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, 2005

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, 2005, there were 51,850,353 shares of the registrant's Common Stock, $.01 par value, outstanding.

Cullen/Frost Bankers, Inc.
Quarterly Report on Form 10-Q
March 31, 2005


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

18

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.

Unregistered Sales of Equity 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

37

Item 6.

Exhibits

37

Signatures

38

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,

2005

2004

Interest income:

Loans, including fees

$

76,693

$

56,639

Securities:

  Taxable

30,884

31,455

  Tax-exempt

2,506

2,229

Interest-bearing deposits

21

10

Federal funds sold and resell agreements

2,819

998

Total interest income

112,923

91,331

Interest expense:

Deposits

14,888

8,222

Federal funds purchased and repurchase agreements

2,780

1,023

Junior subordinated deferrable interest debentures

3,505

2,626

Subordinated notes payable and other borrowings

1,647

1,128

Total interest expense

22,820

12,999

Net interest income

90,103

78,332

Provision for possible loan losses

2,400

500

Net interest income after provision for possible loan losses

87,703

77,832

Non-interest income:

Trust fees

14,290

13,107

Service charges on deposit accounts

19,367

21,683

Insurance commissions and fees

8,610

10,163

Other charges, commissions and fees

4,288

4,309

Net gain (loss) on securities transactions

-

(1,739

)

Other

11,484

9,866

Total non-interest income

58,039

57,389

Non-interest expense:

Salaries and wages

40,000

38,760

Employee benefits

12,037

11,484

Net occupancy

7,344

7,330

Furniture and equipment

5,802

5,449

Intangible amortization

1,371

1,404

Other

23,933

22,170

Total non-interest expense

90,487

86,597

Income before income taxes

55,255

48,624

Income taxes

17,888

15,719

Net income

$

37,367

$

32,905

Earnings per common share:

Basic

$

0.72

$

0.64

Diluted

0.70

0.62

See Notes to Consolidated Financial Statements.

(Dollars in thousands, except per share amounts)

March 31,

December 31,

March 31,

2005

2004

2004

Assets:

Cash and due from banks

$

538,846

$

545,602

$

895,710

Interest-bearing deposits

3,997

3,512

3,220

Federal funds sold and resell agreements

367,100

744,675

621,750

  Total cash and cash equivalents

909,943

1,293,789

1,520,680

Securities held to maturity, at amortized cost

15,687

16,714

23,133

Securities available for sale, at estimated fair value

2,972,440

2,957,296

3,226,627

Trading account securities

5,345

4,671

3,549

Loans, net of unearned discounts

5,402,980

5,164,991

4,726,263

  Less: Allowance for possible loan losses

(76,538

)

(75,810

)

(82,587

)

    Net loans

5,326,442

5,089,181

4,643,676

Premises and equipment, net

173,712

170,026

169,403

Goodwill

102,367

102,367

98,873

Other intangible assets, net

12,778

14,149

14,597

Cash surrender value of life insurance policies

106,239

105,223

107,036

Accrued interest receivable and other assets

224,239

199,371

182,247

    Total assets

$

9,849,192

$

9,952,787

$

9,989,821

Liabilities:

Deposits:

  Non-interest-bearing demand deposits

$

2,920,752

$

2,969,387

$

3,007,461

  Interest-bearing deposits

5,082,516

5,136,291

4,765,845

    Total deposits

8,003,268

8,105,678

7,773,306

Federal funds purchased and repurchase agreements

554,273

506,342

457,391

Subordinated notes payable and other borrowings

150,799

150,872

151,084

Junior subordinated deferrable interest debentures

226,805

226,805

226,805

Accrued interest payable and other liabilities

106,067

140,695

601,558

  Total liabilities

9,041,212

9,130,392

9,210,144

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

214,695

212,910

203,922

Retained earnings

717,831

697,872

640,944

Deferred compensation

(5,205

)

(5,567

)

(3,478

)

Accumulated other comprehensive income (loss), net of tax

(40,752

)

(10,784

)

21,858

Treasury stock, 1,744,263, 1,637,764 and 2,232,286 shares, at cost

(79,125

)

(72,572

)

(84,105

)

  Total shareholders' equity

807,980

822,395

779,677

    Total liabilities and shareholders' equity

$

9,849,192

$

9,952,787

$

9,989,821

See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.

Consolidated Statements of Changes in Shareholders' Equity

(Dollars in thousands, except per share amounts)

Three Months Ended

March 31,

2005

2004

Total shareholders' equity at beginning of period

$

822,395

$

770,004

Comprehensive income:

  Net income

37,367

32,905

  Other comprehensive income:

    Change in fair value of securities available for sale of $(46,104) in 2005 and
      $19,484 in 2004, net of reclassification adjustment of $1,739 in 2004
      and tax effect of $(16,136) in 2005 and $7,428 in 2004

(29,968

)

13,795

  Total comprehensive income

7,399

46,700

Stock option exercises and non-vested stock awards (194,095 shares in 2005 and
   405,250 shares in 2004)

4,174

8,016

Tax benefit from stock compensation

1,785

3,078

Purchase of treasury stock (300,594 shares in 2005 and 852,013 shares in 2004)

(14,395

)

(35,916

)

Amortization of deferred compensation

351

293

Cash dividends ($0.265 per share in 2005 and $0.24 per share in 2004)

(13,729

)

(12,498

)

Total shareholders' equity at end of period

$

807,980

$

779,677

See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)

Three Months Ended

March 31,

2005

2004

Operating Activities:

Net income

$

37,367

$

32,905

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

Provision for possible loan losses

2,400

500

Deferred tax expense (benefit)

(444

)

(77

)

Accretion of loan discounts

(1,636

)

(1,453

)

Securities premium amortization (discount accretion), net

(37

)

415

Net (gain) loss on securities transactions

-

1,739

Depreciation and amortization

6,197

6,211

Origination of loans held for sale

(24,211

)

(18,043

)

Proceeds from sales of loans held for sale

17,786

16,377

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

(714

)

(747

)

Tax benefit from stock option exercises

1,785

3,078

Amortization of deferred compensation

351

293

Earnings on life insurance policies

(1,016

)

(1,058

)

Net change in: