CULLEN FROST BANKERS INC - 10-Q Quarterly Report

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Securities and Exchange Commission Washington, D.C. 20549
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Form 10-Q

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


For Quarter Ended June 30, 2002				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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: At July 17, 2002, there were 51,019,992 shares of Common Stock, $.01 par value, outstanding.

Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Statements of Income
(dollars in thousands, except per share amounts)			Three Months Ended June 30								Six Months Ended June 30

						2002		2001			2002		2001

Interest Income:
Loans, including fees			$		67,791		$	90,033		$	134,393	$	188,636
Securities:
	Taxable				28,144			22,137			56,448		46,460
	Tax-exempt				1,975			1,869			3,956		3,759

		Total Securities			30,119			24,006			60,404		50,219
	Time deposits				65			99			115		215
	Federal funds sold and securities purchased under repurchase agreements			524				3,520			1,000		5,764

		Total Interest Income			98,499			117,658			195,912		244,834
Interest Expense:
	Deposits				13,876			32,422			29,187		71,962
	Federal funds purchased and securities sold under repurchase agreements				1,310			3,417			2,497		7,779
	Guaranteed preferred beneficial interests in the Corporation's junior
	subordinated deferrable interest debentures				2,119			2,119			4,238		4,238
	Subordinated notes payable and other borrowings				1,639			502			3,522		1,038

		Total Interest Expense			18,944			38,460			39,444		85,017

		Net Interest Income			79,555			79,198			156,468		159,817
Provision for possible loan losses					5,396			1,000			12,196		16,031

		Net Interest Income After Provision For Possible Loan Losses			74,159			78,198			144,272		143,786
Non-Interest Income:
	Trust fees				12,073			12,837			24,188		24,843
	Service charges on deposit accounts				19,585			18,051			37,992		34,551
	Insurance commissions				5,537			3,598			11,143		7,493
	Other service, collection and exchange charges, commissions and fees				7,939			6,665			13,984		12,599
	Net gain (loss) on securities transactions				88			(12	)		88		(2	)
	Other				9,960			7,334			18,580		15,747

		Total Non-Interest Income			55,182			48,473			105,975		95,231
Non-Interest Expense:
	Salaries and wages				35,996			36,711			72,136		72,321
	Employee benefits				8,664			8,339			17,590		17,250
	Net occupancy				7,393			7,343			14,806		14,546
	Furniture and equipment				5,591			6,240			11,415		12,252
	Intangible amortization				1,735			3,752			3,612		7,632
	Other				21,886			21,382			41,945		42,367

		Total Non-Interest Expense			81,265			83,767			161,504		166,368

		Income Before Income Taxes and Cumulative Effect of Accounting Change			48,076			42,904			88,743		72,649
Income taxes					15,423			14,243			28,373		24,458

Income before cumulative effect of accounting change					32,653			28,661			60,370		48,191
Cumulative effect of change in accounting for derivatives, net of tax													3,010

		Net Income	$		32,653		$	28,661		$	60,370	$	51,201

Basic per share:
	Income before cumulative effect of accounting change		$		.64		$	.56		$	1.18	$	.93
	Cumulative effect of change in accounting, net of taxes												.06

		Net Income	$		.64		$	.56		$	1.18	$	.99

Diluted per share:
	Income before cumulative effect of accounting change		$		.61		$	.54		$	1.13	$	.90
	Cumulative effect of change in accounting, net of taxes												.06

		Net Income	$		.61		$	.54		$	1.13	$	.96

Dividends per common share					.22			.215			.435		.410

See notes to consolidated financial statements.


2

Consolidated Balance Sheets
(dollars in thousands, except per share amounts)	June 30 2002				December 31 2001					June 30 2001

Assets
Cash and due from banks		$	1,038,195			$	994,622		$		975,169
Time deposits			9,354				6,530				4,379
Securities held to maturity			42,781				51,231				61,534
Securities available for sale			2,069,187				2,105,247				1,651,385
Trading account securities							118				1,665
Federal funds sold and securities purchased under resale agreements			93,275				129,550				141,650
Loans, net of unearned discount of $8,905 at June 30, 2002; $5,005 at December 31, 2001 and $6,762 at June 30, 2001			4,497,905				4,518,608				4,545,914
Less: Allowance for possible loan losses			(78,577	)			(72,881	)			(65,254	)

Net loans			4,419,328				4,445,727				4,480,660
Premises and equipment			173,734				148,871				149,853
Accrued interest and other assets			396,055				487,688				398,191

Total Assets		$	8,241,909			$	8,369,584		$		7,864,486


Liabilities
Demand deposits (non-interest bearing):
Commercial and individual		$	1,982,823			$	2,317,926		$		2,029,368
Correspondent banks			499,420				298,055				250,451
Public funds			48,510				53,848				40,077

Total demand deposits			2,530,753				2,669,829				2,319,896
Time deposits (interest bearing):
Savings and Interest-on-Checking			979,094				1,063,923				951,151
Money market deposit accounts			1,830,729				1,804,796				1,820,766
Time			1,163,909				1,202,246				1,271,100
Public funds			336,725				357,213				324,177

Total time deposits			4,310,457				4,428,178				4,367,194

Total deposits			6,841,210				7,098,007				6,687,090
Federal funds purchased and securities sold under repurchase agreements			370,220				305,384				342,896
Accrued interest and other liabilities			133,998				120,499				121,232
Subordinated notes payable and other notes payable			149,984				152,152				2,236
Guaranteed preferred beneficial interest in the Corporation's junior subordinated deferrable interest debentures, net			98,650				98,623				98,595

Total Liabilities			7,594,062				7,774,665				7,252,049
Shareholders' Equity
Common stock, par value $.01 per share; Shares authorized: 90,000,000; Shares issued: 53,561,616			536				536				536
Surplus			195,039				191,856				190,240
Retained earnings			514,724				478,432				473,932
Accumulated other comprehensive income (loss), net of tax			17,843				(14,005	)			3,605
Treasury stock (2,541,624; 2,206,381; 1,980,490 shares)			(80,295	)			(61,900	)			(55,876	)

Total Shareholders' Equity			647,847				594,919				612,437

Total Liabilities and Shareholders' Equity		$	8,241,909			$	8,369,584		$		7,864,486




See notes to consolidated financial statements.

Consolidated Statements of Changes in Shareholders' Equity
(dollars in thousands)								Accumulated Other
									Comprehensive Income / (Loss) net of tax
		Common Stock		Surplus		Retained Earnings			Comprehensive Income / (Loss) net of tax			Treasury Stock			Total


Balance at January 1, 2001		$	536	$	187,673	$	448,006		$	(4,023	)	$	(59,166	)	$	573,026
	Net Income for the twelve months ended December 31, 2001						80,916									80,916
	Unrealized loss on securities available for sale of $4,672, net of tax and reclassification adjustment for after-tax gains included in net income of $51									(4,723	)					(4,723	)
	Additional minimum pension liability, net of tax									(5,259	)					(5,259	)

	Total comprehensive income															70,934

	Transactions from employee stock purchase plan and options						(6,234	)					5,193			(1,041	)
	Tax benefit related to exercise of stock options				3,475											3,475
	Purchase of treasury stock												(10,424	)		(10,424	)
	Issuance of restricted stock				708								2,497			3,205
	Restricted stock plan deferred compensation, net						(960	)								(960	)
	Cash dividend						(43,296	)								(43,296	)

Balance at December 31, 2001			536		191,856		478,432			(14,005	)		(61,900	)		594,919
	Net Income for the six months ended June 30, 2002						60,370									60,370
	Unrealized gain on securities available for sale of $31,905, net of tax and reclassification adjustment for after-tax gains included in net income of $57									31,848						31,848

	Total comprehensive income															92,218

	Transactions from employee stock purchase plan and options						(2,712	)					10,138			7,426
	Tax benefit related to exercise of stock options				3,090											3,090
	Purchase of treasury stock												(28,733	)		(28,733	)
	Issuance of restricted stock				93								200			293
	Restricted stock plan deferred compensation, net						851									851
	Cash dividend						(22,217	)								(22,217	)

Balance at June 30, 2002		$	536	$	195,039	$	514,724		$	17,843		$	(80,295	)	$	647,847



See notes to consolidated financial statements.

Consolidated Statements of Cash Flows					Six Months Ended
(dollars in thousands)					June 30

					2002			2001

Operating Activities
Net income				$	60,370		$	51,201
Adjustments to reconcile net income to net
	cash provided by operating activities:
		Provision for possible loan losses			12,196			16,031
		Credit for deferred taxes			(3,495	)		(965	)
		Accretion of discounts on loans			(2,473	)		(594	)
		Accretion of securities' discounts			(1,226	)		(2,767	)
		Amortization of securities' premiums			2,168			1,073
		Decrease in trading account securities			118			806
		Net realized (gain) loss on securities transactions			(88	)		2
		Net gain on sale of assets			(2,843	)		(2,128	)
		Depreciation and amortization			13,599			17,891
		Increase (decrease) in interest receivable			5,629			(4,792	)
		Decrease in interest payable			(3,371	)		(2,446	)
		Originations of loans held-for-sale			(26,279	)		(6,510	)
		Proceeds from sales of loans held-for-sale			117,513			14,408
		Tax benefit from exercise of employee stock options			3,090			2,497
		Net change in other assets and liabilities			88,691			23,213

			Net cash provided by operating activities		263,599			106,920

Investing Activities
Proceeds from maturities of securities held to maturity					8,421			9,562
Proceeds from sales of securities available for sale					3,662,176			181,295
Proceeds from maturities of securities available for sale					285,195			362,815
Purchases of securities available for sale					(3,863,139	)		(587,152	)
Purchase of bank-owned life insurance								(100,000	)
Net increase in loan portfolio					(74,155	)		(31,916	)
Net inflow from acquisitions					19,163
Net increase in premises and equipment					(34,662	)		(9,007	)
Proceeds from sales of repossessed properties					460			707

	Net cash provided (used) by investing activities				3,459			(173,696	)

Financing Activities
Net (decrease) increase in demand deposits, IOC accounts, and savings accounts					(234,387	)		191,589
Net decrease in certificates of deposits					(44,154	)		(4,189	)
Net increase (decrease) in short-term borrowings					64,836			(20,215	)
Proceeds from employee stock purchase plan and options					7,719			2,843
Purchase of treasury stock					(28,733	)
Dividends paid					(22,217	)		(21,137)

		Net cash (used) provided by financing activities			(256,936	)		148,891

		Increase in cash and cash equivalents			10,122			82,115
Cash and cash equivalents at beginning of year					1,130,702			1,039,083

		Cash and cash equivalents at the end of the period		$	1,140,824		$	1,121,198


Supplemental information:
	Interest Paid			$	40,318		$	79,684

See notes to consolidated financial statements.

Notes to Consolidated Financial Statements
Cullen/Frost Bankers, Inc. and Subsidiaries
(tables in thousands)

Note A - Basis of Presentation

The consolidated financial statements include the accounts of Cullen/Frost Bankers, Inc. ("Cullen/Frost" or the "Corporation") and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have not been audited by independent accountants, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the financial position and results of operations. All such adjustments were of a normal and recurring nature. For further information, refer to the consolidated financial statements and footnotes thereto included in Cullen/Frost's Annual Report on Form 10-K for the year ended December 31, 2001. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Certain reclassifications have been made to make prior periods comparable.

Note B - Allowance for Possible Loan Losses

An analysis of the transactions in the allowance for possible loan losses is presented below. The amount maintained in the allowance for loan losses reflects management's continuing assessment of the potential losses inherent in the portfolio based on evaluations of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio.

			Six Months Ended
			June 30

(in thousands)			2002				2001

Balance at the beginning of the period			$	72,881		$		63,265
Provision for possible loan losses				12,196				16,031
Net charge-offs:
	Losses charged to the allowance			(9,958	)			(18,444	)
	Recoveries			3,458				4,402

		Net charge-offs		(6,500	)			(14,042	)

Balance at the end of the period			$	78,577		$		65,254

Note C - Impaired Loans

A loan within the scope of Statement of Financial Accounting Standard ("SFAS") No. 114 is considered impaired when, based on current information and events, it is probable that Cullen/Frost will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled principal and interest payments. All impaired loans are on non-accrual status and included in non-performing assets. At June 30, 2002, the majority of the impaired loans were commercial loans, and collectibility was measured based on the fair value of the collateral. Interest payments on impaired loans are typically applied to principal unless collectibility of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Subsequent to classification as an impaired loan, there was no interest income recognized on these loans for the first six months of 2002 and 2001. The total allowance for possible loan losses includes activity related to allowances calculated in accordance with SFAS No. 114 and activity related to other loan loss allowances determined in accordance with SFAS No. 5.

The average recorded investment in impaired loans was $30.7 million and $15.5 million for the six months ended June 30, 2002 and 2001 respectively. The following is a summary of loans considered to be impaired:

				June 30

(in thousands)		2002				2001

Impaired loans with no allocated allowance	$		7,937		$		1,621
Impaired loans with an allocated allowance			18,278				16,997

Total recorded investment in impaired loans	$		26,215		$		18,618

Allocated allowance	$		7,965		$		7,318

Note D - Common Stock and Earnings Per Common Share

	A reconciliation of earnings per share follows:

	Six Months Ended				Three Months Ended
	June 30				June 30

(in thousands, except per share amounts)		2002		2001		2002		2001

Numerators for both basic and diluted
earnings per share, net income	$	60,370	$	51,201	$	32,653	$	28,661

Denominators:
Denominators for basic earnings per share, average outstanding common shares		51,186		51,540		51,120		51,562
Dilutive effect of stock options based on the average price for the period		2,228		2,008		2,436		1,685

Denominators for diluted earnings per share		53,414		53,548		53,556		53,247

Earnings per share:
Basic	$	1.18	$	.99	$	.64	$	.56
Diluted		1.13		.96		.61		.54

Note E - Capital

At June 30, 2002 and 2001, Cullen/Frost's subsidiary bank was considered "well capitalized" as defined by the Federal Deposit Insurance Corporation Improvement Act of 1991, the highest regulatory rating, and Cullen/Frost's capital ratios were in excess of "well capitalized" levels. A financial institution is deemed to be well capitalized if the institution has a Tier 1 risk-based capital ratio of 6.0 percent or greater, a total risk-based capital ratio of 10.0 percent or greater, and a Tier 1 leverage ratio of 5.0 percent or greater, and the institution is not subject to regulatory actions such as an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. Cullen/Frost and its subsidiary bank currently exceed all minimum capital requirements. Management is not aware of any conditions or events that would have lowered the Corporation's regulatory capital rating since June 30, 2002.

Cullen/Frost's Tier 1 Capital consists of shareholders' equity before unrealized gains and losses related to securities available for sale plus $100 million of 8.42 percent Trust Preferred Securities, less intangible assets. Total Capital is comprised of Tier 1 Capital plus $150 million of 6.875 percent subordinated bank notes and the permissible portion of the allowance for possible loan losses. Risk-adjusted assets are calculated based on regulatory requirements and include total assets and certain off balance sheet items (primarily loan commitments), less intangible assets.

The Tier 1 and Total Capital ratios are calculated by dividing the respective capital amounts by the risk-adjusted assets. The leverage ratio is calculated by dividing Tier 1 Capital by average total assets (excluding intangible assets) for the quarter.

Cullen/Frost is subject to the regulatory capital requirements administered by the Federal Reserve Bank. Regulators can initiate certain mandatory actions if the Corporation fails to meet the minimum requirements, which could have a direct material effect on the Corporation's financial statements.

The table below reflects various measures of regulatory capital at June 30, 2002 and 2001 for Cullen/Frost.

		June 30, 2002				June 30, 2001

(in thousands)		Amount		Ratio		Amount		Ratio

Risk-Based
	Tier 1 Capital	$	604,891	10.67	%	$	587,793	10.70	%
	Well capitalized requirement		340,017	6.00			329,536	6.00

	Total Capital	$	824,593	14.55	%	$	653,047	11.89	%
	Well capitalized requirement		566,696	10.00			549,227	10.00

	Risk-adjusted assets, net of goodwill	$	5,666,957			$	5,492,274

Leverage ratio				7.62	%			7.78	%
Well capitalized requirement				5.00				5.00

Average equity as a percentage of average assets				7.67				7.84

Note F - Income Taxes

The following is an analysis of the Corporation's income taxes included in the consolidated statements of operations for the six-month periods and quarters ended June 30, 2002 and 2001:

		Six Months Ended							Three Months Ended
		June 30							June 30

(in thousands)		2002				2001				2002				2001

Current income tax expense	$	31,868		$		25,423		$		18,451		$		14,546
Deferred income tax benefit		(3,495	)			(965	)			(3,028	)			(303	)

Income tax expense as reported	$	28,373		$		24,458		$		15,423		$		14,243

Current income tax expense related to the cumulative effect of change in accounting for derivatives
				$	1,620

Income tax payments	$	18,418		$	18,925		$			18,418			$	18,925

Net deferred tax assets at June 30, 2002 were $18.9 million with no valuation allowance. The deferred tax assets were supported by taxes paid in prior years.

Note G - Acquisitions

Cullen/Frost regularly evaluates acquisition opportunities and conducts due diligence activities in connection with possible acquisitions. As a result, acquisition discussions and, in some cases negotiations, may take place, and future acquisitions involving cash, debt or equity securities may occur. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of the Corporation's book value and net income per common share may occur in connection with any future transactions.

On March 6, 2002, The Frost National Bank ("Frost Bank") signed a definitive agreement to acquire the location and certain deposits of the Harlingen branch of JPMorgan Chase Bank. This acquisition, which was completed during the second quarter of 2002, allows the Corporation to expand its presence in the Rio Grande Valley.

Frost Bank assumed approximately $20 million in deposits associated with its acquisition of the Harlingen branch. The Harlingen location became a Frost Bank financial center. This transaction is not expected to have a material impact on Cullen/Frost's 2002 results of operations.

On August 1, 2001, Frost Insurance Agency ("FIA"), a subsidiary of Frost Bank, completed its acquisition of AIS Insurance & Risk Management ("AIS"), an independent insurance agency based in Fort Worth. AIS offered a broad range of commercial insurance for small to mid-size businesses, including property and casualty, employee benefits (health, life and retirement plans), business succession planning and risk management services. This acquisition was accounted for as a purchase transaction and did not have a material impact on Cullen/Frost's 2001 results of operations.

Note H - Accounting for SFAS No. 133

On January 1, 2001, Cullen/Frost adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", and at that time, designated anew the derivative instruments used for risk management into hedging relationships in accordance with the requirements of the new standard. SFAS No. 133 requires the recognition of all derivatives on the balance sheet at fair value.

Cullen/Frost enters into derivative contracts to hedge interest rate exposure by modifying the interest rate characteristics of related balance sheet instruments. To qualify for hedge accounting, derivatives must be highly effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the derivative contract. Derivative contracts are carried on the balance sheet at fair value in other assets and other liabilities. Derivatives used for hedging purposes at June 30, 2002 consisted entirely of interest rate swaps used to hedge changes in the fair value of assets and liabilities due to changes in interest rates. As a result of changes in interest rates, hedged assets and liabilities will appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation will generally be offset by income or loss on the fair value of the derivative instruments that are associated with the hedg ed assets and liabilities. When a fair value type hedge no longer qualifies for hedge accounting, previous adjustments to the carrying value of the hedged item are reversed immediately to current earnings and the hedge is reclassified to a trading position recorded at fair value.

During the second quarter 2002, the Corporation terminated 39 interest rate swap contracts hedging fixed rate commercial loans with a notional value of $93 million. A loss of $3.2 million will be amortized over the remaining life of the commercial loans. At June 30, 2002 the Corporation had 15 fair value type commercial loan/lease interest rate swaps with a notional amount of $44.2 million.

Note I - Accounting Changes

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." These Statements make significant changes to the accounting for business combinations, goodwill and intangible assets. SFAS No. 141, which replaced APB Opinion No. 16, eliminated the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. In addition, it established criteria for recognition of indefinite lived intangible assets separately from goodwill. SFAS No. 141 was effective for purchase-accounting business combinations completed after June 30, 2001. SFAS No. 141 will impact how future acquisitions are accounted for by the Corporation, but had no impact on 2001 results of operations, financial position or liquidity.

With the adoption of SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized. Instead, they are reviewed for impairment at least annually, or when certain indicators are encountered, to determine if they should be written down with a charge to earnings. At June 30, 2002 the Corporation did not have indefinite lived intangible assets other than goodwill. Intangible assets, such as core deposit intangibles, with a determinable useful life will continue to be amortized over their respective useful lives. The Corporation adopted SFAS No. 142 on January 1, 2002.

SFAS No. 142 requires a transitional impairment test be applied to all goodwill and other indefinite-lived intangible assets within the first six months after adoption. The impairment test involves identifying separate reporting units based on the reporting structure of the Corporation, then assigning all assets and liabilities, including goodwill, to these units. Goodwill is assigned based on the reporting unit benefiting from the factors that gave rise to the goodwill. Each reporting unit is then tested for goodwill impairment by comparing the fair value of the unit with its book value, including goodwill. If the fair value of the reporting unit is greater than its book value, no goodwill impairment exists. However, if the book value of the reporting unit is greater than its determined fair value, goodwill impairment may exist and further testing is required to determine the amount, if any, of the actual impairment loss. Any impairment loss determined with this tr ansitional test would be reported as a change in accounting principle. The Corporation has completed its transitional impairment test of goodwill and did not record an impairment loss as a result of this test.

The following table presents a reconciliation of reported net income and earnings per share to the amounts adjusted for the exclusion, in 2001, of goodwill amortization, net of tax:

		Six Months Ended					Three Months Ended
		June 30					June 30

		2002			2001		2002			2001

Net Income:
Net income, as reported		$	60,370	$		51,201	$	32,653	$	28,661
Goodwill amortization, net of tax						3,674				1,834

	Adjusted Net Income	$	60,370	$		54,875	$	32,653	$	30,495

Basic earnings per share:
	Net Income, as reported	$	1.18	$		.99	$	.64	$	.56
	Goodwill amortization, net of tax					.06				.03

	Adjusted Net Income	$	1.18	$		1.05	$	.64	$	.59

Diluted earnings per share:
	Net Income, as reported	$	1.13	$		.96	$	.61	$	.54
	Goodwill amortization, net of tax					.06				.03

	Adjusted Net Income	$	1.13	$		1.02	$	.61	$	.57

Note J - Operating Segments

The Corporation has three reportable operating segments: Banking, the Financial Management Group ("FMG") and Frost Securities Inc. ("FSI"). These business units were identified through the products and services that are offered within each unit. Banking includes both commercial and consumer banking services. Commercial banking services are provided to corporations and other business clients and include a wide array of lending and cash management products. Consumer banking services include direct lending and depository services. FMG includes fee-based services within private trust, retirement services, and financial management services, including personal wealth management and brokerage services. FSI is a full-service investment bank offering financial advisory services, mergers and acquisitions support, equity research, and institutional equity sales and trading. The firm provides institutional investors with in-depth research coverage in energy and communications t echnology.

The accounting policies of each reportable segment are the same as those of the Corporation except for the following items, which impact the Banking and FMG segments. The Corporation uses a match-funded transfer pricing process to assess operating segment performance. Expenses for consolidated back-office operations are allocated to operating segments based on estimated uses of those services. General overhead-type expenses such as executive administration, accounting and internal audit are allocated based on the direct expense level of the operating segment. Prior period amounts have been reclassified to conform to the current year's presentation.

Six Months Ended: (in thousands)	Banking		FMG		FSI			Non-Banks			Consolidated

June 30, 2002
Revenues from (expenses to) external customers	$	227,530	$	32,466	$	6,553		$	(4,106	)			$	262,443

Net income (loss)	$	60,669	$	6,167	$	(1,479	)	$	(4,987	)			$	60,370


June 30, 2001
Revenues from (expenses to) external customers	$	220,280	$	33,702	$	5,329		$	(4,263	)			$	255,048

Net income (loss)	$	51,108	$	6,586	$	(2,013	)	$	(4,480	)			$	51,201


Three Months Ended: (in thousands)	Banking		FMG		FSI			Non-Banks				Consolidated

June 30, 2002
Revenues from (expenses to) external customers	$	116,392	$	16,421	$	3,966		$	(2,042	)			$		134,737

Net income (loss)	$	32,646	$	2,986	$	(564	)	$	(2,415	)			$		32,653


March 31, 2002
Revenues from ( expenses to) external customers	$	111,138	$	16,045	$	2,587		$	(2,064	)			$		127,706

Net income (loss)	$	28,023	$	3,181	$	(915	)	$	(2,572	)			$		27,717


June 30, 2001
Revenues from (expenses to) external customers	$	109,562	$	17,242	$	2,926		$	(2,059	)			$		127,671

Net income (loss)	$	28,421	$	3,694	$	(958	)	$	(2,496	)			$		28,661


Note K - Subsequent Event

On July 23, 2002, the Corporation announced that its start-up securities firm, Frost Securities, was exiting all capital markets related activities with the close of business that day. The disposal of the capital markets segment includes research, sales, trading, and capital markets-related investment banking. The move will result in the elimination of approximately forty-four positions, or most of the subsidiary's fifty employees.
Conditions in the capital markets, combined with the uncertainty of the outlook for the future, made further investments into this segment uneconomic. Cullen/Frost expects to recognize an after-tax charge for discontinued operations in the third quarter of 2002 of approximately $3.9 million or $.07 per diluted common share.
Cullen/Frost intends to maintain a small group of investment banking professionals to continue providing advisory and private equity services to middle market companies in its market area.

11

Item 2.

Management's Discussion and Analysis of Financial

Condition and Results of Operations

Financial Review

Cullen/Frost Bankers, Inc. and Subsidiaries

(taxable-equivalent basis - tables in thousands)

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"), even though they are not specifically identified as such. In addition, certain statements in future filings by Cullen/Frost with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of the Corporation which are not statements of historical fact will constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of Cullen/Frost or its management or Board of Directors, including those relating to prod ucts or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", "intends", "targeted" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: (i) local, regional and international economic conditions and the impact they may have on Cullen/Frost and its customers; (ii) the effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; (iii) inflation, interest rate, market and monetary fluctuations; (iv) political instability; (v) acts of war or terrorism; (vi) the timely development and acceptance of new products and services and perceived overall value of these products and services by users; (vii) changes in consumer spending, borrowings and savings habits; (viii) technological changes; (ix) acquisitions and integration of acquired businesses; (x) the ability to i ncrease market share and control expenses; (xi) changes in the competitive environment among financial holding companies; (xii) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which Cullen/Frost and its subsidiaries must comply; (xiii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board; (xiv) changes in the Corporation's organization, compensation and benefit plans; (xv) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; (xvi) costs or difficulties related to the integration of the businesses of Cullen/Frost being greater than expected; and (xvii) the Corporation's success at managing the risks involved in the foregoing.

Such forward-looking statements speak only as of the date on which such statements are made. Cullen/Frost undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

Results of Operations

The results of operations are included in the material that follows. All balance sheet amounts are presented in averages unless otherwise indicated. Certain reclassifications have been made to make prior periods comparable. Taxable-equivalent adjustments are the result of increasing income from tax-free loans and investments by an amount equal to the taxes that would be paid if the income were fully taxable assuming a 35 percent federal tax rate, thus making tax-exempt yields comparable to taxable asset yields. Dollar amounts in tables are stated in thousands, except for per share amounts.
Cullen/Frost reported net income of $32.7 million or $.61 per diluted common share for the quarter ended June 30, 2002 compared to $27.7 million or $.52 per diluted common share for the first quarter of 2002 and $28.7 million or $.54 per diluted common share for the second quarter of 2001. Net income for the six months ended June 30, 2002 was $60.4 million or $1.13 per diluted common share compared to $51.2 million or $.96 per diluted common share for the same period of 2001. If the non-amortization of goodwill provisions of SFAS No. 142 (see Note I Accounting Changes on page 10) had been in effect, earnings per diluted common share would have been $.57 for the second quarter and $1.02 for the first six months of 2001.
Returns on average equity and average assets were 20.89 percent and 1.62 percent, respectively, for the second quarter of 2002 compared to 19.09 percent and 1.50 percent for the second quarter of 2001. For the six months ended June 30, 2002, returns on average equity and average assets were 19.65 percent and 1.51 percent, respectively, compared to 17.31 percent and 1.36 percent for the same period in 2001.

				Six Months Ended							Three Months Ended

				June 30			June 30				June 30			March 31			June 30
Earnings Summary				2002				2001			2002			2002			2001

Taxable-equivalent net interest income				$	158,890			$	162,176		$	80,764		$	78,126		$	80,367
Taxable-equivalent adjustment					2,422				2,359			1,209			1,213			1,169

Net interest income					156,468				159,817			79,555			76,913			79,198
Provision for possible loan losses					12,196				16,031			5,396			6,800			1,000
Non-Interest income:
		Net gain (loss) on securities transactions			88				(2	)		88						(12	)
		Other			105,887				95,233			55,094			50,793			48,485

			Total non-interest income		105,975				95,231			55,182			50,793			48,473
Non-Interest expense:
		Intangible amortization			3,612				7,632			1,735			1,877			3,752
		Other			157,892				158,736			79,530			78,362			80,015

			Total non-interest expense		161,504				166,368			81,265			80,239			83,767

Income before income taxes and cumulative effect of
	accounting change				88,743				72,649			48,076			40,667			42,904
Income Taxes					28,373				24,458			15,423			12,950			14,243

Income before cumulative effect of accounting change					60,370				48,191			32,653			27,717			28,661
Cumulative effect of change in accounting for
	derivatives, net of tax								3,010

Net Income				$	60,370			$	51,201		$	32,653		$	27,717		$	28,661

Net income per diluted common share:				$	1.13			$	.96		$	.61		$	.52		$	.54
Return on Average Assets					1.51	%			1.36	%		1.62	%		1.39	%		1.50	%
Return on Average Equity					19.65				17.31			20.89			18.36			19.09

13

Net Interest Income

Net interest income is the difference between interest income on earning assets, such as loans and investment securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income. Net interest income on a taxable-equivalent basis for the second quarter of 2002 was $80.8 million, up from the $78.1 million recorded for the first quarter of 2002 and up slightly from $80.4 million recorded for the second quarter of 2001. Rate and volume components are summarized in the following table:

	First Six Months			Second Quarter				Second Quarter
	2002 vs			2002 vs				2002 vs
Change in Taxable-Equivalent	First Six Months			Second Quarter				First Quarter
Net Interest Income	2001			2001				2002

Due to volume	$	12,668		$	7,109		$		1,164
Due to interest rate spread		(15,954	)		(6,712	)			1,474

	$	(3,286	)	$	397		$		2,638


Net interest margin is the taxable-equivalent net interest income as a percentage of average earning assets for the period. Net interest margin was 4.72 percent for the second quarter of 2002 compared to 4.68 percent and 5.00 percent for the first quarter of 2002 and second quarter of 2001, respectively. The decline in the net interest margin from the second quarter of 2001 reflects the impact of sharply reduced interest rates on the Corporation's asset-sensitive balance sheet (the company's earning assets subject to repricing exceed its interest-bearing liabilities that are able to reprice). The federal funds rate declined eleven times during 2001, resulting in an average federal funds rate of 1.75 percent for the first and second quarters of 2002, compared with 4.34 percent for the second quarter of 2001. Despite the decline in net interest margin, the growth in average earning assets, funded primarily by demand deposits, resulted in an increase in net interest incom e from the second quarter of 2001. Average earning assets for the second quarter of 2002 grew 6.4 percent over the same quarter of 2001.
Net interest income for the second quarter of 2002 increased by $2.6 million from the preceding quarter primarily as the result of the repricing downward of time deposits and the growth in average loans outstanding.
The Corporation is funded primarily by core deposits, with demand deposits historically being a strong source of funds. This low cost funding base has historically been a positive to net interest income and margin. However, in a falling rate environment the Corporation suffers margin compression as its earning assets reprice and deposit pricing does not decrease proportionately.
Net interest spread, which represents the difference between the rate earned on earning assets and the rates paid out on funds, was 4.30 percent for the second quarter of 2002. This was an increase of six basis points from the first quarter of 2002 and seven basis points from the second quarter of 2001. The net interest spread for the six months ended June 30, 2002 was 4.27 percent, an increase of four basis points from 4.23 percent for the same period of 2001.
Net interest margin was 4.70 percent for the six months ended June 30, 2002 compared to 5.09 percent a year ago. This decline in the net interest margin reflects the impact of sharply reduced interest rates on the Corporation's asset-sensitive balance sheet. Net interest income for the six months ended June 30, 2002 decreased $3.3 million from a year ago. This is primarily the result of declines in the Federal Funds rate of 200 basis points from June 30, 2001 combined with constrained loan growth over the same period.

14

Non-Interest Income

Total non-interest income for the quarter was up $4.4 million or 8.6 percent compared to the first quarter of 2002 and up $6.7 million or 13.8 percent from the second quarter of 2001. Other non-interest income for the second quarter 2002 includes a gain of $2.6 million associated with the accelerated sale of student loans. Total non-interest income for the six months ended June 30, 2002 was up $10.7 million or 11.3 percent compared to the same period last year.

		Six Months Ended							Three Months Ended

		June 30		June 30			June 30				March 31			June 30
Non-Interest Income		2002		2001			2002				2002			2001

Trust fees		$	24,188	$	24,843			$		12,073	$	12,115	$		12,837
Service charges on deposit accounts			37,992		34,551					19,585		18,407			18,051
Insurance commissions			11,143		7,493					5,537		5,606			3,598
Other service charges, collection and exchange
Charges, commissions and fees			13,984		12,599					7,939		6,045			6,665
Net gain (loss) on securities transactions			88		(2	)				88					(12	)
Other			18,580		15,747					9,960		8,620			7,334

	Total	$	105,975	$	95,231			$		55,182	$	50,793	$		48,473


For the second quarter 2002...
Trust fees were flat despite the continuing decline and volatility in the current market environment (the S&P 500 was down 16 percent on average from the second quarter of 2001) compared to the first quarter of 2002 and down $764 thousand compared to the second quarter of 2001. Trust income was down from the second quarter 2001 due to a decrease of $751 thousand in oil and gas fees, which were impacted by the decrease in oil prices. Partially offsetting this decrease was new revenue of $156 thousand to the Corporation related to securities lending. The securities lending program, which the Corporation began to offer in the fourth quarter of 2001, offers institutional investors the opportunity to add incremental returns on their investment and pension portfolios by lending custodial-held securities to broker/dealers. The market value of trust assets at the end of the second quarter of 2002 was $12.9 billion, down $671 million and $260 million from the first quarter of 2002 and second quarter of 2001, respectively. Trust assets were comprised of managed assets of $5.9 billion and custody assets of $7.0 billion compared to $5.8 billion and $7.3 billion, respectively, a year ago.
Service charges on deposit accounts for the second quarter of 2002 increased $1.2 million or 6.4 percent from the first quarter of this year. This increase was mainly due to higher fees on commercial accounts associated with higher treasury management activity. These higher fees were due in large part to five additional business days in the second quarter. In addition to the higher commercial account fees, there was a modest increase in consumer overdraft charges and NSF income. When compared to the second quarter of 2001 service charges increased by $1.5 million or 8.5 percent. This increase was mainly due to higher fees associated with commercial accounts resulting primarily from higher treasury management activity, a lower earnings credit rate and higher billable services, offset in part by lower overdraft fees and NSF charges.
Insurance commissions were flat compared to the first quarter of 2002 and up $1.9 million, or 53.9 percent compared to the second quarter of 2001. The increase from the second quarter a year ago was the combined result of the acquisition of AIS Insurance & Risk Management ($1.0 million of the increase), continued selling efforts and the effect of higher insurance premiums on commission revenues, as the insurance market has started to tighten the availability of certain products.
Other service charges were up $1.9 million or 31.3 percent compared to the previous quarter and up $1.3 million or 19.1 percent from the same quarter a year ago. The increase from both periods was related to higher equity sales commission revenue and corporate finance fees at Frost Securities.

15

Other non-interest income increased $1.3 million or 15.6 percent when compared to the previous quarter this year and $2.6 million or 35.8 percent when compared to the second quarter a year ago. The increase from both periods was primarily related to the $2.6 million pre-tax gain on an accelerated sale of student loans, which are normally sold in due course throughout the year, combined with higher FMG annuity fee income. Offsetting this gain was the impact of the sale of a data processing center during the first quarter of 2002. The previous quarter included $1 million earned by FIA related to the performance of insurance policies placed with various insurance carriers, that is seasonal and typically received in the first quarter of each year.

For the six months ended June 30, 2002...
Trust income was down $655 thousand from the first half of last year, primarily in oil and gas fees decreasing $1.2 million, impacted by the decrease in oil prices, partially offset by new revenues from securities lending of $354 thousand. Service charges on deposits increased $3.4 million or 10.0 percent compared to the same period one year ago. This increase was mainly due to higher treasury management fees on commercial accounts, related to a lower earnings credit rate, which resulted in the Corporation receiving more payment for services through fees than through the use of balances, as well as higher billable services, offset by lower overdraft fees and NSF charges. Insurance commissions increased $3.7 million or 48.7 percent compared to the same period a year ago. The increase was the combined result of the impact of the acquisition of AIS during the third quarter of 2001 ($1.9 million), continued selling efforts and the effect of higher insurance premiums on co mmission revenues, as the insurance market has started to tighten the availability of certain products. Other service charge income increased $1.4 million or 11.0 percent from the same period last year. The increase was related to higher equity sales commission revenue and corporate finance fees at Frost Securities. Other income was up $2.8 million or 18.0 percent compared to the same period last year. The increase was primarily related to the $2.6 million pre-tax gain on the accelerated sale of student loans that were scheduled to reprice downward at the end of the period. These loans are normally sold in due course throughout the year. Also contributing to the increase was the increase in cash surrender value on bank owned life insurance policies and higher FMG annuity fee income. Included in 2001, was a $1.1 million gain recognized from the sale of an interest rate floor.

Non-Interest Expense

Total non-interest expense for the quarter was up $1.0 million or 1.3 percent compared to the first quarter of 2002 and down $2.5 million, or 3.0 percent compared to the second quarter of 2001. Total non-interest expense for the six months ended June 30 2002 was down $4.9 million or 2.9 percent compared to the same period last year. The comparisons to 2001 for intangible amortization are impacted by the implementation of SFAS No. 142.

		Six Months Ended				Three Months Ended

		June 30		June 30		June 30		March 31				June 30
Non-Interest Expense		2002		2001		2002			2002			2001

Salaries and wages		$	72,136	$	72,321	$	35,996		$	36,140	$		36,711
Employee benefits			17,590		17,250		8,664			8,926			8,339
Net occupancy			14,806		14,546		7,393			7,413			7,343
Furniture and equipment			11,415		12,252		5,591			5,824			6,240
Intangible amortization			3,612		7,632		1,735			1,877			3,752
Other			41,945		42,367		21,886			20,059			21,382

	Total	$	161,504	$	166,368	$	81,265		$	80,239	$		83,767


For the second quarter 2002...
Salaries and wages were flat compared with the first quarter of 2002 and were down $715 thousand or 2.0 percent from the second quarter of 2001. During the fourth quarter of 2001, four percent of the staff accepted voluntary early retirement and an additional two percent were impacted by a reduction in

16

workforce. The decrease from the second quarter a year ago is a result of these events, partially offset by the reinstatement of the accrual for potential performance related bonuses. Employee benefits were down $262 thousand or 2.9 percent compared to last quarter and up $325 thousand or 3.9 percent compared to the second quarter of 2001. When compared to the first quarter of 2002, payroll taxes paid decreased as some employees reached the maximum level for the year, which was partially offset by an increase in medical costs. When compared to the second quarter of 2001, the increase was primarily related to higher medical costs.

Net occupancy expense remained flat with the first quarter of 2002 and the second quarter of 2001. Frost Bank completed the planned repurchase of both the twenty-one story office tower and the nine-story adjacent parking garage facility during the second quarter of 2002. The total purchase price of the office tower and the adjacent parking garage was $41 million. This transaction had the effect of decreasing lease expense; however, increases in lease expense related to other facilities partially offset this decrease. Furniture and equipment expense was down $233 thousand or 4.0 percent and $649 thousand or 10.4 percent from the first quarter of 2002 and the second quarter of 2001, respectively. The decrease from both periods is related to lower service contracts expense, software maintenance, depreciation and repair costs.

Intangible amortization decreased $142 thousand or 7.6 percent and $2.0 million or 53.8 percent from the first quarter of 2002 and the second quarter of 2001, respectively. The decrease from a year ago was substantially due to the implementation of SFAS No. 142, which replaced the practice of amortizing goodwill and indefinite lived intangible assets with an annual review for impairment. See Note I "Accounting Changes" on page 10 for further discussion on this statement.

Other non-interest expense was up $1.8 million or 9.1 percent and up $504 thousand or 2.4 percent from the first quarter of 2002 and the second quarter of 2001, respectively. The increase from the prior quarter was primarily due to higher sundry losses (including a $400 thousand write-down of foreclosed property), up $966 thousand, and higher travel costs up $228 thousand. The increase from the year ago quarter was also impacted by the higher sundry losses, up $1.2 million when compared to that quarter. Federal Reserve charges were also up $455 thousand, when compared to the second quarter last year, due to the impact of lower rates. These increases were partially offset by lower attorney and other professional expense.

For the six months ended June 30, 2002...

Salaries and wages remained flat compared to the same period a year ago primarily related to the voluntary early retirement and the reduction in workforce, offset by the reinstatement of the accrual for potential performance related bonuses. Employee benefits increased $340 thousand or 2.0 percent from the same period last year due primarily from higher medical costs. Net occupancy was up $260 thousand or 1.8 percent compared to a year ago. The increase was related to higher property taxes and higher lease expense related to various facilities offset by the benefit of lower lease expense related to the purchase of the twenty-one story office tower and the nine-story adjacent parking garage facility, discussed above. Furniture and equipment expense decreased $837 thousand or 6.8 percent due primarily to lower depreciation and software maintenance costs. Intangible amortization decreased $4.0 million or 52.7 percent from a year ago almost all related to the implementat ion of SFAS No. 142. See Note I on page 10 for further information. Other non-interest expenses decreased $422 thousand or 1.0 percent primarily due to lower attorney fees and other professional expenses, and a broad based decrease in operating expenses, offset by higher Federal Reserve service charges, due to the lower interest rate environment, and higher sundry losses.

Results of Segment Operations

The Corporation's operations are managed along three Operating Segments: Banking, the Financial Management Group ("FMG") and Frost Securities Inc. ("FSI"). A description of each business and the methodologies used to measure financial performance are described in Note J to the Consolidated Financial Statements on page 11. The following table summarizes net income by Operating Segment for the quarters and six months ending June 30, 2002 and 2001:

	Six Months Ended							Three Months Ended

	June 30			June 30				June 30			March 31				June 30
	2002				2001			2002				2002			2001

Banking	$	60,669			$	51,108		$	32,646			$	28,023		$	28,421
Financial Management Group		6,167				6,586			2,986				3,181			3,694
Frost Securities Inc.		(1,479	)			(2,013	)		(564	)			(915	)		(958	)
Non-Banks		(4,987	)			(4,480	)		(2,415	)			(2,572	)		(2,496	)

Consolidated Net Income	$	60,370			$	51,201		$	32,653			$	27,717		$	28,661


Banking

Net income was $32.6 million for the second quarter of 2002, up 14.9 percent from $28.4 million for the same period of 2001. The increase in net income in the second quarter of 2002 versus 2001 reflects the impact of higher net interest income and non-interest income combined with lower non-interest expense, partially offset by a higher provision for possible loan losses.
Net interest income was up $1.0 million due to the growth in average earning assets, funded primarily by demand deposits, despite the impact of sharply declining interest rates on the banking group's asset -sensitive balance sheet. The average federal funds rate declined from 4.34 percent for the second quarter of 2001 to 1.75 percent for the second quarter of 2002.
Non-interest income was up $5.8 million from the second quarter of last year as the result of the $2.6 million gain on the accelerated sale of student loans, higher service charges on deposit accounts (see Service charges discussion in non-interest income on page 15) and FIA's higher insurance commissions.
Non-interest expense decreased $3.5 million, or 5.3 percent from the year ago quarter. As the result of the non-amortization of goodwill provision of SFAS No. 142, intangible amortization decreased $1.9 million or 53.1 percent from the second quarter last year. Salaries and benefits were down $1.5 million or 4.3 percent, as the result of the early retirement program and the reduction in force implemented in the fourth quarter of 2001, partially offset by higher medical costs.
The Corporation recorded a $5.4 million provision for possible loan losses during the second quarter of 2002, compared to $1.0 million recorded during the second quarter of 2001. Net charge-offs for the second quarter of 2002 were $4.1 million compared with net recoveries of $189 thousand in the same quarter a year ago. The higher provision from the prior year quarter is reflective of the higher net charge-off level and the continued uncertainty in the current economy.
FIA, which is included in the Banking operating segment, had gross revenues of $5.6 million during the second quarter of 2002 as compared with $3.9 million in the same period of 2001. Insurance commissions were the largest component of these revenues, increasing $1.9 million or 53.9 percent over 2001. This increase reflects the acquisition on August 1, 2001 of AIS ($1.0 million), continued selling efforts and the effect of higher insurance premiums on commission revenues, due to the tightening insurance markets for some products.

18

Financial Management Group

Net income for the second quarter of 2002 was $3.0 million, down $708 thousand or 19.2 percent compared to $3.7 million for the same period of 2001. This decline in earnings results from lower net interest income and non-interest income combined with higher non-interest expense.

Net interest income was down $637 thousand compared to the previous year quarter as the lower rate environment has reduced the funds transfer price paid on FMG's securities sold under repurchase agreements. Non-interest income was down $184 thousand from second quarter of 2001, primarily due to lower oil and gas fees (down $751 thousand) due to lower prices, offset by higher annuity income (up $590 thousand) and the securities lending program ($156 thousand), which is further described in the "Non-Interest Income" section.

Most of the increase in operating expenses, up $231 thousand from the same quarter last year, was due to higher salaries and benefits, which were up $395 thousand, due to higher commissions paid and an increase in the number of employees.

Frost Securities Inc.

FSI's operating loss of $564 thousand for the second quarter of 2002 was a 41.1 percent improvement from the loss for the same period last year. Total revenues were up $1.0 million or 35.5 percent over 2001 driven primarily by higher corporate finance fees. FSI revenues represented approximately 7.2 percent of the Corporation's non-interest income during the second quarter of 2002.

Non-interest expenses for the second quarter of 2002 were up $461 thousand to $4.8 million, primarily related to compensation expenses.

On July 23, 2002, Cullen/Frost announced that FSI was exiting all capital markets related activities with the close of business that day. See Note K, Subsequent Event on page 11 for more information.

Non-Banks

The operating loss for non-banks in the second quarter of 2002 was flat with the same period of 2001.

Income Taxes

Cullen/Frost recognized income tax expense of $15.4 million for the second quarter of 2002, compared to $13.0 million for the first quarter of 2002, and $14.2 million in the second quarter of 2001. The effective tax rate for the second quarter of 2002 was 32.08 percent compared 31.84 percent for the first quarter of 2002 and 33.20 percent for the second quarter of 2001. The lower effective tax rate in the second quarter of 2002 compared to the second quarter in 2001 was mainly due to an increase in tax exempt income resulting from the purchase of bank owned life insurance purchased during the second quarter of 2001, and to the decrease in nondeductible goodwill amortization in 2002 as a result of the implementation of SFAS No. 142.

Balance Sheet

Average assets for the second quarter of 2002 were $8.1 billion flat with the first quarter of 2002 and up $410 million or 5.3 percent from the second quarter of 2001.

Total deposits averaged $6.7 billion for the current quarter down $28 million or 1.7 percent on an annualized basis compared with the previous quarter and up $241 million or 3.7 percent when compared to the second quarter of 2001. Excluding the decline in deposits related to a large mortgage originator and servicing customer for which Frost Bank is the depository and clearing bank ($83.5 million from the prior quarter and $58.7 million from the second quarter of 2001), total deposits would have increased 3.4 percent on an annualized basis from the prior quarter and 4.8 percent from the same quarter a year ago. The largest increase over the second quarter of 2001 was in average demand deposits, up $326 million or 17.0 percent, primarily due to an increase in correspondent banking deposits.

Average loans for the second quarter of 2002 were $4.6 billion, up 4.8 percent on an annualized basis from the first quarter of 2002 and flat with the second quarter of last year.


Loans

Total period-end loans for the second quarter 2002 were $4.5 billion, down $61 million or 5.4 percent on an annualized basis compared to the first quarter 2002 and down $48 million or 1.1 percent compared to the second quarter 2001. The student loan portfolio decreased $101.4 million to $11.7 million at June 30, 2002 from $113.1 million at March 31, 2002 as a result of the acceleration in sales of loans which would have normally been sold in the ordinary course of business over an extended period. These loans were scheduled to reprice to lower rates at the end of the period. The Corporation continues to originate student loans. The Corporation withdrew from the mortgage origination business as well as the indirect lending business during 2000, and these portfolios continue to decrease through payoffs and refinancings. The shared national credits portfolio ("SNCs"), discussed later in this section, decreased by $36 million from the first quarter of 2002 and decreased b y $57 million from the second quarter a year ago. The mortgage, indirect and student loan portfolios are also discussed in more detail later in this section. Excluding the impact from these four portfolios (SNCs, mortgage, indirect and student loans), the total period-end loan portfolio increased by 10.0 percent on an annualized basis from the first quarter 2002 and grew 5.9 percent over the second quarter of 2001.

Loan Portfolio			June 30		Percentage			March 31			December 31			June 30
Period-End Balances			2002		of Total			2002			2001			2001

Real estate:
	Construction:
		Commercial	$	381,592		8.5	%	$	390,724		$	373,431		$	364,121
		Consumer		42,203		.9			41,500			44,623			47,200
	Land:
		Commercial		129,388		2.9			120,496			128,782			138,572
		Consumer		10,578		.2			10,550			7,040			7,292
	Commercial real estate mortgages			1,023,085		22.8			1,000,888			994,485			985,904
	1-4 Family residential mortgages			212,204		4.7			224,372			244,897			283,065
	Other consumer real estate			283,291		6.3			279,183			278,849			273,870

	Total real estate			2,082,341		46.3			2,067,713			2,072,107			2,100,024
Commercial and industrial				2,098,176		46.6			2,052,952			1,985,447			1,952,325
Consumer:
	Indirect			42,908		1.0			52,667			65,217			98,216
	Other			259,701		5.8			371,197			345,899			346,422
Other, including foreign				23,684		.5			20,851			54,943			55,689
Unearned discount				(8,905	)	(.2	)		(6,288	)		(5,005	)		(6,762	)

		Total	$	4,497,905		100.0	%	$	4,559,092		$	4,518,608		$	4,545,914


At June 30, 2002, the majority of the loan portfolio was comprised of the commercial and industrial loan portfolio totaling $2.1 billion or 46.6 percent of total loans and the real estate loan portfolio totaling $2.1 billion or 46.3 percent of total loans. The real estate total includes both commercial and consumer balances.
The commercial and industrial loan portfolio increased 7.5 percent from the second quarter 2001 to 2.1 billion and increased 12.0 percent for the same period after adjusting for the decline in SNCs. At June 30, 2002, approximately 93 percent of the outstanding balance of SNCs were included in the commercial and industrial portfolio, with the remainder included in the real estate categories. The Corporation's commercial and industrial loans are a diverse group of loans to small, medium and large

20

businesses. The purpose of these loans varies from supporting seasonal working capital needs to term financing of equipment. While some short term loans may be made on an unsecured basis, most are secured by the assets being financed with appropriate collateral margins. The commercial and industrial loan portfolio also includes the commercial lease portfolio and asset-based lending. At June 30, 2002, the commercial lease portfolio totaled $56.3 million and asset-based loans totaled $61.9 million compared with March 31, 2002 balances of $43.5 million and $45.1 million, respectively, and June 30, 2001 balances of $41.1 million and $45.5 million, respectively.
The Corporation had a total SNCs portfolio of approximately $201 million outstanding at June 30, 2002, down from $237 million at March 31, 2002 and down from $258 million at June 30, 2001. At June 30, 2002, approximately 40 percent of the SNCs were energy related with the remainder diversified throughout various industries. These participations are done in the normal course of business to meet the needs of the Corporation's customers. General corporate policy towards participations is to lend to companies either headquartered in or having significant operations within our markets. In addition, the Corporation must have an existing banking relationship or the expectation of broadening the relationship with other bank products.
Total real estate loans at June 30, 2002 were $2.1 billion, up 2.8 percent from March 31, 2002. However, excluding the decline in the 1-4 family residential mortgage portfolio, which is discussed below, total real estate loans increased $26.8 million or 5.8 percent on an annualized basis from the first quarter of 2002, and $53.2 million or 2.9 percent from June 30, 2001. The commercial real estate portfolio, which totals $1.5 billion, represents over 73 percent of the total real estate loans at June 30, 2002. The majority of this portfolio is commercial real estate mortgages, which includes both permanent and intermediate term loans. The diversity in the commercial real estate portfolio allows the Corporation to reduce the impact of a decline in any single industry.
The primary focus of the commercial real estate portfolio has been loans secured by owner-occupied properties. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Consequently, these loans must undergo the analysis and underwriting process of a commercial and industrial loan, as well as a commercial real estate loan. At June 30, 2002, approximately 49 percent of the Corporation's commercial real estate loans were secured by owner-occupied properties.
The consumer loan portfolio, including all consumer real estate, at June 30, 2002 totaled $851 million, down 52.5 percent on an annualized basis from March 31, 2002. Excluding the impact of the student loan sale, 1-4 family residential mortgage and indirect lending portfolios, total consumer loans decreased by 3.5 percent on an annualized basis from the first quarter of 2002. As the following table illustrates, the consumer loan portfolio has four distinct segments - consumer real estate, consumer non-real estate, indirect consumer loans and 1-4 family residential mortgages.

Consumer Portfolio		June 30		March 31		December 31		June 30
Period-End Balances (in millions)		2002		2002		2001			2001

Construction		$	42.2	$	41.5	$	44.6		$	47.2
Land			10.6		10.5		7.0			7.3
Other consumer real estate			283.3		279.2		278.9			273.9

	Total consumer real estate		336.1		331.2		330.5			328.4
Consumer non-real estate			259.7		371.2		345.9			346.4
Indirect			42.9		52.7		65.2			98.2
1-4 Family residential mortgages			212.2		224.4		244.9			283.1

	Total Consumer loans	$	850.9	$	979.5	$	986.5		$	1,056.1



21

The consumer non-real estate loan segment was $259.7 million at June 30, 2002 compared to $371.2 million at March 31, 2002. Loans in this segment were impacted by the student loan sale and also include automobile loans, unsecured revolving credit products, personal loans secured by cash and cash equivalents, and other similar types of credit facilities.
The indirect consumer loan segment was $42.9 million at June 30, 2002, a decrease of $55.3 million or 56.3 percent since June 30, 2001. At June 30, 2002, the majority of the portfolio was comprised of new and used automobile loans (53.5 percent of total), as well as purchased home improvement and home equity loans (43.5 percent of total). The portfolio is not expected to completely pay off by year-end 2002 due to the longer life of the non-auto loans in this portfolio. However, the portfolio is expected to continue to decline over the remainder of the year.
The Corporation also discontinued originating 1-4 family residential mortgage loans in 2000. These types of loans are now offered through the Corporation's co-branding arrangement with GMAC Mortgage. At June 30, 2002, the 1-4 family residential loan segment totaled $212.2 million down from $224.4 million at March 31, 2002. This portfolio will continue to decline due to the decision to withdraw from the mortgage origination business and the high level of mortgage refinancings during the current low rate environment.
Loans to Mexico based borrowers, secured by liquid assets held in the United States, were $9.9 million at June 30, 2002, $10.3 million at March 31, 2002, and $14.7 million at June 30, 2001. Cullen/Frost's cross-border outstandings to Mexico excluding these loans totaled $414 thousand at June 30, 2002 up from $63 thousand at December 31, 2001 and from $74 thousand at June 30, 2001. At June 30, 2002 and 2001, none of the Mexico-related loans were on non-performing status.

Loan Commitments

In the normal course of business, in order to meet the financial needs of its customers, Cullen/Frost is a party to financial instruments with off-balance sheet risk. These include commitments to extend credit and standby letters of credit, which commit the Corporation to make payments to or on behalf of customers when certain specified future events occur. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Corporation's normal credit policies. Collateral is obtained based on management's credit assessment of the customer. Commitments to extend credit and standby letters of credit amounted to $2.4 billion and $114.8 million, respectively, at June 30, 2002. Included in the allowance for possible loan losses at June 30, 2002 was approximately $1.6 million associated with unfunded loan commitments. Commercial and industrial loan commitments represent approximately 76.3 percent of the total loan commitments outstanding at June 30, 2002. Acceptances due from customers at June 30, 2002 were $3.1 million.

Non-Performing Assets

			Real
June 30, 2002			Estate			Other			Total

Non-accrual loans			$	10,026		$	20,063		$	30,089
Foreclosed assets				3,667						3,667

		Total	$	13,693		$	20,063		$	33,756

As a percentage of total
	non-performing assets			40.6	%		59.4	%		100.0	%

Non-performing assets totaled $33.8 million at June 30, 2002 down 16.9 percent from $40.6 million at March 31, 2002 and up 31.3 percent from $25.7 million at June 30, 2001. During the second quarter of 2002, the Corporation sold its remaining interests in a non-accrual loan with a carrying value of $7.7 million. This loan, made to a private company in the marketing and sales promotion industry, was a large SNC that went on non-accrual status in the third quarter of 2001. This transaction resulted in a recovery of $1.25 million, which was credited against the allowance for possible loan losses.

22

Non-performing assets as a percentage of total loans and foreclosed assets were .75 percent at June 30, 2002 compared to .89 percent last quarter and .57 percent one year ago. Non-performing assets as a percentage of total assets were .41 percent at the end of the second quarter 2002 compared to .50 percent for the first quarter of 2002 and .33 percent for the second quarter 2001. The level of non-performing assets at June 30, 2002 at .41 percent of total assets was within the range of previous guidance.
Non-performing assets include non-accrual loans and foreclosed assets. Generally, loans are placed on non-accrual status if principal or interest payments become 90 days past due and/or management deems the collectibility of the principal and/or interest to be in question, as well as when required by regulatory provisions. Once interest accruals are discontinued, accrued but uncollected interest is charged to current year operations. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured.
Foreclosed assets represent property acquired as the result of borrower defaults on loans. Foreclosed assets are valued at the lower of the loan balance or estimated fair value, less estimated selling costs, at the time of foreclosure. Write-downs occurring at foreclosure are charged against the allowance for possible loan losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs are provided for subsequent declines in value. Expenses related to maintaining foreclosed properties are included in other non-interest expense.
The after-tax impact (assuming a 35 percent marginal tax rate) of lost interest from non-performing assets was approximately $303 thousand for the second quarter of 2002, compared to approximately $561 thousand for the first quarter of 2002 and approximately $473 thousand for the second quarter of 2001. Accruing loans past due are summarized below:

		June 30		March 31			June 30
ACCRUING LOANS PAST DUE		2002		2002			2001

30 to 89 days		$	39,605		$	29,345	$	31,656
90 days or more			5,801			6,568		13,369

	Total	$	45,406		$	35,913	$	45,025


Allowance for Possible Loan Losses

The allowance for possible loan losses was $78.6 million or 1.75 percent of period-end loans at June 30, 2002, compared to $77.3 million or 1.70 percent for the first quarter of 2002 and $65.3 million or 1.44 percent at June 30, 2001. The allowance for possible loan losses as a percentage of non-accrual loans was 261 percent at June 30, 2002, compared to 212 percent and 285 percent at the end of the first quarter of 2002 and the second quarter of 2001, respectively.
The Corporation recorded a $5.4 million provision for possible loan losses during the second quarter of 2002, compared to $6.8 million during the prior quarter and $1.0 million recorded during the second quarter of 2001. The higher provision from the prior year quarter is reflective of the higher net charge-off level and the continued uncertainty in the current economy.
Net charge-offs in the second quarter of 2002 totaled $4.1 million, compared to net charge-offs of $2.4 million in the prior quarter and a net recovery of $189 thousand for the second quarter of 2001. The second quarter 2002 charge-off level was related to two commercial and industrial loans offset in part by the previously mentioned recovery on the sale of a non-accrual loan. See the Non-Performing Assets section on page 22 for further information. The allowance for possible loan losses is maintained at a level considered appropriate by management, based on estimated probable losses in the loan portfolio.

23




	2002				2001

	Second		First			Second
NET CHARGE-OFFS (RECOVERIES)	Quarter		Quarter			Quarter

Real Estate	$	808	$	59		$	(688	)
Commercial and industrial		2,942		1,830			84
Consumer		351		413			387
Other, including foreign		18		79			28

	$	4,119	$	2,381		$	(189	)


Provision for possible loan losses	$	5,396	$	6,800		$	1,000
Allowance for possible loan losses		78,577		77,300			65,254

Capital and Liquidity

At June 30, 2002, shareholders' equity was $647.8 million compared to $612.4 million at June 30, 2001 and $604.2 million at March 31, 2002. In addition to net income of $60.4 million, activity in shareholders' equity during 2002 included $22.2 million of dividends paid and $28.7 million paid for repurchasing shares of the Corporation's common stock. The accumulated other comprehensive income component of equity was $17.8 million as of June 30, 2002 compared to a loss of $14.0 million as of December 31, 2001. This change resulted from the $31.8 million, net of tax, of unrealized gain on securities available for sale as of June 30, 2002. Currently, under regulatory requirements, the unrealized gain or loss on securities available for sale does not increase or reduce regulatory capital and is not included in the calculation of risk-based capital and leverage ratios. The Federal Reserve Board utilizes capital guidelines designed to measure Tier 1 and Total Capital and take into consideration the risk inherent in both on-balance sheet and off-balance sheet items. See Note E "Capital" on page seven for a discussion of Cullen/Frost's capital ratios.
Cullen/Frost's board of directors raised the cash dividend in the second quarter of 2002 to $.22 per common share from $.215 per common share paid each quarter since the second quarter of 2001. This equates to a dividend payout ratio of 34.4 percent, 39.7 percent and 38.7 percent for the second and first quarters of 2002 and the second quarter of 2001, respectively. In addition, the Corporation announced in the third quarter of 2001 that its board of directors had authorized the repurchase of up to 2.6 million shares of its common stock over a two-year period, from time to time, at various prices in the open market or through private transactions. As of June 30, 2002, 1.2 million shares at a cost of $39.2 million had been repurchased under this program.
Funding sources available at the holding company level include a $25 million short-term line of credit. There were no borrowings outstanding from this source at June 30, 2002.
Liquidity measures the ability to meet current and future cash flow needs as they become due. Cullen/Frost seeks to ensure that these needs are met at a reasonable cost by maintaining a level of liquid funds through asset/liability management.
Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash, short-term time deposits in banks, securities available for sale, maturities and cash flow from securities held to maturity, and Federal funds sold and securities purchased under resale agreements.
Liability liquidity is provided by access to funding sources, which include core deposits and correspondent banks in Cullen/Frost's natural trade area that maintain accounts with and sell Federal funds to Frost Bank, as well as Federal funds purchased and securities sold under repurchase agreements from upstream banks. The liquidity position of Cullen/Frost is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate.

24

Consolidated Average Balance Sheets and Interest Income Analysis-Year-to-Date
(dollars in thousands - taxable-equivalent basis)				June 30, 2002								June 30, 2001

							Interest								Interest
				Average			Income/		Yield/			Average			Income/		Yield/
				Balance			Expense		Cost			Balance			Expense		Cost

Assets:
Time deposits				$	14,682		$	115	1.58		%	$	7,071		$	215	5.24	%
Securities:
	U.S. Treasury				36,168			376	2.09				59,556			1,784	6.04
	U.S. Government agencies and corporations				1,867,572			55,386	5.93				1,339,492			43,525	6.50
	States and political subdivisions
		Tax-exempt			176,725			6,164	6.98				163,199			5,851	7.17
		Taxable			2,232			74	6.63				3,378			109	6.48
	Other				31,659			616	3.89				34,793			1,050	6.04

			Total securities		2,114,356			62,616	5.92				1,600,418			52,319	6.54
Federal funds sold and securities purchased
	under resale agreements				107,684			1,000	1.85				238,654			5,764	4.80
Loans, net of unearned discount					4,560,801			134,603	5.95				4,561,781			188,895	8.35

Total Earning Assets and Average Rate Earned					6,797,523			198,334	5.87				6,407,924			247,193	7.76
Cash and due from banks					816,614								741,280
Allowance for possible loan losses					(77,225	)							(64,529	)
Premises and equipment					151,250								150,477
Accrued interest and other assets					392,596								331,444

	Total Assets			$	8,080,758							$	7,566,596

Liabilities:
Demand deposits:
	Commercial and individual			$	1,898,118							$	1,744,306
	Correspondent banks				440,859								242,229
	Public funds				41,051								37,486

		Total demand deposits			2,380,028								2,024,021
Time deposits:
	Savings and Interest-on-Checking				1,022,338			965	.19				960,548			2,542	.53
	Money market deposit accounts				1,813,393			11,619	1.29				1,802,539			30,022	3.36
	Time accounts				1,175,498			13,971	2.40				1,279,978			33,333	5.25
	Public funds				343,073			2,632	1.55				301,746			6,065	4.05

		Total time deposits			4,354,302			29,187	1.35				4,344,811			71,962	3.34

	Total deposits				6,734,330								6,368,832
Federal funds purchased and securities sold
	under repurchase agreements				340,680			2,497	1.46				361,322			7,779	4.28
Guaranteed preferred beneficial interests in the
	Corporation's junior subordinated deferrable
	interest debentures				98,637			4,238	8.59				98,582			4,238	8.60
Subordinated notes payable and other notes
	payable				152,082			3,114	4.13				3,347			109	6.57
Other borrowings					21,118			408	3.90				31,623			929	5.93

Total Interest-Bearing Funds and Average
	Rate Paid				4,966,819			39,444	1.60				4,839,685			85,017	3.53

Accrued interest and other liabilities					114,406								106,530

	Total Liabilities				7,461,253								6,970,236
Shareholders' Equity					619,505								596,360

	Total Liabilities and Shareholders' Equity			$	8,080,758							$	7,566,596

Net interest income							$	158,890							$	162,176

Net interest spread									4.27		%						4.23	%

Net interest income to total average earning assets										4.70	%						5.09	%


The above information is shown on a taxable-equivalent basis assuming a 35% tax rate. Non-accrual loans are
included in the average loan amounts outstanding for these computations.

25

Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
(dollars in thousands - taxable-equivalent basis)				June 30, 2002								March 31, 2002

							Interest								Interest
				Average			Income/		Yield/			Average			Income/		Yield/
				Balance			Expense		Cost			Balance			Expense		Cost

Assets:
Time deposits				$	13,868		$	65	1.89		%	$	15,504		$	50	1.30	%
Securities:
	U.S. Treasury				58,028			290	2.00				14,065			85	2.47
	U.S. Government agencies and corporations				1,865,691			27,470	5.89				1,869,473			27,917	5.97
	States and political subdivisions
		Tax-exempt			176,419			3,078	6.98				177,035			3,086	6.97
		Taxable			2,229			37	6.64				2,234			37	6.62
	Other				33,965			348	4.10				29,328			268	3.65

			Total securities		2,136,332			31,223	5.85				2,092,135			31,393	6.00
Federal funds sold and securities purchased
	under resale agreements				112,638			524	1.84				102,674			476	1.85
Loans, net of unearned discount					4,587,665			67,896	5.94				4,533,639			66,707	5.97

Total Earning Assets and Average Rate Earned					6,850,503			99,708	5.83				6,743,952			98,626	5.90
Cash and due from banks					766,820								866,962
Allowance for possible loan losses					(79,512	)							(74,912	)
Premises and equipment					154,785								147,677
Accrued interest and other assets					397,713								401,632

	Total Assets			$	8,090,309							$	8,085,311

Liabilities:
Demand deposits:
	Commercial and individual			$	1,869,124							$	1,927,435
	Correspondent banks				472,994								408,367
	Public funds				38,442								43,689

		Total demand deposits			2,380,560								2,379,491
Time deposits:
	Savings and Interest-on-Checking				1,023,782			490	.19				1,020,878			475	.19
	Money market deposit accounts				1,818,573			5,783	1.28				1,808,156			5,835	1.31
	Time accounts				1,164,320			6,347	2.19				1,186,800			7,624	2.61
	Public funds				332,982			1,256	1.51				353,275			1,377	1.58

		Total time deposits			4,339,657			13,876	1.28				4,369,109			15,311	1.42

	Total deposits				6,720,217								6,748,600
Federal funds purchased and securities sold
	under repurchase agreements				353,525			1,310	1.47				327,692			1,187	1.45
Guaranteed preferred beneficial interests in the
	Corporation's junior subordinated deferrable
	interest debentures				98,644			2,119	8.59				98,630			2,119	8.60
Subordinated notes payable and other notes
	payable				151,996			1,466	3.86				152,170			1,648	4.33
Other borrowings					19,325			173	3.60				22,929			235	4.16

Total Interest-Bearing Funds and Average
	Rate Paid				4,963,147			18,944	1.53				4,970,530			20,500	1.66

Accrued interest and other liabilities					119,790								123,173

	Total Liabilities				7,463,497								7,473,194
Shareholders' Equity					626,812								612,117

	Total Liabilities and Shareholders' Equity			$	8,090,309							$	8,085,311

Net interest income							$	80,764							$	78,126

Net interest spread									4.30		%						4.24	%

Net interest income to total average earning assets										4.72	%						4.68	%


The above information is shown on a taxable-equivalent basis assuming a 35% tax rate. Non-accrual loans are
included in the average loan amounts outstanding for these computations.

26

Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
(dollars in thousands - taxable-equivalent basis)				December 31, 2001								September 30, 2001

								Interest								Interest
				Average				Income/		Yield/			Average			Income/		Yield/
				Balance				Expense		Cost			Balance			Expense		Cost

Assets:
Time deposits				$		8,433		$	44	2.06	%		$	6,104		$	72	4.67	%
Securities:
	U.S. Treasury					62,885			346	2.18				17,738			164	3.66
	U.S. Government agencies and corporations				1,741,198				26,488	6.09				1,596,137			25,251	6.33
	States and political subdivisions
		Tax-exempt				174,457			3,038	6.97				168,484			2,959	7.03
		Taxable				2,250			37	6.57				2,796			46	6.53
	Other					29,859			285	3.82				29,426			254	3.46

			Total securities			2,010,649			30,194	6.01				1,814,581			28,674	6.32
Federal funds sold and securities purchased
	under resale agreements					202,824			1,155	2.23				331,845			2,864	3.38
Loans, net of unearned discount						4,551,040			72,881	6.35				4,512,277			82,637	7.27

Total Earning Assets and Average Rate Earned					6,772,946				104,274	6.12				6,664,807			114,247	6.81
Cash and due from banks						930,601								820,091
Allowance for possible loan losses						(80,382	)							(65,561	)
Premises and equipment						149,950								150,157
Accrued interest and other assets						417,922								387,047

	Total Assets			$		8,191,037							$	7,956,541

Liabilities:
Demand deposits:
	Commercial and individual			$		2,087,115							$	1,955,445
	Correspondent banks					303,831								262,399
	Public funds					43,766								40,859

		Total demand deposits				2,434,712								2,258,703
Time deposits:
	Savings and Interest-on-Checking					981,430			475	.19				962,999			588	.24
	Money market deposit accounts					1,859,110			7,418	1.58				1,839,010			10,571	2.28
	Time accounts					1,236,146			10,413	3.34				1,268,349			13,355	4.18
	Public funds					323,523			1,601	1.96				297,830			2,316	3.09

		Total time deposits				4,400,209			19,907	1.79				4,368,188			26,830	2.44

	Total deposits					6,834,921								6,626,891
Federal funds purchased and securities sold
	under repurchase agreements					316,599			1,435	1.77				366,360			2,840	3.03
Guaranteed preferred beneficial interests in the
	Corporation's junior subordinated deferrable
	interest debentures					98,616			2,119	8.60				98,602			2,118	8.60
Subordinated notes payable and other notes
	payable					152,142			2,053	5.40				99,678			1,575	6.32
Other borrowings						30,068			401	5.30				32,338			464	5.70

Total Interest-Bearing Funds and Average
	Rate Paid					4,997,634			25,915	2.06				4,965,166			33,827	2.70

Accrued interest and other liabilities						124,902								103,718

	Total Liabilities					7,557,248								7,327,587
Shareholders' Equity						633,789								628,954

	Total Liabilities and Shareholders' Equity			$		8,191,037							$	7,956,541

Net interest income								$	78,359							$	80,420

Net interest spread										4.06	%							4.11	%

Net interest income to total average earning assets										4.60	%							4.80	%


The above information is shown on a taxable-equivalent basis assuming a 35% tax rate. Non-accrual loans are
included in the average loan amounts outstanding for these computations.

27

Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
(dollars in thousands - taxable-equivalent basis)				June 30, 2001

							Interest
				Average			Income/		Yield/
				Balance			Expense		Cost

Assets:
Time deposits				$	7,751		$	99	5.11	%
Securities:
	U.S. Treasury				17,028			192	4.52
	U.S. Government agencies and corporations				1,337,607			21,427	6.41
	States and political subdivisions
		Tax-exempt			163,453			2,908	7.12
		Taxable			3,388			55	6.46
	Other				32,751			469	5.73

			Total securities		1,554,227			25,051	6.45
Federal funds sold and securities purchased
	under resale agreements				315,871			3,520	4.41
Loans, net of unearned discount					4,559,623			90,157	7.93

Total Earning Assets and Average Rate Earned					6,437,472			118,827	7.40
Cash and due from banks					806,665
Allowance for possible loan losses					(65,728	)
Premises and equipment					150,376
Accrued interest and other assets					351,930

	Total Assets			$	7,680,715

Liabilities:
Demand deposits:
	Commercial and individual			$	1,828,870
	Correspondent banks				248,370
	Public funds				35,709

		Total demand deposits			2,112,949
Time deposits:
	Savings and Interest-on-Checking				970,673			1,115	.46
	Money market deposit accounts				1,824,869			12,857	2.83
	Time accounts				1,276,765			15,741	4.95
	Public funds				293,816			2,709	3.70

		Total time deposits			4,366,123			32,422	2.98

	Total deposits				6,479,072
Federal funds purchased and securities sold
	under repurchase agreements				360,786			3,417	3.75
Guaranteed preferred beneficial interests in the
	Corporation's junior subordinated deferrable
	interest debentures				98,589			2,119	8.60
Subordinated notes payable and other notes
	payable				3,060			47	6.17
Other borrowings					31,405			455	5.81

Total Interest-Bearing Funds and Average
	Rate Paid				4,859,963			38,460	3.17

Accrued interest and other liabilities					105,602

	Total Liabilities				7,078,514
Shareholders' Equity					602,201

	Total Liabilities and Shareholders' Equity			$	7,680,715

Net interest income							$	80,367

Net interest spread									4.23	%

Net interest income to total average earning assets									5.00	%


The above information is shown on a taxable-equivalent basis assuming a 35% tax rate. Non-accrual loans are
included in the average loan amounts outstanding for these computations.

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

There has been no material change in the market risks faced by the Company since December 31, 2001. For information regarding the Company's market risk, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

Part II: Other Information

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Shareholders of the Corporation was held on May 22, 2002. The following matters were submitted to a vote of the Corporation's shareholders.

1. Election of Directors:

Election of five director nominees into Class III, with a term expiring in 2005, was approved with no nominee receiving less than 45,784,359 million votes.

Class III Nominees:	Total Votes For	Total Votes Withheld
R. Denny Alexander	46,116,873	390,672
Eugene H. Dawson, Sr.	45,784,359	723,186
Ruben M. Escobedo	46,288,960	218,585
Joe R. Fulton	46,276,127	231,418
Ida Clement Steen	46,289,608	217,937


2. Ratification of Independent Auditors

Total Votes For	44,291,912
Total Votes Against	2,215,633
Total Abstentions	n/a

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None

(b) Reports on Form 8-K

None

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Cullen/Frost Bankers, Inc.
	(Registrant)


Date: July 24, 2002	By: /s/ Phillip D. Green

	Phillip D. Green
	Group Executive Vice President
	and Chief Financial Officer
	(Duly Authorized Officer and
	Principal Accounting Officer)