Regulatory Matters

12 Months Ended

Dec. 31, 2012

Regulatory Matters

Note 10 - Regulatory Matters

Regulatory Capital Requirements. 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.

Quantitative measures established by regulations to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

Cullen/Frost’s and Frost Bank’s Tier 1 capital consists of shareholders’ equity excluding unrealized gains and losses on securities available for sale, the accumulated gain or loss on effective cash flow hedging derivatives, the net actuarial gain/loss on the Corporation’s defined benefit post-retirement benefit plans, goodwill and other intangible assets. Tier 1 capital for Cullen/Frost also includes trust preferred securities issued by its unconsolidated subsidiary trust totaling $120 million in 2012 and 2011 (see Note 7—Borrowed Funds). Cullen/Frost’s and Frost Bank’s total capital is comprised of Tier 1 capital for each entity plus a permissible portion of the allowance for loan losses. The Corporation’s aggregate $100 million of floating rate subordinated notes are not included in Tier 1 capital but the permissible portion (which decreases 20% per year during the final five years of the term of the notes) totaling $80 million at December 31, 2012 and $100 million at December 31, 2011, is included in total capital of Cullen/Frost.

The Tier 1 and total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, excluding goodwill and other intangible assets, allocated by risk weight category, and certain off-balance-sheet items (primarily loan commitments). The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets.

Year-end actual and required capital ratios for Cullen/Frost and Frost Bank were as follows:

	Actual					Minimum Required for Capital Adequacy Purposes					Required to be Considered Well Capitalized
	Capital Amount		Ratio			Capital Amount		Ratio			Capital Amount		Ratio
2012
Total Capital to Risk-Weighted Assets
Cullen/Frost	$	1,947,974		15.11	%	$	1,031,526		8.00	%	$	1,289,408		10.00	%
Frost Bank		1,730,444		13.43			1,030,878		8.00			1,288,597		10.00
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost		1,763,521		13.68			515,763		4.00			773,645		6.00
Frost Bank		1,625,991		12.62			515,439		4.00			773,158		6.00
Leverage Ratio
Cullen/Frost		1,763,521		8.28			851,483		4.00			1,064,354		5.00
Frost Bank		1,625,991		7.64			850,954		4.00			1,063,693		5.00
2011
Total Capital to Risk-Weighted Assets
Cullen/Frost	$	1,835,428		16.24	%	$	903,970		8.00	%	$	1,129,962		10.00	%
Frost Bank		1,641,921		14.54			903,427		8.00			1,129,284		10.00
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost		1,625,281		14.38			451,985		4.00			677,977		6.00
Frost Bank		1,531,774		13.56			451,713		4.00			677,570		6.00
Leverage Ratio
Cullen/Frost		1,625,281		8.66			750,643		4.00			938,304		5.00
Frost Bank		1,531,774		8.17			750,249		4.00			937,811		5.00

Management believes that, as of December 31, 2012, Cullen/Frost and its bank subsidiary, Frost Bank, were “well capitalized” based on the ratios presented above.

Cullen/Frost and Frost Bank are subject to the regulatory capital requirements administered by the Federal Reserve (see the section captioned “Charter Conversion” below) 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 the Corporation’s financial statements. Management believes, as of December 31, 2012, that Cullen/Frost and Frost Bank meet all capital adequacy requirements to which they are subject.

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 December 31, 2012, Frost Bank could pay aggregate dividends of up to $306.5 million to Cullen/Frost without prior regulatory approval.

Trust Preferred Securities. In accordance with the applicable accounting standard related to variable interest entities, the accounts of the Corporation’s wholly owned subsidiary trust, Cullen/Frost Capital Trust II, have not been included in the Corporation’s consolidated financial statements. However, the $120.0 million in trust preferred securities issued by this subsidiary trust have been included in the Tier 1 capital of Cullen/Frost for regulatory capital purposes pursuant to guidance from the Federal Reserve. As previously stated in Note 7 - Borrowed Funds, certain provisions of the 2012 Capital Proposals will require the Corporation to deduct, over four years beginning on January 1, 2013, all trust preferred securities from the Corporation’s Tier 1 capital. Trust preferred securities no longer included in Tier 1 capital would nonetheless be included as a component of Tier 2 capital. Excluding trust preferred securities from Tier 1 capital at December 31, 2012 would not affect the Corporation’s ability to meet all capital adequacy requirements to which it is subject.

Charter Conversion. On June 22, 2012, Frost Bank, the sole banking subsidiary of the Corporation, became a Texas state chartered bank and a member of the Federal Reserve System. Accordingly, the Texas Department of Banking and the Federal Reserve are now the primary regulators of Frost Bank, and Frost Bank will no longer be regulated by the Office of the Comptroller of the Currency (“OCC”). Deposits at Frost Bank continue to be insured by the FDIC up to applicable limits.