Capital and Regulatory Matters

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

Cullen/Frost’s and Frost Bank’s Common Equity Tier 1 capital includes common stock and related paid-in capital, net of treasury stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1. Common Equity Tier 1 for both Cullen/Frost and Frost Bank is reduced by, goodwill and other intangible assets, net of associated deferred tax liabilities, and subject to transition provisions. Frost Bank's Common Equity Tier 1 is also reduced by its equity investment in its financial subsidiary, Frost Insurance Agency (“FIA”).

Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. For Cullen/Frost, additional Tier 1 capital at June 30, 2017 and December 31, 2016 includes $144.5 million of 5.375% non-cumulative perpetual preferred stock. Frost Bank did not have any additional Tier 1 capital beyond Common Equity Tier 1 at June 30, 2017 or December 31, 2016.

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both Cullen/Frost and Frost Bank includes a permissible portion of the allowance for loan losses. Tier 2 capital for Cullen/Frost also includes $100.0 million of qualified subordinated debt at June 30, 2017 and $133.0 million of trust preferred securities at both June 30, 2017 and December 31, 2016.

The following table presents actual and required capital ratios for Cullen/Frost and Frost Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of June 30, 2017 and December 31, 2016 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. See the 2016 Form 10-K for a more detailed discussion of the Basel III Capital Rules.



	Actual				Minimum Capital Required - Basel III Phase-In Schedule				Minimum Capital Required - Basel III Fully Phased-In				Required to be Considered Well Capitalized
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
June 30, 2017
Common Equity Tier 1 to Risk-Weighted Assets
Cullen/Frost	$	2,385,585	12.81	%	$	1,070,444	5.75	%	$	1,303,367	7.00	%	$	1,210,067	6.50	%
Frost Bank	2,401,554		12.94		1,067,432		5.75		1,299,400		7.00		1,206,662		6.50
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost	2,530,071		13.59		1,349,691		7.25		1,582,296		8.50		1,489,314		8.00
Frost Bank	2,401,554		12.94		1,345,892		7.25		1,577,843		8.50		1,485,123		8.00
Total Capital to Risk-Weighted Assets
Cullen/Frost	2,912,629		15.65		1,722,019		9.25		1,954,601		10.50		1,861,642		10.00
Frost Bank	2,551,112		13.74		1,717,173		9.25		1,949,100		10.50		1,856,403		10.00
Leverage Ratio
Cullen/Frost	2,530,071		8.61		1,174,957		4.00		1,174,910		4.00		1,468,696		5.00
Frost Bank	2,401,554		8.18		1,173,726		4.00		1,173,679		4.00		1,467,157		5.00
December 31, 2016
Common Equity Tier 1 to Risk-Weighted Assets
Cullen/Frost	$	2,239,186	12.52	%	$	916,360	5.125	%	$	1,251,425	7.00	%	$	1,162,213	6.50	%
Frost Bank	2,296,480		12.88		913,460		5.125		1,247,463		7.00		1,158,535		6.50
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost	2,383,672		13.33		1,184,563		6.625		1,519,587		8.50		1,430,416		8.00
Frost Bank	2,296,480		12.88		1,180,814		6.625		1,514,776		8.50		1,425,889		8.00
Total Capital to Risk-Weighted Assets
Cullen/Frost	2,669,717		14.93		1,542,168		8.625		1,877,137		10.50		1,788,020		10.00
Frost Bank	2,449,525		13.74		1,537,286		8.625		1,871,194		10.50		1,782,361		10.00
Leverage Ratio
Cullen/Frost	2,383,672		8.14		1,171,682		4.00		1,171,573		4.00		1,464,602		5.00
Frost Bank	2,296,480		7.85		1,170,249		4.00		1,170,141		4.00		1,462,812		5.00

As of June 30, 2017, capital levels at Cullen/Frost and Frost Bank exceed all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis. Based on the ratios presented above, capital levels as of June 30, 2017 at Cullen/Frost and Frost Bank exceed the minimum levels necessary to be considered “well capitalized.”

Cullen/Frost and Frost Bank are subject to the regulatory capital requirements administered by the Federal Reserve Board and, for Frost Bank, the Federal Deposit Insurance Corporation (“FDIC”). Regulatory authorities can initiate certain mandatory actions if Cullen/Frost or Frost Bank fail to meet the minimum capital requirements, which could have a direct material effect on our financial statements. Management believes, as of June 30, 2017, that Cullen/Frost and Frost Bank meet all capital adequacy requirements to which they are subject.

Stock Repurchase Plans. From time to time, our board of directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. On October 27, 2016, our board of directors authorized a $100.0 million stock repurchase program, allowing us to repurchase shares of our common stock over a two-year period from time to time at various prices in the open market or through private transactions. As of June 30, 2017, no shares have been repurchased under the plan.

Dividend Restrictions. In the ordinary course of business, Cullen/Frost is dependent upon dividends from Frost Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of Frost Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. Under the foregoing dividend restrictions and while maintaining its “well capitalized” status, at June 30, 2017, Frost Bank could pay aggregate dividends of up to $420.6 million to Cullen/Frost without prior regulatory approval.

Under the terms of the junior subordinated deferrable interest debentures that Cullen/Frost has issued to Cullen/Frost Capital Trust II and WNB Capital Trust I, Cullen/Frost has the right at any time during the term of the debentures to defer the payment of interest at any time or from time to time for an extension period not exceeding 20 consecutive quarterly periods with respect to each extension period. In the event that we have elected to defer interest on the debentures, we may not, with certain exceptions, declare or pay any dividends or distributions on our capital stock or purchase or acquire any of our capital stock.

Under the terms of our Series A Preferred Stock, in the event that we do not declare and pay dividends on our Series A Preferred Stock for the most recent dividend period, we may not, with certain exceptions, declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of our common stock or any of our securities that rank junior to our Series A Preferred Stock.