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, 2004

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 21, 2004, there were 51,343,330 shares of the registrant's Common Stock, $.01 par value, outstanding.

Cullen/Frost Bankers, Inc.
Quarterly Report on Form 10-Q
March 31, 2004


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

34

Item 4.

Controls and Procedures

34

Part II - Other Information

Item 1.

Legal Proceedings

35

Item 2.

Changes in Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Submission of Matters to a Vote of Security Holders

35

Item 5.

Other Information

35

Item 6.

Exhibits and Reports on Form 8-K

35

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
March 31,

2004

2003

Interest income:

Loans, including fees

$

56,639

$

60,042

Securities:

  Taxable

31,455

29,236

  Tax-exempt

2,229

2,117

Interest-bearing deposits

10

42

Federal funds sold and securities purchased under resale agreements

998

2,286

Total interest income

91,331

93,723

Interest expense:

Deposits

8,222

10,651

Federal funds purchased and securities sold under repurchase agreements

1,023

1,422

Junior subordinated deferrable interest debentures

2,626

2,184

Subordinated notes payable and other borrowings

1,128

1,357

Total interest expense

12,999

15,614

Net interest income

78,332

78,109

Provision for possible loan losses

500

3,600

Net interest income after provision for possible loan losses

77,832

74,509

Non-interest income:

Trust fees

13,107

10,865

Service charges on deposit accounts

21,683

21,104

Insurance commissions and fees

10,163

8,831

Other charges, commissions and fees

4,309

3,649

Net loss on securities transactions

(1,739

)

-

Other

9,866

7,589

Total non-interest income

57,389

52,038

Non-interest expense:

Salaries and wages

38,760

36,497

Employee benefits

11,484

10,591

Net occupancy

7,330

7,070

Furniture and equipment

5,449

5,459

Intangible amortization

1,404

1,685

Other

22,170

19,769

Total non-interest expense

86,597

81,071

Income before income taxes

48,624

45,476

Income taxes

15,719

14,606

Net income

$

32,905

$

30,870

Earnings per common share:

Basic

$

0.64

$

0.60

Diluted

0.62

0.59

See Notes to Consolidated Financial Statements.

(Dollars in thousands, except per share amounts)

March 31,

December 31,

March 31,

2004

2003

2003

Assets:

Cash and due from banks

$

895,710

$

1,067,888

$

1,246,769

Interest-bearing deposits

3,220

2,793

1,881

Federal funds sold and securities purchased under resale agreements

621,750

567,525

950,925

  Total cash and cash equivalents

1,520,680

1,638,206

2,199,575

Securities held to maturity, at amortized cost

23,133

25,088

33,802

Securities available for sale, at estimated fair value

3,226,627

2,940,738

2,585,905

Trading account securities

3,549

5,589

-

Loans, net of unearned discounts

4,726,263

4,590,746

4,511,095

  Less: Allowance for possible loan losses

(82,587

)

(83,501

)

(83,410

)

    Net loans

4,643,676

4,507,245

4,427,685

Premises and equipment, net

169,403

168,611

167,933

Goodwill

98,873

98,873

98,873

Other intangible assets, net

14,597

16,001

20,202

Cash surrender value of life insurance policies

107,036

105,978

105,871

Accrued interest receivable and other assets

182,247

165,785

175,110

    Total assets

$

9,989,821

$

9,672,114

$

9,814,956

Liabilities:

Deposits:

  Non-interest-bearing demand deposits

$

3,007,461

$

3,143,473

$

3,190,865

  Interest-bearing deposits

4,765,845

4,925,384

4,563,225

    Total deposits

7,773,306

8,068,857

7,754,090

Federal funds purchased and securities sold under repurchase agreements

457,391

421,801

947,492

Subordinated notes payable and other borrowings

151,084

152,752

163,935

Junior subordinated deferrable interest debentures

226,805

103,093

103,093

Accrued interest payable and other liabilities

601,558

155,607

128,077

  Total liabilities

9,210,144

8,902,110

9,096,687

Shareholders' Equity:

Junior participating preferred stock, par value $0.01 per share; 250,000 shares authorized; none issued

- -

- -

- -

Common stock, par value $0.01 per share; 90,000,000 shares authorized;   53,561,616 shares issued

536

536

536

Additional paid-in capital

203,922

200,844

197,075

Retained earnings

640,944

625,405

568,539

Deferred compensation

(3,478

)

(3,771

)

(1,788

)

Accumulated other comprehensive income, net of tax

21,858

8,063

26,143

Treasury stock, 2,232,286, 1,785,523 and 2,214,841 shares, at cost

(84,105

)

(61,073

)

(72,236

)

  Total shareholders' equity

779,677

770,004

718,269

    Total liabilities and shareholders' equity

$

9,989,821

$

9,672,114

$

9,814,956

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,

2004

2003

Total shareholders' equity at beginning of period

$

770,004

$

703,790

Comprehensive income:

  Net income

32,905

30,870

  Other comprehensive income:

    Change in fair value of securities available for sale of $19,484 in 2004
      $(9,854) in 2003, net of reclassification adjustment of $1,739 in 2004 and
      tax effect of $7,428 in 2004 and $(3,449) in 2003

13,795

(6,405

)

  Total comprehensive income

46,700

24,465

Stock option exercises

8,016

894

Tax benefit from stock compensation

3,078

245

Purchase of treasury stock

(35,916

)

-

Amortization of deferred compensation

293

169

Cash dividends

(12,498

)

(11,294

)

Total shareholders' equity at end of period

$

779,677

$

718,269

See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)

Three Months Ended

March 31,

2004

2003

Operating Activities:

Net income

$

32,905

$

30,870

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

Provision for possible loan losses

500

3,600

Deferred tax (benefit) expense

(77

)

675

Accretion of loan discounts

(1,453

)

(1,098

)

Securities premium amortization (discount accretion), net

415

(139

)

Net loss on securities transactions

1,739

-

Depreciation and amortization

6,211

6,510

Origination of loans held for sale

(18,043

)

(17,291

)

Proceeds from sales of loans held for sale

16,377

79

Net gain on sale of loans held for sale and other assets

(747

)

(196

)

Tax benefit from stock option exercises

3,078

245

Amortization of deferred compensation

293

169

Earnings on life insurance policies

(1,058

)

(1,221

)

Net change in: