CULLEN FROST BANKERS INC - 10-Q Quarterly Report

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United States Securities and Exchange Commission
Washington, D.C. 20549

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Form 10-Q

[ X ]

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

For the quarterly period ended:

September 30, 2003

[ ]

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to ________________

Commission file number:

0-7275

Cullen/Frost Bankers, Inc.

(Exact name of registrant as specified in its charter)

Texas

74-1751768

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

100 W. Houston Street, San Antonio, Texas

78205

(Address of principal executive offices)

(Zip code)

(210) 220-4011

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the

Exchange Act). Yes [ X ] No [ ]

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

Cullen/Frost Bankers, Inc. Quarterly Report on Form 10-Q September 30, 2003 Table of Contents
			Page
Part I - Financial Information

	Item 1.	Financial Statements (Unaudited)

		Consolidated Statements of Income	3

		Consolidated Balance Sheets	4

		Consolidated Statements of Changes in Shareholders' Equity	5

		Consolidated Statements of Cash Flows	6

		Notes to Consolidated Financial Statements	7

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

	Item 4.	Controls and Procedures	35

Part II - Other Information

	Item 1.	Legal Proceedings	36

	Item 2.	Changes in Securities and Use of Proceeds	36

	Item 3.	Defaults Upon Senior Securities	36

	Item 4.	Submission of Matters to a Vote of Security Holders	36

	Item 5.	Other Information	36

	Item 6.	Exhibits and Reports on Form 8-K	36


Signatures			37

Part I. Financial Information Item 1. Financial Statements (Unaudited) Cullen/Frost Bankers, Inc. Consolidated Statements of Income (Dollars in thousands, except per share amounts)

			Three Months Ended September 30,						Nine Months Ended September 30,

				2003		2002			2003		2002


Interest income:
	Loans, including fees		$	57,460	$	66,984		$	176,523	$	201,377
	Securities:
	Taxable			27,630		27,637			85,929		84,085
	Tax-exempt			2,121		1,988			6,352		5,944
	Interest-bearing deposits			23		46			88		142
	Federal funds sold and securities purchased under resale agreements			2,617		1,411			8,105		2,411

		Total interest income		89,851		98,066			276,997		293,959

Interest expense:
	Deposits			8,563		13,881			29,347		43,068
	Federal funds purchased and securities sold under repurchase agreements			453		1,485			3,028		3,982
	Guaranteed preferred beneficial interests in junior subordinated
		deferrable interest debentures		2,118		2,118			6,356		6,356
	Subordinated notes payable and other borrowings			1,198		1,579			3,839		5,101

		Total interest expense		12,332		19,063			42,570		58,507


Net interest income				77,519		79,003			234,427		235,452
Provision for possible loan losses				1,998		5,850			9,044		18,046

		Net interest income after provision for possible loan losses		75,521		73,153			225,383		217,406

Non-interest income:
	Trust fees			11,646		11,666			34,717		35,854
	Service charges on deposit accounts			22,576		19,720			65,432		57,712
	Insurance commissions			7,276		7,250			20,944		18,393
	Other service, collection and exchange charges, commissions and fees			6,334		4,176			14,423		13,013
	Net gain on securities transactions			40		-			40		88
	Other			7,274		7,621			26,758		25,971

		Total non-interest income		55,146		50,433			162,314		151,031

Non-interest expense:
	Salaries and wages			37,408		35,888			109,428		104,396
	Employee benefits			9,129		8,372			29,140		25,580
	Net occupancy			7,804		7,202			22,246		21,875
	Furniture and equipment			5,418		5,495			16,272		16,814
	Intangible amortization			1,412		1,736			4,477		5,348
	Other			21,111		19,351			62,006		58,713

		Total non-interest expense		82,282		78,044			243,569		232,726


Income from continuing operations before income taxes				48,385		45,542			144,128		135,711
Income taxes				15,622		14,760			46,262		43,632

Income from continuing operations				32,763		30,782			97,866		92,079
Loss from discontinued operations, net of tax (Note 11)				-		(4,320	)		-		(5,247	)


		Net income	$	32,763	$	26,462		$	97,866	$	86,832


Basic per share:
	Income from continuing operations		$	0.64	$	0.60		$	1.91	$	1.81
	Net income			0.64		0.52			1.91		1.70

Diluted per share:
	Income from continuing operations		$	0.62	$	0.59		$	1.87	$	1.75
	Net income			0.62		0.51			1.87		1.65

See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc. Consolidated Balance Sheets (Dollars in thousands, except per share amounts)

	September 30,			December 31,		September 30,
		2003			2002		2002


Assets:
Cash and due from banks	$	1,118,250		$	1,331,136		$	1,044,076
Interest-bearing deposits		3,216			8,661			6,570
Federal funds sold and securities purchased under resale agreements		625,700			724,150			516,250

Total cash and cash equivalents		1,747,166			2,063,947			1,566,896

Securities held to maturity, at amortized cost		27,591			36,135			39,282
Securities available for sale, at estimated fair value		2,833,067			2,417,126			2,121,372
Trading account securities		3,063			4,995			374
Loans, net of unearned discounts		4,525,666			4,518,913			4,569,431
Less: Allowance for possible loan losses		(83,410	)		(82,584	)		(81,500	)

Net loans		4,442,256			4,436,329			4,487,931
Premises and equipment, net		165,564			169,927			172,154
Goodwill		98,873			97,838			98,826
Other intangible assets, net		17,410			21,330			22,341
Cash surrender value of life insurance policies		108,244			104,650			107,195
Accrued interest receivable and other assets		208,549			202,526			168,559

Total assets	$	9,651,783		$	9,554,803		$	8,784,930


Liabilities:
Deposits:
Non-interest-bearing demand deposits	$	3,227,723		$	3,229,052		$	2,951,573
Interest-bearing deposits		4,512,633			4,399,091			4,348,772

Total deposits		7,740,356			7,628,143			7,300,345

Federal funds purchased and securities sold under repurchase agreements		752,826			811,218			407,062
Subordinated notes payable and other borrowings		159,721			168,164			169,721
Guaranteed beneficial interests in junior subordinated deferrable
interest debentures		100,000			100,000			100,000
Accrued interest payable and other liabilities		138,597			143,488			121,181

Total liabilities		8,891,500			8,851,013			8,098,309

Shareholders' Equity:
Common stock, par value $.01 per share; 90,000,000 shares authorized; 53,561,616 shares issued		536			536			536
Surplus		199,185			196,830			195,523
Retained earnings		606,994			549,422			532,803
Deferred compensation		(1,509	)		(1,957	)		(451	)
Accumulated other comprehensive income, net of tax		14,969			32,548			37,960
Treasury stock, 1,809,974, 2,266,141 and 2,511,991 shares, at cost		(59,892	)		(73,589	)		(79,750	)

Total shareholders' equity		760,283			703,790			686,621

Total liabilities and shareholders' equity	$	9,651,783		$	9,554,803		$	8,784,930



See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(Dollars in thousands)

		Nine Months Ended
		September 30,

		2003			2002


Total shareholders' equity at beginning of period	$	703,790		$	594,919

Comprehensive income:

Net income		97,866			86,832
Other comprehensive income:
Change in fair value of securities available for sale of $(27,005) in 2003 and $80,034 in 2002, net of reclassification adjustment of $(40) in 2003 and $(88) in 2002 and tax effect of $9,466 in 2003 and $(27,981) in 2002		(17,579	)		51,965


Total comprehensive income		80,287			138,797

Stock option exercises and employee stock purchase plan purchases		9,378			8,110
Tax benefit from stock option exercises		2,345			3,445
Purchase of treasury stock		-			(28,733	)
Repurchase of restricted stock		-			(845	)
Amortization of deferred compensation		511			4,380
Cash dividends		(36,028	)		(33,452	)


Total shareholders' equity at end of period	$	760,283		$	686,621


See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)

					Nine Months Ended
					September 30,

					2003			2002


Net income				$	97,866		$	86,832
Adjustments to reconcile net income to net cash from operating activities:
	Provision for possible loan losses				9,044			18,046
	Deferred tax benefit				(3,055	)		(5,874	)
	Accretion of loan discounts				(2,850	)		(4,279	)
	Securities premium amortization, net				921			1,140
	Net gain on sale of assets				(2,979	)		(2,947	)
	Net gain on securities transactions				(40	)		(88	)
	Depreciation and amortization				19,346			21,779
	Tax benefit from stock option exercises				2,345			3,445
	Amortization of deferred compensation				511			4,380
	Earnings on life insurance policies				(3,594	)		(3,767	)
	Charge for discontinued operations				-			3,035
	Net change in:
		Trading account securities			1,932			(256	)
		Loans held for sale			(1,364	)		70,284
		Accrued interest receivable and other assets			1,352			126,916
		Accrued interest payable and other liabilities			(5,733	)		(30,886	)

			Net cash from operating activities		113,702			287,760

Investing Activities
	Securities held to maturity:
		Purchases			(1,000	)		-
		Maturities, calls and principal repayments			9,523			11,912
	Securities available for sale:
		Purchases			(8,179,334	)		(6,827,158	)
		Sales			6,767,281			6,460,533
		Maturities, calls and principal repayments			968,207			429,431
	Net change in loans				(12,856	)		(125,691	)
	Net cash (paid) received in acquisitions				(750	)		19,163
	Proceeds from sales of premises and equipment				1,092			2,182
	Purchases of premises and equipment				(7,071	)		(40,232	)
	Proceeds from sales of repossessed properties				5,697			2,280

			Net cash from investing activities		(449,211	)		(67,580	)

Financing Activities
	Net change in deposits				112,213			180,593
	Net change in short-term borrowings				(58,392	)		101,678
	Principal payments on notes payable and other borrowings				(8,443	)		(11,337	)
	Proceeds from stock option exercises and employee stock purchase plan purchases				9,378			8,110
	Purchase of treasury stock				-			(28,733	)
	Repurchase of restricted stock				-			(845	)
	Cash dividends paid				(36,028	)		(33,452	)

			Net cash from financing activities		18,728			216,014


Net change in cash and cash equivalents					(316,781	)		436,194
Cash and equivalents at beginning of period					2,063,947			1,130,702


Cash and equivalents at end of period				$	1,747,166		$	1,566,896


Supplemental disclosures:
	Cash paid for interest			$	50,295		$	63,787
	Cash paid for income taxes				32,941			37,836

See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.
Notes to Consolidated Financial Statements
(table amounts in thousands, except per share amounts)

Note 1 - Basis of Presentation

Cullen/Frost Bankers, Inc. (Cullen/Frost) is a financial holding company and a bank holding company headquartered in San Antonio, Texas that provides, through its subsidiaries, a broad array of products and services throughout 12 Texas markets. In addition to general commercial and consumer banking, other products and services offered include trust and investment management, investment banking, insurance brokerage, leasing, asset-based lending, treasury management and item processing.

The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of Cullen/Frost and its wholly owned subsidiaries (collectively referred to as the "Corporation"). 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. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (SEC). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principl es generally accepted in the United States for complete financial statements and should be read in conjunction with the consolidated financial statements, and notes thereto, for the year ended December 31, 2002, included in the Corporation's Annual Report on Form 10-K filed with the SEC on March 28, 2003 (the "2002 Form 10-K"). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

The accounting and financial reporting policies the Corporation follows conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for possible loan losses is particularly subject to change.

Certain reclassifications have been made to make prior periods comparable, including the effects of discontinued operations (See Note 11 - Discontinued Operations).

The Corporation accounts for stock-based employee compensation plans based on the "intrinsic value method" provided in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Because the exercise price of the Corporation's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized on options granted. Compensation expense for restricted stock awards is based on the market price of the stock on the date of grant and is recognized ratably over the vesting period of the award.

Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS 148, requires pro forma disclosures of net income and earnings per share for companies not adopting its fair value accounting method for stock-based employee compensation. The pro forma disclosures presented in Note 9 - Stock-Based Compensation use the fair value method of SFAS 123 to measure compensation expense for stock-based employee compensation plans.

Comprehensive income includes all changes in shareholders' equity during a period, except those resulting from investments by and distributions to owners. Besides net income, other components of the Corporation's comprehensive income include the after tax effect of changes in the fair value of securities available for sale and additional minimum pension liability adjustments. Comprehensive income for the nine months ended September 30, 2003 is reported in the accompanying consolidated statements of changes in shareholders' equity. Comprehensive income totaled $15.3 million for the three months ended September 30, 2003 compared to $46.6 million for the three months ended September 30, 2002.

Note 2 - Securities

A summary of the amortized cost and estimated fair value of securities, excluding trading securities, is presented below.

	September 30, 2003									December 31, 2002

	Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses	Estimated Fair Value		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value



Securities Held to Maturity:
U.S. government agencies and corporations	$	24,358	$		785	$	3	$	25,140		$	33,556		$	1,273		$	2		$	34,827
States and political subdivisions		2,108			153		-		2,261			2,454			156			-			2,610
Other		1,125			-		15		1,110			125			-			-			125

Total	$	27,591	$		938	$	18	$	28,511		$	36,135		$	1,429		$	2		$	37,562


Securities Available for Sale:
U.S. Treasury	$	-	$		-	$	-	$	-		$	16,991		$	12		$	-		$	17,003
U.S. government agencies and corporations		2,549,525			55,892		8,477		2,596,940			2,090,705			75,970			6			2,166,669
State and political subdivisions		192,682			8,804		193		201,293			191,944			7,205			110			199,039
Other		34,834			-		-		34,834			34,415			-			-			34,415

Total	$	2,777,041	$		64,696	$	8,670	$	2,833,067		$	2,334,055		$	83,187		$	116		$	2,417,126

Securities with a fair value totaling $1.2 billion at September 30, 2003 and $1.4 billion at December 31, 2002 were pledged to secure public funds, trust deposits, securities sold under repurchase agreements and for other purposes, as required or permitted by law. Obligations of U.S. government agencies and corporations classified as available for sale in the table above included securities loaned in connection with dollar-roll repurchase agreements with a fair value totaling $305.3 million at September 30, 2003 and $395.7 million at December 31, 2002.

Note 3 - Loans

Loans were as follows:

			September 30,				Percentage				December 31,			Percentage
				2003			of Total				2002			of Total


Commercial and industrial				$	2,162,007			47.8	%	$		2,155,550			47.7	%
Real estate:
	Construction:
		Commercial			353,022			7.8				315,340			7.0
		Consumer			26,232			0.6				45,152			1.0
	Land:
		Commercial			165,193			3.6				158,271			3.5
		Consumer			5,175			0.1				8,231			0.2
	Commercial real estate mortgages				1,099,563			24.3				1,050,957			23.2
	1-4 family residential mortgages				124,814			2.8				179,077			4.0
	Other consumer real estate				281,345			6.2				276,429			6.1

	Total real estate				2,055,344			45.4				2,033,457			45.0
Consumer:
	Indirect				10,653			0.2				25,262			0.6
	Other				286,914			6.4				289,190			6.4
Other, including foreign					19,471			0.4				23,295			0.5
Unearned discount					(8,723	)		(0.2	)			(7,841	)		(0.2	)

		Total loans		$	4,525,666			100.0	%	$		4,518,913			100.0	%

Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations, which typically occurs when principal or interest payments are more than 90 days past due. Non-accrual loans totaled $34.2 million at September 30, 2003 and $34.9 million at December 31, 2002. Accruing loans past due more than 90 days totaled $12.3 million at September 30, 2003 and $9.1 million at December 31, 2002.

Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from 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. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Impaired loans were as follows:

							September 30,					December 31,
								2003					2002


Balance of impaired loans with no allocated allowance							$	7,432				$		9,769
Balance of impaired loans with an allocated allowance								22,015						19,247

Total recorded investment in impaired loans							$	29,447				$		29,016


Amount of the allowance allocated to impaired loans							$	9,878				$		9,275


All impaired loans are included in non-performing assets. The impaired loans included in the table above were primarily comprised of collateral dependent commercial loans. The average recorded investment in impaired loans was $31.1 million and $31.5 million during the three and nine months ended September 30, 2003 and $29.7 million and $30.6 million for the three and nine months ended September 30, 2002. No interest income was recognized on these loans subsequent to their classification as impaired.

The Corporation has U.S. dollar denominated loans and commitments to borrowers in Mexico. The outstanding balance of these loans and the unfunded amounts available under these commitments were not significant at September 30, 2003 or December 31, 2002.

Note 4 - Allowance for Possible Loan Losses

The allowance for possible loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management's best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management's continuing evaluation 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. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management's judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowan ce is dependent upon a variety of factors beyond the Corporation's control, including the performance of the Corporation's loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

Activity in the allowance for possible loan losses was as follows:

		Three Months Ended September 30,									Nine Months Ended September 30,

			2003			2002					2003						2002


Balance at the beginning of the period		$	83,410		$	78,577				$	82,584					$	72,881
Provision for possible loan losses			1,998			5,850					9,044						18,046
Net charge-offs:
	Losses charged to the allowance		(4,482	)		(4,084			)		(13,034				)		(14,042	)
	Recoveries		2,484			1,157					4,816						4,615

	Net charge-offs		(1,998	)		(2,927			)		(8,218				)		(9,427	)


Balance at the end of the period		$	83,410		$	81,500				$	83,410					$	81,500

Note 5 - Deposits

Deposits were as follows:


	September 30,				Percentage			December 31,		Percentage			September 30,				Percentage
		2003		of Total				2002		of Total					2002		of Total


Non-interest-bearing demand deposits:
Commercial and individual		$	2,244,208			29.0	%	$	2,165,033		28.4	%		$		2,128,445		29.1	%
Correspondent banks			897,864			11.6			1,001,713		13.1					749,104		10.3
Public funds			85,651			1.1			62,306		0.8					74,024		1.0

Total non-interest-bearing demand deposits			3,227,723			41.7			3,229,052		42.3					2,951,573		40.4

Interest-bearing deposits:
Savings and Interest-On-Checking			1,036,445			13.4			1,030,227		13.5					980,002		13.4
Money market accounts			2,224,752			28.7			1,925,924		25.3					1,892,349		25.9
Time accounts under $100,000			431,029			5.6			477,957		6.3					493,750		6.8
Time accounts of $100,000 or more			525,710			6.8			612,183		8.0					645,808		8.9
Public funds			294,697			3.8			352,800		4.6					336,863		4.6

Total interest-bearing deposits			4,512,633			58.3			4,399,091		57.7					4,348,772		59.6


Total deposits		$	7,740,356			100.0	%	$	7,628,143		100.0	%		$		7,300,345		100.0	%

Deposits from foreign sources, primarily Mexico, totaled $669.6 million at September 30, 2003 and $691.1 million at December 31, 2002.

Note 6 - Commitments and Contingencies

Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, the Corporation enters into various transactions, which, in accordance with generally accepted accounting principles, are not included in its consolidated balance sheets. The Corporation enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Corporation minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

The Corporation enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Corporation's commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for possible loan losses. Commitments to extend credit totaled $2.2 billion and $2.1 billion at September 30, 2003 and December 31, 2002.

Standby Letters of Credit. Standby letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Corporation would be required to fund the commitment. The maximum potential amount of future payments the Corporation could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Corporation would be entitled to seek recovery from the customer. The Corporation's policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements. Standby letters of credit totaled $229.0 million at September 30, 2003 and $159.3 million at December 31, 2002. As of September 30, 2003, in accordance with a new accounting standa rd, the Corporation has an accrued liability of $1.2 million related to potential obligations under these guarantees. No liability was recorded for these guarantees prior to January 1, 2003. See Note 13 - New Accounting Standards.

Lease Commitments. The Corporation leases certain office facilities and office equipment under operating leases. Rent expense for all operating leases totaled $3.2 million and $9.9 million for the three and nine months ended September 30, 2003 and $3.4 million and $10.0 million for the three and nine months ended September 30, 2002. There has been no significant change in the future minimum lease payments payable by the Corporation since December 31, 2002. See the 2002 Form 10-K for information regarding these commitments.

Litigation. The Corporation and its subsidiaries are subject to various claims and legal actions that have arisen in the normal course of conducting business. Management does not expect the ultimate disposition of these matters to have a material adverse impact on the Corporation's financial statements.

Note 7 - Capital

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

Quantitative measures established by regulations to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

Cullen/Frost's and Frost Bank's Tier 1 capital consists of shareholders' equity excluding unrealized gains and losses on securities available for sale, goodwill and other intangible assets. Tier 1 capital for Cullen/Frost also includes $100 million of 8.42% trust preferred securities. Cullen/Frost's and Frost Bank's total capital is comprised of Tier 1 capital plus $150 million of 6.875% subordinated notes payable and a permissible portion of the allowance for possible loan losses.

The Tier 1 and total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, excluding goodwill and other intangible assets, allocated by risk weight category and certain off-balance-sheet items (primarily loan commitments). The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets.

Actual and required capital ratios for Cullen/Frost and Frost Bank were as follows:

	Actual					Minimum Required for Capital Adequacy Purposes					Required to be Well Capitalized Under Prompt Corrective Action Regulations

		Capital Amount	Ratio				Capital Amount	Ratio				Capital Amount	Ratio


September 30, 2003
Total Capital to Risk-Weighted Assets
Cullen/Frost	$	940,481		15.00	%	$	501,525		8.00	%		N/A		N/A
Frost Bank		891,064		14.23			501,049		8.00		$	626,311		10.00		%
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost		712,055		11.36			250,762		4.00			N/A			N/A
Frost Bank		662,712		10.58			250,525		4.00			375,787			6.00
Leverage Ratio
Cullen/Frost		712,055		7.39			385,525		4.00			N/A			N/A
Frost Bank		662,712		6.88			385,096		4.00			481,370			5.00

December 31, 2002
Total Capital to Risk-Weighted Assets
Cullen/Frost	$	859,518		14.16	%	$	485,529		8.00	%		N/A		N/A
Frost Bank		814,889		13.44			485,188		8.00		$	606,485		10.00		%
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost		634,733		10.46			242,764		4.00			N/A			N/A
Frost Bank		590,157		9.73			242,594		4.00			363,891			6.00
Leverage Ratio
Cullen/Frost		634,733		7.25			350,268		4.00			N/A			N/A
Frost Bank		590,157		6.75			349,879		4.00			437,349			5.00

Frost Bank has been notified by its regulator that, as of its most recent regulatory examination, it is regarded as well capitalized under the regulatory framework for prompt corrective action. Such determination has been made based on Frost Bank's Tier 1, total capital, and leverage ratios. There have been no conditions or events since this notification that management believes would change Frost Bank's categorization as well capitalized under the aforementioned ratios.

Cullen/Frost is subject to the regulatory capital requirements administered by the Federal Reserve, while Frost Bank is subject to the regulatory capital requirements administered by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. Regulatory authorities can initiate certain mandatory actions if Cullen/Frost or Frost Bank fail to meet the minimum capital requirements, which could have a direct material effect on the Corporation's financial statements. Management believes, as of September 30, 2003, that Cullen/Frost and Frost Bank meet all capital adequacy requirements to which they are subject.

Note 8 - Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of shares determined for the basic computation plus the dilutive effect of stock options and restricted stock granted using the treasury stock method.

Basic and diluted earnings per share computations were as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,

		2003		2002			2003		2002


Numerators for both basic and diluted earnings per share:
Income from continuing operations	$	32,763	$	30,782		$	97,866	$		92,079
Loss from discontinued operations, net of tax		-		(4,320	)		-			(5,247	)


Net income	$	32,763	$	26,462		$	97,866	$		86,832


Denominators:
Weighted-average shares outstanding for basic earnings per share		51,503		50,924			51,351			50,956
Dilutive effect of stock options and restricted stock awards		1,315		1,444			1,091			1,514


Weighted-average shares outstanding for diluted earnings per share		52,818		52,368			52,442			52,470


Basic earnings per share:
Income from continuing operations	$	0.64	$	0.60		$	1.91	$		1.81
Loss from discontinued operations, net of tax		-		(0.08	)		-			(0.11	)


Net income	$	0.64	$	0.52		$	1.91	$		1.70


Diluted earnings per share:
Income from continuing operations	$	0.62	$	0.59		$	1.87	$		1.75
Loss from discontinued operations, net of tax		-		(0.08	)		-			(0.10	)


Net income	$	0.62	$	0.51		$	1.87	$		1.65

Note 9 - Stock-Based Compensation

The following pro forma information presents net income and earnings per share for the three and nine months ended September 30, 2003 and 2002 as if the fair value method of SFAS 123 had been used to measure compensation cost for stock-based compensation plans. For purposes of these pro forma disclosures, the estimated fair value of stock options and restricted stock awards is amortized to expense over the related vesting periods.

				Three Months Ended								Nine Months Ended
				September 30,						September 30,

	2003						2002				2003				2002


Net income, as reported		$	32,763			$	26,462		$		97,866			$	86,832
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			112				2,348				332				3,040
Less: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects			(1,808		)		(4,314	)			(4,851		)		(8,677	)


Pro forma net income		$	31,067			$	24,496		$		93,347			$	81,195


Earnings per share:
Basic - as reported		$	0.64			$	0.52		$		1.91			$	1.70
Basic - pro forma			0.61				0.48				1.82				1.59

Diluted - as reported			0.62				0.51				1.87				1.65
Diluted - pro forma			0.60				0.48				1.80				1.57

The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option-pricing model. This model was developed for use in estimating the fair value of publicly traded options that have no vesting restrictions and are fully transferable. Additionally, the model requires the input of highly subjective assumptions. Because the Corporation's employee stock options have characteristics significantly different from those of publicly traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the Black-Scholes option-pricing model does not necessarily provide a reliable single measure of the fair value of the Corporation's employee stock options.

Note 10 - Income Taxes

Income tax expense was as follows:

	Three Months Ended September 30,								Nine Months Ended September 30,

		2003			2002			2003				2002


Current income tax expense	$	16,362		$	17,139		$	49,317			$	49,506
Deferred income tax benefit		(740	)		(2,379	)		(3,055		)		(5,874	)


Income tax expense as reported, before discontinued operations	$	15,622		$	14,760		$	46,262			$	43,632


Current income tax benefit related to discontinued operations	$	-		$	(2,327	)	$	-			$	(2,825	)


Net deferred tax assets totaled $28.8 million at September 30, 2003 and $16.3 million at December 31, 2002. No valuation allowance was recorded against these deferred tax assets, as the amounts are recoverable through taxes paid in prior years.

Note 11 - Discontinued Operations

On July 23, 2002, the Corporation announced that its start-up securities firm, Frost Securities, Inc., was exiting all capital markets-related activities at the close of business on that day. Conditions in the capital markets, combined with the uncertainty of the outlook for the future, made further investments by the Corporation in this segment uneconomic. The discontinued capital markets components included research, sales, trading, and capital markets-related investment banking. The move resulted in the elimination of approximately forty-four positions, or substantially all of the subsidiary's fifty employees. The Corporation maintains a small group of investment banking professionals to continue providing limited advisory and private equity services to middle market companies in its market area.

During the third quarter of 2002, the Corporation recognized a loss on the disposal of the discontinued operations of $6.7 million ($4.4 million, or $.08 diluted per share, after-tax). The loss on the disposal was primarily related to accelerated deferred compensation and severance expense.

The results of operations of the discontinued component are presented separately in the accompanying consolidated statement of income for the three and nine months ended September 30, 2002, net of tax, following income from continuing operations. Details are presented in the table below:

	Three Months			Nine Months
	Ended			Ended
	September 30, 2002			September 30, 2002


Revenues	$	688			$	6,084
Expenses		619				7,440
Loss on disposal		6,716				6,716

Loss before income taxes		(6,647	)			(8,072	)
Income tax benefit		(2,327	)			(2,825	)

Loss from discontinued operations	$	(4,320	)		$	(5,247	)


Loss per share from discontinued operations:
Basic	$	(0.08	)		$	(0.11	)
Diluted		(0.08	)			(0.10	)

Note 12 - Operating Segments

The Corporation has two reportable operating segments, Banking and the Financial Management Group (FMG), that are delineated by the products and services that each segment offers. Banking includes both commercial and consumer banking services, Frost Insurance Agency and the continuing portion of Frost Securities, Inc. (See Note 11 - Discontinued Operations). 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. Prior period amounts have been reclassified to conform to the current presentation.

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. Income tax expense for the individual segments is calculated essentially at the statutory rate. The parent company records the tax expense or benefit necessary to reconcile to the consolidated total.

Summarized operating results by segment were as follows:

	Banking			FMG			Non- Banks				Discontinued Operations			Consolidated


Three Months Ended:
September 30, 2003
Revenues from (expenses to) external customers	$	119,259	$		15,065	$		(1,659	)	$		- -			$	132,665
Net income (loss)		33,225			1,697			(2,159	)			-				32,763

September 30, 2002
Revenues from (expenses to) external customers	$	115,151	$		15,980	$		(1,695	)	$		688			$	129,436
Net income (loss)		30,332			2,837			(2,387	)			(4,320	)			26,462

Nine Months Ended:
September 30, 2003
Revenues from (expenses to) external customers	$	356,440	$		45,164	$		(4,863	)	$		- -			$	396,741
Net income (loss)		97,592			6,989			(6,715	)			-				97,866

September 30, 2002
Revenues from (expenses to) external customers	$	343,838	$		48,446	$		(5,801	)	$		6,084			$	386,483
Net income (loss)		90,449			9,004			(7,374	)			(5,247	)			86,832

Note 13 - New Accounting Standards

Financial Accounting Standards Board Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002, and were adopted in the Corporation's financial statements for the year ended December 31, 2002. Implementation of the remaining provisions of FIN 45 on January 1, 2003 did not have a significant impact on the Corporation's financial statements. The Corporation considers the fees collected in connection with the issuance of letters of credit to be representative of the fair value of its obligation undertaken in issuing the guarantee. Accordingly, under FIN 45, the Corporation now defers fees collected in connection with the issuance of letters of credit. The fees are then recognized in income proportionately over the life of the letter of credit agreement. As of September 30, 2003, the Corporation had deferred letter of credit fees totaling $1.2 million, which represents the fair value of the Corporation's potential obligations under the letter of credit guarantees.

FIN No. 46 "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51." FIN 46 establishes accounting guidance for consolidation of variable interest entities (VIE) that function to support the activities of the primary beneficiary. The primary beneficiary of a VIE entity is the entity that absorbs a majority of the VIE's expected losses, receives a majority of the VIE's expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship or other business relationship with a VIE. Prior to the implementation of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. The provisions of FIN 46 were effective immediately for all arrangements entered into after January 31, 2003. If a VIE existed prior to February 1, 2003, FIN 46 was effective at the beginning of the first interim period beginning after June 15, 2003. However, on October 8, 2003, the Financial Accounting Standards Board (FASB) deferred the implementation date of FIN 46 until the first period ending after December 15, 2003.

The Corporation expects to adopt FIN 46 in connection with its consolidated financial statements for the year ended December 31, 2003. In its current form, FIN 46 may require the Corporation to de-consolidate its investment in Cullen/Frost Capital Trust I in future financial statements. The potential de-consolidation of subsidiary trusts of bank holding companies formed in connection with the issuance of trust preferred securities, like Cullen/Frost Capital Trust I, appears to be an unintended consequence of FIN 46. It is currently unknown if, or when, the FASB will address this issue. In July 2003, the Board of Governors of the Federal Reserve System issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier I capital for regulatory capital purposes until notice is given to the contrary. The Federal Reserve intends to review the regulatory implications of any accoun ting treatment changes and, if necessary or warranted, provide further appropriate guidance. There can be no assurance that the Federal Reserve will continue to permit institutions to include trust preferred securities in Tier I capital for regulatory capital purposes. As of September 30, 2003, assuming the Corporation was not permitted to include the $100 million in trust preferred securities issued by Cullen/Frost Capital Trust I in its Tier 1 capital, the Corporation would still exceed the regulatory required minimums for capital adequacy purposes (see Note 7 - Capital). If the trust preferred securities were no longer permitted to be included in Tier 1 capital, the Corporation would also be permitted to redeem the capital securities, which bear interest at 8.42%, without penalty.

The interpretations of FIN 46 and its application to various transaction types and structures are evolving. Management continuously monitors emerging issues related to FIN 46, some of which could potentially impact the Corporation's financial statements.

SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The amendments (i) reflect decisions of the Derivatives Implementation Group (DIG), (ii) reflect decisions made by the FASB in conjunction with other projects dealing with financial instruments and (iii) address implementation issues related to the application of the definition of a derivative. SFAS 149 also modifies various other existing pronouncements to conform with the changes made to SFAS 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003, with all provisions applied prospectively. Adoptio n of SFAS 149 on July 1, 2003 did not have a significant impact on the Corporation's financial statements.

SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for how an issuer classifies, measures and discloses in its financial statements certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify financial instruments that are within its scope as liabilities, in most circumstances. Such financial instruments include (i) financial instruments that are issued in the form of shares that are mandatorily redeemable; (ii) financial instruments that embody an obligation to repurchase the issuer's equity shares, or are indexed to such an obligation, and that require the issuer to settle the obligation by transferring assets; (iii) financial instruments that embody an obligation that the issuer may settle by issuing a variable number of its equity shares if, at inception, the monetary value of the obligation is predominantly based on a fixed amount, variations in something other than the fair value of the issuer's equity shares or variations inversely related to changes in the fair value of the issuer's equity shares; and (iv) certain freestanding financial instruments. SFAS 150 is effective for contracts entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of SFAS 150 on July 1, 2003 did not have a significant impact on the Corporation's financial statements.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial Review
Cullen/Frost Bankers, Inc.
(taxable-equivalent basis - table dollars in thousands, except per share amounts)

The following discussion should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2002, included in the Corporation's 2002 Form 10-K. Operating results for the three and nine months ended September 30, 2003 are not necessarily indicative of the results for the year ending December 31, 2003, or any future period.

Forward-Looking Statements and Factors that Could Affect Future Results

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"), notwithstanding that such statements are not specifically identified. In addition, certain statements may be contained in the Corporation's future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Corporation that are not statements of historical fact and 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 relat ing to products 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:

w	Local, regional and international economic conditions and the impact they may have on the Corporation and its customers and the Corporation's assessment of that impact.
w	Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.
w	The effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board.
w	Inflation, interest rate, market and monetary fluctuations.
w	Political instability.
w	Acts of war or terrorism.
w	The timely development and acceptance of new products and services and perceived overall value of these products and services by users.
w	Changes in consumer spending, borrowings and savings habits.
w	Technological changes.
w	Acquisitions and integration of acquired businesses.
w	The ability to increase market share and control expenses.
w	Changes in the competitive environment among financial holding companies.
w	The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Corporation and its subsidiaries must comply.
w	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 and other accounting standard setters.
w	Changes in the Corporation's organization, compensation and benefit plans.
w	The costs and effects of litigation and of unexpected or adverse outcomes in such litigation.
w	Greater than expected costs or difficulties related to the integration of new lines of business.
w	The Corporation's success at managing the risks involved in the foregoing items.


Forward-looking statements speak only as of the date on which such statements are made. The Corporation 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.

Application of Critical Accounting Policies and Accounting Estimates

The accounting and reporting policies followed by the Corporation conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Corporation bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The Corporation considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Corporation's financial statements. Accounting polices related to the allowance for possible loan losses are considered to be critical, as these policies involve considerable subjective judgment and estimation by management. The Corporation also considers accounting policies related to stock-based compensation to be critical due to the continuously evolving standards, changes to which could materially impact the way the Corporation accounts for stock options.

For additional information regarding critical accounting policies, refer to Note A - Summary of Accounting Policies in the Notes to Consolidated Financial Statements and the sections captioned "Application of Critical Accounting Policies" and "Allowance for Possible Loan Losses" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Corporation's 2002 Form 10-K. There have been no significant changes in the Corporation's application of accounting policies since December 31, 2002.

Results of Operations

A discussion of the Corporation's results of operations is presented below. Certain reclassifications have been made to make prior periods comparable. Taxable-equivalent adjustments are the result of increasing income from tax-free loans and securities by an amount equal to the taxes that would be paid if the income were fully taxable based on a 35% federal income tax rate, thus making tax-exempt asset yields comparable to taxable asset yields.

In the third quarter of 2002, the Corporation discontinued the operations of the capital markets division of its investment banking subsidiary, Frost Securities, Inc. (FSI). All operating results for this discontinued component of our operations have been reclassified to "discontinued operations" and are reported separately, net of tax, in the income statement. All prior periods have been restated to reflect this change.

Overview

Net income totaled $32.8 million and $97.9 million, or $0.62 and $1.87 diluted per share, for the three and nine months ended September 30, 2003 compared to $26.5 million and $86.8 million, or $0.51 and $1.65 diluted per share, for the three and nine months ended September 30, 2002 and $34.2 million, or $0.65 diluted per share, for the three months ended June 30, 2003. Income from continuing operations was equal to reported net income for the 2003 interim periods, while income from continuing operations totaled $30.8 million and $92.1 million, or $0.59 and $1.75 diluted per share, for the three and nine months ended September 30, 2002. Income from continuing operations does not include the net after-tax effect of losses from the discontinued FSI operations totaling $4.3 million and $5.2 million during the three and nine months ended September 30, 2002.

Selected income statement data, returns on average assets and average equity and dividends per share for the comparable periods were as follows:

	Three Months Ended									Nine Months Ended

	September 30,			June 30,			September 30,			September 30,			September 30,
	2003			2003			2002				2003		2002


Taxable-equivalent net interest income	$	78,821		$	80,036		$	80,225		$	238,334		$	239,115
Taxable-equivalent adjustment		1,302			1,302			1,222			3,907			3,663

Net interest income, as reported		77,519			78,734			79,003			234,427			235,452
Provision for possible loan losses		1,998			3,446			5,850			9,044			18,046
Non-interest income		55,146			55,195			50,433			162,314			151,031
Non-interest expense		82,282			80,216			78,044			243,569			232,726

Income from continuing operations before taxes		48,385			50,267			45,542			144,128			135,711
Income taxes		15,622			16,034			14,760			46,262			43,632

Income from continuing operations		32,763			34,233			30,782			97,866			92,079
Loss from discontinued operations, net of tax		-			-			(4,320	)		-			(5,247	)

Net income	$	32,763		$	34,233		$	26,462		$	97,866		$	86,832


Basic per share:
Income from continuing operations	$	0.64		$	0.67		$	0.60		$	1.91		$	1.81
Net income		0.64			0.67			0.52			1.91			1.70

Diluted per share:
Income from continuing operations	$	0.62		$	0.65		$	0.59		$	1.87		$	1.75
Net income		0.62			0.65			0.51			1.87			1.65

Return on average assets:
Based on income from continuing operations		1.33	%		1.41	%		1.47	%		1.36	%		1.51	%
Based on net income		1.33			1.41			1.26			1.36			1.42

Return on average equity:
Based on income from continuing operations		17.78	%		18.72	%		18.30	%		18.05	%		19.37	%
Based on net income		17.78			18.72			15.73			18.05			18.26

Dividends per share	$	0.24		$	0.24		$	0.22		$	0.70		$	0.655

As stated above, the 2002 net income amounts include the net after-tax effect of losses from the discontinued FSI operations. Accordingly, management believes an analysis of income from continuing operations provides a more relevant comparison. Income from continuing operations for the three and nine months ended September 30, 2003 increased $2.0 million, or 6.4%, and $5.8 million, or 6.3% over the same periods in 2002. The increase over the comparable three-month period was primarily the result of a $4.7 million increase in non-interest income and a $3.9 million decrease in the provision for possible loan losses, partly offset by a $4.2 million increase in non-interest expense and a $1.5 million decrease in net interest income. The increase over the comparable nine-month period was primarily the result of a $11.3 million increase in non-interest income and a $9.0 million decrease in the provision for possible loan losses. The impact of these items was partly offset by a $10.8 million increase in non-interest expense and a $1.0 million decrease in net interest income.

Net income for the third quarter of 2003 decreased $1.5 million, or 4.3%, from the second quarter of 2003. The decrease was primarily the result of a $2.1 million increase in non-interest expense and a $1.2 million decrease in net interest income partly offset by a $1.4 million decrease in the provision for possible loan losses.

Details of the changes in the various components of net income are further discussed below.

Net Interest Income

Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Corporation's largest source of revenue, representing 59.1% of total revenue during the first nine months of 2003. Net interest margin is the taxable-equivalent net interest income as a percentage of average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin.

The general market rates of interest, including the deposit and loan rates offered by many financial institutions, are influenced by the Federal Reserve. The Corporation's loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, began 2002 at 4.75% and remained stable until the fourth quarter when the rate decreased 50 basis points to 4.25%. During 2003, the prime rate remained at 4.25% until the end of the second quarter, when the rate decreased 25 basis points to 4.00%. The federal funds rate, which is the cost of immediately available overnight funds, decreased in a similar manner beginning 2002 at 1.75% and decreasing 50 basis points in the fourth quarter. During 2003, the federal funds rate remained at 1.25% until the end of the second quarter, when the rate decreased 25 basis points to 1.00%.


The Corporation's balance sheet is asset sensitive, meaning that earning assets generally reprice more quickly than interest-bearing liabilities. Therefore, the Corporation's net interest margin is likely to increase in sustained periods of rising interest rates and decrease in sustained periods of declining interest rates. The Corporation is primarily funded by core deposits, with demand deposits historically being a significant source of funds. This lower-cost funding base has historically had a positive impact on the Corporation's net interest income and net interest margin. However, in a sustained declining interest rate environment, such as the interest rate environment experienced since early 2001, the Corporation experiences compression of its net interest margin. This compression results from resistance to further reductions in interest rates paid on the Corporation's already low cost deposit base, which results in a disproportionately larger decreas e in the yields on earning assets. Further analysis of the components of the Corporation's net interest margin is presented below.

The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to average volume or average interest rate change in proportion to the absolute amounts of the change in each. The comparison between the second and third quarters of 2003 includes an additional change factor that shows the effect of the difference in the number of days in each period, as further discussed below.

	Third Quarter			Third Quarter			Year to Date
	2003 vs.			2003 vs.			2003 vs.
	Third Quarter			Second Quarter			Year to Date
	2002			2003			2002


Due to changes in average volume	$	6,398		$	2,179		$	19,879
Due to changes in average interest rates		(7,802	)		(4,250	)		(20,660	)
Due to difference in the number days in each of the comparable periods		- -			856			- -

Total change	$	(1,404	)	$	(1,215	)	$	(781	)


Taxable-equivalent net interest income for the three and nine months ended September 30, 2003 decreased $1.4 million, or 1.8%, and $781 thousand, or 0.3%, compared to the same periods in 2002. The lack of significant fluctuation between the comparable periods resulted as the positive impact of growth in the average volume of earning assets was offset by the negative impact of declining average interest rates. The average volume of earning assets for the first nine months of 2003 increased $1.1 billion from the first nine months of 2002. Over the same time frame, the net interest margin decreased 67 basis points.

Taxable-equivalent net interest income for the third quarter of 2003 decreased $1.2 million, or 1.5%, from the second quarter of 2003, despite the increase in the number of days in the third quarter. Net interest income for the third quarter of 2003 included 92 days compared to 91 days for the second quarter of 2003. On an equivalent basis, removing the impact of the additional day from the third quarter total, net interest income would have decreased an additional $856 thousand, for a total effective decrease of $2.1 million, from the second quarter of 2003. This effective decrease in taxable-equivalent net interest income from the second quarter of 2003 was the result of a 7 basis point decrease in the net interest margin combined with a $34.8 million decrease in the average volume of earning assets. The decline in the net interest margin was partly due to the 25 basis point drop in market interest rates at the end of the seco nd quarter of 2003, as discussed above. Partly offsetting the effect of the decline in taxable-equivalent net interest income due to declines in both the net interest margin and average earning assets was a $140.4 million decrease in the average volume of interest-bearing liabilities. The ratio of earning assets to interest-bearing liabilities increased from 140.0% in the second quarter to 142.9% in the third quarter.

The majority of the growth in earning assets during 2003 as compared to 2002 was in federal funds sold and securities purchased under resale agreements. Funding for this growth was primarily provided by increases in dollar-roll repurchase agreements. During the fourth quarter of 2002, the Corporation began to leverage earning assets by utilizing dollar-roll repurchase agreements. By doing this, the Corporation has been able to capitalize on the spread between the yield earned on federal funds sold and securities purchased under resale agreements and the cost of the dollar-roll repurchase agreements. This spread has a positive effect on the dollar amount of net interest income; however, because the funds are invested in lower yielding federal funds sold and securities purchased under resale agreements, which had an average yield of 1.17% during the first nine months of 2003, the Corporation's net interest margin is negatively impacted. The average yield on ea rning assets decreased from 5.79% for the first nine months of 2002 to 4.69% for the first nine months of 2003. Over the same time frame, the average cost of interest-bearing liabilities decreased from 1.57% for the first nine months of 2002 to 1.00% for the first nine months of 2003. As a result of these changes, the Corporation's net interest margin decreased from 4.56% and 4.65% for the three and nine months ended September 30, 2002 to 3.88% and 3.98% for the three and nine months ended September 30, 2003.

Other earning asset growth of significance during the first nine months of 2003 was in U.S. government agency securities, which increased in average volume by $452.0 million over the comparable period in 2002 and had an average yield of 4.85% in 2003 compared to 5.86% in 2002. The average volume of loans, the Corporation's primary category of earning assets, decreased $62.1 million during the first nine months of 2003 from the comparable period in 2002 and had an average yield of 5.28% in 2003 compared to 5.93% in 2002.

Exclusive of the federal funds sold growth that was funded by the dollar-roll transactions discussed above, funding for the remaining growth in average earning assets was provided by deposit growth. Average deposits increased $779.5 million. This increase included $628.6 million, or 80.6%, related to non-interest-bearing deposits. Accordingly, the ratio of average non-interest-bearing deposits to total average deposits increased from 35.9% during the first nine months of 2002 to 40.5% during the same period in 2003. This change in proportions, combined with a general decline in market rates, had the effect of (i) reducing the average cost of total deposits by 33 basis points over the comparable periods; and, (ii) mitigating a portion of the impact of declining yields on earning assets on the Corporation's net interest income. The average cost of interest-bearing deposits and total deposits was 0.87% and 0.52% during the first nine months of 2 003 and 1.33% and 0.85% during the first nine months of 2002.

Non-Interest Income

The components of non-interest income were as follows:

	Three Months Ended									Nine Months Ended

	September 30,				June 30,	September 30,		September 30,					September 30,
		2003			2003		2002					2003			2002


Trust fees	$		11,646	$	12,206	$	11,666		$		34,717			$		35,854
Service charges on deposit accounts			22,576		21,752		19,720				65,432					57,712
Insurance commissions			7,276		6,682		7,250				20,944					18,393
Other service, collection and exchange charges,
commissions and fees			6,334		4,440		4,176				14,423					13,013
Net gain on securities transactions			40		-		-				40					88
Other			7,274		10,115		7,621				26,758					25,971

Total	$		55,146	$	55,195	$	50,433		$		162,314			$		151,031


Total non-interest income for the third quarter of 2003 increased $4.7 million, or 9.3%, from the third quarter of 2002 while remaining relatively unchanged from the second quarter of 2003. Total non-interest income for the nine months ended September 30, 2003 increased $11.3 million, or 7.5%, over the comparable period in 2002. Changes in the components of non-interest income are discussed below.

Trust fee income for the three months ended September 30, 2003 was not significantly different from the comparable period in 2002. However, outsourcing of the administration of certain employee benefit plans at the beginning of 2003 resulted in lower investment fees.

Trust fee income for nine months ended September 30, 2003 decreased $1.1 million, or 3.2%, compared to the same period in 2002. Investment fees are the most significant component of trust fees, making up approximately 71% of total trust fees for the first nine months of 2003. Investment and other custodial account fees are generally based on the market value of assets within a trust account. Volatility in the equity markets impacts the market value of trust assets and the related investment fees.

The decrease in trust fee income during the nine months ended September 30, 2003 was primarily the result of declines in investment fees and estate fees. The impact of these items was partly offset by an increase in oil and gas trust management fees. The decline in investment fees was primarily due to weaker equity market conditions overall in 2003 compared to the same periods in 2002.

Trust fee income for the third quarter of 2003 decreased $560 thousand, or 4.6%, from the second quarter of 2003. The decrease was primarily due to a decrease in tax fees related to the preparation of tax returns for customer trust accounts (such fees are generally seasonal with the majority of such fees recognized during the second quarter), lower oil and gas fees and certain insignificant accrual adjustments.. The impact of these items was partly offset by an increase in investment fee income resulting from improved equity market conditions since the second quarter.

At September 30, 2003, trust assets, including both managed assets and custody assets, were primarily composed of equity securities (42.6% of trust assets), fixed income securities (37.1% of trust assets) and cash equivalents (12.7% of trust assets). The estimated fair value of trust assets was approximately $13.4 billion (including managed assets of $6.3 billion and custody assets of $7.1 million) at September 30, 2003, compared to approximately $12.6 billion (including managed assets of $5.9 billion and custody assets of $6.7 million) at December 31, 2002 and approximately $12.1 billion (including managed assets of $5.7 billion and custody assets of $6.4 million) at September 30, 2002.

Service charges on deposit accounts for the three and nine months ended September 30, 2003 increased $2.9 million, or 14.5%, and $7.7 million, or 13.4%, over the comparable periods in 2002. The increases were primarily due to increases in overdraft fees on individual and commercial accounts and increases in treasury management revenues on commercial accounts. The increased treasury management revenues resulted primarily from a lower earnings credit rate as well as higher levels of billable services. The earnings credit rate is the value given to deposits maintained by treasury management customers. In a lower rate environment, deposit balances are not as valuable because of a lower earnings credit rate. This results in customers paying for more of their services through fees rather than through the use of deposit balances.

Service charges on deposit accounts increased $824 thousand, or 3.8%, during the third quarter of 2003 compared to the second quarter of 2003 primarily due to increases in overdraft fees on individual and commercial accounts and increases in treasury management revenues on commercial accounts.

Effective October 4, 2003, the Corporation reduced certain maintenance and transaction fees applicable to all its consumer checking accounts. Accordingly, in the short-term, management expects this to have a slight negative impact on service charges on deposit accounts. The impact is expected to be less than $1.0 million over the next several quarters.

Insurance commissions for the three months ended September 30, 2003 did not significantly fluctuate from the comparable period in 2002. Insurance commissions increased $2.6 million, or 13.9%, for the nine months ended September 30, 2003 compared to the same period in 2002 primarily due to the combined result of continued selling efforts and the effect of a tighter market for certain products resulting in higher insurance premiums and related commission revenues. The Corporation also acquired a small insurance agency during the first quarter of 2003.

Insurance commissions for the third quarter of 2003 increased $594 thousand, or 8.9%, over the second quarter of 2003 primarily due to normal variation in the timing of renewals and in the market demand for insurance products. The second quarter of 2003 experienced weaker market demand for insurance products compared to the first and third quarters of 2003. Recently, the Corporation has begun to experience market pressure related to the pricing of insurance policies and commission levels.

Other service charges and fees for the three months ended September 30, 2003 increased $2.2 million, or 51.7%, compared to the same period in 2002. The increase was primarily due to increases in investment banking fees. During the third quarter of 2003, the Corporation recognized $2.4 million in such fees, most of which were related to a single transaction. Other service charges and fees also increased, in part, due to accelerated realization of deferred loan fees because of loan prepayments resulting from the lower interest rate environment. These increases were offset by lower letter of credit fees due to the deferral of certain fees in accordance with a new accounting standard (see Note 13 - New Accounting Standards in the accompanying notes to consolidated financial statements included elsewhere in this report) and decreases in other miscellaneous service charges.

Other service charges and fees for the nine months ended September 30, 2003 increased $1.4 million, or 10.8%, compared to the same period in 2002. The increase was primarily due to increases in investment banking fees, accelerated realization of deferred loan fees due to loan prepayments and increases in other miscellaneous service charges offset by decreases in letter of credit fees, mutual fund fees, money market fees, income associated with the factoring of accounts receivable and ATM service fees.

Other service charges and fees for the third quarter of 2003 increased $1.9 million, or 42.7%, compared to the second quarter of 2003. The increase was primarily due to increases in investment banking corporate advisory fees and accelerated realization of deferred loan fees offset by decreases in letter of credit fees and other miscellaneous service charges.

Other non-interest income decreased $347 thousand, or 4.6%, for the three months ended September 30, 2003 compared to the same period in 2002. The decrease was primarily result of decreases in annuity income, earnings from the accretion of the cash surrender value of life insurance policies and non-recurring other income items. The impact of these items was partly offset by increases in lease rental income, check card income, royalty income from mineral interests and realized gains on the sale of student loans.

Other non-interest income increased $787 thousand, or 3.0%, for the nine months ended September 30, 2003 compared to the same period in 2002. The increase primarily resulted from increases in rebate income received from various insurance carriers related to the performance of insurance policies previously placed (which is seasonal in nature and is generally received in the first quarter of each year), lease rental income, check card income, royalty income from mineral interests and gains on sales of foreclosed assets and bank premises. Gains on sales of foreclosed assets and sales of bank premises totaled $880 thousand and $504 thousand, respectively, during the nine months ended September 30, 2003 compared to $78 thousand and $120 thousand, respectively, during the comparable period in 2002. The increases in the aforementioned other non-interest income items were partly offset by decreases in gains realized on the sale of student loans, annuity income, automated services income generated from a data processing center sold in the first quarter of 2002, and non-recurring other income items. During the nine months ended September 30, 2002, the Corporation sold $117.8 million in student loans ($106.7 million of which occurred in the second quarter) with realized gains totaling $3.3 million compared to sales of $48.2 million in student loans ($44.5 million of which occurred in the second quarter) with realized gains totaling $1.7 million during the comparable period 2003.

Other non-interest income for the third quarter of 2003 decreased $2.8 million, or 28.1%, compared to the second quarter of 2003. The decrease primarily resulted from decreases in gains realized on the sale of student loans, which decreased $1.5 million, and decreases in non-recurring gains on sales of foreclosed assets and bank premises, which decreased $1.1 million. Other components of non-interest income which decreased included earnings from the accretion of the cash surrender value of life insurance policies, check card income, annuity income, and royalty income from mineral interests. The effect of these items was partly offset by increases in securities trading account income.

Non-Interest Expense

The components of non-interest expense were as follows:

		Three Months Ended										Nine Months Ended

		September 30,				June 30,		September 30,			September 30,				September 30,
				2003		2003			2002					2003			2002


Salaries and wages	$		37,408		$	35,523	$		35,888	$			109,428			$		104,396
Employee benefits			9,129			9,420			8,372				29,140					25,580
Net occupancy			7,804			7,372			7,202				22,246					21,875
Furniture and equipment			5,418			5,395			5,495				16,272					16,814
Intangible amortization			1,412			1,380			1,736				4,477					5,348
Other			21,111			21,126			19,351				62,006					58,713

Total	$		82,282		$	80,216	$		78,044	$			243,569			$		232,726


Total non-interest expense for the three and nine months ended September 30, 2003 increased $4.2 million, or 5.4%, and $10.8 million, or 4.7%, over the comparable periods in 2002. Total non-interest expense for the third quarter of 2003 increased $2.1 million, or 2.6%, compared to the second quarter of 2003. Changes in the components of non-interest expense are discussed below.

Salaries and wages for the three and nine months ended September 30, 2003 increased $1.5 million, or 4.2%, and $5.0 million, or 4.8%, over the comparable periods in 2002. The increases over the comparable periods are primarily related to increases in headcount, merit increases and increases in commissions paid in connection with increased revenues associated with Frost Insurance Agency. Salaries and wages for the third quarter of 2003 increased $1.9 million, or 5.3%, compared to the second quarter of 2003 primarily related to an increase in commissions paid due to increases in revenues associated with Frost Insurance Agency and the continuing component of Frost Securities, Inc. Additionally, the second quarter of 2003 included a reversal of some previously accrued salaries and commissions payable that reduced the total amount of salaries and wages expense that would have otherwise been reported during the quarter.

Employee benefits for the three and nine months ended September 30, 2003 increased $757 thousand, or 9.0%, and $3.6 million, or 13.9%, over the comparable periods in 2002. The increases are primarily related to increases in retirement plan expense, profit sharing plan expense, medical insurance and payroll taxes. Employee benefits for the third quarter of 2003 decreased $291 thousand, or 3.1%, compared to the second quarter of 2003 primarily due to decreases in payroll taxes.

Net occupancy expense for the third quarter of 2003 increased $602 thousand, or 8.4%, from the third quarter of 2002 and $432 thousand, or 5.9%, from the second quarter of 2003. The increase from the third quarter of 2002 was primarily due to increased depreciation on leasehold improvements and increased building maintenance and utilities costs. The increase from the second quarter of 2003 was primarily due to increases in utilities costs and other non-recurring miscellaneous expense items.

Net occupancy expense for the nine months ended September 30, 2003 did not significantly fluctuate from the comparable period in 2002. The Corporation experienced decreased lease expense resulting from the purchases of the twenty-one story Frost Bank office tower and the adjacent parking garage facility in downtown San Antonio in the second quarter of 2002. The Corporation also experienced an increase in parking garage income as a result of the purchase. The impact of these items was offset by increased building maintenance, insurance and utilities costs, higher depreciation expense on leasehold improvements, higher lease expense related to various other facilities and higher depreciation expense related to the purchased office tower and garage.

Furniture and equipment expense for the three and nine months ended September 30, 2003 decreased $77 thousand, or 1.4%, and $542 thousand, or 3.2%, from the comparable periods in 2002. The decreases from 2002 are primarily related to decreases in furniture and equipment depreciation, software amortization and equipment rental expense partly offset by increases in software maintenance expense. Furniture and equipment expense for the third quarter of 2003 did not significantly fluctuate compared to the second quarter of 2003.

Intangible amortization for the three and nine months ended September 30, 2003 decreased $324 thousand, or 18.7%, and $871 thousand, or 16.3%, from the comparable periods in 2002. The decreases are primarily related to the completion of the amortization of certain intangible assets, partly offset by additional amortization related to intangible assets recorded during the first quarter of 2003 in connection with the acquisition of an insurance agency. Intangible amortization for the third quarter of 2003 was not significantly different from the second quarter of 2003.

Other non-interest expense for the three and nine months ended September 30, 2003 increased $1.8 million, or 9.1%, and $3.3 million, or 5.6%, over the comparable periods in 2002. The increases are primarily related to increases in attorney fees, advertising/promotional expenses, check card expenses, expenses related to leased properties, and higher federal reserve service charges due to the lower interest rate environment. Other non-interest expense for the third quarter of 2003 was not significantly different from the second quarter of 2003.

Results of Segment Operations

The Corporation's operations are managed along two operating segments: Banking and the Financial Management Group ("FMG"). A description of each business and the methodologies used to measure financial performance is described in Note 12 - Operating Segments in the accompanying notes to consolidated financial statements included elsewhere in this report. Net income (loss) by operating segment is presented below:

				Three Months Ended											Nine Months Ended

	September 30,						June 30,			September 30,			September 30,				September 30,
		2003					2003				2002				2003			2002


Banking	$		33,225			$	34,210		$		30,332		$	97,592			$		90,449
Financial Management Group			1,697				2,254				2,837			6,989					9,004
Non-Banks			(2,159		)		(2,231	)			(2,387	)		(6,715		)			(7,374	)
Discontinued operations			-				-				(4,320	)		-					(5,247	)

Consolidated net income	$		32,763			$	34,233		$		26,462		$	97,866			$		86,832


Banking

Net income for the three and nine months ended September 30, 2003 increased $2.9 million, or 9.5%, and $7.1 million, or 7.9%, over the comparable periods in 2002. The increase over the comparable three-month period resulted primarily from a $3.9 million decrease in the provision for possible loan losses and a $5.3 million increase in non-interest income. The impact of these items was partly offset by a $1.2 million decrease in net interest income and a $3.7 million increase in non-interest expense. The increase over the comparable nine-month period resulted primarily from a $9.0 million decrease in the provision for possible loan losses and a $12.7 million increase in non-interest income. The impact of these items was partly offset by a $8.7 million increase in non-interest expense.

Net interest income for the three and nine months ended September 30, 2003 decreased $1.2 million, or 1.5%, and $92 thousand, from the comparable periods in 2002. The lack of significant fluctuation between the comparable periods resulted as the positive impact of growth in the average volume of earning assets was offset by the negative impact of declining average interest rates. The impact of the increase in the average volume of earning assets was somewhat constrained as the majority of the growth in earning assets was in lower-yielding federal funds sold and securities purchased under resale agreements, which also led to a decrease in net interest margins over the comparable periods. See the analysis of net interest income included in the section captioned "Net Interest Income" included elsewhere in this discussion.

The provision for possible loan losses for the three and nine months ended September 30, 2003 totaled $2.0 million and $9.0 million compared to $5.9 million and $18.0 million for the same periods in 2002. See the analysis of the provision for possible loan losses included in the section captioned "Allowance for Possible Loan Losses" included elsewhere in this discussion.

Non-interest income for the three and nine months ended September 30, 2003 increased $5.3 million, or 15.1%, and $12.7 million, or 12.0%, over the comparable periods in 2002 primarily due to increases in service charges on deposit accounts and other service charges. Increased insurance commissions were also partly responsible for the increase over the comparable nine-month period. See the analysis of service charges on deposit accounts, and other service charges and insurance commissions included in the section captioned "Non-Interest Income" included elsewhere in this discussion.

Non-interest expense for the three and nine months ended September 30, 2003 increased $3.7 million, or 5.8%, and $8.7 million, or 4.5%, over the comparable periods in 2002. The increase was primarily related to increases in salaries and wages and employee benefits. Combined, these categories of non-interest expense increased $2.6 million and $8.1 million over the comparable three- and nine-month periods. The increase was primarily the result of increases in headcount, merit increases, increases in commissions paid in connection with increased revenues associated with Frost Insurance Agency, increases in payroll taxes and increases in employee benefit plan expenses.

Frost Insurance Agency, which is included in the Banking operating segment, had gross revenues of $7.3 million and $22.9 million during the three and nine months ended September 30, 2003 compared to $7.3 million and $19.6 million during the three and nine months ended September 30, 2002. Insurance commissions were the largest component of these revenues, increasing $2.7 million, or 14.5%, during the nine months ended September 30, 2003 compared to the same period in 2002. The increase was primarily the result of continued selling efforts and the effect of a tighter market resulting in higher insurance premiums and related commission revenues. Additionally, the Corporation had increases in rebate income received from various insurance carriers related to the performance of insurance policies previously placed. The rebate income is seasonal in nature and is generally received in the first quarter of each year.

Financial Management Group (FMG)

Net income for the three and nine months ended September 30, 2003 decreased $1.1 million, or 40.2%, and $2.0 million, or 22.4%, from the comparable periods in 2002. The decrease from the comparable three-month period was primarily due to decreases in net interest income and non-interest income combined with increases in salaries and wages, employee benefits and other non-interest expense. The decrease from the comparable nine-month period was primarily due to a decrease in trust fees in addition to fluctuations in other income and expense components similar to those that affected the comparable three-month period.

Net interest income for the three and nine months ended September 30, 2003 decreased $285 thousand, or 24.0%, and $929 thousand, or 26.6%, from the comparable periods in 2002 primarily because the lower interest rate environment has reduced the funds transfer price paid on FMG's securities sold under repurchase agreements.

Non-interest income for the three and nine months ended September 30, 2003 decreased $630 thousand, or 4.3%, and $2.4 million, or 5.2%, from the comparable periods in 2002. The decline from the comparable three-month period was primarily due to decreases in service charges and other non-interest income partly offset by a slight increase in trust fees. The decline from the comparable nine-month period was primarily due to decreases in trust fees and services charges.

Trust fee income is the most significant income component for FMG. Trust fee income for the three months ended September 30, 2003 was not significantly different from the comparable period in 2002. The decrease in trust fee income during the nine months ended September 30, 2003 was primarily the result of declines in estate fees and investment fees. The impact of these items was partly offset by an increase in oil and gas trust management fees. Investment fees are the most significant component of trust fees, making up approximately 71% of total trust fees for the first nine months of 2003. Investment and other custodial account fees are generally based on the market value of assets within a trust account. Volatility in the equity markets impacts the market value of trust assets and the related investment fees. The decline in investment fees was primarily due to weaker equity market conditions overall in 2003 compared to the same periods in 2002.. S ee the analysis of trust fees included in the section captioned "Non-Interest Income" included elsewhere in this discussion.

The decreases in service charges over the comparable three- and nine-month periods were primarily due to declines in mutual fund and money market fees. The decrease in other non-interest income from the comparable three-month period was primarily due to declines in brokerage commission income and income from sales of annuity products.

Non-interest expense for the three and nine months ended September 30, 2003 increased $584 thousand, or 4.9%, and $1.9 million, or 5.5%, over the comparable periods in 2002 primarily due to increases in salaries and wages, employee benefits and other non-interest expense. The increases in salaries and wages and employee benefits were primarily the result of merit increases, increases in payroll taxes and increases in employee benefit plan expenses. The increases in other non-interest expense were primarily due to general increases in the various components of other non-interest expense, including cost allocations.

Non-Banks

The $228 thousand and $659 thousand decreases in the net loss for the Non-Banks operating segment for the three and nine months ended September 30, 2003 compared the same periods in 2002 were primarily due to an increase in royalty income from mineral interests and other miscellaneous items.

Discontinued Operations

During the third quarter of 2002 the Company discontinued the operations of the capital markets division of its investment banking subsidiary, Frost Securities, Inc. See Note 11 - Discontinued Operations in the accompanying notes to consolidated financial statements included elsewhere in this report.

Income Taxes

The Corporation recognized income tax expense on continuing operations for the three and nine months ended September 30, 2003 of $15.6 million and $46.3 million, for effective rates of 32.3% and 32.1%, compared to $14.8 million and $43.6 million, for effective rates of 32.4% and 32.2%, for the three and nine months ended September 30, 2002. The effective income tax rates differed from the U.S. statutory rate of 35% during the comparable periods primarily due to the effect of tax-exempt income from loans, securities and life insurance policies.

Average Balance Sheet

Average assets totaled $9.7 billion for the nine months ended September 30, 2003 representing an increase of $1.5 billion, or 18.1%, over average assets for the nine months ended September 30, 2002. Average loans for the first nine months of 2003 were $4.5 billion representing a 1.4% decrease from the first nine months of 2002. Average federal funds sold and securities purchased under resale agreements for the first nine months of 2003 increased $734.2 million, or 412.1%, from the first nine months of 2002. The increase in average federal funds sold and securities purchased under resale agreements was primarily the result of the Corporation's use of dollar-roll repurchase agreements to capitalize on yield spreads. See the analysis of dollar-roll transactions under the section captioned "Net Interest Income" included elsewhere in this discussion. Total deposits averaged $7.6 billion for the first nine months of 2003, increas ing $779.5 million, or 11.5%, compared to the first nine months of 2002.

Loans

Loans were as follows as of the dates indicated:

	September 30,			Percent			June 30,				December 31,			September 30,
		2003		of Total					2003			2002			2002


Commercial and industrial	$	2,162,007			47.8	%		$	2,108,656		$	2,155,550		$	2,142,271
Real estate:
Construction:
Commercial		353,022			7.8				359,651			315,340			351,557
Consumer		26,232			0.6				35,349			45,152			48,802
Land:
Commercial		165,193			3.6				153,562			158,271			148,140
Consumer		5,175			0.1				5,553			8,231			9,818
Commercial real estate mortgages		1,099,563			24.3				1,072,496			1,050,957			1,051,190
1-4 family residential mortgages		124,814			2.8				145,714			179,077			197,801
Other consumer real estate		281,345			6.2				276,729			276,429			279,728

Total real estate		2,055,344			45.4				2,049,054			2,033,457			2,087,036

Consumer:
Indirect		10,653			0.2				14,849			25,262			33,220
Other		286,914			6.4				272,327			289,190			282,725
Other, including foreign		19,471			0.4				24,365			23,295			32,155
Unearned discount		(8,723	)		(0.2	)			(7,700	)		(7,841	)		(7,976	)


Total	$	4,525,666			100.0	%		$	4,461,551		$	4,518,913		$	4,569,431

Loans totaled $4.5 billion at September 30, 2003 and remained relatively stable compared to June 30, 2003 and December 31, 2002. Excluding shared national credits purchased ("SNCs"), 1-4 family residential mortgages, the indirect lending portfolio and student loans, loans increased 1.9% from June 30, 2003 and 3.5% from December 31, 2002. SNCs, which are discussed further below, are participations purchased from upstream financial organizations and tend to be larger in size than the Corporation's originated portfolio. The Corporation stopped originating mortgage and indirect consumer loans during 2000, and as such, these portfolios are excluded when analyzing the growth of the loan portfolio. Student loans are similarly excluded because the Corporation primarily originates these loans for resale. Accordingly, student loans are classified as held for sale and are generally sold after the deferment period has ended; however, from time to time, the Corporation has sold such loans prior to the end of the deferment period.

At September 30, 2003, the majority of the loan portfolio was comprised of commercial and industrial loans, which totaled $2.2 billion, or 47.8% of total loans, and real estate loans, which totaled $2.1 billion, or 45.4% of total loans. The real estate total includes both commercial and consumer balances.

Excluding SNCs, commercial and industrial loans increased 3.1% from June 30, 2003, and 4.0% from December 31, 2002 to $2.0 billion. The Corporation's commercial and industrial loans are a diverse group of loans to small, medium and large 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 collateral margins that are consistent with the Corporation's loan policy guidelines. The commercial and industrial loan portfolio also includes the commercial lease and asset-based lending portfolios. At September 30, 2003, commercial leases totaled $61.8 million and asset-based loans totaled $43.8 million compared to $59.3 million and $48.4 million at June 30, 2003 and $57.6 million and $49.8 million at December 31, 2002.

The Corporation's SNC portfolio totaled $169.2 million at September 30, 2003, decreasing from $176.9 million at June 30, 2003 and $239.4 million at December 31, 2002. The decrease during 2003 was due to the repayment of several large credits. At September 30, 2003, 69.4% of outstanding SNCs were related to the energy industry. The remaining SNCs were diversified throughout various other industries, with no other single industry exceeding more than 10% of the total SNC portfolio. Additionally, almost all of the outstanding balance of SNCs was included in the commercial and industrial portfolio, with the remainder included in the real estate categories. SNC participations are originated in the normal course of business to meet the needs of the Corporation's customers. As a matter of policy, the Corporation generally only participates in SNCs for companies headquartered in or which have significant operations within the Corporation's ma rket areas. In addition, the Corporation must have direct access to the company's management, an existing banking relationship or the expectation of broadening the relationship with other banking products and services.

Real estate loans totaled $2.1 billion at September 30, 2003 and remained relatively stable compared to December 31, 2002. Excluding 1-4 family residential mortgage loans, which are discussed below, total real estate loans increased $27.2 million, or 1.4% from June 30, 2003 and $76.2 million, or 4.1%, from December 31, 2002. Commercial real estate loans totaled $1.1 billion at September 30, 2003 and represented 53.5% of total real estate loans. The majority of this portfolio consists of commercial real estate mortgages, which includes both permanent and intermediate term loans. The Corporation's primary focus for the commercial real estate portfolio has been growth in 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 that of a real estate loan. At September 30, 2003, approximately half of the Corporation's commercial real estate loans were secured by owner-occupied properties.

The consumer loan portfolio, including all consumer real estate, totaled $735.1 million at September 30, 2003, decreasing 2.1% from June 30, 2003 and 10.7% from December 31, 2002. However, excluding 1-4 family residential mortgages, indirect loans and student loans, total consumer loans decreased $10.0 million, or 1.7%, from June 30, 2003 and $22.4 million, or 3.9% from December 31, 2002.

As the following table illustrates as of the dates indicated, the consumer loan portfolio has four distinct segments, including consumer real estate, consumer non-real estate, indirect consumer loans and 1-4 family residential mortgages.

	September 30,		June 30,		December 31,		September 30,
		2003		2003		2002		2002


Consumer real estate:
Construction	$	26,232	$	35,349	$	45,152	$	48,802
Land		5,175		5,553		8,231		9,818
Other consumer real estate		281,345		276,729		276,429		279,728

Total consumer real estate		312,752		317,631		329,812		338,348
Consumer non-real estate		286,914		272,327		289,190		282,725
Indirect		10,653		14,849		25,262		33,220
1-4 family residential mortgages		124,814		145,714		179,077		197,801

Total consumer loans	$	735,133	$	750,521	$	823,341	$	852,094


The consumer non-real estate loan portfolio primarily consists of automobile loans, unsecured revolving credit products, personal loans secured by cash and cash equivalents, student loans and other similar types of credit facilities. Consumer non-real estate loans decreased only 0.8% from December 31, 2002 despite the fact that the Corporation sold approximately $48.2 million of student loans during the first nine months of 2003 due to significant growth in student loans during the third quarter. The 71.5% net increase in student loans during the third quarter was primarily due to seasonal patterns. Excluding student loans, consumer non-real estate loans decreased $5.4 million, or 2.2% from December 31, 2002.

The indirect consumer loan segment has continued to decrease since the Corporation's decision to discontinue originating these types of loans during 2001. At September 30, 2003, the majority of the portfolio was comprised of purchased home improvement and home equity loans (57.7%), as well as new and used automobile loans (39.5%). The portfolio is not expected to completely pay off before December 31, 2003 due to the longer life of the non-auto loans in this portfolio. However, the portfolio is expected to decrease by that time.

The Corporation also discontinued originating 1-4 family residential mortgage loans in 2000. Although this portfolio will continue to decline due to the decision to withdraw from the mortgage origination business, high levels of mortgage refinances due to the low interest rate environment have accelerated the decrease.

During September 2003, Texas voters approved an ammendment to the Texas constitution related to home equity lending. The amendment will permit financial institutions to offer home equity lines of credit. As a result, the Corporation has added home equity lines of credit to its loan offerings and expects to begin originating such lines in the fourth quarter.

Non-Performing Assets

Non-performing assets and accruing past due loans were as follows:

	September 30,		June 30,		December 31,		September 30,
		2003		2003		2002		2002


Non-accrual loans:
Real estate	$	11,986	$	15,655	$	11,702	$	14,155
Commercial and industrial		17,791		18,968		19,878		19,181
Other		4,441		2,530		3,281		4,627

Total non-accrual loans		34,218		37,153		34,861		37,963

Foreclosed assets:
Real estate		6,925		6,360		8,005		2,389
Other		52		43		42		128

Total foreclosed assets		6,977		6,403		8,047		2,517


Total non-performing assets	$	41,195	$	43,556	$	42,908	$	40,480


Accruing past due loans:
30 to 89 days past due	$	27,482	$	29,473	$	30,766	$	38,911
90 or more days past due		12,304		6,853		9,081		7,045

Total accruing loans past due	$	39,786	$	36,326	$	39,847	$	45,956

Non-performing assets at September 30, 2003 decreased 5.4% from June 30, 2003 and 4.0% from December 31, 2002. Non-performing assets as a percentage of total loans and foreclosed assets totaled 0.91% at September 30, 2003, 0.97% at June 30, 2003 and 0.95% at December 31, 2002. The decrease during the first nine months of 2003 was related to a decline in non-accrual real estate loans and commercial and industrial loans.

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 requirements. 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 recorded at 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 and are included in other non-interest expense along with other expenses related to maintaining the properties.

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor's potential operating or financial difficulties. Management monitors these loans closely and reviews their performance on a regular basis. At September 30, 2003, the Corporation had $27.5 million in loans of this type which are not included in either of the non-accrual or 90 days past due loan categories. Approximately 81.1% of the total is related to two credits - one to a company in several distribution businesses, and the other to a company in the retail industry. Weakness in these companys' operating performance combined with a slowdown in certain business sectors has caused the Corporation to heighten the attention given to these credits.

The after-tax impact (assuming a 35% marginal tax rate) of lost interest from non-performing assets was $366 thousand and $1.2 million for the three and nine months ended September 30, 2003, compared to $380 thousand and $1.2 million for the three and nine months ended September 30, 2002.

Allowance for Possible Loan Losses

The allowance for possible loan losses totaled $83.4 million, or 1.84% of loans at September 30, 2003, compared to $83.4 million, or 1.87% of loans at June 30, 2003, $82.6 million, or 1.83% of loans at December 31, 2002 and $81.5 million, or 1.78% of loans at September 30, 2002. The allowance for possible loan losses as percentage of non-accrual loans was 243.8% at September 30, 2003 compared to 224.5% at June 30, 2003, 236.9% at December 31, 2002 and 214.7% at September 30, 2002.

Charge-offs are loan balances that have been written off against the allowance for possible loan losses once the loan is determined to be uncollectible. Loan charge-offs, net of recoveries, were as follows:


		Three Months Ended										Nine Months Ended

		September 30,			June 30,		September 30,			September 30,					September 30,
		2003			2003				2002				2003				2002


Real estate	$	922		$	(42	)		$	88		$		1,165			$	955
Commercial and industrial		669			2,971				2,326				5,851				7,187
Consumer		407			517				489				1,202				1,252
Other, including foreign		-			-				24				-				33

Total net charge-offs	$	1,998		$	3,446			$	2,927		$		8,218			$	9,427


Net charge-offs as a percentage of average loans		0.18	%		0.31	%			0.26	%			0.25	%			0.28	%

The allowance for possible loan losses is maintained at a level considered appropriate by management, based on estimated probable losses within the existing loan portfolio. The provision for possible loan losses reflects loan quality trends, including the level of net charge-offs or recoveries, among other factors. The provision for possible loan losses totaled $2.0 million and $9.0 million for the three and nine months ended September 30, 2003, decreasing $3.9 million and $9.0 million from the comparable periods in 2002. Higher provisions were considered necessary during 2002 due to the overall uncertainty in the economy. The provision for possible loan losses for the third quarter of 2003 decreased $2.2 million from the second quarter of 2003. The decrease reflects the fact that the Corporation has not experienced a significiant change in loan portfolio credit quality since the end of the second quarter. Accordingly, manageme nt believes the level of the allowance for possible loan losses continues to remain adequate. Should any of the factors considered by management in evaluating the adequacy of the allowance for possible loan losses change, the Corporation's estimate of probable loan losses could also change, which could affect the level of future provisions for possible loan losses.

Capital and Liquidity

At September 30, 2003, shareholders' equity totaled $760.3 million compared to $749.8 million at June 30, 2003, $703.8 million at December 31, 2002 and $686.6 million at September 30, 2002. In addition to net income of $97.9 million, other significant changes in shareholders' equity during the first nine months of 2003 included $36.0 million of dividends paid and $9.4 million in proceeds from stock option exercises and the related tax benefits of $2.3 million. The accumulated other comprehensive income component of shareholders' equity totaled $15.0 million at September 30, 2003 compared to $32.4 million at June 30, 2003 and $32.5 million at December 31, 2002. These fluctuations resulted from changes in the fair value of securities available for sale, net of taxes. 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. Regulatory agencies for banks and bank holding companies utilize 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 7 - Capital in the accompanying notes to consolidated financial statements included elsewhere in this report.

The Corporation paid quarterly dividends of $0.22, $0.24 and $0.24 per common share during the first, second and third quarters of 2003, respectively, and quarterly dividends of $0.215, $0.22 and $0.22 per common share during the first, second and third quarters of 2002, respectively. This equates to a dividend payout ratio of 37.8% and 36.8% during the three and nine months ended September 30, 2003 and 42.5% and 38.5% during the three and nine months ended September 30, 2002. In addition, the Corporation initiated a program during the third quarter of 2001 to repurchase 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. The Corporation did not repurchase any shares under this program during the first nine months of 2003. The repurchase program terminated in the third quarter of 2003 and a total of 1.2 million shares at a cost of $39.2 million were repurchased under this program.

Funding sources available at the holding company level include a $25.0 million short-term line of credit with another financial institution. The line of credit matures annually and bears interest at a fixed LIBOR-based rate or floats with the prime rate. There were no borrowings outstanding on this line of credit at September 30, 2003.

Liquidity measures the ability to meet current and future cash flow needs as they become due. The Corporation seeks to ensure 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, interest-bearing 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 the Corporation'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 the Corporation is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse effect on the Corporation's liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, which if implemented, would have a material adverse effect on the Corporation.

Consolidated Average Balance Sheets and Interest Income Analysis-Year-to-Date
(dollars in thousands - taxable-equivalent basis)				September 30, 2003								September 30, 2002

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

Assets:
Interest-bearing deposits				$	9,373		$	88	1.25		%	$	14,557		$	169	1.55	%
Securities:
	U.S. Treasury				33,174			303	1.22				39,386			597	2.03
	U.S. Government agencies and corporations				2,326,340			84,607	4.85				1,874,352			82,426	5.86
	States and political subdivisions
		Tax-exempt			201,013			9,923	6.58				178,560			9,263	6.92
		Taxable			1,641			82	6.63				2,237			111	6.61
	Other				38,789			939	3.23				32,706			955	3.89

			Total securities		2,600,957			95,854	4.91				2,127,241			93,352	5.85
Federal funds sold and securities purchased
	under resale agreements				912,406			8,105	1.17				178,171			2,411	1.78
Loans, net of unearned discount					4,482,150			176,857	5.28				4,544,209			201,690	5.93

Total Earning Assets and Average Rate Earned					8,004,886			280,904	4.69				6,864,178			297,622	5.79
Cash and due from banks					1,104,329								823,164
Allowance for possible loan losses					(83,596	)							(78,347	)
Premises and equipment					167,786								158,692
Accrued interest and other assets					457,268								404,893

	Total Assets			$	9,650,673							$	8,172,580

Liabilities:
Non-interest-bearing demand deposits:
	Commercial and individual			$	2,099,414							$	1,914,703
	Correspondent banks				904,347								472,442
	Public funds				55,565								43,574

		Total demand deposits			3,059,326								2,430,719
Interest-bearing deposits:
	Savings and Interest-on-Checking				1,033,254			721	0.09				1,007,388			1,446	0.19
	Money market deposit accounts				2,106,597			15,882	1.01				1,831,287			17,986	1.31
	Time accounts				1,023,172			10,257	1.34				1,168,236			19,783	2.26
	Public funds				331,008			2,487	1.00				336,240			3,853	1.53

		Total time deposits			4,494,031			29,347	0.87				4,343,151			43,068	1.33

	Total deposits				7,553,357								6,773,870
Federal funds purchased and securities sold
	under repurchase agreements				940,000			3,028	0.42				362,829			3,982	1.45
Junior subordinated deferrable interest debentures					100,000			6,356	8.47				100,000			6,356	8.47
Subordinated notes payable and other notes					150,533			3,540	3.14				152,553			4,518	3.95
Federal Home Loan Bank advances					12,287			299	3.26				20,537			583	3.80

Total Interest-Bearing Funds and Average
	Rate Paid				5,696,851			42,570	1.00				4,979,070			58,507	1.57

Accrued interest and other liabilities					169,578								127,170

	Total Liabilities				8,925,755								7,536,959
Shareholders' Equity					724,918								635,621

	Total Liabilities and Shareholders' Equity			$	9,650,673							$	8,172,580

Net interest income							$	238,334							$	239,115

Net interest spread									3.69		%						4.22	%

Net interest income to total average earning assets										3.98	%						4.65	%


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.

Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
(dollars in thousands - taxable-equivalent basis)				September 30, 2003								June 30, 2003

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

Assets:
Interest-bearing deposits				$	8,481		$	23	1.04		%	$	8,974		$	23	1.06	%
Securities:
	U.S. Treasury				17,975			65	1.43				67,519			187	1.11
	U.S. government agencies and corporations				2,352,036			27,248	4.63				2,333,060			28,529	4.89
	States and political subdivisions:
		Tax-exempt			202,374			3,314	6.55				202,116			3,302	6.54
		Taxable			1,369			23	6.70				1,566			26	6.59
	Other				44,430			295	2.65				35,996			322	3.56

			Total securities		2,618,184			30,945	4.73				2,640,257			32,366	4.90
Federal funds sold and securities purchased
	under resale agreements				998,842			2,617	1.03				1,013,001			3,202	1.25
Loans, net of unearned discount					4,457,410			57,568	5.12				4,455,480			59,134	5.32

Total Earning Assets and Average Rate Earned					8,082,917			91,153	4.48				8,117,712			94,725	4.67
Cash and due from banks					1,113,310								1,127,547
Allowance for possible loan losses					(83,867	)							(83,432	)
Premises and equipment					166,364								167,839
Accrued interest and other assets					461,778								438,940

	Total Assets			$	9,740,502							$	9,768,606

Liabilities:
Non-interest-bearing demand deposits:
	Commercial and individual			$	2,207,610							$	2,091,571
	Correspondent banks				937,025								932,728
	Public funds				58,402								51,938

		Total demand deposits			3,203,037								3,076,237
Interest-bearing deposits:
	Savings and Interest-On-Checking				1,047,568			188	0.07				1,036,734			261	0.10
	Money market deposit accounts				2,201,973			4,805	0.87				2,101,658			5,684	1.08
	Time accounts				979,206			2,920	1.18				1,018,412			3,403	1.34
	Public funds				315,889			650	0.82				331,764			785	0.95

		Total time deposits			4,544,636			8,563	0.75				4,488,568			10,133	0.91

	Total deposits				7,747,673								7,564,805
Federal funds purchased and securities sold
	under repurchase agreements				852,248			453	0.21				1,045,693			1,153	0.44
Guaranteed preferred beneficial interests in junior
	subordinated deferrable interest debentures				100,000			2,118	8.47				100,000			2,119	8.47
Subordinated notes payable and other notes					150,389			1,133	3.01				150,607			1,176	3.12
Federal Home Loan Bank advances					9,783			65	2.58				12,598			108	3.44

Total Interest-Bearing Funds and Average
	Rate Paid				5,657,056			12,332	0.87				5,797,466			14,689	1.01

Accrued interest and other liabilities					149,417								161,557

	Total Liabilities				9,009,510								9,035,260
Shareholders' Equity					730,992								733,346

	Total Liabilities and Shareholders' Equity			$	9,740,502							$	9,768,606

Net interest income							$	78,821							$	80,036

Net interest spread									3.61		%						3.66	%

Net interest income to total average earning assets										3.88	%						3.95	%


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.

Consolidated Average Balance Sheets and Interest Income Analysis-By Quarter
(dollars in thousands - taxable-equivalent basis)				March 31, 2003								December 31, 2002

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

Assets:
Interest-bearing deposits				$	10,690		$	42	1.59		%	$	13,220		$	30	0.90	%
Securities:
	U.S. Treasury				13,985			52	1.50				16,543			91	2.17
	U.S. government agencies and corporations				2,293,277			28,829	5.03				2,033,449			27,529	5.42
	States and political subdivisions:
		Tax-exempt			198,505			3,307	6.66				191,919			3,429	7.15
		Taxable			1,996			33	6.58				2,240			37	6.61
	Other				35,848			322	3.61				34,598			339	3.92

			Total securities		2,543,611			32,543	5.12				2,278,749			31,425	5.52
Federal funds sold and securities purchased
	under resale agreements				722,336			2,286	1.27				442,473			1,579	1.40
Loans, net of unearned discount					4,534,405			60,155	5.38				4,515,604			64,241	5.64

Total Earning Assets and Average Rate Earned					7,811,042			95,026	4.91				7,250,046			97,275	5.34
Cash and due from banks					1,071,671								1,104,180
Allowance for possible loan losses					(83,485	)							(82,499	)
Premises and equipment					169,186								171,581
Accrued interest and other assets					461,760								430,494

	Total Assets			$	9,430,174							$	8,873,802

Liabilities:
Non-interest-bearing demand deposits:
	Commercial and individual			$	1,996,745							$	2,023,906
	Correspondent banks				842,247								793,306
	Public funds				56,332								48,779

		Total demand deposits			2,895,324								2,865,991
Interest-bearing deposits:
	Savings and Interest-On-Checking				1,015,103			272	0.11				992,806			354	0.14
	Money market deposit accounts				2,014,095			5,393	1.09				1,933,820			5,874	1.20
	Time accounts				1,072,929			3,934	1.49				1,118,686			4,984	1.77
	Public funds				345,697			1,052	1.23				340,398			1,103	1.30

		Total time deposits			4,447,824			10,651	0.97				4,385,710			12,315	1.11

	Total deposits				7,343,148								7,251,701
Federal funds purchased and securities sold
	under repurchase agreements				922,834			1,422	0.62				512,323			1,377	1.05
Guaranteed preferred beneficial interests in junior
	subordinated deferrable interest debentures				100,000			2,119	8.47				100,000			2,119	8.47
Subordinated notes payable and other notes					150,607			1,230	3.29				150,608			1,385	3.68
Federal Home Loan Bank advances					14,532			127	3.56				18,331			162	3.51

Total Interest-Bearing Funds and Average
	Rate Paid				5,635,797			15,549	1.12				5,166,972			17,358	1.34

Accrued interest and other liabilities					188,865								143,119

	Total Liabilities				8,719,986								8,176,082
Shareholders' Equity					710,188								697,720

	Total Liabilities and Shareholders' Equity			$	9,430,174							$	8,873,802

Net interest income							$	79,477							$	79,917

Net interest spread									3.79		%						4.00	%

Net interest income to total average earning assets										4.10	%						4.41	%


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.

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

								Interest
					Average			Income/		Yield/
					Balance			Expense		Cost

Assets:
Time deposits					$	14,312		$	54	1.50	%
Securities:
	U.S. Treasury					45,716			221	1.92
	U.S. government agencies and corporations					1,887,692			27,040	5.73
	States and political subdivisions
		Tax-exempt				182,171			3,099	6.80
		Taxable				2,248			37	6.58
	Other					34,765			339	3.90

			Total securities			2,152,592			30,736	5.71
Federal funds sold and securities purchased
	under resale agreements					316,848			1,411	1.74
Loans, net of unearned discount						4,511,565			67,087	5.90

Total Earning Assets and Average Rate Earned						6,995,317			99,288	5.64
Cash and due from banks						836,049
Allowance for possible loan losses						(80,555	)
Premises and equipment						173,333
Accrued interest and other assets						397,492

	Total Assets				$	8,321,636

Liabilities:
Non-interest-bearing demand deposits:
	Commercial and individual				$	1,947,332
	Correspondent banks					534,577
	Public funds					48,539

		Total demand deposits				2,530,448
Interest-bearing deposits:
	Savings and Interest-On-Checking					977,977			480	0.19
	Money market deposit accounts					1,866,489			6,367	1.35
	Time accounts					1,153,949			5,813	2.00
	Public funds					322,799			1,221	1.50

		Total time deposits				4,321,214			13,881	1.27

	Total deposits					6,851,662
Federal funds purchased and securities sold
	under repurchase agreements					406,404			1,485	1.43
Guaranteed preferred beneficial interests in junior
	subordinated deferrable interest debentures					100,000			2,118	8.47
Subordinated notes payable and other notes						151,002			1,404	3.72
Federal Home Loan Bank advances						19,396			175	3.57

Total Interest-Bearing Funds and Average
	Rate Paid					4,998,016			19,063	1.51

Accrued interest and other liabilities						125,846

	Total Liabilities					7,654,310
Shareholders' Equity						667,326

	Total Liabilities and Shareholders' Equity				$	8,321,636

Net interest income								$	80,225

Net interest spread										4.13	%

Net interest income to total average earning assets										4.56	%


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.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

There has been no significant change in the market risks faced by the Corporation since December 31, 2002. For information regarding the Corporation's market risk, refer to the Corporation's 2002 Form 10-K.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Corporation's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Corporation's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. No changes were made to Corporation's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting.

Part II: Other Information


Item 1. Legal Proceedings

The Corporation and its subsidiaries are subject to various claims and legal actions that have arisen in the normal course of conducting business. Management does not expect the ultimate disposition of these matters to have a material adverse impact on the Corporation's financial statements.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

	Exhibit Number	Description


	31.1	Rule 13a-14(a) Certification of the Corporation's Chief Executive Officer

	31.2	Rule 13a-14(a) Certification of the Corporation's Chief Financial Officer

	32.1	Section 1350 Certifications of the Corporation's Chief Executive Officer and Chief Financial Officer. This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

(b) Reports on Form 8-K

During the quarter ended September 30, 2003, the Corporation filed one Current Report on Form 8-K, dated July 23, 2003, which contained a press release announcing financial results for the quarter ended June 30, 2003.

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: October 22, 2003	By: /s/ Phillip D. Green

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