To Our Shareholders$^{CULLEN/FROST BANKERS, INC.}$ As we have every year since this company was founded 135 years ago, during 2002 we challenged ourselves to reflect on and refine our corporate culture. Last year, as  the national conscience fixated on lapses in business ethics and corporate governance, the merits of our old-fashioned way of doing business were brought to the forefront. At a time when other companies are focusing on values and ethics and mission state- ments in their annual reports, we made a conscious decision to back away from that approach.There’s no need for us to highlight our values. After all, we’ve been living them for 135 years. So fundamental are these values to our company that we have decided to deliver  our annual report to shareholders this year in a simple and straightforward way, solely through my letter.This annual report is dedicated to all the people in this company who bring these values and the Frost Philosophy to life every day and sustain the legacy of our founder. The year 2002 was our best year ever, with record annual earnings of $117 million, or $2.23 per diluted common share. To some extent, our success during this difficult economic environment and a time of historically low interest rates was the result of strategic actions taken at the end of 2001 to align our expense base with revenue streams. But that success was also due to a diligent effort on the part of our employees to build business and reduce expenses throughout 2002. In late 2001, amid an uncertain economy, we made some tough decisions. We implemented a staff reduction of 2 percent, eliminating 73 jobs. We enacted an across-the-board salary freeze, which lasted for most of the year.When we offered an early retirement program in late 2001, 131 employees opted to accept, and these individuals were not replaced.Although this was not initially done as a cost-saving measure, the impact on 2002 earnings was  $6.6 million. And we reduced future pension plan volatility by freezing our defined  benefit plan and adding a deferred profit sharing plan. At the same time, as a result of uncertainty in the economy, we built our loan loss reserve to 1.83 percent, up from 1.61 percent a year earlier. During a year when the Federal Reserve cut interest rates to the lowest level in more than four decades, ★ 2 ANNUAL REPORT