Three Centuries of Business in

1999 Annual Report

A Texas Financial Services Family Table of Contents

1 Financial Highlights 2 Letter to Shareholders 4 Three Centuries of Business in Texas 16 Corporate Officers and Directors 21 Appendix: Form 10-K

Cullen/Frost Bankers, Inc. is a multi- holding company, headquartered in , with assets of $7 billion at December 31, 1999. Through its member – Frost Bank and National Bank – the corporation has 80 financial centers across Texas in Austin, Boerne, Corpus Christi, , Fort Worth, Galveston, , McAllen, New Braunfels, San Antonio and San Marcos. The corporation and its subsidiaries provide a full range of retail and commercial banking products, investment and brokerage services, insurance products and investment banking services.

The annual meeting of shareholders is scheduled for May 31, 2000, at 10 a.m. in the Commanders Room of Frost National Bank, 100 West Houston Street, San Antonio, Texas. 1999 Annual Report 1

Financial Highlights (In thousands, except per share amounts)

FOR THE YEAR 1999 1998

Net Income ...... $ 97,642 $ 75,645 Earnings Per Diluted Common Share ...... 1.78 1.38 Return on Average Assets ...... 1.42% 1.18% Return on Average Equity ...... 18.68 15.44 Shareholders’ Equity (at year end) ...... $9.64$9.60 Dividends - CFR ...... 675 .575

Operating Earnings ...... $ 97,642 $ 85,156* Operating Earnings Per Diluted Common Share ...... 1.78 1.56 Operating Return on Average Assets ...... 1.42% 1.33% Operating Return on Average Equity ...... 18.68 17.38 *Excludes the after-tax impact of the $12.2 million charge associated with the merger of Overton Bancshares, Inc. completed in the second quarter of 1998.

Cash Operating Earnings** ...... $ 109,208 $ 95,207 Cash Operating Earnings Per Diluted Common Share . . 1.99 1.74 Cash Operating Return on Average Assets ...... 1.59% 1.48% Cash Operating Return on Average Equity ...... 20.89 19.43 **Operating earnings before intangible amortization (including goodwill and core deposit intangibles, net of tax)

AT YEAR END Loans ...... $4,166,728 $3,646,603 Securities ...... 1,629,911 2,091,703 Deposits ...... 5,953,832 5,845,487 Shareholders’ Equity ...... 509,311 512,919 Total Assets ...... 6,996,680 6,869,605 Highlights 2 1999 Annual Report 1999 Annual Report 3

To Our Shareholders, The end of 1999 marked more than the close of the 20th century. It marked the end of a decade of significant We focus on profitable revenue growth. We are in great markets, have an excellent staff, and we practice relation- transition for our company. During this period we dealt with more than just the monumental forces of change generally ship banking in a way Texans appreciate. We want to take advantage of this powerful combination in order to grow our impacting our industry. We also had to successfully transform ourselves. We had to move from a company which, early business effectively. As evidence of our success, since their low point of this decade in 1992, our average deposits had in the decade, was still suffering the ill effects of battling the devastated Texas economy of the 1980s to a company almost doubled and our average loans had more than tripled by 1999. Most of this growth occurred without the benefit focused on growth and above-average profitability. I am pleased to report we’ve been able to accomplish this. of acquisitions. Also, our important Trust business almost tripled its level of fee income during the decade. As we end the final year of this decade, we now find ourselves at a level of profitability in the top third of the banks We are fanatical about credit quality. We don’t believe you can have survived the 80s in Texas banking and not be in our peer group. Our 1999 earnings hit an all time high at $1.78 per diluted common share, increasing 14 percent from fanatical about credit quality. 1998 operating earnings. Our return on assets of 1.42 percent and our return on equity of 18.68 percent also represent In 1999 we built on these strengths. We continued to see an inflow of talented, experienced Texas bankers, and we historic highs from previous operating levels. invested $61 million to acquire Keller State Bank and The Bank of Commerce, both in the high-growth Fort Worth I want to share with you what I believe are key elements of our improving performance over this period. These market. We also committed to four new financial centers in other markets we serve around the state. Our total revenues elements helped us achieve the record 1999 performance noted above, and our commitment to them gives me reason increased 12 percent, aided by a 13 percent increase in non-interest income and strong loan growth. for optimism for the years ahead. During the year we made two additional strategic investments. We acquired a respected Texas insurance agency, We are focused on Texas. Since its recovery in the 90s, the Texas economy has consistently out-performed the Professional Insurance Agents, Inc. (PIA) in May, and we opened the doors of our start-up investment banking subsidiary, nation and other major states such as Florida and California. Texas has dramatically reduced its reliance on the oil and Frost Securities Inc., in August. Both businesses are intended to deepen our relationships with our current customers gas industry and has diversified to take advantage of other opportunities, such as high technology. Fortune Magazine while also taking advantage of opportunities to create new customers throughout the state. The recently passed reports, for example, that today nearly a quarter of the world’s personal computers are produced in Texas. You don’t have Financial Services Modernization Act will benefit both of these efforts through the elimination of previous restrictions to be around our company very long to notice that we are very proud of our 132-year-old Texas heritage. We know Texas that limited the efficiency of delivering these services by banks. and we sell it hard. In 1999 we also laid the groundwork for a significant enhancement of our Internet banking capabilities, which will We have great people. We focus on creating a culture that values integrity, caring, and excellence. We value the begin early in 2000. This project represents another meaningful investment in technology that we believe is necessary relationships we have with each other and with our customers, and we work hard at pushing decision-making in order to remain competitive, as the Internet becomes even more pervasive in our lives. authority down close to those customers because we believe that gives them the best service available. Financial We move into the 21st century as a 132-year-old financial institution. While many people rightly take comfort in Services is a people business, and we have found that excellent people are drawn to an organization that thinks this way. the stability and credibility this demonstrates, others may worry if an organization this old can make the changes They are drawn individually, as we continually add experienced bankers from larger institutions in the state, and they necessary to compete in the years ahead. I firmly believe we can. We are combining the best of both the old and the new are drawn corporately, as we continue to be the acquirer of choice in Texas. Bankers from companies we have acquired to forge an even stronger financial institution for the future. continue to play key roles at all levels in our growing company. As always, thank you for your continued support. We have not hesitated to make investments to improve our company. This includes investments during the decade of over $500 million in acquisitions to expand our geographic footprint to all the major growth markets in the state. Sincerely, Today, 56 percent of our deposits are outside San Antonio, compared to only 35 percent at the beginning of the decade. We have also made investments in keeping up with technology. For example, we have invested over $4 million in a four-year development of a data warehousing system that provides us the information to run our business and serve our Dick Evans customers even better. Chairman and Chief Executive Officer To Our Sh areholders 4 1999 Annual Report

Three CENTURIES of Business in Texas

With the new millennium, Cullen/Frost embarks building and sustaining customer relationships.

on its third century of business in Texas. The Fundamental to the company’s success — today as

organization enters the 2000s determined to use the it was at the start — is a belief that the key to

strengths of its heritage and growing revenue and maintaining

the technology of today to shape profitability lies in providing

its future. value to customers.

From its beginnings as a small Using Technology to Strengthen Customer mercantile business founded in Relationships 1868 by Col. T.C. Frost, the com- As technological advances

pany has evolved into a $7 billion transform the way the business

regional banking organization, world operates, Frost is finding

publicly traded on the New York new ways to apply this technolo-

Stock Exchange and regarded as gy to reinforce its core business

the most respected brand in Texas philosophy and take care of its

banking. Frost today provides its customers. Through the strategic

customers with a broad range of management of information, the The values and business philosophy banking, investment, insurance established by founder Colonel T.C. bank can identify needs, offer Frost continue to guide Cullen/Frost and other financial services, and 132 years later. solutions to problems and deliver delivers them through faster, more outstanding service, which Frost

targeted and increasingly convenient systems. customers have come to expect.

What has remained unchanged in 132 years is the Developing a relationship-based sales approach

Colonel’s basic philosophy about the importance of has necessitated a change in both programs and

1868 1871 Colonel Frost opens for business in San Antonio. P.T. Barnum’s Greatest Show On Earth opens.

1870s

1865 1870 1876 The U.S. Civil War ends. Texas is admitted into the Union.✯ Alexander Graham Bell invents the telephone. Frost Bank customer Linda Snyder pays her bills from the comfort of her home, whenever it’s convenient. With Frost Direct Internet Banking, processes, and Frost has approached these changes with Linda can pay bills, view statements and account registers, transfer funds between accounts, see enthusiasm. In 1999 the bank began a strategic pro- images of cleared checks and automatically reconcile accounts, while Kevin looks on. gram to stay in regular contact with its key customers, using the right people and the latest technology to strengthen and deepen those relationships. Through in both old and new ways. A university professor this program, Frost officers can make sure customers in Austin has embraced the Internet and now does are maximizing their opportunities. all her banking online. An attorney in Fort Worth

As industry consolidation creates financial giants wants the personal contact of a relationship officer. A and changes the paradigm of banking, Frost is finding business owner in Houston handles transactions that its customers want to interact with the bank through the motor bank and ATM. And a retired

1881 1886 1891 1895 Clara Barton founds Statue of Liberty is dedicated James Naismith invents First movie shown the Red Cross. in . the game of basketball. in a U.S. theater. 1880s 1890s

1883 1887 1892 1899 Frost installs its first • Thomas Edison invents Ellis Island opens as the Frost National Bank telephone system. the record player. U.S. population surges due receives national charter • Frost Bank runs its first to immigration. with deposits totalling advertisement in a newspaper. over $1 million. 6 1999 Annual Report

teacher in Corpus Christi enjoys occasional visits institutions operate, shattering the barriers of Glass-

with the lobby tellers. They are able to access Frost in Steagall, which had restricted banks, insurance

whatever way is most convenient for them. companies and securities firms from combining

While the bank has maintained the access to operations for more than 60 years. As many banks

personal contact so many customers want, it has determine how best to leverage the opportunities the

also cultivated a flexibility to change in a rapidly new Gramm-Leach-Bliley Act affords, Frost is well

evolving environment to remain competitive. positioned to move forward, as the result of strategic

Internet Banking was introduced in 1999, and is a actions taken before the passage of the new act.

growing focus for the bank in 2000. Frost has initiat- In May, Frost finalized the acquisition of

ed an Internet Solutions Project that will facilitate its Professional Insurance Agents, Inc. (PIA), a highly

ability to offer key products and services through its respected mid-sized insurance agency based in Victoria,

website. In addition to a new website design, which Texas, with operations in Central Texas. The agency, will simplify access and links, Frost is launching which now operates as a division of Frost Insurance Internet-based treasury management services and Agency, Inc. was founded in 1971 with an operating offering core banking services online. Access to philosophy parallel to Frost’s. PIA operates through the brokerage and trust accounts will follow. bank’s Financial Management Group. E-commerce opportunities are expected to With the passage of financial services reform, Frost flourish well into the new century, and Frost is taking customers will have access to PIA’s full complement proactive steps to propel the company forward and of insurance services, including life, health, accident, seize those opportunities. This new focus on products property and casualty, commercial and long-term care. and services delivered through the Internet will only As Frost expands insurance services statewide and enhance the bank’s connections with its customers. broadens the financial services it provides to cus- As a business tool, the Internet offers Frost the tomers, the smooth transition experienced with PIA potential to enhance both responsiveness and will be a model for other insurance acquisitions in the customer service. For Frost, this whole new arena for future. In February of 2000, Frost Insurance Agency communication represents not change, but progress. announced a letter of intent to purchase Wayland

Diversifying as the Financial Paradigm Changes Hancock, a Houston-based agency that will expand

The Financial Services Modernization Act of access to insurance services for Frost customers in this

1999 will dramatically change the way financial important market.

1903 • The Wright brothers record the 1906 1908 first airborne flight in history. Major earthquake shakes Henry Ford develops the first • The first World Series is played. San Francisco. automobile, the Model T. 1900s

1901 1904 1907 1909 • Walt Disney is born. • Comic book is invented. Record 1.29 million immigrants John D. Rockefeller • Oil is discovered in South Texas. • Telephone answering machine enter United States. becomes world’s is invented. first billionaire. Frost Private Banker Rick Guerra talks with a customer in Corpus Christi. By utilizing Frost’s advanced information management technology and a relationship-based sales approach, Rick services. With this new division, Frost can help its is able to serve as a financial advisor and help customers maximize their financial opportunities. Texas customers access equity markets through an

investment banking company based in Texas.

Another strategic initiative this year has been the In its trading and equity research division, Frost launch of Frost Securities, Inc. as a subsidiary of Securities focuses on the energy and technology

Cullen/Frost. The new investment banking firm, based sectors, with an emphasis on the key companies and in Dallas, offers a full range of corporate finance, industries of the Southwest. In the energy sector, equity research and institutional trading and research focuses on companies engaged in oil field brokerage services for corporate and institutional service and equipment as well as exploration and clients. The concept for a Texas-based investment production. Frost Securities’ technology analysts tar- banking firm grew out of consolidations in this get businesses involved in communications including industry and customer demand for investment banking Internet infrastructure and services, communication-

1910 Frost National Bank hires 1913 its first female employee as a Knute Rockne transforms football telephone switchboard operator. with the forward pass. 1910s

1912 1914 1919 • Jim Thorpe wins Pentathlon and • WWI begins in Europe. Currency bearing Frost Bank’s name is Decathlon at the Olympics. • The Panama Canal opens. issued by the Treasury Department. • Universal Pictures is founded. Buzz Miller of Allen & Allen Lumber gets an update on the performance of the firm’s 401(k) offerings from Judy Gilby and Gwen Dominic of semiconductors, software-based Internet technologies Frost Retirement Services. Thanks to Frost, Allen & Allen employees can plan for their retirement. and network access equipment, Internet-connected

devices and next-wave communications.

The corporate finance team provides assistance As the financial services industry continues to

in a broad range of investment banking services, evolve, Frost anticipates being able to leverage the

including public offerings, private placements, strengths of both the investment banking and insur-

merger and acquisition advisory, sale engagements, ance subsidiaries to broaden and deepen the bank’s

leveraged buyouts and takeover defenses. With the customer base throughout the state. state’s strong economy, Frost Securities anticipates a Financial Management Services number of corporate finance opportunities for Continue to Expand

companies that want to work with a Texas-based The Frost Financial Management Group complet-

investment banking firm. ed another year of positive growth, continuing a trend

1927 1920 • Television demonstrated for first time. • U.S. population over 100 million. 1926 • Charles Lindbergh completes first • First Miss America pageant held. A. A. Milne writes children’s non-stop trans-Atlantic flight. • Prohibition goes into effect. classic, Winnie the Pooh. • Babe Ruth hits record 60 home runs. 1920s

1922 1924 1929 Frost’s new bank building The Federal Bureau of The Stock Market Crash opens for business. Investigation (F.B.I.) F.B.I.is created sends Wall Street into by the U.S. Government to confusion and the country combat crime. into the Great Depression. 1999 Annual Report 9

of strong financial performance. With a year-end for trusts or individually-managed assets for corporate increase in trust assets from $11.7 billion to $12.8 accounts. The Financial Management Group actively billion, this area continues to contribute significant manages portfolios, using long-term investment fee income to the bottom line. Managed assets disciplines for asset allocation and security selection. increased from $5.4 billion to $5.6 billion, with non-managed assets growing from $6.3 billion to $7.2 billion. In gross trust income,

Cullen/Frost ranks 45th among all U.S. banks.

The past decade has seen dramatic changes in the way

Americans manage, invest and save their money, with nearly half of all U.S. households owning equities, compared with just 28 percent ten years ago. In fact,

Americans have three-fourths of Frost Securities executives Rob Brown and Bill Barnard visit the trading floor in the Dallas offices. their liquid financial assets Cullen/Frost opened the Texas-based investment banking subsidiary in 1999 in Dallas, offering invested in securities products. Frost is well corporate finance, equity research and institutional positioned to take advantage of this trend through trading and brokerage services. Below, Managing Director Bob Nasi oversees coverage sales. its Financial Management Group, which includes traditional trust and estate planning services, as well as investment management, financial planning, brokerage and retirement plan services.

In addition to being able to invest on their own in mutual funds, stocks and bonds, investors can also have professionals manage their money for them, giving them access to Frost’s own commingled funds

1933 1930 • On March 6, President Roosevelt orders all • Unemployment in the banks closed. U.S. exceeds 4 million. • Federal Deposit Insurance Corporation, insuring 1934 • Over 1,300 banks fail. accounts up to $5,000 is created. Dust Bowl hits the U.S. 1930s

1932 1933 1938 More than 1,100 • March 14, all San Antonio banks are allowed to Congress passes the Fair Labor banks fail. resume business. Standards Act. A new 44-hour work-week goes into effect, with min. hourly wage set at 25 cents. 10 1999 Annual Report

The investment team includes 19 portfolio managers, access to trust accounts, as well as online trading for

four analysts and three traders, with a total of 354 brokerage accounts.

years of investment experience. Y2K Successes, Privacy Commitment

Focusing on an equity management style of Preparation for Year 2000 was a major focus in

Growth At a Reasonable Price, the Frost Financial 1999. Frost took a national leadership role in estab-

Management Group continues to provide strong invest- lishing programs to ensure customer confidence in

ment performance. That success was once again the banking industry’s readiness to handle the mil-

demonstrated by the flagship Frost fund, the Large Cap lennium date change. Frost, along with municipalities

Core Stock Fund, which outperformed the S&P 500 and utilities, spearheaded public forums in several

Index for the 12-month period ending December 31, Texas markets, to reassure citizens. As an active par-

1999, realizing a 22.68 percent increase vs. 21.04 per- ticipant on the President’s Council on Year 2000,

cent for the S&P 500. For the three years ending Community Conversations, Frost was profiled in a

December 31, 1999, this fund’s annualized performance national booklet sent to all neighborhood associations

was 28.14 percent vs. 27.57 percent for the S&P 500. across the U.S.

To offer customers a variety of investment strate- The transition to January 1, 2000 was smooth and

gies, Frost partners with select external investment uneventful because of the extensive advance prepara-

managers who specialize in different investment styles tions at all levels of the bank. Thus “business as

to sub-advise commingled funds, which are available usual” in the new millennium became not only a

only in Texas to Frost customers. In 1999 Frost added byword, but a reality.

INVESCO Global Asset Management to provide For more than 130 years, Frost Bank has recog-

expertise in international fund management. nized and respected the confidentiality of customer

As the Internet impacts the way business is con- information, refusing to sell customer lists or other

ducted, it is also increasing convenience, flexibility financial information. As financial services reform

and access to Financial Management Group products. moved the privacy issue to the national forefront, the

This year, through a link to the Frost Bank website, bank put into writing the policy that had been implic-

the retirement services area provided 401(k) plan par- it for many years.

ticipants online access to their retirement accounts. In the Customer Privacy Statement, customers

Also in development are several additional online were reassured of the bank’s commitment to observing

investment services, which will offer Internet-based both the letter and the spirit of the law surrounding

1944 1940 • Franklin D. Roosevelt is elected to • Disney’s Fantasia opens. his fourth term as President. 1947 • Frost Bank installs the • Allied troops storm the beaches at Jackie Robinson becomes the first Audichron time-of-day service. Normandy, France, on D-Day. black player in Major League Baseball. 1940s

1941 1945 1948 • Japan attacks Pearl Harbor, • WWII ends: The Allies celebrate victory • The transistor is invented. drawing the U.S. into WWII. over the Nazis on May 8th and Japan • Almost one million U.S. • Orson Welles’ Citizen Kane on August 14th. households now own premieres in movie houses. • Frost Bank deposits pass $100 million. a television. From the Austin Frost Financial Management Group, Jeanne Glorioso coaches investment and brokerage officers statewide to build their practice and develop opportunities. Jeanne reviews a presentation with Kristin Carrasquillo. Frost today provides its customers with a broad range of banking, investment, insurance and other financial

services, and delivers them through faster, more target- With the new millennium, Cullen/Frost embarks ed and increasingly convenient systems. on its third century of business in Texas. The What has remained unchanged in 132 years is the organization enters the 2000s determined to use the Colonel’s basic philosophy about the importance of strengths of its heritage and building and sustaining customer relationships. the technology of today to shape its future. Fundamental to the company’s success — today as From its beginnings as a small mercantile business it was at the start — is a belief that the key to founded in 1868 by Col. T.C. Frost, the company has growing revenue and maintaining profitability lies in evolved into a $7 billion regional banking organization, providing value to customers. publicly traded on the New York Stock Exchange and Using Technology to Strengthen Customer regarded as the most respected brand in Texas banking. Relationships

1955 • Ray Kroc buys hamburger franchise 1950 from the McDonald brothers. 1958 Charles Schultz debuts • Disneyland opens to the public. • NASA established. his comic strip, Peanuts. • Polio vaccine declared safe. • Bank credit cards debut. 1950s

1952 1957 1959 • American Bandstand premieres in • Dr. Seuss publishes The Cat in the Hat. • The microchip is invented. Philadelphia as Bob Horn’s Bandstand. • Frost Bank assets pass $200 million. • Alaska and Hawaii achieve • Ernest Hemingway publishes U.S. statehood. The Old Man and the Sea. On the growing San

Antonio/Austin I-35

corridor, San Marcos

and New Braunfels are

strong Frost markets, as

is Boerne just northwest

of San Antonio in the

Texas Hill Country.

Austin, the Texas

capital city, was named

Fortune Magazine’s Frost Bank subsidiary Frost Insurance Agency acquired Professional Insurance Agents, Inc. in “Best City for Business 1999 to broaden the financial services available in North America” in to customers. PIA executives John Brimberry and Katie Lenss talk about changes in the financial 1999. The Austin area is a dynamic and growing hub services industry. for technology and communication companies and

scores of other high-tech businesses. For the first

San Antonio, the nation’s eighth largest city, is time, durable manufacturing has surpassed state gov-

home to four Fortune 500 companies and has experi- ernment in the number of overall jobs. Job growth in

enced a 3.4 percent job growth in 1999. It’s also the Austin is among the strongest in the state, a vigorous

second fastest-growing big city in the U.S. From its 4.4 percent. Austin is the seventh fastest-growing area

earlier reliance on the military job sector, San in the U.S. Keeping pace with this growth, Frost plans

Antonio now has a broader economic base, including to expand the number of financial centers in 2000.

healthcare and biomedical, tourism and telecommu- While national media has focused on Austin as

nications. The service sector continues to dominate a major technology hub, the Dallas/Fort Worth

the city’s economy, and the redevelopment of Kelly Metroplex also has a significant high-tech focus. The

Air Force Base as a distribution and aerospace main- economy in the Metroplex has been especially strong

tenance center is under way. In its headquarters city, this year, with Texas’ largest job market showing a

Frost plans to open several new locations in 2000, 3.9 percent job growth in the financial sector,

including a prototype for future financial centers. construction, communications, as well as business

1960 1965 • John F. Kennedy becomes the • Total assets pass $300 million. youngest U.S. President ever elected. • Frost Motor Bank Family Banking 1966 • The Twist is the latest dance craze. Center opens for business. Star Trek debuts on TV. 1960s

1963 1969 IBM 1401 computer is installed • Neil Armstrong walks at Frost Bank to provide on the moon. electronic processing. • Sesame Street debuts. 1999 Annual Report 13

and personal service. The area is home to 16 Fortune strengthened its position in Tarrant County with the

500 companies, and Dallas is the base for the bank’s purchase of Keller State Bank and Bank of Commerce. new investment banking subsidiary, Frost Securities. The Keller acquisition enabled Frost to better serve

Following the successful acquisition of Overton Bank the commercial growth near Alliance Airport, while and Trust in Fort Worth in 1998, Frost further Bank of Commerce expanded the bank’s services in

other key areas and brought the total number of Frost

locations in the Metroplex to 20. Dr. Beverly Attaway and her business banker Tina Poindexter discuss ways the Houston dentist Houston, the fourth largest city in the U.S. and a can maximize cash flow. Frost developed the business banking program in Houston early in major port, is home to NASA and 15 Fortune 500 1999 and then expanded it to other markets later in the year.

1975 • Last Americans leave Vietnam. 1970 • Microsoft is founded by Bill 1979 First NYC Marathon is run. Gates and Paul Allen. Sony introduces the Walkman. 1970s

1972 1973 1977 Bobby Fisher takes Frost Bank Tower opens. • Frost Bank Corporation merges with Cullen World Chess Title. Bankers, Inc. to form Cullen/Frost Bankers, Inc. • Elvis Presley, Charlie Chaplin and Bing Crosby die. Market President Martin McDonald meets with Kevin Kilpatrick and Tim Kilpatrick of Pescor Plastics, Inc. to discuss production. The Fort Worth-based company is one of the world’s companies. Although the oil and gas industry sector is largest manufacturers of stadium cups. Frost still an important economic driver, Houston has been provided working capital and financed state-of- the-art injection molding equipment for the firm. able to create a broader and more diversified economy

since the 1980s, expanding in computers, electronics,

international trade, healthcare, manufacturing and

software development. Fueled by a strong business

climate, Houston has experienced a 2.8 percent job

growth in 1999, including many in the construction

and real estate industries. Frost relocated its medical

center location in 1999 and also added a financial

center in northwest Houston. The bank introduced

a Business Banking initiative in the Houston area,

1982 1987 The U.S. Government forces the 1983 1984 Cullen/Frost is the only major break-up of AT&T after deciding Frost acquires Northfield Olympic Games held in Los bank holding company in Texas that it was in fact a monopoly. Bank of Houston. Angeles boycotted by Soviet Bloc. to report a profit. 1980s

1981 1982 1986 1988 Interest rates surge • Cullen/Frost assets exceed $3 billion for first time. Texas legislature authorizes All Cullen/Frost San Antonio to historic highs. • Acquisition of Chase National Bank of Austin is announced. countywide branch banking banks are merged into • Acquisition of United States National Bank and and mergers with out-of-state Frost Bank. Sugar Land State Bank. bank holding companies. 1999 Annual Report 15

which became the model for a statewide Business International trade forms the backbone of the

Banking program. McAllen economy. A gateway to Mexico, the Rio

Nearby Galveston, with two United States Grande Valley is the third fastest-growing area of the

National Bank locations, has a strong healthcare U.S. Along with increases in international trade and

and education sector, anchored by the University the expansion of opportunity brought about through

of Texas Medical Branch. Other economic drivers NAFTA, McAllen has grown in manufacturing, ware-

are tourism, energy sector industries, transportation, house and distribution and medical services. With

communications, financial services and personal two locations in McAllen, Frost is positioned to ben-

business services. In February 2000, Cullen/Frost efit from growth in this area. announced that

it would merge

the charter of

United States

National Bank CHANGE into the Frost National Bank charter, fully integrating …and Value the two financial organizations and expanding the In a business world in which the only constant is services available to Galveston customers. change, the emphasis on value at Cullen/Frost Corpus Christi, the sixth largest port in ship ton- remains as important as ever. Frost has maintained its nage in the U.S., is also the eighth largest city in focus on providing an expanded range of financial Texas. While the petrochemical industry is a strong services and using new technology to take care of economic force, Corpus Christi also has significant customers. In every Texas market it serves, Frost tourism, healthcare and military sectors and a strong Bank is renewing Col. T.C. Frost’s philosophy of metal processing industry. Job growth has been strong creating long-term relationships that bring value to in services, durable manufacturing, wholesale and both customers and shareholders. government, with the Texas A&M campus in Corpus

Christi providing a job boost in the government

sector. Frost operates seven locations in the Coastal

Bend area and is ranked second largest among Corpus

Christi banks in deposits.

1993 1995 1997 1999 The North American Frost acquires: • Frost acquires Citizens Bank • Frost acquires Keller State Bank and Free Trade Agreement • Valley National Bank of McAllen of Corpus Christi. Bank of Commerce in Tarrant County. (NAFTA) is signed • National Commerce Bank of Houston • Cullen/Frost first listed • Frost opens insurance division, in San Antonio. • Comerica Bank of San Antonio on NYSE. acquires PIA. 1990s

1993 1994 1996 1998 1999 Cullen/Frost wins bid for First • Swap Cullen/Frost Dallas for Texas • Frost acquires State Bank Frost acquires: • Frost launches online City Bank of San Antonio Commerce Bank Corpus Christi. & Trust of San Marcos. • Harrisburg Bank of Houston banking service. and Austin, increasing assets • Frost acquires Creekwood Capitol of • Frost acquires Park • Overton Bank and Trust of • Frost Securities, Inc. by almost $500 million. Houston, now Frost Capitol Group. National Bank of Houston. Fort Worth and Dallas established. 16 1999 Annual Report

Directors

● R. Denny Alexander Cass Edwards, Jr. ■ Richard M. Kleberg, III Owner, R. Denny Alexander Managing Partner, Banking and Investments & Company Edwards Trust ▲ John C. Korbell ■ ● Isaac Arnold, Jr. ▲ ✚ Ruben M. Escobedo, C.P.A. Senior Vice President, SalomonSmithBarney; Oil, Real Estate, Investments Oil and Ranching Advisory Director ✱ ● ✚ ■ Dick Evans Royce S. Caldwell Chairman and Chief Executive Officer Robert S. McClane President, Southwestern Bell Operations, President, SBC Communications, Inc. ✱ ✚ Pat Frost McClane Partners, L.L.C. ■ Ruben R. Cardenas President, Frost Bank Ida Clement Steen Cardenas, Whitis & ✱ ● ✚ Tom Frost Investments Stephen, L.L.P. Senior Chairman Horace Wilkins, Jr. Henry E. Catto Joe R. Fulton President-Special Markets, Partner, Catto & Catto President, Fulton Construction Company SBC Communications, Inc. ✚ Bob W. Coleman ▲ ✚ James W. Gorman, Jr. ▲ ✚ Mary Beth Williamson Chairman and Chief Executive Officer Oil, Real Estate, Investments Education (Consultant) Texace Corporation ● ✚ James L. Hayne Stan McCormick Harry H. Cullen Managing Partner, Catto & Catto Senior Vice President, Oil, Real Estate, Investments Secretary to the Board Harris L. Kempner, Jr. ▲ Roy H. Cullen President, Kempner Capital Management Directors Emeriti Oil, Real Estate, Investments Company, Inc. Advisory Director W.N. Finnegan, III ■ Eugene H. Dawson, Sr. Herman Richter Chairman of the Board, Curtis Vaughan, Jr. Pape-Dawson Consulting Engineers

■ Audit Committee ▲ Compensation and Benefits Committee ✱ Executive Committee ● Strategic Planning Committee ✚ Loan/CRA Committee

Cullen/FrostP.O. Box 1600 • San Antonio, Texas 78296 • 210.220.4011 1999 Annual Report 17

Region/Market Presidents

AUSTIN Bob Huthnance Mike Clements Steve Boma President, Austin Region President, Medical Center & St. Lukes President, Hulen Tim Crowley Terry Crockett Randall Canedy President, North Austin President, Sugar Land & Kensington President, Mansfield Marvin Rickabaugh Mike Doherty Mark Jones President, Austin Downtown President, Post Oak President, Keller Beth Everts Martin McDonald BOERNE President, Greenbriar President, Ridglea Fred Stumberg President, Boerne Dan Guarino Greg Morse President, Woodway President, Downtown Arlington CORPUS CHRISTI Guy Hitt Steve Sims Mike Carrell President, Harrisburg President, Grapevine President, Corpus Christi Region Larry Jensen Doug Terry Lavonne Garrison President, Clear Lake President, Hurst President, Central Corpus Christi Linda Long Chuck Miller President, Pearland DALLAS COUNTY President, South Corpus Christi Jim Johnston Dave Martin President, Dallas County Region John Trice President, FM 1960 President, Padre Island Bob White Ed Michna President, Park Cities Sylvia Whitmore President, Bellaire President, North Corpus Christi Steve Wilson Jeff Smith President, Coppell President, Stafford GALVESTON F.A. Odom SAN ANTONIO President, United States National Bank MCALLEN Pat Frost Raymond Jenkins President, San Antonio Region President, McAllen HOUSTON Don Frost Robby Shelton President, President, Houston Region NEW BRAUNFELS Jim Davis Tom McDonnell Berry Allen President, New Braunfels President, North Central San Antonio President, Southeast Houston Linda Winston Scott Baxter TARRANT COUNTY President, Northwest San Antonio President, & Cullen Center Fort Worth Nathan Robinett SAN MARCOS John Black President, Tarrant County Region President, Memorial Clovis Barker Bill Adams Chairman, Hill Country Earle Bolks President, South Arlington President, Northwest Crossing Stewart Alcorn John Clarke President, Downtown Fort Worth President, Westchase Senior Officers

Tom Frost Paul Bracher Paul Olivier Senior Chairman Senior Executive Vice President Executive Vice President Dick Evans John Brimberry Bill Perotti Chairman and Chief Executive Officer President, Professional Insurance Agents, Inc. Senior Executive Vice President and Chief Credit Officer Pat Frost Rob Brown President, Frost Bank President, Frost Securities, Inc. Jerry Salinas Executive Vice President and Treasurer Phillip D. Green Jim Eckel Senior Executive Vice President and Senior Vice President Bill Sirakos Chief Financial Officer Executive Vice President Bernard Gonzales Karen Banks Senior Executive Vice President John Spencer President, Frost Brokerage Services, Inc. Executive Vice President Norton Hargis, Jr. Dave Beck Executive Vice President Pam Thomas President, State Regions Senior Vice President Richard Kardys Bobby Berman Senior Executive Vice President Ken Trapp Executive Vice President Senior Executive Vice President Bankers, Inc. 18 1999 Annual Report

Directors

R. Denny Alexander Robert E. Fawcett, Jr. Herman J. Richter* Owner, R. Denny Alexander & Company Special Advisory Director Retired Chairman of the Board, Richter’s Bakery Isaac Arnold, Jr. Pat Frost Oil, Real Estate, Investments President, Frost Bank Ida Clement Steen Investments Royce S. Caldwell T.C. Frost President, Southwestern Bell Operations Senior Chairman, Cullen/Frost Bankers, Inc. David J. Straus* SBC Communications, Inc. Chairman of the Board, STRAFCO, Inc. Joe R. Fulton Ruben R. Cardenas President, Fulton Construction Company Curtis Vaughan, Jr.* Cardenas, Whitis & Stephen, L.L.P. Chairman of the Board, Vaughan & Sons, Inc. James W. Gorman, Jr. Henry E. Catto Oil, Real Estate, Investments Robert V. West, Jr.* Partner, Catto & Catto Investments James L. Hayne Bob W. Coleman Managing Partner, Catto & Catto Horace Wilkins, Jr. Chairman and CEO, Texace Corporation President, Special Markets, Richard M. Kleberg, III SBC Communications, Inc. Eugene H. Dawson, Sr. Banking and Investments Chairman of the Board, Mary Beth Williamson Pape-Dawson Consulting Engineers Fred C. Lepick* Education (Consultant) Consultant Cass Edwards, Jr. Bernard Gonzales Managing Partner, Edwards Trust John R. Locke, Jr.* Senior Executive Vice President, Jenkens & Gilchrist Groce, Secretary to the Board Ruben M. Escobedo, C.P.A. Locke & Hebdon, Attorneys Dick Evans Robert S. McClane Chairman and CEO, Cullen/Frost Bankers, Inc. President, McClane Partners, L.L.C. *Director Emeritus

Advisory Directors

SAN ANTONIO AREA Geary Atherton James V. Johnson Marie P. Thurston Investments Merchandising Consultant Office Manager, Charles S. Thurston, M.D. Harold Brannan, M.D. Roy E. Johnston Ricks Wilson President, South Texas Radiology Group Attorney-at-Law Investments James M. Cavender, III Elkin McGaughy Thomas G. Yantis President, Cavender Oldsmobile Developer President, Yantis Corporation William K. Clark Bobby Joe Miller Azrock Chairman Emeritus, Vice President/General Manager, AUSTIN Domco Ambassador-at-Large Allen & Allen Company, Inc. Ed Auler Fall Creek Vineyards Stephanie Coleman Jack L. Nicholson Area Vice President, Staffing Solutions Real Estate Developer Michael M. Barron Attorney-at-Law, Barron & Adler Pete Cortez H.M. Northington, Jr. MTC, Inc. Rancher, Attorney Jim Boon Executive Director, The Ex-Students’ Rudy Davila William B. Osborn, III Association of The University of Texas President/Owner, Davila Pharmacy Managing Partner, Osborn Oil & Gas Joe Christie Eugene H. Dawson, Jr. Patrick J. Pape President, Christie Gas Corporation President, Attorney Pape-Dawson Consulting Engineers Liz Coker-Trautwein James C. Phelps CEO, Minco Technology Labs, Inc. George W. Delavan, Jr. Petroleum Consultant Real Estate Developer Homer Garrison, III Robert B. Price President, Mary Nell Garrison Realtors Alan W. Dreeben Executive Vice President, Executive Vice President, University of Texas Health Science Center Jean D. Glass Block Distributing Company President, Glass & Company, C.P.A.s James M.O. Rubin, M.D. Bernard T. Fein, M.D. Anesthesiologist Van R. Hoisington President, Hoisington Investment Donald B. Harrell Henry A. Scholl Management Company Owner, Harrell Properties President, Olmos Lumber Company Ronald W. Kessler Bruce Hill Chesley I. Swann Attorney-at-Law, Locke Liddell & Sapp LLP Attorney Real Estate Investments

Austin • Boerne • Corpus Christi • Dallas • Fort Worth FrostHouston • McAllen • New Braunfels • San Antonio • SanBank Marcos 1999 Annual Report 19

Advisory Directors Continued

Charles H. Morrison James R. Garrison Andrew Delaney President, Morrison Properties Investments Retired Vice Chairman and Chief Investment Officer, American General Corporation John D. Oswalt, M.D. J.W. Gary Cardiothoracic and Vascular Surgeons Attorney, Gary, Thomasson, Hall & Marks W.N. Finnegan, III Attorney, Former President, John C. Scurlock M. Dudley Gowland, C.P.A. R.E. Smith Interests Investments Gowland, Strealy Altheide James E. Furr Donald S. Thomas, Jr. Roy M. Grassedonio Managing Principal, Partner, Clark, Thomas & Winters, Investments Gensler & Associates/Architects Attorneys-at-Law Robert E. Harris Dawson O. George, III Barbara Wallace Insurance President, TGX Oil & Gas, Inc. Co-owner, Amelia Bullock Realtors Fred W. Heldenfels, IV James R. Gibbs Layton B. Wilson Heldenfels Enterprises, Inc. President & Chief Executive Officer, President, Layton B. Wilson Company Claudio Herrera Frontier Oil Corporation BOERNE Consultant Don H. Haley Tom Bibb Linda Jordan Partner, Haley Martin Associates Vice President, Joy Pipe USA, Inc. President, LK Jordan & Associates, Inc. Ralph T. Hull Jim Chittim Joe A. Lewis, M.D. Investments, Attorney Owner, Flying Circle Bags Histopath Willie Iles, Jr. Doris Doss Dietert Fred J. Nemec, C.P.A. Assistant Regional Director/Operations Fields Nemec & Co. Southern Region Boy Scouts of America Mary Jane Morrison Frank Peerman, AIA W.H. Jordan, Jr. Israel Peña Architect Attorney President/Owner, Israel Peña & Associates, Architects H.O. Pipkin John Knox, Jr. The Pipkin Company President, Suretec Financial Corp. George M. Plummer Plummer Enterprises and Accord Homes Charles R. Porter, Jr. Robert A. Lahr Investments Retired President & Chief Executive Officer, Robert J. Weiss, Jr. Tuboscope International Fairco Enterprises Jack Powers Investor David Miclette President, Bowen, Miclette & Britt CORPUS CHRISTI Jon C. Spradley James Y. Anderson Spradley Energy, Inc. – Geologist Hugh Morrison President, Anderson Machinery President, Pilgrim Cleaners, Inc. Charles A. Steen Joseph M. Baria President, Gulf Coast Energy, Inc. Harris J. Pappas Oil and Gas Production President, Pappas Restaurants, Inc. Walter M. Stoops Jeff Bell Investments N.J. Pierce Investments Management Consultant, Ralph C. Storm N.J. Pierce and Associates John C. Brooke Investments The Kleberg Law Firm H. Leon Shackelford Jerry L. Susser President, HLS Supply, Inc. Charles J. Brown Consultant Investments Sherwin J. Siff, M.D. George K. Taggart, III Bone & Joint Clinic of Houston Gus T. Canales Chairman, Aransas Natural Gas Company President, Gus Canales, Inc. Edward E. Williams, Ph.D. Chester L. Wheless Professor, Administration Science, J.B. Clark Investments Jones Graduate School of Administration, Owner, Mid-Coastal Farms Rice University David S. Crow Captain J. Fred Wilkerson General Partner, Aracor, Inc. Crow Ranches, Inc. MCALLEN Philip L. Davidson Carlos J. Cardenas, M.D. HOUSTON South Texas Gastroenterology Associates, P.A. Investments Isaac Arnold, Jr. Joe R. DeLeon Oil, Real Estate, Investments Christina Martin Owner, Scottie’s Tours N Travels, Inc. Owner, Retail Pharmacies Jan Stockard Cato Leslie W. Dunn Investments Ricardo D. Martinez, M.D., F.A.C.S. Vice President, Corpus Christi Leaseholds, Inc. Charles F. Chambers Wayne A. Showers Pat M. Eisenhauer, CLU/CPCU Corporate Development, Investments Calpine Natural Gas Co. Investments Glenn W. Timmons George B. Gaines, Jr. Harry H. Cullen General Manager, Victoria Palms Resort President & CEO, Western Steel Company Oil, Real Estate, Investments

Austin • Boerne • Corpus Christi • Dallas • Fort Worth FrostHouston • McAllen • New Braunfels • San Antonio • SanBank Marcos 20 1999 Annual Report

Advisory Directors Continued

Ernest R. Williams John M. Griffith, Jr. SAN MARCOS Real Estate Investments Investments Clovis R. Barker Stephanie M. Wilson James M. Harrison Chairman, Hill Country, Frost Bank Private Investments Eleanor Butt Crook NEW BRAUNFELS James E. Helzer Terry P. Gilmore Ernesto Jergins President, JEH Company, Inc. Owner, TP Gilmore Company, Owner, Ernesto’s Jewelry Factory Fred Ivy General Contractor Mike A. Ybarra Investments Bruce Ingram Principal, Owner, Ingram Ready-Mix Providence Commercial Real Estate Services Raymond B. Kelly, Jr. Private Investments Van E. Rea, M.D. NORTH TEXAS REGION Edward Martin, II Radiology Associates, Central Texas Medical Center R. Denny Alexander President, The Dunlap Company Owner, R. Denny Alexander & Company John W. Newbern Fraye B. Stokes Owner and General Manager, President and Director, Louis H. Barnett Stokes Construction Company International Consultant in Chemicals, Nationwide Advertising Specialty Company, Inc. Plastics and Management Robert S. Newkirk Dr. Jerome H. Supple President, Southwest Texas State University Cass O. Edwards, Jr. Director, McDonald Sanders Law Firm Managing Partner, Edwards Trust Margret Rimmer Preston M. Geren, Jr. Retired Preston M. Geren, Jr., Investments Everett A. Roberts Pete Geren President, Innovative Developers, Inc. Management Consultant, Public Strategies, Inc. Dennis H. Withers President, Trinity Forge, Inc. Paul Greenwell Vice President - Principal, Randy Rodgers Luther King Capital Management Corporation Investment Advisor

United States National Bank – Galveston Directors

Vandy V. Anderson Thomas E. Farmer F.A. Odom Investments Co-President, President and CEO, Farmer’s Marine Copper Works, Inc. United States National Bank David W. Beck, Jr. President, State Regions, Frost Bank John W. Kelso E.J. Pederson President, Texas Gulf Construction Co., Inc. Executive Vice President, Glenn H. Clements The University of Texas Medical Branch Chairman of the Board, Rai B. Kelso Galveston Division, Stewart Title Company President, O.B.T. Corporation J. Fellman Seinsheimer, III The United Fire Group Carolyn S. Clyburn Harris L. Kempner, Jr. President, The House Company Chairman Emeritus and Advisor to the Board A.D. Suderman, III Real Estate Brokers President, Suderman Contracting Bernard A. Milstein, M.D. Stevedores, Inc. J.L. Dunn, III Ophthalmologist, The Eye Clinic of Galveston President, Dunn Heat Exchangers, Inc. John E. Walker Neil N. Nathan Investments General Agent, American National Insurance Company

Advisory Directors

Thomas N. James, M.D. Robert L.K. Lynch Sam G. Tramonte Professor of Medicine/Pathology, Chairman of the Board, Yaga, Inc. Senior Partner, Tramonte, Tramonte & Bastien The University of Texas Medical Branch William J. Merrell, Jr., Ph.D. James E. Yarbrough J.L. Jinkins, Jr., M.D. President, John Heinz III Center for Science, President, Pavex, Inc. Investments Economics and the Environment Loretta Menotti Perez Linford O. Kauffman R.H. Stanton, Jr., D.D.S. Administrative Assistant- Investments Dentist Executive Secretary to the Board

J.R. Locke, Sr. 1894-2000 – Director, Frost Bank 1949-1994 InJames I. Campbell Memoriam 1924-1999 – Advisory Director, San Antonio Area, Frost Bank 1974-1999 Banking Locations

SAN ANTONIO DALLAS MCALLEN 210.220.4011 214.515.4900 956.682.1241

AUSTIN FORT WORTH NEW BRAUNFELS 512.473.4343 817.420.5200 830.643.3500

BOERNE GALVESTON SAN MARCOS 830.249.2551 409.763.1151 512.393.5600

CORPUS CHRISTI HOUSTON 361.883.3621 713.388.7600

Cullen/Frost Bankers, Inc.

100 West Houston P.O. Box 1600 San Antonio, Texas 78296 210.220.4011 email:[email protected] http://www.frostbank.com

Form 10-K and Investor Inquiries

Analysts, investors and others desiring additional financial data about Cullen/Frost Bankers, Inc. may contact Greg Parker, Senior Vice President, Director of Investor Relations, at 210.220.5632.

TRANSFER AGENT AND REGISTRAR Bank of New York, P.O. Box 3856 Houston, Texas 77253-3856 1.800.882.6559 A Texas Financial Services Family