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

SAN ANTONIO, Oct. 25 /PRNewswire-FirstCall/ -- Cullen/Frost Bankers, Inc. today reported record earnings for the third quarter of 2006 of $50.0 million, a 17.8 percent increase, compared to the $42.5 million reported for the same period in 2005. On a per-share basis, net income for the quarter was $.88 per diluted common share, up 11.4 percent over the $.79 per diluted common share reported a year earlier. For the quarter, return on average assets and return on average equity were 1.72 percent and 18.56 percent, respectively, up from 1.68 percent and down from 18.98 percent for the same quarter in 2005.

For the third quarter of 2006, net interest income on a tax-equivalent basis rose 19.6 percent to $121.1 million, from the $101.3 million reported for the same quarter of 2005. Average loans increased 17.4 percent, to $6.6 billion, compared to the $5.6 billion reported for the third quarter a year earlier. Average deposits for the quarter increased to $9.1 billion, up 14.0 percent over the $8.0 billion reported for the third quarter of 2005. Excluding the impact of three acquisitions completed during the fourth quarter of 2005 and the first quarter of 2006, average loans rose 6.4 percent, and average deposits were up 5.3 percent, compared to the third quarter a year ago.

"I am pleased to report third quarter results for our company," said Dick Evans, chairman and CEO. "Although average loan growth was up 17.4 percent over the same quarter a year earlier it was primarily impacted by recent acquisitions. To combat a highly competitive environment, combined with interest rate challenges, it is especially important that we continue to execute the sales disciplines we developed several years ago. Average loan volumes were flat from the second quarter, which combined with flat market rates over the same time period, contributed to a slight contraction in our net interest margin to 4.69 percent.

"I was pleased to see deposit growth of 5.3 percent without recent acquisitions, and a 10.4 percent increase in trust fees from the third quarter a year ago. We are moving ahead with plans to finalize the acquisition of Summit Bank during the fourth quarter of this year and look forward to welcoming this Fort Worth-based bank into the Frost banking organization.

"From job growth to a business-friendly environment and well-diversified economic base, I continue to feel positive about the Texas economy. The markets we serve are some of the best in the country, and we look forward to the opportunities that will come. As always, I am grateful to our outstanding staff for their dedication and support in serving the needs of our customers."

For the first nine months of 2006, earnings were $145.2 million, or $2.58 per diluted common share, up 20.5 percent compared to $120.5 million, or $2.26 per diluted common share, for the same period in 2005. Returns on average assets and equity for the first nine months of 2006 were 1.70 percent and 18.81 percent respectively, compared to 1.63 percent and 18.88 percent for the same period a year earlier.

Noted financial data for the third quarter of 2006 follows: * Net-interest income on a taxable equivalent basis for the third quarter totaled $121.1 million, up 19.6 percent compared to $101.3 million for the same period a year ago. Impacting net interest income was a $1.3 billion increase in the average volume of earning assets, combined with an improvement in the earning asset mix, as average loans increased $1.0 billion from the third quarter last year. The increase in rates and volumes also led to a 17-basis-point increase in the net interest margin, which was 4.69 percent for the quarter, compared to 4.52 percent for the third quarter of 2005. The net interest margin for the third quarter, when compared to the second quarter of 2006, contracted one basis point from 4.70 percent and was impacted by flat loan volumes and the leveling off of market rates. * Non-interest income for the third quarter of 2006 totaled $59.9 million, up 3.2 percent from $58.1 million for the third quarter of 2005. Trust income was $16.0 million, up 10.4 percent from a year ago, mainly from investment fees that have benefited from both new accounts and improvements in the equities market compared to last year. Oil and gas trust management fees also contributed to the increase from last year as they increased $344 thousand. Other non-interest income was $10.9 million, a 9.9 percent increase over the $9.9 million reported the same quarter a year earlier. The primary reason for the increase was higher income from Visa checkcard usage. Service charges on deposit accounts were $19.3 million, compared to $20.2 million for the third quarter of 2005. The decrease was primarily due to the rising interest rate environment over the past year, in which commercial treasury management customers earn more credit for their deposit balances, resulting in a reduction of the amount of fees paid for these services. * Non-interest expense was $102.9 million for the quarter, up $10.9 million, or 11.9 percent, from the $92.0 million reported a year earlier. Total salaries and wages and related employee benefits rose to $59.6 million, up 15.1 percent, compared to the third quarter of 2005, and were impacted by the acquisitions during late 2005 and early 2006, as well as normal annual merit increases, combined with an increase in the number of employees. Other expenses rose $1.7 million, or 6.7 percent from the third quarter last year, due to the acquisitions and conversion-related expenses. Also impacting the rise was a $900 thousand write-down on other real estate owned. * For the third quarter of 2006, the provision for possible loan losses was $1.7 million, compared to net charge-offs of $1.6 million. For the third quarter of 2005, the provision for possible loan losses was $2.7 million, compared to net charge-offs of $2.7 million. The allowance for possible loan losses as a percentage of total loans was 1.31 percent at September 30, 2006, compared to 1.35 percent for the third quarter last year and 1.30 percent for the second quarter of 2006.

Cullen/Frost Bankers, Inc. will host a conference call on Wednesday, October 25, 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, October 29, 2006 at 800-642-1687, with a Conference ID # of 8503485. The call will also be available by webcast at the URL listed below and available for playback after 2:00 p.m. CT; 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 $11.6 billion at September 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 one of the largest banks 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. 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 and the registration statements on Form S-4 and Form S-4/A filed with the SEC on August 15, 2006 and September 14, 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.

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) 2006 2005 ----------------------------- ------------------ 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr ------- ------- ------- ------- ------- CONDENSED INCOME STATEMENTS --------------------------- Net interest income $118,526 $116,968 $112,440 $107,800 $99,285 Net interest income (1) 121,093 119,309 114,719 109,968 101,255 Provision for possible loan losses 1,711 5,105 3,934 2,950 2,725 Non-interest income: Trust fees 15,962 15,744 15,754 15,059 14,463 Service charges on deposit accounts 19,301 19,566 19,107 19,749 20,173 Insurance commissions and fees 7,204 6,144 8,975 5,539 7,389 Other charges, commissions and fees 6,558 8,196 5,914 6,117 6,135 Net gain (loss) on securities transactions --- --- (1) 19 --- Other 10,871 10,615 11,009 10,070 9,894 ------- ------- ------- ------- ------- Total non-interest income 59,896 60,265 60,758 56,553 58,054 Non-interest expense: Salaries and wages 48,743 47,463 46,106 43,787 41,818 Employee benefits 10,882 11,434 13,176 9,252 9,973 Net occupancy 8,964 8,512 8,433 8,244 8,111 Furniture and equipment 6,553 6,357 6,302 5,983 6,202 Intangible amortization 1,293 1,358 1,306 1,160 1,050 Other 26,505 25,070 24,873 26,652 24,838 ------- ------- ------- ------- ------- Total non-interest expense 102,940 100,194 100,196 95,078 91,992 ------- ------- ------- ------- ------- Income before income taxes 73,771 71,934 69,068 66,325 62,622 Income taxes 23,769 23,384 22,391 21,408 20,167 ======= ======= ======= ======= ======= Net income $50,002 $48,550 $46,677 $44,917 $42,455 ======= ======= ======= ======= ======= PER SHARE DATA -------------- Net income - basic $0.90 $0.88 $0.86 $0.83 $0.81 Net income - diluted 0.88 0.86 0.83 0.81 0.79 Cash dividends 0.34 0.34 0.30 0.30 0.30 Book value at end of quarter 20.08 18.51 18.34 18.03 17.03 OUTSTANDING SHARES ------------------ Period-end shares 55,821 55,542 55,106 54,483 52,657 Weighted-average shares - basic 55,440 55,105 54,574 54,015 52,345 Dilutive effect of stock compensation 1,147 1,198 1,353 1,346 1,285 Weighted-average shares - diluted 56,587 56,303 55,927 55,361 53,630 SELECTED ANNUALIZED RATIOS -------------------------- Return on average assets 1.72% 1.70% 1.68% 1.63% 1.68% Return on average equity 18.56 19.02 18.86 18.52 18.98 Net interest income to average earning assets (1) 4.69 4.70 4.66 4.54 4.52 (1) Taxable-equivalent basis assuming a 35% tax rate. Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) 2006 2005 ----------------------------- ------------------ 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr ------- ------- ------- ------- ------- BALANCE SHEET SUMMARY --------------------- ($ in millions) Average Balance: Loans $6,565 $6,539 $6,307 $6,008 $5,593 Earning assets 10,181 10,090 9,906 9,587 8,916 Total assets 11,522 11,450 11,286 10,901 10,037 Non-interest-bearing demand deposits 3,309 3,300 3,305 3,302 2,964 Interest-bearing deposits 5,829 5,769 5,691 5,378 5,052 Total deposits 9,138 9,069 8,996 8,680 8,016 Shareholders' equity 1,069 1,024 1,004 962 887 Period-End Balance: Loans $6,516 $6,577 $6,511 $6,085 $5,710 Earning assets 10,324 10,076 10,300 10,203 9,185 Goodwill and intangible assets 268 268 269 184 111 Total assets 11,647 11,403 11,579 11,741 10,280 Total deposits 9,270 9,078 9,292 9,146 8,283 Shareholders' equity 1,121 1,028 1,011 982 897 Adjusted shareholders' equity (1) 1,179 1,135 1,086 1,033 928 ASSET QUALITY ------------- ($ in thousands) Allowance for possible loan losses $85,667 $85,552 $84,142 $80,325 $77,117 as a percentage of period-end loans 1.31% 1.30% 1.29% 1.32% 1.35% Net charge-offs $1,596 $3,695 $2,490 $2,928 $2,711 Annualized as a percentage of average loans 0.10% 0.23% 0.16% 0.19% 0.19% Non-performing assets: Non-accrual loans $30,045 $30,824 $34,027 $33,179 $34,432 Foreclosed assets 4,971 6,461 6,766 5,748 6,394 ------- ------- ------- ------- ------- Total $35,016 $37,285 $40,793 $38,927 $40,826 As a percentage of: Total loans and foreclosed assets 0.54% 0.57% 0.63% 0.64% 0.71% Total assets 0.30 0.33 0.35 0.33 0.40 CONSOLIDATED CAPITAL RATIOS --------------------------- Tier 1 Risk-Based Capital Ratio 12.39% 12.00% 11.55% 12.24% 13.01% Total Risk-Based Capital Ratio 14.68 14.65 14.21 14.94 15.92 Leverage Ratio 9.76 9.39 9.12 9.62 10.16 Equity to Assets Ratio (period-end) 9.63 9.01 8.73 8.37 8.72 Equity to Assets Ratio (average) 9.28 8.94 8.89 8.82 8.84 (1) Shareholders' equity excluding accumulated other comprehensive income (loss). Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) (In thousands, except per share amounts) Nine Months Ended September 30, ----------------------- 2006 2005 ----------------------------------------------------------------------- CONDENSED INCOME STATEMENTS --------------------------- Net interest income $347,934 $283,466 Net interest income (1) 355,119 288,971 Provision for possible loan losses 10,750 7,300 Non-interest income Trust fees 47,460 43,294 Service charges on deposit accounts 57,974 59,002 Insurance commissions and fees 22,323 22,192 Other charges, commissions and fees 20,668 17,008 Net gain (loss) securities transactions (1) --- Other 32,495 32,330 ------- ------- Total non-interest income $180,919 $173,826 Non-interest expense Salaries and wages 142,312 122,272 Employee benefits 35,492 32,325 Net occupancy 25,909 22,863 Furniture and equipment 19,212 17,929 Intangible amortization 3,957 3,699 Other 76,448 72,841 ------- ------- Total non-interest expense $303,330 $271,929 Income before income taxes 214,773 178,063 Income taxes 69,544 57,557 ------- ------- Net income $145,229 $120,506 ------- ------- PER SHARE DATA -------------- Net income - basic $2.64 $2.32 Net income - diluted 2.58 2.26 Cash dividends 0.98 0.865 Book value at end of period 20.08 17.03 OUTSTANDING SHARES ------------------ Period-end shares 55,821 52,657 Weighted-average shares - basic 55,043 51,963 Dilutive effect of stock compensation 1,233 1,315 Weighted-average shares - diluted 56,276 53,278 SELECTED ANNUALIZED RATIOS -------------------------- Return on average assets 1.70% 1.63% Return on average equity 18.81 18.88 Net interest income to average earning assets (1) 4.68 4.41 (1) Taxable-equivalent basis assuming a 35% tax rate. Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) As of or for the Nine Months Ended September 30, ---------------------- 2006 2005 ----------------------------------------------------------------------- BALANCE SHEET SUMMARY --------------------- ($ in millions) Average Balance: Loans $6,471 $5,455 Earning assets 10,059 8,761 Total assets 11,416 9,887 Non-interest-bearing demand deposits 3,305 2,910 Interest-bearing deposits 5,763 5,038 Total deposits 9,068 7,948 Shareholders' equity 1,032 853 Period-End Balance: Loans $6,516 $5,710 Earning assets 10,324 9,185 Goodwill and intangible assets 268 111 Total assets 11,647 10,280 Total deposits 9,270 8,283 Shareholders' equity 1,121 897 Adjusted shareholders' equity(1) 1,179 928 ASSET QUALITY ------------- ($ in thousands) Allowance for possible loan losses $85,667 $77,117 As a percentage of period-end loans 1.31% 1.35% Net charge-offs: $7,781 $5,993 Annualized as a percentage of average loans 0.16% 0.15% Non-performing assets: Non-accrual loans $30,045 $34,432 Foreclosed assets 4,971 6,394 ------- ------- Total $35,016 $40,826 As a percentage of: Total loans and foreclosed assets 0.54% 0.71% Total assets 0.30 0.40 CONSOLIDATED CAPITAL RATIOS --------------------------- Tier 1 Risk-Based Capital Ratio 12.39% 13.01% Total Risk-Based Capital Ratio 14.68 15.92 Leverage Ratio 9.76 10.16 Equity to Assets Ratio (period-end) 9.63 8.72 Equity to Assets Ratio (average) 9.04 8.63 (1) Shareholders' equity excluding accumulated other comprehensive income (loss).