<PAGE> 1
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:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [X] 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 Section 240.14a-11(c) or Section 240.14a-2.
</TABLE>
Cullen/Frost Bankers, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than 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)(4) and 0-12.
(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
LOGO
- --------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 27, 1998
- --------------------------------------------------------------------------------
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 27, 1998, at
10:00 a.m., San Antonio time, for the following purposes:
1. To re-elect seven directors to serve until the 2001 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
from 60,000,000 to 90,000,000;
3. To consider and vote upon a proposed resolution to amend the
Articles of Incorporation to reduce the par value per share of the
Company's Common Stock from $5.00 per share to $0.01;
4. To ratify the selection of Ernst & Young LLP to act as independent
auditors of Cullen/Frost for the fiscal year that commenced January 1,
1998; and
5. To transact such other business as may properly come before the
meeting or any postponements or adjournments thereof.
Only stockholders of record at the close of business on April 3, 1998, are
entitled to notice of and to vote at the Annual Meeting or any postponements or
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 PROPOSALS TO AMEND THE
ARTICLES OF INCORPORATION REQUIRE 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 20, 1998
- --------------------------------------------------------------------------------
<PAGE> 3
LOGO
- --------------------------------------------------------------------------------
PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 27, 1998
- --------------------------------------------------------------------------------
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 27, 1998, in accordance with the attached
notice. This Proxy Statement and the accompanying proxy card are being mailed to
shareholders beginning on or about April 20, 1998.
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 $6,500 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 proposal to amend the Articles of Incorporation
to decrease the par value per share of Common Stock as described in Item 3 of
the Proxy Statement; in favor of the proposal to approve the selection of Ernst
& Young LLP as independent auditors described in Item 4 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 3, 1998, the record date for determining shareholders of Cullen/Frost
entitled to vote at the meeting, there were outstanding 22,264,489 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
Items 2 and 3 require the affirmative vote of at least two-thirds of the
outstanding shares. Action to be taken on Item 4 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 4. In addition, shares not voted or proxies which are market
"abstain" will be the equivalent of a negative vote with respect to Items 2 and
3.
- --------------------------------------------------------------------------------
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 II will expire at
this 1998 Annual Meeting, Class III at the 1999 Annual Meeting and Class I at
the 2000 Annual Meeting.
The seven current directors assigned to Class II have been nominated to
stand for re-election as directors at the Annual Meeting in 1998 for a
three-year term. 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. The nominees' and directors'
beneficial ownership of Cullen/Frost Common stock is also identified below. The
nominees and directors are listed by class.
<TABLE>
<CAPTION>
SHARES OWNED(1)
--------------------
AMOUNT AND
NATURE
OF
DIRECTOR BENEFICIAL
NAME AGE PRINCIPAL OCCUPATION SINCE OWNERSHIP PERCENT
---- --- -------------------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
NOMINEES FOR TERM EXPIRING IN 2001:
Class II
- --------
Royce S. Caldwell........... 59 President, SBC Operations, 1994 1,400 .01
SBC Communications Inc.
Ruben R. Cardenas........... 67 Attorney, Cardenas, Whitis & 1995 2,000 .01
Stephen, L.L.P.
Henry E. Catto.............. 67 Partner, Catto & Catto 1993 12,000 .05
Insurance 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........ 51 Chairman of the Board, Chief 1993 161,686(5) .72
Executive Officer, and
President of Cullen/Frost;
Chairman of the Board and
Chief Executive Officer of
Frost National Bank, a
Cullen/Frost Subsidiary
James W. Gorman, Jr......... 67 Oil, real estate, and 1987 7,000(6) .03
investments
Richard M. Kleberg, III..... 55 Banking and investments 1992 5,200 .02
Horace Wilkins, Jr.......... 47 Regional President, 1997 1,200 .01
Southwestern Bell Telephone
Co.
(Table continued on following page)
</TABLE>
- --------------------------------------------------------------------------------
2
<PAGE> 5
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OWNED(1)
--------------------
AMOUNT AND
NATURE
OF
DIRECTOR BENEFICIAL
NAME AGE PRINCIPAL OCCUPATION SINCE OWNERSHIP PERCENT
---- --- -------------------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
DIRECTORS WHOSE TERM EXPIRES IN 1999:
Class III
- ---------
Bob W. Coleman.............. 66 President and Chief 1997 4,171(6) .02
Executive Officer, Texace
Corporation
Eugene H. Dawson, Sr. ...... 63 President, Pape-Dawson 1996 16,200 .07
Consulting Engineers
Ruben M. Escobedo........... 60 Certified Public Accountant 1996 1,600 .01
W. N. Finnegan, III......... 72 Attorney; former President, 1977 23,453 .10
R. E. Smith Interests, Inc.
T. C. Frost................. 70 Senior Chairman of the Board 1966 767,978(5) 3.40
of Cullen/Frost
Joe R. Fulton............... 63 President, Fulton 1997 6,000(7) .03
Construction Corporation
Ida Clement Steen........... 45 Investments 1996 1,440 .01
Curtis Vaughan, Jr.......... 70 Chairman of the Board of 1980 13,752 .06
Vaughan & Sons, Inc.
(Distributor of lumber and
other building materials and
real estate development)
DIRECTORS WHOSE TERM EXPIRES IN 2000:
Class I
- -------
Isaac Arnold, Jr. .......... 62 Oil, real estate, 1977 14,984 .07
investments
Harry H. Cullen............. 62 Oil, real estate, 1993(2) 142,974(3) .63
investments
Roy H. Cullen............... 68 Oil, real estate, 1977 103,666(4) .46
investments
Patrick B. Frost............ 37 President, The Frost 1997 64,664(5) .29
National Bank, a
Cullen/Frost Subsidiary
James L. Hayne.............. 64 Managing partner of Catto & 1977 97,858(6) .43
Catto (insurance agency)
Robert S. McClane........... 58 President, McClane Partners; 1985 65,194(5) .29
former President of
Cullen/Frost
Mary Beth Williamson........ 64 Education (Consultant) 1996 1,440 .01
</TABLE>
- ---------------
(Notes on following page)
- --------------------------------------------------------------------------------
3
<PAGE> 6
- --------------------------------------------------------------------------------
(1) Unless otherwise indicated, beneficial ownership is as of December 31, 1997,
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 stock options
exercisable within sixty (60) days from December 31, 1997, as follows -- Mr.
T. C. Frost 155,282, Mr. Evans 80,762, Mr. Patrick B. Frost 38,014, and Mr.
McClane 15,602; all other directors and nominees 1,000 options each. 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) Includes 53,064 shares for which Mr. Harry Cullen has shared voting and
investment power with Mr. Roy Cullen.
(4) Includes 53,064 shares for which Mr. Roy Cullen has shared voting and
investment power with Mr. Harry Cullen, and 48,176 shares for which Mr. Roy
Cullen has shared voting and shared investment power with others.
(5) Includes the following shares allocated under the 401(k) Stock Purchase Plan
for Employees of Cullen/Frost Bankers, Inc., for which each beneficial owner
has both sole voting and investment power -- Mr. T. C. Frost 21,629, Mr.
Evans 15,528, Mr. Patrick B. Frost, 6,306, and Mr. McClane 836. In addition,
the number of shares reported for Mr. T. C. Frost includes 28,592 shares
held in the Pat and Tom Frost Foundation Trust for which Mr. T. C. Frost
disclaims beneficial ownership.
(6) Disclaims beneficial ownership of shares: Mr. Bob Coleman 1,000 shares held
in a charitable foundation; Mr. James Gorman 2,000 shares held in a
charitable foundation; Mr. James Hayne 87,060 shares due to spouse's
investment in a limited partnership.
(7) Ownership is as of February 28, 1998.
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; Mr. Kleberg -- Abraxas Petroleum Corporation; and Mr.
Wilkins -- American Water Works.
There are no arrangements or understandings between any nominee or director
of Cullen/Frost and any other person pursuant to which such nominee or director
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 B. 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), Beneficial Ownership Reporting Compliance, 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 New York Stock Exchange ("NYSE"). A
delinquent Form 3 -- Initial Statement of Beneficial Ownership -- was filed for
Mr. Bob Coleman for shares gifted to a charitable foundation. A delinquent Form
5 -- Annual Statement of Beneficial Ownership -- was filed for Mr. Richard M.
Kleberg, III related to a change in direct ownership to indirect ownership in a
family partnership.
- --------------------------------------------------------------------------------
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 as follows:
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,
the Bylaws of Cullen/Frost, or Texas law. Current members are T. C. Frost,
Richard W. Evans, Jr., and Patrick B. Frost.
Audit Committee: The Audit Committee is composed of exclusively outside
(non-employee) directors. It reviews the scope and results of the annual audit
by Ernst & Young LLP, Cullen/Frost's independent auditors, and it also reviews
such auditors' 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 of 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 exclusively 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, (viii) the Group Medical and Life
Insurance Plan, and (ix) the 1997 Directors Stock Plan. Current members are Roy
H. Cullen, Ruben M. Escobedo, James W. Gorman, Jr., and Curtis Vaughan, Jr. In
addition, David Straus of The Frost National Bank Board of Directors
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 analyzes
strategic directions for Cullen/Frost in light of competitive conditions,
monitors the corporate mission statement and capital planning, and reviews
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 1997, there were five meetings of the Board of Directors, three
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 1997, 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 Roy H. Cullen and Horace
Wilkins, Jr.
- --------------------------------------------------------------------------------
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, non-employee 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 58% of total executive compensation
for 1997. 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 were slightly below median
market levels of comparator companies in 1997. However, merit increases were
made at a rate comparable to the increases provided at other companies.
Effective October 29, 1997, Mr. T. C. Frost relinquished his role as Chief
Executive Officer, but continues as Senior Chairman of the Company. Mr. Evans
assumed the role of Chief Executive Officer effective October 29, 1997. In
determining Mr. Evans' base salary for 1998, the Committee considered his new
role as CEO and the base salaries of CEOs at comparator companies. Based on
these factors, the Committee established Mr. Evans's base salary at $400,000,
which is below the median level of CEOs at comparator companies.
ANNUAL INCENTIVES
The Company maintains a formal incentive plan for executives which is based
on competitive target incentives at comparator companies. 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, but an additional bonus pool may be created for performance
above the targeted level. The Committee has the authority to adjust payout as
measured against financial objectives up or down by 20 percent.
In 1997, annual incentives accounted for approximately 15% 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 paid to Mr. T. C. Frost for 1997 was based on his
combined base salary and retirement income of $460,000. In determining the
annual incentive payment for Mr. T. C. Frost for 1997, the Committee reviewed
the financial results for the year and determined that the budgeted level of
performance, as measured by net income, was slightly exceeded. The Committee
then considered his leadership and contributions to the success of the Company,
and awarded Mr. T. C. Frost a bonus of $250,000. The Committee also considered
the superior performance of Mr. Evans in his previous role as Chief Operating
Officer and in his new role as Chief Executive Officer and accordingly, awarded
him a bonus of $175,000. All other proxy reported executive officers were
awarded their target bonuses.
Each year, the Committee, in conjunction with management, reviews the
current target bonus levels versus competitive market data (as measured by the
Comparator Group) and internal equity. As a result, the target for Mr. Evans was
set at 50% based on competitive targets for other CEOs at comparator companies.
Mr. T. C. Frost is not a formal participant in the 1998 bonus plan.
- --------------------------------------------------------------------------------
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 27% of an executive's total compensation package in
1997.
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.
Mr. T. C. Frost did not receive options for 1997 and is no longer a formal
participant in the Stock Plan. Mr. Evans was granted options to purchase 15,000
shares with an exercise price of $48.1875 as is detailed in the table on page
11. This award, in conjunction with the award of restricted stock, was above the
median level for CEOs of comparator companies. However, the Committee felt this
was appropriate in recognition of his new role as CEO and his below market base
salary. Without giving effect to such grants, Mr. Evans now has beneficial
ownership of 161,686 shares of the Company's common stock which includes 80,762
shares for which he has a right to receive pursuant to presently exercisable
employee stock options. With the 1997 grant, Mr. Evans holds options to purchase
an additional 131,482 shares. Mr. Evans'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, and has
continued that policy by granting restricted stock in 1997. The last grant of
restricted stock was in 1995. Mr. T. C. Frost did not receive a grant of
restricted stock in 1997. Mr. Evans received a grant of 5,000 shares of
restricted stock.
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.
- --------------------------------------------------------------------------------
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. 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.
Since January 1, 1997, some of the members of the Compensation and Benefits
Committee 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 such banks' business. In
the opinion of management, all of the transactions were on substantially the
same terms, including with respect to interest rates and collateral to the
extent applicable, as those prevailing at the time for comparable transactions
with unaffiliated parties and did not involve more than a 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 such banks' business.
- --------------------------------------------------------------------------------
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 four most highly
compensated executive officers (the "named executive officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- ------------------------------------
SECURITIES
UNDERLYING ALL
OTHER RESTRICTED OPTIONS 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...................... 1997 $200,000 $250,000 $45,325 $ 0 0 $66,747
Senior Chairman of Cullen/Frost 1996 $150,000 $250,000 $41,590 $ 0 62,000 $50,212
1995 $140,000 $170,000 $40,372 $228,750 34,000 $49,234
Richard W. Evans, Jr............. 1997 $358,333 $175,000 $16,288 $240,938 15,000 $27,140
Chairman of the Board and Chief 1996 $308,333 $122,500 $12,567 $ 0 31,000 $23,828
Executive Officer of Cullen/Frost 1995 $300,000 $ 90,000 $12,367 $114,375 17,000 $21,260
Robert S. McClane (5)............ 1997 $300,000 $ 0 $13,078 $ 0 0 $26,010
President of Cullen/Frost 1996 $300,000 $ 90,000 $12,140 $ 0 15,000 $26,010
1995 $300,000 $ 90,000 $12,293 $114,375 17,000 $25,860
Patrick B. Frost................. 1997 $217,500 $ 69,000 $ 7,461 $ 96,375 5,000 $13,573
President, The Frost National 1996 $202,500 $ 64,500 $ 6,207 $ 0 17,000 $12,615
Bank, a Cullen/Frost Subsidiary 1995 $179,167 $ 50,000 $ 5,721 $ 45,750 8,000 $11,152
Phillip D. Green................. 1997 $185,000 $ 63,000 $ 6,135 $ 84,328 5,000 $12,475
Executive Vice President and
Chief 1996 $171,667 $ 54,000 $ 5,049 $ 0 14,000 $11,575
Financial Officer of Cullen/Frost 1995 $161,667 $ 42,500 $ 4,659 $ 38,888 7,000 $10,942
</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
1997. Mr. T. C. Frost's values also include $22,150 as reimbursement to him
for 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, 1997
were as follows: Mr. T. C. Frost, 10,000 shares valued at $606,875; Mr.
Evans, 10,000 shares valued at $606,875; Mr. McClane 5,000 shares valued at
$303,438; Mr. P. Frost, 4,000 shares valued at $242,750; and Mr. Green,
3,450 shares valued at $209,372. Aggregate market value is based on a fair
market value of $60.6875 at December 31, 1997. Dividends are paid on the
restricted shares at the same time and at the same rate as dividends paid on
unrestricted shares. Stock awarded in 1995 and 1997 vests at the end of 3
years from the date of award.
(3) Reflects adjustment for the 2-for-1 stock split effected in 1996.
(4) Represents total and/or imputed income from certain insurance premiums paid
by Cullen/Frost as well as the Company's contributions to the 1991 Thrift
Plan. The amounts for insurance premiums and/or imputed income for 1997 and
1996 were $68,835 and $54,850, respectively. The Company's contribution to
the 1991 Thrift Plan was $77,090 in 1997 and $69,390 in 1996.
(5) Mr. McClane retired as President of Cullen/Frost effective May 31, 1997.
- --------------------------------------------------------------------------------
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 DATE 5% 10%
---- ------------ ------------ -------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
T. C. Frost........... 0 0.0% $48.1875 10/03/2007 $ 0 $ 0
Richard W. Evans,
Jr.................. 15,000 8.5% $48.1875 10/03/2007 $ 454,573 $ 1,151,977
Robert S. McClane..... 0 0.0% $48.1875 10/03/2007 $ 0 $ 0
Patrick B. Frost...... 5,000 2.8% $48.1875 10/03/2007 $ 151,524 $ 383,992
Phillip D. Green...... 5,000 2.8% $48.1875 10/03/2007 $ 151,524 $ 383,992
All shareholders(2)... N/A N/A N/A N/A $674,745,886 $1,709,938,554
</TABLE>
- ---------------
(1) Based on 176,000 options granted to all employees in 1997.
(2) Shows potential realizable value at assumed annual rates for all
shareholders based on 22,265,270 shares outstanding as of December 31, 1997.
Gains on "All Shareholders" assume a base price of $48.1875 and an Option
Term expiring 10/03/2007.
Shown below is information on stock options exercised during 1997 by each
of the named executive officers and the market value at fiscal year-end of
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/
OPTIONS/SARS AT SARS HELD AT FISCAL
SHARES FISCAL YEAR-END(1) YEAR-END(2)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
T. C. Frost................. -- -- 155,282 97,720 $7,210,836 $3,462,889
Richard W. Evans, Jr........ -- -- 80,762 65,720 $3,717,836 $1,998,437
Robert S. McClane........... 44,456 $927,515 15,602 28,120 $ 662,656 $1,045,195
Patrick B. Frost............ -- -- 38,014 34,710 $1,660,908 $1,139,918
Phillip D. Green............ 6,000 $324,243 26,524 26,472 $1,164,135 $ 821,097
</TABLE>
- ---------------
(1) Reflects adjustment for 10% stock dividend in 1993 and 2-for-1 stock split
effective in 1996.
(2) Total value of options based on a fair market value of Company Stock of
$60.6875 as of December 31, 1997.
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 Subsidiaries 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
- --------------------------------------------------------------------------------
11
<PAGE> 14
- --------------------------------------------------------------------------------
Plan and a previous employee stock ownership plan. The entire cost of the
Retirement Plan and Restoration Plan is provided by Cullen/Frost and its
subsidiaries.
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
- ------------ -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$125,000 $ 29,778 $ 39,703 $ 49,629 $ 59,555 $ 69,481 $ 77,073 $ 83,948 $ 90,823
150,000 36,340 48,453 60,567 72,680 84,793 93,760 102,010 110,260
175,000 42,903 57,203 71,504 85,805 100,106 110,448 120,073 129,698
200,000 49,465 65,953 82,442 98,930 115,418 127,135 138,135 149,135
225,000 56,028 74,703 93,379 112,055 130,731 143,823 156,198 168,573
250,000 62,590 83,453 104,317 125,180 146,043 160,510 174,260 188,010
300,000 75,715 100,953 126,192 151,430 176,668 193,885 210,385 226,885
400,000 101,965 135,953 169,942 203,930 237,918 260,635 282,635 304,635
450,000 115,090 153,453 191,817 230,180 268,543 294,010 318,760 343,510
500,000 128,215 170,953 213,692 256,430 299,168 327,385 354,885 382,385
</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 which is based on the highest three years of compensation during
the last ten years of service. An eligible employee's benefit under the
Retirement Plan 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" under
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,
1997 for each person named in the Summary Compensation Table on page 10 are as
follows: Mr. T. C. Frost -- 48 years; Mr. Evans -- 27 years (40 years at age
65); Mr. McClane -- 35 years (41 years at age 65); Mr. P. Frost -- 13 years (41
years at age 65); and Mr. Green -- 17 years (39 years at age 65). Mr. T. C.
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 benefit, 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 above.
Benefits under the SERP are reduced, dollar-for-dollar, by benefits received
under the Retirement Plan and Restoration Plan, 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 $84,000
annually and Mr. McClane would receive $63,000 annually.
- --------------------------------------------------------------------------------
12
<PAGE> 15
- --------------------------------------------------------------------------------
Agreements
Cullen/Frost has change-in-control agreements with three of the five named
executives officers 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, P. Frost, and Green could receive 2.99 times their average
annual compensation during the previous five years if their employment is
terminated within two years following a change-in-control and (i) if the
termination is by Cullen/Frost or a successor company and the termination is for
reasons other than cause, disability, or retirement or (ii) if the termination
is by the executive officer 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 three 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, 1997 and that termination of employment also had occurred on that
date, the maximum amounts that would be payable to the named executives are as
follows: Mr. Evans $1,366,206; Mr. P. Frost $693,859; and Mr. Green $887,809.
The Company entered into an agreement with Mr. McClane in connection with
his planned retirement from the Company on June 1, 1999 that provided for his
employment as President of the Company through the 1997 Annual Meeting of
Shareholders, 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 to 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................................................. 767,978(3) 3.40%
Richard W. Evans, Jr........................................ 161,686 .72
Patrick B. Frost............................................ 64,664 .29
Robert S. McClane........................................... 65,194 .29
Phillip D. Green............................................ 44,632 .20
All directors, nominees and executive officers as group (25
persons, including two advisory directors)................ 1,600,792(4) 7.08
</TABLE>
- ---------------
(1) Beneficial ownership is as of December 31, 1997. 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,
1997, as follows -- Mr. T. C. Frost 155,282, Mr. Evans 80,762, Mr. P. Frost
38,014, Mr. McClane 15,602, Mr. Green 26,524, and all executive officers and
directors as a group 334,184.
(2) Includes the following shares allocated under the 401(k) Stock Purchase Plan
for which each beneficial owner has both sole voting and investment
power -- Mr. T. C. Frost 21,629, Mr. Evans 15,528, Mr. P. Frost 6,306, Mr.
McClane 836, and Mr. Green 9,268.
(3) Includes 28,592 shares held in the Pat and Tom Frost Foundation Trust for
which Mr. T. C. Frost disclaims beneficial ownership.
(4) Includes 53,567 shares for which directors, nominees and named executive
officers have both sole voting and investment power, 101,240 shares with
shared voting and shared investment power with others, and 93,364 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
(Fiscal Year Covered) Bankers, Inc. S&P 500 Bank Index
<S> <C> <C> <C>
1992 100 100 100
1993 125 110 105
1994 112 111 100
1995 186 153 157
1996 255 188 215
1997 475 251 323
</TABLE>
ASSUMES $100 INVESTED ON 12/31/92 AND REINVESTMENT OF DIVIDENDS.
- --------------------------------------------------------------------------------
15
<PAGE> 18
- --------------------------------------------------------------------------------
PRINCIPAL SHAREHOLDERS
At December 31, 1997, 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
NAME AND ADDRESS OF OF BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP OF CLASS
------------------- -------------- --------
<S> <C> <C>
Cullen/Frost Bankers, Inc.
P. O. Box 1600
San Antonio, Texas 78296.................................... 2,168,876(1) 9.74%
</TABLE>
- ---------------
(1) On December 31, 1997, 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 2,168,876 shares. The Frost National Bank and United States
National Bank of Galveston had sole voting power for 1,600,138 shares and
61,909 shares, respectively. The Frost National Bank and United States
National Bank of Galveston had shared voting power for 289 and 54,342
shares, respectively. The Frost National Bank and United States National
Bank of Galveston had sole investment power for 132,966 shares and 119,762
shares, respectively, and shared investment power for 29,324 shares and
2,764 shares, respectively. The Frost National Bank and United States
National Bank of Galveston had both sole voting and investment power for
119,666 shares and 61,909 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, 1997, 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, each of whom is a Cullen/Frost director, 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, 1997.
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 1997, JAB had draws of $76,598 and repayments of $425,729. The
balance of the line at December 31, 1997 was $25,869. In addition, JAB has
a loan for land development purposes with The Frost National Bank.
Principal payments on this loan totaled $334,350 and interest payments
totaled $68,815 during 1997. The balance of the loan at December 31, 1997
was $490,650. The principal and interest payments required by the terms of
the Notes for 1998 are anticipated to exceed 5% of JAB's gross revenues.
In the opinion of management, all of the foregoing transactions were on
substantially the same terms, including with respect to interest rates and
collateral to the extent applicable, as those prevailing at the time for
comparable transactions with unaffiliated parties and did not involve more than
a 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
- --------------------------------------------------------------------------------
PROPOSED RESOLUTION TO AMEND ARTICLES OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
(ITEM 2 ON PROXY CARD)
Cullen/Frost is presently authorized under its Articles of Incorporation to
issue not more than 60,000,000 shares of Common Stock, par value $5.00 per
share. As of April 3, 1998, there were 22,264,489 shares of Common Stock
outstanding, 2,602,493 shares of Common Stock reserved for issue under various
employee benefit plans, 150,000 shares reserved for issue under the 1997
Directors Stock Plan, and approximately 4,380,000 shares reserved for issue in
connection with Cullen/Frost's announced acquisition of Overton Banchshares,
Inc.
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 number of authorized shares of Common Stock from
60,000,000 to 90,000,000.
Authorized shares of Common Stock may be issued on such terms and for such
corporate purposes as the Board of Directors may determine. This requires no
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. Under the rules of the New
York Stock Exchange, certain issuances of Common Stock require prior shareholder
approval, including issuances in connection with new stock option plans and
certain issuances of 20% or more of the Common Stock outstanding (before the
issuance 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 the Company has authority to issue to 90,000,000; and further
RESOLVED, that Article Four of Cullen/Frost's Articles of
Incorporation be amended by deleting the reference to 60,000,000 shares of
Common Stock and inserting in its place a reference to 90,000,000 shares of
Common Stock.
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. It provides 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. Except as set forth above, 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 in the
event additional shares are issued. 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 Common stock. Holders of
Common Stock do not have any dissenters' or appraisal rights in connection with
this proposal.
- --------------------------------------------------------------------------------
17
<PAGE> 20
- --------------------------------------------------------------------------------
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.
PROPOSED RESOLUTION TO AMEND ARTICLES OF INCORPORATION TO
DECREASE THE PAR VALUE PER SHARE OF COMMON STOCK
(ITEM 3 ON PROXY CARD)
Under Texas corporate law, par value is initially determined by
incorporators of an entity and set forth in the Articles of Incorporation. Many
companies who incorporate today use a low par value (e.g., $0.01) or have no par
value.
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 decrease the par value per share of Common Stock from $5.00 to
$0.01.
The text of the proposed resolution is as follows:
RESOLVED, that Article Four of Cullen/Frost's Articles of
Incorporation be amended to decrease the par value per share of Common
Stock to $0.01; and further
RESOLVED, that Article Four of Cullen/Frost's Articles of
Incorporation be amended by deleting the reference to $5.00 as the par
value per share of Common Stock and inserting in its place a reference to
$0.01 par value per share of Common Stock.
The concept of par value, which dates back to early corporate law, once
served to protect stock purchasers and creditors from the issuance of stock at
prices below par value. The stated par value was presumed to be the
corporation's value and represented an assurance to both stock purchasers and
creditors that the corporation in which they were investing had a certain value.
Today, corporations issue stock at prices which bear no discernible relationship
to par value.
Although par value generally does not serve the corporate purposes for
which it was originally intended, it remains a factor under Texas law in
determining the funds available for use by the Company in paying dividends and
other distributions to shareholders and in determining the extent of any
permissible corporate repurchases of shares of Common Stock. The Company is
required to maintain a stated capital account at least equal to the total number
of shares issued, multiplied by the par value per share. With a $5.00 par value,
the Company is required to maintain a stated capital account of at least
$111,322,445 as of April 3, 1998. In order for the Company to pay dividends to
its shareholders or repurchase shares of its Common Stock, it must calculate its
surplus in accordance with Texas law. Surplus is the excess of the Company's net
assets over its stated capital.
The Board believes that the proposed reduction in the par value of the
shares of Common Stock is desirable to provide the Company with flexibility in
managing its corporate funds. The adoption of the amendment to reduce the par
value of shares of the Company's Common Stock will substantially increase the
Company's ability to determine any surplus available for dividends,
distributions, corporate share repurchases and other corporate purposes under
Texas law.
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.
- --------------------------------------------------------------------------------
18
<PAGE> 21
- --------------------------------------------------------------------------------
SELECTION OF AUDITORS
(ITEM 4 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, 1998. 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 1999 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, 1998.
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
LOGO
DIANE JACK
Corporate Secretary
Dated: April 20, 1998
A copy of Cullen/Frost's 1997 Annual Report on Form 10-K is available
without charge (except for exhibits) upon written request to Cullen/Frost
Bankers, Inc., attention Greg Parker, 100 West Houston Street, San Antonio,
Texas 78205.
- --------------------------------------------------------------------------------
19
<PAGE> 22
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR ANNUAL MEETING
OF CULLEN/FROST BANKERS, INC.
The undersigned hereby revoking all proxies previously granted, appoints
T.C. FROST, RICHARD W. EVANS, JR., and PATRICK B. FROST, 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 27, 1998, 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, AND 4
AND IN THE DISCRETION OF THE PROXIES UPON SUCH OTHER BUSINESS AS MAY PROPERLY
COME BEFORE THE ANNUAL MEETING.
(Continued and to be dated and signed on the reverse.)
CULLEN/FROST BANKERS, INC.
P.O. BOX 11100
NEW YORK, N.Y. 10203-0100
- --------------------------------------------------------------------------------
(1) ELECTION OF DIRECTORS
<TABLE>
<S> <C> <C> <C> <C>
FOR all nominees [ ] WITHHOLD AUTHORITY to vote [ ] *EXCEPTIONS: FOR all
listed below for all nominees listed below nominees except those listed below
</TABLE>
Class II: Royce S. Caldwell, Ruben R. Cardenas, Henry E. Catto, Richard
W. Evans, Jr., James W. Gorman, Jr., Richard M. Kleberg, III,
Horace Wilkins, Jr.
*Exceptions
-------------------------------------------------------------
(2) The approval of the resolution to amend the Articles of Incorporation to
increase the authorized shares of Common Stock from 60,000,000 shares to
90,000,000 shares.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(3) The approval of the resolution to amend the Articles of Incorporation to
decrease the par value per share of Common Stock from $5.00 per share to
$0.01 per share.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(4) The approval of the selection of Ernst & Young, LLP as independent
auditors of Cullen/Frost for the fiscal year that commenced January 1,
1998.
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: __________________________, 1998
[ ] ---------------------------------------
(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.
