CULLEN FROST BANKERS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _________ TO _________

COMMISSION FILE NUMBER 0-7275

CULLEN/FROST BANKERS, INC.
(Exact name of registrant as specified in its charter)

TEXAS 74-1751768
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

100 W. HOUSTON STREET
SAN ANTONIO, TEXAS 78205
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(Address of principal executive (Zip Code)
offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(210) 220-4011

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of
the registrant was $1,746,517,082 based on the closing price of such stock as of
March 15, 2002.

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Proxy Statement for Annual Meeting of Shareholders to be held May 22, 2002
(Part III)
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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS
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GENERAL
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Cullen/Frost Bankers, Inc. ("Cullen/Frost" or "Corporation"), a Texas
business corporation incorporated in 1977 and headquartered in San Antonio,
Texas, is a financial holding company within the meaning of the Bank Holding
Company Act of 1956, as partially amended by the Gramm-Leach-Bliley Act (the
"Modernization Act") (collectively "the BHC Act"), and, as such, is registered
with the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). The New Galveston Company, incorporated under the laws of Delaware, is
a wholly-owned second-tier financial holding company subsidiary which owns all
banking and non-banking subsidiaries with the exception of Cullen/Frost Capital
Trust I, a Delaware statutory business trust and wholly-owned subsidiary of the
Corporation. At December 31, 2001, Cullen/Frost's principal assets consisted of
all of the capital stock of The Frost National Bank ("Frost Bank"). Frost Bank
operates 80 financial centers across Texas with 17 locations in the San Antonio
area, 22 in the Houston/Galveston area, 15 in the Fort Worth area, 8 in the
Corpus Christi area, 6 in Austin, 4 in Dallas, 3 in San Marcos, 2 in McAllen, 2
in the Boerne/Fair Oaks area, and 1 in New Braunfels. At December 31, 2001,
Cullen/Frost had consolidated total assets of $8.4 billion and total deposits of
$7.1 billion. Based on information from the Federal Reserve Board, at September
30, 2001, Cullen/Frost was the largest of the 124 bank holding companies
headquartered in Texas.

Cullen/Frost's operations are managed along three distinct operating
segments consisting of Banking, the Financial Management Group and its
investment banking subsidiary, Frost Securities Inc. (See Results of Segment
Operations on page 22 and Note U on page 71).

Cullen/Frost provides policy direction to Frost Bank in, among others, the
following areas: (i) asset and liability management; (ii) accounting, budgeting,
planning, insurance and investment banking; (iii) capitalization; (iv)
regulatory compliance and (v) investor relations.

Frost Bank is a separate entity that operates under the management of its
own officers and also maintains a separate board of directors. Frost Bank, the
origin of which can be traced to a mercantile partnership organized in 1868, was
chartered as a national banking association in 1899. At December 31, 2001, Frost
Bank, was the largest commercial bank headquartered in San Antonio and South
Texas.

SERVICES OFFERED BY FROST BANK
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Commercial Banking

Frost Bank provides commercial services for corporations and other business
clients. Loans are made for a wide variety of general corporate purposes,
including interim construction financing on industrial and commercial
properties, and financing on equipment, inventories, accounts receivable, and
acquisition financing, as well as commercial leasing. Frost Bank provides
financial services to business clients on both a national and international
basis.

Consumer Services

Frost Bank provides a full range of consumer banking services, including
checking accounts, savings programs, automated teller machines, installment and
real estate loans, home equity loans, drive-in and night deposit services, safe
deposit facilities, and brokerage services.

International Banking

Frost Bank provides international banking services to customers residing in
or dealing with businesses located in Mexico. These services consist of
accepting deposits (in United States dollars only), making loans
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(in United States dollars only), issuing letters of credit, handling foreign
collections, transmitting funds and, to a limited extent, dealing in foreign
exchange. Reference is made to pages 29 and 37 of this document.

Correspondent Banking

Frost Bank acts as correspondent for approximately 315 financial
institutions, primarily banks in Texas. These banks maintain deposits with Frost
Bank, which offers them a full range of services including check clearing,
transfer of funds, loan participations, fixed income security services, and
securities custody and clearance.

Insurance

Frost Insurance Agency, Inc., is a wholly-owned subsidiary of Frost Bank
and brokers corporate and personal property and casualty insurance as well as
group health and life insurance products to individuals and businesses.

Trust Services

Frost Bank provides a wide range of trust, investment, agency and custodial
services for individual and corporate clients. These services include the
administration of estates and personal trusts, as well as the management of
investment accounts for individuals, employee benefit plans and charitable
foundations. At December 31, 2001, trust assets with a market value of $13.3
billion were being administered by Frost Bank. These assets were comprised of
managed assets of $6.0 billion and custody assets of $7.3 billion.

Brokerage Services

Frost Brokerage Services, a wholly-owned subsidiary of Frost Bank, was
formed in March 1986 to provide brokerage services and perform other
transactions or operations related to the sale and purchase of securities of all
types.

SERVICES OFFERED BY THE CULLEN/FROST NON-BANKING SUBSIDIARIES
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Frost Securities, Inc. ("FSI") is a full-service investment bank offering
financial advisory services, mergers and acquisitions support, equity research,
and institutional equity sales and trading. The firm provides institutional
investors with in-depth research coverage in energy and communications
technology.

Main Plaza Corporation ("Main Plaza") is a wholly-owned non-banking
subsidiary. Main Plaza occasionally makes loans to qualified borrowers. Loans
are funded with borrowings against Cullen/Frost's current cash or borrowings
against credit lines.

Daltex General Agency, Inc. ("Daltex"), a wholly-owned non-banking
subsidiary, is a managing general insurance agency. Daltex provides vendor's
single interest insurance.

Cullen/Frost Capital Trust I is a Delaware statutory business trust that
issued $100 million in Trust Preferred Capital Securities in 1997, which are
guaranteed by the Corporation.

COMPETITION
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Frost Bank experiences a very competitive environment in its commercial
banking businesses, primarily from other banks located in its respective service
areas. Frost Bank also competes with insurance companies, finance and mortgage
companies, savings and loan institutions, credit unions, money market funds,
investment banks and other financial institutions. In the case of some larger
customers, competition exists with institutions in other major metropolitan
areas in Texas and in the remainder of the United States, some of which are
larger than Frost Bank in terms of capital, resources and personnel.

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Cullen/Frost and Frost Bank have been impacted by the Modernization Act, as
it eliminated barriers between commercial banking, investment banking, and
insurance sales. The elimination of barriers has created the potential for more
competition by increasing the number of non-bank competitors.

SUPERVISION AND REGULATION
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Cullen/Frost

Cullen/Frost is a legal entity separate and distinct from its bank
subsidiary and was designated a financial holding company under the
Modernization Act effective March 11, 2000. The Modernization Act: (i) allows
financial holding companies meeting management, capital and CRA standards to
engage in a substantially broader range of financial activities and activities
incidental to financial activities than was previously permissible, including
insurance underwriting and making merchant banking investments in commercial and
financial companies; (ii) allows insurers and other financial services companies
to acquire banks; (iii) removes various restrictions that previously applied to
bank holding company ownership of securities firms and mutual fund advisory
companies; and (iv) established the overall regulatory structure applicable to
bank holding companies that also engage in insurance and securities operations.

Cullen/Frost is primarily regulated by the Federal Reserve Board, which has
established guidelines with respect to the maintenance of appropriate levels of
capital and payment of dividends by financial holding companies. If Frost Bank
ceases to be "well capitalized" under applicable regulatory standards, the
Federal Reserve Board may, among other actions, order Cullen/Frost to divest of
Frost Bank or to conform its activities to those permissible for a bank holding
company. In addition, if Frost Bank receives a rating under the CRA Act of less
than satisfactory, Cullen/Frost will be prohibited from engaging in new
activities or acquiring companies other than bank holding companies, banks or
savings associations.

The Modernization Act also modified laws related to financial privacy and
community reinvestment. The new financial privacy provisions, which were not
mandatory until July 1, 2001, generally prohibit financial institutions,
including Cullen/Frost, from disclosing nonpublic personal financial information
to third parties unless customers have the opportunity to "opt out" of the
disclosure.

The Federal Reserve Act and the Federal Deposit Insurance Act ("FDIA")
impose restrictions on loans by Frost Bank to Cullen/Frost and certain of its
subsidiaries, on investments in securities thereof and on the taking of such
securities as collateral for loans. Such restrictions generally prevent
Cullen/Frost from borrowing from Frost Bank unless the loans are secured by
marketable obligations. Further, such secured loans, other transactions, and
investments by Frost Bank are limited in amount as to Cullen/Frost or to certain
other subsidiaries to ten percent of Frost Bank's capital and surplus and as to
Cullen/Frost and all such subsidiaries to an aggregate of 20 percent of Frost
Bank's capital and surplus.

Under Federal Reserve Board policy, Cullen/Frost is expected to act as a
source of financial strength to Frost Bank and to commit resources to support
such bank in circumstances where it might not do so absent such policy. In
addition, any loans by Cullen/Frost to its bank would be subordinate in right of
payment to deposits and to certain other indebtedness of Frost Bank. In the
event of a financial holding company's bankruptcy, any commitment by the
financial holding company to a federal bank regulatory agency to maintain the
capital of a subsidiary bank will be assumed by the bankruptcy trustee and be
entitled to a priority of payment.

Subsidiary Bank

Frost Bank is organized as a national banking association under the
National Bank Act and is subject to regulation and examination by the Office of
the Comptroller of the Currency (the "Comptroller of the Currency").

Federal and state laws and regulations of general application to banks have
the effect, among others, of regulating the scope of Frost Bank's business,
investments, cash reserves, purpose and nature of loans, collateral for loans,
maximum interest rates chargeable on loans, amount of dividends that may be
declared
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and required capitalization ratios. Federal law imposes restrictions on Frost
Bank's extensions of credit to, and certain other transactions with,
Cullen/Frost and other subsidiaries, investments in stock or other securities
thereof and taking of such securities as collateral for loans to other
borrowers.

The Comptroller of the Currency has authority to prohibit a bank from
engaging in activities that, in such agency's opinion, constitute an unsafe or
unsound practice in conducting its business. It is possible, depending on the
financial condition of the bank in question and other factors, that such agency
could claim that the payment of dividends or other payments might, under some
circumstances, be such an unsafe or unsound practice.

The principal source of Cullen/Frost's cash revenues is dividends from
Frost Bank and there are certain limitations on the payment of dividends to
Cullen/Frost by Frost Bank. The prior approval of the Comptroller of the
Currency is required if the total of all dividends declared by a national bank
in any calendar year would exceed the bank's net profits, as defined, for that
year combined with its retained net profits for the preceding two calendar
years, less any regulatory required transfers to surplus. In addition, a
national bank may not pay dividends in an amount in excess of its undivided
profits less certain bad debts specified in regulatory requirements. Although
not necessarily indicative of amounts available to be paid in future periods,
Frost Bank had approximately $110.9 million available for the payment of
dividends, without prior regulatory approval, at December 31, 2001.

Capital Adequacy

Bank regulators have adopted risk-based capital guidelines for financial
holding companies and banks. The minimum ratio of qualifying total capital to
risk-weighted assets (including certain off-balance sheet items) is eight
percent. At least half of the total capital is to be comprised of common stock,
retained earnings, non-cumulative perpetual preferred stocks, minority
interests, (and for financial holding companies, a limited amount of qualifying
cumulative perpetual preferred stock), less certain intangibles including
goodwill ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist of
other preferred stock, certain other instruments, and limited amounts of
subordinated debt and the allowance for loan and lease losses.

In addition, bank regulators have established minimum leverage ratio (Tier
1 capital to average total assets) guidelines for financial holding companies
and banks. These guidelines provide for a minimum leverage ratio of three
percent for financial holding companies and banks that meet certain specified
criteria, including that they have the highest regulatory rating. All other
banking organizations will be required to maintain a leverage ratio of at least
four percent plus an additional cushion where warranted. The guidelines also
provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels, without significant levels of intangible
assets. The bank regulators have not advised Cullen/Frost or Frost Bank of any
specific minimum leverage ratio applicable to it. For information concerning
Cullen/Frost's capital ratios, see the discussion under the caption "Capital and
Liquidity" on page 38 and Note L "Capital" on page 58.

Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvements Act of 1991
("FDICIA"), among other things, requires the Federal banking agencies to take
"prompt corrective action" with respect to depository institutions that do not
meet minimum capital requirements. FDICIA established five capital tiers: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized". Under the final rules
adopted by the Federal banking regulators relating to these capital tiers, an
institution is deemed to be: well capitalized if the institution has a total
risk-based capital ratio of ten percent or greater, a Tier 1 risk-based capital
ratio of six percent or greater, and a leverage ratio of five percent or
greater, and the institution is not subject to an order, written agreement,
capital directive, or prompt corrective action directive to meet and maintain a
specific capital level for any capital measure; adequately capitalized if the
institution has a total risk-based capital ratio of eight percent or greater, a
Tier 1 risk-based capital ratio of four percent or greater, and a leverage ratio
of four percent or greater (or a leverage ratio of three percent for financial
holding companies which meet certain specified criteria, including having the

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highest regulatory rating); undercapitalized if the institution has a total
risk-based capital ratio that is less than eight percent, a Tier 1 risk-based
capital ratio less than four percent or a leverage ratio less than four percent
(or a leverage ratio less than three percent if the institution is rated
composite one in its most recent report of examination, subject to appropriate
Federal banking agency guidelines); significantly undercapitalized if the
institution has a total risk-based capital ratio less than six percent, a Tier 1
risk-based capital ratio less than three percent, or a leverage ratio less than
three percent; and critically undercapitalized if the institution has a ratio of
tangible equity to total assets equal to or less than two percent.

At December 31, 2001, Frost Bank, Cullen/Frost's only insured depository
institution subsidiary was considered "well capitalized".

FDICIA generally prohibits a depository institution from making any capital
distributions (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized institutions are subject to growth
limitations and are required to submit a capital restoration plan. The agencies
may not accept such a plan without determining, among other things, that the
plan is based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. In addition, for a capital restoration plan to
be acceptable, the depository institution's parent holding company must
guarantee that the institution will comply with such capital restoration plan.
The aggregate liability of the parent holding company is limited to the lesser
of (i) an amount equal to five percent of the depository institution's total
assets at the time it became undercapitalized and (ii) the amount which is
necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized.

"Significantly undercapitalized" depository institutions may be subject to
a number of requirements and restrictions, including orders to sell sufficient
voting stock to become "adequately capitalized," requirements to reduce total
assets, and cessation of receipt of deposits from correspondent banks.
"Critically undercapitalized" institutions are subject to the appointment of a
receiver or conservator.

DEPOSIT INSURANCE
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Frost Bank is subject to Federal Deposit Insurance Corporation ("FDIC")
deposit insurance assessments and to certain other statutory and regulatory
provisions applicable to FDIC-insured depository institutions. The risk-based
assessment system imposes insurance premiums based upon a matrix that takes into
account a bank's capital level and supervisory rating. Over the last several
years many banks, including Frost Bank, have paid no deposit insurance premiums.
It is possible that in the near term the FDIC could impose assessment rates on
institutions such as Frost Bank in connection with declines in the insurance
funds or increases in the amount of insurance coverage.

A depository institution insured by the FDIC can be held liable for any
loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly
controlled, FDIC-insured depository institution in danger of default. "Default"
is defined generally as the appointment of a conservator or receiver, and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance.

DEPOSITOR PREFERENCE
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Deposits and certain claims for administrative expenses and employee
compensation against an insured depository institution are afforded priority
over other general unsecured claims against such an institution, including
federal funds and letters of credit, in the "liquidation or other resolution" of
such an institution by any receiver.

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ACQUISITIONS
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The BHC Act generally limits acquisitions by bank holding companies that
are not financial holding companies to commercial banks and companies engaged in
activities that the Federal Reserve Board has determined to be so closely
related to banking as to be a proper incident thereto and requires the prior
approval of the Federal Reserve Board to consummate such acquisitions. Financial
holding companies may acquire non-banking entities under the Modernization Act
by providing a notice to the Federal Reserve Board after consummation of such an
acquisition.

The BHC Act, the Federal Bank Merger Act, and the Texas Banking Code
regulate the acquisitions of commercial banks. The BHC Act requires the prior
approval of the Federal Reserve Board for the direct or indirect acquisition of
more than five percent of the voting shares of a commercial bank or bank holding
company. With respect to Frost Bank, the approval of the Comptroller of the
Currency is required for branching, purchasing the assets or assuming deposits
of other banks and bank mergers in which the continuing bank is a national bank.

In reviewing bank acquisition and merger applications, the bank regulatory
authorities will consider, among other things, the competitive effect and public
benefits of the transactions, the capital position of the combined organization,
and the applicant's record under the Community Reinvestment Act and fair housing
laws.

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

INTERSTATE BANKING AND BRANCHING LEGISLATION
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The Riegle-Neal Interstate Branching Efficiency Act ("IBBEA"), authorizes
interstate acquisitions of banks and bank holding companies without geographic
limitation. IBBEA also authorizes a bank to merge with a bank in another state
as long as neither of the states has opted out of interstate branching. A bank
may establish a de novo branch in a state in which the bank does not maintain a
branch if the state expressly permits de novo branching. Once a bank has
established branches in a state through an interstate merger transaction, the
bank may establish and acquire additional branches at any location in the state
where any bank involved in the merger transaction could have established or
acquired branches under applicable federal or state law. A bank that has
established a branch in a state through de novo branching may establish and
acquire additional branches in such state in the same manner and to the same
extent as a bank having a branch in such state as a result of an interstate
merger. If a state opts out of interstate branching within the specified time
period, no bank in any other state may establish a branch in the opting out
state, whether through an acquisition or de novo. On August 28, 1995, Texas
enacted legislation opting out of interstate branching; however, in the second
quarter of 1998, the OCC approved a series of merger transactions requested by a
non-Texas based institution that ultimately resulted in the merger of its Texas
based bank into the non-Texas based institution. Although challenged in the
courts, the final legal ruling allowed the merger to proceed. In addition, on
May 13, 1998, the Texas Banking Commissioner began accepting applications filed
by state banks to engage in interstate mergers and branching.

REGULATORY ECONOMIC POLICIES
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The earnings of Cullen/Frost are affected not only by general economic
conditions but also by the policies of various governmental regulatory
authorities. The Federal Reserve Board regulates the supply of credit in order
to influence general economic conditions, primarily through open market
operations in United States government obligations, as well as varying the
discount rate on financial institution borrowings and
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varying reserve requirements against financial institution deposits and by
restricting certain borrowings by such financial institutions and their
subsidiaries. The deregulation of interest rates has had, and is expected to
continue to have, an impact on the competitive environment in which Frost Bank
operates.

Governmental policies have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future. However, Cullen/Frost cannot accurately predict the nature or extent
of any effect such policies may have on its future business and earnings.

EMPLOYEES
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At December 31, 2001, Cullen/Frost employed 3,387 full-time equivalent
employees. Employees of Cullen/Frost enjoy a variety of employee benefit
programs, including a deferred profit sharing plan, 401(k) stock purchase plans,
various comprehensive medical, accident and group life insurance plans and paid
vacations. Cullen/Frost considers its employee relations to be good.

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EXECUTIVE OFFICERS OF THE REGISTRANT
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The names, ages, recent business experience and positions or offices held
by each of the executive officers of Cullen/Frost during 2001 are as follows:

Stan McCormick, age 56, has been an officer of Frost Bank since 1994 and
Secretary of Cullen/Frost from June 1999 to present.

There are no arrangements or understandings between any executive officer
of Cullen/Frost and any other person pursuant to which such executive officer
was or is to be selected as an officer.

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ITEM 2. PROPERTIES
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The executive offices of Cullen/Frost, as well as the principal banking
headquarters of Frost Bank, are housed in both a 21-story office tower and a
nine-story office building located on approximately 3.5 acres of land in
downtown San Antonio. Cullen/Frost and Frost Bank lease approximately 50 percent
of the office tower. The nine-story office building was purchased in April 1994.
Frost Bank also leases space in a seven-story parking garage adjacent to the
banking headquarters. In June 1987, Frost Bank consummated the sale of its
office tower and leased back a portion of the premises under a 13-year primary
lease term with options allowing for occupancy up to 50 years. The Bank also
sold its adjacent parking garage facility and leased back space in that
structure under a 12-year primary lease term with options allowing for occupancy
up to 50 years. Both leases allow for purchase of the related asset under
specific terms. Frost Bank has agreed to repurchase both the office tower and
the adjacent parking garage facility. Closing of the purchase agreement on the
properties is expected to take place in the second quarter of 2002, with the
purchase price of the office tower and the adjacent parking garage being
approximately $25.7 million and $15.0 million, respectively.

ITEM 3. LEGAL PROCEEDINGS
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Certain subsidiaries of Cullen/Frost are defendants in various matters of
litigation which have arisen in the normal course of conducting a commercial
banking business. In the opinion of management, the disposition of such pending
litigation will not have a material effect on Cullen/Frost's consolidated
financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
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MATTERS
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Common Stock Market Prices and Dividends

The tables below set forth for each quarter the high and low sales prices
for Cullen/Frost's common stock and the dividends per share paid for each
quarter. The Company's common stock is traded on The New York Stock Exchange
("NYSE") under the symbol "CFR". High and low sales prices are as reported by
the NYSE. The closing price on March 15, 2002 was $35.71.

The number of record holders of common stock at February 22, 2002 was
2,172.

The Corporation's management is committed to continuing to pay regular cash
dividends; however, there is no assurance as to future dividends because they
are dependent on future earnings, capital requirements and financial conditions.
See "Capital and Liquidity" section on page 38 in Item 7 for further discussion
and Note K "Dividends" on page 57.

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ITEM 6. SELECTED FINANCIAL DATA
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CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)

Historical amounts have been restated for stock splits and to reflect the
pooling-of-interests merger with Overton Bancshares, Inc., in 1998.

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SELECTED FINANCIAL DATA
(dollars in thousands, except per share amounts)

* 2001 basic and diluted earnings per share before the after-tax restructuring
charges were $1.82 and $1.76, respectively.

1998 basic and diluted earnings per share before the after-tax merger related
charge were $1.60 and $1.56, respectively.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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FINANCIAL REVIEW

Discussed below are the operating results for Cullen/Frost Bankers, Inc.
and Subsidiaries ("Cullen/ Frost" or the "Corporation") for the years 1999
through 2001. All of the acquisitions during this period were accounted for as
purchase transactions, and as such, their related results of operations are
included from the date of acquisition.

All balance sheet amounts presented in the following financial review are
averages unless otherwise indicated. Certain reclassifications have been made to
make prior periods comparable. Taxable-equivalent adjustments are the result of
increasing income from tax-free loans and investments by an amount equal to the
taxes that would be paid if the income were fully taxable assuming a 35 percent
federal tax rate, thus making tax-exempt yields comparable to taxable asset
yields. Dollar amounts in tables are stated in thousands, except for per share
amounts.

FORWARD-LOOKING STATEMENTS
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Certain statements contained in this Annual Report on Form 10-K that are
not statements of historical fact constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"),
even though they are not specifically identified as such. In addition, certain
statements in future filings by Cullen/Frost with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of the Corporation which are not statements of historical fact
constitute forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to: (i) projections of
revenues, income or loss, earnings or loss per share, the payment or nonpayment
of dividends, capital structure and other financial items; (ii) statements of
plans and objectives of Cullen/Frost or its management or Board of Directors,
including those relating to 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: (i) local, regional and
international economic conditions and the impact they may have on Cullen/Frost
and its customers; (ii) the effects of and changes in trade, monetary and fiscal
policies and laws, including interest rate policies of the Federal Reserve
Board; (iii) inflation, interest rate, market and monetary fluctuations; (iv)
political instability; (v) acts of war or terrorism; (vi) the timely development
and acceptance of new products and services and perceived overall value of these
products and services by users; (vii) changes in consumer spending, borrowings
and savings habits; (viii) technology changes; (ix) acquisitions and integration
of acquired businesses; (x) the ability to increase market share and control
expenses; (xi) changes in the competitive environment among financial holding
companies; (xii) the effect of changes in laws and regulations (including laws
and regulations concerning taxes, banking, securities and insurance) with which
Cullen/Frost and its subsidiaries must comply; (xiii) the effect of changes in
accounting policies and practices, as may be adopted by the regulatory agencies
as well as the Financial Accounting Standards Board; (xiv) changes in the
Corporation's organization, compensation and benefit plans; (xv) the costs and
effects of litigation and of unexpected or adverse outcomes in such litigation;
(xvi) costs or difficulties related to the integration of the businesses of
Cullen/ Frost being greater than expected; and (xvii) the Corporation's success
at managing the risks involved in the foregoing.

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

15

ACQUISITIONS
- ---------------------

Cullen/Frost regularly evaluates acquisition opportunities and conducts due
diligence activities in connection with possible acquisitions. As a result,
acquisition discussions and, in some cases, negotiations, may take place and
future acquisitions involving cash, debt or equity securities may occur.
Acquisitions typically involve the payment of a premium over book and market
values, and, therefore, some dilution of the Corporation's book value and net
income per common share may occur in connection with any future transaction. All
of the acquisitions during the period 1999 through 2001 were accounted for as
purchase transactions, and as such, their related results of operations are
included from the date of acquisition. None of the acquisitions had a material
impact on Cullen/Frost's results of operations.

Bank Acquisitions

On May 20, 1999, Cullen/Frost paid approximately $42.3 million to acquire
Commerce Financial Corporation and its four-location subsidiary, Bank of
Commerce, in Fort Worth, Texas. The Corporation acquired loans of approximately
$76 million and deposits of approximately $164 million.

On January 15, 1999, Cullen/Frost paid approximately $18.7 million to
acquire Keller State Bank which had three locations in Tarrant County, Texas.
The Corporation acquired loans of approximately $38 million and deposits of
approximately $62 million.

Insurance Acquisitions

On August 1, 2001, Frost Insurance Agency ("FIA"), a subsidiary of The
Frost National Bank, completed its acquisition of AIS Insurance & Risk
Management ("AIS"), an independent insurance agency based in Fort Worth. AIS
offered a broad range of commercial insurance for small to mid-size businesses,
including property and casualty, employee benefits (health, life and retirement
plans), business succession planning and risk management services.

On July 1, 2000 FIA acquired Nieman Hanks Puryear Partners and Nieman Hanks
Puryear Benefits ("Nieman Hanks"), an Austin-based independent insurance agency.
Nieman Hanks offered property and casualty insurance, professional and umbrella
liability, homeowner and auto insurance, group health, life and disability
policies and 401(k) retirement plans and executive planning.

On April 1, 2000, FIA acquired Wayland Hancock Insurance Agency, Inc.
("Wayland Hancock"), a Houston-based independent insurance agency. Wayland
Hancock offered a full range of property and casualty, life and health insurance
products, as well as retirement and financial planning, to individuals and
businesses.

On May 1, 1999, FIA acquired Professional Insurance Agents, Inc. ("PIA"), a
mid-sized independent insurance agency based in Victoria, Texas, with additional
locations in San Antonio, New Braunfels and Refugio. PIA offered as agent,
corporate and personal property and casualty insurance as well as group health
and life insurance products to individuals and businesses. PIA was the newly
formed FIA's first insurance agency acquisition.

Investment Banking Subsidiary

On August 2, 1999 Cullen/Frost began operations of its investment banking
subsidiary in Dallas, Texas. Frost Securities, Inc. ("FSI") is a full-service
investment bank offering financial advisory services, mergers and acquisitions
support, equity research, and institutional equity sales and trading. The firm
provides institutional investors with in-depth research coverage in energy and
communications technology.

16

RESULTS OF OPERATIONS
- ---------------------

For the year ended December 31, 2001, the Corporation reported net income
of $80.9 million or $1.52 per diluted common share, compared to $108.8 million
or $2.03 per diluted common share and $97.6 million or $1.78 per diluted common
share for 2000 and 1999, respectively. Operating earnings for 2001 were $93.8
million or $1.76 per diluted common share. Operating earnings exclude $19.9
million of pre-tax restructuring charges that are discussed in detail on page
23. Operating earnings for 2001 were lower than the net income reported in 2000,
primarily due to higher provision for possible loan losses and lower net
interest income.

* Operating basic and diluted earnings per share for 2001 were $1.82 and $1.76,
respectively. Operating ROA and ROE for 2001 were 1.20 percent and 15.28
percent, respectively.

The provision for possible loan losses increased to $40.0 million for 2001,
up from the $14.1 million recorded in 2000. This level of increase was
considered necessary in light of credit deterioration in two large credits and
continued uncertainty in the current economic environment. Loan loss reserves at
the end of 2001 were built to $72.9 million or 1.61 percent of period-end loans.

The operating results for 2001 were also impacted by an unprecedented
decline in short term interest rates throughout the year, which resulted in
lower net interest income, down two percent from 2000. With core deposits,
especially demand deposits, being the predominant source of the Corporation's
funding, the falling

17

interest rate environment caused margin compression due mainly to earning assets
repricing faster than interest-bearing liabilities. More detail is available in
the Net Interest Income section below.

Also included in the 2001 results was a pre-tax gain of $5.7 million
related to the sale of an interest rate floor, which was purchased as a hedge
against falling interest rates. Of the total gain, $1.1 million was included in
other non-interest income, with the remainder included, net of tax, as a $3.0
million cumulative effect of adopting Statement of Financial Accounting Standard
("SFAS") No. 133, which went into effect January 1, 2001. See the Interest Rate
Swaps/Floor section on page 39 for further details.

Given the impact of the higher provision for possible loan losses, lower
net interest income, and $19.9 million in restructuring charges, return on
average assets for 2001 was 1.03 percent, compared with 1.52 percent in 2000,
while return on average equity was 13.18 percent in 2001, compared with 20.41
percent in 2000. Operating earnings return on average assets and return on
average equity were 1.20 percent and 15.28 percent, respectively, for the year
2001.

NET INTEREST INCOME
- -------------------

Net interest income, which accounted for 62 percent of Cullen/Frost's 2001
total revenue, is the Company's largest source of revenue. Net interest income
is the difference between interest income on earning assets, such as loans and
investment securities, and interest expense on liabilities, such as deposits and
borrowings, which are used to fund those assets. The level of interest rates and
the volume and mix of earning assets and interest-bearing liabilities impact net
interest income. Net interest margin is the taxable-equivalent net interest
income as a percentage of average earning assets for the period. This measure is
followed closely by the analyst community.

Net interest income on a tax equivalent basis for 2001 was $321.0 million,
a two percent decrease from $327.3 million recorded in 2000 and up from the
$301.5 million for 1999. The net interest margin was 4.89 percent for the year
ended December 31, 2001, compared to 5.32 percent and 5.15 percent for the years
2000 and 1999, respectively. The decrease in the net interest income and net
interest margin from a year ago is reflective of the impact of sharply reduced
interest rates on the Corporation's asset-sensitive balance sheet (the company's
earning assets are repricing faster than its interest-bearing liabilities). The
federal funds rate (generally one-day loans of excess reserves from one bank to
another) declined eleven times for a total of 4.75 percent during 2001. The
Corporation is funded primarily by core deposits with demand deposits
historically being a strong source of funds. This low cost funding base has
historically been a positive to net interest income and margin. However, in a
falling rate environment the Corporation suffers margin compression as (i) its
earning assets are repricing quicker than its interest-bearing liabilities and
(ii) its low cost funding base results in its inability to cut these rates
proportionately with decreases in market rates. For 2001, the Corporation's
ratio of average demand deposits to total average deposits was 33.4 percent,
which was well above peer levels. See "Consolidated Average Balance Sheets" on
pages 76 and 77 and "Rate Volume Analysis" on page 78.

Net interest spread, which represents the difference between the rate
earned on earning assets and the rates paid out on funds, decreased 18 basis
points for 2001 to 4.15 percent. This compares to 4.33 percent and 4.34 percent
for 2000 and 1999, respectively. The net interest spread as well as the net
interest margin will be impacted by future changes in short-term and long-term
interest rate levels, as well as the impact from the competitive environment. A
discussion on the effects of changing interest rates on net interest income is
included in the Market Risk Disclosure -- Interest Sensitivity section on page
39.

The Corporation uses interest rate swaps and interest rate floors, commonly
referred to as derivatives, to manage exposure to interest rates. Information on
these swaps and floors is included in the Interest Rate Swaps/Floor section on
page 39 and Notes A on page 47 and S on page 69 to the Consolidated Financial
Statements.

18

NON-INTEREST INCOME
- -------------------

Non-interest income was $192.9 million for 2001, up $22 million or 12.9
percent when compared with $170.9 million for 2000, and up from $151.3 million
for 1999. The $22 million increase from last year is primarily related to an
increase in service charges on deposit accounts for both commercial and consumer
accounts, an increase in insurance commissions, and higher revenues associated
with FSI. The increase in non-interest income for 2000 compared to 1999 was
broad based as all categories of fee income increased. The increase from 1999 to
2000 came from core growth and was also driven, in part, by the positive impact
of the insurance agency acquisitions made during 2000 and FSI's first full year
of operations. In addition to core growth, non-interest income was favorably
impacted in 1999 by the first quarter acquisition of Keller State Bank and the
second quarter acquisitions of Commerce Financial Corporation and PIA.

Trust fees declined one percent compared to a year ago due to lower
investment fees, which account for approximately 75 percent of trust fees.
Investment fees are based on the market value of assets within a trust account.
The market value of trust assets and the related investment fees were negatively
impacted by the unfavorable equity market conditions during the year. The
decline in investment fees ($1.6 million) was partially offset by higher fees on
accounts with oil and gas properties ($1.2 million). These accounts are charged
based on energy prices, which were higher during 2001 relative to 2000. In 2000,
trust fees were up $2.9 million or 6.2 percent from 1999, mainly due to
increases in investment fees and oil and gas fees, which partially offset
decreases in management fees associated with small cap value funds.

The market value of trust assets at the end of 2001 was $13.3 billion, up
$400 million when compared to $12.9 billion at the end of 2000, with growth
occurring in both managed and custody assets. Most of this growth occurred at
the end of the year having little impact on investment fees in 2001. Trust
assets were comprised of managed assets of $6.0 billion and custody assets of
$7.3 billion at year-end 2001 compared to $5.7 billion and $7.2 billion,
respectively, last year.

Service charges on deposits increased $9.9 million or 16.3 percent from
2000. This increase can be attributed to higher revenues associated with both
commercial and individual accounts and higher overdraft fees partially offset by
lower non-sufficient funds charges. The increase associated with commercial
accounts resulted primarily from higher treasury management services. Due in
part to a lower earnings credit rate, the Corporation received more payment for
services through fees than through the use of balances. The increase in revenues
from individual accounts continues to result from the simplification of deposit
account offerings in 1999. This simplification process resulted in fewer product
offerings while enhancing the remaining available products ultimately resulting
in a better value for the customer. In 2000, deposit service charges increased
$1.8 million or 3.1 percent from 1999. This increase was due to higher overdraft
charges and higher revenues associated with individual accounts. The previously
discussed simplification of deposit account offerings, which began in 1999, was
the primary reason for the increase in individual account revenues.

19

Insurance commissions increased $7.1 million or 68.6 percent from a year
ago. Excluding the impact of the acquisition of AIS in the third quarter of
2001, insurance commissions would have increased 56.8 percent. This increase was
the combined result of the impact of continued selling efforts and the effect of
higher insurance premiums on commission revenues, as the insurance market has
started to tighten the availability of certain products. Insurance commissions
increased $6.4 million to $10.3 million in 2000 compared to $3.9 million in
1999. The increase in insurance commission income was positively impacted by the
two agency acquisitions during 2000.

Other service charges and fees increased $4.9 million or 24.1 percent when
compared to 2000. The primary contributor to this increase was growth in equity
sales commission revenue at FSI. Other service charges and fees increased $6.4
million or 46.2 percent from 1999 to 2000. Primary contributors to this growth
were revenues from FSI, as it completed its first full year of operation.

Other non-interest income increased $579 thousand or 1.9 percent to $31.1
million in 2001 compared to $30.5 million in 2000. The increase is related to
the 2001 purchase of bank owned life insurance on certain employees where the
Corporation is the beneficiary. The increase in cash surrender value on these
insurance policies during 2001 was $3.4 million and was recorded in other
non-interest income. This revenue and higher revenues received from larger
balances held by the provider of the Corporation's official checks program were
the primary reasons for the increase from a year ago. Additionally, a $1.1
million gain was recognized from the sale of an interest rate floor. These
increases were offset somewhat by the $2 million non-recurring pre-tax gain from
the sale of the mortgage servicing rights in 2000 and lower gain on the sale of
student loans. Other non-interest income increased $2.0 million or 7.1 percent
to $30.5 million in 2000 compared to $28.5 million in 1999. The increase in 2000
from 1999 resulted from higher income primarily related to increased usage of
the Visa check card and annuity sales income and the previously mentioned $2
million gain from the sale of the mortgage servicing rights in 2000. These
increases were partially offset by fewer mortgage loan origination fees, which
resulted from the Corporation's outsourcing mortgage loans through the
co-branding arrangement with GMAC Mortgage, and lower gains on the sale of
student loans.

NON-INTEREST EXPENSE
- --------------------

Non-interest expense was $352.6 million for 2001, an increase of $39.3
million or 12.6 percent compared with $313.3 million for 2000 and $287.2 million
for 1999. Non-interest expense would have been $332.7 million, an increase of
$19.5 million or 6.2 percent from 2000 excluding the restructuring charges
included in the table and discussed below. Excluding the restructuring charge,
approximately 65 percent of the increase from 2000 related to salaries and
benefits. The increase in non-interest expense for 2000 was impacted by the
insurance agency acquisitions made during 2000. In addition, the increase was
impacted by a full years cost associated with Frost Securities and Commerce
Financial Corporation. The acquisitions of Keller State Bank, Commerce Financial
Corporation, and PIA, as well as the formation of FSI, impacted the growth in
expenses in 1999.

20

Salaries and wages increased by $6.1 million or 4.4 percent in 2001 and
$16.5 million or 13.5 percent in 2000. Salaries and wages in both years have
experienced increases related to FSI, the Corporation's investment banking
subsidiary which began operations in August of 1999, and acquisitions made by
FIA as well as normal market and merit increases based on performance in 2000.
Offsetting part of the increase from the year 2000 was a decrease from the
elimination of management bonuses for 2001. Also, included in 2000 were
approximately $600 thousand in severance costs related to the outsourcing of
mortgage loans.

Pension and other employee benefits increased by $6.3 million or 21.7
percent during 2001 as a result of higher retirement plan expense, higher
payroll taxes and higher medical expenses. For the year 2000 compared to 1999,
pension and other employee benefits increased 11.8 percent as a result of two
insurance acquisitions and the first full year of operations for FSI, as well
as, higher medical expenses throughout the Corporation.

Net occupancy increased $1.7 million or 6.2 percent during 2001 primarily
reflecting higher general building maintenance and utility expenses and higher
property tax expense related to a full year of operations for the two insurance
acquisitions made in 2000 and five months of operations for the August 2001
acquisition. In 2000, net occupancy expense increased $756 thousand or 2.8
percent due to higher building lease expense and general building maintenance
and utility expenses affected by de novo branches opened in 2000 and the second
and third quarter 2000 insurance acquisitions. De novo branches are branches
originally established by the bank and not acquired from another institution by
purchase or merger. These increases were offset somewhat by lower property tax
expense.

Furniture and equipment costs increased $2.4 million or 11.3 percent in
2001 primarily due to higher software maintenance and amortization primarily
related to the Corporation's e-commerce efforts and enhanced web site introduced
in November of 2000. In 2000, furniture and equipment costs increased $1.5
million or 7.7 percent, which was also primarily due to higher amortized
software and software maintenance.

Intangible amortization for 2001 includes $8.0 million of goodwill
amortization and $7.1 million of other intangible amortization, primarily
related to core deposit intangibles. Intangible amortization for 2000 includes
$7.9 million of goodwill amortization and $7.7 million of other intangible
amortization, primarily related to core deposit intangibles. The increase in
amortized goodwill was due to goodwill associated with acquisitions by FIA.
Other intangible amortization decreased due to the run-off of core deposit
intangibles associated with bank acquisitions in earlier years. See the
discussion in the Cash Earnings section on page 24 for a discussion of SFAS No.
142, which will impact intangible amortization expense effective in 2002.

The restructuring charges recorded in 2001 included separation and benefit
charges of $11.5 million related to a voluntary early retirement program
effective as of December 31, 2001, which was accepted by about four percent of
the staff. The $11.5 million charge consisted of approximately $6.0 million
related to additional pension benefits, $1.4 million associated with future
medical benefits, with the remainder due to cash payments based on length of
service. The restructuring charges also included $6.7 million due to the
freezing of the Corporation's defined benefit pension plan (replaced by a
deferred profit sharing plan). The remaining $1.7 million related to severance
and outplacement services for a two percent reduction in workforce. Anticipated
savings from the reduction in workforce and the voluntary early retirement
program ("ERW") are expected to be approximately $13.2 million in 2002. The
freeze of the defined benefit plan and its replacement by a deferred profit
sharing plan should reduce the volatility in retirement plan expense going
forward. However, the Corporation still has funding obligations related to the
defined benefit plan and could recognize retirement expense related to this plan
in future years, which would be dependent on the return earned on plan assets,
the level of interest rates and employee turnover.

Other non-interest expense increased $3.3 million or 4.1 percent during
2001 primarily due to higher professional, advertising, and travel expenses
related to the Corporation's fee business expansion efforts. Federal Reserve
service charges were also up from last year due to the lower rate environment,
as the Corporation paid more for services through fees than through the use of
balances held at the Federal Reserve. Somewhat offsetting this increase in
expenses was lower educational and telephone expense. Other non-interest expense
increased $3.6 million or 4.6 percent during 2000 and was broad-based throughout
several operational accounts including professional expenses, business
development and travel expenses.

21

RESULTS OF SEGMENT OPERATIONS
- -----------------------------

The Corporation's operations are managed along three Operating Segments:
Banking, the Financial Management Group ("FMG") and FSI, which began operations
in August of 1999. A description of each business and the methodologies used to
measure financial performance are described in Note U to the Consolidated
Financial Statements on page 71. The following table summarizes operating
earnings by Operating Segment for each of the last three years:

Banking

Operating earnings were $91.6 million for 2001, down 13.2 percent from
$105.6 million for 2000 and down from $93.4 million for 1999. The decrease in
operating earnings in 2001 versus 2000 reflects the impact of a $26.0 million
increase in the provision for possible loan losses, mainly related to a
deterioration of two large credits and continued uncertainty in the current
economic environment. The loan loss reserve was built to $72.9 million or 1.61
percent of period-end loans. Net interest income was lower due to the decline in
short-term interest rates, from 6.50 percent at the beginning of the year to
1.75 percent by year-end. The bank is primarily funded by non-interest bearing
demand deposits representing 33.3 percent of total deposits at year-end 2001.
This high level of demand deposits has been a positive for the bank's net
interest income in the past. In a falling rate environment, however, margin
compression can occur more rapidly as rates on this funding source cannot go any
lower.

Partially offsetting the adverse impacts of higher provision for loan
losses and lower net interest income were higher service charges on deposits,
increased insurance commissions, and the pre-tax gain of $5.7 million related to
the sale of an interest rate floor. The $9.9 million increase in service charges
on deposits, up 16.4 percent, over 2000 can be attributed to higher revenues
associated with both commercial and individual accounts and higher overdraft
fees partially offset by lower non-sufficient funds charges.

FIA, which is included in the banking operating segment, had gross revenues
of $18.8 million during 2001 as compared with $11.1 million in 2000. Insurance
commissions were the largest component of these revenues. The $7.1 million or
68.6 percent increase over 2000 reflects the acquisition on August 1, 2001 of
AIS and the full year impact of the acquisitions made in the third and second
quarters of 2000. It also reflects the impact of tightening insurance markets
for some products, as well as continued selling efforts. Referrals made by
employees across the organization, including commercial banking, are expected to
be an important source of growth for FIA. During 2001, FIA was successful on
about 60 percent of their proposals made to qualified referrals provided by
other employees of the bank.

There were no bank acquisitions during 2001 or 2000. Results for the year
2000 reflect the full year impact of the acquisition in May 1999 of PIA and the
two bank acquisitions made in the first and second quarters of 1999.

Financial Management Group

Operating earnings for 2001 were $11.4 million, compared to $16.2 million
for 2000 and $15.3 million for 1999. Net interest income was down $2.7 million
compared to the previous year as the lower rate environment has reduced the
funds transfer price paid on FMG's securities sold under repurchase agreements.
Total non-interest income was up $1.0 million from 2000. The leading component
of FMG non-interest income, trust

22

fees, were down slightly due to equity market conditions and the resulting
impact to investment fees, which represent approximately 75 percent of trust
fees. Other fees, not included in trust fees, such as brokerage commissions from
the sale of mutual funds, money markets and annuities, account for most of the
increase year over year. This was slightly offset by a decrease in brokerage
commissions from less sales of equities.

Operating expenses were up $3.0 million from last year. Most of the
increase was due to salaries and benefits, as well as litigation expenses and
sundry losses. Salaries and benefits were up, in part, to support business
initiatives within FMG through expansion of the brokerage sales force,
securities lending and fixed income management. Comparing 2000 to 1999, the
increase in operating earnings can be attributed to growth in investment fees
and oil and gas fees. While oil and gas fees were influenced by the higher
market prices of oil and gas, investment fees were positively impacted by a
larger fee base due to growth in the number of trust accounts combined with
increased market values associated with managed assets.

Frost Securities Inc.

FSI's operating loss of $3.7 million for 2001 increased from a $3.4 million
loss for 2000, and from a $2.4 million loss for less than a half year of
operations in 1999. Investment banking fees have been adversely impacted by
market conditions in the energy and technology sectors. Both years were further
impacted by expenses as the company continued to expand this business segment
during its startup phase. Total revenues were up $4.1 million or 63.9 percent
over 2000 driven primarily by equities sales commissions, which represented
about 90 percent of FSI's 2001 revenue. FSI revenues represented approximately
six percent of the Corporation's non-interest income during 2001.

Non-interest expenses for 2001 were up $4.5 million or 39.4 percent to $16
million. Approximately one half of the increase was in salaries and benefits
associated with an increase in overall average headcount of 23 percent
year-over-year. Also impacting higher salaries were increases in sales
commissions related to higher revenue from equity sales. Business development
expenses were up due to an increase in institutional sales marketing activity.
Clearing fees were higher as a result of increased commission revenue.
Additional market data and trading floor communication systems and recruiting
expenses also added to the increase in non-interest expenses. Staffing levels at
the end of 2001 included 46 employees compared to 43 at the end of 2000 and 28
at the end of 1999. As of year-end 2001 there were 39 energy and 24 technology
stocks under coverage.

Non-Banks

The reduction in operating loss for non-banks in 2001 was due to a decrease
in expenses relating to elimination of management bonuses. The increased loss in
2000 compared with 1999 was due to increased incentive compensation and fees for
professional services.

Restructuring Charges

The restructuring charges, after tax, recorded in 2001 included separation
and benefit charges of $7.5 million after tax related to a voluntary early
retirement program effective as of December 31, 2001, which was accepted by
about four percent of the staff. The $7.5 million after tax charge consisted of
approximately $3.9 million after tax related to additional pension benefits,
$900 thousand after tax associated with future medical benefits, with the
remainder due to cash payments based on length of service. The restructuring
charges also included $4.3 million after tax due to the freezing of the
Corporation's defined benefit pension plan (replaced by a deferred profit
sharing plan). The remaining $1.1 million after tax related to severance and
outplacement services for a two percent reduction in workforce.

23

INCOME TAXES
- ------------

Cullen/Frost recognized income tax expense of $40.2 million in 2001,
compared to $57.4 million in 2000, and $51.0 million in 1999. The effective tax
rate in 2001 was 33.18 percent compared to 34.54 percent in 2000 and 34.30
percent in 1999. The lower effective tax rate in 2001 compared to 2000 was
mainly due to an increase in tax exempt income resulting from the purchase of
bank owned life insurance during 2001. For a detailed analysis of the
Corporation's income taxes see Note O "Income Taxes" on page 65.

CASH EARNINGS
- -------------

Historically, excluding the merger with Overton Bancshares, Inc. in 1998,
the Corporation's acquisitions have been accounted for using the purchase method
of accounting, which results in the creation of intangible assets. These
intangible assets are deducted from capital in the determination of regulatory
capital. Thus, "cash" or "tangible" earnings represents the regulatory capital
generated during the year and can be viewed as net income excluding intangible
amortization, net of tax. While the definition of "cash" or "tangible" earnings
may vary by company, the Corporation believes this definition is appropriate as
it measures the per share growth of regulatory capital, which impacts the amount
available for dividends, acquisitions, and growth.

Statement of Financial Accounting Standards ("SFAS") No. 142, issued in
July 2001, replaces the practice of amortizing goodwill and indefinite lived
intangible assets with an annual review for impairment. See Note A "Accounting
Changes" section on page 49 for further discussion on this statement.

The following table reconciles reported earnings to net income excluding
intangible amortization ("cash" earnings) for each of the three most recent year
periods:

* Calculated as A/B
** Calculated as A/C
- ---------------------

24

SOURCES AND USES OF FUNDS
- -------------------------

Average assets for 2001 of $7.8 billion increased by 9.6 percent from 2000
levels and increased 4.0 percent between 1999 and 2000. Deposits remain the
primary source of funding for Cullen/Frost. Funding sources in 2001 reflected an
increase in demand deposits and other liabilities offsetting a decrease in time
deposits. In addition, borrowed funds increased due to the third quarter 2001
issuance by Frost Bank of $150 million of its 6 7/8 percent Subordinated Bank
Notes due 2011.

Demand deposits in particular have shown an improving trend over the three
year period, which has been a key factor in the Corporation's ability to
maintain a low cost of funds while funding loan growth. For 2001, average demand
deposits were 33.4 percent of total average deposits compared with 31.3 percent
during 2000, and 30.6 percent during 1999.

Loans continue to be the largest component of the earning assets mix.
However, non-earning assets increased 2.3 percent from levels a year ago because
of float associated with higher demand deposit balances. Non-earning assets
include cash, due from banks, banking premises, accrued interest and other
assets.

25

LOANS
- -----

Total period-end loans for 2001 were $4.5 billion, which were flat compared
to 2000. However, excluding shared national credits purchased ("SNCs"), 1-4
family residential mortgages and the indirect lending portfolio, loans increased
by 5.3 percent over 2000. The Corporation withdrew from the mortgage origination
business, as well as the indirect lending business during 2000, and these
portfolios continue to decrease through payoffs and refinancings. The SNCs
portfolio has decreased steadily over the past year. See NPA section on page 30
for further discussion. The mortgage and indirect portfolios are also discussed
in more detail later in this section.

At December 31, 2001, the majority of the loan portfolio was comprised of
real estate loans totaling $2.1 billion or 45.9 percent of total loans and the
commercial and industrial loan portfolio totaling $2.0 billion or 43.9 percent
of total loans. The real estate total includes both commercial and consumer
balances. At December 31, 2001 and 2000, the Corporation had no concentration,
by Standard Industrial Classification code ("SIC"), in any single industry that
exceeded 10 percent of total loans. The SIC code is a federally designed
standard numbering system identifying companies by industry. Cullen/Frost uses
the SIC code to categorize loans by the recipient's type of business. The
largest single concentration by SIC code at year-end

26

2001 was in energy at 6.5 percent of total loans. The following table
categorizes loan portfolio concentrations by SIC code, illustrating the
diversity in the Corporation's total loan portfolio:

The majority of the 5.3 percent growth in total loans over 2000 (excluding
SNCs, mortgage loans and indirect lending) was in the commercial and industrial
loan portfolio, which increased to $2.0 billion at year-end 2001. 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 appropriate collateral margins. The commercial and
industrial loan portfolio also includes the commercial lease portfolio and asset
based lending. At December 31, 2001, the commercial lease portfolio totaled
$41.0 million and asset based loans totaled $48.6 million. These totals are both
increases from December 31, 2000 balances of $40.0 million and $31.0 million,
respectively. In addition, at December 31, 2001, over 97 percent of the
outstanding balance of SNCs were included in the commercial and industrial
portfolio, with the remainder included in the real estate categories.

The Corporation had a total SNCs portfolio of approximately $237 million
outstanding at year-end 2001, which is down from $316 million at the previous
year end. Of the outstanding total at year-end 2001, approximately 35 percent
were energy related with the remainder diversified throughout various
industries. These participations are done in the normal course of business to
meet the needs of the Corporation's customers. General corporate policy towards
participations is to lend to companies either headquartered in or having
significant operations within our markets. In addition, the Corporation must
have an existing banking relationship or the expectation of broadening the
relationship with other bank products.

Total real estate loans at December 31, 2001 were $2.1 billion, down 2.9
percent from year-end 2000. However, excluding the decline in the 1-4 family
residential mortgage portfolio, which is discussed below, total real estate
loans remained relatively flat with year-end 2000. The commercial real estate
portfolio, which totals $1.5 billion, represents over 72 percent of the total
real estate loans at year-end 2001. The majority of this portfolio is commercial
real estate mortgages, which includes both permanent and intermediate term
loans. The diversity in the commercial real estate portfolio allows the
Corporation to reduce the impact of a

27

decline in any single industry. The following table reflects the concentration
by industry in the commercial real estate portfolio:

The primary focus of the commercial real estate portfolio has been the
growth of loans secured by owner-occupied properties. These loans are viewed
primarily as cash flow loans and secondarily as loans secured by real estate.
Consequently, these loans must undergo the analysis and underwriting process of
a commercial and industrial loan, as well as a commercial real estate loan. At
December 31, 2001, approximately 49 percent of the Corporation's commercial real
estate loans were secured by owner-occupied properties.

The consumer loan portfolio, including all consumer real estate, at
December 31, 2001 totaled $987 million, down 11.2 percent from year-end 2000.
However, excluding the decrease in the 1-4 family residential mortgage and the
indirect lending portfolios, total consumer loans increased by 2.1 percent. As
the following table illustrates, the consumer loan portfolio has four distinct
segments -- consumer real estate, consumer non-real estate, indirect consumer
loans and 1-4 family residential mortgages.

The majority of the 2.1 percent growth in consumer loans, excluding
mortgage and indirect lending, has occurred in the consumer real estate
portfolio, which primarily consists of home equity, home improvement and
residential lot loans. This segment has increased to $331 million at year-end
2001 from $321 million at the previous year-end. The Corporation offers home
equity loans up to 80 percent of the estimated value of the personal residence
of the borrower, less the value of existing mortgages and home improvement
loans. Home equity loans, which were allowed in the state of Texas beginning
January 1, 1998, account for almost half of the consumer real estate total at
year-end 2001.

The consumer non-real estate loan segment has grown to $346 million at
year-end 2001 from $342 million at year-end 2000. Loans in this segment include
automobile loans, unsecured revolving credit products, personal loans secured by
cash and cash equivalents, and other similar types of credit facilities.

The indirect consumer loan segment has continued to decrease by about $18
million per quarter since the Corporation's decision to discontinue originating
these types of loans during 2000. At December 31, 2001, the majority of the
portfolio was comprised of new and used automobile loans (60.1 percent of
total), as well as purchased home improvement and home equity loans (37.4
percent of total). The portfolio is not expected to

28

completely pay off by year-end 2002 due to the longer life of the non-auto loans
in this portfolio. However, the portfolio is expected to be substantially
reduced by that time.

The Corporation also discontinued originating 1-4 family residential
mortgage loans in 2000. These types of loans are now offered through the
Corporation's co-branding arrangement with GMAC Mortgage. At December 31, 2001,
the 1-4 family residential loan segment totaled $245 million down from $311
million at year-end 2000. Although this portfolio will continue to decline due
to the decision to withdraw from the mortgage origination business, the high
level of mortgage refinancings during 2001's falling interest rate environment
drove the substantial decrease during 2001.

The following table details the Corporation's total loan portfolio by a
regional breakout at year-end 2001 and 2000. The "Other portfolios" category
includes indirect lending, 1-4 family residential mortgages, SNCs and student
loans. The decreases in the major components of this category have been
previously discussed.

The majority of the 2001 loan growth in dollars occurred in the higher
growth markets of Fort Worth/ Dallas and Houston, two important and growing
Texas markets. Part of this growth results from the fact that the Corporation
has a smaller market share in these regions. The Corporation has sought to
expand its market share by (i) hiring new loan officers, primarily from banks
with larger market shares and (ii) growing business through customers who
previously did business with banks with larger market share in these regions.
The loan decline in the San Antonio region is reflective of the mature market
share that the Corporation has achieved in its headquarters market. The growth
in the Austin region remained relatively flat for 2001 from 2000, mainly due to
the overall slowing economy in that market, heavily influenced by the decline in
their technology sector.

Loans from Mexico are secured by liquid assets held in the United States
were $10.8 million, $16.8 million, and $17.9 million for the years ended 2001,
2000, and 1999, respectively. Cullen/Frost's cross-border outstandings to Mexico
excluding these loans totaled $63 thousand, $490 thousand and $2.4 million at
December 31, 2001, 2000, and 1999, respectively. At December 31, 2001 and 2000,
none of the Mexico-related loans were on non-performing status compared to $342
thousand at December 31, 1999.

LOAN COMMITMENTS
- ----------------

In the normal course of business, in order to meet the financial needs of
its customers, Cullen/Frost is a party to financial instruments with off-balance
sheet risk. These include commitments to extend credit and standby letters of
credit which commit the Corporation to make payments to or on behalf of
customers when certain specified future events occur. Both arrangements have
credit risk essentially the same as that involved in extending loans to
customers and are subject to the Corporation's normal credit policies.
Collateral is obtained based on management's credit assessment of the customer.
Commitments to extend credit and standby letters of credit amounted to $2.3
billion and $123.5 million, respectively, at December 31, 2001, and $2.1 billion
and $105.8 million respectively, at December 31, 2000. Commercial and industrial
loan commitments represent approximately 75 percent and 69 percent of the total
loan commitments outstanding at December 31, 2001 and 2000. Acceptances due from
customers at December 31, 2001 were $3.9 million.

29

NON-PERFORMING ASSETS
- ---------------------

Non-performing assets were $37.4 million at December 31, 2001, compared
with $18.9 million at December 31, 2000 and $18.8 million at December 31, 1999.
The increase from last year is due to two large SNCs that went on non-accrual
status during 2001. One loan, to an electronics distribution company, went on
non-accrual status during the first quarter. Approximately $13 million of this
credit has been charged-off with $6.3 million remaining in non-accrual loans.
The second loan, which went on non-accrual status in the third quarter, was made
to a private company in the marketing and sales promotion industry, an industry
that was dramatically affected by the terrorist attack on September 11, 2001.
Approximately $9 million of the second loan has been charged-off with $8.2
million remaining in non-accrual loans. Non-performing assets include
non-accrual loans and foreclosed assets. Loans upon which interest income is not
currently accrued because of the borrower's financial problems are classified as
non-accrual. Foreclosed assets represent property acquired as the result of
borrower defaults on loans. Non-performing assets as a percentage of total loans
and foreclosed assets were .83 percent at December 31, 2001, compared to .42
percent one year ago. In addition, non-performing assets as a percentage of
total assets were .45 percent at year end 2001 compared to .25 percent at
year-end 2000. The Corporation anticipates non-performing assets as a percentage
of total assets for 2002 to range plus or minus 10 percent of year-end 2001
levels.

Cullen/Frost did not have any restructured loans for the years ended December
31, 2001-1997.

Interest income that would have been recorded in 2001 on non-performing assets,
had such assets performed in accordance with their original contract terms, was
$2.4 million on non-accrual loans and $181 thousand on foreclosed assets. During
2001, the amount of interest income actually recorded on non-accrual loans was
$913 thousand.

There were no foreign loans 90 days past due as of December 31, 2001.

Loans to a customer whose financial condition has deteriorated are
considered for non-accrual status whether or not the loan is 90 days or more
past due. All non-consumer loans 90 days or more past due are classified as
non-accrual unless the loan is well secured and in the process of collection.
When a loan is placed on non-accrual status, interest income is not recognized
until collected, and any previously accrued but uncollected interest is
reversed. A loan is considered as restructured if it has been modified as to
original terms, resulting in a reduction or deferral of principal and/or
interest as a concession to the debtor that the creditor would not otherwise
consider. Classification of an asset in the non-performing category does not
preclude ultimate collection of loan principal or interest.

Potential problem loans consist of loans that are performing in accordance
with contractual terms but for which management has serious concerns about the
ability of an obligor to continue to comply with repayment terms because of the
obligor's potential operating or financial difficulties. At December 31, 2001,
Cullen/Frost had $4.2 million in loans of this type which had not been included
in either of the non-accrual or 90 days past due loan categories. Subsequent to
December 31, 2001, the Corporation has placed $2.5 million of these loans

30

on non-performing status. Management monitors such loans closely and reviews
their performance on a regular basis.

ALLOWANCE FOR POSSIBLE LOAN LOSSES
- ----------------------------------

The allowance for possible loan losses was $72.9 million or 1.61 percent of
period-end loans at December 31, 2001, compared to $63.3 million or 1.40 percent
of period-end loans at year-end 2000. The allowance for possible loan losses as
a percentage of non-accrual loans was 219.5 percent at December 31, 2001,
compared with 379.7 percent at December 31, 2000.

Cullen/Frost recorded a $40.0 million provision for possible loan losses
during 2001, compared to $14.1 million and $12.4 million recorded during 2000
and 1999, respectively. The increase in the provision for possible loan losses
was due to the two previously discussed SNC loans and reflected the increased
uncertainty in the economy since the terrorist acts of September 11, 2001
combined with the economic downturn already in progress at that time. The
allowance for loan losses is maintained at a level considered appropriate by
management, based on estimated probable losses in the loan portfolio. The
allowance consists of three elements: (i) allowances established for potential
losses on specific loans, (ii) allowances based on historical loan loss
experience, for similar loans with similar loan characteristics, and trends, and
(iii) unallocated allowances, not allocated to loans or a group of loans, but
instead based on general economic conditions and other internal and external
risk factors in the Corporation's individual markets.

The specific allowances are based on a regular analysis and evaluation of
criticized loans. The quality of loans are determined based on an internal
credit risk grading process that evaluates: the obligor's ability to repay, the
underlying collateral, if any, and the economic environment and industry in
which the obligor operates. This analysis is performed at the relationship
manager level for all commercial loans. Obligors whose calculated grade is below
a predetermined grade are viewed as criticized. Once criticized, a loan is
analyzed (at least quarterly) by a special assets officer to determine if a
specific allowance is needed. Specific allocations are based on an obligor's
inability or unwillingness to repay, collateral deficiencies and risk grade,
and/or the state of the borrower's industry. If a specific allowance is not
assigned to a criticized loan, and it is not determined impaired, it is included
in the historical allowance portion of the process for loans with similar
characteristics.

Historical allowances are determined statistically using a loss analysis
that examines loss experience of the portfolio in total, by specific loan types
and the related internal grading of loans charged-off. This loss analysis is
periodically updated based on actual experience. This analysis is performed on
several groups of loans including unfunded loan commitments. Thereby, several
historical allowance pools result. Specifically, historical allowance pools
exist for commercial real estate loans, commercial and industrial loans,
consumer loans and 1-4 family residential mortgages.

Unallocated allowances based on general economic conditions and other
internal and external risk factors are determined by evaluating the experience,
ability and effectiveness of the bank's lending management and staff,
effectiveness of lending policies and procedures and internal controls, changes
in asset quality, changes in loan portfolio volume, composition and
concentrations of credit, impact of competition on loan structuring and pricing,
effectiveness of the internal loan review, impact of environmental risks on
portfolio risks, and impact of rising interest rates on portfolio risk.
Quarterly, senior management evaluates the degree of risk that each one of these
components has on the quality of the loan portfolio. Each component is
determined to have either a high, moderate or low degree of risk. The results
are then input into a "general allocation matrix" to determine the unallocated
general allowance. While the loss analysis for the historical allowance is
performed annually, the Corporation may revise the general allocation factors
whenever necessary in order to address improving or deteriorating credit quality
trends or events; or recognize specific risks associated with a given loan
concentration or pool classification. In addition, an audit committee of
non-management directors reviews the adequacy of the allowance for possible loan
losses quarterly.

31

Cullen/Frost recorded net charge-offs of $30.4 million for the year ended
December 31, 2001, compared to net charge-offs of $9.2 million and $8.8 million
in 2000 and 1999, respectively. Charge-offs are loan balances that have been
written off against the reserve for loan losses once the loan is determined to
be uncollectible. As a percentage of average loans, net charge-offs were .67
percent for 2001 compared to .21 percent last year. The Corporation's gross
charge-offs in 2001 consisted primarily of commercial and industrial loans,
which increased $25.1 million to $32.1 million, and consumer loans, which
decreased $1.3 million to $4.3 million. The increase in commercial and
industrial loan charge-offs is associated with two large SNC non-accrual loans
(previously discussed in the Non-Performing Assets section on page 30). The
Corporation's gross charge-offs in 2000 consisted primarily of commercial and
industrial loans, which increased $1.7 million to $7.0 million, and consumer
loans, which decreased $1.8 million to $5.6 million. The decrease in consumer
charge-offs for 2001 and 2000 is related to lower indirect lending charge-offs,
a product that the company stopped originating in 2000.

* There were no foreign charge-offs in 2001-1997.

32

Cullen/Frost has certain lending policies and procedures in place that are
designed to maximize loan income within an acceptable level of risk. These
policies and procedures, some of which are described below, are reviewed
regularly by senior management. A reporting system supplements this review
process by providing management and the board of directors with frequent reports
related to loan production, loan quality, concentrations of credit, loan
delinquencies and non-performing and potential problem loans. Diversification in
the loan portfolio is a means of managing risk associated with fluctuations in
economic conditions.

Commercial and industrial loans are underwritten after evaluating and
understanding the borrower's ability to operate profitably and prudently expand
their business. Once it is determined that the borrower's management possesses
sound ethics and solid business acumen, current and projected cash flows are
examined to determine the ability to repay their obligations as agreed.
Underwriting standards are designed to promote relationship banking rather than
transactional banking. While some short-term loans may be made on an unsecured
basis, most are secured by the assets being financed with appropriate collateral
margins.

The diversity of the Corporation's commercial real estate portfolio allows
it to reduce the impact of a decline in a single market or industry. Management
monitors and evaluates commercial real estate loans based on collateral,
geography and risk grade criteria. As a general rule, single purpose projects
are avoided unless other underwriting factors are present to help mitigate the
risk. The Corporation also utilizes the knowledge of third-party experts to
provide insight and guidance about the economic conditions and dynamics of the
markets served by the Corporation. In addition, management closely tracks the
level of owner-occupied commercial real estate loans versus non-owner occupied
loans. At December 31, 2001, 49 percent of the Corporation's commercial real
estate loans were 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 withstand the analysis of a commercial loan and
the underwriting process of a commercial real estate loan.

Loans secured by non-owner occupied commercial real estate are made to
developers and builders who have a relationship with Cullen/Frost and who have a
proven record of success. These loans are underwritten through the use of
feasibility studies, independent appraisal reviews, sensitivity analysis of
absorption and lease rates and financial analysis of the developers and property
owners. Sources of repayment for these types of loans may be pre-committed
permanent loans from approved long-term lenders, sales of developed property or
an interim mini-perm loan commitment from the Corporation until permanent
financing is obtained. These loans are closely monitored by on-site inspections
and are considered to have higher risks than other real estate loans due to
their ultimate repayment being sensitive to interest rate changes, general
economic conditions and the availability of long-term financing.

A computer-based credit scoring analysis is used to supplement the consumer
loan underwriting process. To monitor and manage consumer loan risk, policies
and procedures are developed and modified, as needed, jointly by line and staff
personnel. This activity, coupled with relatively small loan amounts that are
spread across many individual borrowers, minimizes the risk. Additionally, trend
and outlook reports are provided to senior management on a frequent basis to aid
in planning. Underwriting standards for home equity loans are heavily influenced
by statutory requirements, which include but are not limited to, maximum
loan-to-value percentage, collection remedies, the number of such loans a
borrower can have at one time and documentation requirements.

33

Cullen/Frost has an independent Loan Review Division that reviews and
validates the credit risk program on a periodic basis. Results of these reviews
are presented to senior management and the board of directors. Loan Review's
function complements and reinforces the risk identification and assessment
decisions made by lenders and credit personnel, as well as the Corporation's
policies and procedures.

Loans identified as losses by management, internal loan review and/or bank
examiners are charged-off. Furthermore, consumer loan accounts are charged-off
automatically based on regulatory requirements.

An allowance for possible loan losses is maintained in an amount which, in
management's judgment, provides an adequate reserve to absorb probable credit
losses related to specifically identified loans as well as loan losses inherent
in the remainder of the loan portfolio that have been incurred as of the balance
sheet date.

Allocation of a portion of the allowance does not preclude its availability
to absorb losses in other categories.

34

SECURITIES
- ----------

Total securities, including securities available for sale, were $2.2
billion at year-end 2001 compared to $1.7 billion a year ago, and consist
primarily of obligations of U.S. Government agencies. Securities available for
sale totaled $2.1 billion at December 31, 2001, compared to $1.6 billion at
year-end 2000. Available for sale securities are stated at fair value, with
unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity. Securities held to maturity totaled $51 million at
December 31, 2001 compared to $71 million at December 31, 2000. Securities
classified as held to maturity are carried at amortized cost. Debt securities
are classified as held to maturity when Cullen/Frost has the positive intent and
ability to hold the securities to maturity. The remaining securities are
classified as trading and are carried at fair value. Trading securities were
$118 thousand at December 31, 2001 compared to $2.5 million at December 31,
2000. Trading securities held primarily for sale in the near term are valued at
their fair values, with unrealized gains and losses included immediately in
other income.

The average yield of the securities portfolio for the year ended December
31, 2001 was 6.33 percent compared with 6.84 percent for 2000. See page 79
"Maturity Distribution and Securities Portfolio Yields" for additional
information on end of period securities.

Total securities including trading, available for sale and held to maturity
are summarized below:

35

DEPOSITS
- --------

Total average demand deposits increased 15.3 percent from 2000. Most of the
increase came in commercial and individual accounts, which increased $247.3
million or 15.1 percent. Approximately 62 percent of the increase in commercial
and individual deposit levels is related to a large mortgage originator and
servicing customer for which Cullen/Frost is the depository and clearing bank.
The remaining portion of the increase is attributable to broad based growth and
was not impacted by a banking acquisition. Cullen/Frost continues to maintain
good relationships with correspondent banks in the markets it serves. These
relationships along with market conditions are the primary reason for the
increase of $35 million or 15.4 percent in correspondent bank deposit levels
from a year ago. Reflective of Cullen/Frost's commitment to relationships and
full-service business banking is the high level of average demand deposits as a
percentage of total deposits. Average demand deposits for 2001 were 33.4 percent
of total deposits compared to 31.3 percent for 2000.

Total average time deposits increased $210.2 million or 5.1 percent from a
year ago. The largest increase of $122.4 million or 7.2 percent was in money
market deposit accounts. During 2000, Cullen/Frost simplified its retail deposit
products and offered a new money market index account. The money market index
account requires the maintenance of certain balances in a checking account and
offers a higher-yielding money fund with rates based on an external index. The
money market index account had $545 million in average deposits for 2001
compared with $162 million for 2000. In addition, public funds increased $55.7
million or 22.2 percent with jumbo certificate of deposits representing the
largest category of public funds and accounting for $35.9 million of the
increase. These increases were offset by a decline in consumer time accounts
under $100,000 of $18.1 million or 3.2 percent.

36

The table below provides average deposits and related growth by geographic
market primarily excluding correspondent bank deposits.

The following table summarizes the certificates of deposit in amounts of
$100,000 or more as of December 31, 2001 by time remaining until maturity.

Other time deposits of $100,000 or more were $172.3 million at December 31,
2001. Of this amount 67.2 percent matures within three months, 27.1 percent
matures between three and six months and the remainder matures between six
months and one year.

Mexico has been considered a part of the natural trade territory of the
banking offices of Cullen/Frost for over 90 years. Thus, dollar-denominated
foreign deposits from Mexican sources have traditionally been a significant
source of funding. The Corporation's average foreign deposits increased 1.2
percent from 2000.

SHORT-TERM BORROWINGS
- ---------------------

The Corporation's primary source of short-term borrowings is Federal funds
purchased from correspondent banks and securities sold under repurchase
agreements in the natural trade territory of Frost Bank, as well as from
upstream banks. The net purchase position, experienced for the last four years,
is primarily the result of continued growth in earning assets over core deposit
growth. Core deposits are deposits that have traditionally been stable,
including all deposits other than time deposits of $100,000 or more and foreign
deposits. The reduction in this position during 2001 resulted from the
Corporation's use of funds acquired from the issuance of $150 million of Bank
Notes in August by Frost Bank. The weighted-average interest rate on Federal
funds purchased at December 31, 2001 and 2000 was 1.49 percent and 6.31 percent,
respectively.

37

Generally, the interest rates on securities sold under repurchase agreements are
a percentage of the Federal funds rate.

In addition, Cullen/Frost had average borrowings from the Federal Home Loan
Bank of $31.4 million, $32.1 million and $12.1 million for 2001, 2000 and 1999,
respectively. See Note I on page 56 for further discussion.

CAPITAL AND LIQUIDITY
- --------------------------------------------------------------------------------

At December 31, 2001, shareholders' equity was $594.9 million, which was an
increase of 3.8 percent from $573.0 million at December 31, 2000. In addition to
net income of $80.9 million, activity in 2001 included $43.3 million of
dividends paid and $10.4 million paid for repurchasing shares of the
Corporation's common stock. The unrealized loss on securities available for sale
and additional minimum pension liability, net of deferred taxes, was $14.0
million as of December 31, 2001 compared to an unrealized loss of $4.0 million
as of December 31, 2000, which had the effect of decreasing capital by $10.0
million. Currently, under regulatory requirements, the unrealized gain or loss
on securities available for sale does not reduce regulatory capital and is not
included in the calculation of risk-based capital and leverage ratios.

Cullen/Frost paid a quarterly dividend of $.195 per common share during the
first quarter of 2001. During the second quarter of 2001 the Corporation raised
its cash dividend 10.3 percent to .215 for the second, third, and fourth
quarters of 2001. The Corporation paid a quarterly dividend of $.175 per common
share during the first quarter of 2000 increasing to $.195 per common share
during the second, third, and fourth quarters of 2000. The dividend payout ratio
was 53.5 percent for 2001 compared to 36.3 percent for 2000. In addition, the
Corporation announced in 2001 that its board of directors had authorized the
repurchase of up to 2.6 million shares of its common stock over a two-year
period from time to time at various prices in the open market or through private
transactions. As of December 31, 2001, 398 thousand shares worth $10.4 million
had been repurchased under this program.

The Federal Reserve Board utilizes capital guidelines designed to measure
Tier 1 and Total Capital and take into consideration the risk inherent in both
on-balance sheet and off-balance sheet items. For Cullen/ Frost's capital ratios
at December 31, 2001 and 2000, see Note L "Capital" on page 58.

Liquidity measures the ability to meet current and future cash flow needs
as they become due. Cullen/ Frost seeks to ensure that these needs are met at a
reasonable cost by maintaining a level of liquid funds through asset/liability
management. Asset liquidity is provided by liquid assets which are readily
marketable or pledgeable or which will mature in the near future. Liquid assets
include cash, short-term time deposits in banks, securities available for sale,
maturities and cash flow from securities held to maturity, and Federal funds
sold and securities purchased under resale agreements.

38

Liability liquidity is provided by access to funding sources which include
core deposits and correspondent banks in Cullen/Frost's natural trade area that
maintain accounts with and sell Federal funds to Frost Bank, as well as Federal
funds purchased and securities sold under repurchase agreements from upstream
banks. The liquidity position of Cullen/Frost is continuously monitored and
adjustments are made to the balance between sources and uses of funds as deemed
appropriate.

INTEREST RATE SWAPS/FLOOR
- --------------------------------------------------------------------------------

Cullen/Frost uses interest rate swaps and floors to hedge its interest rate
risk. The Corporation had 43 fair value type commercial loan/lease interest rate
swaps with a notional amount of $119 million at December 31, 2001 and 34
commercial loan/lease interest rate swaps with a notional amount of $211 million
at December 31, 2000. In 2001 and 2000, each swap was a hedge against a specific
commercial fixed-rate loan/lease or against a specific pool of commercial
floating-rate loans with lives ranging from approximately one month to ten
years. For 2001 and 2000, the scheduled reductions of the interest rate swaps'
notional amount generally matched the expected amortization of the underlying
loan/lease or pool of loans.

In 2000, the Corporation entered into an interest rate floor three-year
agreement with a notional amount totaling $1 billion. The interest rate floor
was a hedge of interest rate exposure associated with commercial loan accounts
in an environment of falling rates. The floor agreement was sold during the
first quarter of 2001. Under new accounting rules (see "Accounting Changes" on
page 49) adopted on January 1, 2001, the interest rate floor did not qualify for
hedge accounting treatment and in management's opinion would have introduced
excessive volatility into earnings. For a discussion on the gain from the sale
see Note S on page 69.

In 2001 Cullen/Frost entered into a fair value type interest rate swap
agreement related to the $150 million fixed rate subordinated debt issued in
2001. The swap agreement has an effective notional amount of $150 million over a
period of five years.

In 2001, the Corporation's derivative financial instruments used in hedging
activities were all designated as fair value type hedges, which were required to
meet specific criteria. For fair value type hedges, the changes in fair values
of both the hedging derivative and the hedged item were recorded in current
earnings as other income or other expense and were immaterial in 2001. When a
fair value type hedge no longer qualifies for hedge accounting, previous
adjustments to the carrying value of the hedged item are reversed immediately to
current earnings and the hedge is reclassified to a trading position recorded at
fair value.

Interest rate swap and floor contracts involve the risk of dealing with
counterparties and their ability to meet contractual terms. Each counterparty to
a swap transaction is approved by Cullen/Frost's Asset/ Liability Management
Committee ("ALCO" or the "Committee") and has a credit rating that is investment
grade. The net amount payable or receivable under interest rate swaps/floors is
accrued as an adjustment to interest income and was not material in 2001, 2000
or 1999. Effective January 1, 2001, Cullen/Frost has adopted SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" (See "Accounting
Changes" on page 49.)

MARKET RISK DISCLOSURE -- INTEREST RATE SENSITIVITY
- --------------------------------------------------------------------------------

Market risk is the potential loss arising from adverse changes in the fair
value of a financial instrument due to the changes in market rates and prices.
In the ordinary course of business, Cullen/Frost's market risk is primarily that
of interest rate risk. The Corporation's interest rate sensitivity and liquidity
are monitored on an ongoing basis by the ALCO committee. The Committee seeks to
avoid fluctuating net interest margins and to maximize net interest income
within acceptable levels of risks through periods of changing interest rates. A
variety of measures are used to provide for a comprehensive view of the
magnitude of interest rate risk, the distribution of risk, level of risk over
time and exposure to changes in certain interest rate relationships.

Cullen/Frost utilizes an earnings simulation model as the primary
quantitative tool in measuring the amount of interest rate risk associated with
changing market rates. The model quantifies the effects of various interest rate
scenarios on the projected net interest income and net income over the ensuing
12-month period.
39

The model was used to measure the impact on net interest income relative to a
base case scenario, of rates increasing ratably 200 basis points or decreasing
ratably 50 basis points (due to the already low level of short term rates) over
the next 12 months. These simulations incorporate assumptions regarding balance
sheet growth and mix, pricing and the repricing and maturity characteristics of
the existing and projected balance sheet. The impact of interest rate swaps is
included in the model. Other interest rate-related risks such as prepayment,
basis and option risk are also considered. The resulting model simulations show
that a 200 basis point increase in rates will result in a positive variance in
net interest income of 4.2 percent relative to the base case over the next 12
months; while a decrease of 50 basis points will result in a negative variance
in net interest income of 0.6 percent. This compares to last year's estimate
when a 200 basis points increase in rates resulted in a positive variance in net
interest income of 0.9 percent relative to the base case over the next 12
months, while a decrease of 200 basis points resulted in a negative variance in
net interest income of 1.8 percent. The Corporation's trading portfolio is
immaterial, and, as such, separate quantitative disclosure is not presented.

The Committee continuously monitors and manages the balance between
interest rate-sensitive assets and liabilities. The objective is to manage the
impact of fluctuating market rates on net interest income within acceptable
levels. In order to meet this objective, management may lengthen or shorten the
duration of assets or liabilities or enter into derivative contracts to mitigate
potential market risk.

PARENT CORPORATION
- --------------------------------------------------------------------------------

Historically, a large portion of the parent Corporation's income, which
provides funds for the payment of dividends to shareholders and for other
corporate purposes, has been derived from Cullen/Frost's investments in
subsidiaries. The amount of dividends received from Frost Bank is based upon its
earnings and capital position. See Note K "Dividends" on page 57. Management
fees are not assessed.

NON-BANKING SUBSIDIARIES
- --------------------------------------------------------------------------------

The New Galveston Company is a second-tier wholly-owned financial holding
company subsidiary, which holds all shares of each banking and non-banking
subsidiary. Cullen/Frost has four principal non-banking subsidiaries. Frost
Securities, Inc., an investment banking subsidiary based in Dallas, Texas offers
a full range of services including financial advisory services, mergers and
acquisitions support, equity research, institutional equity sales and trading.
The firm provides institutional investors with in-depth research coverage in
energy and communications technology. Main Plaza Corporation occasionally makes
loans to qualified borrowers. Such loans are typically funded with borrowings
against Cullen/Frost's current cash or borrowings against credit lines. Daltex
General Agency, Inc., a managing general insurance agency, provides vendor's
single interest insurance for Cullen/Frost subsidiary banks. Cullen/Frost
Capital Trust I is a Delaware statutory trust. The sole purpose of the trust was
to issue Capital Securities and lend the proceeds back to the Corporation on a
long term basis. This structure allowed the Corporation to obtain Tier 1
regulatory capital on a tax advantaged basis. The subsidiary is consolidated and
the capital is recorded in the liability section of the balance sheet.

SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------

Frost Bank has signed a definitive agreement to acquire the Harlingen
branch of JPMorgan Chase Bank. This acquisition allows the Corporation to expand
its presence in the Rio Grande Valley, which began when it acquired Valley
Bancshares and its bank in McAllen, Valley National Bank in 1995. A second
McAllen location was opened in 1997.

Frost Bank will assume approximately $20 million in deposits associated
with the Harlingen branch. Completion of the acquisition is expected to occur
during the second quarter, following regulatory approval, at which time the
Harlingen location will become a Frost Bank financial center.

40

CRITICAL ACCOUNTING POLICIES
- --------------------------------------------------------------------------------

The Securities and Exchange Commission ("SEC") recently issued guidance for
the disclosure of "critical accounting policies". The SEC defines "critical
accounting policies" as those that are most important to the portrayal of a
company's financial condition and results, and require management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.

Cullen/Frost follows financial accounting and reporting policies that are
in accordance with accounting principles generally accepted in the United States
of America ("GAAP"). The more significant of these policies are summarized in
Note A, Summary of Accounting Policies, on page 47. Not all these significant
accounting policies require management to make difficult, subjective or complex
judgments. However, the policies noted below could be deemed to meet the SEC's
definition of critical accounting policies.

Management considers the policies related to the allowance for possible
loan losses as the most critical to the financial statement presentation. The
total allowance for possible loan losses includes activity related to allowances
calculated in accordance with Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and
activity related to other loan loss allowances determined in accordance with
SFAS No. 5, "Accounting for Contingencies." The allowance for possible loan
losses is established through a provision for possible loan losses charged to
current operations. The amount maintained in the allowance reflects management's
continuing assessment of the potential losses inherent in the portfolio based on
evaluations of industry concentrations, specific credit risks, loan loss
experience, current loan portfolio quality, present economic, political and
regulatory conditions and unidentified losses inherent in the current loan
portfolio. Certain non-homogeneous loans are accounted for under the provisions
of SFAS No. 114. This standard requires an allowance to be established as a
component of the allowance for loan losses for certain loans when it is probable
that all amounts due pursuant to the contractual terms of the loan will not be
collected. In these situations a reserve is recorded when the carrying amount of
the loan exceeds the discounted cash flows using the loan's initial effective
interest rate or the fair value of the collateral for certain collateral
dependent loans. Income on impaired loans is recognized based on the
collectability of the principal amount. See "Allowance for Possible Loan Losses"
beginning on page 31 for further discussion of the risk factors considered by
management.

41

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
- ---------------------------------------------------

The management of Cullen/Frost Bankers, Inc. is responsible for the
preparation of the financial statements, related financial data and other
information in this annual report. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States and include amounts based on management's estimates and judgment
where appropriate. Financial information appearing throughout this annual report
is consistent with the financial statements.

In meeting its responsibility both for the integrity and fairness of these
financial statements and information, management depends on the accounting
systems and related internal accounting controls that are designed to provide
reasonable assurances that transactions are authorized and recorded in
accordance with established procedures, that assets are safeguarded and that
proper and reliable records are maintained.

The concept of reasonable assurance is based on the recognition that the
cost of a system of internal controls should not exceed the related benefits. As
an integral part of the system of internal controls, Cullen/ Frost maintains an
internal audit staff, which monitors compliance with and evaluates the
effectiveness of the system of internal controls and coordinates audit coverage
with the independent auditors.

The Audit Committee of Cullen/Frost's Board of Directors, which is composed
entirely of directors independent of management, meets regularly with
management, regulatory examiners, internal auditors, the asset review staff and
independent auditors to discuss financial reporting matters, internal controls,
regulatory reports, internal auditing and the nature, scope and results of the
audit efforts. Internal Audit and Asset Review report directly to the Audit
Committee. The banking regulators, internal auditors and independent auditors
have direct access to the Audit Committee.

The consolidated financial statements have been audited by Ernst & Young
LLP, independent auditors, who render an independent opinion on management's
financial statements. Their appointment was recommended by the Audit Committee
and approved by the Board of Directors and this approval was ratified by the
shareholders. The audit by the independent auditors provides an additional
assessment of the degree to which Cullen/Frost's management meets its
responsibility for financial reporting. Their opinion on the financial
statements is based on auditing procedures, which include their consideration of
internal controls and performance of selected tests of transactions and records,
as they deem appropriate. These auditing procedures are designed to provide an
additional reasonable level of assurance that the financial statements are
fairly presented in conformity with generally accepted accounting principles in
all material respects.

/s/ DICK EVANS /s/ PHILLIP D. GREEN
Dick Evans Phillip D. Green
Chairman and Chief Group Executive Vice President
Executive Officer and Chief Financial Officer

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ---------------------------------------------------------------------
The information required by this Item is set forth in the section entitled
"Market Risk Disclosure -- Interest Rate Sensitivity" included under Item 7 of
this document on page 39, and is incorporated herein by reference.

42

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)

See notes to consolidated financial statements.

43

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)

See notes to consolidated financial statements.

44

CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

See notes to consolidated financial statements.

45

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)

See notes to consolidated financial statements.

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A -- SUMMARY OF ACCOUNTING POLICIES
- ----------------------------------------

Cullen/Frost Bankers, Inc. ("Cullen/Frost" or the "Corporation") is a
financial holding company that provides, through its subsidiaries a broad array
of products and services throughout 11 Texas markets. In addition to general
commercial 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 accounting and reporting policies followed by Cullen/Frost are in
accordance with accounting principles generally accepted in the United States
and conform to general practices within the banking industry. The more
significant accounting and reporting policies are summarized below.

BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of Cullen/Frost and its wholly-owned subsidiaries. Condensed parent
company financial statements reflect investments in subsidiaries using the
equity method of accounting. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to make prior years comparable.

USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. See the Allowance for Possible Loan Losses section for an
important use of estimates.

SECURITIES -- Securities are classified as held to maturity and carried at
amortized cost when Cullen/Frost has the intent and ability to hold the
securities until maturity. Securities held for resale in anticipation of
short-term market movements are classified as trading and are carried at market
value with both net realized and unrealized gains and losses included in other
income during the period. Securities to be held for indefinite periods of time
are classified as available for sale and stated at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity. When a security is sold, its adjusted carrying value is
used to compute the gain or loss on the sale. Declines in value other than
temporary declines are adjusted against the security with a charge to
operations.

LOANS -- Interest on loans is accrued and accreted to operations based on
the principal amount outstanding. Interest on certain consumer loans is
recognized over their respective terms using a method that approximates the
interest method. Loan origination fees and certain direct costs of originated
loans are amortized as an adjustment to the yield over the term of the loan in
accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases". In addition, unearned discounts are also amortized. Loan commitment
fees for commitment periods greater than one year are deferred and amortized
into fee income on a straight-line basis over the commitment period. At December
31, 2001, net unamortized deferred costs were approximately $1.6 million.

Generally, loans are placed on non-accrual status if principal or interest
payments become 90 days past due and/or management deems the collectability of
the principal and/or interest to be in question, as well as when required by
regulatory provisions. Once interest accruals are discontinued, accrued but
uncollected interest is charged to current year operations. Subsequent receipts
on non-accrual loans are recorded as a reduction of principal, and interest
income is recorded only once principal recovery is reasonably assured. Loans
that are determined to be uncollectible are charged to the allowance for
possible loan losses. Management continually reviews the collectability of
loans.

ALLOWANCE FOR POSSIBLE LOAN LOSSES -- Management considers this to be an
important estimate. The amount maintained in the allowance for possible loan
losses reflects management's continuing assessment of the potential losses
inherent in the portfolio based on evaluations of industry concentrations,
specific credit risks, loan loss experience, current loan portfolio quality,
present economic, political and regulatory conditions and unidentified losses
inherent in the current loan portfolio. Determination of the allowance for
possible loan

47

losses is inherently subjective, as it requires significant estimates. The
allowance consists of three elements: (i) allowances established for potential
losses on specific loans, (ii) allowances based on historical loan loss
experience, for similar loans with similar loan characteristics, and trends, and
(iii) unallocated allowances, not allocated to loans or a group of loans, but
instead based on general economic conditions and other internal and external
risk factors in the Corporation's individual markets. The allowance for possible
loan losses is established through a provision for possible loan losses charged
to current operations based on factors previously mentioned. The allowance for
possible loan losses incorporates the results of measuring impaired loans in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan" and activity related to other
loan loss allowances determined in accordance with SFAS No. 5, "Accounting for
Contingencies." Certain loans that are not similar in nature or kind are
accounted for under the provisions of SFAS No. 114. This standard requires an
allowance to be established as a component of the allowance for loan losses for
certain loans when it is probable that all amounts due pursuant to the
contractual terms of the loan will not be collected and the recorded investment
in the loan exceeds the fair value. The allowance for possible loan losses
related to loans that are impaired as defined by SFAS No. 114 is generally based
on the fair value of the collateral for certain collateral dependent loans or
discounted cash flows using the loan's initial effective interest rate. Income
on impaired loans, which are non-accrual loans greater than or equal to $250
thousand, is recognized based on the collectability of the principal amount.

FORECLOSED ASSETS -- Foreclosed assets consist of property that has been
formally repossessed. Collateral obtained through foreclosure is recorded at the
lower of fair value less estimated selling costs or the book value of the loan
prior to foreclosure. Write-downs are provided for subsequent declines in value
and are recorded in other non-interest expense.

PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
generally computed on a straight-line basis over the estimated useful lives of
the assets. Leasehold improvements are generally amortized over the lesser of
the term of the respective leases or the estimated useful lives of the
improvements.

INTANGIBLE ASSETS -- The excess of cost over fair value of net assets of
businesses acquired (goodwill) is amortized on a straight-line and accelerated
basis (as appropriate) over periods generally not exceeding twenty-five years.
Core deposit and other intangibles are amortized on an accelerated basis over
their estimated lives ranging from five to ten years. Intangible assets are
included in other assets. All such intangible assets are evaluated, when events
or circumstances change, as to the recoverability of their carrying value. If
circumstances indicate that the carrying value of the assets may not be
recoverable, an impairment charge would be recorded. At December 31, 2001,
intangible assets were $124 million, net of accumulated amortization of $105
million.

Effective January 1, 2002, Cullen/Frost adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which changes the way goodwill and certain other
intangible assets are recognized and accounted for in the Consolidated Financial
Statements. See "Accounting Changes" on page 49 for further discussion of the
impact of this new accounting pronouncement on the Corporation's financial
statements.

FEDERAL INCOME TAXES -- Cullen/Frost files a consolidated federal income
tax return that includes the taxable income of all of its subsidiaries. Deferred
tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial reporting bases and
the tax bases of assets and liabilities. Deferred tax assets are the expected
future tax benefits of deductible temporary differences and operating loss and
tax credit carryforwards. Deferred tax assets are reduced by a valuation
allowance if there is a likelihood of more than 50 percent that some portion or
all of the deferred tax asset will not be realized. Deferred tax liabilities are
recognized for the temporary differences that will result in taxable amounts in
future years. Both deferred tax assets and liabilities are measured using the
enacted tax rate that is expected to apply to taxable income in the periods in
which the deferred tax asset or liability is expected to be realized or settled.

STOCK OPTIONS AND RESTRICTED STOCK -- Cullen/Frost accounts for its stock
options based on the "intrinsic value method" provided in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to

48

Employees," ("APB No. 25") and related Interpretations. Under APB No. 25,
because the exercise price of Cullen/Frost's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized on option plans. Compensation expense for restricted stock
awards is based on the market price on the date of grant and is recognized over
the vesting period of the award.

SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE -- Securities purchased under agreements to resell and
securities sold under agreements to repurchase are generally treated as
collateralized financing transactions and are recorded at the amounts at which
the securities were acquired or sold plus accrued interest. The fair value of
collateral either received from or provided to a third party is continually
monitored and additional collateral obtained or requested to be returned to the
Corporation as deemed appropriate. The counterparty to a Securities Sold Under
Agreement to Repurchase contract has an absolute and binding obligation to
return the pledged securities at the contract's maturity in exchange for the
predetermined amount of cash plus accrued interest. Similarly, the counterparty
to a Securities Purchased Under Agreement to Resell contract has an absolute and
binding obligation to receive the pledged securities at the contract's maturity
in exchange for the predetermined amount of cash plus accrued interest. The
securities involved in these transactions are generally U.S. Treasury or Federal
Agency issues.

FINANCIAL DERIVATIVES -- The Corporation enters into derivative contracts
to hedge interest rate exposure by modifying the interest rate characteristics
of related balance sheet instruments. To qualify for hedge accounting,
derivatives must be highly effective at reducing the risk associated with the
exposure being hedged and must be designated as a hedge at the inception of the
derivative contract. Derivative contracts are carried on the balance sheet at
fair value in other assets and other liabilities. Derivatives used for hedging
purposes at year-end 2001 consisted entirely of interest rate swaps used to
hedge changes in the fair value of assets and liabilities due to changes in
interest rates. As a result of changes in interest rates, hedged assets and
liabilities will appreciate or depreciate in market value. The effect of this
unrealized appreciation or depreciation will generally be offset by income or
loss on the fair value of the derivative instruments that are associated with
the hedged assets and liabilities. When a fair value type hedge no longer
qualifies for hedge accounting, previous adjustments to the carrying value of
the hedged item are reversed immediately to current earnings and the hedge is
reclassified to a trading position recorded at fair value.

Prior to the adoption of SFAS No. 133 the fair value of these derivative
instruments were not recorded on the balance sheet and unrealized gains or
losses were deferred.

ACCOUNTING CHANGES -- The following is a brief discussion of pronouncements
issued by the Financial Accounting Standards Board ("FASB") that are pending
adoption or have been recently adopted by Cullen/Frost.

On January 1, 2001, the Corporation adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and at that time, designated
anew the derivative instruments used for risk management into hedging
relationships in accordance with the requirements of the new standard. SFAS No.
133 requires the recognition of all derivatives on the balance sheet at fair
value. See the accounting policy for Financial Derivatives above and Note S on
page 69 for further discussion.

In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
140). SFAS No. 140 replaces SFAS No. 125. The guidance in SFAS No. 140, while
not changing most of the guidance originally issued in SFAS No. 125, revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain additional disclosures related to
transferred assets. Certain provisions of the statement related to the
recognition, reclassification and disclosure of collateral, as well as the
disclosure of securitization transactions, became effective for Cullen/Frost for
2000 year-end reporting. Other provisions related to the transfer and servicing
of financial assets and the extinguishing of liabilities were effective for
transactions occurring after March 31, 2001. The application of the new rules
did not have a material impact on the Corporation's results of operations,
financial position or liquidity.

49

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

With the adoption of SFAS No. 142 goodwill and indefinite lived intangible
assets are no longer amortized. Instead they are reviewed for impairment at
least annually or when certain indicators are encountered to determine if they
should be written down with a charge to earnings. At December 31, 2001 the
Corporation did not have indefinite lived intangible assets other than goodwill.
Intangible assets, such as core deposit intangibles, with a determinable useful
life will continue to be amortized over their respective useful lives. The
Corporation has adopted the Statement effective on January 1, 2002. The
non-amortization provisions are effective immediately for goodwill and
intangible assets acquired after June 30, 2001 and prior to the adoption.
Application of the non-amortization provisions of the Statement is expected to
result in additional net income of approximately $6.9 million or approximately
$.13 per diluted common share in 2002. The Statement requires a transitional
impairment test be applied to all goodwill and other indefinite-lived intangible
assets within the first six months after adoption. The impairment test involves
identifying separate reporting units based on the reporting structure of the
Corporation, then assigning all assets and liabilities, including goodwill, to
these units. Goodwill is assigned based on the reporting unit benefiting from
the factors that gave rise to the goodwill. Each reporting unit is then tested
for goodwill impairment by comparing the fair value of the unit with its book
value, including goodwill. If the fair value of the reporting unit is greater
than its book value, no goodwill impairment exits. However, if the book value of
the reporting unit is greater than its determined fair value, goodwill
impairment may exist and further testing is required to determine the amount, if
any, of the actual impairment loss. Any impairment loss determined with this
transitional test would be reported as a change in accounting principle. The
Corporation has completed a preliminary transitional impairment test of goodwill
and based on current information does not expect to record an impairment loss as
a result of this test.

In October 2001 the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets". This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS No. 144
replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed of", as well as the provisions of APB
Opinion No. 30, "Reporting Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business", for the disposal of segments of a
business. The Statement requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. This statement is effective
for fiscal years beginning after December 15, 2001 and is not expected to have a
material effect on the Corporation.

NOTE B -- ACQUISITIONS
- ---------------------

The transactions listed below have been or will be accounted for as
purchase transactions with the total cash consideration funded through internal
sources, including funds provided by the issuance of the $100 million Trust
Preferred Capital Securities, see Note I "Borrowed Funds" on page 56. The
purchase price has been allocated to the underlying assets and liabilities based
on estimated fair values at the date of acquisition. Results of operations are
included from the date of acquisition.

2002 PENDING ACQUISITION
BRANCH OF JPMORGAN CHASE BANK -- HARLINGEN

The Frost National Bank ("Frost Bank") has signed a definitive agreement to
acquire the location and certain deposits of the Harlingen branch of JPMorgan
Chase Bank. This acquisition allows the Corporation to

50

expand its presence in the Rio Grande Valley, which began when it acquired
Valley Bancshares and its bank in McAllen, Valley National Bank in 1995. A
second McAllen location was opened in 1997.

Frost Bank will assume approximately $20 million in deposits associated
with the Harlingen branch. Completion of the acquisition is expected to occur
during the second quarter, following regulatory approval, at which time the
Harlingen location will become a Frost Bank financial center. This acquisition
is not expected to have a material impact on Cullen/Frost's 2002 net income.

2001 ACQUISITION
AIS INSURANCE AGENCY -- FORT WORTH

On August 1, 2001, Frost Insurance Agency ("FIA") completed its acquisition
of AIS Insurance & Risk Management, an independent insurance agency based in
Fort Worth, Texas. AIS offered a broad range of commercial insurance for small
to mid-size businesses, including property and casualty, employee benefits
(health, life and retirement plans), business succession planning and risk
management services. In accordance with SFAS No. 142, which is discussed in Note
A, no amortization has been recorded on goodwill associated with this
acquisition. This acquisition did not have a material impact on Cullen/Frost's
2001 net income.

2000 ACQUISITIONS
NIEMAN HANKS PURYEAR PARTNERS AND NIEMAN HANKS PURYEAR BENEFITS -- AUSTIN

On July 1, 2000, FIA acquired Nieman Hanks Puryear Partners and Nieman
Hanks Puryear Benefits ("Nieman Hanks"), an Austin, Texas based independent
insurance agency. Nieman Hanks offered property and casualty insurance,
professional and umbrella liability insurance, homeowners and auto insurance,
group health, life and disability policies and 401(k) retirement plans and
executive planning. This acquisition did not have a material impact on
Cullen/Frost's 2000 net income.

WAYLAND HANCOCK INSURANCE AGENCY, INC. -- HOUSTON

On April 1, 2000, FIA acquired Wayland Hancock Insurance Agency, Inc.
("Wayland Hancock"), a Houston, Texas based independent insurance agency.
Wayland Hancock offered a full range of property and casualty, life and health
insurance products, as well as retirement and financial planning, to individuals
and businesses. This acquisition did not have a material impact on
Cullen/Frost's 2000 net income.

1999 ACQUISITIONS
COMMERCE FINANCIAL CORP. -- FORT WORTH

On May 20, 1999, Cullen/Frost paid approximately $42.3 million to acquire
Commerce Financial Corporation and its four-location subsidiary, Bank of
Commerce, in Fort Worth, Texas. The Corporation acquired loans of approximately
$76 million and deposits of approximately $164 million. This acquisition did not
have a material impact on Cullen/Frost's 1999 net income.

PROFESSIONAL INSURANCE AGENTS, INC. -- VICTORIA

On May 1, 1999, FIA acquired Professional Insurance Agents, Inc. ("PIA"), a
mid-sized independent insurance agency based in Victoria, Texas, with additional
locations in San Antonio, New Braunfels and Refugio. PIA offered corporate and
personal property and casualty insurance as well as group health and life
insurance products to individuals and businesses. This acquisition did not have
a material impact on Cullen/Frost's 1999 net income.

KELLER STATE BANK -- TARRANT COUNTY

On January 15, 1999, Frost Bank paid approximately $18.7 million to acquire
Keller State Bank which had three locations in Tarrant County, Texas. The
Corporation acquired loans of approximately $38 million and deposits of
approximately $62 million. This acquisition did not have a material impact on
Cullen/Frost's 1999 net income.

51

INVESTMENT BANKING SUBSIDIARY

On August 2, 1999 Cullen/Frost began operations of its investment banking
subsidiary in Dallas, Texas. Frost Securities, Inc. offers a full range of
services including financial advisory services, mergers and acquisitions, equity
research, and institutional equity sales and trading. The firm provides
institutional investors with in-depth research coverage in energy and
communications technology.

NOTE C -- CASH AND DUE FROM BANKS
- ---------------------------------

Frost Bank is required to maintain cash or non-interest bearing reserves
with the Federal Reserve Bank that are equal to specified percentages of
deposits. The average amounts of reserve and contractual balances were $73.0
million for 2001 and $73.4 million for 2000.

NOTE D -- SECURITIES
- --------------------

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

The amortized cost and estimated fair value of securities at December 31,
2001 are presented below by contractual maturity. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without prepayment penalties.

Proceeds from sales of securities available for sale during 2001 were $5.5
billion with gross gains of $173 thousand and gross losses of $95 thousand
realized on those sales. During 2000, gross gains of $487 thousand and gross
losses of $483 thousand were realized on $3.0 billion in proceeds from these
sales.

52

Proceeds from sales of securities available for sale during 1999 were $1.7
billion. During 1999, gross gains of $625 thousand and gross losses of $711
thousand were realized on those sales.

The carrying value of securities pledged to secure public funds, trust
deposits, securities sold under repurchase agreements and for other purposes, as
required or permitted by law, amounted to $1.0 billion at December 31, 2001 and
$1.1 billion at December 31, 2000.

NOTE E -- LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
- ------------------------------------------------------

A summary of loans outstanding follows:

In the normal course of business, in order to meet the financial needs of
its customers, Cullen/Frost is a party to financial instruments with off-balance
sheet risk. These include commitments to extend credit and standby letters of
credit which commit the Corporation to make payments on behalf of customers when
certain specified future events occur. Both arrangements have credit risk
essentially the same as that involved in extending loans to customers and are
subject to the Corporation's normal credit policies. Collateral is obtained
based on management's credit assessment of the customer. Commitments to extend
credit and standby letters of credit amounted to $2.3 billion and $123.5
million, respectively, at December 31, 2001, and $2.1 billion and $105.8 million
respectively, at December 31, 2000. Commercial and industrial loan commitments
represent approximately 75 percent and 69 percent of the total loan commitments
outstanding at December 31, 2001 and 2000.

The majority of Cullen/Frost's real estate loans are secured by real estate
in San Antonio, Houston and Fort Worth.

In the normal course of business, Cullen/Frost's subsidiary bank makes
loans to directors and officers of both Cullen/Frost and its subsidiaries. These
loans are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other unaffiliated persons. Loans made to directors and executive officers of
Cullen/Frost and its significant subsidiaries, including loans made to their
associates, amounted to $15.4 million and $11.8 million at December 31, 2001 and
2000, respectively. During 2001, additions to these loans amounted to $15.0
million, repayments totaled $8.9 million and other changes totaled $2.5 million.
These other changes consisted primarily of changes in related-party status.
Standby letters of credit extended to directors and executive officers of
Cullen/Frost and

53

its significant subsidiaries and their associates amounted to $127 thousand and
$267 thousand at December 31, 2001 and 2000, respectively.

A summary of the changes in the allowance for possible loan losses follows:

A loan within the scope of SFAS No. 114 is considered impaired when, based
on current information and events, it is probable that Cullen/Frost will be
unable to collect all amounts due according to the contractual terms of the loan
agreement, including scheduled principal and interest payments. All impaired
loans are included in non-performing assets. At December 31, 2001, the majority
of the impaired loans were commercial loans and collectability was measured
based on the fair value of the collateral. Interest payments on impaired loans
are typically applied to principal unless collectability of the principal amount
is reasonably assured, in which case interest is recognized on a cash basis.
Subsequent to classification as an impaired loan, there was no interest income
recognized in 1999 through 2001 on these loans. The total allowance for possible
loan losses includes activity related to allowances calculated in accordance
with SFAS No. 114 and activity related to other loan loss allowances determined
in accordance with SFAS No. 5.

The average recorded investment in impaired loans was $24.1 million, $8.3
million, and $6.2 million for the years ended December 31, 2001, 2000, and 1999,
respectively. The following is a summary of loans considered to be impaired:

NOTE F -- NON-PERFORMING ASSETS
- -------------------------------

A summary of non-performing assets follows:

Cullen/Frost recognized interest income on non-accrual loans of
approximately $913 thousand, $565 thousand and $1.1 million in 2001, 2000 and
1999, respectively. Had these loans performed according to their original
contract terms, Cullen/Frost would have recognized additional interest income of
approximately $2.4 million in 2001, $1.9 million in 2000 and $1.3 million in
1999. Cullen/Frost did not have any restructured loans for the years ended
December 31, 2001 and 2000.

54

NOTE G -- PREMISES AND EQUIPMENT
- ----------------------------------------

A summary of premises and equipment follows:

Depreciation of premises and equipment of $14.4 million, $14.1 million, and
$14.2 million was included in non-interest expense for the years ended December
31, 2001, 2000 and 1999, respectively. The useful lives applied in depreciating
buildings ranged from 7 to 39 years, leasehold improvements ranged from 5 to 15
years, and furniture and equipment ranged from 2 to 12 years.

NOTE H -- DEPOSITS
- -----------------

A summary of deposits outstanding by category follows:

Deposits from non-United States sources totaled $712 million and $748
million at December 31, 2001 and 2000, respectively. Deposits from directors and
executive officers of Cullen/Frost and its significant subsidiaries, including
deposits from their associates were less than one percent of total deposits at
December 31, 2001.

At December 31, 2001, Cullen/Frost's aggregate amount of maturities of
public and private time accounts are as follows:

55

NOTE I -- BORROWED FUNDS
- -----------------------

Advances from the Federal Home Loan Bank ("FHLB") totaled $27.6 million,
and $32.6 million at December 31, 2001 and 2000, respectively. These advances,
which are included in other liabilities, fall under provisions of a credit
facility designed to enable Frost Bank to fund long-term loans. The advances
mature between January 2002 and July 2018, bear interest at the FHLB's floating
rate (average 4.68 percent at December 31, 2001), and are collateralized by a
blanket floating lien on all first mortgage loans, the FHLB capital stock owned
by Frost Bank, and any funds on deposit with the FHLB.

Maturities for the FHLB advances are as follows:

The following table represents balances as they relate to securities sold
under repurchase agreements:

Frost Bank issued $150 million of its 6 7/8 percent Subordinated Bank Notes
(the "Bank Notes") due 2011, during August of 2001. The Bank Notes pay interest
semiannually and are not redeemable prior to maturity. The Bank Notes qualify as
Tier 2 capital for both Frost Bank and the Corporation and are reported as debt
on the balance sheet, net of deferred issuance cost. The Bank Notes were offered
only to accredited investors in denominations of $250 thousand or more under the
Office of the Comptroller of the Currency's abbreviated registration procedures
set forth in Section 16.6 of 12 C.F.R. Part 16. Frost Bank intends to use the
proceeds from the sale of these Bank Notes for general corporate purposes.

Cullen/Frost Capital Trust I, a Delaware statutory business trust (the
"Issuer Trust") and wholly-owned subsidiary of the Corporation, issued on
February 6, 1997, $100 million of its 8.42 percent Capital Securities, Series A
(the "Capital Securities"), which represent beneficial interests in the Issuer
Trust, in an offering exempt from registration under the Securities Act of 1933
pursuant to Rule 144A. The Capital Securities will mature on February 1, 2027
and are redeemable in whole or in part at the option of the Corporation at any
time after February 1, 2007 with the approval of the Federal Reserve and in
whole at any time upon the occurrence of certain events affecting their tax or
regulatory capital treatment. The Issuer Trust used the proceeds of the offering
of the Capital Securities to purchase Junior Subordinated Debentures of the
Corporation which constitute its only assets and which have terms substantially
similar to the Capital Securities. Payments of distributions on the Capital
Securities and payments on liquidation or redemption of the Capital Securities
are guaranteed by the Corporation on a limited basis pursuant to a Guarantee.
The Corporation has also entered into an Agreement as to Expenses and
Liabilities with the Issuer Trust pursuant to which it has agreed on a
subordinated basis to pay any costs, expenses or liabilities of the Issuer Trust
other than those arising under the Capital Securities. The obligations of the
Corporation under the Junior Subordinated Debentures, the related Indenture, the
trust agreement establishing the Issuer Trust, the

56

Guarantee and the Agreement as to Expenses and Liabilities, in the aggregate,
constitute a full and unconditional guarantee by the Corporation of the Issuer
Trust's obligations under the Capital Securities.

The Corporation used the majority of the proceeds from the sale of the
Junior Subordinated Debentures for acquisitions and the repurchase of the
Corporation's common stock. The Capital Securities are included in the Tier 1
capital of the Corporation for regulatory capital purposes and are reported as
debt on the balance sheet, net of deferred issuance costs. The Corporation
records distributions payable on the Capital Securities as interest expense. The
Corporation has the right to defer payments of interest on the Junior
Subordinated Debentures at any time or from time to time for a period of up to
ten consecutive semi-annual periods with respect to each deferral period. Under
the terms of the Junior Subordinated Debentures, in the event that under certain
circumstances there is an event of default under the Junior Subordinated
Debentures or the Corporation has elected to defer interest on the Junior
Subordinated Debentures, the Corporation may not, with certain exceptions,
declare or pay any dividends or distributions on its capital stock or purchase
or acquire any of its capital stock.

On March 13, 1997, the Corporation and the Issuer Trust filed a
Registration Statement on Form S-4 with the Securities and Exchange Commission
to register under the Securities Act of 1933 the exchange of up to $100 million
aggregate Liquidation Amount of "new" 8.42 percent Capital Securities, Series A
for the then outstanding Capital Securities. On April 25, 1997, the Corporation
exchanged all of the outstanding Capital Securities for registered Capital
Securities. The "new" Capital Securities have the same terms as the "old"
Capital Securities. This exchange enhanced the transferability of the Capital
Securities and had no impact on redemption of the Capital Securities, the Junior
Subordinated Debentures issued by the Company, the Company's Guarantee of the
Capital Securities, or other matters described above.

NOTE J -- COMMON STOCK AND EARNINGS PER SHARE
- ---------------------------------------------

A reconciliation of earnings per share for 2001, 2000 and 1999 follows:

NOTE K -- DIVIDENDS
- -------------------

In the ordinary course of business, Cullen/Frost is dependent upon
dividends from Frost Bank to provide funds for the payment of dividends to
shareholders and to provide for other cash requirements. The amount of dividends
Frost Bank may declare is subject to regulations. Without prior regulatory
approval, Frost Bank had approximately $110.9 million available for the payment
of dividends to Cullen/Frost at December 31, 2001.

57

NOTE L -- CAPITAL
- -----------------

At December 31, 2001 and 2000, Cullen/Frost's subsidiary bank was
considered "well capitalized" as defined by the Federal Deposit Insurance
Corporation Improvement Act of 1991, the highest regulatory rating, and
Cullen/Frost's capital ratios were in excess of "well capitalized" levels. A
financial institution is deemed to be well capitalized if the institution has a
Tier 1 risk-based capital ratio of 6.0 percent or greater, a total risk-based
capital ratio of 10.0 percent or greater, and a Tier 1 leverage ratio of 5.0
percent or greater and the institution is not subject to regulatory actions such
as an order, written agreement, capital directive or prompt corrective action
directive to meet and maintain a specific capital level for any capital measure.
Cullen/Frost and its subsidiary bank currently exceed all minimum capital
requirements. Management is not aware of any conditions or events that would
have changed the Corporation's regulatory capital rating since December 31,
2001.

The table below reflects various measures of regulatory capital at year-end
2001 and 2000 for Cullen/Frost.

Cullen/Frost's Tier 1 Capital consists of shareholders equity before
unrealized gains and losses related to securities available for sale plus the
Capital Securities discussed in Note I, less intangible assets. Total Capital is
comprised of Tier 1 Capital plus the Bank Notes discussed in Note I and the
permissible portion of the allowance for possible loan losses. Risk-adjusted
assets are calculated based on regulatory requirements and include total assets
and certain off balance sheet items (primarily loan commitments), less
intangible assets.

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

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

58

NOTE M -- LEASES AND RENTAL AGREEMENTS
- --------------------------------------------------------------------------------

Rental expense for all leases amounted to $15.7 million, $15.1 million and
$14.3 million for the years ended December 31, 2001, 2000 and 1999,
respectively.

In June 1987, Frost Bank consummated the sale of its office tower and
leased back a portion of the premises under a 13-year primary lease term with
options allowing for occupancy up to 50 years. Frost Bank also sold its adjacent
parking garage facility and leased back space in that structure under a 12-year
primary lease term with options allowing for occupancy up to 50 years. Both
leases allow for purchase of the related asset under specific terms. Frost Bank
has agreed to purchase both the office tower and the adjacent parking garage
facility. The purchase of the properties is expected to occur in the second
quarter of 2002, with the purchase price of the office tower and adjacent
parking garage being approximately $25.7 million and $15.0 million,
respectively.

A summary of the total future minimum rental commitments due under
non-cancelable equipment leases and long-term agreements on premises (excluding
the office tower and adjacent parking garage facility)at December 31, 2001
follows:

It is expected that certain leases will be renewed, or equipment replaced
with new leased equipment, as these leases expire. Aggregate future minimum
rentals to be received under non-cancelable subleases greater than one year at
December 31, 2001, were $1.1 million.

59

NOTE N -- EMPLOYEE BENEFIT PLANS
- -------------------------------

RETIREMENT PLANS --

Defined Benefit Plan -- Cullen/Frost has a non-contributory defined benefit
plan that covers substantially all employees who have completed at least one
year of service and have attained the age of 21. Defined benefits are provided
based on an employee's final average compensation, age at retirement and years
of service. Cullen/Frost's funding policy is to contribute quarterly an amount
necessary to satisfy the Employee Retirement Income Security Act ("ERISA")
funding standards. An eligible employee's right to receive benefits under the
plan becomes fully vested upon the earlier of the date on which such employee
has completed five years of service or the date on which such employee attains
65 years of age. Retirement benefits under the plan are paid to vested employees
upon their (i) normal retirement at age 65 or later or (ii) early retirement at
or after age 55, but before age 65. This plan was frozen as of December 31, 2001
and replaced with a deferred profit sharing plan. In accordance with SFAS No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", $6.3 million in expenses, which
were previously being amortized over the service years, were recognized as
restructuring charges (see Note V on page 73) during 2001 as a result of this
curtailment.

Restoration Plan -- Cullen/Frost's Restoration of Retirement Income Plan
(providing benefits in excess of the limits under Section 415 of the Internal
Revenue Code of 1986, as amended) for eligible employees is designed to comply
with the requirements of ERISA. The entire cost of the plan is supported by
Cullen/Frost contributions. The Corporation recognized $335 thousand as
restructuring charges (see Note V on page 73) during 2001 as a result of the
curtailment of this plan as of December 31, 2001.

The above plans, as amended, provide for the payment of monthly retirement
income pursuant to a formula based on an eligible employee's highest three
consecutive years of final average compensation during the last ten consecutive
years of employment. The freezing of the plan provides that future salary
increases will not be considered.

Deferred Profit Sharing Plan -- On January 1, 2002, the Corporation adopted
a deferred profit sharing plan, which is a contributory retirement plan.
Contributions will be made to individual eligible employee accounts based upon
the Corporation's fiscal year profitability. Employee assets will be
self-directed into a menu of investment options. The assets will be subject to
vesting requirements and withdrawal restrictions.

During the fourth quarter of 2001, Cullen/Frost offered a voluntary early
retirement program ("ERW") to employees with eligibility determined by age plus
years of service. Of the 280 eligible employees, 131, or four percent of the
staff, chose to accept this offer. As a result of the ERW, the Corporation
recognized $6.0 million in special termination benefit costs related to the
Defined Benefit Plan. The ERW also resulted in the creation of a post-retirement
medical liability of $1.4 million as of December 31, 2001. Both of these costs
were part of the restructuring charges (See Note V on page 73).

60

The following table summarizes benefit obligation and plan asset activity
for the plans.

Net pension cost included the following components:

The prior service cost and special termination benefit were recorded as part of
the fourth quarter 2001 restructuring charges. (See Note V on page 73)

61

Cullen/Frost has a supplemental executive retirement plan ("SERP") for a
key executive. The plan provides for target retirement benefits, as a percentage
of pay, beginning at age 55. The target percentage is 45 percent of pay at age
55, increasing to 60 percent at age 60 and later. Benefits under the SERP are
reduced, dollar-for-dollar, by benefits received under the Retirement and
Restoration Plans, described above, and any social security benefits.

SAVINGS PLANS --

Cullen/Frost maintains a 401(k) stock purchase plan (the "401(k) Plan").
The 401(k) Plan permits each participant to make before- or after-tax
contributions up to 16 percent of eligible compensation and subject to dollar
limits from Internal Revenue Service regulations. Cullen/Frost matches 100
percent of the employees contributions to the 401(k) Plan based on the amount of
each participant's contributions up to a maximum of six percent of eligible
compensation. Eligible employees must complete 90 days of service in order to
enroll and vest in the Corporation's matching contributions immediately.
Cullen/Frost's gross expenses related to the 401(k) Plan were $5.9 million, $5.5
million and $4.8 million for 2001, 2000 and 1999, respectively. The
Corporation's matching contribution is initially invested in Cullen/Frost stock.
However, employees may immediately reallocate the Corporation's matching
portion, as well as invest their individual contribution, to any of a variety of
investment vehicles offered within the 401(k) Plan.

The 1991 Thrift Incentive Stock Purchase Plan ("1991 Stock Purchase Plan")
was adopted to offer those employees whose participation in the 401(k) Plan is
limited an alternative means of receiving comparable benefits. Cullen/Frost's
expenses related to the 1991 Stock Purchase Plan were $118 thousand, $105
thousand and $123 thousand for 2001, 2000 and 1999, respectively.

EXECUTIVE STOCK PLANS --

Cullen/Frost has two active executive stock plans and one outside director
stock plan; the 1992 Stock Plan, the 2001 Stock Plan and the 1997 Director Stock
Plan ("1997 Plan"). The 2001 Stock Plan has an aggregate of 4,830,790 shares of
common stock authorized for award. The 2001 Stock Plan has replaced all other
previously approved executive stock plans.

The 2001 Stock Plan allows Cullen/Frost to grant restricted stock,
incentive stock options, nonqualified stock options, stock appreciation rights,
or any combination thereof to certain key employees of the Corporation. When the
shareholders approved the 2001 Stock Plan, all remaining shares authorized for
grant under the superceded 1992 Cullen/Frost Stock Plan were transferred to the
new plan.

The 1997 Plan allows Cullen/Frost to grant nonqualified stock options to
outside directors. The options may be awarded in such number, and upon such
terms, and at any time and from time to time as determined by Cullen/Frost's
Compensation and Benefits Committee ("Committee") of the Board of Directors.

Each award from all plans is evidenced by an award agreement that specifies
the option price, the duration of the option, the number of shares to which the
option pertains, and such other provisions as the Committee determines. The
option price for each grant is at least equal to the fair market value of a
share on the date of grant. Options granted expire at such time as the Committee
determines at the date of grant and in no event does the exercise period exceed
a maximum of ten years.

62

The following table summarizes option transactions in each of the last
three years for plans active as of December 31, 2001. During 2001, the 1983
Nonqualified Stock Option Plan and the 1988 Nonqualified Stock Option Plan
expired. Stock option exercises under the 1988 Plan were 161,852, 19,072 and
77,578 for 2001, 2000 and 1999 respectively. Under the 1983 Plan, option
exercises were 2,860, 17,412 and zero for 2001, 2000 and 1999 respectively.

A Includes 655,662 options which are all exercisable with a weighted-average
exercise price of $8.69.

B Includes 846,000 options which are all exercisable with a weighted-average
exercise price of $14.04.

C Includes 2,440,500 options with a weighted-average exercise price of $24.66
of which 1,015,500 are exercisable with a weighted-average exercise price
of $24.48.

D Includes 1,426,250 options of which none are exercisable with a
weighted-average exercise price of $33.32.

E Includes 1,608,100 options of which none are exercisable with a
weighted-average exercise price of $24.12.

F Includes 1,000 options of which none are exercisable with a
weighted-average exercise price of $37.27.

G Includes 254,000 options which are all exercisable with a weighted-average
exercise price of $27.27.

H Includes 68,000 options which are all exercisable with a weighted-average
exercise price of $36.25.

63

There were 2,839,162, 2,064,908 and 1,915,976 options exercisable for 2001,
2000, and 1999 with a weighted-average exercise price of $18.26, $13.66, and
$12.19, respectively. Options awarded during 2001 through the 1997 Directors
Plan have a six-year life with immediate vesting. Options awarded prior to 2001
through the 1997 Directors Plan have a ten-year life with immediate vesting. All
other options awarded in 1999 through 2001 have a six-year life with a
three-year cliff vesting period. Options awarded in 1998 have a ten-year life
with a three-year cliff vesting period. In general, options awarded prior to
1998 had a ten-year life with a five-year vesting period. These plans, which
were approved by shareholders, were established to enable Cullen/Frost to retain
and motivate key employees. A committee of non-participating directors has sole
authority to select the employees, establish the awards to be issued, and
approve the terms and conditions of each award contract. Cullen/Frost has common
stock reserved for future issuance upon the grant and exercise of options of
10,317,232 shares.

In accounting for the impact of issuing stock options, Cullen/Frost applies
the intrinsic value method set forth in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and Related Interpretation as
allowed by SFAS No. 123, "Accounting for Stock Based Compensation". SFAS No. 123
requires disclosure of pro forma net income and earnings per share information
assuming that stock options granted in 1999, 2000 and 2001 have been accounted
for in accordance with the fair value method described in SFAS No. 123.

The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options, which have
characteristics that are different from Cullen/Frost's employee stock options.
In addition, option valuation models require the input of highly subjective
assumptions, which can significantly impact the estimated fair value. As such,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of stock options.

The following weighted-average assumptions were used for 2001, 2000 and
1999, respectively: risk-free interest rates with a term of six years were 4.70
percent, 5.03 percent and 6.56 percent; dividend yield of 2.75 percent, 2.00
percent and 3.00 percent; volatility factors of the expected market price of
Cullen/Frost's common stock of 32 percent, 29 percent and 24 percent; and
weighted-average expected lives of the options of six years. The
weighted-average grant-date fair value of options granted during 2001, 2000 and
1999 was $7.10, $9.33, and $6.02, respectively. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period.

Cullen/Frost's pro forma information as if compensation expense had been
recognized in accordance with the fair value requirements SFAS No. 123 is
summarized below:

* Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its proforma effect is not necessarily indicative of its
impact on future years.

** Actual net income for 2001 was $80.9 million. 2001 basic and diluted earnings
per share were $1.57 and $1.52, respectively.

64

Restricted shares are generally awarded under a three- to four-year cliff
vesting period. The market value of restricted shares at the date of grant is
expensed over the vesting period. The following table summarizes restricted
stock transactions in each of the last three years.

* Reflects the deferred compensation expense recorded in each year, which is
spread over the vesting period of outstanding restricted stock. Total deferred
compensation expense on all restricted stock during 2001 was $1.9 million.

Cullen/Frost has change-in-control agreements with 23 of its executives.
Under these agreements, each covered person could receive, upon the
effectiveness of a change-in-control, two to three times (depending on the
person) the executive's base compensation plus target bonus established for the
year, and any unpaid base salary and pro rata target bonus for the year in which
the termination occurs, including vacation pay. Additionally, the executive's
insurance benefits will continue for two to three full years after the
termination and all long-term incentive awards immediately vest. The Corporation
has no material liability for post-retirement or post-employment benefits other
than pensions.

NOTE O -- INCOME TAXES
- ----------------------

The following is an analysis of the Corporation's income taxes included in
the consolidated statements of operations for the years ended December 31, 2001,
2000, and 1999:

65

The following is a reconciliation of the difference between income tax
expense as reported and the amount computed by applying the statutory income tax
rate to income before income taxes:

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 2001, and 2000
are presented below:

At December 31, 2001 and 2000, no valuation allowance for deferred tax
assets was necessary because they were supported by recoverable taxes paid in
prior years.

66

NOTE P -- NON-INTEREST EXPENSE
- ------------------------------

Significant components of other non-interest expense for the years ended
December 31, 2001, 2000, and 1999 are presented below:

Included in Other expense in the above table are advertising expenses of
$4.0 million, $3.3 million, and $3.4 million for 2001, 2000, and 1999,
respectively. Advertising costs are expensed as incurred.

NOTE Q -- CASH FLOW DATA
- ------------------------

For purposes of reporting cash flow, cash and cash equivalents include the
following:

Generally, Federal funds are sold for one-day periods and securities
purchased under resale agreements are held for less than thirty-five days.

Supplemental cash flow information is as follows:

67

NOTE R -- FAIR VALUES OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------

Fair Values of Financial Instruments -- SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments" requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
This disclosure does not, and is not intended to, represent the fair value of
Cullen/Frost.

The following methods and assumptions were used in estimating its fair
value of financial instruments:

Cash and cash equivalents: The carrying amounts reported in the
consolidated balance sheet, for cash and due from banks, time deposits, and
Federal funds sold and securities purchased under resale agreements,
approximates their fair value.

Securities: Estimated fair values are based on quoted market prices, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar instruments.

Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair value for other loans is estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The carrying amount of accrued interest
approximates its fair value.

Interest rate swaps/floor asset/liability: The estimated fair value of the
existing agreements are based on quoted market prices.

Deposits: SFAS No. 107 defines the fair value of demand deposits as the
amount payable on demand, and prohibits adjusting fair value for any deposit
base intangible. The deposit base intangible is not considered in the fair value
amounts. The carrying amounts for variable-rate money market accounts
approximate their fair value. The fair value of fixed-term certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities.

Short-term borrowings: The carrying amount reported in the consolidated
balance sheet approximates the estimated fair value.

Loan commitments, standby and commercial letters of credit: Cullen/Frost's
lending commitments have variable interest rates and "escape" clauses if the
customer's credit quality deteriorates. Therefore, the amounts committed
approximate fair value.

Guaranteed preferred beneficial interest in the Corporation's junior
subordinated deferrable interest debentures: The fair value of the Trust
Preferred Capital Securities is estimated based on the quoted market prices of
the instruments.

Subordinated notes payable: The fair value of the Subordinated Bank Notes
is estimated based on the quoted market prices of the instruments.

68

The estimated fair values of Cullen/Frost's financial instruments are as
follows:

NOTE S -- DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------

Cullen/Frost uses interest rate swaps and floors to hedge its interest rate
risk. The Corporation had 43 fair value type commercial loan/lease interest rate
swaps with a notional amount of $119 million at December 31, 2001 and 34
commercial loan/lease interest rate swaps with a notional amount of $211 million
at December 31, 2000. In 2001 and 2000, each swap was a hedge against a specific
commercial fixed-rate loan/lease or against a specific pool of commercial
floating-rate loans with lives ranging from approximately one month to ten
years. For 2001 and 2000, the scheduled reductions of the interest rate swaps'
notional amount generally matched the expected amortization of the underlying
loan/lease or pool of loans.

In 2000, the Corporation entered into an interest rate floor three-year
agreement with a notional amount totaling $1 billion. The interest rate floor
was a hedge of interest rate exposure associated with commercial loan accounts
in an environment of falling rates. The floor agreement was sold during the
first quarter of 2001. Under SFAS No. 133, adopted on January 1, 2001, the
interest rate floor did not qualify for hedge accounting treatment and in
management's opinion would have introduced excessive volatility into earnings.
The Corporation recognized a gain of $5.7 million related to the sale of the
floor agreement. Of the total gain $1.1 million was included in other
non-interest income, with the remainder included, net of tax, as a $3.0 million
cumulative effect of adopting SFAS No. 133.

In 2001 Cullen/Frost entered into a fair value type interest rate swap
agreement related to the $150 million fixed rate subordinated debt issued in
2001. The swap agreement has an effective notional amount of $150 million over a
period of five years.

In 2001, the Corporation's derivative financial instruments used in hedging
activities were all designated as fair value type hedges, which were required to
meet specific criteria. For fair value type hedges, the changes in fair values
of both the hedging derivative and the hedged item were recorded in current
earnings as other income or other expense and were immaterial in 2001. When a
fair value type hedge no longer qualifies for hedge accounting, previous
adjustments to the carrying value of the hedged item are reversed immediately to
current earnings and the hedge is reclassified to a trading position recorded at
fair value.

69

Interest rate swap and floor contracts involve the risk of dealing with
counterparties and their ability to meet contractual terms. Each counterparty to
a swap transaction is approved by Cullen/Frost's Asset/ Liability Management
Committee and has a credit rating that is investment grade. The net amount
payable or receivable under interest rate swaps/floors is accrued as an
adjustment to interest income and was not material in 2001 or 2000.

Cullen/Frost's credit exposure on interest rate swaps is limited to
Cullen/Frost's net favorable value and interest payments of all swaps to each
counterparty. In such cases collateral is required from the counterparties
involved if the net value of the swaps exceeds a nominal amount considered to be
immaterial. At December 31, 2001, the Corporation's credit exposure relating to
interest rate swaps was immaterial. Activity in the notional amounts of end-user
derivatives for each of the three years ended December 31, 2001, 2000 and 1999,
is summarized as follows:

The following table summarizes the weighted average receive and pay rates
for the interest rate swaps at December 31, 2001.

The fair value and any related carrying amounts of the interest rate swaps can
be found in Note R on page 68.

70

NOTE T -- CONTINGENCIES
- --------------------------------------------------------------------------------

Certain subsidiaries of Cullen/Frost are defendants in various matters of
litigation which have arisen in the normal course of conducting a commercial
banking business. In the opinion of management, the disposition of such pending
litigation will not have a material effect on Cullen/Frost's consolidated
financial position.

NOTE U -- OPERATING SEGMENTS
- --------------------------------------------------------------------------------

The Corporation has three reportable operating segments: Banking, the
Financial Management Group and Frost Securities Inc. Banking includes both
commercial and consumer banking services. Commercial banking services are
provided to corporations and other business clients and include a wide array of
lending and cash management products. Consumer banking services include direct
lending and depository services. The Financial Management Group includes
fee-based services within private trust, retirement services, and financial
management services, including personal wealth management, insurance, and
brokerage services. Frost Securities Inc., an investment banking subsidiary,
began operations in August 1999. These business units were identified through
the products and services that are offered within each unit. Prior period
amounts have been reclassified to conform to the current year's presentation.

The accounting policies of each reportable segment are the same as those of
the Corporation described in Note A, except for the following items, which
impact the Banking and Financial Management Group 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.

71

The following table summarizes financial results by operating segment:

* Excludes off balance sheet managed and custody assets with total market value
of $13.3 billion, $12.9 billion, and $12.8 billion at year-end 2001, 2000 and
1999, respectively.

72

NOTE V -- RESTRUCTURING CHARGES
- --------------------------------

During the fourth quarter of 2001, the Corporation recorded pre-tax
restructuring charges totaling $19.9 million. Included in the restructuring
charges were approximately $11.5 million related to costs associated with a
voluntary early retirement program that was accepted by about four percent of
the staff. The $11.5 million charge consisted of approximately $6.0 million
related to the retirement plan, $1.4 million associated with future medical
benefits with the remainder due to cash payments based on length of service. The
restructuring charges also included $6.7 million due to the freezing of the
Corporation's defined benefit pension plan as of December 31, 2001. This defined
benefits plan (see Note N on page 60) was replaced with a deferred profit
sharing plan. The remaining $1.7 million of the restructuring charges was
related to severance and outplacement services for a two percent reduction in
workforce, of which $469 thousand remained to be paid at December 31, 2001.

73

NOTE W -- CONDENSED PARENT CORPORATION FINANCIAL STATEMENTS
- -----------------------------------------------------------

Condensed financial information of the Parent Corporation as of December
31, 2001 and 2000 and for each of the three years in the period ended December
31, 2001 follows:

74

Report of Ernst & Young LLP
Independent Auditors

SHAREHOLDERS AND BOARD OF DIRECTORS
CULLEN/FROST BANKERS, INC.

We have audited the accompanying consolidated balance sheets of
Cullen/Frost Bankers, Inc. and Subsidiaries (the Corporation) as of December 31,
2001 and 2000, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cullen/Frost
Bankers, Inc. and Subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States.

ERNST & YOUNG LLP

San Antonio, Texas
January 22, 2002

75

CONSOLIDATED AVERAGE BALANCE SHEETS
(dollars in thousands -- taxable-equivalent basis)

The following unaudited schedule is presented for additional information
and analysis.

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

76

77

FINANCIAL STATISTICS
(dollars in thousands)

The following unaudited schedules and statistics are presented for
additional information and analysis.

RATE/VOLUME ANALYSIS
- --------------------

The allocation of the rate/volume variance has been made on a pro-rata basis
assuming absolute values. The above information is shown on a taxable-equivalent
basis assuming a 35 percent tax rate.

LOAN MATURITY AND SENSITIVITY
- -----------------------------

Due to the specific nature of the portfolios, loans secured by 1-4 family
housing totaling $245 million, student loans totaling $103 million, certain
commercial loans totaling $90 million and unearned income of $5 million are not
included in the amounts in the table above.

78

MATURITY DISTRIBUTION AND SECURITIES PORTFOLIO YIELDS
- -----------------------------------------------------

Weighted average yields have been computed on a fully taxable-equivalent basis
assuming a tax rate of 35%.

* Included in the totals are mortgage-backed securities and collateralized
mortgage obligations of $1.8 billion which are included in maturity categories
based on their stated maturity date.

QUARTERLY RESULTS OF OPERATIONS
- -------------------------------
(Unaudited)

* Includes gain (loss) on securities transactions.

79

CULLEN/FROST BANKERS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

BANK SUBSIDIARY
(in thousands)
- --------------------------------------------------------------------------------

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- -------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------

The information regarding directors and executive officers called for by
Item 10 is incorporated herein by reference to Cullen/Frost's Proxy Statement
for its Annual Meeting of Shareholders to be held May 22, 2002.

The additional information regarding executive officers called for by Item
10 is included in Part I, Item 1 of this document under the heading "Executive
Officers of the Registrant".

ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------

The information called for by Item 11 is incorporated herein by reference
to Cullen/Frost's Proxy Statement for its Annual Meeting of Shareholders to be
held May 22, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------

The information called for by Item 12 is incorporated herein by reference
to Cullen/Frost's Proxy Statement for its Annual Meeting of Shareholders to be
held May 22, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------

The information called for by Item 13 is incorporated herein by reference
to Cullen/Frost's Proxy Statement for its Annual Meeting of Shareholders to be
held May 22, 2002.

80

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------

(a) The following documents are filed as part of this Annual Report on
Form 10-K:
1. Financial Statements -- Reference is made to Part II, Item 8, of
this Annual Report on Form 10-K.
2. The Financial Statement Schedules are omitted, as the required
information is included in the annual report.
3. Exhibits -- The following exhibits are filed as a part of this
Annual Report on Form 10-K:

* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 601 of Regulation S-K.

(b) Reports on Form 8-K -- No such reports were filed during the quarter
ended December 31, 2001.

81

- ---------------

(1) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed September 5, 1989 (File No.
33-30776)

(2) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed September 5, 1989 (File No.
33-30777)

(3) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed October 31, 1990 (File No.
33-37500)

(4) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed March 18, 1991 (File No.
33-39478)

(5) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed October 20, 1992 (File No.
33-53492)

(6) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual Report on Form 10-K for the Year Ended December
31, 1994 (File No. 0-7275)

(7) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual Report on Form 10-K/A for the Year Ended December
31, 1995 (File No. 0-7275)

(8) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual Report on Form 10-K for the Year Ended December
31, 1997 (File No. 0-7275)

(9) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual Report on Form 10-K for the Year Ended December
31, 1998 (File No. 0-7275)

(10) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Current Report on Form 8-A12B dated February 1, 1999
(File No. 0-7275)

(11) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual Report on Form 10-K for the Year Ended December
31, 2000 (File No. 0-7275)

(12) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed September 4, 2001 (File No.
33-68928)

(13) To be filed as an amendment.

82

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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.

Date: March 29, 2002 CULLEN/FROST BANKERS, INC.
(Registrant)

By: /s/ PHILLIP D. GREEN

----------------------------------
PHILLIP D. GREEN
GROUP EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 29, 2002.

83

SIGNATURES -- (CONTINUED)

84

EXHIBIT INDEX

* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 601 of Regulation S-K.
- ---------------

(1) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed September 5, 1989 (File No.
33-30776)

(2) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed September 5, 1989 (File No.
33-30777)

(3) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed October 31, 1990 (File No.
33-37500)

(4) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed March 18, 1991 (File No.
33-39478)

(5) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed October 20, 1992 (File No.
33-53492)

(6) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual Report on Form 10-K for the Year Ended December
31, 1994 (File No. 0-7275)

85

(7) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual Report on Form 10-K/A for the Year Ended December
31, 1995 (File No. 0-7275)

(8) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual Report on Form 10-K for the Year Ended December
31, 1997 (File No. 0-7275)

(9) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual Report on Form 10-K for the Year Ended December
31, 1998 (File No. 0-7275)

(10) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Current Report on Form 8-A12B dated February 1, 1999
(File No. 0-7275)

(11) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Annual Report on Form 10-K for the Year Ended December
31, 2000 (File No. 0-7275)

(12) Incorporated herein by reference to the designated Exhibits to
Cullen/Frost's Report on Form S-8 filed September 4, 2001 (File No.
33-68928)

(13) To be filed as an amendment.

86