Cullen/Frost Reports Steady Second Quarter Results

Operational Stability in a Challenging Economic Environment

SAN ANTONIO, July 23 /PRNewswire-FirstCall/ -- Cullen/Frost Bankers, Inc.
(NYSE: CFR) today reported steady results for the second quarter of 2008,
demonstrating stability in its overall operations in a challenging economy.
The company reported net income of $52.5 million in the quarter, compared
to the $53.6 million reported for the second quarter of 2007. On a per-share
basis, earnings for the second quarter were $.89 per diluted common share, the
same as the $.89 per diluted common share reported a year earlier. The second
quarter of 2008 results included $700 thousand in after tax expense related to
a patent litigation settlement. Returns on average assets and equity for the
second quarter of 2008 were 1.56 percent and 13.44 percent, respectively,
compared to 1.66 percent and 15.40 percent for the same quarter of 2007.
For the second quarter of 2008, net interest income on a
taxable-equivalent basis rose 2.4 percent to $136.2 million, compared to the
$133.1 million reported for the same quarter a year earlier. Average loans
were $8.2 billion, up 9.8 percent from the $7.5 billion reported for the
second quarter of 2007. Average deposits for the quarter increased 3.2 percent
to $10.4 billion from the $10.1 billion reported a year earlier.
"The company performed well for the second quarter," said Cullen/Frost
Chairman and CEO Dick Evans. "Loans and deposits were both up by solid margins
over last year's second quarter, and we had good growth in our non-interest
income and net interest income. However, we are mindful of the challenges of
the current business environment, as we saw an increase in the provision for
possible loan losses from the same quarter a year ago. With a loan-to-deposit
ratio of 79 percent, credit quality at manageable levels and capital ratios in
excess of well-capitalized levels, we continue to focus on customer
relationships.
"The Texas economy remains resilient, though not immune to the currents
affecting the national economy. Texas continues, for example, to enjoy
positive job growth. As a result, competition in the state is extremely
strong. We see it in deposit pricing from banks that need to shore up
liquidity, and we see it on the lending side in both loan structure and
pricing. We are meeting the challenges, and there's nowhere else I'd want to
be in business."
Evans highlighted areas in which the company is competing even more
vigorously.
"This week we are introducing a first-of-its-kind online account that we
believe will gain great acceptance. At the same time as we launch this new
account, we continue to focus on the bricks and mortar financial centers that
many of our customers still want. During the second quarter, we relocated one
of our financial centers serving the South side of San Antonio to a new
facility, and we expect to open a total of five new financial centers in San
Antonio, Dallas and Houston by the end of 2008. We see great opportunities in
the Texas markets we serve, and I believe the Texas economy will continue to
outperform that of the nation.
"Earlier this month, Frost began offering a family of mutual funds to
retail investors through a bank subsidiary, Frost Investment Advisors. These
funds, which were formerly commingled funds available only to trust customers
and participants of qualified retirement plans, are now available to
institutional investors and to the general public on a variety of platforms.
This allows Frost's experienced team to offer investment services and
expertise to more clients, who have come to trust the Frost name for
stability.
"I thank our superb employees, whose energy, enthusiasm and commitment to
our company and our customers make our results possible," Evans continued.
For the first six months of 2008, net income was $105.3 million, or $1.78
per diluted common share, compared to $100.9 million, or $1.67 per diluted
common share, for the first six months of 2007. Returns on average assets and
average equity for the first six months of 2008 were 1.57 percent and 13.66
percent, respectively, compared to 1.57 percent and 14.60 percent for the same
period in 2007.
Other noted financial data for the second quarter follows:
-- Tier 1 and Total Risk-Based Capital Ratios were 10.15 percent and 12.68
percent, respectively, at the end of the second quarter of 2008 and are
in excess of well capitalized levels.
-- Net interest income on a taxable-equivalent basis increased 2.4 percent
to $136.2 million, from the $133.1 million reported a year earlier.
This increase primarily resulted from an increase in the average volume
of interest earning assets and was partly offset by a decrease in the
net interest margin. The net interest margin was 4.68 percent for the
second quarter, compared to 4.67 for the first quarter this year and
4.72 for the second quarter of 2007.
-- Non-interest income for the second quarter of 2008 increased 10.2
percent to $70.6 million, compared to the $64.0 million reported a year
earlier.

Trust fees increased 7.6 percent to $19.0 million, compared to $17.7
million in the second quarter of 2007. Contributing to the increase were
higher levels of oil and gas management fees, as well as investment fees. The
increase in oil and gas management fees was, in part, related to new lease
bonuses and increased production. Investment fees represent approximately 70
percent of total trust fees and are generally assessed based on the market
value of trust assets, which were $23.9 billion at the end of the second
quarter. This market value includes both assets that are managed and held in
custody.
Service charges on deposits were $21.6 million, up 7.4 percent, or $1.5
million, compared to the same quarter the previous year. Impacting this rise
was a $2.0 million increase in service charges on commercial accounts,
resulting from higher treasury management fees. A drop in the earnings credit
rate for commercial accounts, compared to a year earlier, impacted treasury
management fees. When interest rates are lower, customers earn less credit
for their deposit balances, and this, in turn, increases the amount of service
charges to be paid for through fees.
Insurance commissions and fees were $7.0 million, up 7.2 percent from the
$6.5 million reported in the same quarter a year earlier.
Other service charges and fees were $9.5 million, up $2.5 million, compared to
$7.0 million reported in the same quarter a year earlier. During the second
quarter of 2008, the company recognized $1.4 million in investment banking
fees related to corporate advisory services.
Other income rose 6.3 percent from the second quarter of last year to
$13.5 million and was impacted by higher mineral interest income and higher
revenue from checkcard usage.
-- Non-interest expense for the quarter was $120.1 million, an increase of
6.6 percent over the $112.6 million reported for the second quarter of
last year. Total salaries and related employee benefits rose 5.1
percent, to $66.4 million, and were impacted by an increase in the
number of employees, as well as normal annual merit increases. Net
occupancy was up $608 thousand, compared to the second quarter of 2007,
mainly due to an increase in lease expense. Furniture and fixtures
increased $952 thousand from the same quarter last year, with most of
the increase coming from software maintenance and depreciation expense,
which were impacted by upgrades to our retail banking technology and
teller systems and new locations. Other non-interest expense increased
$2.9 million from a year earlier. The second quarter 2008 results
include approximately $1.1 million from a settlement, release and
license agreement associated with patent infringement litigation
initiated by Data Treasury Corporation. The additional impact of the
agreement on the operating results of the Corporation in future periods
is not material. The specific terms of the agreement are confidential
but include the licensing of two Data Treasury patents.

-- For the second quarter of 2008, the provision for possible loan losses
was $6.3 million, compared to net charge-offs of $4.3 million. The
loan loss provision for the second quarter of 2007 was $2.65 million,
compared to net charge-offs of $2.72 million. Non-performing assets for
the second quarter of 2008 were $49.6 million, compared to $36.6
million last quarter and $49.7 million a year earlier. The allowance
for possible loan losses as a percentage of loans at June 30, 2008 was
1.13 percent, compared to 1.30 percent at the end of the second quarter
of 2007. As a percentage of non-accrual loans, the allowance for
possible loan losses was 233.5 percent at June 30, 2008, compared to
211.1 percent at the same date last year.

Cullen/Frost Bankers, Inc. will host a conference call on Wednesday, July
23, 2008, 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 27, 2008 at 1-800-642-1687 or 1-706-645-9291 for international calls,
with Conference ID # of 55373225. 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. (NYSE: CFR) is a financial holding company,
headquartered in San Antonio, with assets of $13.7 billion at June 30, 2008.
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.
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)

2008 2007
------------------ ----------------------------
2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr
CONDENSED INCOME -------- -------- -------- -------- --------
STATEMENTS
----------------------
Net interest income $131,328 $129,880 $130,760 $130,624 $129,520
Net interest income(1) 36,223 134,767 135,269 134,704 133,095
Provision for possible
loan losses 6,328 4,005 3,576 5,784 2,650

Non-interest income:
Trust fees 19,040 18,282 18,009 17,749 17,694
Service charges on
deposit accounts 21,634 19,593 21,044 20,696 20,147
Insurance commissions
and fees 7,015 11,158 5,979 7,695 6,545
Other charges,
commissions and fees 9,496 6,931 7,949 10,772 6,979
Net gain (loss) on
securities
transactions (56) (48) 15 -- --
Other 13,452 14,312 13,387 13,844 12,655
Total non-interest -------- -------- -------- -------- --------
income 70,581 70,228 66,383 70,756 64,020

Non-interest expense:
Salaries and wages 54,534 55,138 54,069 52,996 51,203
Employee benefits 11,912 14,113 9,945 10,727 11,997
Net occupancy 10,091 9,647 10,198 9,509 9,483
Furniture and equipment 9,182 8,950 8,870 8,793 8,230
Intangible amortization 1,955 2,046 2,162 2,184 2,188
Other 32,416 30,146 28,906 29,358 29,541
Total non-interest -------- -------- -------- -------- --------
expense 120,090 120,040 114,150 113,567 112,642
Income before income -------- -------- -------- -------- --------
taxes 75,491 76,063 79,417 82,029 78,248
Income taxes 22,944 23,283 24,717 25,566 24,619
-------- -------- -------- -------- --------
Net income $52,547 $52,780 $54,700 $56,463 $53,629
======== ======== ======== ======== ========

PER SHARE DATA
--------------------
Net income - basic $0.89 $0.90 $0.94 $0.97 $0.90
Net income - diluted 0.89 0.89 0.93 0.95 0.89
Cash dividends 0.42 0.40 0.40 0.40 0.40
Book value at end of
quarter 26.11 26.85 25.18 23.74 22.99

OUTSTANDING SHARES
------------------------
Period-end shares 59,081 58,747 58,662 58,423 59,074
Weighted-average
shares - basic 58,733 58,538 58,387 58,439 59,324
Dilutive effect of stock
compensation 483 520 598 731 810
Weighted-average
shares - diluted 59,216 59,058 58,985 59,170 60,134

SELECTED ANNUALIZED RATIOS
---------------------------
Return on average assets 1.56% 1.59% 1.65% 1.72% 1.66%
Return on average equity 13.44 13.89 15.18 16.44 15.40
Net interest income to
average earning assets(1) 4.68 4.67 4.70 4.69 4.72

(1) Taxable-equivalent basis assuming a 35% tax rate.

Cullen/Frost Bankers, Inc.
CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED)

2008 2007
----------------- ---------------------------
2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr
------- ------- ------- ------- -------
BALANCE SHEET SUMMARY
---------------------
($ in millions)
Average Balance:
Loans $8,187 $7,918 $7,560 $7,436 $7,455
Earning assets 11,717 11,605 11,422 11,340 11,248
Total assets 13,518 13,382 13,169 13,026 12,923
Non-interest-bearing
demand deposits 3,531 3,518 3,483 3,567 3,505
Interest-bearing deposits 6,885 6,876 6,765 6,685 6,593
Total deposits 10,416 10,394 10,248 10,252 10,098
Shareholders' equity 1,573 1,529 1,429 1,363 1,396

Period-End Balance:
Loans $8,354 $8,013 $7,769 $7,461 $7,412
Earning assets 11,608 11,874 11,556 11,492 11,257
Goodwill and intangible
assets 554 556 558 560 562
Total assets 13,671 13,794 13,485 13,167 12,949
Total deposits 10,627 10,728 10,530 10,096 10,177
Shareholders' equity 1,542 1,577 1,477 1,387 1,358
Adjusted shareholders'
equity(1) 1,557 1,513 1,484 1,445 1,445

ASSET QUALITY
-------------
($ in thousands)
Allowance for possible
loan losses $94,520 $92,498 $92,339 $92,263 $96,071
as a percentage of
period-end loans 1.13% 1.15% 1.19% 1.24% 1.30%

Net charge-offs $4,306 $3,846 $3,500 $9,592 $2,723
Annualized as a
percentage of average
loans 0.21% 0.20% 0.18% 0.51% 0.15%

Non-performing assets:
Non-accrual loans $40,485 $28,642 $24,443 $21,356 $45,503
Foreclosed assets 9,146 7,944 5,406 5,023 4,222
------- ------- ------- ------- -------
Total $49,631 $36,586 $29,849 $26,379 $49,725

As a percentage of:
Total loans and
foreclosed assets 0.59% 0.46% 0.38% 0.35% 0.67%
Total assets 0.36 0.27 0.22 0.20 0.38

CONSOLIDATED CAPITAL RATIOS
---------------------------
Tier 1 Risk-Based Capital
Ratio 10.15% 9.98% 9.96% 10.07% 10.14%
Total Risk-Based Capital
Ratio 12.68 12.55 12.59 12.83 13.25
Leverage Ratio 8.69 8.51 8.37 8.01 8.10
Equity to Assets Ratio
(period-end) 11.28 11.43 10.95 10.53 10.49
Equity to Assets Ratio
(average) 11.63 11.42 10.85 10.46 10.80

(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,
-----------------------
2008 2007
-----------------------------------------------------------------------
CONDENSED INCOME STATEMENTS
---------------------------
Net interest income $261,208 $257,353
Net interest income(1) 270,991 264,222
Provision for possible loan losses 10,333 5,300
Non-interest income
Trust fees 37,322 34,601
Service charges on deposit accounts 41,227 38,978
Insurance commissions and fees 18,173 17,173
Other charges, commissions and fees 16,427 13,837
Net gain (loss) securities transactions (104) --
Other 27,764 26,503
-------- --------
Total non-interest income 140,809 131,092

Non-interest expense
Salaries and wages 109,672 102,917
Employee benefits 26,025 26,423
Net occupancy 19,738 19,117
Furniture and equipment 18,132 15,158
Intangible amortization 4,001 4,514
Other 62,562 66,600
-------- --------
Total non-interest expense 240,130 234,729

Income before income taxes 151,554 148,416
Income taxes 46,227 47,508
-------- --------
Net income $105,327 $100,908
-------- --------
PER SHARE DATA
--------------
Net income - basic $1.80 $1.70
Net income - diluted 1.78 1.67
Cash dividends 0.82 0.74
Book value at end of period 26.11 22.99

OUTSTANDING SHARES
------------------
Period-end shares 59,081 59,074
Weighted-average shares - basic 58,635 59,499
Dilutive effect of stock compensation 507 864
Weighted-average shares - diluted 59,142 60,363

SELECTED ANNUALIZED RATIOS
--------------------------
Return on average assets 1.57% 1.57%
Return on average equity 13.66 14.60
Net interest income to average earning assets(1) 4.67 4.69

(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,
-----------------------
2008 2007
--------------------------------------------------------------------------
BALANCE SHEET SUMMARY
---------------------
($ in millions)
Average Balance:
Loans $8,052 $7,430
Earning assets 11,661 11,298
Total assets 13,455 12,992
Non-interest-bearing demand deposits 3,524 3,523
Interest-bearing deposits 6,881 6,652
Total deposits 10,405 10,175
Shareholders' equity 1,551 1,394

Period-End Balance:
Loans $8,354 $7,412
Earning assets 11,608 11,257
Goodwill and intangible assets 554 562
Total assets 13,671 12,949
Total deposits 10,627 10,177
Shareholders' equity 1,542 1,358
Adjusted shareholders' equity(1) 1,557 1,445

ASSET QUALITY
-------------
($ in thousands)
Allowance for possible loan losses $94,520 $96,071
As a percentage of period-end loans 1.13% 1.30%

Net charge-offs: $8,152 $5,314
Annualized as a percentage of average loans 0.20% 0.14%

Non-performing assets:
Non-accrual loans $40,485 $45,503
Foreclosed assets 9,146 4,222
-------- --------
Total $49,631 $49,725

As a percentage of:
Total loans and foreclosed assets 0.59% 0.67%
Total assets 0.36 0.38

CONSOLIDATED CAPITAL RATIOS
---------------------------
Tier 1 Risk-Based Capital Ratio 10.15% 10.14%
Total Risk-Based Capital Ratio 12.68 13.25
Leverage Ratio 8.69 8.10
Equity to Assets Ratio (period-end) 11.28 10.49
Equity to Assets Ratio (average) 11.52 10.73

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

SOURCE Cullen/Frost Bankers, Inc.

Investor Relations, Greg Parker, +1-210-220-5632, or Media Relations, Renee
Sabel, +1-210-220-5416, both of Cullen-Frost Bankers, Inc.