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

SAN ANTONIO, July 27 /PRNewswire-FirstCall/ -- Cullen/Frost Bankers, Inc. today reported a 19 percent increase in second quarter 2005 net income of $40.7 million, or $.77 per diluted share, compared to $34.1 million, or $.65 per diluted share for the same quarter of 2004. Returns on average assets and average equity were 1.67 percent and 19.35 percent, respectively, for the second quarter of 2005, compared to 1.43 percent and 18.11 percent for the same quarter of 2004.

Earnings for the second quarter of 2005 included pre-tax income of $2.4 million related to net proceeds received from the settlement of legal claims arising from the departure of certain revenue-producing employees in the benefits area of our Austin insurance operations. The gross settlement proceeds of $4.5 million were reduced by a $2.1 million write-down of related intangible assets.

"It is a pleasure for me to report record quarterly earnings for the company," said Dick Evans, chairman and CEO of Cullen/Frost. "Our net interest margin increased to 4.42 percent -- a level we haven't seen in more than two years -- and net interest income grew by 16 percent from last year. This was due, in part, to our asset sensitive balance sheet, which was positively impacted by the rising rate environment. It was great to see a solid increase of 14 percent in average loans compared to the prior year. Asset quality continues to be manageable, with both non-performing assets and net charge-offs down from a year ago." Evans continued, "I am pleased to have the settlement of legal claims from the employee benefits area in the Austin insurance operations behind us. And, I am grateful to our dedicated staff for their continued outstanding effort, which makes it possible for us to deliver this strong performance."

Average loans for the second quarter rose 14.4 percent over the same quarter of 2004, increasing from $4.8 billion to $5.5 billion. Average deposits for the quarter were $7.9 billion, compared to $7.7 billion a year earlier.

For the first six months of 2005 net income was $78.1 million, or $1.47 per diluted common share, compared to $67.0 million, or $1.27 per diluted common share, for the same period in 2004. Returns on average assets and average equity for the first six months of 2005 were 1.60 percent and 18.83 percent, respectively, compared to 1.42 percent and 17.49 percent for the first six months last year.

Noted financial data for the second quarter of 2005 follows: * Net interest income on a taxable-equivalent basis was $95.9 million for the second quarter of 2005, a 16.2 percent increase over the $82.6 million reported for the same quarter a year earlier. The net interest margin rose by 40 basis points, from 4.02 percent to 4.42 percent. Contributing to these increases was a rise in general market rates -- influenced by periodic increases in the Fed Funds rate, which rose from 1.25 percent on June 30, 2004 to 3.25 percent on June 30, 2005 -- along with a 5.4 percent growth in earning assets, with a larger proportion of these assets being in higher yielding loans. * Non-interest income for the second quarter of 2005 totaled $57.7 million, compared to $56.3 million reported a year earlier, a 2.5 percent increase. For the second quarter, income from trust fees was $14.5 million, a 6.1 percent increase over the $13.7 million reported the previous year. Driving this growth in investment fees were improvements in the equities market when compared to a year earlier, and the addition of new trust accounts. Other income was up $3.7 million from the second quarter last year, as the Corporation recognized income of $2.4 million related to net proceeds from the settlement of legal claims relating to the departure of certain revenue producing employees in the benefits area of our Austin insurance operations. Service charges on deposits for the quarter were $19.5 million, compared to $22.5 million for the second quarter of 2004. This decrease was primarily related to a drop in treasury management fees from commercial accounts impacted by an increase in the earnings credit rate compared to a year earlier. During a rising interest rate environment, customers earn more credit for their deposit balances, which in turn reduces the amount of fees paid for these services. * Non-interest expense was $89.5 million, up $4.3 million, or 5.0 percent over the $85.2 million reported for the same period last year. Salaries and wages, combined with employee benefits, were up $2.3 million, or 4.8 percent from the same quarter of 2004, primarily due to normal annual merit increases and higher staff levels. Other expenses were up $1.6 million, or 7.3 percent, compared to the second quarter last year, and were impacted by increases in charitable donations and professional services expense. * For the second quarter of 2005, the provision for possible loan losses was $2.2 million, compared to net charge-offs of $1.6 million. The provision for possible loan losses for the second quarter of 2004 was $2.0 million, compared to net charge-offs of $4.1 million. At the end of the second quarter, the allowance for possible loan losses as a percentage of period-end loans was 1.38 percent, compared to 1.67 percent at the same date last year. Non-performing assets at June 30, 2005 were $41.3 million compared to $46.2 million for the second quarter of 2004.

Cullen/Frost Bankers, Inc. will host a conference call on Wednesday, July 27, 2005 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 12:00 p.m. CT until midnight Sunday, July 31, 2005 at (800) 642-1687 with Conference ID # of 7522259. 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 $10 billion at June 30, 2005. 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 78 financial centers across Texas in Austin, Boerne, Corpus Christi, Dallas, Fort Worth, Galveston, Harlingen, Houston, McAllen, New Braunfels, San Antonio and San Marcos. Founded in 1868, Frost is the largest national bank based in Texas, helping Texans with their financial needs during three centuries. Cullen/Frost Bankers' stock is traded on the New York Stock Exchange under the symbol CFR.

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, 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 the integration of acquired businesses. See the Corporation's Current Report on Form 8-K filed with the SEC on April 22, 2005. * The ability to increase market share and control expenses. * Changes in the competitive environment among financial services 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) 2005 2004 ----------------- --------------------------- 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr ------- ------- ------- ------- ------- CONDENSED INCOME STATEMENTS ---------------------- Net interest income $94,078 $90,103 $87,888 $83,976 $81,242 Net interest income (1) 95,926 91,789 89,416 85,419 82,576 Provision for possible loan losses 2,175 2,400 --- --- 2,000 Non-interest income: Trust fees 14,541 14,290 13,886 13,213 13,704 Service charges on deposit accounts 19,462 19,367 20,855 22,409 22,468 Insurance commissions and fees 6,193 8,610 6,536 8,048 6,234 Other charges, commissions and fees 4,821 4,288 5,709 4,383 4,952 Net gain (loss) on securities transactions --- --- --- (1,638) --- Other 12,716 11,484 8,765 9,219 8,978 ------- ------- ------- ------- ------- Total non-interest income 57,733 58,039 55,751 55,634 56,336 Non-interest expense: Salaries and wages 40,454 40,000 40,588 39,836 38,855 Employee benefits 10,315 12,037 9,568 9,532 9,592 Net occupancy 7,408 7,344 7,157 7,524 7,364 Furniture and equipment 5,925 5,802 5,999 5,662 5,661 Intangible amortization 1,278 1,371 1,370 1,285 1,287 Other 24,070 23,933 22,053 22,660 22,440 ------- ------- ------- ------- ------- Total non-interest expense 89,450 90,487 86,735 86,499 85,199 ------- ------- ------- ------- ------- Income before income taxes 60,186 55,255 56,904 53,111 50,379 Income taxes 19,502 17,888 18,573 17,140 16,261 ------- ------- ------- ------- ------- Net income $40,684 $37,367 $38,331 $35,971 $34,118 ======= ======= ======= ======= ======= PER SHARE DATA ------------------ Net income - basic $0.78 $0.72 $0.74 $0.70 $0.67 Net income - diluted 0.77 0.70 0.71 0.68 0.65 Cash dividends 0.30 0.265 0.265 0.265 0.265 Book value at end of quarter 16.81 15.59 15.84 15.89 14.41 OUTSTANDING SHARES -------------------- Period-end shares 52,308 51,817 51,924 51,988 51,520 Weighted-average shares - basic 51,884 51,653 52,083 51,568 51,281 Dilutive effect of stock compensation 1,246 1,416 1,555 1,562 1,441 Weighted-average shares - diluted 53,130 53,069 53,638 53,130 52,722 SELECTED ANNUALIZED RATIOS -------------------------- Return on average assets 1.67% 1.54% 1.52% 1.50% 1.43% Return on average equity 19.35 18.31 18.18 18.45 18.11 Net interest income to average earning assets(1) 4.42 4.29 4.04 4.09 4.02 (1) Taxable-equivalent basis assuming a 35% tax rate. Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) 2005 2004 ----------------- --------------------------- 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr ------- ------- ------- ------- ------- BALANCE SHEET SUMMARY ---------------------- ($ in millions) Average Balance: Loans $5,483 $5,286 $5,023 $4,844 $4,792 Earning assets 8,697 8,666 8,851 8,317 8,254 Total assets 9,786 9,840 10,028 9,515 9,617 Non-interest-bearing demand deposits 2,869 2,897 2,947 2,891 2,959 Interest-bearing deposits 5,005 5,058 5,035 4,878 4,743 Total deposits 7,874 7,955 7,982 7,769 7,702 Shareholders' equity 844 828 839 776 758 Period-End Balance: Loans $5,589 $5,403 $5,165 $4,948 $4,813 Earning assets 8,903 8,768 8,892 8,544 8,132 Goodwill and intangible assets 112 115 117 118 112 Total assets 9,951 9,849 9,953 9,825 9,570 Total deposits 8,011 8,003 8,106 7,822 7,934 Shareholders' equity 879 808 822 826 742 Adjusted shareholders' equity (1) 890 849 833 822 785 ASSET QUALITY --------------- ($ in thousands) Allowance for possible loan losses $77,103 $76,538 $75,810 $77,114 $80,485 As a percentage of period-end loans 1.38% 1.42% 1.47% 1.56% 1.67% Net charge-offs $1,610 $1,672 $1,304 $3,371 $4,102 Annualized as a percentage of average loans 0.12% 0.13% 0.10% 0.28% 0.34% Non-performing assets: Non-accrual loans $34,205 $32,884 $30,443 $42,701 $41,046 Foreclosed assets 7,130 8,189 8,673 7,734 5,152 ------- ------- ------- ------- ------- Total $41,335 $41,073 $39,116 $50,435 $46,198 As a percentage of: Total loans and foreclosed assets 0.74% 0.76% 0.76% 1.02% 0.96% Total assets 0.42 0.42 0.39 0.51 0.48 CONSOLIDATED CAPITAL RATIOS --------------------------- Tier 1 Risk-Based Capital Ratio 12.84% 12.73% 12.83% 13.18% 13.08% Total Risk-Based Capital Ratio 15.82 15.82 15.99 16.48 16.52 Leverage Ratio 10.06 9.51 9.18 9.62 9.12 Equity to Assets Ratio (period-end) 8.84 8.20 8.26 8.41 7.76 Equity to Assets Ratio (average) 8.62 8.41 8.37 8.15 7.88 (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, ----------------------- 2005 2004 ---------------------------------------------------------------- CONDENSED INCOME STATEMENTS --------------------------- Net interest income $184,181 $159,574 Net interest income (1) 187,672 162,267 Provision for possible loan losses 4,575 2,500 Non-interest income Trust fees 28,831 26,811 Service charges on deposit accounts 38,829 44,151 Insurance commissions and fees 14,803 16,397 Other charges, commissions and fees 9,109 9,261 Net gain (loss) securities transactions --- (1,739) Other 24,200 18,844 ------- ------- Total non-interest income 115,772 113,725 Non-interest expense Salaries and wages 80,454 77,615 Employee benefits 22,352 21,076 Net occupancy 14,752 14,694 Furniture and equipment 11,727 11,110 Intangible amortization 2,649 2,691 Other 48,003 44,610 ------- ------- Total non-interest expense 179,937 171,796 Income before income taxes 115,441 99,003 Income taxes 37,390 31,980 ------- ------- Net income $78,051 $67,023 ------- ------- PER SHARE DATA -------------- Net income - basic $1.51 $1.30 Net income - diluted 1.47 1.27 Cash dividends 0.565 0.505 Book value at end of period 16.81 14.41 OUTSTANDING SHARES ------------------ Period-end shares 52,308 51,520 Weighted-average shares - basic 51,769 51,474 Dilutive effect of stock compensation 1,331 1,438 Weighted-average shares - diluted 53,100 52,912 SELECTED ANNUALIZED RATIOS -------------------------- Return on average assets 1.60 1.42 Return on average equity 18.83 17.49 Net interest income to average earning assets (1) 4.35 4.03 (1) Taxable-equivalent basis assuming a 35% tax rate. Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) As of or for the Six Months Ended June 30, ----------------------- 2005 2004 ---------------------------------------------------------------- BALANCE SHEET SUMMARY --------------------- ($ in millions) Average Balance: Loans $5,385 $4,711 Earning assets 8,682 8,118 Total assets 9,810 9,470 Non-interest-bearing demand deposits 2,882 2,910 Interest-bearing deposits 5,032 4,747 Total deposits 7,914 7,657 Shareholders' equity 836 771 Period-End Balance: Loans $5,589 $4,813 Earning assets 8,903 8,132 Goodwill and intangible assets 112 112 Total assets 9,951 9,570 Total deposits 8,011 7,934 Shareholders' equity 879 742 Adjusted shareholders' equity (1) 890 785 ASSET QUALITY ------------- ($ in thousands) Allowance for possible loan losses $77,103 $80,485 As a percentage of period-end loans 1.38% 1.67% Net charge-offs: $3,282 $5,516 Annualized as a percentage of average loans 0.12% 0.23% Non-performing assets: Non-accrual loans $34,205 $41,046 Foreclosed assets 7,130 5,152 ------- ------- Total $41,335 $46,198 As a percentage of: Total loans and foreclosed assets 0.74% 0.96% Total assets 0.42 0.48 CONSOLIDATED CAPITAL RATIOS --------------------------- Tier 1 Risk-Based Capital Ratio 12.84% 13.08% Total Risk-Based Capital Ratio 15.82 16.52 Leverage Ratio 10.06 9.12 Equity to Assets Ratio (period-end) 8.84 7.76 Equity to Assets Ratio (average) 8.52 8.14 (1) Shareholders' equity excluding accumulated other comprehensive income (loss). Greg Parker Investor Relations 210/220-5632 or Renee Sabel Media Relations 210/220-5416