Cullen/Frost Reports 4th Quarter Results, Record Annual Earnings for 2007 and Timing of Earnings Conference Call

SAN ANTONIO, Jan. 23 /PRNewswire-FirstCall/ -- Cullen/Frost Bankers, Inc. today reported net income for the fourth quarter of 2007 of $54.7 million, or $.93 per diluted common share, a 13.1 percent increase over fourth quarter 2006 earnings of $48.4 million, or $.84 per diluted common share. For the fourth quarter of 2007, returns on average assets and equity were 1.65 percent and 15.18 percent respectively, compared to 1.59 percent and 16.04 percent for the same period of 2006. Included in the fourth quarter of 2006 results were $2.0 million in conversion expenses relating to the December acquisition of Summit Bancshares, Inc.

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The company also reported record annual earnings for 2007 of $212.1 million, or $3.55 per diluted common share, up 9.5 percent from 2006 earnings of $193.6 million, or $3.42 per diluted common share. For the year, returns on average assets and equity were 1.63 percent and 15.20 percent respectively, compared to the 1.67 percent and 18.03 percent reported in 2006.

"It is a pleasure for me to report another record year for our company," said Dick Evans, Cullen/Frost chairman and CEO. "As we navigate this challenging banking environment, our performance affirms the benefit of several strategic decisions that have positioned us well. In 2000, we got out of the residential mortgage business because we believed the industry had lost its relationship focus and had become a commoditized business with insufficient profitability. We also exited the indirect lending and credit card businesses in the past for the same reason. Credit quality continues to be good, and we have no direct exposure to the sub-prime lending crisis that has impacted the financial services industry since last summer.

"In addition, last quarter we took steps to reduce the potential negative impact on our net interest income of a declining rate environment by entering into a seven-year $1.2 billion interest rate swap that has moved us to a more interest rate-neutral position. It was good to see our net interest margin for the year increase to 4.69 percent, despite the Fed cutting the prime rate 100 basis points during the second half of the year. For the year, average loans reached $7.5 billion and average deposits were $10.2 billion, both all-time high numbers. I was also pleased to see non-interest income rise 11.4 percent, to $268.2 million.

"Continuing our commitment to expand in the Texas markets we serve, we added another new financial center to the growing Austin market and relocated our NASA financial center in the Houston area to a new building during the fourth quarter. In addition, in December, we announced the acquisition of Prime Benefits, an Austin-based independent insurance agency, which will complement our insurance team in Austin. Building on our strong base, we will continue to focus on growing Cullen/Frost and meeting the competitive challenges of other financial institutions that are scrambling to stake a claim in this great state that we have called home for 140 years.

"As always, it is our outstanding employees who made these strong results for 2007 possible. I thank them for their dedication to taking good care of our customers and their commitment to teamwork."

For the year ended December 31, 2007, average annual total loans were $7.5 billion, up 14.4 percent compared to $6.5 billion for the previous year. Average annual total deposits for 2007 rose to $10.2 billion, an increase of 11.2 percent over the $9.2 billion reported in 2006. Net interest income on a taxable-equivalent basis grew to $534.2 million, an 11.5 percent increase over the $479.1 million reported a year earlier, reflecting increasing volumes as a result of our acquisitions and organic growth. For 2007, non-interest income increased to $268.2 million, up 11.4 percent over the $240.7 million reported for 2006, while non-interest expenses increased 12.7 percent over the previous year to $462.4 million.

Noted financial data for the fourth quarter:

All of the following comparisons to the fourth quarter of last year were impacted, in part, by the acquisition of Summit Bancshares, Inc on December 8, 2006.

-- Net interest income on a taxable-equivalent basis for the fourth quarter totaled $135.3 million a 9.1 percent increase from the $124.0 million reported for the fourth quarter of 2006. Impacting this rise in net interest income, in part, was a 7.5 percent increase in average deposits from the fourth quarter of 2006 to $10.2 billion. This increase contributed to a $793 million increase in the average volume of earning assets, compared to the fourth quarter of 2006, to $11.4 billion. The earning asset mix has improved from the same period a year earlier, with average loans for the quarter rising to $7.6 billion, 13.2 percent higher than the $6.7 billion reported for earlier the same period last year. The company purchased a seven-year earlier $1.2 billion interest rate swap in October of 2007, moving its balance sheet to a more interest rate neutral position in order to reduce some of the potential negative earnings impact of a declining rate environment. The net interest margin was 4.70 percent for the fourth quarter, compared to 4.62 percent for the fourth quarter of 2006 and up one basis point from 4.69 percent for the third quarter of 2007. -- Non-interest income for the fourth quarter of 2007 was $66.4 million, compared to the $58.4 million reported a year earlier. Trust income rose 12.5 percent to $18.0 million, compared to $16.0 million for the fourth quarter of 2006, primarily from higher investment fees resulting from improvements in the equities market and new accounts. Service charges on deposits were $21.0 million, a rise of $1.9 million, compared to $19.1 million reported for the previous year's fourth quarter. This increase was due to higher retail and commercial overdrafts. Other charges, commissions and fees were $7.9 million, compared to $6.0 million reported for the fourth quarter of 2006. This increase was impacted by $700,000 in investment banking fees earned during the quarter. Other non-interest income was $13.4 million, an 18.1 percent increase over the $11.3 million reported a year earlier. The largest factor contributing to this increase was higher income from Visa checkcard usage. -- Non-interest expense for the fourth quarter of 2007 was $114.2 million, up $8.6 million or 8.1 percent from the $105.6 million for the fourth quarter of 2006. Combined, salaries and wages and employee benefits were up $4.8 million over the same quarter a year earlier, as a result of normal annual merit and market increases, along with an increase in the number of employees. Net occupancy expense was up $1.4 million to $10.2 million, primarily the result of higher lease expenses associated with the additional locations from the acquisitions made during 2006 and new locations opened in 2007. Expenses for furniture and equipment were up $1.8 million to $8.9 million, due mainly to higher depreciation expense for furniture and equipment and higher software maintenance costs. Both of these expenses were impacted, in part, by the company's decision to bring certain data processing functions in-house, as well as the acquisitions. The additional expense that resulted from bringing certain data processing functions in-house was more than offset in other expense by a decrease in outside computer service costs. Other expense was $28.9 million, flat, when compared to the fourth quarter of 2006, which included $2.0 million in conversion related expenses relating to the Summit acquisition. -- For the fourth quarter of 2007, the provision for possible loan losses was $3.6 million, compared to net charge-offs of $3.5 million. For the fourth quarter of 2006, the provision for possible loan losses was $3.4 million, compared to net charge offs of $3.3 million. The allowance for possible loan losses as a percentage of total loans was 1.19 percent at December 31, 2007, compared to 1.30 percent at year-end 2006. Non-performing assets were $29.8 million at year-end, compared to $26.4 million the previous quarter and $57.7 million at year-end 2006.

Cullen/Frost Bankers, Inc. will host a conference call on Wednesday, January 23, 2008 at 10:00 a.m. Central Time (CT) to discuss the results for the quarter and the year. The media and other interested parties are invited to access the call in a "listen only" mode at 800-944-6430. Digital playback of the conference call will be available after 12:00 p.m. CT until midnight Sunday, January 27, 2008 at 800-642-1687, with the Conference ID # of 30604147. 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 website, 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 $13.5 billion at December 31, 2007. The corporation provides a full range of commercial and consumer banking products, investment and brokerage services, insurance products and investment banking services. Its subsidiary, Frost Bank, 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 God or 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.

Greg Parker Investor Relations 210/220-5632 or Renee Sabel Media Relations 210/220-5416 Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) (In thousands, except per share amounts) 2007 2006 --------------------------------------- --------- 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr --------- --------- --------- --------- --------- CONDENSED INCOME STATEMENTS --------------------------- Net interest income $130,760 $130,624 $129,520 $127,833 $121,229 Net interest income(1) 135,269 134,704 133,095 131,127 124,017 Provision for possible loan losses 3,576 5,784 2,650 2,650 3,400 Non-interest income: Trust fees 18,009 17,749 17,694 16,907 16,009 Service charges on deposit accounts 21,044 20,696 20,147 18,831 19,142 Insurance commissions and fees 5,979 7,695 6,545 10,628 5,907 Other charges, commissions and fees 7,949 10,772 6,979 6,858 6,009 Net gain (loss) on securities transactions 15 -- -- -- -- Other 13,387 13,844 12,655 13,848 11,333 --------- --------- --------- --------- --------- Total non-interest income 66,383 70,756 64,020 67,072 58,400 Non-interest expense: Salaries and wages 54,069 52,996 51,203 51,714 48,472 Employee benefits 9,945 10,727 11,997 14,426 10,739 Net occupancy 10,198 9,509 9,483 9,634 8,786 Furniture and equipment 8,870 8,793 8,230 6,928 7,081 Intangible amortization 2,162 2,184 2,188 2,326 1,671 Other 28,906 29,358 29,541 37,059 28,846 --------- --------- --------- --------- --------- Total non-interest expense 114,150 113,567 112,642 122,087 105,595 --------- --------- --------- --------- --------- Income before income taxes 79,417 82,029 78,248 70,168 70,634 Income taxes 24,717 25,566 24,619 22,889 22,272 --------- --------- --------- --------- --------- Net income $54,700 $56,463 $53,629 $47,279 $48,362 --------- --------- --------- --------- --------- PER SHARE DATA -------------- Net income - basic $0.94 $0.97 $0.90 $0.79 $0.85 Net income - diluted 0.93 0.95 0.89 0.78 0.84 Cash dividends 0.40 0.40 0.40 0.34 0.34 Book value at end of quarter 25.18 23.74 22.99 23.64 23.01 OUTSTANDING SHARES ------------------ Period-end shares 58,662 58,423 59,074 59,972 59,839 Weighted-average shares - basic 58,387 58,439 59,324 59,676 56,726 Dilutive effect of stock compensation 598 731 810 919 1,007 Weighted-average shares - diluted 58,985 59,170 60,134 60,595 57,733 SELECTED ANNUALIZED RATIOS -------------------------- Return on average assets 1.65% 1.72% 1.66% 1.47% 1.59% Return on average equity 15.18 16.44 15.40 13.78 16.04 Net interest income to average earning assets(1) 4.70 4.69 4.72 4.65 4.62 (1) Taxable-equivalent basis assuming a 35% tax rate. Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) 2007 2006 --------------------------------------- --------- 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr --------- --------- --------- --------- --------- BALANCE SHEET SUMMARY --------------------- ($ in millions) Average Balance: Loans $7,560 $7,436 $7,455 $7,404 $6,681 Earning assets 11,422 11,340 11,248 11,349 10,629 Total assets 13,169 13,026 12,923 13,058 12,071 Non-interest-bearing demand deposits 3,483 3,567 3,505 3,541 3,423 Interest-bearing deposits 6,765 6,685 6,593 6,711 6,107 Total deposits 10,248 10,252 10,098 10,252 9,530 Shareholders' equity 1,429 1,363 1,396 1,392 1,196 Period-End Balance: Loans $7,769 $7,461 $7,412 $7,459 $7,373 Earning assets 11,556 11,492 11,257 11,405 11,461 Goodwill and intangible assets 558 560 562 564 563 Total assets 13,485 13,167 12,949 13,176 13,224 Total deposits 10,530 10,096 10,177 10,280 10,388 Shareholders' equity 1,477 1,387 1,358 1,418 1,377 Adjusted shareholders' equity(1) 1,484 1,445 1,445 1,466 1,432 ASSET QUALITY ------------- ($ in thousands) Allowance for possible loan losses $92,339 $92,263 $96,071 $96,144 $96,085 as a percentage of period-end loans 1.19% 1.24% 1.30% 1.29% 1.30% Net charge-offs $3,500 $9,592 $2,723 $2,591 $3,329 Annualized as a percentage of average loans 0.18% 0.51% 0.15% 0.14% 0.20% Non-performing assets: Non-accrual loans $24,443 $21,356 $45,503 $46,769 $52,204 Foreclosed assets 5,406 5,023 4,222 3,715 5,545 --------- --------- --------- --------- --------- Total $29,849 $26,379 $49,725 $50,484 $57,749 As a percentage of: Total loans and foreclosed assets 0.38% 0.35% 0.67% 0.68% 0.78% Total assets 0.22 0.20 0.38 0.38 0.44 CONSOLIDATED CAPITAL RATIOS --------------------------- Tier 1 Risk-Based Capital Ratio 9.96% 10.07% 10.14% 10.41% 11.25% Total Risk-Based Capital Ratio 12.59 12.83 13.25 13.54 13.43 Leverage Ratio 8.37 8.01 8.10 8.31 9.56 Equity to Assets Ratio (period-end) 10.95 10.53 10.49 10.76 10.41 Equity to Assets Ratio (average) 10.85 10.46 10.80 10.66 9.91

(1) Shareholders' equity excluding accumulated other comprehensive income (loss).

Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) (In thousands, except per share amounts) Year Ended December 31 ------------------------------------------------- 2007 2006 2005 2004 2003 --------- --------- --------- --------- --------- CONDENSED INCOME STATEMENTS --------------------------- Net interest income $518,737 $469,163 $391,266 $331,438 $313,758 Net interest income(1) 534,195 479,138 398,938 337,102 318,945 Provision for possible loan losses 14,660 14,150 10,250 2,500 10,544 Non-interest income: Trust fees 70,359 63,469 58,353 53,910 47,486 Service charges on deposit accounts 80,718 77,116 78,751 87,415 87,805 Insurance commissions and fees 30,847 28,230 27,731 30,981 28,660 Other charges, commissions and fees 32,558 28,105 23,125 22,877 22,522 Net gain(loss) on securities transactions 15 (1) 19 (3,377) 40 Other 53,734 43,828 42,400 33,304 28,848 --------- --------- --------- --------- --------- Total non-interest income 268,231 240,747 230,379 225,110 215,361 Non-interest expense: Salaries and wages 209,982 190,784 166,059 158,039 146,622 Employee benefits 47,095 46,231 41,577 40,176 38,316 Net occupancy 38,824 34,695 31,107 29,375 29,286 Furniture and equipment 32,821 26,293 23,912 22,771 21,768 Intangible amortization 8,860 5,628 4,859 5,346 5,886 Other 124,864 106,722 99,493 89,323 84,157 --------- --------- --------- --------- --------- Total non-interest expense 462,446 410,353 367,007 345,030 326,035 --------- --------- --------- --------- --------- Income before income taxes 309,862 285,407 244,388 209,018 192,540 Income taxes 97,791 91,816 78,965 67,693 62,039 --------- --------- --------- --------- --------- Net income $212,071 $193,591 $165,423 $141,325 $130,501 --------- --------- --------- --------- --------- PER SHARE DATA -------------- Net income - basic $3.60 $3.49 $3.15 $2.74 $2.54 Net income - diluted 3.55 3.42 3.07 2.66 2.48 Cash dividends 1.54 1.32 1.165 1.035 0.94 Book value 25.18 23.01 18.03 15.84 14.87 OUTSTANDING SHARES ------------------ Period-end shares 58,662 59,839 54,483 51,924 51,776 Weighted-average shares - basic 58,952 55,467 52,481 51,651 51,442 Dilutive effect of stock compensation 761 1,175 1,322 1,489 1,216 Weighted-average shares - diluted 59,713 56,642 53,803 53,140 52,658 SELECTED ANNUALIZED RATIOS -------------------------- Return on average assets 1.63% 1.67% 1.63% 1.47% 1.36% Return on average equity 15.20 18.03 18.78 17.91 17.78 Net interest income to average earning assets(1) 4.69 4.67 4.45 4.05 3.98 (1) Taxable-equivalent basis assuming a 35% tax rate.

Cullen/Frost Bankers, Inc.

CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) Year Ended December 31 ------------------------------------------------- 2007 2006 2005 2004 2003 --------- --------- --------- --------- --------- BALANCE SHEET SUMMARY --------------------- ($ in millions) Average Balance: Loans $7,464 $6,524 $5,594 $4,823 $4,497 Earning assets 11,340 10,203 8,969 8,352 8,011 Total assets 13,042 11,581 10,143 9,619 9,584 Non-interest-bearing demand deposits 3,524 3,334 3,009 2,915 3,038 Interest bearing deposits 6,689 5,850 5,124 4,852 4,540 Total deposits 10,213 9,184 8,133 7,767 7,577 Shareholders' equity 1,395 1,074 881 789 734 Period-End Balance: Loans $7,769 $7,373 $6,085 $5,165 $4,591 Earning assets 11,556 11,461 10,197 8,892 8,132 Goodwill and intangible assets 558 563 184 117 115 Total assets 13,485 13,224 11,741 9,953 9,672 Total deposits 10,530 10,388 9,146 8,106 8,069 Shareholders' equity 1,477 1,377 982 822 770 Adjusted shareholders' equity(1) 1,484 1,432 1,033 833 762 ASSET QUALITY ------------- ($ in thousands) Allowance for possible loan losses $92,339 $96,085 $80,325 $75,810 $83,501 As a percentage of period-end loans 1.19% 1.30% 1.32% 1.47% .82% Net charge-offs: $18,406 $11,110 $8,921 $10,191 $9,627 As a percentage of average loans 0.25% 0.17% 0.16% 0.20% 0.21% Non-performing assets: Non-accrual loans $24,443 $52,204 $33,179 $30,443 $47,451 Foreclosed assets 5,406 5,545 5,748 8,673 5,343 --------- --------- --------- --------- --------- Total $29,849 $57,749 $38,927 $39,116 $52,794 As a percentage of: Total loans and foreclosed assets 0.38% 0.78% 0.64% 0.76% 1.15% Total assets 0.22 0.44 0.33 0.39 0.55

(1) Shareholders' equity excluding accumulated other comprehensive income (loss).