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

SAN ANTONIO, July 26 /PRNewswire-FirstCall/ -- Cullen/Frost Bankers, Inc. today reported second quarter 2006 net income of $48.6 million, a 19.3 percent increase from the $40.7 million reported for the second quarter of 2005. On a per-share basis, earnings for the quarter were $.86 per diluted common share, up 11.7 percent over the $.77 per diluted common share reported a year earlier. Returns on average assets and equity for the second quarter of 2006 were 1.70 percent and 19.02 percent, respectively, compared to 1.67 percent and 19.35 percent for the same quarter of 2005.

For the second quarter of 2006, net interest income on a taxable- equivalent basis was up 24.4 percent to $119.3 million, from the $95.9 million reported for the same quarter a year earlier. Average loans increased 19.3 percent to $6.5 billion, compared to the $5.5 billion reported for the second quarter of 2005. Average deposits for the quarter rose to $9.1 billion, up 15.2 percent over the $7.9 billion reported a year earlier. Excluding the impact of three acquisitions completed during the fourth quarter of 2005 and the first quarter of 2006, average loans were up 11.2 percent, and average deposits rose 9.1 percent, compared to the second quarter a year earlier.

"I am extremely pleased by our company's strong results for the second quarter, as we continue to expand our Texas franchise," said Dick Evans, chairman and CEO of Cullen/Frost. "Our strong performance for the quarter reflects our staff's success in integrating recent acquisitions and executing our sales strategy across lines of business. I was especially pleased to see a record 1.70 percent return on assets, along with a 19 percent increase in loans and 15 percent rise in deposits. Reflecting this outstanding loan and deposit growth, along with the continued impact of a rising interest rate environment on our asset-sensitive balance sheet, net interest income also grew by a solid 24 percent. The market value of trust assets also topped $20 billion this quarter, a new high for us.

"With our state's strong population growth, demographics, low cost of living and business-friendly environment, I continue to feel very positive about the state's economy and the markets we serve," Evans continued. "With our outstanding employees meeting the competitive challenges, we are well positioned for future growth."

"Just three weeks ago, we announced a merger agreement with Fort Worth- based Summit Bancshares, which has assets of $1.1 billion. This is an outstanding bank in an outstanding market we have served since the acquisition of Overton Bank and Trust in 1998. Their philosophy and relationship-driven business focus parallel our own, and we look forward to bringing their staff and customers into the Frost family. Late in the quarter we also converted all 10 Alamo Bank of Texas locations to Frost Bank, completing a process that began when we closed on the acquisition during the first quarter."

For the first six months of 2006, net income was $95.2 million, or $1.70 per diluted common share, compared to $78.1 million, or $1.47 per diluted common share, for the first six months of 2005. Returns on average assets and average equity for the first six months of 2006 were 1.69 percent and 18.94 percent, respectively, compared to 1.60 percent and 18.83 percent for the same period in 2005.

Other noted financial data for the second quarter follows: * Net interest income on a taxable-equivalent basis increased 24.4 percent to $119.3 million, from the $95.9 million reported a year earlier. Impacting this increase, in part, was a 15.2 percent increase in average deposits from the second quarter last year, to $9.1 billion, which in turn contributed to a rise of $1.4 billion in average earning assets compared to the same period a year earlier. The earning asset mix continued to improve as average loans for the quarter rose to $6.5 billion, 19.3 percent higher than the $5.5 billion reported for the second quarter of 2005. Net interest income and net interest margin were also impacted by the ongoing rising rate environment. The net interest margin was 4.70 percent for the second quarter, up from 4.66 percent for the previous quarter and 4.42 percent for the second quarter of 2005. * Non-interest income for the second quarter of 2006 rose 4.4 percent to $60.3 million, from the $57.7 million reported a year earlier. Trust fees were up 8.3 percent to $15.7 million, compared to $14.5 million in the second quarter of 2005, primarily as a result of increased levels of investment fees and oil and gas trust management fees. Investment fees are assessed based on the market values of trust assets, which exceeded $20 billion for the first time. This market value includes both assets that are managed and those held in custody. Other service charges and fees were $8.2 million, up 45.3 percent compared to the same quarter a year earlier. This increase was due primarily to the recognition of $2.4 million in investment banking fees during the second quarter of 2006 related to corporate advisory services. Other income dropped 10.8 percent from the second quarter of last year, to $10.6 million. Impacting the second quarter of 2005 was $2.4 million in income the company recognized related to net proceeds from a legal settlement. * Non-interest expense for the quarter was $100.2 million, an increase of 12.0 percent over the $89.5 million reported for the second quarter of last year. Total salaries and related employee benefits rose to $58.9 million, or 16.0 percent, impacted by the acquisitions completed during the fourth quarter of 2005 and the first quarter of 2006 and normal annual merit increases. The Company also recognized $1.8 million in expense related to stock options during the quarter in connection with the adoption of a new accounting standard, effective at the beginning of the year. The recent acquisitions impacted lease expense, utilities and depreciation expense related to buildings, resulting in an increase in net occupancy of $1.1 million compared to the second quarter of 2005. Other non-interest expense was also up $1.0 million from a year earlier, impacted, in large part by acquisition-related conversion expenses. * For the second quarter of 2006, the provision for possible loan losses was $5.1 million, compared to net charge-offs of $3.7 million. The loan loss provision for the second quarter of 2005 was $2.2 million, compared to net charge-offs of $1.6 million. Non-performing assets for the second quarter were $37.3 million, compared to $41.3 million a year earlier. The allowance for possible loan losses as a percentage of loans at June 30, 2006 was 1.30 percent, compared with 1.38 percent at the end of the second quarter of 2005.

Cullen/Frost Bankers, Inc. will host a conference call on Wednesday, July 26, 2006, 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 800-944-6430. Digital playback of the conference call will be available after 2:00 p.m. CT until midnight, Sunday, July 30,2006 at 800-642-1687 with Conference ID # of 2822874. 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 $11.4 billion at June 30, 2006. 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 93 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 the largest Texas- based bank, 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. 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. See the Corporation's current reports on Form 8-K filed with the SEC on July 3, 2006 and July 7, 2006. * The ability to increase market share and control expenses. * Changes in the competitive environment among financial holding companies. * 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) 2006 2005 ------------------- ----------------------------- 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr -------- -------- -------- -------- -------- CONDENSED INCOME STATEMENTS --------------------------- Net interest income $116,968 $112,440 $107,800 $99,285 $94,078 Net interest income (1) 119,309 114,719 109,968 101,255 95,926 Provision for possible loan losses 5,105 3,934 2,950 2,725 2,175 Non-interest income: Trust fees 15,744 15,754 15,059 14,463 14,541 Service charges on deposit accounts 19,566 19,107 19,749 20,173 19,462 Insurance commissions and fees 6,144 8,975 5,539 7,389 6,193 Other charges, commissions and fees 8,196 5,914 6,117 6,135 5,642 Net gain (loss) on securities transactions --- (1) 19 --- --- Other 10,615 11,009 10,070 9,894 11,895 -------- -------- -------- -------- -------- Total non-interest income 60,265 60,758 56,553 58,054 57,733 Non-interest expense: Salaries and wages 47,463 46,106 43,787 41,818 40,454 Employee benefits 11,434 13,176 9,252 9,973 10,315 Net occupancy 8,512 8,433 8,244 8,111 7,408 Furniture and equipment 6,357 6,302 5,983 6,202 5,925 Intangible amortization 1,358 1,306 1,160 1,050 1,278 Other 25,070 24,873 26,652 24,838 24,070 -------- -------- -------- -------- -------- Total non-interest expense 100,194 100,196 95,078 91,992 89,450 -------- -------- -------- -------- -------- Income before income taxes 71,934 69,068 66,325 62,622 60,186 Income taxes 23,384 22,391 21,408 20,167 19,502 -------- -------- -------- -------- -------- Net income $48,550 $46,677 $44,917 $42,455 $40,684 ======== ======== ======== ======== ======== PER SHARE DATA ------------------ Net income - basic $0.88 $0.86 $0.83 $0.81 $0.78 Net income - diluted 0.86 0.83 0.81 0.79 0.77 Cash dividends 0.34 0.30 0.30 0.30 0.30 Book value at end of quarter 18.51 18.34 18.03 17.03 16.81 OUTSTANDING SHARES ------------------- Period-end shares 55,542 55,106 54,483 52,657 52,308 Weighted-average shares - basic 55,105 54,574 54,015 52,345 51,884 Dilutive effect of stock compensation 1,198 1,353 1,346 1,285 1,246 Weighted-average shares - diluted 56,303 55,927 55,361 53,630 53,130 SELECTED ANNUALIZED RATIOS -------------------------- Return on average assets 1.70% 1.68% 1.63% 1.68% 1.67% Return on average equity 19.02 18.86 18.52 18.98 19.35 Net interest income to average earning assets (1) 4.70 4.66 4.54 4.52 4.42 (1) Taxable-equivalent basis assuming a 35% tax rate. Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) 2006 2005 ------------------- ----------------------------- 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr -------- -------- -------- --------- -------- BALANCE SHEET SUMMARY --------------------- ($ in millions) Average Balance: Loans $6,539 $6,307 $6,008 $5,593 $5,483 Earning assets 10,090 9,906 9,587 8,916 8,697 Total assets 11,450 11,286 10,901 10,037 9,786 Non-interest-bearing demand deposits 3,300 3,305 3,302 2,964 2,869 Interest-bearing deposits 5,769 5,691 5,378 5,052 5,005 Total deposits 9,069 8,996 8,680 8,016 7,874 Shareholders' equity 1,024 1,004 962 887 844 Period-End Balance: Loans $6,577 $6,511 $6,085 $5,710 $5,589 Earning assets 10,076 10,300 10,203 9,185 8,903 Goodwill and intangible assets 268 269 184 111 112 Total assets 11,403 11,579 11,741 10,280 9,951 Total deposits 9,078 9,292 9,146 8,283 8,011 Shareholders' equity 1,028 1,011 982 897 879 Adjusted shareholders' equity (1) 1,135 1,086 1,033 928 890 ASSET QUALITY ----------------- ($ in thousands) Allowance for possible loan losses $85,552 $84,142 $80,325 $77,117 $77,103 As a percentage of period-end loans 1.30% 1.29% 1.32% 1.35% 1.38% Net charge-offs $3,695 $2,490 $2,928 $2,711 $1,610 Annualized as a percentage of average loans 0.23% 0.16% 0.19% 0.19% 0.12% Non-performing assets: Non-accrual loans $30,824 $34,027 $33,179 $34,432 $34,205 Foreclosed assets 6,461 6,766 5,748 6,394 7,130 -------- -------- -------- --------- -------- Total $37,285 $40,793 $38,927 $40,826 $41,335 As a percentage of: Total loans and foreclosed assets 0.57% 0.63% 0.64% 0.71% 0.74% Total assets 0.33 0.35 0.33 0.40 0.42 CONSOLIDATED CAPITAL RATIOS --------------------------- Tier 1 Risk-Based Capital Ratio 12.00% 11.55% 12.24% 13.01% 12.84% Total Risk-Based Capital Ratio 14.65 14.21 14.94 15.92 15.82 Leverage Ratio 9.39 9.12 9.62 10.16 10.06 Equity to Assets Ratio (period-end) 9.01 8.73 8.37 8.72 8.84 Equity to Assets Ratio (average) 8.94 8.89 8.82 8.84 8.62 (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, ------------------------ 2006 2005 ----------------------------------------------------------------------- CONDENSED INCOME STATEMENTS --------------------------- Net interest income $229,408 $184,181 Net interest income (1) 234,027 187,672 Provision for possible loan losses 9,039 4,575 Non-interest income Trust fees 31,498 28,831 Service charges on deposit accounts 38,673 38,829 Insurance commissions and fees 15,119 14,803 Other charges, commissions and fees 14,110 10,873 Net gain (loss) securities transactions (1) --- Other 21,624 22,436 ------- ------- Total non-interest income 121,023 115,772 Non-interest expense Salaries and wages 93,569 80,454 Employee benefits 24,610 22,352 Net occupancy 16,945 14,752 Furniture and equipment 12,659 11,727 Intangible amortization 2,664 2,649 Other 49,943 48,003 ------- ------- Total non-interest expense 200,390 179,937 Income before income taxes 141,002 115,441 Income taxes 45,775 37,390 ------- ------- Net income $95,227 $78,051 ------- ------- PER SHARE DATA Net income - basic $1.74 $1.51 Net income - diluted 1.70 1.47 Cash dividends 0.64 0.565 Book value at end of period 18.51 16.81 OUTSTANDING SHARES Period-end shares 55,542 52,308 Weighted-average shares - basic 54,841 51,769 Dilutive effect of stock compensation 1,275 1,331 Weighted-average shares - diluted 56,116 53,100 SELECTED ANNUALIZED RATIOS Return on average assets 1.69% 1.60% Return on average equity 18.94 18.83 Net interest income to average earning assets (1) 4.68 4.35 (1) Taxable-equivalent basis assuming a 35% tax rate. Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) As of or for the Six Months Ended June 30, ------------------------ 2006 2005 ----------------------------------------------------------------------- BALANCE SHEET SUMMARY --------------------- ($ in millions) Average Balance: Loans $6,424 $5,385 Earning assets 9,998 8,682 Total assets 11,369 9,810 Non-interest-bearing demand deposits 3,302 2,882 Interest-bearing deposits 5,730 5,032 Total deposits 9,032 7,914 Shareholders' equity 1,014 836 Period-End Balance: Loans $6,577 $5,589 Earning assets 10,076 8,903 Goodwill and intangible assets 268 112 Total assets 11,403 9,951 Total deposits 9,078 8,011 Shareholders' equity 1,028 879 Adjusted shareholders' equity (1) 1,135 890 ASSET QUALITY ------------- ($ in thousands) Allowance for possible loan losses $85,552 $77,103 As a percentage of period-end loans 1.30% 1.38% Net charge-offs: $6,185 $3,282 Annualized as a percentage of average loans 0.19% 0.12% Non-performing assets: Non-accrual loans $30,824 $34,205 Foreclosed assets 6,461 7,130 ------- ------- Total $37,285 $41,335 As a percentage of: Total loans and foreclosed assets 0.57% 0.74% Total assets 0.33 0.42 CONSOLIDATED CAPITAL RATIOS --------------------------- Tier 1 Risk-Based Capital Ratio 12.00% 12.84% Total Risk-Based Capital Ratio 14.65 15.82 Leverage Ratio 9.39 10.06 Equity to Assets Ratio (period-end) 9.01 8.84 Equity to Assets Ratio (average) 8.92 8.52 (1) Shareholders' equity excluding accumulated other comprehensive income (loss). Greg Parker Investor Relations 210/220-5632 or Renee Sabel Media Relations 210/220-5416