## To Our Shareholders: 

his was another outstanding year for our company, as our annual earnings reached a record $141.3 million. In reporting our results for 2004, I was pleased to report that we achieved all-time highs in three key areas. At year-end, loans were at $5.2 billion–the highest level ever; deposits were $8.1 billion–the highest level ever; and trust assets were $17.1 billion–the highest level ever. Of course, these elevated volumes didn’t just happen; they were a direct result of a strong sales discipline we have instilled in our staff at all levels throughout the company. T 

This growth was also helped along by national and Texas economies that continued to improve throughout the year, as well as a gradually increasing interest rate environment that is a positive for an asset-sensitive company such as ours. While rates will likely rise throughout 2005, we feel confident they will remain at a level low enough to appeal to both business and consumer borrowers. I was also pleased to see net interest margin for the year 2004 rise for the first time since 2000, to 4.05 percent. 

Net interest income represents some 60 percent of our revenue, yet we were able to increase our profitability during an extended period of low interest rates. The reason for this sustained profitability is that we did other things extremely well when interest rates dropped and loan volumes were flat. We dug in, maintained a strict expense discipline, worked very hard, and grew our non-interest income businesses. 

Service charges on deposits, at $87.4 million, repre- sented 39 percent of our non-interest income revenue stream for 2004. This service charge revenue has grown at a compound annual growth rate of 7.6 percent over the past five years, reflecting expansion in both commercial and retail fee income, as well as fees from our correspon- dent banking operations. 

Another cornerstone of our fee income is our Financial Management Group, which was established more than 80 years ago and has continued over the years to make a significant contribution to our revenue stream. 

Our trust assets reached another record this year, $17.1 billion, a result of improved equity markets as well as adding new accounts. 

Within our Financial Management Group, we have added a new division, Wealth Management Services. One of the changes brought about by Sarbanes-Oxley was that accounting firms could no longer offer both consulting and audit work for the same clients. This created an opportunity for us when a part of the wealth management division of a major accounting firm in our headquarters city of San Antonio made the decision, after a number of meetings with our Financial Management Group, to join Frost. The move allowed them to continue to take care of their high net worth clients and expanded our ability to offer a broader range of services to the specialized needs of this client base. 

Our insurance subsidiary has also had a positive impact on this non-interest income piece of our revenue pie. Over the past five years, we have built an agency that ranks among the top 40 banks in insurance revenue nationwide. Frost Insurance Agency provides a full range of property and casualty, group employee benefits, estate planning and business succession, and personal insurance throughout Texas. 

During 2004, we strengthened Frost Insurance Agency by acquiring The Sammons Group, a full-service Dallas-based insurance agency. This was a strategic move for Frost Insurance Agency, and we were pleased to welcome this outstanding Dallas agency to the Frost 

