Employee Benefit Plans

Retirement Plans

Profit Sharing Plans. The profit-sharing plan is a defined contribution retirement plan that covers employees who have completed at least one year of service and are age 21 or older. All contributions to the plan are made at our discretion and may be made without regard to current or accumulated profits. Contributions are allocated to eligible participants uniformly, based upon compensation, age and other factors. Plan participants self-direct the investment of allocated contributions by choosing from a menu of investment options. Account assets are subject to withdrawal restrictions and participants vest in their accounts after three years of service. We also maintain a separate non-qualified profit sharing plan for certain employees whose participation in the qualified profit sharing plan is limited. The plan offers such employees an alternative means of receiving comparable benefits. Expense related to these plans totaled $11.3 million in 2015, $10.8 million in 2014 and $11.4 million in 2013.

Retirement Plan and Restoration Plan. We maintain a non-contributory defined benefit plan (the “Retirement Plan”) that was frozen as of December 31, 2001. The plan provides pension and death benefits to substantially all employees who were at least 21 years of age and had completed at least one year of service prior to December 31, 2001. Defined benefits are provided based on an employee’s final average compensation and years of service at the time the plan was frozen and age at retirement. The freezing of the plan provides that future salary increases will not be considered. Our funding policy is to contribute yearly, at least the amount necessary to satisfy the funding standards of the Employee Retirement Income Security Act (“ERISA”).

Our Restoration of Retirement Income Plan (the “Restoration Plan”) provides benefits for eligible employees that are in excess of the limits under Section 415 of the Internal Revenue Code of 1986, as amended, that apply to the Retirement Plan. The Restoration Plan is designed to comply with the requirements of ERISA. The entire cost of the plan, which was also frozen as of December 31, 2001, is supported by our contributions.

We use a December 31 measurement date for our defined benefit plans. Combined activity in our defined benefit pension plans was as follows:



	2015			2014			2013
Change in benefit obligation:
Benefit obligation at beginning of year	$	199,637		$	163,876		$	178,158
Interest cost	8,210			8,002			7,341
Actuarial (gain) loss	(6,489		)	34,438			(15,333		)
Benefits paid	(7,218		)	(6,679		)	(6,290		)
Benefit obligation at end of year	194,140			199,637			163,876
Change in plan assets:
Fair value of plan assets at beginning of year	168,185			164,769			145,901
Actual return on plan assets	1,567			9,428			24,489
Employer contributions	736			667			669
Benefits paid	(7,218		)	(6,679		)	(6,290		)
Fair value of plan assets at end of year	163,270			168,185			164,769
Funded status of the plan at end of year and accrued (benefit) liability recognized	$	30,870		$	31,452		$	(893	)
Accumulated benefit obligation at end of year	$	194,140		$	199,637		$	163,876

Certain disaggregated information related to our defined benefit pension plans as of year-end was as follows:



	Retirement Plan				Restoration Plan
	2015		2014		2015		2014
Projected benefit obligation	$	174,429	$	179,970	$	19,711	$	19,667
Accumulated benefit obligation	174,429		179,970		19,711		19,667
Fair value of plan assets	163,270		168,185		—		—
Funded status of the plan at end of year and accrued (benefit) liability recognized	11,159		11,785		19,711		19,667

The components of the combined net periodic cost (benefit) for our defined benefit pension plans were as follows:



	2015			2014			2013
Expected return on plan assets, net of expenses	$	(11,932	)	$	(12,514	)	$	(11,087	)
Interest cost on projected benefit obligation	8,210			8,002			7,341
Net amortization and deferral	6,995			2,687			6,558
Net periodic expense (benefit)	$	3,273		$	(1,825	)	$	2,812

As of December 31, 2015, we changed the method we use to estimate the interest cost component of net periodic benefit cost for our defined benefit pension and other post-retirement benefit plans. Prior to the change, we estimated the interest cost component utilizing a single weighted-average discount rate derived from the yield curve used to measure our projected benefit obligation. Under the new method, we will utilize a full yield curve approach in the estimation of the interest cost component by applying the specific annual spot rates along the yield curve used in the measurement of our projected benefit obligation to the relevant projected cash flows. We view the full yield curve method as more representationally faithful of effective settlement rates as the interest cost component of the net periodic cost is measured more precisely, reflecting the difference in the timing of future benefit payment cash flows. This new method constitutes a change in an accounting estimate that is inseparable from a change in accounting principle and will be accounted for prospectively, with the resulting change impacting the recognition of net periodic benefit cost beginning January 1, 2016. While the change resulted in a decrease in the interest cost component of the net periodic benefit cost that will be recognized in 2016, the overall impact is not significant to our financial statements.

Amounts related to our defined benefit pension plans recognized as a component of other comprehensive income were as follows:



	2015			2014			2013
Net actuarial gain (loss)	$	3,118		$	(34,837	)	$	35,293
Deferred tax (expense) benefit	(1,091		)	12,193			(12,353		)
Other comprehensive income (loss), net of tax	$	2,027		$	(22,644	)	$	22,940

Amounts recognized as a component of accumulated other comprehensive loss as of year-end that have not been recognized as a component of the combined net period benefit cost of our defined benefit pension plans are presented in the following table. We expect to recognize approximately $6.2 million of the net actuarial loss reported in the following table as of December 31, 2015 as a component of net periodic benefit cost during 2016.



	2015			2014
Net actuarial loss	$	(71,920	)	$	(75,038	)
Deferred tax benefit	25,172			26,263
Amounts included in accumulated other comprehensive loss, net of tax	$	(46,748	)	$	(48,775	)

The weighted-average assumptions used to determine the benefit obligations as of the end of the years indicated and the net periodic benefit cost for the years indicated are presented in the table below. Because the plans were frozen, increases in compensation are not considered after 2001.



	2015		2014		2013
Benefit obligations:
Discount rate	4.55	%	4.20	%	5.00	%
Net periodic benefit cost:
Discount rate	4.20	%	5.00	%	4.20	%
Expected return on plan assets	7.25		7.25		7.75

Management uses an asset allocation optimization model to analyze the potential risks and rewards associated with various asset allocation strategies on a quarterly basis. As of December 31, 2015, management’s investment objective for our defined benefit plans is to achieve long-term growth. This strategy provides for a target asset allocation of approximately 65% invested in equity securities, approximately 32% invested in fixed income debt securities with any remainder invested in cash or short-term cash equivalents. The modeling process calculates, with a 90% confidence ratio, the potential risk associated with a given asset allocation and helps achieve adequate diversification of investment assets. The plan assets are reviewed annually to determine if the obligations can be met with the current investment mix and funding strategy.

The major categories of assets in our Retirement Plan as of year-end are presented in the following table. Assets are segregated by the level of the valuation inputs within the fair value hierarchy established by ASC Topic 820 “Fair Value Measurements and Disclosures,” utilized to measure fair value (see Note 18 - Fair Value Measurements). Our Restoration Plan is unfunded.



	2015		2014
Level 1:
Mutual funds	$	162,379	$	165,429
Cash and cash equivalents	322		1,447
Level 2:
Corporate bonds and notes	—		653
U.S. government agency securities	316		394
States and political subdivisions	253		262
Total fair value of plan assets	$	163,270	$	168,185

Mutual funds include various equity, fixed-income and blended funds with varying investment strategies. Approximately 71% of mutual fund investments consist of equity investments as of December 31, 2015. The investment objective of equity funds is long-term capital appreciation with current income. The remaining mutual fund investments consist of U.S. fixed-income securities, including investment-grade U.S. Treasury securities, U.S. government agency securities and mortgage-backed securities, corporate bonds and notes and collateralized mortgage obligations. The investment objective of fixed-income funds is to maximize investment return while preserving investment principal. Corporate bonds and notes include investment-grade bonds and notes of U.S. companies from diversified industries. U.S. government agency securities include obligations of Ginnie Mae. States and political subdivisions include fixed income municipal securities. Our investment strategies prohibit selling assets short and the use of derivatives. Additionally, our defined benefit plans do not directly invest in real estate, commodities, or private investments.

The asset allocation optimization model is used to estimate the expected long-term rate of return for a given asset allocation strategy. Expectations of returns for each asset class are based on comprehensive reviews of historical data and economic/financial market theory. During periods with volatile interest rates and equity security prices, the model may call for changes in the allocation of plan investments to achieve desired returns. Management assumed a long-term rate of return of 7.25% in the determination of the net periodic benefit cost for 2015. The expected long-term rate of return on assets was selected from within the reasonable range of rates determined by historical real returns, net of inflation, for the asset classes covered by the plan’s investment policy and projections of inflation over the long-term period during which benefits are payable to plan participants.

As of December 31, 2015, expected future benefit payments related to our defined benefit plans were as follows:



2016	$	12,729
2017	9,421
2018	9,911
2019	10,365
2020	10,816
2021 through 2025	58,848
	$	112,090

We expect to contribute $4.9 million to the defined benefit plans during 2016.

Supplemental Executive Retirement Plan. We maintain a supplemental executive retirement plan (“SERP”) for one active key executive. The plan provides for target retirement benefits, as a percentage of pay, beginning at age 55. The target percentage is 45 percent of pay at age 55, increasing to 60 percent at age 60 and later. Benefits under the SERP are reduced, dollar-for-dollar, by benefits received under the profit sharing, non-qualified profit sharing, defined benefit retirement and restoration plans, described above, and any social security benefits. Expense related to this plan was not significant during 2015, 2014 and 2013.

Savings Plans

401(k) Plan and Thrift Incentive Plan. We maintain a 401(k) stock purchase plan that permits each participant to make before- or after-tax contributions in an amount not less than 2% and not exceeding 50% of eligible compensation and subject to dollar limits from Internal Revenue Service regulations. We match 100% of the employee’s contributions to the plan based on the amount of each participant’s contributions up to a maximum of 6% of eligible compensation. Eligible employees must complete 90 days of service in order to enroll and vest in our matching contributions immediately. Expense related to the plan totaled $13.3 million in 2015, $12.3 million in 2014, and $11.5 million in 2013. Our matching contribution is initially invested in the Cullen/Frost common stock fund. However, employees may immediately reallocate our matching portion, as well as invest their individual contribution, to any of a variety of investment alternatives offered under the 401(k) Plan.

We maintain a thrift incentive stock purchase plan to offer certain employees whose participation in the 401(k) plan is limited an alternative means of receiving comparable benefits. Expense related to this plan was not significant during 2015, 2014 and 2013.

Stock Compensation Plans

We have three active stock compensation plans (the 2005 Omnibus Incentive Plan, the 2007 Outside Directors Incentive Plan and the 2015 Omnibus Incentive Plan). All of the plans have been approved by our shareholders. During 2015, the 2015 Omnibus Incentive Plan (“2015 Plan”) was established to replace both the 2005 Omnibus Incentive Plan (“2005 Plan”) and the 2007 Outside Directors Incentive Plan (the “2007 Directors Plan”). All remaining shares authorized for grant under the superseded 2005 Plan and 2007 Directors Plan were transferred to the 2015 Plan. Our stock compensation plans were established to (i) motivate superior performance by means of performance-related incentives, (ii) encourage and provide for the acquisition of an ownership interest in our company by employees and non-employee directors and (iii) enable us to attract and retain qualified and competent persons as employees and to serve as members of our board of directors.

Under the 2015 Plan, we may grant, among other things, nonqualified stock options, incentive stock options, stock awards, stock appreciation rights, restricted stock units, performance share units or any combination thereof to certain employees and non-employee directors. Any of the authorized shares may be used for any type of award allowable under the Plan. The Compensation and Benefits Committee (“Committee”) of our Board of Directors has sole authority to (i) establish the awards to be issued, (ii) select the employees and non-employee directors to receive awards, and (iii) approve the terms and conditions of each award contract. Each award under the stock plans is evidenced by an award agreement that specifies the option price, the duration of the option, the number of shares to which the option pertains, and such other provisions as the Committee determines. The option price for each grant is at least equal to the fair market value of a share of Cullen/Frost’s common stock on the date of grant. Options granted expire at such time as the Committee determines at the date of grant and in no event does the exercise period exceed a maximum of ten years. Upon a change-in-control of Cullen/Frost, as defined in the plans, all outstanding options and non-vested stock awards/units immediately vest.

A combined summary of activity in our active stock plans is presented in the following table.



			Director Deferred Stock Units Outstanding		Non-Vested Stock Awards/Stock Units Outstanding				Stock Options Outstanding
	Available for Grant		Number of Units	Weighted- Average Grant-Date Fair Value	Number of Shares/Units		Weighted- Average Grant-Date Fair Value		Number of Shares		Weighted- Average Exercise Price
Balance at January 1, 2013	1,188,963		27,724	55.46	188,560		$	51.67	5,513,516		$	51.94
Authorized	2,293,660		—	—	—		—		—		—
Granted	(635,360	)	5,500	60.07	38,010		71.39		591,850		71.38
Stock options exercised	—		—	—	—		—		(1,319,786	)	52.02
Stock awards/units vested	—		—	—	(26,830	)	50.64		—		—
Forfeited/expired	46,890		—	—	—		—		(46,890	)	46.05
Balance at December 31, 2013	2,894,153		33,224	56.22	199,740		55.32		4,738,690		54.35
Authorized	—		—	—	—		—		—		—
Granted	(955,443	)	5,643	78.04	32,050		78.92		917,750		78.93
Stock options exercised	—		—	—	—		—		(560,291	)	52.04
Stock awards/units vested	—		—	—	(56,300	)	52.46		—		—
Forfeited/expired	66,267		—	—	—		—		(66,267	)	62.21
Balance at December 31, 2014	2,004,977		38,867	59.39	175,490		60.55		5,029,882		58.99
Authorized	515,000		—	—	—		—		—		—
Granted	(951,506	)	6,576	72.94	53,990		65.11		890,940		65.11
Stock options exercised	—		—	—	—		—		(287,326	)	51.70
Stock awards/units vested	—		—	—	(56,300	)	48.00		—		—
Forfeited/expired	21,256		—	—	—		—		(21,256	)	66.72
Balance at December 31, 2015	1,589,727		45,443	61.35	173,180		$	66.05	5,612,240		$	60.30

Options awarded to employees generally have a ten-year life and vest in equal annual installments over a four-year period. Non-vested stock awards/stock units awarded to employees generally have a four-year-cliff vesting period. No options were awarded to non-employee directors during the reported periods. Deferred stock units awarded to non-employee directors generally have immediate vesting. Upon retirement from our board of directors, non-employee directors will receive one share of our common stock for each deferred stock unit held. Outstanding non-vested stock units and deferred stock units receive equivalent dividend payments as such dividends are declared on our common stock.

Other information regarding options outstanding and exercisable as of December 31, 2015 is as follows:



					Options Outstanding				Options Exercisable
Range of Exercise Prices					Number of Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life in Years	Number of Shares	Weighted- Average Exercise Price
$	45.01	to	$	50.00	898,753	$	48.27	4.53	898,753	$	48.27
50.01		to	55.00		2,065,524	52.74		4.78	1,885,777	52.58
55.01		to	60.00		296,150	57.63		0.89	296,150	57.63
65.01		to	70.00		890,940	65.11		9.83	—	—
70.01		to	75.00		566,123	71.38		7.77	280,988	71.38
75.01		to	80.00		894,750	78.94		8.74	223,689	78.94
			Total		5,612,240	60.30		6.27	3,585,357	55.03

The total intrinsic value of outstanding in-the-money stock options and outstanding in-the-money exercisable stock options was $26.2 million and $25.3 million at December 31, 2015.

Shares issued in connection with stock compensation awards are issued from available treasury shares. If no treasury shares are available, new shares are issued from available authorized shares. Shares issued in connection with stock compensation awards along with other related information were as follows:



	2015		2014		2013
New shares issued from available authorized shares	—		—		153,275
Issued from available treasury stock	337,056		601,851		1,179,551
Total	337,056		601,851		1,332,826
Proceeds from stock option exercises	$	14,853	$	29,158	$	68,653
Intrinsic value of stock options exercised	5,766		13,714		20,506
Fair value of stock awards/units vested	3,728		4,346		1,918

Stock-based Compensation Expense. Stock-based compensation expense is recognized ratably over the requisite service period for all awards. The service period generally matches the vesting period for most awards; however, the service period for certain executive officers does not extend past the date they reach 65 years of age. Stock-based compensation expense and the related income tax benefit was as follows:



	2015		2014		2013
Stock options	$	9,660	$	9,142	$	8,814
Non-vested stock awards/stock units	2,597		2,920		2,819
Deferred stock-units	480		441		330
Total	$	12,737	$	12,503	$	11,963
Income tax benefit	$	4,458	$	4,376	$	4,187

Unrecognized stock-based compensation expense at December 31, 2015 was as follows:



Stock options	$	21,245
Non-vested stock awards/stock units	3,355
Total	$	24,600

The weighted-average period over which the remaining unrecognized stock-based compensation expense related to stock options is expected to be recognized was 2.9 years as of December 31, 2015. The weighted-average period over which the remaining unrecognized stock-based compensation expense related to non-vested stock awards/stock units is expected to be recognized was 2.9 years as of December 31, 2015.

Valuation of Stock-Based Compensation. The fair value of our employee stock options granted is estimated on the measurement date, which, for us, is the date of grant. The fair value of stock options is estimated using a binomial lattice-based valuation model that takes into account employee exercise patterns based on changes in our stock price and other variables, and allows for the use of dynamic assumptions about interest rates and expected volatility.

The weighted-average fair value of stock options granted during 2015, 2014 and 2013 estimated using a binomial lattice-based valuation model, was $10.23, $16.97, and $13.74. The assumptions used to determine the fair value of options granted are detailed in the table below.



	2015		2014		2013
Weighted-average risk-free interest rate	2.05	%	2.33	%	2.65	%
Dividend yield	3.02		2.71		2.92
Weighted-average expected market price volatility	26.48		26.66		24.20
Weighted-average expected term	5.7 years		7.1 years		6.7 years

Expected volatility is based on the short-term historical volatility (estimated over the most recent two years) and the long-term historical volatility (estimated over a period at least equal to the contractual term of the options) of our stock, and other factors. A variance targeting methodology is utilized to estimate the convergence, or mean reversion, from short-term to long-term volatility within the model. In estimating the fair value of stock options under the binomial lattice-based valuation model, separate groups of employees that have similar historical exercise behavior are considered separately. The expected term of options granted is derived using a regression model and represents the period of time that options granted are expected to be outstanding. Certain groups of employees exhibit different behavior.

The fair value of non-vested stock awards/stock units and deferred stock units for the purposes of recognizing stock-based compensation expense is the market price of the stock on the measurement date, which, for us, is the date of the award.