Cullen/Frost Reports Second Quarter Results and Timing of Earnings Conference Call

SAN ANTONIO, July 25 /PRNewswire-FirstCall/ -- Cullen/Frost Bankers, Inc. today reported second quarter 2007 net income of $53.6 million, a 10.5 percent increase from the $48.6 million reported for the second quarter of 2006. On a per-share basis, earnings for the second quarter were $.89 per diluted common share, up 3.5 percent over the $.86 per diluted common share reported a year earlier. Returns on average assets and equity for the second quarter of 2007 were 1.66 percent and 15.40 percent, respectively, compared to 1.70 percent and 19.02 percent for the same quarter of 2006.

For the second quarter of 2007, net interest income on a taxable-equivalent basis increased 11.6 percent to $133.1 million, compared to the $119.3 million reported for the same quarter a year earlier. Average loans were $7.5 billion, up 14.0 percent from the $6.5 billion reported for the second quarter of 2006. Average deposits for the quarter rose 11.3 percent to $10.1 billion over the $9.1 billion reported a year earlier. Both loans and deposit volumes were impacted by the December 2006 acquisition of Summit Bancshares, Inc.

"As we report another record quarter for our company, I was pleased to see our net interest margin reach 4.72 percent, the highest level we have achieved in five years," said Cullen/Frost Chairman and CEO Dick Evans. "Trust income was also up by a solid 12.4 percent. Loans and deposits each increased by double digits over last year's second quarter and were impacted by our Summit Bancshares acquisition in Fort Worth. We continue to operate in an environment of strong competition in loan structure and pricing, impacting organic loan growth, as evidenced by recent flat loan volumes."

"This year, we are pleased to be opening new financial centers in San Antonio, Austin and the Rio Grande Valley, including our first location in Brownsville. Texas continues to outperform the U.S. in job growth and other measures, and I continue to be positive about the state's economy and the Texas markets we serve."

"As always, our outstanding employees provide the commitment that make our results possible," Evans continued. "They take care of our customers every day, and they step up when we ask them to meet new goals and challenges. I am very proud of them and grateful for their loyalty."

For the first six months of 2007, net income was $100.9 million, or $1.67 per diluted common share, compared to $95.2 million, or $1.70 per diluted common share, for the first six months of 2006. Returns on average assets and average equity for the first six months of 2007 were 1.57 percent and 14.60 percent, respectively, compared to 1.69 percent and 18.94 percent for the same period in 2006.

Other noted financial data for the second quarter follows:

All of the following comparisons to the second quarter a year ago were impacted, in part, by the acquisition of Summit Bancshares, Inc. in Fort Worth in the fourth quarter of 2006.

-- Net interest income on a taxable-equivalent basis increased 11.6 percent to $133.1 million, from the $119.3 million reported a year earlier. Partly impacting this increase was an 11.3 percent increase in average deposits from the second quarter of 2006 to $10.1 billion, which, in turn, contributed to a rise of $1.2 billion in average earning assets compared to the same period a year earlier. The earning asset mix continued to improve, with average loans for the quarter rising to $7.5 billion, up 14.0 percent from the $6.5 billion reported for the second quarter of 2006. The net interest margin was 4.72 percent for the second quarter, a rise of seven basis points from the first quarter this year and up two basis points over the second quarter of 2006. -- Non-interest income for the second quarter of 2007 increased 5.4 percent to $64.0 million, compared to the $60.8 million reported a year earlier. Trust fees rose 12.4 percent to $17.7 million, compared to $15.7 million in the second quarter of 2006. Contributing to the increase were higher levels of investment fees, as well as an increase in the number of trust accounts. Investment fees are assessed based on the market value of trust assets, which now exceeds $24 billion. This market value includes both assets that are managed and held in custody. Service charges on deposits were $20.1, up 3.0 percent, or $581 thousand, compared to the same quarter the previous year. Insurance commissions and fees were $6.5 million, up 6.5 percent over the $6.1 million reported the same quarter a year earlier. Other service charges and fees were $7.0 million, compared to $8.7 million reported the same quarter a year earlier. During the second quarter of 2006, the company recognized $2.4 million in investment banking fees related to corporate advisory services, which impacted other service charges and fees that quarter. Other income increased 19.2 percent from the second quarter of last year to $12.7 million, with approximately 40 percent of this increase in other income due to an $802 thousand increase in income from checkcard usage. -- Non-interest expense for the quarter was $112.6 million, an increase of 11.9 percent over the $100.7 million reported for the second quarter of last year. Total salaries and related employee benefits rose to $63.2 million, or 7.3 percent, and were impacted by the an increase in the number of employees related to the acquisition during the fourth quarter of 2006, as well as normal annual merit increases and incentive accruals. The Summit acquisition also impacted lease expense, utilities and depreciation expense related to buildings, resulting in an increase in net occupancy of $971 thousand, compared to the second quarter of 2006. Furniture and fixtures, which were up $1.9 million from the same quarter last year, were also impacted in various furniture and fixture accounts by the acquisition. However, most of the increase occurred in software maintenance, which included upgrades to retail banking technology and teller systems, up $1.0 million over the comparable period a year ago. Other non-interest expense increased $4.0 million from a year earlier, impacted, in part, by the recent Summit acquisition. The largest single component of the rise in other non- interest expense was advertising/promotion expense, up $923 thousand. -- For the second quarter of 2007, the provision for possible loan losses was $2.65 million, compared to net charge-offs of $2.72 million. The loan loss provision for the second quarter of 2006 was $5.1 million, compared to net charge-offs of $3.7 million. Non-performing assets for the second quarter of 2007 were $49.7 million, compared to $37.3 million a year earlier. The allowance for possible loan losses as a percentage of loans at June 30, 2007 was 1.30 percent, the same percentage as at the end of the second quarter of 2006.

Cullen/Frost Bankers, Inc. will host a conference call on Wednesday, July 25, 2007, at 10:00 a.m. Central Time (CT) to discuss the results for the quarter. The media and other interested parties are invited to access the call in a "listen only" mode at 1-800-944-6430. Digital playback of the conference call will be available after 2:00 p.m. CT until midnight Sunday, July 29, 2007 at 800-642-1687 with Conference ID # of 7272329. The call will also be available by webcast at the URL listed below and available for playback after 2:00 p.m. CT. After entering the Web site, http://www.frostbank.com/, go to "About Frost" on the top navigation bar, then click on Investor Relations.

Cullen/Frost Bankers, Inc. is a financial holding company, headquartered in San Antonio, with assets of $12.9 billion at June 30, 2007. The corporation provides a full range of commercial and consumer banking products, investment and brokerage services, insurance products and investment banking services. Frost operates more than 100 financial centers across Texas in the Austin, Corpus Christi, Dallas, Fort Worth, Houston, Rio Grande Valley and San Antonio regions. Founded in 1868, Frost is one of the largest banking organizations headquartered in Texas, with a legacy of helping Texans with their financial needs during three centuries.

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Earnings Release that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in the Corporation's future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Corporation that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of Cullen/Frost or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", "intends", "targeted", "continue", "remain", "will", "should", "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

-- Local, regional, national and international economic conditions and the impact they may have on the Corporation and its customers and the Corporation's assessment of that impact. -- Changes in the level of non-performing assets and charge-offs. -- Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements. -- The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board. -- Inflation, interest rate, securities market and monetary fluctuations. -- Political instability. -- Acts of war or terrorism. -- The timely development and acceptance of new products and services and perceived overall value of these products and services by users. -- Changes in consumer spending, borrowings and savings habits. -- Changes in the financial performance and/or condition of the Corporation's borrowers. -- Technological changes. -- Acquisitions and integration of acquired businesses. -- The ability to increase market share and control expenses. -- Changes in the competitive environment among financial holding companies and other financial service providers. -- The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Corporation and its subsidiaries must comply. -- The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters. -- Changes in the Corporation's organization, compensation and benefit plans. -- The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews. -- Greater than expected costs or difficulties related to the integration of new products and lines of business. -- The Corporation's success at managing the risks involved in the foregoing items.

Forward-looking statements speak only as of the date on which such statements are made. The Corporation undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) (In thousands, except per share amounts) 2007 2006 ------- ------- ------- ------- ------- 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr ------- ------- ------- ------- ------- CONDENSED INCOME STATEMENTS --------------------------- Net interest income $129,520 $127,833 $121,229 $118,526 $116,968 Net interest income(1) 133,095 131,127 124,017 121,093 119,309 Provision for possible loan losses 2,650 2,650 3,400 1,711 5,105 Non-interest income: Trust fees 17,694 16,907 16,009 15,962 15,744 Service charges on deposit accounts 20,147 18,831 19,142 19,301 19,566 Insurance commissions and fees 6,545 10,628 5,907 7,204 6,144 Other charges, commissions and fees 6,979 6,858 6,009 7,228 8,681 Net gain (loss) on securities transactions -- -- -- -- -- Other 12,655 13,848 11,333 10,871 10,615 ------ ------ ------ ------ ------ Total non-interest income 64,020 67,072 58,400 60,566 60,750 Non-interest expense: Salaries and wages 51,203 51,714 48,472 48,743 47,463 Employee benefits 11,997 14,426 10,739 10,882 11,434 Net occupancy 9,483 9,634 8,786 8,964 8,512 Furniture and equipment 8,230 6,928 7,081 6,553 6,357 Intangible amortization 2,188 2,326 1,671 1,293 1,358 Other 29,541 37,059 28,846 27,175 25,555 ------ ------ ------ ------ ------ Total non-interest expense 112,642 122,087 105,595 103,610 100,679 ------ ------ ------ ------ ------ Income before income taxes 78,248 70,168 70,634 73,771 71,934 Income taxes 24,619 22,889 22,272 23,769 23,384 ------ ------ ------ ------ ------ Net income $53,629 $47,279 $48,362 $50,002 $48,550 ======= ======= ======= ======= ======= PER SHARE DATA -------------- Net income - basic $0.90 $0.79 $0.85 $0.90 $0.88 Net income - diluted 0.89 0.78 0.84 0.88 0.86 Cash dividends 0.40 0.34 0.34 0.34 0.34 Book value at end of quarter 22.99 23.64 23.01 20.08 18.51 OUTSTANDING SHARES ------------------ Period-end shares 59,074 59,972 59,839 55,821 55,542 Weighted-average shares - basic 59,324 59,676 56,726 55,440 55,105 Dilutive effect of stock compensation 810 919 1,007 1,147 1,198 Weighted-average shares - diluted 60,134 60,595 57,733 56,587 56,303 SELECTED ANNUALIZED RATIOS -------------------------- Return on average assets 1.66% 1.47% 1.59% 1.72% 1.70% Return on average equity 5.40 13.78 16.04 18.56 19.02 Net interest income to average earning assets(1) 4.72 4.65 4.62 4.69 4.70 (1) Taxable-equivalent basis assuming a 35% tax rate. Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) 2007 2006 ------- ------- ------- ------- ------- 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr ------- ------- ------- ------- ------- BALANCE SHEET SUMMARY --------------------- ($ in millions) Average Balance: Loans $ 7,455 $ 7,404 $ 6,681 $ 6,565 $ 6,539 Earning assets 11,248 11,349 10,629 10,181 10,090 Total assets 12,923 13,058 12,071 11,522 11,450 Non-interest-bearing demand deposits 3,505 3,541 3,423 3,309 3,300 Interest-bearing deposits 6,593 6,711 6,107 5,829 5,769 Total deposits 10,098 10,252 9,530 9,138 9,069 Shareholders' equity 1,396 1,392 1,196 1,069 1,024 Period-End Balance: Loans $ 7,412 $ 7,459 $ 7,373 $ 6,516 $ 6,577 Earning assets 11,257 11,405 11,461 10,324 10,076 Goodwill and intangible assets 562 564 563 268 268 Total assets 12,949 13,176 13,224 11,647 11,403 Total deposits 10,177 10,280 10,388 9,270 9,078 Shareholders' equity 1,358 1,418 1,377 1,121 1,028 Adjusted shareholders' equity(1) 1,445 1,466 1,432 1,179 1,135 ASSET QUALITY ------------- ($ in thousands) Allowance for possible loan losses $96,071 $96,144 $96,085 $85,667 $85,552 As a percentage of period-end loans 1.30% 1.29% 1.30% 1.31% 1.30% Net charge-offs $2,723 $2,591 $3,329 $1,596 $3,695 Annualized as a percentage of average loans 0.15% 0.14% 0.20% 0.10% 0.23% Non-performing assets: Non-accrual loans $45,503 $46,769 $52,204 $30,045 $30,824 Foreclosed assets 4,222 3,715 5,545 4,971 6,461 ------ ------ ------ ------ ------ Total $49,725 $50,484 $57,749 $35,016 $37,285 As a percentage of: Total loans and foreclosed assets 0.67% 0.68% 0.78% 0.54% 0.57% Total assets 0.38 0.38 0.44 0.30 0.33 CONSOLIDATED CAPITAL RATIOS --------------------------- Tier 1 Risk-Based Capital Ratio 10.14% 10.41% 11.25% 12.39% 12.00% Total Risk-Based Capital Ratio 13.25 13.54 13.43 14.68 14.65 Leverage Ratio 8.10 8.31 9.56 9.76 9.36 Equity to Assets Ratio (period-end) 10.49 10.76 10.41 9.63 9.01 Equity to Assets Ratio (average) 10.80 10.66 9.91 9.28 8.94 (1) Shareholders' equity excluding accumulated other comprehensive income (loss). Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) (In thousands, except per share amounts) Six Months Ended June 30, ---------------- 2007 2006 ---------------- CONDENSED INCOME STATEMENTS --------------------------- Net interest income $257,353 $229,408 Net interest income(1) 264,222 234,027 Provision for possible loan losses 5,300 9,039 Non-interest income Trust fees 34,601 31,498 Service charges on deposit accounts 38,978 38,673 Insurance commissions and fees 17,173 15,119 Other charges, commissions and fees 13,837 14,868 Net gain (loss) securities transactions -- (1) Other 26,503 21,624 ------- ------- Total non-interest income 131,092 121,781 Non-interest expense Salaries and wages 102,917 93,569 Employee benefits 26,423 24,610 Net occupancy 19,117 16,945 Furniture and equipment 15,158 12,659 Intangible amortization 4,514 2,664 Other 66,600 50,701 ------- ------- Total non-interest expense 234,729 201,148 Income before income taxes 148,416 141,002 Income taxes 47,508 45,775 ------- ------- Net income $100,908 $95,227 ------- ------- PER SHARE DATA -------------- Net income - basic $ 1.70 $ 1.74 Net income - diluted 1.67 1.70 Cash dividends 0.74 0.64 Book value at end of period 22.99 18.51 OUTSTANDING SHARES ------------------ Period-end shares 59,074 55,542 Weighted-average shares - basic 59,499 54,841 Dilutive effect of stock compensation 864 1,275 Weighted-average shares - diluted 60,363 56,116 SELECTED ANNUALIZED RATIOS -------------------------- Return on average assets 1.57% 1.69% Return on average equity 14.60 18.94 Net interest income to average earning assets(1) 4.69 4.68 (1) Taxable-equivalent basis assuming a 35% tax rate. Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) As of or for the Six Months Ended June 30, ---------------- 2007 2006 ---------------- BALANCE SHEET SUMMARY --------------------- ($ in millions) Average Balance: Loans $7,430 $6,424 Earning assets 11,298 9,998 Total assets 12,992 11,369 Non-interest-bearing demand deposits 3,523 3,302 Interest-bearing deposits 6,652 5,730 Total deposits 10,175 9,032 Shareholders' equity 1,394 1,014 Period-End Balance: Loans $7,412 $6,577 Earning assets 11,257 10,076 Goodwill and intangible assets 562 268 Total assets 12,949 11,403 Total deposits 10,177 9,078 Shareholders' equity 1,358 1,028 Adjusted shareholders' equity(1) 1,445 1,135 ASSET QUALITY ------------- ($ in thousands) Allowance for possible loan losses $96,071 $85,552 As a percentage of period-end loans 1.30% 1.30% Net charge-offs: $5,314 $6,185 Annualized as a percentage of average loans 0.14% 0.19% Non-performing assets: Non-accrual loans $45,503 $30,824 Foreclosed assets 4,222 6,461 ------ ------ Total $49,725 $37,285 As a percentage of: Total loans and foreclosed assets 0.67% 0.57% Total assets 0.38 0.33 CONSOLIDATED CAPITAL RATIOS --------------------------- Tier 1 Risk-Based Capital Ratio 10.14% 12.00% Total Risk-Based Capital Ratio 13.25 14.65 Leverage Ratio 8.10 9.39 Equity to Assets Ratio (period-end) 10.49 9.01 Equity to Assets Ratio (average) 10.73 8.92 (1) Shareholders' equity excluding accumulated other comprehensive income (loss). Greg Parker Investor Relations 210/220-5632 or Renee Sabel Media Relations 210/220-5416