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:

June 30, 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 July 22, 2004, there were 51,532,630 shares of the registrant's Common Stock, $.01 par value, outstanding.

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

36

Item 4.

Controls and Procedures

36

Part II - Other Information

Item 1.

Legal Proceedings

37

Item 2.

Changes in Securities and Use of Proceeds

37

Item 3.

Defaults Upon Senior Securities

37

Item 4.

Submission of Matters to a Vote of Security Holders

37

Item 5.

Other Information

38

Item 6.

Exhibits and Reports on Form 8-K

38

Signatures

39

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
June 30,

Six Months Ended
June 30,

2004

2003

2004

2003

Interest income:

Loans, including fees

$

59,172

$

59,021

$

115,811

$

119,063

Securities:

  Taxable

32,328

29,063

63,783

58,299

  Tax-exempt

2,158

2,114

4,387

4,231

Interest-bearing deposits

17

23

27

65

Federal funds sold and resell agreements

1,087

3,202

2,085

5,488

Total interest income

94,762

93,423

186,093

187,146

Interest expense:

Deposits

8,246

10,133

16,468

20,784

Federal funds purchased and repurchase agreements

1,083

1,153

2,106

2,575

Junior subordinated deferrable interest debentures

3,059

2,184

5,685

4,368

Subordinated notes payable and other borrowings

1,132

1,284

2,260

2,641

Total interest expense

13,520

14,754

26,519

30,368

Net interest income

81,242

78,669

159,574

156,778

Provision for possible loan losses

2,000

3,446

2,500

7,046

Net interest income after provision for possible loan losses

79,242

75,223

157,074

149,732

Non-interest income:

Trust fees

13,704

12,206

26,811

23,071

Service charges on deposit accounts

22,468

21,752

44,151

42,856

Insurance commissions and fees

6,234

6,641

16,397

15,472

Other charges, commissions and fees

4,952

4,440

9,261

8,089

Net loss on securities transactions

-

-

(1,739

)

-

Other

8,978

10,221

18,844

17,810

Total non-interest income

56,336

55,260

113,725

107,298

Non-interest expense:

Salaries and wages

38,855

35,523

77,615

72,020

Employee benefits

9,592

9,420

21,076

20,011

Net occupancy

7,364

7,372

14,694

14,442

Furniture and equipment

5,661

5,395

11,110

10,854

Intangible amortization

1,287

1,380

2,691

3,065

Other

22,440

21,126

44,610

40,895

Total non-interest expense

85,199

80,216

171,796

161,287

Income before income taxes

50,379

50,267

99,003

95,743

Income taxes

16,261

16,034

31,980

30,640

Net income

$

34,118

$

34,233

$

67,023

$

65,103

Earnings per common share:

Basic

$

0.67

$

0.67

$

1.30

$

1.27

Diluted

0.65

0.65

1.27

1.25

See Notes to Consolidated Financial Statements.

(Dollars in thousands, except per share amounts)

June 30,

December 31,

June 30,

2004

2003

2003

Assets:

Cash and due from banks

$

912,820

$

1,067,888

$

1,075,705

Interest-bearing deposits

3,641

2,793

1,730

Federal funds sold and resell agreements

367,875

567,525

1,266,250

  Total cash and cash equivalents

1,284,336

1,638,206

2,343,685

Securities held to maturity, at amortized cost

19,442

25,088

30,723

Securities available for sale, at estimated fair value

2,923,649

2,940,738

2,679,609

Trading account securities

3,855

5,589

4,643

Loans, net of unearned discounts

4,813,058

4,590,746

4,461,551

  Less: Allowance for possible loan losses

(80,485

)

(83,501

)

(83,410

)

    Net loans

4,732,573

4,507,245

4,378,141

Premises and equipment, net

167,715

168,611

166,540

Goodwill

98,873

98,873

98,873

Other intangible assets, net

13,310

16,001

18,822

Cash surrender value of life insurance policies

108,105

105,978

107,159

Accrued interest receivable and other assets

218,518

165,785

185,405

    Total assets

$

9,570,376

$

9,672,114

$

10,013,600

Liabilities:

Deposits:

  Non-interest-bearing demand deposits

$

3,130,756

$

3,143,473

$

3,382,670

  Interest-bearing deposits

4,803,092

4,925,384

4,519,667

    Total deposits

7,933,848

8,068,857

7,902,337

Federal funds purchased and repurchase agreements

407,718

421,801

977,779

Subordinated notes payable and other borrowings

151,014

152,752

160,422

Junior subordinated deferrable interest debentures

226,805

103,093

103,093

Accrued interest payable and other liabilities

108,716

155,607

120,155

  Total liabilities

8,828,101

8,902,110

9,263,786

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

205,200

200,844

197,448

Retained earnings

661,219

625,405

589,998

Deferred compensation

(3,247

)

(3,771

)

(1,619

)

Accumulated other comprehensive income, net of tax

(42,231

)

8,063

32,438

Treasury stock, 2,041,186, 1,785,523 and 2,097,744 shares, at cost

(79,202

)

(61,073

)

(68,987

)

  Total shareholders' equity

742,275

770,004

749,814

    Total liabilities and shareholders' equity

$

9,570,376

$

9,672,114

$

10,013,600

See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.

Consolidated Statements of Changes in Shareholders' Equity

(Dollars in thousands)

Six Months Ended

June 30,

2004

2003

Total shareholders' equity at beginning of period

$

770,004

$

703,790

Comprehensive income:

  Net income

67,023

65,103

  Other comprehensive income:

    Change in fair value of securities available for sale of $(79,114) in 2004 and
      $(170) in 2003, net of reclassification adjustment of $1,739 in 2004 and
      tax effect of $(27,081) in 2004 and $(60) in 2003

(50,294

)

(110

)

  Total comprehensive income

16,729

64,993

Stock option exercises and non-vested stock awards (596,350 shares in 2004 and
  168,397 shares in 2003)

12,672

3,710

Tax benefit from stock compensation

4,329

618

Purchase of treasury stock (852,013 shares in 2004)

(35,916

)

-

Amortization of deferred compensation

588

338

Cash dividends ($0.505 per share in 2004 and $0.46 per share in 2003)

(26,131

)

(23,635

)

Total shareholders' equity at end of period

$

742,275

$

749,814

See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)

Six Months Ended

June 30,

2004

2003

Operating Activities:

Net income

$

67,023

$

65,103

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

Provision for possible loan losses

2,500

7,046

Deferred tax benefit

(392

)

(2,315

)

Accretion of loan discounts

(2,770

)

(1,925

)

Securities premium amortization (discount accretion), net

849

(24

)

Net loss on securities transactions

1,739

-

Depreciation and amortization

12,207