Good morning. My name is Kimberly and I will be your conference operator today. At this time, I would like to welcome everyone to the Cullen/Frost Bank yearend and fourth quarter Earnings Call. (Operator Instructions) Thank you. Mr. Greg Parker, Executive Vice President and Director of Investor Relations, you may begin your conference.

Thank you. This morning's conference call will be led by Dick Evans, Chairman and CEO and Phil Green, Group Executive Vice President and CFO. Before I turn the call over to Dick and Phil, I need to take a moment to address the Safe Harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the Safe Harbor Provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of the text and this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available at our website or by calling the Investor Relations department at 210-220-5632. At this time, I will turn the call over to Dick.

Good morning and thank you for joining our call. I am pleased to provide you with a brief overview of the results we reported today for the fourth quarter 2008, and the full year. As always, Phil Green, our CFO, will follow with more detail after, when we will be happy to answer any questions. Our results are strong. The numbers are good. They speak for themselves. And frankly, I am happy to let the numbers do the talking. But I will say this, in a year in which the economy in general, and the financial sector in particular set so many records for wrong reasons; it feels good to be on the right side of the record book. And that's the kind of quarter and year that we enjoyed at Cullen/Frost. Before diving into the numbers, I want to talk about why we are positioned, especially when there is so much pain throughout the industry and the economy. A big factor is that a few years ago, we launched a comprehensive program to examine our business from every angle, to understand where we want to take the company and how we get there. As a result, we are now very disciplined in our ability to target, pursue and win the right kind of customer, one who fits Cullen/Frost approach and culture. This customer relationship program has been a great success. For Cullen/Frost, a new banking relationship means we have the customer’s primary operating account. It takes months of hard work to secure a new customer relationship and a good deal of hard work after to produce new financial product pipelines, and that's exactly what we have done. Plenty of basic blocking and tackling. When you hear some of the companies talk about getting back to basics in response to…

Thank you, Dick. Just a few more comments and then we will open it up for questions. First, let me say regarding our earnings outlook for the year, while the range of analyst estimates is certainly broad, we feel that the current consensus earnings estimate for 2009 is reasonable. Regarding some of the factors that impact our outlook for the year, there are obviously some good and some more challenging. On the challenging side, I point out that we expect the cost we pay for FDIC premiums to increase dramatically, from about $4 million dollars in 2008, to $15 million in 2009, an increase of $0.12 a share. That's not something we knew much about; it's a reflection of the times and is an increase cost the industries have to bear. Another cost we will see increased sharply is in the pensions. In 2008, we actually saw a slightly negative pension cost $269,000 as earnings on planned assets generated sufficient returns to offset costs. With the historic drop in the market in 2008, that’s affected virtually all investors. It will impact pension expense in 2009 by $6 million, or $0.06 a share, even though our plan was frozen several years ago. So, to recap these two items that reflect the general impact of the current financial crisis combined for a cost of $0.18 per share on 2009's outlook. I want to note a few other items that might be categories challenges, before I point out some positives. First, regarding margin, the drop in margin during the fourth quarter was actually not as bad as it appeared because the 11 basis points of the 14 basis point drop occurred, because we expanded the balance sheet during the quarter $320 million by purchasing Fed funds directly from our downstream correspondence instead of…

Thank you, Phil. We will be happy to entertain your questions.

(Operator Instructions) Your first question comes from John Pancari from JPMorgan.

Can you give a little more detail on your delinquencies? I believe you indicated the past dues in totals, but obviously just wondering are they for all past dues from 30 days up, or do you have the breakout for the 30 days versus the 90 plus?

To answer the first part of your question, it is 30 days up and I’m reaching for the 90 days. You will recall, did you understand, at year end it's typical that sometimes you get a little jump, and that was $20 million. The other $20 million was related primarily to an account that we removed, and two potential problems, and it's that $15 million that I talked about. If you look at the numbers, 90 days, and over it was $19 million of the $121 million.

Okay.

Does that answer your question?

That does. Okay. And then Dick, can you give--

Just for clarification you probably have this, that's up about $5 million from where it was last quarter the over 90 days, over last year, I'm sorry. Last year.

Okay. And can you give me the numbers again for the potential problem loans?

The potential problem loans were $50.8 million, up from $42.4 million. I will point out to you that increase is two borrowers. Interesting enough, the one is a pizza franchise, which is quite frankly at the right part of the business in an economic slowdown. This happens to be a one price or you can eat type of franchise. They have been working most of the year on a sale. The sale fell through because of the capital markets. Which quite frankly is kind of a theme that you will see going through a lot of what’s happening. The good news is, is cash flowing. I wish it wasn’t quite as tight, but it is cash flowing positive. So, that's $19 million of the increase. And then there is a collection agency that also was selling its portfolio that fell through and that's a $11 million of the increase. I'm talking about potential problems.

Okay. And the past dues, you identified a large credit there. What was that one? What industry?

It was the Pizza math. Yes, the Pizza company that I was just talking about.

Okay.

And what we were doing over yearend and because the sale fell through, we working into it, it got past due in the 30 day range, now it's renewed and in potential problems.

Okay, all right. And then, can you just comment quickly on your snicks portfolio credit trends there?

They are up and they continue to have the same characteristic of 60% of energy related and it is nothing is over 10% in that regard. It was primarily up because of two credits, and one was in the spirits business, and the other one is a manufacturer of coolers and freezers, which is the number one brand, I’d say, in that market. So, they were up about $40 million, they were up from $930 million of $502 million to $534 million.

I will just also add that, if you look at the categories by industry, the energy component was up by about $30 million, which would be the largest single increase, and then we did have the beer, ale and spirits that Dick talked about also.

Is that outstanding balances, is that what you’re talking about? Or is that--

That's correct.

Okay.

That's outstanding balances. I’d say to you in the shared national credits, there is only one credit that is classified and it is an energy credit, interesting enough, it is not because of pricing, which I think is fortunate. It is a company, it's a $19 million credit. It's a company that spent most of ‘08 working on a sale of the company, which fell through, and we are getting some new reserve studies to see exactly where we sit. We have $19 million of the $240 million credit. I might just, while we are on energy, because we certainly I think if you look at the three categories going forward that we really focus on, obviously one to four family houses. That's been increasing, interestingly enough, out of the non-performer increase of $29.8 million, $22.8 million were really in two credits and it was dominated by a home building industry. We think, and it's always tough to call, we think maybe the increase of problems on home building has started to slow. When you and I first started talking, if you go back, I think it was in the third quarter of last year, we had commitments of $480 million, had $255 million outstanding. Today, we have commitments of $342 million and $207 million outstanding. $60 million of those are criticized; $5.5 million are foreclosed. The foreclosure is staying around the $4.5 million to $5.5 million dollars range. And if you look at the trend and criticize from last June, it's gone from $52 million to $59 million, to $60 million. And I’m particularly getting some comfort from September to the end of the year, still hanging around the $60 million range. Secondly, I think in this volatile energy market, we have spent a great deal of time analyzing…

I appreciate you writing the book and you answered my other two questions. So, thank you.

You're welcome.

Your next question is from Terry McEvoy from Oppenheimer.

Good morning.

Good morning.

Thanks for the response to John's questions. Most of my questions have been answered. Still what '09 consensus estimate are you looking at? The numbers are all over the place, as you pointed out. But I just want to make sure, given that wide range, that I'm on the same page with your comments.

The one I saw was, I think is around 342.

Okay. That’s about it. And then just a last question, you seem very optimistic about charge-offs remaining consistent in '09, with where they were in the fourth quarter in 2008. But then on the other side, you do appear somewhat cautious about the outlook for the economy and the impact to some of your borrowers, and we did see that increase in NPAs and delinquencies. So, what gives you the conviction that charge-offs are going to be flat? And then could you talk about the reserve building process that you mentioned. Do you think we will see a similar amount in '09 versus 2008, in terms of the dollar amount?

Let me just make a couple of quick comments and clarify and then I'll let Dick make some comment. I don’t think I specifically said charge-offs would be flat. I said, I don't think they increased significantly. I think we're running charge-offs about 24 basis points in 2008. We expect around 29 basis points, so, 29, 30 basis points. So, that's not a huge increase in terms of dollar amounts. But we expect to be building a reserve, and just because we are going in to a climate that's slowing, and so we would look to increase our reserve for loan losses. We are right now expecting to provide, say $20 million in excessive charge-offs. But that's going to depend on what classifications, doing a lot of things. This is just an early outlook for the year. But that’s the thing we are looking at, is building the reserve up and it really just gives us the ability to meet any portfolio deterioration that we see. Now we feel good about that level of providing. So, again, that’s where we see things at this time. But I’ll turn it over, to see if Dick has any comments on that.

Phil has given you a good summary. You asked a good question, because we recognize both sides of the equation. It's really consistent. We looked at the amount of increases. We've looked and analyzed the risk so far that we see. When I say so far, with everything we know today, we have analyzed all of it. And we can say to you that while we know classified are increasing, non-performers have increased, potential problems have increased in that regard. We are comfortable with that level of charge-off taken out the hurricane last quarter in the third quarter. They got somewhere consistent to that, and when Phil said if you look at this company, the 24 basis points, if you look back over a number of years, it's about where it runs. And if we ease up to 29 basis points, which we're reserving for, I will tell you this time next year I’ll be proud of that in the economic situation that we have.

That's helpful. Thank you.

(Operator Instructions)

I think we have one more question, we’re holding for it.

Your next question comes from Jon Arfstrom of RBC Capital Markets.

Good morning.

Good morning, Jon.

Dick, you made one comment in your prepared comments about how San Antonio and Fort Worth probably faired better in economic slowdown. Is that just simple as the job mix that you talked about or there is something else behind that comment?

No, there really isn't. Let me kind of go back to the other two things I said. You'll see Austin, Austin is really doing well, and doing well right now, but it will swing more because it's got the high tech. And you've seen the results of the tech companies the last couple of weeks and so you can see that thing swing at broader positions. Dallas, despite what happened in the '80s, is still the financial center to a large part of Texas, and has a lot of insurance companies, a lot of real estate, and it's also got the telecom in those markets. So, you'll see those swings more and, historically, San Antonio stays pretty much just about where the state average is. You know Toyota, we are glad to have the new Toyota plant here, which, I don't know, 10 years to 20 years from now we'll probably have more of a manufacturing swing. Fort Worth has a little more manufacturing than San Antonio market, but no, there is really not anything in addition to that. I also look I've reported to you for over two years the loss pipeline, and interestingly enough, we lost, when I say lost, pipeline these are loans that we declined because of pricing restructure, and last year it was a $1.2 billion and still pretty strong number. We had that growth and yet we declined $1.2 billion, it ran about 50-50 structure pricing. I looked at the numbers a little surprised that in '07 it was $1.150 billion. As we went through the year of '08, it started off in the first quarter. It was 50-50, pricing restructure, same in the second quarter, it also started to slow, which won't be any surprise because the loan volume slowed, as I reported to you new prospects. And at the end, the fourth quarter were 60% that we declined before, because of structure in 39 pricing. So, that gives me some comfort that we stay in with our discipline of good structure in the company. And at the same time, because of the discipline in the sales that I talked somewhat length about, is as we wind our way through this slowing economy, this can be a great opportunity for a company to grow its business. It just has to be sure it gets the golden nuggets and don’t pick up any trash along the way. And that's exactly what we are doing.

Two other questions. Either you or Phil had referred to maybe a bit of flight to quality on the deposit front. And you've seen some disruption in the brokerage business and I'm curious what you feel the pipeline looks like in your trust business, have you seen more people come to Cullen/Frost because of maybe some dissatisfaction with their other relationships?

I think that our expectations for the coming year, we will get half our growth in the investment side of things, from the market, half the growth from new business. That's traditionally what we look at. And I think we have been pretty successful with that. I think our success has just been steady from what I hear. I have not heard of any particular dislocations on the investment side of things. But I’m familiar that what they have been doing there, it is steady and it's been successful.

I think one of the other strengths, when you say Phil, has been our fixed income, which has performed well in combination with what we have done in equities. I have talked to you about what’s happening in the equity market and certainly, we had our challenges. I'm proud of the work our people have done, but they’ve done a great job on the fixed income side.

They have and we do a great job in the oil and gas side of the business, too, really had good growth in that this year. Although as you would expect, since a lot of the fees are based upon royalties to an extent bonuses from leasing activity, we will be in a challenging market coming into next year with that. They’ve done a good job as well.

I want to just going back to the previous discussion as far as growing loans, one of the reasons our loan growth, you who lived with us for a long time, remember all of ‘07, we had a lot of discussion about, why we weren't able to grow as fast as others could. One of the factors, I think part of it was our, I think a big part was our discipline, as far as structure that I’ve already said. But another thing is the advanced rate on commitments, the funding rate. And we went through ‘06 at about 47%, if you look at that. If you look at ‘07, it just dropped, in fact it got as low as right at 41%, and this year, or last year in ‘08, it moved up all year long back up to the 47%. So, you see that affect on loan growth, and I think you need to keep that in mind as you go forward.

Okay. Just a last question. Could you comment on your attitude towards acquisitions in ‘09? Obviously, the market has changed quite a bit. And I'm curious what your thoughts are.

First of all, don't forget we are a company that is interested in acquisitions. Number one, because of culture and quality of the organization and the highest customer service, so that separates a lot out of it to begin with. And secondly, I would say to you that any acquisition that we considered, I believe this is an environment that I cannot imagine how long the due diligence would be.

That makes sense. Thank you.

Your next question comes from Jennifer Demba of SunTrust.

Hi, Jennifer.

Thank you, good morning.

Good morning.

Of your $78 million in non-performers, can you give us a sense of what some of the largest ones are in size?

Hold on just a minute. The largest one we added was $11 million, and then nearly everything else is in the $2 million to $3 million range. And sure you've got, as I've already said, you've got homebuilders and a little bit of land in there. You got one $2.5 million loan that is related to Ike that we talked about. You've got about $7 million insurance company that's in those numbers. And other than that, that's pretty much where it is. So, I would say homebuilding pretty much dominates it and we talked a lot about that. We gave the summary. And other than that, it's pretty much diversified. If you look at the problems homebuilding has, really the increases are what I call management issues, even though oil and gas line was a management issue, and weak management always starts to appear faster in a recession than it does in good times.

Dick, you mentioned earlier that your Ike problem loans were perhaps lower than you originally projected.

As I told you, when we put the $10 million we had no idea. The storm was a lot worse than anybody realized, because everybody in the world was focused on the financial storm and not the other, but we are still looking. Those things take a while to find out. It's interesting, just $2.5 million loan I mentioned to you. It was kind of a weak sister before the storm, and it just kind of finished them off, from the standpoint of just really creating a problem out of it. When I say that, don't come to the conclusion. I'm talking about a loss and we are just working with it. It was just more than they could take.

So, at this point it looks like maybe you will have overprovided for Ike and you can kind of shift some of that into general economic deterioration. Is that a fair way to look at it?

Yes, really what happens is, the longer you go, it takes longer to find out how much it is. There is no question. We have fewer extensions than we expected, we have fewer delinquencies, the insurance checks are still coming in. The clean up has really been amazing. If you flew into Galveston right after the storm, or when I did and reported last quarter, there were just mountains of trash and today they are gone. And we're still looking at what's happening. You could probably say that we are about $7 million related to Ike versus the $10 million and, as I just pointed out, all the factors are still going on, but there is no doubt that longer you go, you learn more about that and the eggs start to get scrambled along with everything else that's going on in the economy.

Okay. Thank you very much.

There are no further questions at this time.

Thank you for your continued support in our company. We appreciate your good questions. This completes our call.

Thank you for participating in today's conference. You may now disconnect.