENCES OF THE 1992 STOCK PLAN
Federal Tax Treatment of Incentive Stock Options: A participant will not
realize taxable income when an incentive stock option is granted under the 1992
Plan or when an incentive stock option is exercised, and the Company will not be
entitled to a deduction with respect to the granting of exercise of such an
option except in the limited circumstances discussed below. If an incentive
stock option grantee holds the shares acquired under the option for at least two
years from the date the option is granted and at least one year from the date
the option is exercised, any gain realized by the participant when the shares
are sold will be taxable to the grantee as capital gain. If the shares are not
held for the two- and the one-year periods, the participant will realize
ordinary income in the year of disposition of the shares in an amount equal to
the excess of the fair market value of the shares on the date of exercise (or
the proceeds of the disposition, if lower) over the option exercise price, and
the Company will be entitled to a corresponding deduction. Any remaining gain
will generally be capital gain. If the shares are disposed of at a loss, the
loss will be a capital loss. The difference between the exercise price of an
incentive stock option and the fair market value of the shares subject to the
option at the time of exercise is an item of tax preference which may result in
the participant being subject to the alternative minimum tax. Whether a
participant is subject to the alternative minimum tax in lieu of "regular"
income tax will depend on individual facts and circumstances.
Federal Tax Treatment of Nonqualified Stock Options: A participant will
not realize taxable income, and the Company will not be entitled to a deduction,
at the time that a nonqualified stock option is granted under the 1992 Plan.
Upon exercising a nonqualified stock option, a participant will realize ordinary
income, and the Company will be entitled to a corresponding deduction, in an
amount equal to the excess of the fair market value on the exercise date of the
shares subject to the option over the exercise price of the option. The
participant will have a basis in the shares received as a result of the
exercise, for purposes of computing capital gain or loss on a future sale or
exchange of those shares, equal to the fair market value of those shares on the
exercise date.
Federal Tax Treatment of Restricted Stock: The recipient of a grant of
restricted stock under the 1992 Plan will not realize taxable income and the
Company will not be entitled to a deduction with respect to such grant on the
date of such grant unless the recipient makes an election under Section 83(b) of
the Code, within 30 days after grant, to include in income the fair market value
of the stock on the date of grant. When the participant becomes entitled to
freely transfer the stock, the grantee will realize ordinary income in an amount
equal to the excess of the fair market value of the stock on such date over the
amount, if any, that the recipient paid for the stock and the Company will
generally be entitled to a corresponding deduction.
Federal Tax Treatment of SARs: The recipient of a grant of SARs will not
realize taxable income and the Company will not be entitled to deduction with
respect to such grant on the date of such grant. Upon the exercise of a SAR, the
recipient will realize ordinary income, and the Company will be entitled to a
corresponding deduction, equal to the amount of cash received.
- --------------------------------------------------------------------------------
20
<PAGE> 23
- --------------------------------------------------------------------------------
The 1992 Stock Plan shall terminate not later than 10 years after its
original approval by the Board of Directors, and the board has the power to
terminate it at any earlier time.
The benefits that will be received under the 1992 Stock Plan, as amended,
by particular individuals or groups are not determinable at this time. The
benefits that were received for the 1996 fiscal year by the Named Executive
Officers pursuant to the 1992 Stock Plan are summarized in tables on page 11.
The accompanying proxy will be voted in favor of approval of the Amendments
unless contrary instructions are noted on the proxy.
The affirmative vote of a majority of the shares of Common Stock present in
person or by proxy are entitled to vote at the Annual Meeting is required for
adoption of the Amendment to the Plan.
The Board of Directors recommends a vote "FOR" approval of the Amendment.
APPROVAL OF THE 1997 DIRECTORS STOCK PLAN
(ITEM 4 ON PROXY CARD)
On January 28, 1997, the Company's Board of Directors (the "Board")
adopted, subject to approval by the shareholders, the 1997 Directors Stock Plan
(the "Plan") for nonemployee directors. The purpose of the Plan is to further
align the interests of the nonemployee directors and shareholders by encouraging
director stock ownership and motivating directors with compensation tied to the
value of the Company's Common stock. The Plan will also enhance the Company's
ability to attract and retain the services of experienced and highly qualified
nonemployee directors.
The affirmative vote of a majority of the shares of Common Stock present in
person or by proxy and entitled to vote at the Annual Meeting is required for
adoption of the Plan.
The Board of Directors recommends that shareholders vote "FOR" this
proposal.
SUMMARY DESCRIPTION OF THE STOCK PLAN
The following is a summary of the principal features of the Plan, a copy of
which is set forth hereto as Annex C. If approved by the shareholders, the Plan
will be effective as of May 28, 1997.
Administration. The Plan will be administered by the Compensation and
Benefits Committee of the Board (the "Committee").
Participation. Nonemployee directors shall participate in the Plan.
Fifteen of the eighteen current directors are nonemployees and shall participate
in the Plan.
Stock Available for Issuance Through the Plan. The Plan provides for
awards of nonqualified stock options, as further described below. Up to 150,000
shares of the Company's Common Stock are authorized for issuance through the
Plan.
Description of Awards Under the Plan. The Committee may award to
nonemployee directors nonqualified stock options. Stock options will typically
be issued in consideration for the performance of services for the Company.
Awards of nonqualified stock options are described in greater detail below.
The Committee will have discretion to award nonqualified stock options
("NQSOs"). The maximum grant of NQSOs in any one fiscal year under the Plan to
any one Outside Director is 5,000 shares. The Plan provides that the exercise
price of any NQSO may not be less than the fair market value of the underlying
shares of Common Stock on the date of grant. Upon the exercise of an NQSO
granted under the Plan, the option price is payable in full to the Company,
either in cash or by tendering shares having a fair market value
- --------------------------------------------------------------------------------
21
<PAGE> 24
- --------------------------------------------------------------------------------
at the time of exercise equal to the total option price (providing shares have
been held for at least six months prior to their tender). NQSOs granted to
nonemployee directors under the Plan will expire at such times as the Committee
determines at the time of grant. In no event should the exercise period exceed a
maximum of ten years. Each NQSO award agreement will set forth the extent to
which the director will have the right to exercise the option following
termination of the director's service to the Company.
The following discussion is intended only as a brief summary of the federal
income tax rules relevant to the Company and to nonemployee directors for NQSO
awards under the Plan.
A director will recognize no income upon the grant of an NQSO, and, upon
exercise, will recognize ordinary income to the extent of the excess of the fair
market value of the shares on the date the option is exercised over the amount
paid by the director for the shares. Upon a subsequent disposition of the shares
received under the option, the director will recognize capital gain or loss to
the extent of the difference between the fair market value of the shares at the
time of exercise and the amount realized on the disposition.
The Company will receive an income tax deduction at the same time and in
the same amount which is taxable to the director as compensation. The ordinary
income a nonemployee director recognizes under the foregoing rules is not
subject to withholding. However, a nonemployee director must take such income
into account in determining the tax payments such director is required to make.
On April 4, 1997, the closing price for a share of the Company's Common
Stock, as reported on the National Association of Security Dealers Automated
Quotation system composite tape, was 35.00.
Adjustments and Amendments. The Plan provides for appropriate adjustments
in the number of shares of Common stock available for future awards in the event
of changes in outstanding Common Stock by reason of a merger, stock split, or
certain other events.
The Plan may be modified or amended by the Committee at any time and for
any purpose which the Committee deems appropriate. However, no such amendment
shall adversely affect any outstanding awards without the affected holder's
consent.
Nontransferability. Unless otherwise provided in an award agreement, no
award granted pursuant to, and no right to payment under, the Plan shall be
assignable or transferable by a nonemployee director except by will or by the
laws of descent and distribution, and any option or similar rights shall be
exercisable during a director's lifetime only by the director or by the
director's guardian or legal representative. These limitations may be waived by
the Committee, subject to any applicable laws and regulations.
Duration of the Plan. The Plan will remain in effect until all awards
granted thereunder shall have been satisfied or terminated pursuant to the terms
of the Plan.
NEW PLAN BENEFITS
The benefits that will be received under the 1997 Director Stock Plan by
particular directors are not determinable at this time. The compensation which
was received in the 1996 fiscal year by the directors is set forth in the
section "General Information About the Board of Directors" which appears on page
5.
- --------------------------------------------------------------------------------
22
<PAGE> 25
- --------------------------------------------------------------------------------
SELECTION OF AUDITORS
(ITEM 5 ON PROXY CARD)
The Board of Directors desires to obtain from the shareholders an
indication of their approval of the selection of Ernst & Young LLP, certified
public accountants, as independent auditors of Cullen/Frost. Accordingly, upon
the affirmative vote of a majority of the shares of Cullen/Frost Common Stock
present at the meeting, the Board of Directors will adopt a resolution naming
Ernst & Young LLP as independent auditors of Cullen/Frost for the fiscal year
which commenced January 1, 1997. Ernst & Young LLP has audited the financial
statements of Cullen/Frost since 1969.
In the opinion of Cullen/Frost management, the presence of Ernst & Young
LLP at the meeting is not necessary to present properly the results of
operations of Cullen/Frost. However, if any shareholder desires to submit a
question to the independent auditors, management will ensure that the question
is transmitted to them and that an appropriate response is made directly to the
shareholder.
SHAREHOLDER PROPOSALS
With respect to the 1998 Annual Meeting of Shareholders, any shareholder's
proposal for inclusion in the Proxy Statement for that meeting must be received
by Cullen/Frost at its principal offices not later than December 28, 1997.
OTHER MATTERS
Management of Cullen/Frost knows of no other business to be presented at
the meeting, but if other matters do properly come before the meeting, unless
otherwise instructed, it is intended that the persons named in the proxy will
vote shares according to their best judgment.
By Order of the Board of Directors
/s/ DIANE JACK
DIANE JACK
Corporate Secretary
Dated: April 17, 1997
A copy of Cullen/Frost's 1996 Annual Report on Form 10-K is available
without charge (except for exhibits) upon written request to Cullen/Frost
Bankers, Inc., 100 West Houston Street, San Antonio, Texas 78205.
- --------------------------------------------------------------------------------
23
<PAGE> 26
- --------------------------------------------------------------------------------
ANNEX A
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 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.
- --------------------------------------------------------------------------------
A-1
<PAGE> 27
- --------------------------------------------------------------------------------
(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
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
- --------------------------------------------------------------------------------
A-2
<PAGE> 28
- --------------------------------------------------------------------------------
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.
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.
- --------------------------------------------------------------------------------
A-3
<PAGE> 29
- --------------------------------------------------------------------------------
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.
7.4. EXERCISE OF STOCK OPTION. The shares covered by a Stock Option may be
purchased in such installments and 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
- --------------------------------------------------------------------------------
A-4
<PAGE> 30
- --------------------------------------------------------------------------------
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.
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.
- --------------------------------------------------------------------------------
A-5
<PAGE> 31
- --------------------------------------------------------------------------------
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-6
<PAGE> 32
- --------------------------------------------------------------------------------
ANNEX B
AMENDMENT TO THE CULLEN/FROST BANKERS, INC. 1992 STOCK PLAN
(EFFECTIVE AS OF MAY 28, 1997)
The Board of Directors of Cullen/Frost Bankers, Inc., pursuant to Section
9.5 of Cullen/Frost Bankers, Inc. 1992 Stock Plan ( the "Plan"), hereby amends
the Plan as described below; provided, however, that such amendments shall
become effective only after approval by the Company's shareholders. The
amendments are as follows:
The following terms and accompanying definitions shall be added to the Plan
under Section 2.1:
(r) "Covered Employee" means a Participant who the Committee determines is
likely to be, as of the date of vesting and/or payout of Incentive, as
applicable, is one of the group of "covered employees," as defined in
the regulations promulgated under Code Section 162(m), or any successor
thereto.
(s) "Performance-Based Exception" means the performance-based exception
from the tax deductibility limitations of Code Section 162(m).
Section 5.1 of the Plan shall be deleted and replaces with the following:
5.1 NUMBER OF SHARES AVAILABLE FOR GRANT. Subject to adjustment as
provided in Section 5.2 herein, the number of Shares hereby reserved for
issuance to Participants under the Plan shall be two million eight hundred sixty
thousand (2,860,000). In no event may greater than two hundred sixty-five
thousand (265,000) shares be available for issuance with respect to grants of
Restricted Stock under the Plan. The Board shall determine the appropriate
methodology for calculating the number of Shares issued pursuant to the Plan.
Unless and until the Board determines that an Incentive shall not be designed to
comply with the Performance-Based Exception, the following rules shall apply to
grants of such Incentives under the Plan:
(a) Stock Options: The maximum aggregate number of shares of Common stock
that may be granted in the form of Stock Options, pursuant to any
Incentives granted in any one fiscal year to any one single
Participant, shall be four hundred thousand (400,000).
(b) SARs: The maximum aggregate number of shares of Common Stock that may
be granted in the form of Stock Appreciation Rights, pursuant to any
Incentives granted in any one fiscal year to any one single
Participant, shall be four hundred thousand (400,000)
(c) Restricted Stock: The maximum aggregate grant with respect to
Incentives granted in the form of Restricted Stock granted in any one
fiscal year to any one participant shall be one hundred fifty thousand
(150,000) shares of common stock.
Section 5.4 shall be added to the Plan and shall read as follows:
5.4 PERFORMANCE MEASURES. Unless and until the Committee proposes for
shareholder vote and shareholders approve a change in the general performance
measures set forth in this Section 5.4, the attainment of which may determine
the degree of payout and/or vesting with respect to Incentives granted to
Covered Employees which are designed to qualify for the Performance-Based
Exception, the performance measure(s) to be used for purposes of such grants
shall be chosen from among:
(a) Return on Equity;
(b) Earnings Per Share;
(c) Operating Cash Flow;
- --------------------------------------------------------------------------------
B-1
<PAGE> 33
- --------------------------------------------------------------------------------
(d) Gross Revenue;
(e) Income Before Taxes;
(f) Net Income;
(g) Return on Revenue; and
(h) Stock Price Appreciation.
The Committee shall have the discretion to adjust the determinations of the
degree of attainment of the preestablished performance goals, provided, however,
that Incentives which are designed to qualify for the Performance-Based
Exception, and which are held by Covered Employees, may not be adjusted upward
(the Committee shall retain the discretion to adjust such Incentives downward).
In the event that applicable tax and/or securities laws change to permit
Board discretion to alter the governing performance measures without obtaining
shareholder approval of such changes, the Board shall have sole discretion to
make such changes without obtaining shareholder approval. In addition, in the
event that the Committee determines that it is advisable to grant Incentives
which shall not qualify for the Performance-Based Exception, the Committee may
make such grants without satisfying the requirements of Code Section 162(m).
The second sentence of Section 7.2 of the Plan shall be deleted and replaced
with the following:
Each Incentive 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. Except as may be otherwise provided by the
Committee, each Nonqualified 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.
Section 9.7 shall be added to the Plan and shall read as follows:
9.7 POOLING OF INTERESTS ACCOUNTING. Notwithstanding any other provision
of the Plan to the contrary, in the event that the consummation of a Change in
Control is contingent on using the pooling of interests accounting methodology,
the Board may take any action necessary to preserve the use of pooling of
interests accounting.
Section 9.8 shall be added to the Plan and shall read as follows:
9.8 COMPLIANCE WITH CODE SECTION 162(m). At all times when Code Section
162(m) is applicable, all Incentives granted under this Plan shall comply with
the requirements of Code Section 162(m); provided, however, that in the event
the Board determines that such compliance is not desired with respect to any
Incentive or Incentives available for grant under the Plan, then compliance with
Code Section 162(m) will not be required. In addition, in the event that changes
are made to Code Section 162(m) to permit greater flexibility with respect to
any Incentive or Incentives available under the Plan, the Board may make any
adjustments it deems appropriate.
- --------------------------------------------------------------------------------
B-2
<PAGE> 34
- --------------------------------------------------------------------------------
ANNEX C
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.
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.
- --------------------------------------------------------------------------------
C-1
<PAGE> 35
- --------------------------------------------------------------------------------
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).
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
- --------------------------------------------------------------------------------
C-2
<PAGE> 36
- --------------------------------------------------------------------------------
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 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
- --------------------------------------------------------------------------------
C-3
<PAGE> 37
- --------------------------------------------------------------------------------
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.
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,
- --------------------------------------------------------------------------------
C-4
<PAGE> 38
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
C-5
<PAGE> 39
- --------------------------------------------------------------------------------
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR ANNUAL MEETING
OF CULLEN/FROST BANKERS, INC.
P.O. BOX 11100, NEW YORK, N.Y. 10203-0100
The undersigned hereby revoking all proxies previously granted, appoints ROY
H. CULLEN, T.C. FROST and RICHARD W. EVANS, JR., and each of them, with power of
substitution, as proxy of the undersigned, to attend the Annual Meeting of
Shareholders of Cullen/Frost Bankers, Inc. on May 28, 1997, and any adjournments
thereof, and to vote the number of shares the undersigned would be entitled to
vote if personally present as designated on the reverse.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3, 4 AND 5
AND IN THE DISCRETION OF THE PROXIES UPON SUCH OTHER BUSINESS AS MAY PROPERLY
COME BEFORE THE ANNUAL MEETING.
<TABLE>
<S> <C> <C> <C>
(1) ELECTION OF DIRECTORS FOR all nominees [ ] WITHHOLD AUTHORITY to vote [ ] *EXCEPTIONS: FOR all [ ]
listed below for all nominees listed below nominees except those
listed below
</TABLE>
Class I: I. Arnold, Jr., H. H. Cullen, R. H. Cullen, P. Frost, J. L. Hayne,
R. S. McClane, M. B. Williamson
Class II: H. Wilkins, Jr.
Class III: B. W. Coleman, J. R. Fulton
*Exceptions
------------------------------------------------------------------
(2) The approval of the resolution to amend the Articles of Incorporation to
increase the authorized shares of Common Stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) The approval of the amendments to the 1992 Stock Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(4) The approval of the 1997 Directors Stock Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(5) The approval of the selection of Ernst & Young as independent auditors of
Cullen/Frost for the fiscal year that commenced January 1, 1997.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Address Change
and/or Comments Mark Here [ ]
Signature should correspond with
the printed name appearing hereon.
When signing in a fiduciary or
representative capacity, give full
title as such, or when more than
one owner, each should sign.
Dated: , 1997.
-----------------------------------
(Signature of Shareholder)
-----------------------------------
(Signature of Shareholder)
Votes must be indicated [X] in
Black or Blue ink.
PLEASE BE CERTAIN THAT YOU HAVE DATED AND SIGNED THIS PROXY. RETURN YOUR PROXY
IN THE ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
