CFR Cullen Frost Bankers Inc

Finishes Year Up in a Down Economy SAN ANTONIO, Jan. 28 /PRNewswire-FirstCall/ -- Cullen/Frost Bankers, Inc. today reported strong results for the fourth quarter of 2008, which contributed to near-record full-year results for the Texas financial services leader, despite operating in the most turbulent banking market since perhaps the Great Depression. Cullen/Frost reported net income for the fourth quarter of 2008 of $53.0 million, or $.89 per diluted common share, compared to fourth quarter 2007 earnings of $54.7 million, or $.93 per diluted common share. For the fourth quarter of 2008, returns on average assets and equity were 1.47 percent and 12.79 percent respectively, compared to 1.65 percent and 15.18 percent for the same period of 2007. The company also reported annual earnings for 2008 of $207.3 million, or $3.50 per diluted common share, compared to 2007 earnings of $212.1 million, or $3.55 per diluted common share. For the year, returns on average assets and equity were 1.51 percent and 13.11 percent respectively, compared to the 1.63 percent and 15.20 percent reported in 2007. "I am very pleased with our company's performance for the quarter and the year, in perhaps the most challenging banking environment our nation has faced in seven decades," said Dick Evans, Cullen/Frost chairman and CEO. "This was compounded by the $10 million provision for possible loan losses we reported in the third quarter related to Hurricane Ike, one of the most destructive natural disasters in Texas history." "It was gratifying to see a $507 million increase in average deposits over the previous quarter, the largest in a single quarter in our company's history a strong show of confidence by our customers that value Frost as a safe haven. I was also pleased to see a $278 million increase in average loans for the quarter. This performance is especially noteworthy in light of the credit crisis that dominated the economy." Evans said the company would build on those results by adding new locations across Texas and by introducing innovative services for customers. The company opened seven financial centers in 2008 and will open additional locations in Austin, Houston, San Antonio and Dallas in 2009. Also, the company will introduce mobile banking services in 2009, enabling customers to do business with Frost whenever and wherever they like. "I thank our outstanding employees around the state for their efforts. Cullen/Frost's success is grounded in our company's culture and philosophy, which our employees bring to life every day through their strong work ethic, loyalty and commitment to taking good care of our customers. Commenting on the outlook for the Texas economy in 2009, Evans noted, "While we have been very fortunate in Texas to escape the worst of the current recession, observers expect some weakening in job growth and the rest of the Texas economy in 2009. Although I still feel optimistic about our prospects this year, it is tempered by the possibility that Texas will feel the effects of the broader recession. "Still, I believe Cullen/Frost is better positioned than most banking companies in the U.S. to weather the current economic storm." For the year ended December 31, 2008, average annual total loans were $8.3 billion, an increase of 11.4 percent compared to $7.5 billion for the previous year. Average annual total deposits for 2008 rose to $10.5 billion, up 3.1 percent over the $10.2 billion reported in 2007. Net interest income on a taxable-equivalent basis grew to $554.4 million, a 3.8 percent increase over the $534.2 million reported a year earlier, reflecting the impact of increasing volumes. For 2008, non-interest income rose to $287.3 million, up 7.1 percent over the $268.2 million reported for 2007, while non-interest expense increased 5.2 percent over the previous year to $486.6 million. Noted financial data for the fourth quarter: -- Net interest income on a taxable-equivalent basis for the fourth quarter totaled $143.7 million, a 6.2 percent increase from the $135.3 million reported for the fourth quarter of 2007. Impacting this rise in net interest income, in part, was a 6.5 percent increase in average deposits from the fourth quarter of 2007 to $10.9 billion. On a linked quarter basis, the company had the largest increase in average deposits without acquisitions in company history $507 million. This increase contributed to a $1.0 billion increase in the average volume of earning assets, compared to the fourth quarter of 2007, to $12.4 billion. The earning asset mix has improved from the same period a year earlier, with average loans for the quarter rising to $8.7 billion, 15.2 percent higher than the $7.6 billion reported for the same period last year. The company has seen the benefits of the seven-year life $1.2 billion interest rate swap it entered into 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 4.60 percent for the fourth quarter, compared to 4.70 percent for the fourth quarter of 2007 and 4.74 percent for the third quarter of 2008. -- Non-interest income for the fourth quarter of 2008 was $69.2 million, up 4.2 percent over the $66.4 million reported a year earlier. Trust income was $17.5 million, compared to $18.0 million for the fourth quarter of 2007, primarily from lower investment fees resulting from declines in the equities market. Investment fees are assessed based on the market value of trust assets, which totaled $21.7 billion at the end of the year 2008. The drop in investment fees was partly offset by higher oil and gas fees compared to the year ago fourth quarter. Service charges on deposits were $23.7 million, an increase of $2.7 million or 12.6 percent, compared to $21.0 million reported for the previous year's fourth quarter. A decrease in the earnings credit rate for commercial accounts, compared to a year earlier, impacted treasury management fees. When average market interest rates are lower, customers earn less credit for their deposit balances, which, in turn, increases the amount of fees required to pay for services. Other charges, commissions and fees were $8.4 million, compared to $7.9 million reported for the fourth quarter of 2007. Most of this increase related to increases in mutual fund management fees related to Frost Investment Advisors, LLC, a newly formed registered investment advisor subsidiary of the Corporation. -- Non-interest expense for the fourth quarter of 2008 was $123.5 million, up $9.4 million or 8.2 percent from the $114.2 million for the fourth quarter of 2007. Combined, salaries and wages and employee benefits were up $5.0 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. Expenses for furniture and equipment were up $1.1 million to $10.0 million, due mainly to increases in software maintenance expense and software amortization expense. These expenses related primarily to upgrades in information systems and retail banking technology. Other expense was $32.2 million, a $3.3 million increase when compared to the fourth quarter of 2007. Advertising/promotions were up $1.8 million and FDIC insurance expense was up $1.5 million compared to the fourth quarter a year ago. -- For the fourth quarter of 2008, the provision for possible loan losses was $8.6 million, compared to net charge-offs of $5.4 million. 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. The allowance for possible loan losses as a percentage of total loans was 1.25 percent at December 31, 2008, compared to 1.19 percent at year-end 2007. Non-performing assets were $78.0 million at year-end, compared to $55.2 million the previous quarter and $29.8 million at year-end 2007. Cullen/Frost Bankers, Inc. will host a conference call on Wednesday, January 28, 2009 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, February 1, 2009 at 800-642-1687, with the Conference ID # of 80509618. 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. (NYSE:CFR) is a financial holding company, headquartered in San Antonio, with assets of $15.0 billion at December 31, 2008. 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 the largest banking organization headquartered in Texas that operates only in Texas, with a legacy of helping clients 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. -- Volatility and disruption in national and international financial markets. -- Government intervention in the U.S. financial system. -- 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) 2008 2007 ------------------------------------- ------- 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr ------- ------- ------- ------- ------- CONDENSED INCOME STATEMENTS ---------------- Net interest income $138,081 $134,736 $131,328 $129,880 $130,760 Net interest income(1) 143,707 139,655 136,223 134,767 135,269 Provision for possible loan losses 8,550 18,940 6,328 4,005 3,576 Non-interest income: Trust fees 17,483 19,749 19,040 18,282 18,009 Service charges on deposit accounts 23,697 22,642 21,634 19,593 21,044 Insurance commissions and fees 6,470 8,261 7,015 11,158 5,979 Other charges, commissions and fees 8,407 10,723 9,496 6,931 7,949 Net gain (loss) on securities transactions (133) 78 (56) (48) 15 Other 13,274 15,862 13,452 14,312 13,387 ------ ------ ------ ------ ------- Total non-interest income 69,198 77,315 70,581 70,228 66,383 Non-interest expense: Salaries and wages 58,468 57,803 54,534 55,138 54,069 Employee benefits 10,517 10,677 11,912 14,113 9,945 Net occupancy 10,384 10,342 10,091 9,647 10,198 Furniture and equipment 10,010 9,657 9,182 8,950 8,870 Intangible amortization 1,929 1,976 1,955 2,046 2,162 Other 32,235 32,517 32,416 30,146 28,906 ------ ------ ------ ------ ------ Total non-interest expense 123,543 122,972 120,090 120,040 114,150 ------- ------- ------- ------- ------- Income before income taxes 75,186 70,139 75,491 76,063 79,417 Income taxes 22,223 21,174 22,944 23,283 24,717 Net income $52,963 $48,965 $52,547 $52,780 $54,700 ======= ======= ======= ======= ======= PER SHARE DATA -------------- Net income - basic $0.90 $0.83 $0.89 $0.90 $0.94 Net income - diluted 0.89 0.82 0.89 0.89 0.93 Cash dividends 0.42 0.42 0.42 0.40 0.40 Book value at end of quarter 29.68 27.16 26.11 26.85 25.18 OUTSTANDING SHARES ------------------ Period-end shares 59,416 59,299 59,081 58,747 58,662 Weighted-average shares - basic 59,171 58,932 58,733 58,538 58,387 Dilutive effect of stock compensation 311 433 483 520 598 Weighted-average shares - diluted 59,482 59,365 59,216 59,058 58,985 SELECTED ANNUALIZED RATIOS ------------------- Return on average assets 1.47% 1.44% 1.56% 1.59% 1.65% Return on average equity 12.79 12.39 13.44 13.89 15.18 Net interest income to average earning assets(1) 4.60 4.74 4.68 4.67 4.70 (1) Taxable-equivalent basis assuming a 35% tax rate. Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) 2008 2007 ------------------------------------- ------- 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr ------- ------- ------- ------- ------- BALANCE SHEET SUMMARY ------------- ($in millions) Average Balance: Loans $8,712 $8,434 $8,187 $7,918 $7,560 Earning assets 12,435 11,712 11,717 11,605 11,422 Total assets 14,347 13,486 13,518 13,382 13,169 Non-interest-bearing Demand deposits 3,803 3,605 3,531 3,518 3,483 Interest-bearing deposits 7,106 6,797 6,885 6,876 6,765 Total deposits 10,909 10,402 10,416 10,394 10,248 Shareholders' equity 1,647 1,573 1,573 1,529 1,429 Period-End Balance: Loans $8,844 $8,596 $8,354 $8,013 $7,769 Earning assets 13,001 11,984 11,608 11,874 11,556 Goodwill and intangible assets 551 553 554 556 558 Total assets 15,034 14,061 13,671 13,794 13,485 Total deposits 11,509 10,618 10,627 10,728 10,530 Shareholders' equity 1,764 1,611 1,542 1,577 1,477 Adjusted shareholders' equity(1) 1,626 1,593 1,557 1,513 1,484 ASSET QUALITY ------------- ($in thousands) Allowance for Possible loan losses $110,244 $107,109 $94,520 $92,498 $92,339 as a percentage of period-end loans 1.25% 1.25% 1.13% 1.15% 1.19% Net charge-offs $5,415 $6,351 $4,306 $3,846 $3,500 Annualized as a percentage of average loans 0.25% 0.30% 0.21% 0.20% 0.18% Non-performing assets: Non-accrual loans $65,174 $45,475 $40,485 $28,642 $24,443 Foreclosed assets 12,866 9,683 9,146 7,944 5,406 ------ ------ ------ ------ ------ Total $78,040 $55,158 $49,631 $36,586 $29,849 As a percentage of: Total loans and foreclosed assets 0.88% 0.64% 0.59% 0.46% 0.38% Total assets 0.52 0.39 0.36 0.27 0.22 CONSOLIDATED CAPITAL RATIOS -------------------- Tier 1 Risk-Based Capital Ratio 10.30% 10.33% 10.15% 9.98% 9.96% Total Risk-Based Capital Ratio 12.58 12.67 12.68 12.55 12.59 Leverage Ratio 8.80 9.04 8.69 8.51 8.37 Equity to Assets Ratio (period-end) 11.73 11.46 11.28 11.43 10.95 Equity to Assets Ratio (average) 11.48 11.66 11.63 11.42 10.85 (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 ------------------------------------------------ 2008 2007 2006 2005 2004 -------- -------- -------- -------- -------- CONDENSED INCOME STATEMENTS ---------------- Net interest income $534,025 $518,737 $469,163 $391,266 $331,438 Net interest income(1) 554,353 534,195 479,138 398,938 337,102 Provision for possible loan losses 37,823 14,660 14,150 10,250 2,500 Non-interest income: Trust fees 74,554 70,359 63,469 58,353 53,910 Service charges on deposit accounts 87,566 80,718 77,116 78,751 87,415 Insurance commissions and fees 32,904 30,847 28,230 27,731 30,981 Other charges, commissions and fees 35,557 32,558 28,105 23,125 22,877 Net gain(loss) on securities transactions (159) 15 (1) 19 (3,377) Other 56,900 53,734 43,828 42,400 33,304 ------ ------ ------ ------ ------ Total non-interest income 287,322 268,231 240,747 230,379 225,110 Non-interest expense: Salaries and wages 225,943 209,982 190,784 166,059 158,039 Employee benefits 47,219 47,095 46,231 41,577 40,176 Net occupancy 40,464 38,824 34,695 31,107 29,375 Furniture and equipment 37,799 32,821 26,293 23,912 22,771 Intangible amortization 7,906 8,860 5,628 4,859 5,346 Other 127,314 124,864 106,722 99,493 89,323 ------- ------- ------- ------ ------ Total non-interest expense 486,645 462,446 410,353 367,007 345,030 ------- ------- ------- ------- ------- Income before income taxes 296,879 309,862 285,407 244,388 209,018 Income taxes 89,624 97,791 91,816 78,965 67,693 -------- ------- -------- -------- -------- Net income $207,255 $212,071 $193,591 $165,423 $141,325 ======== ======== ======== ======== ======== PER SHARE DATA -------------- Net income - basic $3.52 $3.60 $3.49 $3.15 $2.74 Net income - diluted 3.50 3.55 3.42 3.07 2.66 Cash dividends 1.66 1.54 1.32 1.165 1.035 Book value 29.68 25.18 23.01 18.03 15.84 OUTSTANDING SHARES ------------------ Period-end shares 59,416 58,662 59,839 54,483 51,924 Weighted-average shares - basic 58,845 58,952 55,467 52,481 51,651 Dilutive effect of stock compensation 440 761 1,175 1,322 1,489 Weighted-average shares - diluted 59,285 59,713 56,642 53,803 53,140 SELECTED ANNUALIZED RATIOS Return on average assets 1.51% 1.63% 1.67% 1.63% 1.47% Return on average equity 13.11 15.20 18.03 18.78 17.91 Net interest income to average earning assets(1) 4.67 4.69 4.67 4.45 4.05 (1)Taxable-equivalent basis assuming a 35% tax rate. Cullen/Frost Bankers, Inc. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) Year Ended December 31 ---------------------------------------------- 2008 2007 2006 2005 2004 ------ ------ ------ ------ ------ BALANCE SHEET SUMMARY ------------- ($in millions) Average Balance: Loans $8,314 $7,464 $6,524 $5,594 $4,823 Earning assets 11,868 11,340 10,203 8,969 8,352 Total assets 13,685 13,042 11,581 10,143 9,619 Non-interest-bearing demand deposits 3,615 3,524 3,334 3,009 2,915 Interest bearing deposits 6,916 6,689 5,850 5,124 4,852 Total deposits 10,531 10,213 9,184 8,133 7,767 Shareholders' equity 1,580 1,395 1,074 881 789 Period-End Balance: Loans $8,844 $7,769 $7,373 $6,085 $5,165 Earning assets 13,001 11,556 11,461 10,197 8,892 Goodwill and intangible assets 551 558 563 184 117 Total assets 15,034 13,485 13,224 11,741 9,953 Total deposits 11,509 10,530 10,388 9,146 8,106 Shareholders' equity 1,764 1,477 1,377 982 822 Adjusted shareholders' equity(1) 1,626 1,484 1,432 1,033 833 ASSET QUALITY ------------- ($in thousands) Allowance for possible loan losses $110,244 $92,339 $96,085 $80,325 $75,810 As a percentage of period-end loans 1.25% 1.19% 1.30% 1.32% 1.47% Net charge-offs: $19,918 $18,406 $11,110 $8,921 $10,191 As a percentage of average loans 0.24% 0.25% 0.17% 0.16% 0.20% Non-performing assets: Non-accrual loans $65,174 $24,443 $52,204 $33,179 $30,443 Foreclosed assets 12,866 5,406 5,545 5,748 8,673 ------- ------- ------- ------- ------- Total $78,040 $29,849 $57,749 $38,927 $39,116 As a percentage of: Total loans and foreclosed assets 0.88% 0.38% 0.78% 0.64% 0.76% Total assets 0.52 0.22 0.44 0.33 0.39 (1) Shareholders' equity excluding accumulated other comprehensive income (loss). DATASOURCE: Cullen/Frost Bankers, Inc. CONTACT: Greg Parker, Investor Relations, +1-210-220-5632, or Renee Sabel, Media Relations, +1-210-220-5416, both of Cullen-Frost Bankers, Inc. Web Site: http://www.frostbank.com/

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