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

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Form 10-Q

X

Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended:

March 31, 2003

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:

0-7275

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 an accelerated filer (as defined in Rule 12b-2 of the

Exchange Act).

Yes

X

No

As of April 16, 2003, there were 51,364,175 shares of Common Stock, $.01 par value, outstanding.

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,

2003

2002

Interest Income:

Loans, including fees

$

60,042

$

66,602

Securities:

  Taxable

29,236

28,304

  Tax-exempt

2,117

1,981

Interest-bearing deposits

42

42

Federal funds sold and securities purchased under resale agreements

2,286

476

Total Interest Income

93,723

97,405

Interest Expense:

Deposits

10,651

15,311

Federal funds purchased and securities sold under repurchase agreements

1,422

1,187

Guaranteed preferred beneficial interests in junior subordinated deferrable

  interest debentures

2,119

2,119

Subordinated notes payable and other long-term debt

1,357

1,883

Total Interest Expense

15,549

20,500

Net Interest Income

78,174

76,905

Provision for possible loan losses

3,600

6,800

Net Interest Income After Provision For Possible Loan Losses

74,574

70,105

Non-Interest Income:

Trust fees

10,865

12,115

Service charges on deposit accounts

21,104

18,407

Insurance commissions

6,947

5,606

Other service, collection and exchange charges, commissions and fees

3,649

3,832

Other

9,408

8,499

Total Non-Interest Income

51,973

48,459

Non-Interest Expense:

Salaries and wages

36,497

34,534

Employee benefits

10,591

8,735

Net occupancy

7,070

7,347

Furniture and equipment

5,459

5,774

Intangible amortization

1,685

1,877

Other

19,769

18,856

Total Non-Interest Expense

81,071

77,123

Income From Continuing Operations Before Income Taxes

45,476

41,441

Income taxes

14,606

13,221

Income from continuing operations

30,870

28,220

Loss from discontinued operations, net of tax (Note 9)

-

(503

)

Net Income

$

30,870

$

27,717

Basic Per Share:

Income from continuing operations

$

0.60

$

0.55

Net income

0.60

0.54

Diluted Per Share:

Income from continuing operations

$

0.59

$

0.53

Net income

0.59

0.52

Dividends Per Share

$

0.22

$

0.215

See notes to consolidated financial statements.

(dollars in thousands, except per share amounts)

March 31,

December 31,

March 31,

2003

2002

2002

Assets

Cash and due from banks

$

1,246,769

$

1,331,136

$

846,975

Interest-bearing deposits

1,881

8,661

14,305

Federal funds sold and securities purchased under resale agreements

950,925

724,150

107,150

  Total cash and cash equivalents

2,199,575

2,063,947

968,430

Securities held to maturity

33,802

36,135

46,631

Securities available for sale (loaned under agreement to repurchase:

  $524,090 at March 31, 2003; $395,671 at December 31, 2002;

    and none at March 31, 2002)

2,585,905

2,417,126

2,020,110

Trading account securities

-

4,995

646

Loans, net of unearned discounts

4,511,095

4,518,913

4,559,092

    Less: Allowance for possible loan losses

(83,410

)

(82,584

)

(77,300

)

      Net loans

4,427,685

4,436,329

4,481,792

Premises and equipment, net

167,933

169,927

144,856

Goodwill

98,873

97,838

96,462

Other intangible assets, net

20,202

21,330

25,812

Accrued interest receivable and other assets

286,657

304,691

287,020

      Total Assets

$

9,820,632

$

9,552,318

$

8,071,759

Liabilities

Non-interest-bearing demand deposits:

  Commercial and individual

$

2,205,018

$

2,165,033

$

1,802,284

  Correspondent banks

923,089

1,001,713

521,389

  Public funds

62,758

62,306

53,023

    Total non-interest-bearing demand deposits

3,190,865

3,229,052

2,376,696

Interest-bearing deposits:

  Savings and interest-on-checking

1,071,637

1,030,227

1,042,347

  Money market accounts

2,109,033

1,925,924

1,846,255

  Time accounts

1,037,234

1,090,140

1,168,964

  Public funds

345,321

352,800

339,604

    Total interest-bearing deposits

4,563,225

4,399,091

4,397,170

    Total deposits

7,754,090

7,628,143

6,773,866

Federal funds purchased and securities sold under repurchase agreements

947,492

811,218

317,849

Subordinated notes payable and other borrowings

162,807

167,002

171,452

Guaranteed preferred beneficial interests in junior subordinated   deferrable interest debentures, net

98,691

98,678

98,636

Accrued interest payable and other liabilities

139,283

143,487

105,757

    Total Liabilities

9,102,363

8,848,528

7,467,526

Shareholders' Equity

Common stock, par value $.01 per share; 90,000,000 shares authorized;   53,561,616 shares issued

536

536

536

Surplus

197,075

196,830

193,376

Retained earnings

568,539

549,422

497,377

Deferred compensation

(1,788

)

(1,957

)

(3,462

)

Accumulated other comprehensive income (loss), net of tax

26,143

32,548

(13,680

)

Treasury stock, 2,214,841, 2,266,141 and 2,373,125 shares, at cost

(72,236

)

(73,589

)

(69,914

)

      Total Shareholders' Equity

718,269

703,790

604,233

      Total Liabilities and Shareholders' Equity

$

9,820,632

$

9,552,318

$

8,071,759

See notes to consolidated financial statements.

Cullen/Frost Bankers, Inc.

Consolidated Statements of Changes in Shareholders' Equity

(dollars in thousands)

Three Months Ended

March 31,

2003

2002

Total shareholders' equity at beginning of period

$

703,790

$

594,919

Comprehensive income:

  Net income

30,870

27,717

  Other comprehensive income:

      $500 in 2002, net of tax effect of $(3,449) in 2003 and $175 in 2002

(6,405

)

325

         Total comprehensive income

24,465

28,042

Stock option exercises and employee stock purchase plan purchases

894

3,454

Tax benefit from stock option exercises

245

1,447

Purchase of treasury stock

-

(13,113

)

Repurchase of restricted stock

-

(47

)

Amortization of deferred compensation

169

525

Cash dividends

(11,294

)

(10,994

)

Total shareholders' equity at end of period

$

718,269

$

604,233

See notes to consolidated financial statements.

Cullen/Frost Bankers, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

Three Months Ended

March 31

2003

2002

Net income

$

30,870

$

27,717

Adjustments to reconcile net income to net cash from operating activities:

Provision for possible loan losses

3,600

6,800

Deferred tax expense (benefit)

675

(467

)

Accretion of loan discounts

(1,098

)

(1,297

)

Securities (discount accretion) premium amortization, net

(139

)

688

Net (gain) loss on sale of assets

(196

)

78

Depreciation and amortization

6,510

6,911

Originations of loans held for sale

(17,291

)

(21,019

)

Proceeds from sales of loans held for sale

79

10,801

Tax benefit from stock option exercises

245

1,447

Amortization of deferred compensation

169

525

Earnings on life insurance policies

(1,221

)

(1,338

)

Net change in:

Trading account securities

4,995

(528)

Accrued interest receivable and other assets

21,636

87,426

Accrued interest payable and other liabilities

(4,999

)

2,944

Net cash from operating activities

43,835

120,688

Investing Activities

Securities held to maturity:

Purchases

(1,000

)

-

Maturities, calls and principal repayments

3,326

4,588

Securities available for sale:

Purchases

(402,294

)

(84,402

)

Maturities, calls and principal repayments

223,807

169,364

Net change in loans

22,061

(31,122

)

Net cash paid in acquisitions

(750

)

-

Proceeds from sales of premises and equipment

201

147

Purchases of premises and equipment

(1,675

)

(1,200

)

Proceeds from sales of repossessed properties

525

275

Net cash from investing activities

(155,799

)

57,650

Financing Activities:

Net change in deposits

125,947

(324,141

)

Net change in short-term borrowings

136,274

12,465

Principal payments on notes payable and other borrowings

(4,229

)

(8,234

)

Proceeds from stock option exercises and employee stock purchase plan purchases

894

3,454

Purchase of treasury stock

-

(13,113

)

Repurchase of restricted stock

-

(47

)

Cash dividends paid

(11,294

)

(10,994

)

Net cash from financing activities

247,592

(340,610

)