Cullen/Frost Reports Solid Third Quarter Results

SAN ANTONIO, Oct. 27 /PRNewswire-FirstCall/ -- Cullen/Frost Bankers, Inc. (NYSE: CFR) today reported earnings for the third quarter of 2010 of $55.0 million, an increase of 23.0 percent over the $44.7 million reported for the same period in 2009. On a per-share basis, net income for the quarter was $.90 per diluted common share, compared to the $.75 per diluted common share reported a year earlier.

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Return on average assets and return on average equity for the third quarter of 2010 were 1.25 percent and 10.49 percent, respectively, compared to 1.11 percent and 9.70 percent for the same quarter in 2009.

The provision for possible loan losses was $10.1 million, compared to $16.9 million reported a year earlier, while the allowance for possible loan losses as a percentage of loans increased to 1.57 percent from 1.45 percent for the same quarter of 2009.

For the third quarter of 2010, net interest income on a tax-equivalent basis increased 7.4 percent to $155.7 million, compared to the $144.9 million reported for the same quarter of 2009.  Average deposits for the quarter were $14.3 billion, an increase of $474 million over the previous quarter, and a rise of $1.5 billion over the $12.8 billion reported for the third quarter of 2009. Average loans for the third quarter of 2010 declined slightly to $8.1 billion, compared to the $8.6 billion reported for the third quarter a year earlier, and were essentially flat compared to the $8.1 billion reported in the second quarter.  

"Our company's third quarter performance reflects that Cullen/Frost continues to operate well in this challenging environment," said Cullen/Frost CEO Dick Evans. "I was pleased to see good growth in net interest income, as we continue to see the benefits of lower deposit costs and having deployed some of our liquidity into quality investments during the last half of 2009. We continue to grow our customer base and expand relationships, which we believe will fuel our future growth."

The flight to quality and safety that Cullen/Frost has been experiencing for eight consecutive quarters continues to drive average deposit growth, with deposits up almost $4.0 billion since the third quarter of 2008.  

"Customers and prospects are continuing to bring their money to Frost amid this deleveraging environment, and we will be there to help them reinvest and grow their businesses again when confidence returns," Evans said.  

"Although making loans continues to be challenged by an environment in which both businesses and consumers remain cautious and are paying down debt, Cullen/Frost continues to add new relationships and build for the future.  We are also maintaining discipline in expense control, even as  we continue to invest in our company."

The new Frost Technology Center, which is now fully operational, will meet the company's technology infrastructure expansion needs for the foreseeable future.  This quarter, the organization moved an older financial center in Fort Worth to a newer facility, and the relocation of one of the  Dallas locations should be complete by year-end. The company is also in the midst of a program to renovate a number of older financial centers throughout the state to better serve customers and reflect the Frost brand.

"We continue to believe Texas is positioned to do well coming out of this recession and that the U.S. economy is starting to level off, which is encouraging," said Evans. "Even with improved economic conditions, charge-offs and the provision for loan losses remain at elevated levels. Our credit quality levels continue to be manageable.

"The Texas markets Frost serves are among the strongest in the nation, and the state's economy continues to outpace the U.S. by about one percent in job growth. Cullen/Frost has strong capital and money to lend, and we continue to focus on building and expanding relationships."

"With the two-year anniversary of Cullen/Frost's turning down TARP bailout funds approaching in a few days, we believe that decision was  among the best in our company's 142-year history," Evans continued. "Declining the bailout funds freed the organization to focus our attention unabated  on building our business.  Cullen/Frost has continued to pay dividends throughout the financial crisis, even increasing our dividend each year for the last 16 years."

"At Cullen/Frost, it is the human capital as much as the financial capital that makes this possible. Our employees have done an incredible job of helping us take advantage of the opportunities this recession has presented, and I appreciate their ongoing efforts to help our company grow," Evans said.

For the first nine months of 2010, earnings were $155.7 million, up 22.1 percent,  compared to $127.5 million reported for the same period of 2009. On a per-share basis, earnings for the year to date were $2.57 per diluted common share, compared to $2.14 per diluted common share for the same period in 2009. Returns on average assets and equity for the first nine months of 2010 were 1.23 percent and 10.42 percent respectively, compared to 1.10 percent and 9.45 percent for the same period a year earlier.

Noted financial data for the third quarter of 2010 follows.

• Tier 1 and Total Risk-Based Capital Ratios for the Corporation at the end of the third quarter of 2010 were 13.38 percent and 15.46 percent, respectively and are in excess of well capitalized levels.  The tangible common equity ratio was 9.15 percent at the end of the third quarter of 2010 compared to 8.70 percent for the same quarter last year.  
• Net-interest income on a taxable equivalent basis for the third quarter of 2010 totaled $155.7 million, an increase of 7.4 percent compared to $144.9 million for the same period a year ago. This increase primarily resulted from an increase in the average volume of earning assets  as we are now seeing the benefits of deploying some of our liquidity into quality investments late in the second half of 2009. The net interest margin was 4.04 percent for the third quarter of 2010, compared to 4.12 percent for the third quarter of 2009, and 4.18 percent for the second quarter of 2010. The margin has been pressured in this near zero rate environment although that pressure has been mitigated somewhat by the benefits of quality municipal bond investments made since the last half of 2009.
• Non-interest income for the third quarter of 2010 totaled $70.4 million, compared to $69.5 million reported for the third quarter of 2009.

Trust fee income was $17.0 million, compared to $16.8 million a year earlier. Most of this increase was related to increases in oil and gas trust management fees and securities lending income.  Investment fees, which represent approximately 74 percent of total trust fees,  were flat compared to the same quarter a year ago.

Service charges on deposit accounts were $25.0 million, down $1.4 million compared to $26.4 million for the third quarter of 2009. This reduction resulted from a $988 thousand decrease in overdraft/insufficient funds charges on consumer accounts, which was impacted by new overdraft regulations, and a $957 thousand decrease in service charges on commercial accounts. These decreases were partly offset by a $613 thousand increase in point-of-sale income from PIN-based debit card transactions.  

Other charges, commissions and fees were $7.7 million for the third quarter of 2010, up $863 thousand from last year's third quarter of $6.8 million, due primarily to commission income related to the sale of annuities (up $287 thousand) and mutual fund management fees (up $246 thousand). Other non-interest income increased $1.1 million  from the third quarter last year due primarily to increases in revenues from Visa checkcard usage (up $671 thousand) and mineral interest income (up $231 thousand).

• Non-interest expense was $132.6 million for the quarter, up $318 thousand, or flat with the $132.2 million reported a year earlier.  Total salaries rose $1.2 million, or 2.0 percent, to $59.7 million, and were impacted by an increase in incentive compensation expense and stock-based compensation expense and were partially offset by lower staff levels.  Employee benefits were down $747 thousand, or 5.6  percent, primarily related to decreases in expenses from the Corporation's retirement plan (down $862 thousand). Net occupancy expense was $12.2 million, an increase of $1.1 million, or 9.8 percent, from the third quarter last year due mainly to increases in expense for the new technology center, in building depreciation, service contracts expense and building maintenance. Furniture and equipment was $12.2 million, which was up $1.0 million, or 9.3 percent from the same quarter last year. This increase occurred due to increases in software amortization expense and equipment rental, also related to the technology center.  Other expenses declined $1.9 million, or 6.1 percent, from the third quarter last year. The most significant components of this decrease were the losses from sale/write down of foreclosed assets (down $1.1 million) and armored motor services expense (down $599 thousand).
• For the third quarter of 2010, the provision for possible loan losses was $10.1 million, compared to net charge-offs of $9.4 million.  For the third quarter of 2009, the provision for possible loan losses was $16.9 million, compared to net charge-offs of $16.3 million.  The allowance for possible loan losses as a percentage of total loans was 1.57 percent at September 30, 2010, compared to 1.45 percent at the end of the third quarter last year and 1.56 percent at the end of the second quarter of 2010.  

Cullen/Frost Bankers, Inc. will host a conference call on Wednesday, October 27, 2010, 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, October 31, 2010 at 800-642-1687 with Conference ID # of 18344509. 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, 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 $17.7 billion at September 30, 2010.  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 110 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 banking organization 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.

SOURCE Cullen/Frost Bankers, Inc.