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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission File Number 0-7275

CULLEN/FROST BANKERS, INC.

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      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 o

      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.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)     Yes x          No o

      As of June 28, 2002, the aggregate market value of the common stock of the registrant held by non-affiliates of the registrant was approximately $1,758,247,597.

      As of March 14, 2003, there were 51,337,275 shares of the registrant’s common stock, $.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders of Cullen/ Frost Bankers, Inc. to be

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PART I

General

       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 and bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Financial Modernization Act of 1999 (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 and bank holding company subsidiary of Cullen/ Frost, 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, 2002, Cullen/ Frost’s principal assets consisted of all of the capital stock of The Frost National Bank (“Frost Bank”). Frost Bank operates 78 financial centers across Texas with 17 locations in the San Antonio area, 21 in the Houston/ Galveston area, 15 in the Fort Worth area, eight in the Corpus Christi area, five in Austin, four in Dallas, two in San Marcos, two in McAllen, two in the Boerne/ Fair Oaks area, one in New Braunfels, and one in Harlingen. At December 31, 2002, Cullen/ Frost had consolidated total assets of $9.6 billion and total deposits of $7.6 billion. Based on information from the Federal Reserve Board, at September 30, 2002, Cullen/ Frost was the largest of the 129 bank holding companies headquartered in Texas.

      Cullen/ Frost’s operations are managed along two reportable operating segments consisting of Banking and the Financial Management Group. (See “Results of Segment Operations” on page 23 and Note V “Operating Segments” on page 74).

      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 was chartered as a national banking association in 1899, but its origin can be traced to a mercantile partnership organized in 1868. At December 31, 2002, Frost Bank was the largest commercial bank headquartered in Texas.

Services Offered by Frost Bank

      Frost Bank provides commercial banking 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 and treasury management services. Frost Bank provides financial services to business clients on both a national and international basis.

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

      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 (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 31 and 39 of this document.

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     Correspondent Banking

      Frost Bank acts as correspondent for approximately 311 financial institutions, which are 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, fixed income security services, and securities custody and clearance services.

     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, 2002, trust assets with a market value of $12.6 billion were being administered by Frost Bank. These assets were comprised of managed assets of $5.9 billion and custody assets of $6.7 billion.

     Capital Markets — Fixed Income Services

      The Frost Bank Capital Markets Division was founded in 1999 to meet the transaction needs of fixed income institutional investors. Services provided include sales and trading, new issue underwriting, money market trading, and securities safekeeping and clearance.

     Brokerage Services

      Frost Brokerage Services Inc. a wholly owned subsidiary of Frost Bank, provides brokerage services and performs other transactions or operations related to the sale and purchase of securities of all types.

     Insurance

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

Services/Activities Offered by Other Cullen/Frost Subsidiaries

       Frost Securities, Inc. (“FSI”) is a wholly owned subsidiary that employs a small group of investment bankers who provide limited advisory and private equity services to middle market companies in Texas.

      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 internal credit lines.

      Daltex General Agency, Inc. (“Daltex”), a wholly owned non-banking subsidiary, is a managing general insurance agency. Daltex provides insurance on certain auto loans financed by the bank.

      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

       Frost Bank experiences a very competitive environment in its commercial banking business, primarily from other banks located in its respective service areas. Frost Bank also competes with insurance companies, finance 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

       Cullen/ Frost and its subsidiaries are subject to extensive regulation under federal and state law. This regulatory framework is intended primarily for the protection of depositors and deposit insurance funds and not for the protection of security holders.

      Set forth below is a description of the material elements of the laws and regulations applicable to Cullen/ Frost and its subsidiaries. The description is qualified in its entirety by reference to the full text of the statutes and regulations that are described.

     General

      Cullen/ Frost is a legal entity separate and distinct from Frost Bank and its other subsidiaries. As a financial holding company and a bank holding company, Cullen/ Frost is regulated under the BHC Act and is subject to the supervision of the Federal Reserve Board.

      In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and performing certain servicing activities for subsidiaries. As a result of the Modernization Act, however, bank holding companies that are financial holding companies may engage in any activity, or acquire and retain the shares of any company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the Federal Reserve Board in consultation with the Office of the Comptroller of the Currency (the “OCC”)) or (ii) complementary to a financial activity and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the Federal Reserve Board). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments in commercial and financial companies. They also include activities that the Federal Reserve Board had determined, by order or regulation in effect prior to the enactment of the BHC Act, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

      If a bank holding company seeks to engage in the broader range of activities that are permitted under the BHC Act for financial holding companies, (i) all of its depository institution subsidiaries must be “well capitalized” and “well managed” and (ii) it must file a declaration with the Federal Reserve Board that it elects to be a “financial holding company.” A depository institution subsidiary will be considered to be “well capitalized” if it satisfies the requirements for this status discussed under “Capital Adequacy and Prompt Corrective Action” on page 6. It will be considered to be “well managed” if it received a composite rating and management rating of at least “satisfactory” in its most recent examination. Cullen/ Frost’s declaration to become a financial holding company was declared effective by the Federal Reserve Board on March 11, 2000.

      In order for a financial holding company to commence any new activities permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act (“CRA”). The CRA requires depository institutions to help serve the credit needs of their communities by, among other things, providing credit to low-and moderate-income individuals and communities.

      Cullen/ Frost’s only bank subsidiary, Frost Bank, is organized as a national banking association under the National Bank Act. It is subject to regulation and examination by the OCC.

     Borrowings

      There are various restrictions on the ability of Cullen/ Frost and its non-bank subsidiaries to borrow from, and engage in certain other transactions with, Frost Bank. In general, these restrictions require that any

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      Federal law also provides that extensions of credit and other transactions between Frost Bank and Cullen/ Frost or one of its non-bank subsidiaries must be on terms and conditions, including credit standards, that are substantially the same or at least as favorable to Frost Bank as those prevailing at the time for comparable transactions involving other non-affiliated companies or, in the absence of comparable transactions, on terms and conditions, including credit standards, that in good faith would be offered to, or would apply to, non-affiliated companies.

     Dividends

      The principal source of Cullen/ Frost’s cash revenues is dividends from Frost Bank. The prior approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year would exceed the sum of the bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank’s undivided profits after deducting statutory bad debt in excess of the bank’s allowance for loan losses. Under the foregoing dividend restrictions, and without adversely affecting its “well capitalized” status, Frost Bank could pay aggregate dividends of approximately $144.2 million to Cullen/ Frost, without obtaining affirmative governmental approvals, at December 31, 2002. This amount is not necessarily indicative of amounts that may be available to be paid in future periods.

      In addition, Cullen/ Frost and Frost Bank are subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.

     Support of Subsidiary Bank

      Federal Reserve Board policy requires bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this policy, Cullen/ Frost is expected to commit resources to support Frost Bank, including at times when Cullen/ Frost may not be in a financial position to provide it. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. The BHC Act provides that, in the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

      In addition, under the National Bank Act, if the capital stock of Frost Bank is impaired by losses or otherwise, the OCC is authorized to require payment of the deficiency by assessment upon Cullen/ Frost. If the assessment is not paid within three months, the OCC could order a sale of the Frost Bank stock held by Cullen/ Frost to make good the deficiency.

     Capital Adequacy and Prompt Corrective Action

      The Federal Reserve Board, the OCC and the Federal Deposit Insurance Corporation (the “FDIC”) have substantially similar risk-based capital and leverage ratio guidelines for banking organizations. The guidelines are intended to ensure that banking organizations have adequate capital given the risk levels of their assets and off-balance sheet financial instruments.

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      Under the risk-based capital guidelines adopted by the Federal Reserve Board for bank holding companies and the OCC for national banks, the minimum requirement for the ratio of total capital (as defined) to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is eight percent. At least half of the total capital is to be composed of common stockholders’ equity, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock (in the case of a bank holding company) and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets (“Tier 1 capital”). The remainder of total capital may consist of mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock and the allowance for possible loan losses (“Tier 2 capital” and together with Tier 1 capital, “total capital”).

      The Federal Reserve Board and the OCC also require financial holding companies and national banks, respectively, to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total consolidated quarterly average assets (as defined for regulatory purposes), net of the allowance for possible loan losses, goodwill and certain other intangible assets. The requirements necessitate a minimum leverage ratio of three percent for financial holding companies and national banks that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk. All other financial holding companies and national banks are required to maintain a minimum leverage ratio of four percent, unless a different minimum is specified by an appropriate regulatory authority. The Federal Reserve Board has not advised Cullen/ Frost, and the OCC has not advised Frost Bank, of any specific minimum leverage ratio applicable to it. For information regarding the capital ratios and leverage ratio of Cullen/ Frost and Frost Bank see the discussion under the caption “Capital and Liquidity” on page 41 and Note M “Capital” on page 62.

      The federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital accord of the Basel Committee on Banking Supervision (the “BIS”). The BIS is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. In January 2001, the BIS released a proposal to replace the 1988 capital accord with a new capital accord that would set capital requirements for operational risk and refine the existing capital requirements for credit risk and market risk exposures. Operational risk is defined to mean the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems in connection with external events. The 1988 capital accord does not include separate capital requirements for operational risk. The BIS has stated that its objective is to finalize a new capital accord in the fourth quarter of 2003 and for member countries to implement the accord at year-end 2006. The ultimate timing for a new accord, and the specifics of capital assessments for addressing operational risk, are uncertain. However, it is possible that a new capital accord addressing operational risk will eventually be adopted by the BIS and implemented by the United States federal bank regulatory authorities. The new capital requirements that may arise out of a new BIS capital accord could increase minimum capital requirements applicable to Cullen/ Frost and its subsidiaries.

      The Federal Deposit Insurance Act, as amended (“FDIA”), requires among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA sets forth the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier I capital ratio and the leverage ratio.

      Under the regulations adopted by the federal regulatory authorities, a bank insured by the FDIC will be: (i) “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 is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “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 (three percent in certain circumstances ) and is not “well capitalized”;

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      The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent 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

      Substantially all of the deposits of Frost Bank are insured up to applicable limits by the Bank Insurance Fund (“BIF”) of the FDIC and are subject to deposit insurance assessments to maintain the BIF. The FDIC utilizes a risk-based assessment system which 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 the FDIC could impose assessment rates on institutions such as Frost Bank in the future 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 generally defined as the appointment of a conservator or receiver, and “in danger of default” is generally defined as the existence of certain conditions indicating that a “default” is likely to occur in the absence of regulatory assistance.

     Depositor Preference

      Under federal law, 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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     Financial Privacy

      The Modernization Act modified laws related to financial privacy. The new financial privacy provisions generally prohibit financial institutions, including Cullen/ Frost, from disclosing nonpublic personal financial information to nonaffiliated third parties unless customers have the opportunity to “opt out” of the disclosure.

     Acquisitions

      The BHC Act generally limits acquisitions by bank holding companies that are not qualified as 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. Financial holding companies like Cullen/ Frost are also permitted to acquire companies engaged in activities that are financial in nature and in activities that are incidental and complementary to financial activities without prior Federal Reserve Board approval.

      The BHC Act, the Federal Bank Merger Act, the Texas Banking Code and other federal and state statutes regulate 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 its parent holding company. Under the Federal Bank Merger Act, the prior approval of the Comptroller of the Currency is required for a national bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, 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, the applicant’s performance record under the CRA and fair housing laws and the effectiveness of the subject organizations in combating money laundering activities.

     USA PATRIOT Act

      On October 26, 2001, President Bush signed into law comprehensive anti-terrorism legislation known as the USA PATRIOT Act of 2001 (the “USA Patriot Act”). Title III of the USA Patriot Act substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States.

      The U.S. Treasury Department (“Treasury”) has issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements to financial institutions such as Frost Bank and Cullen/ Frost’s broker-dealer subsidiary. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and control to detect, prevent and report money laundering and terrorist financing. Treasury is expected to issue a number of additional regulations which will further clarify the USA Patriot Act’s requirements.

      Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal and reputational consequences for the institution.

     Legislative Initiatives

      Various legislative and regulatory initiatives are from time to time introduced in Congress and state legislatures, as well as applicable regulatory agencies. Any change in applicable law, regulation or regulatory policy may have a material effect on the business of Cullen/ Frost and its subsidiaries.

Regulatory and Economic Policies

       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

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      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

       At December 31, 2002, Cullen/ Frost employed 3,183 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 plan, 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

       The names, ages, recent business experience and positions or offices held by each of the executive officers of Cullen/ Frost during 2002 are as follows:

Stan McCormick, age 57, 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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Website Access to Reports

       Cullen/ Frost’s website, www.frostbank.com, provides access to the Corporation’s Forms 10-K, 10-Q and 8-K reports filed or furnished to the SEC free of charge, as soon as reasonably practicable after those reports are electronically transmitted to the Securities and Exchange Commission.

Item 2.     PROPERTIES

      The executive offices of Cullen/ Frost, as well as the principal banking headquarters of Frost Bank, are housed in a 21-story office tower and a nine-story office building located on approximately 3.5 acres of land in downtown San Antonio. Frost Bank purchased the twenty-one story office tower and the adjacent parking garage facility in the second quarter of 2002. The combined purchase price of the office tower and parking facility was approximately $41 million. Both structures had been the subject of a sale and leaseback agreement with options allowing for occupancy up to 50 years and for purchases of the related assets under specific terms. Cullen/ Frost and Frost Bank occupy approximately 50 percent of the office tower. The nine-story office building was purchased in April 1994.

Item 3.     LEGAL PROCEEDINGS

      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

      None.

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PART II

Item 5.     MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER

      The tables below set forth for each quarter of 2002 and 2001 the high and low sales prices for Cullen/ Frost’s common stock and the dividends paid per share. The Corporation’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 14, 2003, was $30.03.

      The number of record holders of common stock at March 3, 2003 was 2,011.

      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 the “Supervision and Regulation” section on page 5, the “Capital and Liquidity” section on page 41 in Item 7 and Note L “Dividends” on page 62.

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Item 6.     SELECTED FINANCIAL DATA

Consolidated Statements of Operations

Historical amounts have been restated for classification of a component of FSI as discontinued operations, for stock splits and to reflect the pooling-of-interests merger with Overton Bancshares, Inc. in 1998.

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Selected Financial Data

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Item 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

Financial Review

       Discussed below are the operating results and related financial condition of Cullen/ Frost Bankers, Inc. and Subsidiaries (“Cullen/ Frost” or the “Corporation”) for the years 2000 through 2002. 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.

      On July 23, 2002, Cullen/ Frost announced that it was closing the capital markets division of its investment banking subsidiary, Frost Securities, Inc. “FSI”. All operating results for this discontinued component of the Corporation’s operations have been reclassified to “discontinued operations” and are reported separately, net of tax, in the income statement. All prior periods have been restated to reflect the change.

Forward-Looking Statements

       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”), notwithstanding that 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 and Cullen/ Frost’s assessment of that impact; (ii) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (iii) the effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; (iv) inflation, interest rate, market and monetary fluctuations; (v) political instability; (vi) acts of war or terrorism; (vii) the timely development and acceptance of new products and services and perceived overall value of these products and services by users; (viii) changes in consumer spending, borrowings and savings habits; (ix) technological changes; (x) acquisitions and integration of acquired businesses; (xi) the ability to increase market share and control expenses; (xii) changes in the competitive environment among financial holding companies; (xiii) 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; (xiv) 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; (xv) changes in the Corporation’s organiza-

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      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.

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 tangible book value and net income per common share may occur in connection with any future transaction. All of the acquisitions during the period 2000 through 2002 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.

      On May 18, 2002, The Frost National Bank (“Frost Bank”) acquired the location and certain deposits of the Harlingen branch of JPMorgan Chase Bank. This purchase business combination, which was completed during the second quarter of 2002, allows the Corporation to expand its presence in the Rio Grande Valley. Frost Bank assumed approximately $20 million in deposits associated with its acquisition of the Harlingen branch, which became a Frost Bank financial center. This transaction did not have a material impact on Cullen/ Frost’s 2002 results of operations.

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

      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.

Results of Operations

       For the year ended December 31, 2002, Cullen/ Frost reported net income of $117.0 million or $2.23 per diluted common share, which is a record level for the Corporation. Growth in earning assets which was funded primarily through growth in demand deposits, helped mitigate the effects of an unprecedented low rate environment. In addition, a reduced provision for possible loan losses, steady growth in fee income and continued cost-control efforts were also significant factors contributing to the strong performance. Net income increased from $80.9 million or $1.52 per diluted common share and $108.8 million or $2.03 per diluted common share for 2001 and 2000, respectively. If the non-amortization of goodwill provisions of SFAS No. 142 (see Note B, “Accounting Changes” section on page 54) had been in effect, net income for the years ended December 31, 2001 and 2000 would have been $88.2 million or $1.65 per diluted common share and $116.1 million or $2.16 per diluted common share, respectively.

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      Net income from continuing operations for the year ended December 31, 2002 was $122.2 million or $2.33 per diluted common share, compared to $80.1 million or $1.50 per diluted common share and $111.3 million or $2.07 per diluted common share for 2001 and 2000, respectively. For the year 2001, continuing operations also excludes the cumulative effect of the change in accounting for derivatives which resulted from a new accounting standard adopted January 1, 2001. (See Note A’s “Financial Derivatives” section on Page 53).