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:

September 30, 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 October 16, 2003, there were 51,855,593 shares of the registrant's Common Stock, $.01 par value, outstanding.

Cullen/Frost Bankers, Inc.
Quarterly Report on Form 10-Q
September 30, 2003


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

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

35

Part II - Other Information

Item 1.

Legal Proceedings

36

Item 2.

Changes in Securities and Use of Proceeds

36

Item 3.

Defaults Upon Senior Securities

36

Item 4.

Submission of Matters to a Vote of Security Holders

36

Item 5.

Other Information

36

Item 6.

Exhibits and Reports on Form 8-K

36

Signatures

37

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
September 30,

Nine Months Ended
September 30,

2003

2002

2003

2002

Interest income:

Loans, including fees

$

57,460

$

66,984

$

176,523

$

201,377

Securities:

  Taxable

27,630

27,637

85,929

84,085

  Tax-exempt

2,121

1,988

6,352

5,944

Interest-bearing deposits

23

46

88

142

Federal funds sold and securities purchased under resale agreements

2,617

1,411

8,105

2,411

Total interest income

89,851

98,066

276,997

293,959

Interest expense:

Deposits

8,563

13,881

29,347

43,068

Federal funds purchased and securities sold under repurchase agreements

453

1,485

3,028

3,982

Guaranteed preferred beneficial interests in junior subordinated

deferrable interest debentures

2,118

2,118

6,356

6,356

Subordinated notes payable and other borrowings

1,198

1,579

3,839

5,101

Total interest expense

12,332

19,063

42,570

58,507

Net interest income

77,519

79,003

234,427

235,452

Provision for possible loan losses

1,998

5,850

9,044

18,046

Net interest income after provision for possible loan losses

75,521

73,153

225,383

217,406

Non-interest income:

Trust fees

11,646

11,666

34,717

35,854

Service charges on deposit accounts

22,576

19,720

65,432

57,712

Insurance commissions

7,276

7,250

20,944

18,393

Other service, collection and exchange charges, commissions and fees

6,334

4,176

14,423

13,013

Net gain on securities transactions

40

-

40

88

Other

7,274

7,621

26,758

25,971

Total non-interest income

55,146

50,433

162,314

151,031

Non-interest expense:

Salaries and wages

37,408

35,888

109,428

104,396

Employee benefits

9,129

8,372

29,140

25,580

Net occupancy

7,804

7,202

22,246

21,875

Furniture and equipment

5,418

5,495

16,272

16,814

Intangible amortization

1,412

1,736

4,477

5,348

Other

21,111

19,351

62,006

58,713

Total non-interest expense

82,282

78,044

243,569

232,726

Income from continuing operations before income taxes

48,385

45,542

144,128

135,711

Income taxes

15,622

14,760

46,262

43,632

Income from continuing operations

32,763

30,782

97,866

92,079

Loss from discontinued operations, net of tax (Note 11)

-

(4,320

)

-

(5,247

)

Net income

$

32,763

$

26,462

$

97,866

$

86,832

Basic per share:

Income from continuing operations

$

0.64

$

0.60

$

1.91

$

1.81

Net income

0.64

0.52

1.91

1.70

Diluted per share:

Income from continuing operations

$

0.62

$

0.59

$

1.87

$

1.75

Net income

0.62

0.51

1.87

1.65

See Notes to Consolidated Financial Statements.

(Dollars in thousands, except per share amounts)

September 30,

December 31,

September 30,

2003

2002

2002

Assets:

Cash and due from banks

$

1,118,250

$

1,331,136

$

1,044,076

Interest-bearing deposits

3,216

8,661

6,570

Federal funds sold and securities purchased under resale agreements

625,700

724,150

516,250

  Total cash and cash equivalents

1,747,166

2,063,947

1,566,896

Securities held to maturity, at amortized cost

27,591

36,135

39,282

Securities available for sale, at estimated fair value

2,833,067

2,417,126

2,121,372

Trading account securities

3,063

4,995

374

Loans, net of unearned discounts

4,525,666

4,518,913

4,569,431

    Less: Allowance for possible loan losses

(83,410

)

(82,584

)

(81,500

)

      Net loans

4,442,256

4,436,329

4,487,931

Premises and equipment, net

165,564

169,927

172,154

Goodwill

98,873

97,838

98,826

Other intangible assets, net

17,410

21,330

22,341

Cash surrender value of life insurance policies

108,244

104,650

107,195

Accrued interest receivable and other assets

208,549

202,526

168,559

      Total assets

$

9,651,783

$

9,554,803

$

8,784,930

Liabilities:

Deposits:

  Non-interest-bearing demand deposits

$

3,227,723

$

3,229,052

$

2,951,573

  Interest-bearing deposits

4,512,633

4,399,091

4,348,772

    Total deposits

7,740,356

7,628,143

7,300,345

Federal funds purchased and securities sold under repurchase agreements

752,826

811,218

407,062

Subordinated notes payable and other borrowings

159,721

168,164

169,721

Guaranteed beneficial interests in junior subordinated deferrable

   interest debentures

100,000

100,000

100,000

Accrued interest payable and other liabilities

138,597

143,488

121,181

    Total liabilities

8,891,500

8,851,013

8,098,309

Shareholders' Equity:

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

536

536

536

Surplus

199,185

196,830

195,523

Retained earnings

606,994

549,422

532,803

Deferred compensation

(1,509

)

(1,957

)

(451

)

Accumulated other comprehensive income, net of tax

14,969

32,548

37,960

Treasury stock, 1,809,974, 2,266,141 and 2,511,991 shares, at cost

(59,892

)

(73,589

)

(79,750

)

      Total shareholders' equity

760,283

703,790

686,621

      Total liabilities and shareholders' equity

$

9,651,783

$

9,554,803

$

8,784,930

See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.

Consolidated Statements of Changes in Shareholders' Equity

(Dollars in thousands)

Nine Months Ended

September 30,

2003

2002

Total shareholders' equity at beginning of period

$

703,790

$

594,919

Comprehensive income:

  Net income

97,866

86,832

  Other comprehensive income:

    Change in fair value of securities available for sale of $(27,005) in 2003 and
      $80,034 in 2002, net of reclassification adjustment of $(40) in 2003 and
      $(88) in 2002 and tax effect of $9,466 in 2003 and $(27,981) in 2002

(17,579

)

51,965

         Total comprehensive income

80,287

138,797

Stock option exercises and employee stock purchase plan purchases

9,378

8,110

Tax benefit from stock option exercises

2,345

3,445

Purchase of treasury stock

-

(28,733

)

Repurchase of restricted stock

-

(845

)

Amortization of deferred compensation

511

4,380

Cash dividends

(36,028

)

(33,452

)

Total shareholders' equity at end of period

$

760,283

$

686,621

See Notes to Consolidated Financial Statements.