Edgar Filing: CULLEN FROST BANKERS INC

CFR_10Q2q02

United States Securities and Exchange Commission Washington, D.C. 20549

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Form 10-Q

[ X ]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the quarterly period ended:	March 31, 2008

Or

[ ]	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from _______________ to ________________

	Commission file number:	001-13221


Cullen/Frost Bankers, Inc.
(Exact name of registrant as specified in its charter)


Texas			74-1751768
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)


100 W. Houston Street, San Antonio, Texas			78205
(Address of principal executive offices)			(Zip code)


(210) 220-4011
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ X ]				Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)				Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]

As of April 17, 2008, there were 58,783,716 shares of the registrant's Common Stock, $.01 par value, outstanding.

Cullen/Frost Bankers, Inc. Quarterly Report on Form 10-Q March 31, 2008 Table of Contents
			Page
Part I - Financial Information

	Item 1.	Financial Statements (Unaudited)

		Consolidated Statements of Income	3

		Consolidated Balance Sheets	4

		Consolidated Statements of Changes in Shareholders' Equity	5

		Consolidated Statements of Cash Flows	6

		Notes to Consolidated Financial Statements	7

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

	Item 4.	Controls and Procedures	40

Part II - Other Information

	Item 1.	Legal Proceedings	41

	Item 1A.	Risk Factors	41

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

	Item 3.	Defaults Upon Senior Securities	41

	Item 4.	Submission of Matters to a Vote of Security Holders	41

	Item 5.	Other Information	41

	Item 6.	Exhibits	41


Signatures			42

Part I. Financial Information Item 1. Financial Statements (Unaudited) Cullen/Frost Bankers, Inc. Consolidated Statements of Income (Dollars in thousands, except per share amounts)

					Three Months Ended March 31,

				2008				2007


Interest income:
	Loans, including fees		$		130,963		$		142,761
	Securities:
	Taxable				37,198				36,829
	Tax-exempt				5,331				3,307
	Interest-bearing deposits				73				67
	Federal funds sold and resell agreements				2,138				9,618

		Total interest income			175,703				192,582

Interest expense:
	Deposits				34,474				49,086
	Federal funds purchased and repurchase agreements				5,024				8,221
	Junior subordinated deferrable interest debentures				2,106				3,693
	Subordinated notes payable and other borrowings				4,219				3,749

		Total interest expense			45,823				64,749

Net interest income					129,880				127,833
Provision for possible loan losses					4,005				2,650

		Net interest income after provision for possible loan losses			125,875				125,183

Non-interest income:
	Trust fees				18,282				16,907
	Service charges on deposit accounts				19,593				18,831
	Insurance commissions and fees				11,158				10,628
	Other charges, commissions and fees				6,931				6,858
	Net gain (loss) on securities transactions				(48	)			-
	Other				14,312				13,848

		Total non-interest income			70,228				67,072

Non-interest expense:
	Salaries and wages				55,138				51,714
	Employee benefits				14,113				14,426
	Net occupancy				9,647				9,634
	Furniture and equipment				8,950				6,928
	Intangible amortization				2,046				2,326
	Other				30,146				37,059

		Total non-interest expense			120,040				122,087


Income before income taxes					76,063				70,168
Income taxes					23,283				22,889


		Net income	$		52,780		$		47,279


Earnings per common share:
	Basic		$		0.90		$		0.79
	Diluted				0.89				0.78


See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc. Consolidated Balance Sheets (Dollars in thousands, except per share amounts)

		March 31,			December 31,				March 31,
		2008				2007			2007


Assets:
Cash and due from banks	$	754,493		$		836,539		$	608,787
Interest-bearing deposits		3,311				5,898			4,227
Federal funds sold and resell agreements		523,725				354,075			803,125

Total cash and cash equivalents		1,281,529				1,196,512			1,416,139

Securities held to maturity, at amortized cost		7,772				8,125			9,607
Securities available for sale, at estimated fair value		3,312,373				3,407,012			3,116,212
Trading account securities		14,003				11,913			12,455
Loans, net of unearned discounts		8,012,897				7,769,362			7,459,256
Less: Allowance for possible loan losses		(92,498	)			(92,339	)		(96,144	)

Net loans		7,920,399				7,677,023			7,363,112
Premises and equipment, net		221,533				219,615			217,315
Goodwill		526,476				526,851			527,947
Other intangible assets, net		29,910				31,523			36,153
Cash surrender value of life insurance policies		117,506				116,231			112,880
Accrued interest receivable and other assets		362,428				290,209			364,569

Total assets	$	13,793,929		$		13,485,014		$	13,176,389


Liabilities:
Deposits:
Non-interest-bearing demand deposits	$	3,790,858		$		3,597,903		$	3,574,827
Interest-bearing deposits		6,937,025				6,931,770			6,705,623

Total deposits		10,727,883				10,529,673			10,280,450

Federal funds purchased and repurchase agreements		924,629				933,072			914,833
Subordinated notes payable and other borrowings		259,089				261,146			283,812
Junior subordinated deferrable interest debentures		136,084				139,177			139,177
Accrued interest payable and other liabilities		169,045				144,858			140,287

Total liabilities		12,216,730				12,007,926			11,758,559

Shareholders' Equity:
Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; none issued		-				-			-
Junior participating preferred stock, par value $0.01 per share; 250,000 shares authorized; none issued		-				-			-
Common stock, par value $0.01 per share; 210,000,000 shares authorized; 60,236,862 shares, 60,236,862 shares and 59,972,052 shares issued		602				602			600
Additional paid-in capital		580,046				573,799			555,427
Retained earnings		1,010,257				992,138			909,950
Accumulated other comprehensive income (loss), net of tax		64,374				(7,382	)		(48,147	)
Treasury stock, 1,490,246 shares, 1,574,732 shares and no shares, at cost		(78,080	)			(82,069	)		-

Total shareholders' equity		1,577,199				1,477,088			1,417,830

Total liabilities and shareholders' equity	$	13,793,929		$		13,485,014		$	13,176,389



See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(Dollars in thousands, except per share amounts)

		Three Months Ended
		March 31,

		2008			2007


Total shareholders' equity at beginning of period	$	1,477,088		$	1,376,883

Cumulative effect of adoption of a new accounting principle on January 1, 2008 (Note 18)		(240	)		-

Comprehensive income:
Net income		52,780			47,279
Other comprehensive income (loss):
Change in accumulated gain/loss on effective cash flow hedging derivatives of $55,846 in 2008 and $86 in 2007, net of tax effect of $19,546 in 2008 and $30 in 2007		36,300			56
Change in unrealized gain/loss on securities available for sale of $54,192 in 2008 and $9,628 in 2007, net of reclassification adjustment of $48 in 2008 and tax effect of $18,984 in 2008and $3,370 in 2007		35,256			6,258
Change in funded status of defined benefit post-retirement benefit plans related to the amortization of actuarial losses to net periodic benefit cost of $307 in 2008 and $664 and 2007, net of tax effect of $107 in 2008 and $233 in 2007		200			431

Total other comprehensive income (loss)		71,756			6,745


Total comprehensive income		124,536			54,024

Stock option exercises (488,250 shares in 2008 and 132,949 shares in 2007)		15,017			3,661
Stock compensation expense recognized in earnings		2,374			2,384
Tax benefits related to stock compensation, includes excess tax benefits of $3,712 in 2008 and $1,231 in 2007		3,873			1,268
Purchase of treasury stock (403,764 shares in 2008 and 41 shares in 2007)		(21,889	)		(2	)
Cash dividends ($0.40 per share in 2008 and $0.34 per share in 2007)		(23,560	)		(20,388	)


Total shareholders' equity at end of period	$	1,577,199		$	1,417,830



See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)

					Three Months Ended
					March 31,

					2008			2007


Operating Activities:
Net income				$	52,780		$	47,279
Adjustments to reconcile net income to net cash from operating activities:
	Provision for possible loan losses				4,005			2,650
	Deferred tax expense (benefit)				175			(740	)
	Accretion of loan discounts				(3,002	)		(3,179	)
	Securities premium amortization (discount accretion), net				(94	)		(62	)
	Net (gain) loss on securities transactions				48			-
	Depreciation and amortization				8,122			7,386
	Origination of loans held for sale				(33,763	)		(32,461	)
	Proceeds from sales of loans held for sale				21,678			16,138
	Net gain on sale of loans held for sale and other assets				(898	)		(397	)
	Stock-based compensation expense				2,374			2,384
	Tax benefits from stock-based compensation				161			37
	Excess tax benefits from stock-based compensation				(3,712	)		(1,231	)
	Earnings on life insurance policies				(1,275	)		(1,138	)
	Net change in:
		Trading account securities			(2,090	)		(3,049	)
		Accrued interest receivable and other assets			(42,875	)		(110,971	)
		Accrued interest payable and other liabilities			17,083			(23,417	)

			Net cash from operating activities		18,717			(100,771	)

Investing Activities:
	Securities held to maturity:
		Maturities, calls and principal repayments			352			488
	Securities available for sale:
		Purchases			(618,473	)		(1,594,700	)
		Sales			599,006			511
		Maturities, calls and principal repayments			168,393			1,818,621
	Net change in loans				(235,156	)		(69,506	)
	Net cash paid in acquisitions				(33	)		(1,550	)
	Proceeds from sales of premises and equipment				184			1,391
	Purchases of premises and equipment				(6,888	)		(5,981	)
	Proceeds from sales of repossessed properties				1,018			2,213

			Net cash from investing activities		(91,597	)		151,487

Financing Activities:
	Net change in deposits				198,210			(107,459	)
	Net change in short-term borrowings				(8,443	)		50,643
	Proceeds from notes payable				-			98,799
	Principal payments on notes payable and other borrowings				(5,150	)		(105,647	)
	Proceeds from stock option exercises				15,017			3,661
	Excess tax benefits from stock-based compensation arrangements				3,712			1,231
	Purchase of treasury stock				(21,889	)		(2	)
	Cash dividends paid				(23,560	)		(20,388	)

			Net cash from financing activities		157,897			(79,162	)


Net change in cash and cash equivalents					85,017			(28,446	)
Cash and equivalents at beginning of period					1,196,512			1,444,585


Cash and equivalents at end of period				$	1,281,529		$	1,416,139


Supplemental disclosures:
	Cash paid for interest			$	52,221		$	48,364
	Cash paid for income taxes				1,775			-


See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.
Notes to Consolidated Financial Statements
(Table amounts are stated in thousands, except for share and per share amounts)

Note 1 - Significant Accounting Policies

Nature of Operations. Cullen/Frost Bankers, Inc. (Cullen/Frost) is a financial holding company and a bank holding company headquartered in San Antonio, Texas that provides, through its subsidiaries, a broad array of products and services throughout numerous Texas markets, including commercial and consumer banking, trust and investment management, investment banking, insurance, brokerage, leasing, asset-based lending, treasury management and item processing.

Basis of Presentation. The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of Cullen/Frost and all other entities in which Cullen/Frost has a controlling financial interest (collectively referred to as the "Corporation"). All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies the Corporation follows conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry.

The consolidated financial statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the Corporation's financial position and results of operations. All such adjustments were of a normal and recurring nature. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (SEC). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the Corporation's consolidated financial statements, and notes thereto, for the year ended December 31, 2007, included in the Corporation's Annual Report on Form 10-K filed with the SEC on February 1, 2008 (the "2007 Form 10-K"). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for possible loan losses, the fair value of stock-based compensation awards, the fair values of financial instruments and the status of contingencies are particularly susceptible to significant change in the near term.

Comprehensive Income. Comprehensive income includes all changes in shareholders' equity during a period, except those resulting from transactions with shareholders. Besides net income, other components of the Corporation's comprehensive income include the after tax effect of changes in the net unrealized gain/loss on securities available for sale, changes in the funded status of defined benefit post-retirement benefit plans and changes in the accumulated gain/loss on effective cash flow hedging instruments. Comprehensive income for the three months ended March 31, 2008 and 2007 is reported in the accompanying consolidated statements of changes in shareholders' equity.

Fair Value Measurements. On January 1, 2008, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements." SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements (See Note 17 - Fair Value Measurements).

Endorsement Split-Dollar Life Insurance Arrangements. On January 1, 2008, the Corporation changed its accounting policy and recognized a cumulative-effect adjustment to retained earnings totaling $240 thousand related to accounting for certain endorsement split-dollar life insurance arrangements in connection with the adoption of Emerging Issues Task Force ("EITF") Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements." See Note 18 - New Accounting Standards.

Reclassifications. Certain items in prior financial statements have been reclassified to conform to the current presentation.

Note 2 - Mergers and Acquisitions

Prime Benefits, Inc. On December 1, 2007, the Corporation acquired Prime Benefits, Inc., an independent, Austin-based insurance agency. Prime Benefits, which offered group employee benefits plans, including medical and dental, life, long-term care and disability insurance primarily for businesses, was fully integrated into Frost Insurance Agency. The acquisition was accounted for as a purchase transaction with all cash consideration funded through internal sources. The operating results of Prime Benefits are included with the Corporation's results of operations since the date of acquisition. The purchase of Prime Benefits did not significantly impact the Corporation's financial statements.

Note 3 - Securities

A summary of the amortized cost and estimated fair value of securities, excluding trading securities, is presented below.

	March 31, 2008																	December 31, 2007

	Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses	Estimated Fair Value				Amortized Cost						Gross Unrealized Gains							Gross Unrealized Losses						Estimated Fair Value


Securities Held to Maturity:
U.S. government agencies and corporations	$	6,772				$		149				$	3	$	6,918				$	7,125					$	103							$	14						$	7,214
Other		1,000						-					-		1,000					1,000						-								-							1,000

Total	$	7,772				$		149				$	3	$	7,918				$	8,125					$	103							$	14						$	8,214


Securities Available for Sale:
U. S. government agencies and corporations	$	2,724,402				$		31,968				$	4,817	$	2,751,553				$	2,865,597					$	9,756							$	30,042						$	2,845,311
States and political subdivisions		516,949						7,618					1,475		523,092					524,745						3,040								3,700							524,085
Other		37,728						-					-		37,728					37,616						-								-							37,616

Total	$	3,279,079				$		39,586				$	6,292	$	3,312,373				$	3,427,958					$	12,796							$	33,742						$	3,407,012


Securities with limited marketability, such as stock in the Federal Reserve Bank and the Federal Home Loan Bank, are carried at cost and are reported as other available for sale securities in the table above.

Securities with a fair value totaling $1.9 billion at March 31, 2008 and $2.2 billion at December 31, 2007 were pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law.

Sales of securities available for sale were as follows:

																														Three Months Ended March 31,

																															2008										2007


Proceeds from sales																														$		599,006							$			511
Gross realized gains																																5,104										-
Gross realized losses																																5,152										-

As of March 31, 2008, securities, with unrealized losses segregated by length of impairment, were as follows:

			Less than 12 Months												More than 12 Months												Total

			Estimated						Unrealized						Estimated						Unrealized						Estimated								Unrealized
			Fair Value						Losses						Fair Value						Losses						Fair Value								Losses


Held to Maturity
U.S. government agencies and corporations				$	1,589					$	2					$	326					$	1					$	1,915							$		3


Available for Sale
U.S. government agencies and corporations				$	163,913					$	356					$	307,742					$	4,461					$	471,655							$		4,817
States and political subdivisions					41,580						519						60,399						956						101,979									1,475

Total				$	205,493					$	875					$	368,141					$	5,417					$	573,634							$		6,292


Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time the Corporation will receive full value for the securities. Furthermore, management also has the ability and intent to hold the securities classified as available for sale for a period of time sufficient for a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2008, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Corporation's consolidated income statement.

Note 4 - Loans

Loans were as follows:

			March 31,		Percentage			December 31,		Percentage			March 31,			Percentage
			2008		of Total			2007		of Total			2007			of Total


Commercial and industrial:
	Commercial		$	3,583,588		44.7	%	$	3,472,759		44.7	%		$	3,291,148			44.1	%
	Leases			189,719		2.4			184,140		2.4				175,372			2.4
	Asset-based			37,261		0.5			32,963		0.4				35,708			0.5

		Total commercial and industrial		3,810,568		47.6			3,689,862		47.5				3,502,228			47.0

Real estate:
	Construction:
		Commercial		635,496		7.9			560,176		7.2				659,842			8.8
		Consumer		61,101		0.8			61,595		0.8				108,995			1.5
	Land:
		Commercial		396,759		4.9			397,319		5.1				419,218			5.6
		Consumer		2,189		0.1			2,996		-				4,872			0.1
	Commercial mortgages			2,001,059		25.0			1,982,786		25.5				1,772,347			23.7
	1-4 family residential mortgages			96,978		1.2			98,077		1.3				116,508			1.6
	Home equity and other consumer			607,513		7.5			587,721		7.6				509,135			6.8

		Total real estate		3,801,095		47.4			3,690,670		47.5				3,590,917			48.1

Consumer:
	Indirect			1,805		-			2,031		-				3,075			-
	Student loans held for sale			75,084		0.9			62,861		0.8				64,748			0.9
	Other			323,143		4.1			323,320		4.2				305,708			4.1
Other				29,927		0.4			29,891		0.4				22,083			0.3
Unearned discounts				(28,725	)	(0.4	)		(29,273	)	(0.4	)			(29,503		)	(0.4	)

		Total loans	$	8,012,897		100.0	%	$	7,769,362		100.0	%		$	7,459,256			100.0	%


Concentrations of Credit. Most of the Corporation's lending activity occurs within the State of Texas, including the four largest metropolitan areas of Austin, Dallas/Ft. Worth, Houston and San Antonio as well as other markets. The majority of the Corporation's loan portfolio consists of commercial and industrial and commercial real estate loans. As of March 31, 2008, there were no concentrations of loans related to any single industry in excess of 10% of total loans.

Student Loans Held for Sale. Student loans are primarily originated for resale on the secondary market. These loans, which are generally sold on a non-recourse basis, are carried at the lower of cost or market on an aggregate basis.

Foreign Loans. The Corporation has U.S. dollar denominated loans and commitments to borrowers in Mexico. The outstanding balance of these loans and the unfunded amounts available under these commitments were not significant at March 31, 2008 or December 31, 2007.

Non-Performing/Past Due Loans. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations, which typically occurs when principal or interest payments are more than 90 days past due. Non-accrual loans totaled $28.6 million at March 31, 2008 and $24.4 million at December 31, 2007. Accruing loans past due more than 90 days totaled $17.6 million at March 31, 2008 and $14.3 million at December 31, 2007.

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectibility of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Impaired loans were as follows:

			March 31,	December 31,							March 31,
			2008		2007						2007


Balance of impaired loans with no allocated allowance		$	20,139	$	14,986				$		5,824
Balance of impaired loans with an allocated allowance			2,204		2,166						34,132

Total recorded investment in impaired loans		$	22,343	$	17,152				$		39,956


Amount of the allowance allocated to impaired loans		$	1,159	$	1,556				$		8,170


The impaired loans included in the table above were primarily comprised of collateral dependent commercial loans. The average recorded investment in impaired loans was $19.7 million during the three months ended March 31, 2008 and $42.1 million for the three months ended March 31, 2007. No interest income was recognized on these loans subsequent to their classification as impaired.

Note 5 - Allowance for Possible Loan Losses

The allowance for possible loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management's best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management's continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio, as well as trends in the foregoing. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management's judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Corporation's control, including the performance of the Corporation's loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

Activity in the allowance for possible loan losses was as follows:

						Three Months Ended March 31,

							2008								2007


Balance at the beginning of the period						$		92,339						$		96,085
Provision for possible loan losses								4,005								2,650
Net charge-offs:
	Losses charged to the allowance							(6,666					)			(4,000	)
	Recoveries of loans previously charged off							2,820								1,409

	Net charge-offs							(3,846					)			(2,591	)

Balance at the end of the period						$		92,498						$		96,144


Note 6 - Other Intangible Assets

Goodwill. Goodwill totaled $526.5 million at March 31, 2008 and $526.9 million at December 31, 2007. The decrease in goodwill was related to purchase accounting adjustments related to the acquisition of Prime Benefits, Inc. (see Note 2 - Mergers and Acquisitions).

Other Intangible Assets. Other intangible assets totaled $29.9 million at March 31, 2008 including $26.1 million related to core deposits, $3.0 million related to customer relationships and $805 thousand related to non-compete agreements. Other intangible assets totaled $31.5 million at December 31, 2007 including $27.8 million related to core deposits, $2.5 million related to customer relationships $1.2 million related to non-compete agreements. The changes in intangibles related to customer relationships and non-compete agreements were partly due to purchase accounting adjustments related to the acquisition of Prime Benefits, Inc.

Amortization expense related to intangible assets totaled $2.0 million and $2.3 million during the three months ended March 31, 2008 and 2007. The estimated aggregate future amortization expense for intangible assets remaining as of March 31, 2008 is as follows:

Remainder of 2008										$		5,802
2009												6,269
2010												4,747
2011												3,968
2012												3,242
Thereafter												5,882

										$		29,910

Note 7 - Deposits

Deposits were as follows:


	March 31,		Percentage			December 31,		Percentage			March 31,			Percentage
	2008		of Total			2007		of Total			2007			of Total


Non-interest-bearing demand deposits:
Commercial and individual	$	3,417,945		31.9	%	$	3,171,510		30.1	%		$	3,259,106		31.7	%
Correspondent banks		328,683		3.0			350,123		3.4				260,939		2.6
Public funds		44,230		0.4			76,270		0.7				54,782		0.5

Total non-interest-bearing demand deposits		3,790,858		35.3			3,597,903		35.2				3,574,827		34.8

Interest-bearing deposits:
Private accounts:
Savings and interest checking		1,666,056		15.6			1,722,305		16.4				1,394,418		13.6
Money market accounts		3,528,124		32.9			3,404,472		32.3				3,453,355		33.6
Time accounts under $100,000		600,030		5.6			618,719		5.9				604,848		5.9
Time accounts of $100,000 or more		764,043		7.1			801,269		7.6				766,191		7.4
Public funds		378,772		3.5			385,005		3.6				486,811		4.7

Total interest-bearing deposits		6,937,025		64.7			6,931,770		65.8				6,705,623		65.2


Total deposits	$	10,727,883		100.0	%	$	10,529,673		100.0	%		$	10,280,450		100.0	%


At March 31, 2008 and December 31, 2007, interest-bearing public funds deposits included $140.9 million and $170.5 million in savings and interest checking accounts, $97.1 million and $107.6 million in money market accounts, $5.1 million and $4.8 million in time accounts under $100 thousand and $135.7 million and $102.1 million in time accounts of $100 thousand or more.

Deposits from foreign sources, primarily Mexico, totaled $711.4 million at March 31, 2008 and $699.5 million at December 31, 2007.

Note 8 - Commitments and Contingencies

Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, the Corporation enters into various transactions, which, in accordance with generally accepted accounting principles are not included in its consolidated balance sheets. The Corporation enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Corporation minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

Commitments to Extend Credit. The Corporation enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Corporation's commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Commitments to extend credit totaled $4.8 billion at both March 31, 2008 and December 31, 2007.

Standby Letters of Credit. Standby letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Corporation would be required to fund the commitment. The maximum potential amount of future payments the Corporation could be required to make is represented by the contractual amount of the commitment. If the commitment were funded, the Corporation would be entitled to seek recovery from the customer. The Corporation's policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements. Standby letters of credit totaled $269.7 million at March 31, 2008 and $235.9 million at December 31, 2007. The Corporation had an accrued liability totaling $1.5 million at March 31, 2008 and $1.4 million at December 31, 2007 related to potential obligations under these guarantees.

Lease Commitments. The Corporation leases certain office facilities and office equipment under operating leases. Rent expense for all operating leases totaled $4.6 million and $4.4 million for the three months ended March 31, 2008 and 2007. There has been no significant change in the future minimum lease payments payable by the Corporation since December 31, 2007. See the 2007 Form 10-K for information regarding these commitments.

Litigation. The Corporation is subject to various claims and legal actions that have arisen in the normal course of conducting business. Management does not expect the ultimate disposition of these matters to have a material adverse impact on the Corporation's financial statements.


Note 9 - Borrowed Funds

On January 7, 2008, the Corporation redeemed $3.1 million of floating rate (three-month LIBOR plus a margin of 3.30%) junior subordinated deferrable interest debentures, due January 7, 2033, held of record by Alamo Trust. Concurrently, the $3.0 million of floating rate (three-month LIBOR plus a margin of 3.30%) trust preferred securities issued by Alamo Trust were also redeemed.

On February 15, 2007, the Corporation issued $100 million of 5.75% fixed-to-floating rate subordinated notes due February 15, 2017. The notes bear interest at the rate of 5.75% per annum, payable semi-annually on each February 15 and August 15, commencing on August 15, 2007 until February 15, 2012. From and including February 15, 2012, to but excluding the maturity date or date of earlier redemption, the notes will bear interest at a rate per annum equal to three-month LIBOR for the related interest period plus 0.53%, payable quarterly on each February 15, May 15, August 15 and November 15, commencing May 15, 2012. The notes are subordinated in right of payment to all our senior indebtedness and effectively subordinated to all existing and future debt and all other liabilities of our subsidiaries. The notes cannot be accelerated except in the event of bankruptcy or the occurrence of certain other events of bankruptcy, insolvency or reorganization. The notes mature on February 15, 2017. The Corporation may elect to redeem the notes (subject to regulatory approval), in whole or in part, on any interest payment date on or after February 15, 2012 at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest.

On February 21, 2007, the Corporation redeemed $103.1 million of 8.42% junior subordinated deferrable interest debentures, Series A due February 1, 2027, held of record by Cullen/Frost Capital Trust I. As a result of the redemption, the Corporation incurred $5.3 million in expense during the first quarter of 2007 related to a prepayment penalty and the write-off of the unamortized debt issuance costs. Concurrently, the $100 million of 8.42% trust preferred securities issued by Cullen/Frost Capital Trust I were also redeemed.

Note 10 - Regulatory Matters

Regulatory Capital Requirements. Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

Quantitative measures established by regulations to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

Cullen/Frost's and Frost Bank's Tier 1 capital consists of shareholders' equity excluding unrealized gains and losses on securities available for sale, the funded status of the Corporation's defined benefit post-retirement benefit plans, goodwill and other intangible assets. Tier 1 capital for Cullen/Frost also includes $132 million of trust preferred securities issued by unconsolidated subsidiary trusts. Cullen/Frost's and Frost Bank's total capital is comprised of Tier 1 capital for each entity plus $90 million of the Corporation's aggregate $150 million of 6.875% subordinated notes payable (of which the permissible portion decreases 20% per year during the final five years of the term of the notes) and a permissible portion of the allowance for possible loan losses. The $100 million of 5.75% fixed-to-floating rate subordinated notes issued during the first quarter of 2007 are not included in Tier 1 capital but are included in total capital of Cullen/Frost.

The Tier 1 and total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, excluding goodwill and other intangible assets, allocated by risk weight category and certain off-balance-sheet items (primarily loan commitments). The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets.

Actual and required capital ratios for Cullen/Frost and Frost Bank were as follows:

	Actual					Minimum Required for Capital Adequacy Purposes					Required to be Well Capitalized Under Prompt Corrective Action Regulations

		Capital Amount	Ratio				Capital Amount	Ratio				Capital Amount	Ratio


March 31, 2008
Total Capital to Risk-Weighted Assets
Cullen/Frost	$	1,380,026		12.55	%	$	879,544		8.00	%		N/A		N/A
Frost Bank		1,316,693		11.98			878,950		8.00		$	1,098,687		10.00	%
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost		1,097,528		9.98			439,772		4.00			N/A		N/A
Frost Bank		1,134,195		10.32			439,475		4.00			659,212		6.00
Leverage Ratio
Cullen/Frost		1,097,528		8.51			515,912		4.00			N/A		N/A
Frost Bank		1,134,195		8.80			515,463		4.00			644,329		5.00

December 31, 2007
Total Capital to Risk-Weighted Assets
Cullen/Frost	$	1,353,125		12.59	%	$	859,730		8.00	%		N/A		N/A
Frost Bank		1,288,306		12.05			855,265		8.00		$	1,069,081		10.00	%
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost		1,070,786		9.96			429,865		4.00			N/A		N/A
Frost Bank		1,105,967		10.35			427,632		4.00			641,449		6.00
Leverage Ratio
Cullen/Frost		1,070,786		8.37			511,636		4.00			N/A		N/A
Frost Bank		1,105,967		8.65			511,164		4.00			638,955		5.00

Frost Bank has been notified by its regulator that, as of its most recent regulatory examination, it is regarded as well capitalized under the regulatory framework for prompt corrective action. Such determination has been made based on Frost Bank's Tier 1, total capital, and leverage ratios. There have been no conditions or events since this notification that management believes would change Frost Bank's categorization as well capitalized under the aforementioned ratios.

Cullen/Frost is subject to the regulatory capital requirements administered by the Federal Reserve, while Frost Bank is subject to the regulatory capital requirements administered by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. Regulatory authorities can initiate certain mandatory actions if Cullen/Frost or Frost Bank fail to meet the minimum capital requirements, which could have a direct material effect on the Corporation's financial statements. Management believes, as of March 31, 2008, that Cullen/Frost and Frost Bank meet all capital adequacy requirements to which they are subject.

Trust Preferred Securities. In accordance with the applicable accounting standard related to variable interest entities, the accounts of the Corporation's wholly owned subsidiary trusts, Cullen/Frost Capital Trust II and Summit Bancshares Statutory Trust I, have not been included in the Corporation's consolidated financial statements. However, the $132.0 million in trust preferred securities issued by these subsidiary trusts have been included in the Tier 1 capital of Cullen/Frost for regulatory capital purposes pursuant to guidance from the Federal Reserve Board.

Note 11 - Derivative Financial Instruments

The fair value of derivative positions outstanding is included in accrued interest receivable and other assets and accrued interest payable and other liabilities in the accompanying consolidated balance sheets and in the net change in each of these financial statement line items in the accompanying consolidated statements of cash flows.

Interest Rate Derivatives. The notional amounts and estimated fair values of interest rate derivative positions outstanding at March 31, 2008 and December 31, 2007 are presented in the following table. The Corporation obtains dealer quotations to value its prime-rate loan swaps designated as hedges of cash flows. The Corporation utilizes internal valuation models with observable market data inputs to estimate fair values of customer interest rate swaps, caps and floors

		March 31, 2008						December 31, 2007

	Notional Amount		Estimated Fair Value			Notional Amount					Estimated Fair Value


Interest rate derivatives designated as hedges of fair value:
Interest rate swaps on commercial loans/leases	$	176,549	$	(10,980	)	$		180,908			$	(5,600		)

Interest rate derivatives designated as hedges of cash flows:
Interest rate swaps on variable-rate loans		1,200,000		89,520				1,200,000				33,857

Non-hedging interest rate derivatives:
Interest rate swaps on commercial loans/leases		390,330		25,524				328,226				12,928
Interest rate swaps on commercial loans/leases		390,330		(25,524	)			328,226				(12,928		)

The weighted-average rates paid and received for interest rate swaps outstanding at March 31, 2008 were as follows:

							Weighted-Average

									Interest Rate Paid				Interest Rate Received


Interest rate swaps:
Fair value hedge commercial loan/lease interest rate swaps									4.85	%			2.99		%
Cash flow hedge interest rate swaps on variable-rate loans									5.25				7.56
Non-hedging interest rate swaps									5.25				5.25

Interest rate contracts involve the risk of dealing with both bank customers and institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by the Corporation's Asset/Liability Management Committee.

The Corporation's credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. In such cases, credit exposure may be reduced by the amount of collateral pledged by the counterparty. The Corporation's credit exposure relating to interest rate swaps with bank customers was approximately $25.5 million at March 31, 2008. This credit exposure is partly mitigated as transactions with customers are generally secured by the collateral, if any, securing the underlying transaction being hedged. The Corporation's credit exposure, net of collateral pledged, relating to interest rate swaps with upstream financial institution counterparties was approximately $9.0 million at March 31, 2008. Collateral levels for upstream financial institution counterparties are monitored and adjusted on a regular basis for changes in interest rate swap values.

For fair value hedges, the changes in the fair value of both the derivative hedging instrument and the hedged item are recorded in current earnings as other income or other expense. The extent that such changes in fair value do not offset represents hedge ineffectiveness. For cash flow hedges, the effective portion of the gain or loss on the derivative hedging instrument is reported in other comprehensive income, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is recorded in current earnings as other income or other expense. The amount of hedge ineffectiveness reported in earnings was not significant during any of the reported periods. The accumulated net after-tax gain related to derivatives included in accumulated other comprehensive income totaled $57.6 million at March 31, 2008.

Commodity Derivatives. The Corporation enters into commodity swaps and option contracts to accommodate the business needs of its customers. Upon the origination of a commodity swap or option contract with a customer, the Corporation simultaneously enters into an offsetting contract with a third party to mitigate the exposure to fluctuations in commodity prices.

The notional amounts and estimated fair values of commodity derivative positions outstanding are presented in the following table. The Corporation obtains dealer quotations to value its commodity derivative positions.

			March 31, 2008							December 31, 2007

	Notional Units	Notional Amount		Estimated Fair Value				Notional Amount			Estimated Fair Value


Commodity swaps:
Oil	Barrels		309	$	9,251					355	$		7,997
Oil	Barrels		309		(9,173	)				355			(7,909	)
Natural gas	MMBTUs		2,035		2,699					1,510			820
Natural gas	MMBTUs		2,035		(2,638	)				1,510			(786	)

Commodity options:
Oil	Barrels		318		3,761					383			3,335
Oil	Barrels		318		(3,761	)				383			(3,334	)

The Corporation's credit exposure on commodity swaps/options is limited to the net favorable value of all swaps/options by each counterparty. In such cases, credit exposure may be reduced by the amount of collateral pledged by the counterparty. The Corporation's credit exposure relating to commodity swaps/options with bank customers was approximately $15.6 million at March 31, 2008. This credit exposure is partly mitigated as transactions with customers are generally secured by the collateral, if any, securing the underlying transaction being hedged. The Corporation had no credit exposure in excess of collateral pledged relating to commodity swaps/options with upstream financial institution counterparties at March 31, 2008. Collateral levels for upstream financial institution counterparties are monitored and adjusted on a regular basis for changes in commodity swap/option values.

Foreign Currency Derivatives. The Corporation enters into foreign currency forward contracts to accommodate the business needs of its customers. Upon the origination of a foreign currency forward contract with a customer, the Corporation simultaneously enters into an offsetting contract with a third party to negate the exposure to fluctuations in foreign currency exchange rates. The notional amounts and fair values of open foreign currency forward contracts were not significant at March 31, 2008 and December 31, 2007.

Note 12 - Earnings Per Common Share

Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of shares determined for the basic computation plus the dilutive effect of stock options and non-vested stock granted using the treasury stock method.

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share.

							Three Months Ended
							March 31,

									2008			2007


Weighted-average shares outstanding for basic earnings per share									58,538,014			59,675,798
Dilutive effect of stock options and non-vested stock awards									520,238			919,241

Weighted-average shares outstanding for diluted earnings per share									59,058,252			60,595,039

Note 13 - Stock-Based Compensation

A combined summary of activity in the Corporation's active stock plans is presented in the following table.

			Non-Vested Stock Awards Outstanding				Stock Options Outstanding

	Shares Available for Grant		Number of Shares		Weighted- Average Grant-Date Fair Value		Number of Shares			Weighted- Average Exercise Price


Balance, January 1, 2008	1,896,150			233,100	$	50.68		4,526,276		$		45.44

Granted	(2,000	)		-		-		2,000			53.55
Stock options exercised	-			-		-		(488,250	)		30.76
Stock awards vested	-			-		-		-			-
Forfeited	3,250			-		-		(3,250	)		51.11

Balance, March 31, 2008	1,897,400			233,100		50.68		4,036,776			47.21


During the three months ended March 31, 2008 and 2007, proceeds from stock option exercises totaled $15.0 million and $3.7 million. During the three months ended March 31, 2008, all of the shares issued in connection with stock option exercises were issued from available treasury stock.


Stock-based compensation expense totaled $2.4 million during both the three months ended March 31, 2008 and 2007. Stock-based compensation expense is recognized ratably over the requisite service period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $16.9 million at March 31, 2008, while unrecognized stock-based compensation expense related to non-vested stock awards was $6.0 million at March 31, 2008.

Note 14 - Defined Benefit Plans

The components of the combined net periodic benefit cost for the Corporation's qualified and non-qualified defined benefit pension plans were as follows:

		Three Months Ended March 31,

			2008			2007


Expected return on plan assets, net of expenses	$		(2,310	)	$	(2,047		)
Interest cost on projected benefit obligation			1,936			1,869
Net amortization and deferral			307			664

Net periodic benefit cost	$		(67	)	$	486


The Corporation's non-qualified defined benefit pension plan is not funded. Contributions to the qualified defined benefit pension plan totaled $5.2 million through March 31, 2008. The Corporation does not expect to make any additional contributions during the remainder of 2008.

The net periodic benefit cost related to post-retirement healthcare benefits offered by the Corporation to certain former employees was not significant during either of the reported periods.

Note 15 - Income Taxes

Income tax expense was as follows:

			Three Months Ended March 31,

			2008			2007


Current income tax expense	$		23,108		$	23,629
Deferred income tax expense (benefit)			175			(740		)

Income tax expense as reported	$		23,283		$	22,889


Effective tax rate			30.6	%			32.6	%


Net deferred tax liabilities totaled $10.9 million at March 31, 2008. Net deferred tax assets totaled $27.9 million at December 31, 2007. No valuation allowance was recorded against deferred tax assets, as the amounts are recoverable through taxes paid in prior years.

The Corporation adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109," effective January 1, 2007. Interpretation 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Interpretation 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. Adoption of Interpretation 48 did not have a significant impact on the Corporation's financial statements.

The Corporation files income tax returns with the U.S. Internal Revenue Service ("IRS"). The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2004. During the third quarter of 2007, the IRS completed an examination of the Corporation's U.S. income tax returns for 2004 and 2005. The adjustments resulting from the examination did not have a significant impact on the Corporation's financial statements.

Note 16 - Operating Segments

The Corporation is managed under a matrix organizational structure whereby significant lines of business, including Banking and the Financial Management Group ("FMG"), overlap a regional reporting structure. The regions are primarily based upon geographic location and include Austin, Corpus Christi, Dallas, Fort Worth, Houston, Rio Grande Valley, San Antonio and Statewide. The Corporation is primarily managed based on the line of business structure. In that regard, all regions have the same lines of business, which have the same product and service offerings, have similar types and classes of customers and utilize similar service delivery methods. Pricing guidelines for products and services are the same across all regions. The regional reporting structure is primarily a means to scale the lines of business to provide a local, community focus for customer relations and business development.

The Corporation has two primary operating segments, Banking and FMG, that are delineated by the products and services that each segment offers. The Banking operating segment includes both commercial and consumer banking services, Frost Insurance Agency and Frost Securities, Inc. Commercial banking services are provided to corporations and other business clients and include a wide array of lending and cash management products. Consumer banking services include direct lending and depository services. Frost Insurance Agency provides insurance brokerage services to individuals and businesses covering corporate and personal property and casualty products, as well as group health and life insurance products. Frost Securities, Inc. provides advisory and private equity services to middle market companies. The FMG operating segment includes fee-based services within private trust, retirement services, and financial management services, including personal wealth management and brokerage services. The third operating segment, Non-Banks, is for the most part the parent holding company, as well as certain other insignificant non-bank subsidiaries of the parent that, for the most part, have little or no activity. The parent company's principal activities include the direct and indirect ownership of the Corporation's banking and non-banking subsidiaries and the issuance of debt. Its principal source of revenue is dividends from its subsidiaries.

The accounting policies of each reportable segment are the same as those of the Corporation except for the following items, which impact the Banking and FMG segments: (i) expenses for consolidated back-office operations and general overhead-type expenses such as executive administration, accounting and internal audit are allocated to operating segments based on estimated uses of those services, (ii) income tax expense for the individual segments is calculated essentially at the statutory rate, and (iii) the parent company records the tax expense or benefit necessary to reconcile to the consolidated total.

The Corporation uses a match-funded transfer pricing process to assess operating segment performance. The process helps the Corporation to (i) identify the cost or opportunity value of funds within each business segment, (ii) measure the profitability of a particular business segment by relating appropriate costs to revenues, (iii) evaluate each business segment in a manner consistent with its economic impact on consolidated earnings, and (iv) enhance asset and liability pricing decisions.

Summarized operating results by segment were as follows:

		Banking		FMG			Non-Banks				Consolidated


Revenues from (expenses to) external customers:
Three months ended:
March 31, 2008	$		174,647		$	28,966	$	(3,505	)	$		200,108
March 31, 2007			172,028			26,997		(4,120	)			194,905

Net income (loss):
Three months ended:
March 31, 2008	$		49,436		$	6,263	$	(2,919	)	$		52,780
March 31, 2007			48,520			5,527		(6,768	)			47,279

Note 17 - Fair Value Measurements

Effective January 1, 2008, the Corporation adopted the provisions of SFAS No. 157, "Fair Value Measurements," for financial assets and financial liabilities. In accordance with Financial Accounting Standards Board Staff Position (FSP) No. 157-2, "Effective Date of FASB Statement No. 157," the Corporation will delay application of SFAS 157 for non-financial assets and non-financial liabilities, until January 1, 2009. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Corporation's financial assets and financial liabilities carried at fair value effective January 1, 2008.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Corporation's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Corporation's valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available for Sale. Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Corporation obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.

Trading Securities. U.S. Treasury Bills are reported at fair value utilizing Level 1 inputs. Other securities classified as trading are reported at fair value utilizing Level 2 inputs in the same manner as described above for securities available for sale.

Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Corporation obtains dealer quotations to value its prime-rate loan swaps, commodity swaps/options and foreign currency contracts. The Corporation utilizes internal valuation models with observable market data inputs to estimate fair values of customer interest rate swaps, caps and floors. The Corporation also obtains dealer quotations for these derivatives for comparative purposes to assess the reasonableness of the model valuations.

Impaired Loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on customized discounting criteria.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Level 1

Level 2

Level 3

Total

Inputs

Fair Value

Securities available for sale

3,274,645

Trading account securities

12,951

1,052

14,003

Derivative assets

130,755

Derivative liabilities

52,076

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at March 31, 2008.

Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. As stated above, SFAS 157 will be applicable to these fair value measurements beginning January 1, 2009.

Effective January 1, 2008, the Corporation adopted the provisions of SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115." SFAS 159 permits the Corporation to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, thus the Corporation may record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principals, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. Adoption of SFAS 159 on January 1, 2008 did not have a significant impact on the Corporation's financial statements.

Note 18 - New Accounting Standards

Statements of Financial Accounting Standards

SFAS No. 141, "Business Combinations (Revised 2007)." SFAS 141R replaces SFAS 141, "Business Combinations," and applies to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS 141. Under SFAS 141R, the requirements of SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities," would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS 5, "Accounting for Contingencies." SFAS 141R is expected to have a significant impact on the Corporation's accounting for business combinations closing on or after January 1, 2009.

SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments." SFAS 155 amends SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 155 (i) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (ii) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133, (iii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (iv) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (v) amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. Adoption of SFAS 155 on January 1, 2007 did not have a significant impact on the Corporation's financial statements.

SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140." SFAS 156 amends SFAS 140. "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125," by requiring, in certain situations, an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. All separately recognized servicing assets and servicing liabilities are required to be initially measured at fair value. Subsequent measurement methods include the amortization method, whereby servicing assets or servicing liabilities are amortized in proportion to and over the period of estimated net servicing income or net servicing loss or the fair value method, whereby servicing assets or servicing liabilities are measured at fair value at each reporting date and changes in fair value are reported in earnings in the period in which they occur. If the amortization method is used, an entity must assess servicing assets or servicing liabilities for impairment or increased obligation based on the fair value at each reporting date. Adoption of SFAS 156 on January 1, 2007 did not have a significant impact on the Corporation's financial statements.

SFAS No. 157, "Fair Value Measurements." SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements (see Note 17 - Fair Value Measurements).

SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115." SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates (see Note 17 - Fair Value Measurements).

SFAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No. 51." SFAS 160 amends Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial Statements," to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. SFAS 160 is effective for the Corporation on January 1, 2009 and is not expected to have a significant impact on the Corporation's financial statements.

SFAS No. 161, "Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133." SFAS 161 amends SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," to amend and expand the disclosure requirements of SFAS 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity's financial position, results of operations and cash flows. To meet those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for the Corporation on January 1, 2009 and is not expected to have a significant impact on the Corporation's financial statements.

Financial Accounting Standards Board Interpretations

FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109." The Corporation adopted Interpretation No. 48 on January 1, 2007. See Note 15 - Income Taxes for additional information.

Emerging Issues Task Force Issues

Emerging Issues Task Force ("EITF") Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements." EITF 06-4 requires the recognition of a liability and related compensation expense for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to post-retirement periods. Under EITF 06-4, life insurance policies purchased for the purpose of providing such benefits do not effectively settle an entity's obligation to the employee. Accordingly, the entity must recognize a liability and related compensation expense during the employee's active service period based on the future cost of insurance to be incurred during the employee's retirement. If the entity has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions." The Corporation adopted EITF 06-4 on January 1, 2008 as a change in accounting principle through a cumulative-effect adjustment to retained earnings totaling $240 thousand.

SEC Staff Accounting Bulletins

SAB No. 109, "Written Loan Commitments Recorded at Fair Value Through Earnings." SAB No. 109 supersedes SAB 105, "Application of Accounting Principles to Loan Commitments," and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The guidance in SAB 109 became effective on January 1, 2008 and did not have a material impact on the Corporation's financial statements.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial Review
Cullen/Frost Bankers, Inc.

The following discussion should be read in conjunction with the Corporation's consolidated financial statements, and notes thereto, for the year ended December 31, 2007, included in the 2007 Form 10-K. Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results for the year ending December 31, 2008 or any future period.

Dollar amounts in tables are stated in thousands, except for per share amounts.

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Quarterly Report on Form 10-Q 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:

w	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.
w	Changes in the level of non-performing assets and charge-offs.
w	Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.
w	The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board.
w	Inflation, interest rate, securities market and monetary fluctuations.
w	Political instability.
w	Acts of God or of war or terrorism.
w	The timely development and acceptance of new products and services and perceived overall value of these products and services by users.
w	Changes in consumer spending, borrowings and savings habits.
w	Changes in the financial performance and/or condition of the Corporation's borrowers.
w	Technological changes.
w	Acquisitions and integration of acquired businesses.
w	The ability to increase market share and control expenses.
w	Changes in the competitive environment among financial holding companies and other financial service providers.
w	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.
w	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.
w	Changes in the Corporation's organization, compensation and benefit plans.
w	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.
w	Greater than expected costs or difficulties related to the integration of new products and lines of business.
w	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.

Application of Critical Accounting Policies and Accounting Estimates

The accounting and reporting policies followed by the Corporation conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Corporation bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The Corporation considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Corporation's financial statements. Accounting policies related to the allowance for possible loan losses are considered to be critical, as these policies involve considerable subjective judgment and estimation by management.

For additional information regarding critical accounting policies, refer to Note 1 - Summary of Significant Accounting Policies in the notes to consolidated financial statements and the sections captioned "Application of Critical Accounting Policies" and "Allowance for Possible Loan Losses" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2007 Form 10-K. There have been no significant changes in the Corporation's application of critical accounting policies related to the allowance for possible loan losses since December 31, 2007.

Overview

A discussion of the Corporation's results of operations is presented below. Certain reclassifications have been made to make prior periods comparable. Taxable-equivalent adjustments are the result of increasing income from tax-free loans and securities by an amount equal to the taxes that would be paid if the income were fully taxable based on a 35% federal income tax rate, thus making tax-exempt asset yields comparable to taxable asset yields. All of the Corporation's acquisitions during the reported periods were accounted for as purchase transactions, and as such, their related results of operations are included from the date of acquisition. See Note 2 - Mergers and Acquisitions in the accompanying notes to consolidated financial statements included elsewhere in this report.

Results of Operations

Net income totaled $52.8 million, or $0.89 diluted per share, for the three months ended March 31, 2008 compared to $47.3 million, or $0.78 diluted per share, for the three months ended March 31, 2007 and $54.7 million, or $0.93 diluted per share, for the three months ended December 31, 2007.

Selected income statement data and other selected data for the comparable periods was as follows:

	Three Months Ended

	March 31,			December 31,			March 31,
	2008			2007			2007


Taxable-equivalent net interest income	$	134,767		$	135,269		$	131,127
Taxable-equivalent adjustment		4,887			4,509			3,294

Net interest income		129,880			130,760			127,833
Provision for possible loan losses		4,005			3,576			2,650

Net interest income after provision for possible loan losses		125,875			127,184			125,183
Non-interest income		70,228			66,383			67,072
Non-interest expense		120,040			114,150			122,087

Income before income taxes		76,063			79,417			70,168
Income taxes		23,283			24,717			22,889

Net income	$	52,780		$	54,700		$	47,279


Earnings per common share - basic	$	0.90		$	0.94		$	0.79
Earnings per common share - diluted		0.89			0.93			0.78
Dividends per common share		0.40			0.40			0.34

Return on average assets		1.59	%		1.65	%		1.47	%
Return on average equity		13.89			15.18			13.78

Net income for the three months ended March 31, 2008 increased $5.5 million, or 11.6%, compared to the same period in 2007. The increase was primarily the result of a $3.2 million increase in non-interest income, a $2.0 million increase in net interest income and a $2.0 million decrease in non-interest expense partly offset by a $1.4 million increase in the provision for possible loan losses and a $394 thousand increase in income tax expense.

Net income for the first quarter of 2008 decreased $1.9 million, or 3.5%, from the fourth quarter of 2007. The decrease was primarily the result of a $5.9 million increase in non-interest expense, an $880 thousand decrease in net interest income and a $429 thousand increase in the provision for possible loan losses partly offset by a $3.8 million increase in non-interest income and a $1.4 million decrease in income tax expense.

Details of the changes in the various components of net income are further discussed below.

Net Interest Income

Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Corporation's largest source of revenue, representing 64.9% of total revenue during the first three months of 2008. Net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin.

The Federal Reserve Board influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. The Corporation's loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, began 2007 at 8.25% and decreased 50 basis points in the third quarter and 50 basis in the fourth quarter to end the year at 7.25%. During the first quarter of 2008, the prime interest rate decreased 200 basis points to end the quarter at 5.25%. The federal funds rate, which is the cost of immediately available overnight funds, has moved in a similar manner. It began 2007 at 5.25% and decreased 50 basis points in the third quarter and 50 basis in the fourth quarter to end the year at 4.25%. During the first quarter of 2008, the federal funds rate decreased 200 basis points to end the quarter at 2.25%.

The Corporation's balance sheet has historically been asset sensitive, meaning that earning assets generally reprice more quickly than interest-bearing liabilities. Therefore, the Corporation's net interest margin was likely to increase in sustained periods of rising interest rates and decrease in sustained periods of declining interest rates. In an effort to make the Corporation's balance sheet less sensitive to changes in interest rates, the Corporation entered into interest rate swaps during the fourth quarter of 2007 that effectively convert $1.2 billion of loans with variable interest rates tied to the prime rate into fixed rate loans for a period of seven years (see Note 17 - Derivative Financial Instruments in the 2007 Form 10-K). As a result, the Corporation's balance sheet is more interest-rate neutral and changes in interest rates are expected to have a less significant impact on the Corporation's net interest margin. The Corporation is primarily funded by core deposits, with non-interest-bearing demand deposits historically being a significant source of funds. This lower-cost funding base is expected to have a positive impact on the Corporation's net interest income and net interest margin in a rising interest rate environment. As stated above, during the first quarter of 2008, the federal funds rate and the prime interest rate each decreased 200 basis points to 2.25% and 5.25%, respectively. The Corporation currently believes that there is a reasonable possibility that the federal funds rate and the prime interest rate will decrease further in the foreseeable future; however, there can be no assurance to that effect or as to the magnitude of any decrease should a decrease occur, as changes in market interest rates are dependent upon a variety of factors that are beyond the Corporation's control. Further analysis of the components of the Corporation's net interest margin is presented below.

The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or average interest rate change in proportion to the absolute amounts of the change in each. The comparisons between the quarters include an additional change factor that shows the effect of the difference in the number of days in each period, as further discussed below.

	First Quarter			First Quarter
	2008 vs.			2008 vs.
	Fourth Quarter			First Quarter
	2007			2007


Due to changes in average volume	$	1,799		$	1,731
Due to changes in average interest rates		(831	)		428
Due to difference in the number of days in each of the comparable periods		(1,470	)		1,481

Total change	$	(502	)	$	3,640

Taxable-equivalent net interest income for the three months ended March 31, 2008 increased $3.6 million, or 2.8%, compared to the same period in 2007. The increase primarily resulted from an increase in the average volume of interest-earning assets, an increase in the number of days in the first quarter of 2008 due to leap year and an increase in the net interest margin. The average volume of interest-earning assets for the first quarter of 2008 increased $255.9 million compared to the same period in 2007. Over the same time frame, the net interest margin increased 2 basis points from 4.65% in 2007 to 4.67% in 2008. Taxable-equivalent net interest income for the first quarter of 2008 included 91 days compared to 90 days for the first quarter of 2007. The additional day added approximately $1.5 million to taxable-equivalent net interest income during the first quarter of 2008. Excluding the impact of the additional day during the first quarter of 2008 results in an effective increase in taxable-equivalent net interest income of approximately $2.2 million during the first quarter of 2008 compared to the same period in 2007. This effective increase was the result of the aforementioned increases in the average volume of interest-earning assets and net interest margin. Despite lower average market interest rates, the net interest margin increased during the first quarter of 2008 compared to the same period in 2007 in part due to a disproportionally larger decrease in the average cost of funds, which decreased 103 basis points from 3.28% in 2007 to 2.25% in 2008, compared to the decrease in the average yield on interest-earning assets, which decreased 70 basis points from 6.95% in 2007 to 6.25% in 2008. The decreases in the average cost of funds and the average yield on interest-earning assets were primarily due to a decrease in average market interest rates. The effect of lower average market interest rates on the average yield on interest-earning assets was partly limited by the aforementioned interest rate swaps on variable-rate loans. In addition to lower average market interest rates, the cost of funds was further impacted by an increase in the relative proportion of lower-cost savings and interest checking deposits in 2008 relative to 2007. The negative impact of lower average market interest rates on the average yield on interest-earning assets was partly limited as the Corporation had a larger proportion of average interest-earning assets invested in higher-yielding loans, which increased from 65.2% of total average interest-earning assets during the first quarter of 2007 to 68.2% of total average interest-earning assets during the first quarter of 2008, and a lower proportion of average interest-earning assets invested in lower-yielding federal funds sold and resale agreements during 2008 relative to 2007.

Taxable-equivalent net interest income for the first quarter of 2008 decreased $502 thousand, or 0.4%, from the fourth quarter of 2007. The decrease primarily resulted from a decrease in the number of days in the first quarter and a decrease in the net interest margin partly offset by an increase in the average volume of interest-earning assets. The net interest margin decreased 3 basis points from 4.70% in the fourth quarter of 2007 to 4.67% in the first quarter of 2008. The average volume of interest-earning assets for the first quarter of 2008 increased $148.3 million compared to the fourth quarter of 2007. Taxable-equivalent net interest income for the fourth quarter of 2007 included 92 days compared to 91 days for the first quarter of 2008. The additional day added approximately $1.5 million to taxable-equivalent net interest income during the fourth quarter of 2007. Excluding the impact of the additional day during the fourth quarter of 2007 results in an effective increase in taxable-equivalent net interest income of approximately $968 thousand during the first quarter of 2008. This effective increase was the result of the aforementioned increase in average earning assets partly offset by the 3 basis point decrease in the net interest margin. The decrease in the net interest margin was primarily due to a decrease in average market interest rates. The negative impact of lower average market interest rates on the average yield on interest-earning assets was partly limited by the aforementioned interest rate swaps on variable-rate loans as well as the fact that the Corporation had a larger proportion of average interest-earning assets invested in higher-yielding loans, which increased from 66.2% of total average interest-earning assets during the fourth quarter of 2007 to 68.2% of total average interest-earning assets during the first quarter of 2008.

The average volume of loans, the Corporation's primary category of interest-earning assets, increased $513.7 million and $357.2 million during the first quarter of 2008 compared to the first and fourth quarters of 2007, respectively. The average yield on loans was 6.75% during the first quarter of 2008 compared to 7.90% during the first quarter of 2007 and 7.45% during the fourth quarter of 2007. As stated above, the Corporation had a larger proportion of average interest-earning assets invested in loans during the first quarter of 2008 compared to the first and fourth quarters of 2007. Such investments have significantly higher yields compared to securities and federal funds sold and resell agreements and, as such, have a positive effect on the net interest margin. The average volume of securities increased $204.1 million and decreased $58.7 million during the first quarter of 2008 compared to the first and fourth quarters of 2007, respectively. The average yield on securities was 5.34% during the first quarter of 2008 compared to 5.15% during the first quarter of 2007 and 5.30% during the fourth quarter of 2007. The increase in the average yield on securities during 2008 compared to the first and fourth quarters of 2007 resulted as the Corporation had a larger proportion of securities invested in higher-yielding, tax-exempt municipal securities. Average federal funds sold and resell agreements during the first quarter of 2008 decreased $465.1 million compared to the first quarter of 2007 and decreased $113.4 million compared to the fourth quarter of 2007. The average yield on federal funds sold and resell agreements was 3.23% during the first quarter of 2008 compared to 5.33% during the first quarter of 2007 and 4.56% during the fourth quarter of 2007.

Average deposits increased $141.8 million and $146.3 million during the first quarter of 2008 compared to the first and fourth quarters of 2007, respectively. Average interest-bearing deposits for the first quarter of 2008 increased $165.4 million and $111.5 million compared to the first and fourth quarters of 2007, respectively. The ratio of average interest-bearing deposits to total average deposits was 66.2% for the first quarter of 2008 compared to 65.5% and 66.0% during the first and fourth quarters of 2007, respectively. The average cost of interest-bearing deposits and total deposits was 2.02% and 1.33% during the first quarter of 2008 compared to 2.97% and 1.94% during the first quarter of 2007 and 2.54% and 1.68% during the fourth quarter of 2007. The decrease in the average cost of interest-bearing deposits was primarily the result of decreases in interest rates offered on deposit products due to decreases in average market interest rates.

The Corporation's net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was 4.00% during the first quarter of 2008 compared to 3.67% and 3.87% during the first and fourth quarters of 2007, respectively. The net interest spread, as well as the net interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment. A discussion of the effects of changing interest rates on net interest income is set forth in Item 3. Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.

The Corporation's hedging policies permit the use of various derivative financial instruments, including interest rate swaps, swaptions, caps and floors, to manage exposure to changes in interest rates. Details of the Corporation's derivatives and hedging activities are set forth in Note 11 - Derivative Financial Instruments in the accompanying notes to consolidated financial statements included elsewhere in this report. Information regarding the impact of fluctuations in interest rates on the Corporation's derivative financial instruments is set forth in Item 3. Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.

Provision for Possible Loan Losses

The provision for possible loan losses is determined by management as the amount to be added to the allowance for possible loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management's best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for possible loan losses totaled $4.0 million for the first quarter of 2008 compared to $3.6 million for the fourth quarter of 2007 and $2.7 million for the first quarter of 2007. See the section captioned "Allowance for Possible Loan Losses" elsewhere in this discussion for further analysis of the provision for possible loan losses.

Non-Interest Income

The components of non-interest income were as follows:

	Three Months Ended

		March 31,		December 31,			March 31,
		2008			2007		2007


Trust fees	$	18,282		$	18,009	$	16,907
Service charges on deposit accounts		19,593			21,044		18,831
Insurance commissions and fees		11,158			5,979		10,628
Other charges, commissions and fees		6,931			7,949		6,858
Net gain (loss) on securities transactions		(48	)		15		-
Other		14,312			13,387		13,848

Total	$	70,228		$	66,383	$	67,072


Total non-interest income for the three months ended March 31, 2008 increased $3.2 million, or 4.7%, compared to the same period in 2007 and $3.8 million, or 5.8%, compared to the fourth quarter of 2007. Changes in the components of non-interest income are discussed below.

Trust Fees. Trust fee income for the three months ended March 31, 2008 increased $1.4 million, or 8.1%, compared to the same period in 2007. Investment fees are the most significant component of trust fees, making up approximately 70% of total trust fees for the first three months of 2008. Investment and other custodial account fees are generally based on the market value of assets within a trust account. Volatility in the equity and bond markets impacts the market value of trust assets and the related investment fees.

The $1.4 million increase in trust fee income during the three months ended March 31, 2008 compared to the same period in 2007 was primarily the result of increases in investment fees (up $892 thousand), oil and gas trust management fees (up $628 thousand) and securities lending income (up $536 thousand). These increases were partly offset by a decrease in estate fees (down $444 thousand). The increase in investment fees was primarily due to growth in average trust assets and the number of trust accounts. The growth in average trust assets was primarily in managed accounts, which have a higher fee rate than non-managed accounts. Equity valuations during the first quarter of 2008 have been lower on average compared to the first quarter of 2007 while bond valuations are higher as a result of lower market interest rates. The increase in oil and gas trust management fees was partly related to new lease bonuses and increased production. The increase in securities lending income was due in part to increased transaction spreads.

Trust fee income for the first quarter of 2008 increased $273 thousand, or 1.5%, from the fourth quarter of 2007. The increase was primarily due to increases in oil and gas trust management fees (up $454 thousand) and securities lending income (up $341 thousand). These increases were partly offset by a decrease in estate fees (down $522 thousand).

At March 31, 2008, trust assets, including both managed assets and custody assets, were primarily composed of fixed income securities (41.5% of trust assets), equity securities (37.8% of trust assets) and cash equivalents (14.0% of trust assets). The estimated fair value of trust assets was $24.4 billion (including managed assets of $10.5 billion and custody assets of $13.9 billion) at March 31, 2008, compared to $24.8 billion (including managed assets of $10.5 billion and custody assets of $14.3 billion) at December 31, 2007 and $23.6 billion (including managed assets of $9.3 billion and custody assets of $14.3 billion) at March 31, 2007.

Service Charges on Deposit Accounts. Service charges on deposit accounts for the three months ended March 31, 2008 increased $762 thousand, or 4.0%, compared to the same period in 2007. Increases in overdraft/insufficient funds charges on consumer accounts (up $598 thousand) and service charges on commercial accounts (up $475 thousand) were partly offset by decreases in service charges on consumer accounts (down $680 thousand). The increase in overdraft/insufficient funds charges on consumer accounts was partly the result of growth in deposit accounts and an increase in the per-occurrence fee charged during the second quarter of 2007. The increase in service charges on commercial accounts was primarily related to increased treasury management fees. The increased treasury management fees resulted primarily from a lower earnings credit rate. The earnings credit rate is the value given to deposits maintained by treasury management customers. Because interest rates are lower compared to the first quarter of 2007, deposit balances have become less valuable and are yielding a lower earnings credit rate. As a result, customers are paying for more of their services through fees rather than with earning credits applied to their deposit balances. The decrease in service charges on deposit accounts is partly the result of a shift in the relative mix of deposit products towards lower cost/free accounts, which is partly related to a restructuring of the Corporation deposit product offerings.

Service charges on deposit accounts for the first quarter of 2008 decreased $1.5 million, or 6.9%, compared to the fourth quarter of 2007. The decrease was primarily due to a decrease in overdraft/insufficient funds charges on consumer accounts (down $1.6 million). The decline in overdraft/insufficient funds charges on consumer accounts was partly seasonal in nature. This decrease was partly offset by an increase in service charges on commercial accounts (up $376 thousand).

Insurance Commissions and Fees. Insurance commissions and fees for the three months ended March 31, 2008 increased $530 thousand, or 5.0%, compared to the same period in 2007. The increase is related to an increase in commission income (up $673 thousand) partially offset by a decrease in contingent commissions (down $142 thousand). The growth in commission income was partly due to normal variation in the demand for insurance products. Additionally, the first quarter 2008 includes the impact of the acquisition of Prime Benefits, Inc. during the fourth quarter of 2007 (See Note 2 - Mergers and Acquisitions).

Insurance commissions and fees include contingent commissions totaling $3.3 million and $3.5 million during the three months ended March 31, 2008 and 2007. Contingent commissions primarily consist of amounts received from various property and casualty insurance carriers related to the loss performance of insurance policies previously placed. Such commissions are seasonal in nature and are generally received during the first quarter of each year. These commissions totaled $3.0 million and $3.3 million during the three months ended March 31, 2008 and 2007. Contingent commissions also include amounts received from various benefit plan insurance companies related to the volume of business generated and/or the subsequent retention of such business. These commissions totaled $285 thousand and $125 thousand during the three months ended March 31, 2008 and 2007.

Insurance commissions and fees for the first quarter of 2008 increased $5.2 million, or 86.6%, compared to the fourth quarter of 2007. The increase was primarily due to the seasonal increase in contingent commissions (up $3.3 million) received from various insurance carriers related to the performance of insurance policies previously placed. Commission income for the first quarter of 2008 increased $1.9 million compared to the fourth quarter of 2007 primarily due to normal variation in the timing of renewals and the market demand for insurance products. Additionally, the first quarter 2008 includes a full quarter's impact of the acquisition of Prime Benefits, Inc. during the fourth quarter of 2007.

Other Charges, Commissions and Fees. Other charges, commissions and fees for the three months ended March 31, 2008 increased $73 thousand, or 1.1%, compared to the same period in 2007. The increase was primarily related to increases in commission income related to the sale of money market accounts (up $391 thousand) and commission income related to the sale of annuities (up $306 thousand). These increases were partly offset by a decrease in letter of credit fees (down $223 thousand) and ATM fees (down $182 thousand), as well as decreases in various other categories of service charges.

Other charges, commissions and fees for the first quarter of 2008 decreased $1.0 million, or 12.8%, compared to the fourth quarter of 2007. The decrease was primarily due to decreases in investment banking fees related to corporate advisory services (down $580 thousand), as well as decreases in various other categories of service charges. Investment banking fees related to corporate advisory services are transaction based and can vary significantly from quarter to quarter.

Net Gain/Loss on Securities Transactions. The Corporation sold available-for-sale securities with an amortized cost totaling $599.1 million and $511 thousand during the three months ended March 31, 2008 and 2007. The Corporation realized a net loss of $48 thousand on the 2008 sales. No gains or losses were realized on the 2007 sales. The securities sales during the first quarter of 2008 were related to a restructuring of the Corporation's securities portfolio to help improve net interest income in light of actions taken by the Federal Reserve that resulted in 200 basis point declines in both the federal funds rate and the prime rate. The proceeds from the sales were reinvested in longer-term securities with higher yields.

Other Non-Interest Income. Other non-interest income increased $464 thousand, or 3.4%, for the three months ended March 31, 2008 compared to the same period in 2007. The increase was primarily related to increases in income from check card usage (up $599 thousand), income from securities trading and customer derivative activities (up $188 thousand), increases in sundry income from various miscellaneous items (up $170 thousand). These increases were partly offset by a decrease in gains on sales of assets (down $600 thousand). During the first quarter of 2008, sundry income from various miscellaneous items included $1.9 million related to the partial redemption of shares received from the VISA, Inc. initial public offering resulting from the Corporation's membership interest in VISA USA. A portion of the shares allocated to the Corporation in the initial public offering were withheld to cover the costs and liabilities associated with certain litigation for which the Corporation, based on its prior proportionate membership interest in VISA USA, is obligated to indemnify VISA under its indemnification agreement with VISA USA. The Corporation accrued $548 thousand in connection with its obligations under the indemnification agreement during the fourth quarter of 2007. Since a portion of the shares allocated to the Corporation in the initial public offering were withheld, the Corporation was not required to make any cash payments related to the indemnification agreement. As such, the indemnification accrual related to certain pending litigation was reversed during the first quarter of 2008 and included in the aforementioned $1.9 million of income. Additional accruals may be required in future periods should the Corporation's estimate of its obligations under the indemnification agreement change. Sundry income from various miscellaneous items during the first quarter of 2007 included $1.1 million in income recognized from the collection of interest and other charges on loans charged-off in prior years and $411 thousand in income recognized in connection with a settlement.

Other non-interest income for the first quarter of 2008 increased $925 thousand, or 6.9%, compared to the fourth quarter of 2007. Contributing to the increase were increases in sundry income from various miscellaneous items (up $1.3 million), including the impact of the Visa, Inc. initial public offering discussed above, and gains on the sale of student loans (up $386 thousand). These increases were partly offset by a decrease in gains on sales of assets (down $284 thousand).

Non-Interest Expense

The components of non-interest expense were as follows:

	Three Months Ended

		March 31,	December 31,			March 31,
		2008		2007		2007


Salaries and wages	$	55,138	$	54,069	$	51,714
Employee benefits		14,113		9,945		14,426
Net occupancy		9,647		10,198		9,634
Furniture and equipment		8,950		8,870		6,928
Intangible amortization		2,046		2,162		2,326
Other		30,146		28,906		37,059

Total	$	120,040	$	114,150	$	122,087


Total non-interest expense for the three months ended March 31, 2008 decreased $2.0 million, or 1.7%, compared to the same period in 2007. Total non-interest expense for the first quarter of 2008 increased $5.9 million, or 5.2%, compared to the fourth quarter of 2007. Changes in the components of non-interest expense are discussed below.

Salaries and Wages. Salaries and wages for the three months ended March 31, 2008 increased $3.4 million, or 6.6%, compared to the same period in 2007 and increased $1.1 million, or 2.0%, compared to the fourth quarter of 2007. The increases were primarily related to normal, annual merit increases and increases in headcount.

Employee Benefits. Employee benefits for the three months ended March 31, 2008 decreased $313 thousand, or 2.2%, compared to the same period in 2007. The decrease was primarily related to decreases in expenses related to the Corporation's defined benefit retirement and restoration plans (down $617 thousand) partly offset by an increase in payroll tax expense (up $328 thousand).

Employee benefits for the first quarter of 2008 increased $4.2 million, or 41.9%, compared to the fourth quarter of 2007 primarily due to increases in payroll taxes (up $2.0 million), medical insurance expense (up $1.7 million) and workers compensation insurance expense (up $660 thousand). The Corporation generally experiences a decline in payroll taxes during the fourth quarter each year as certain employees reach maximum taxable salary levels and higher levels of payroll taxes during the first quarter each year due to the annual incentive compensation payments. The increases in medical and workers compensation insurance expense were partly related to the fact that these expenses were reduced during the fourth quarter of 2007 as a result of lower projected costs. The increases related to payroll taxes, medical insurance and workers compensation insurance were partly offset by decreases in expenses related to the Corporation's defined benefit retirement and restoration plans (down $534 thousand).

The Corporation's defined benefit retirement and restoration plans were frozen effective as of December 31, 2001 and were replaced by a profit sharing plan. Management believes these actions reduce the volatility in retirement plan expense. However, the Corporation still has funding obligations related to the defined benefit and restoration plans and could recognize retirement expense related to these plans in future years, which would be dependent on the return earned on plan assets, the level of interest rates and employee turnover.


Net Occupancy. Net occupancy expense for the three months ended March 31, 2008 did not significantly fluctuate compared to the same period in 2007. Net occupancy expense for the first quarter of 2008 decreased $551 thousand, or 5.4%, compared to the fourth quarter of 2007. The decrease was primarily related to a decrease in repair expense (down $176 thousand) and security service expense (down $115 thousand), as well as decreases in various other categories of net occupancy.

Furniture and Equipment. Furniture and equipment expense for the three months ended March 31, 2008 increased $2.0 million, or 29.2%, compared to the same period in 2007 and did not significantly fluctuate compared to the fourth quarter of 2007. The increase from the three months ended March 31, 2007 was primarily related to an increase in software maintenance expense (up $573 thousand), depreciation expense related to furniture and fixtures (up $496 thousand), software amortization expense (up $461 thousand), equipment rental expense (up $256 thousand) and service contracts expense (up $248 thousand). During the second quarter of 2007, the Corporation entered into software maintenance contracts in connection with new operating platforms related to retail delivery.

Intangible Amortization. Intangible amortization is primarily related to core deposit intangibles and, to a lesser extent, intangibles related to customer relationships and non-compete agreements. Intangible amortization for the three months ended March 31, 2008 decreased $280 thousand, or 12.0%, compared to the same period in 2007 and $116 thousand, or 5.4%, compared to the fourth quarter of 2007. The decrease in amortization expense is primarily the result of a reduction in the annual amortization rate of certain intangible assets as the Corporation uses an accelerated amortization approach which results in higher amortization rates during the earlier years of the useful lives of intangible assets, as well as the completion of the amortization for certain intangible assets, partly offset by the impact of the additional amortization of intangible assets acquired in connection with the acquisition of Prime Benefits.

Other Non-Interest Expense. Other non-interest expense for the three months ended March 31, 2008 decreased $6.9 million, or 18.7%, compared to the same period in 2007. Significant components of the decrease included decreases in sundry expense from various miscellaneous items (down $6.7 million), losses on sales of foreclosed assets (down $800 thousand) and advertising/promotions expenses (down $798 thousand), partly offset by increases in professional service expense (up $732 thousand) and check card expense (up $216 thousand). Included in sundry expense from various miscellaneous items during the first quarter for 2007 was $5.3 million in expense recognized during the first quarter of 2007 related to a prepayment penalty and the write-off of the unamortized debt issuance costs incurred in connection with the redemption of $103.1 million of 8.42% junior subordinated deferrable interest debentures. Also included was $1.4 million in expense related to a contribution for previously unmatched employee contributions to the Corporation's 401(k) plan.

Total other non-interest expense for the first quarter of 2008 increased $1.2 million, or 4.3%, compared to the fourth quarter of 2007. Significant components of the increase include advertising/promotions expenses (up $735 thousand), professional service expense (up $630 thousand) and check card expense (up $307 thousand). These increases were partly offset by decreases in outside computer service expense (down $284 thousand).

Results of Segment Operations

The Corporation's operations are managed along two operating segments: Banking and the Financial Management Group (FMG). A description of each business and the methodologies used to measure financial performance is described in Note 16 - Operating Segments in the accompanying notes to consolidated financial statements included elsewhere in this report. Net income (loss) by operating segment is presented below:

	Three Months Ended

	March 31,			December 31,				March 31,
		2008			2007			2007


Banking	$	49,436		$	49,784		$	48,520
Financial Management Group		6,263			7,776			5,527
Non-Banks		(2,919	)		(2,860	)		(6,768	)

Consolidated net income	$	52,780		$	54,700		$	47,279


Banking

Net income for the three months ended March 31, 2008 increased $916 thousand, or 1.9%, compared to the same period in 2007. The increase was primarily the result of a $2.0 million increase in non-interest income, a $1.8 million decrease in income tax expense and a $655 thousand increase in net interest income partly offset by a $2.2 million increase in non-interest expense and a $1.3 million increase in the provision for possible loan losses.

Net interest income for the three months ended March 31, 2008 increased $655 thousand, or 0.5%, from the comparable period in 2007. The increase primarily resulted from an increase in the average volume of interest-earning assets, an increase in the number of days in the first quarter of 2008 due to leap year and an increase in the net interest margin. See the analysis of net interest income included in the section captioned "Net Interest Income" included elsewhere in this discussion.

The provision for possible loan losses for the three months ended March 31, 2008 totaled $4.0 million compared to $2.7 million for the same period in 2007. See the analysis of the provision for possible loan losses included in the section captioned "Allowance for Possible Loan Losses" included elsewhere in this discussion.

Non-interest income for the three months ended March 31, 2008 increased $2.0 million, or 4.4%, compared to the same period in 2007. This increase was primarily due to increases in other non-interest income, service charges on deposit accounts and insurance commissions and fees. See the analysis of other non-interest income, service charges on deposit accounts and insurance commissions and fees and included in the section captioned "Non-Interest Income" included elsewhere in this discussion.

Non-interest expense for the three months ended March 31, 2008 increased $2.2 million, or 2.3%, compared to the same period in 2007. The increase was primarily related to increases in salaries and wages and furniture and equipment expense partly offset by a decrease in other non-interest expense. The increase in salaries and wages was primarily related to normal, annual merit increases and increases in headcount. The increase in furniture and equipment expense was due to increases in software maintenance expense, depreciation expense related to furniture and fixtures, software amortization expense, equipment rental expense and service contracts expense. Other non-interest expense included decreases in advertising/promotion expenses, losses on sales of foreclosed assets and professional service expense, among other things. Other non-interest expense was higher in 2007 in part due to certain sundry charges incurred during the three months ended March 31, 2007. See the analysis of these items included in the section captioned "Non-Interest Expense" included elsewhere in this discussion.

Frost Insurance Agency, which is included in the Banking operating segment, had gross commission revenues of $11.2 million during the three months ended March 31, 2008 and $10.6 million during the three months ended March 31, 2007. Insurance commission revenues increased $530 thousand, or 5.0%, during the three months ended March 31, 2008 compared to the same period in 2007. The increase is primarily related to higher commission income (up $673 thousand) partly offset by a decrease in contingent commissions (down $142 thousand). See the analysis of insurance commissions and fees included in the section captioned "Non-Interest Income" included elsewhere in this discussion.

Financial Management Group (FMG)

Net income for the three months ended March 31, 2008 increased $736 thousand, or 13.3%, compared to the same period in 2007. The increase was primarily due to a $1.4 million increase in non-interest income and a $532 thousand increase in net interest income partly offset by a $762 thousand increase in non-interest expense and a $396 thousand increase in income tax expense.

Net interest income for the three months ended March 31, 2008 increased $532 thousand, or 10.4%, compared to the same period in 2007. The increase in net interest income resulted as the interest rate paid on FMGs repurchase agreements decreased by a disproportionally larger amount than the funds transfer price received for providing those funds. The increase was also partly due to an increase in the average volume of repurchase agreements.

Non-interest income for the three months ended March 31, 2008 increased $1.4 million, or 6.6%, compared to the same period in 2007. The increase was primarily due to increases in trust fees (up $1.4 million) and other charges, commissions and fees (up $610 thousand) partly offset by a decrease in other income (down $575 thousand).

Trust fee income is the most significant income component for FMG. Investment fees are the most significant component of trust fees, making up approximately 70% of total trust fees for the first three months of 2008. Investment and other custodial account fees are generally based on the market value of assets within a trust account. Volatility in the equity and bond markets impacts the market value of trust assets and the related investment fees. The increase in trust fee income during the three months ended March 31, 2008 compared to the same period in 2007 was primarily the result of increases in investment fees, oil and gas trust management fees and securities lending income. These increases were partly offset by a decrease in estate fees. See the analysis of trust fees included in the section captioned "Non-Interest Income" included elsewhere in this discussion.

The increase in other charges, commissions and fees during the first quarter of 2008 compared to 2007 was primarily due to increases in brokerage commissions as well as commission income related to the sale of money market accounts and annuities partly offset by a decrease in commission related to the sale of mutual funds.

Non-interest expense for the three months ended March 31, 2008 increased $762 thousand, or 4.1%, compared to the same period in 2007 primarily due to an increase in salaries and wages and employee benefits (up $1.2 million on a combined basis) partly offset by a decrease in other non-interest expense (down $323 thousand). The increase in salaries and wages and employee benefits were primarily related to normal, annual merit increases and increases in headcount. The decrease in other non-interest expense was primarily due to general decreases in the various components of other non-interest expense, including cost allocations.

Non-Banks

The net loss for the Non-Banks operating segment for the three months ended March 31, 2008 decreased $3.8 million compared to the same period in 2007. During the first quarter of 2007, the net loss included $5.3 million in expense recognized during the first quarter of 2007 related to a prepayment penalty and the write-off of the unamortized debt issuance costs incurred in connection with the redemption of $103.1 million of 8.42% junior subordinated deferrable interest debentures.

Income Taxes

The Corporation recognized income tax expense of $23.3 million, for an effective rate of 30.6%, for the three months ended March 31, 2008 compared to $22.9 million, for an effective rate of 32.6%, for the three months ended March 31, 2007. The effective income tax rates differed from the U.S. statutory rate of 35% during the comparable periods primarily due to the effect of tax-exempt income from loans, securities and life insurance policies. The decrease in the effective tax rate during 2008 was primarily the result of an increase in holdings of tax-exempt municipal securities.

Average Balance Sheet

Average assets totaled $13.4 billion for the three months ended March 31, 2008 representing an increase of $323.8 million, or 2.5%, compared to average assets for the same period in 2007. The increase was primarily reflected in earning assets, which increased $255.9 million, or 2.3%, during the first quarter of 2008 compared to the first quarter of 2007. The increase in earning assets was primarily due to a $513.7 million, or 6.9%, increase in average loans. Total deposits averaged $10.4 billion for the first quarter of 2008, increasing $141.8 million, or 1.4%, compared to the same period in 2007. Average interest-bearing accounts increased from 65.5% of average total deposits in 2007 to 66.2% of average total deposits in 2008.

Loans

Loans were as follows as of the dates indicated:

	March 31,			Percent			December 31,				March 31,
		2008		of Total					2007			2007


Commercial and industrial:
Commercial	$	3,583,588			44.7	%		$	3,472,759		$	3,291,148
Leases		189,719			2.4				184,140			175,372
Asset-based		37,261			0.5				32,963			35,708

Total commercial and industrial		3,810,568			47.6				3,689,862			3,502,228

Real estate:
Construction:
Commercial		635,496			7.9				560,176			659,842
Consumer		61,101			0.8				61,595			108,995
Land:
Commercial		396,759			4.9				397,319			419,218
Consumer		2,189			0.1				2,996			4,872
Commercial real estate mortgages		2,001,059			25.0				1,982,786			1,772,347
1-4 family residential mortgages		96,978			1.2				98,077			116,508
Home equity and other consumer real estate		607,513			7.5				587,721			509,135

Total real estate		3,801,095			47.4				3,690,670			3,590,917

Consumer:
Indirect		1,805			-				2,031			3,075
Student loans held for sale		75,084			0.9				62,861			64,748
Other		323,143			4.1				323,320			305,708
Other		29,927			0.4				29,891			22,083
Unearned discount		(28,725	)		(0.4	)			(29,273	)		(29,503	)


Total	$	8,012,897			100.0	%		$	7,769,362		$	7,459,256


Loans totaled $8.0 billion at March 31, 2008, an increase of $243.5 million, or 3.1%, compared to December 31, 2007. The Corporation stopped originating mortgage and indirect consumer loans during 2000, and as such, these portfolios are excluded when analyzing the growth of the loan portfolio. Student loans are similarly excluded because the Corporation primarily originates these loans for resale. Accordingly, student loans are classified as held for sale. Excluding 1-4 family residential mortgages, the indirect lending portfolio and student loans, loans increased $232.6 million, or 3.1%, from December 31, 2007.

The majority of the Corporation's loan portfolio is comprised of commercial and industrial loans and real estate loans. Commercial and industrial loans made up 47.6% and 47.5% of total loans while real estate loans made up 47.4% and 47.5% of total loans at March 31, 2008 and December 31, 2007, respectively. Real estate loans include both commercial and consumer balances.

Commercial and industrial loans increased $120.7 million, or 3.3%, from $3.7 billion at December 31, 2007 to $3.8 billion at March 31, 2008. The Corporation's commercial and industrial loans are a diverse group of loans to small, medium and large businesses. The purpose of these loans varies from supporting seasonal working capital needs to term financing of equipment. While some short-term loans may be made on an unsecured basis, most are secured by the assets being financed with collateral margins that are consistent with the Corporation's loan policy guidelines. The commercial and industrial loan portfolio also includes the commercial lease and asset-based lending portfolios.

Purchased shared national credits ("SNC"s) are participations purchased from upstream financial organizations and tend to be larger in size than the Corporation's originated portfolio. The Corporation's purchased SNC portfolio totaled $446.4 million at March 31, 2008, increasing $34.5 million, or 8.4%, from $411.9 million at December 31, 2007. At March 31, 2008, 65.4% of outstanding purchased SNCs was related to the energy industry. The remaining purchased SNCs were diversified throughout various other industries, with no other single industry exceeding more than 10% of the total purchased SNC portfolio. Additionally, almost all of the outstanding balance of purchased SNCs was included in the commercial and industrial portfolio, with the remainder included in the commercial real estate category. SNC participations are originated in the normal course of business to meet the needs of the Corporation's customers. As a matter of policy, the Corporation generally only participates in SNCs for companies headquartered in or which have significant operations within the Corporation's market areas. In addition, the Corporation must have direct access to the company's management, an existing banking relationship or the expectation of broadening the relationship with other banking products and services within the following 12 to 24 months. SNCs are reviewed at least quarterly for credit quality and business development successes.

Real estate loans totaled $3.8 billion at March 31, 2008 increasing $110.4 million, or 3.0%, from $3.7 billion at December 31, 2007. Real estate loans include both commercial and consumer balances. Excluding 1-4 family residential mortgage loans, which are discussed below, total real estate loans increased $111.5 million, or 3.0%, from December 31, 2007. Commercial real estate loans totaled $3.0 billion at March 31, 2008 and represented 79.8% of total real estate loans. The majority of this portfolio consists of commercial real estate mortgages, which includes both permanent and intermediate term loans. The Corporation's primary focus for its commercial real estate portfolio has been growth in loans secured by owner-occupied properties. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Consequently, these loans must undergo the analysis and underwriting process of a commercial and industrial loan, as well as that of a real estate loan. At March 31, 2008, approximately 60% of the outstanding principal balance of the Corporation's commercial real estate loans were secured by owner-occupied properties.

The consumer loan portfolio, including all consumer real estate, increased $29.2 million, or 2.6%, from December 31, 2007. Excluding 1-4 family residential mortgages, indirect loans and student loans, total consumer loans increased $18.3 million, or 2.8%, from December 31, 2007.

As the following table illustrates as of the dates indicated, the consumer loan portfolio has five distinct segments, including consumer real estate, consumer non-real estate, student loans held for sale, indirect consumer loans and 1-4 family residential mortgages.

	March 31,		December 31,		March 31,
		2008		2007		2007


Consumer real estate:
Construction	$	61,101	$	61,595	$	108,995
Land		2,189		2,996		4,872
Home equity loans		290,845		282,947		243,113
Home equity lines of credit		93,287		86,873		86,183
Other consumer real estate		223,381		217,901		179,839

Total consumer real estate		670,803		652,312		623,002
Consumer non-real estate		323,143		323,320		305,708
Student loans held for sale		75,084		62,861		64,748
Indirect		1,805		2,031		3,075
1-4 family residential mortgages		96,978		98,077		116,508

Total consumer loans	$	1,167,813	$	1,138,601	$	1,113,041


The consumer non-real estate loan portfolio primarily consists of automobile loans, unsecured revolving credit products, personal loans secured by cash and cash equivalents and other similar types of credit facilities. The Corporation discontinued originating 1-4 family residential mortgage loans and indirect consumer loans in 2000.

Non-Performing Assets

Non-performing assets and accruing past due loans are presented in the table below. The Corporation did not have any restructured loans as of the dates presented.

	March 31,			December 31,			March 31,
		2008			2007			2007


Non-accrual loans:
Commercial and industrial	$	12,516		$	11,445		$	17,058
Real estate		14,465			12,026			28,197
Consumer and other		1,661			972			1,514

Total non-accrual loans		28,642			24,443			46,769

Foreclosed assets:
Real estate		7,305			4,596			3,120
Other		639			810			595

Total foreclosed assets		7,944			5,406			3,715


Total non-performing assets	$	36,586		$	29,849		$	50,484


Non-performing assets as a percentage of:
Total loans and foreclosed assets		0.46	%		0.38	%		0.68	%
Total assets		0.27			0.22			0.38

Accruing past due loans:
30 to 89 days past due	$	53,936		$	45,290		$	51,734
90 or more days past due		17,563			14,347			9,050

Total accruing loans past due	$	71,499		$	59,637		$	60,784


Ratio of accruing past due loans to total loans:
30 to 89 days past due		0.67	%		0.58	%		0.69	%
90 or more days past due		0.22			0.19			0.12

Total accruing loans past due		0.89	%		0.77	%		0.81	%


Non-performing assets include non-accrual loans and foreclosed assets. Generally, loans are placed on non-accrual status if principal or interest payments become 90 days past due and/or management deems the collectibility of the principal and/or interest to be in question, as well as when required by regulatory requirements. Once interest accruals are discontinued, accrued but uncollected interest is charged to current year operations. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured.

Foreclosed assets represent property acquired as the result of borrower defaults on loans. Foreclosed assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure. Write-downs occurring at foreclosure are charged against the allowance for possible loan losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs are provided for subsequent declines in value and are included in other non-interest expense along with other expenses related to maintaining the properties.

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor's potential operating or financial difficulties. Management monitors these loans closely and reviews their performance on a regular basis. At March 31, 2008 and December 31, 2007, the Corporation had $24.1 million and $30.3 million in loans of this type which are not included in either of the non-accrual or 90 days past due loan categories. At March 31, 2008, potential problem loans consisted of ten credit relationships. Of the total outstanding balance at March 31, 2008, 59.4% related to seven customers in the real estate lot development/single-family residential construction industry, 29.2% related to a customer in the insurance industry and 8.5% related to a customer that operates as a retailer of musical instruments. Weakness in these companies' operating performance has caused the Corporation to heighten the attention given to these credits.

The after-tax impact (assuming a 35% marginal tax rate) of lost interest from non-performing loans was approximately $285 thousand for the three months ended March 31, 2008, compared to $730 thousand for the same period in 2007.

Allowance for Possible Loan Losses

Activity in the allowance for possible loan losses is presented in the following table.

	Three Months Ended

		March 31,		December 31,				March 31,
		2008			2007			2007


Balance at beginning of period	$	92,339		$	92,263		$	96,085

Provision for possible loan losses		4,005			3,576			2,650

Charge-offs:
Commercial and industrial		(3,758	)		(1,937	)		(1,247	)
Real estate		(1,082	)		(613	)		(928	)
Consumer and other		(1,826	)		(2,732	)		(1,825	)

Total charge-offs		(6,666	)		(5,282	)		(4,000	)

Recoveries:
Commercial and industrial		1,161			459			317
Real estate		413			81			90
Consumer and other		1,246			1,242			1,002

Total recoveries		2,820			1,782			1,409


Net charge-offs		(3,846	)		(3,500	)		(2,591	)


Balance at end of period	$	92,498		$	92,339		$	96,144


Ratio of allowance for possible loan losses to:
Total loans		1.15	%		1.19	%		1.29	%
Non-accrual loans		322.95			377.77			205.57
Ratio of annualized net charge-offs to average total loans		0.20			0.18			0.14

The allowance for possible loan losses is maintained at a level considered appropriate by management, based on estimated probable losses within the existing loan portfolio. The Corporation's allowance for possible loan loss methodology is based on guidance provided in SEC Staff Accounting Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation Issues," and includes allowance allocations calculated in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS 118, and allowance allocations calculated in accordance with SFAS No. 5, "Accounting for Contingencies." Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools, and specific loss allocations, with adjustments for current events and conditions. The Corporation's process for determining the appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for possible loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for possible loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

The provision for possible loan losses totaled $4.0 million for the first quarter of 2008, compared to $3.6 million for the fourth quarter of 2007 and $2.7 million for the first quarter of 2007. The provision for possible loan losses increased by $1.4 million, or 51.1%, and $429 thousand, or 12.0%, during the three months ended March 31, 2008 compared to the first and fourth quarters of 2007 in part due to higher levels of charge-offs and an increase in classified loans. The ratio of the allowance for possible loan losses to total loans decreased four basis points from 1.19% at December 31, 2007 to 1.15% at March 31, 2008, primarily due to the overall growth in the loan portfolio. Despite the decline in this ratio, management believes the level of the allowance for possible loan losses continues to remain adequate. Should any of the factors considered by management in evaluating the adequacy of the allowance for possible loan losses change, the Corporation's estimate of probable loan losses could also change, which could affect the level of future provisions for possible loan losses.

Capital and Liquidity

Capital. At March 31, 2008, shareholders' equity totaled $1.6 billion compared to $1.5 billion at December 31, 2007 and $1.4 billion at March 31, 2007. In addition to net income of $52.8 million, other significant changes in shareholders' equity during the first three months of 2008 included $23.6 million of dividends paid, $15.0 million in proceeds from stock option exercises and the related tax benefits of $3.9 million and $2.4 million related to stock-based compensation. The accumulated other comprehensive gain/loss component of shareholders' equity totaled a net unrealized gain of $64.4 million at March 31, 2008 compared to a net unrealized loss of $7.4 million at December 31, 2007. This fluctuation was primarily related to the after-tax effect of changes in the accumulated net gain/loss on effective cash flow hedges and the net unrealized gain/loss on securities available for sale primarily resulting from the decrease in market interest rates during the first quarter of 2008. Under regulatory requirements, amounts reported as accumulated other comprehensive income/loss related to the accumulated net gain/loss on effective cash flow hedges, the net unrealized gain or loss on securities available for sale and the funded status of the Corporation's defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage ratios. Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure Tier 1 and total capital and take into consideration the risk inherent in both on-balance sheet and off-balance sheet items. See Note 10 - Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report.

The Corporation paid quarterly dividends of $0.40 per common share during the first quarter of 2008 and the fourth quarter of 2007 and a quarterly dividend of $0.34 per common share in the first quarter of 2007. This equates to a dividend payout ratio of 44.6%, 42.9% and 43.1% for each of these periods, respectively.

From time to time, the Corporation's board of directors has authorized stock repurchase plans. Stock repurchase plans allow the Corporation to proactively manage its capital position and return excess capital to shareholders. Shares purchased under such plans also provide the Corporation with shares of common stock necessary to satisfy obligations related to stock compensation awards. Under the most recent plan, which was approved on April 26, 2007, the Corporation was authorized to repurchase up to 2.5 million shares of its common stock from time to time over a two-year period in the open market or through private transactions. Under the plan, the Corporation repurchased 2.1 million shares at a total cost of $109.4 million during 2007, while the remaining 404 thousand shares approved for repurchase were repurchased during the first quarter of 2008 at a total cost of $21.9 million. See Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds, included elsewhere in this report, for details of stock repurchases during the quarter.

Liquidity. Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to alternative sources of funds. The Corporation seeks to ensure its funding needs are met by maintaining a level of liquid funds through asset/liability management.

Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flow from securities held to maturity, and federal funds sold and resell agreements.

Liability liquidity is provided by access to funding sources which include core deposits and correspondent banks in the Corporation's natural trade area that maintain accounts with and sell federal funds to Frost Bank, as well as federal funds purchased and repurchase agreements from upstream banks.

Since Cullen/Frost is a holding company and does not conduct operations, its primary sources of liquidity are dividends upstreamed from Frost Bank and borrowings from outside sources. Banking regulations require the maintenance of certain capital and net income levels that may limit the amount of dividends that may be paid by the Corporation's bank subsidiary. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Corporation's bank subsidiary to fall below specified minimum levels. Approval is also needed if dividends declared exceed the net profits for that year combined with the retained net profits for the two preceding years. These limitations do not currently prevent the Corporation's bank subsidiary from paying normal dividends to Cullen/Frost. At March 31, 2008, Cullen/Frost had liquid assets, including cash and securities purchased under resell agreements, totaling $51.6 million. Cullen/Frost also had outside funding sources available, including a $25.0 million short-term line of credit with another financial institution. The line of credit matures annually and bears interest at a fixed LIBOR-based rate or floats with the prime rate. There were no borrowings outstanding on this line of credit at March 31, 2008.

The liquidity position of the Corporation is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse effect on the Corporation's liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, which if implemented, would have a material adverse effect on the Corporation.

The Corporation's operating objectives include expansion, diversification within its markets, growth of its fee-based income, and growth internally and through acquisitions of financial institutions, branches and financial services businesses. The Corporation seeks merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale and expanded services. The Corporation regularly evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of the Corporation's tangible book value and net income per common share may occur in connection with any future transaction.

On January 7, 2008, the Corporation redeemed $3.1 million of floating rate (three-month LIBOR plus a margin of 3.30%) junior subordinated deferrable interest debentures, due January 7, 2033, held of record by Alamo Trust. Concurrently, the $3.0 million of floating rate (three-month LIBOR plus a margin of 3.30%) trust preferred securities issued by Alamo Trust were also redeemed. See Note 9 - Borrowed Funds for additional information.

Recently Issued Accounting Pronouncements

See Note 18 - New Accounting Standards in the accompanying notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on the Corporation's financial statements.

Consolidated Average Balance Sheets and Interest Income Analysis-By-Quarter
(dollars in thousands - taxable-equivalent basis)					March 31, 2008								December 31, 2007

								Interest								Interest
					Average			Income/		Yield/			Average			Income/		Yield/
					Balance			Expense		Cost			Balance			Expense		Cost

Assets:
Interest-bearing deposits					$	7,345		$	73	4.00		%	$	8,994		$	124	5.47	%
Federal funds sold and resell agreements						266,060			2,138	3.23				379,484			4,366	4.56
Securities:
	Taxable					2,900,671			37,198	5.15				2,966,132			38,196	5.11
	Tax-exempt					513,512			8,275	6.43				506,716			8,154	6.43

				Total securities		3,414,183			45,473	5.34				3,472,848			46,350	5.30
Loans, net of unearned discounts						7,917,536			132,906	6.75				7,560,382			142,039	7.45

Total Earning Assets and Average Rate Earned						11,605,124			180,590	6.25				11,421,708			192,879	6.70
Cash and due from banks						649,424								665,754
Allowance for possible loan losses						(91,879	)							(92,157	)
Premises and equipment						220,804								219,053
Accrued interest and other assets						998,182								954,184

	Total Assets				$	13,381,655							$	13,168,542

Liabilities:
Non-interest-bearing demand deposits:
	Commercial and individual				$	3,175,749							$	3,165,177
	Correspondent banks					289,530								268,840
	Public funds					52,511								49,001

		Total non-interest-bearing demand deposits				3,517,790								3,483,018
Interest-bearing deposits:
	Private accounts
			Savings and interest checking			1,620,468			1,028	0.26				1,528,748			1,456	0.38
			Money market deposit accounts			3,455,492			17,014	1.98				3,453,993			23,522	2.70
			Time accounts			1,395,089			13,979	4.03				1,419,934			15,558	4.35
	Public funds					405,444			2,453	2.43				362,277			2,804	3.07

		Total interest-bearing deposits				6,876,493			34,474	2.02				6,764,952			43,340	2.54

	Total deposits					10,394,283								10,247,970
Federal funds purchased and repurchase agreements						894,371			5,024	2.26				918,599			7,498	3.24
Junior subordinated deferrable interest debentures						136,288			2,106	6.18				139,177			2,543	7.31
Subordinated notes payable and other notes						250,000			4,080	6.53				250,000			4,080	6.53
Federal Home Loan Bank advances						10,028			139	5.57				11,183			149	5.28

Total Interest-Bearing Funds and Average
	Rate Paid					8,167,180			45,823	2.25				8,083,911			57,610	2.83

Accrued interest and other liabilities						168,135								172,202

	Total Liabilities					11,853,105								11,739,131
Shareholders' Equity						1,528,550								1,429,411

	Total Liabilities and Shareholders' Equity				$	13,381,655							$	13,168,542

Net interest income								$	134,767							$	135,269

Net interest spread										4.00		%						3.87	%

Net interest income to total average earning assets											4.67	%						4.70	%


For these computations: (i) average balances are presented on a daily average basis, (ii) information is shown on a taxable-equivalent basis assuming a 35% tax rate, (iii) average loans include loans on non-accrual status, and (iv) average securities include unrealized gains and losses on securities available for sale while yields are based on average amortized cost.

Consolidated Average Balance Sheets and Interest Income Analysis-By-Quarter
(dollars in thousands - taxable-equivalent basis)					September 30, 2007								June 30, 2007

								Interest								Interest
					Average			Income/		Yield/			Average			Income/		Yield/
					Balance			Expense		Cost			Balance			Expense		Cost

Assets:
Interest-bearing deposits					$	8,749		$	99	4.49		%	$	7,911		$	106	5.37	%
Federal funds sold and resell agreements						713,418			9,288	5.17				498,193			6,623	5.33
Securities:
	Taxable					2,733,002			35,675	5.08				2,918,801			37,767	5.09
	Tax-exempt					449,162			7,312	6.42				367,684			5,896	6.41

				Total securities		3,182,164			42,987	5.26				3,286,485			43,663	5.24
Loans, net of unearned discounts						7,435,690			146,580	7.82				7,455,208			146,204	7.87

Total Earning Assets and Average Rate Earned						11,340,021			198,954	6.92				11,247,797			196,596	6.98
Cash and due from banks						602,798								595,943
Allowance for possible loan losses						(95,992	)							(96,613	)
Premises and equipment, net						220,926								219,288
Accrued interest and other assets						957,770								956,338

	Total Assets				$	13,025,523							$	12,922,753

Liabilities:
Non-interest-bearing demand deposits:
	Commercial and individual				$	3,269,084							$	3,226,530
	Correspondent banks					247,372								230,383
	Public funds					50,614								48,271

		Total non-interest-bearing demand deposits				3,567,070								3,505,184
Interest-bearing deposits:
	Private accounts
			Savings and interest checking			1,325,966			1,776	0.53				1,365,463			1,896	0.56
			Money market deposit accounts			3,630,638			29,072	3.18				3,449,291			27,305	3.18
			Time accounts			1,363,571			15,023	4.37				1,344,221			14,582	4.35
	Public funds					364,681			3,570	3.88				433,652			4,587	4.24

		Total interest-bearing deposits				6,684,856			49,441	2.93				6,592,627			48,370	2.94

	Total deposits					10,251,926								10,097,811
Federal funds purchased and repurchase agreements						852,338			7,981	3.71				859,511			8,251	3.85
Junior subordinated deferrable interest debentures						139,177			2,548	7.32				139,177			2,499	7.18
Subordinated notes payable and other notes						250,000			4,079	6.53				250,000			4,080	6.53
Federal Home Loan Bank advances						16,467			201	4.84				26,299			301	4.59

Total Interest-Bearing Funds and Average
	Rate Paid					7,942,838			64,250	3.21				7,867,614			63,501	3.24

Accrued interest and other liabilities						152,953								153,522

	Total Liabilities					11,662,861								11,526,320
Shareholders' Equity						1,362,662								1,396,433

	Total Liabilities and Shareholders' Equity				$	13,025,523							$	12,922,753

Net interest income								$	134,704							$	133,095

Net interest spread										3.71		%						3.74	%

Net interest income to total average earning assets											4.69	%						4.72	%


For these computations: (i) average balances are presented on a daily average basis, (ii) information is shown on a taxable-equivalent basis assuming a 35% tax rate, (iii) average loans include loans on non-accrual status, and (iv) average securities include unrealized gains and losses on securities available for sale while yields are based on average amortized cost.

Consolidated Average Balance Sheets and Interest Income Analysis-By-Quarter
(dollars in thousands - taxable-equivalent basis)					March 31, 2007

								Interest
					Average			Income/		Yield/
					Balance			Expense		Cost

Assets:
Interest-bearing deposits					$	4,093		$	67	6.65	%
Federal funds sold and resell agreements						731,158			9,618	5.33
Securities:
	Taxable					2,887,714			36,829	5.01
	Tax-exempt					322,337			5,158	6.43

				Total securities		3,210,051			41,987	5.15
Loans, net of unearned discounts						7,403,874			144,204	7.90

Total Earning Assets and Average Rate Earned						11,349,176			195,876	6.95
Cash and due from banks						640,498
Allowance for possible loan losses						(96,164	)
Premises and equipment, net						220,228
Accrued interest and other assets						944,167

	Total Assets				$	13,057,905

Liabilities:
Non-interest-bearing demand deposits:
	Commercial and individual				$	3,238,492
	Correspondent banks					247,549
	Public funds					55,386

		Total non-interest-bearing demand deposits				3,541,427
Interest-bearing deposits:
	Private accounts
			Savings and interest checking			1,384,819			1,427	0.42
			Money market deposit accounts			3,443,281			27,587	3.25
			Time accounts			1,403,127			15,101	4.36
	Public funds					479,820			4,971	4.20

		Total interest-bearing deposits				6,711,047			49,086	2.97

	Total deposits					10,252,474
Federal funds purchased and repurchase agreements						837,430			8,221	3.98
Junior subordinated deferrable interest debentures						197,596			3,693	7.48
Subordinated notes payable and other notes						200,000			3,352	6.70
Federal Home Loan Bank advances						36,181			397	4.45

Total Interest-Bearing Funds and Average
	Rate Paid					7,982,254			64,749	3.28

Accrued interest and other liabilities						142,692

	Total Liabilities					11,666,373
Shareholders' Equity						1,391,532

	Total Liabilities and Shareholders' Equity				$	13,057,905

Net interest income								$	131,127

Net interest spread										3.67	%

Net interest income to total average earning assets										4.65	%


For these computations: (i) average balances are presented on a daily average basis, (ii) information is shown on a taxable-equivalent basis assuming a 35% tax rate, (iii) average loans include loans on non-accrual status, and (iv) average securities include unrealized gains and losses on securities available for sale while yields are based on average amortized cost.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

The disclosures set forth in this item are qualified by the section captioned "Forward-Looking Statements and Factors that Could Affect Future Results" included in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.

Refer to the discussion of market risks included in Item 7A. Quantitative and Qualitative Disclosures About Market Risks in the 2007 Form 10-K. There has been no significant change in the types of market risks faced by the Corporation since December 31, 2007.

The Corporation utilizes an earnings simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next 12 months. The model was used to measure the impact on net interest income relative to a base case scenario of rates increasing 100 and 200 basis points or decreasing 100 and 200 basis points over the next 12 months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The impact of interest rate derivatives, such as interest rate swaps, caps and floors, is also included in the model. Other interest rate-related risks such as prepayment, basis and option risk are also considered.

As of March 31, 2008, the model simulations projected that 100 and 200 basis point increases in interest rates would result in positive variances in net interest income of 0.6% and 0.4%, respectively, relative to the base case over the next 12 months, while a decrease in interest rates of 100 basis points would result in a positive variance in net interest income of 0.1% and a decrease in interest rates of 200 basis points would result in a negative variance in net interest income of 3.5%, relative to the base case over the next 12 months. As of March 31, 2007, the model simulations projected that 100 and 200 basis point increases in interest rates would result in positive variances in net interest income of 1.7% and 2.7%, respectively, relative to the base case over the next 12 months, while decreases in interest rates of 100 and 200 basis points would result in negative variances in net interest income of 2.2% and 4.7%, respectively, relative to the base case over the next 12 months. During the fourth quarter of 2007, the Corporation entered into three interest rate swap contracts with a total notional amount of $1.2 billion. The interest rate swap contracts were designated as hedging instruments in cash flow hedges with the objective of protecting the overall cash flows from the Corporation's monthly interest receipts on a rolling portfolio of $1.2 billion of variable-rate loans outstanding throughout the 84-month period beginning on October 25, 2007 and ending on October 25, 2014 from the risk of variability of those cash flows such that the yield on the underlying loans would remain constant at 7.559% to 8.559%, depending upon the applicable swap contract. In conjunction with entering into the interest rate swap contracts, the Corporation terminated its three interest rate floor contracts, which had a total notional amount of $1.3 billion. These actions resulted in a decrease in the Corporation's sensitivity to changes in interest rates during the first quarter of 2008 compared to the same period in 2007. See Note 17 - Derivative Financial Instruments in the 2007 Form 10-K.

As of March 31, 2008, a projected 100 basis point decrease in interest rates results in a positive variance in net interest income as the Corporation has a proportionally larger amount of interest-bearing liabilities relative to interest-earning assets that would be impacted immediately, or in the near term, by a decrease in interest rates. Additionally, as of March 31, 2008, a projected 200 basis point decrease in interest rates has a more pronounced effect on net interest income compared to the effect a 200 basis point increase in interest rates. This is primarily caused by the negative convexity of the Corporation's balance sheet, which is primarily related to cash flows associated with the mortgage-backed securities held in the Corporation's investment portfolio.

As of March 31, 2008, the effect of a 200 basis point increase in interest rates on the Corporation's derivative holdings would result in a 2.1% negative variance in net interest income. The effect of a 200 basis point decrease in interest rates on the Corporation's derivative holdings would result in a 2.3% positive variance in net interest income.

The effects of hypothetical fluctuations in interest rates on the Corporation's securities classified as "trading" under SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," are not significant, and, as such, separate quantitative disclosure is not presented.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by the Corporation's management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Corporation's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. No change in the Corporation's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the last fiscal quarter that materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

The Corporation and its subsidiaries are subject to various claims and legal actions that have arisen in the normal course of conducting business. Management does not expect the ultimate disposition of these matters to have a material adverse impact on the Corporation's financial statements.

Item 1A. Risk Factors

There has been no material change in the risk factors previously disclosed under Item 1A. of the Corporation's 2007 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information with respect to purchases made by or on behalf of the Corporation or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Corporation's common stock during the three months ended March 31, 2008.

Maximum

Number of Shares

Total Number of

That May Yet Be

Shares Purchased

Purchased Under

Total Number of

Average Price

as Part of Publicly

the Plan at the

Period

Shares Purchased

Paid Per Share

Announced Plan

End of the Period

January 1, 2008 to January 31, 2008

403,764

February 1, 2008 to February 29, 2008

403,764

54.21

403,764

March 1, 2008 to March 31, 2008

Total

403,764

54.21

403,764

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

Exhibit
Number

Description

31.

Rule 13a-14(a) Certification of the Corporation's Chief Executive Officer

31.

Rule 13a-14(a) Certification of the Corporation's Chief Financial Officer

32.

Section 1350 Certification of the Corporation's Chief Executive Officer

32.

Section 1350 Certification of the Corporation's Chief Financial Officer

This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Cullen/Frost Bankers, Inc.

	(Registrant)


Date: April 23, 2008	By: /s/ Phillip D. Green

	Phillip D. Green
	Group Executive Vice President
	and Chief Financial Officer
	(Duly Authorized Officer, Principal Financial
	Officer and Principal Accounting Officer)

001-13221