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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2002

or

o 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 000-14517

TEXAS REGIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

Texas
(State or other jurisdiction
of incorporation or organization)		   74-2294235
(I.R.S. Employer Identification No.)

3900 North 10th Street, 11th Floor
McAllen, Texas 78501
(Address of principal executive offices) (Zip Code)

(956) 631-5400
(Registrant's telephone number, including area code)

        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 ý    No o

        There were 26,252,829 shares of the registrant's Class A Voting Common Stock, $1.00 par value, outstanding as of July 29, 2002.


PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Texas Regional Bancshares, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in Thousands, Except Share Data)

 
   June 30,
2002
   December 31,
2001
  
 
   (Unaudited)

    
  
Assets  
  Cash and Due From Banks   $ 99,271   $ 95,606  
  Interest-Bearing Deposits at Other Banks     264     96  
   
 
 
    Total Cash and Cash Equivalents     99,535     95,702  
  Time Deposits     695     495  
  Securities Available for Sale, at Fair Value     1,045,768     654,721  
  Securities Held to Maturity, at Amortized Cost (Fair Value of $549 in 2002 and $950 in 2001)     514     914  
  Loans Held for Sale     37,697     —  
  Loans Held for Investment, Net of Unearned Discount of $1,516 in 2002 and $2,116 in 2001     2,149,013     1,710,001  
  Less: Allowance for Loan Losses     (26,494 )   (21,050 )
   
 
 
    Net Loans     2,122,519     1,688,951  
  Premises and Equipment     88,596     75,576  
  Accrued Interest Receivable     29,681     22,728  
  Other Real Estate     8,037     7,085  
  Goodwill     24,775     24,256  
  Identifiable Intangibles     19,783     11,742  
  Other Assets     32,149     8,642  
   
 
 
    Total Assets   $ 3,509,749   $ 2,590,812  
   
 
 
Liabilities  
  Deposits              
    Demand   $ 399,402   $ 330,864  
    Savings     130,118     118,042  
    Money Market Checking and Savings     754,953     561,087  
    Time Deposits     1,674,612     1,225,884  
   
 
 
      Total Deposits     2,959,085     2,235,877  
  Other Borrowed Money     185,353     70,709  
  Accounts Payable and Accrued Liabilities     28,872     18,967  
   
 
 
    Total Liabilities     3,173,310     2,325,553  
   
 
 
Commitments and Contingencies              
Shareholders' Equity              
  Preferred Stock; $1.00 Par Value, 10,000,000 Shares Authorized; None Issued and Outstanding     —     —  
  Common Stock—Class A; $1.00 Par Value, 50,000,000 Shares Authorized; Issued and Outstanding 26,248,869 Shares in 2002 and 16,236,481 Shares in 2001     26,249     16,236  
  Paid-In Capital     179,442     137,027  
  Retained Earnings     120,601     109,412  
  Accumulated Other Comprehensive Income, net of tax     10,147     2,584  
   
 
 
    Total Shareholders' Equity     336,439     265,259  
   
 
 
    Total Liabilities and Shareholders' Equity   $ 3,509,749   $ 2,590,812  
   
 
 

The accompanying notes are an integral part of the condensed consolidated financial statements.

2


Texas Regional Bancshares, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and
Comprehensive Income
(Dollars in Thousands, Except Per Share Data)

 
   Three Months
Ended June 30,
   Six Months
Ended June 30,
 
   2002
   2001
   2002
   2001
 
   (Unaudited)
Interest Income                        
  Loans Held for Sale   $ 628   $ —   $ 856   $ —
  Loans Held for Investment, Including Fees     39,087     37,048     74,842     75,976
  Securities                        
    Taxable     11,427     8,791     20,485     17,700
    Tax-Exempt     661     532     1,326     1,074
  Time Deposits     13     22     27     55
  Federal Funds Sold     30     225     56     278
   
 
 
 
    Total Interest Income     51,846     46,618     97,592     95,083
   
 
 
 
Interest Expense                        
  Deposits     16,882     21,658     32,262     44,962
  Other Borrowed Money     1,964     603     3,080     1,372
   
 
 
 
    Total Interest Expense     18,846     22,261     35,342     46,334
   
 
 
 
Net Interest Income Before Provision for Loan Losses     33,000     24,357     62,250     48,749
Provision for Loan Losses     3,023     1,188     5,705     2,926
   
 
 
 
  Net Interest Income After Provision for Loan Losses     29,977     23,169     56,545     45,823
   
 
 
 
Noninterest Income                        
  Service Charges on Deposit Accounts     4,982     3,810     9,452     7,265
  Other Service Charges     1,203     780     2,687     1,855
  Trust Service Fees     649     622     1,297     1,246
  Net Realized Gains on Sales of Securities Available for Sale     618     239     1,076     250
  Data Processing Service Fees     1,626     793     3,108     1,542
  Loan Servicing Income, Net     444     —     577     —
  Other Operating Income     25     477     664     867
   
 
 
 
    Total Noninterest Income     9,547     6,721     18,861     13,025
   
 
 
 
Noninterest Expense                        
  Salaries and Employee Benefits     9,793     7,369     18,463     14,203
  Net Occupancy Expense     1,488     1,112     2,676     2,179
  Equipment Expense     2,192     1,583     3,964     3,125
  Other Real Estate Expense, Net     81     124     162     212
  Amortization of Goodwill     —     574     —     1,147
  Amortization of Identifiable Intangibles     896     534     1,565     1,068
  Other Noninterest Expense     5,283     3,773     9,896     7,549
   
 
 
 
    Total Noninterest Expense     19,733     15,069     36,726     29,483
   
 
 
 
Income Before Income Tax Expense     19,791     14,821     38,680     29,365
Income Tax Expense     6,535     5,079     13,013     10,325
   
 
 
 
Net Income     13,256     9,742     25,667     19,040
Other Comprehensive Income, Net of Tax                        
  Unrealized Gains on Securities Available for Sale                        
    Unrealized Holding Gains Arising During Period     11,931     214     8,262     4,764
    Less: Reclassification Adjustment for Gains Included in Net Income     402     155     699     163
   
 
 
 
      Total Other Comprehensive Income     11,529     59     7,563     4,601
   
 
 
 
Comprehensive Income   $ 24,785   $ 9,801   $ 33,230   $ 23,641
   
 
 
 
Net Income Per Common Share                        
  Basic   $ 0.51   $ 0.40   $ 1.00   $ 0.79
  Diluted     0.50     0.40     0.99     0.78

The accompanying notes are an integral part of the condensed consolidated financial statements.

3


Texas Regional Bancshares, Inc. and Subsidiaries
Condensed Consolidated Statements of
Changes In Shareholders' Equity
(Dollars in Thousands)

 
   Common
Stock—
Class A
   Paid-In
Capital
   Retained
Earnings
   Accumulated
Other
Comprehensive
Income
(Loss)
   Total
Shareholders'
Equity
  
 
   (Unaudited)

  
Six Months Ended June 30, 2002                                
  Balance, Beginning of Period   $ 16,236   $ 137,027   $ 109,412   $ 2,584   $ 265,259  
  Net Income     —     —     25,667     —     25,667  
  Unrealized Gains on Securities, Net of Tax and Reclassification Adjustment     —     —     —     7,563     7,563  
   
 
 
 
 
 
    Total Comprehensive Income     —     —     25,667     7,563     33,230  
   
 
 
 
 
 
  Exercise of Stock Options, 87,017 Shares of Class A Common Stock     87     2,395     —     —     2,482  
  Three-For-Two Stock Split     8,749           (8,769 )   —     (20 )
  Tax Effect of Nonqualified Stock Options Exercised     —     417     —     —     417  
  Purchase of Riverway Holdings, Inc.     1,177     39,603     —     —     40,780  
  Class A Common Stock Cash Dividends     —     —     (5,709 )   —     (5,709 )
   
 
 
 
 
 
  Balance, End of Period   $ 26,249   $ 179,442   $ 120,601   $ 10,147   $ 336,439  
   
 
 
 
 
 
Six Months Ended June 30, 2001                                
  Balance, Beginning of Period   $ 16,091   $ 134,084   $ 79,691   $ (2,162 ) $ 227,704  
  Net Income     —     —     19,040     —     19,040  
  Unrealized Gain on Securities, Net of Tax and Reclassification Adjustment     —     —     —     4,601     4,601  
   
 
 
 
 
 
    Total Comprehensive Income     —     —     19,040     4,601     23,641  
   
 
 
 
 
 
  Exercise of Stock Options, 19,275 Shares of Class A Common Stock     19     574     —     —     593  
  Tax Effect of Nonqualified Stock Options Exercised     —     52     —     —     52  
  Class A Common Stock Cash Dividends     —     —     (4,829 )   —     (4,829 )
   
 
 
 
 
 
  Balance, End of Period   $ 16,110   $ 134,710   $ 93,902   $ 2,439   $ 247,161  
   
 
 
 
 
 

The accompanying notes are an integral part of the condensed consolidated financial statements.

4


Texas Regional Bancshares, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)

 
   Six Months
Ended June 30,
  
 
   2002
   2001
  
 
   (Unaudited)

  
Cash Flows from Operating Activities              
  Net Income   $ 25,667   $ 19,040  
  Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities              
    Depreciation, Amortization and Accretion, Net     5,674     4,726  
    Provision for Loan Losses     5,705     2,926  
    Provision for Estimated Losses on Other Real Estate and Other Assets     —     9  
    Gain on Sale of Securities Available for Sale     (1,076 )   (250 )
    (Gain) Loss on Sale of Other Assets     (28 )   32  
    Gain on Sale of Other Real Estate     (156 )   (41 )
    (Gain) Loss on Disposal of Premises and Equipment     339     (37 )
    Net Decrease in Loans Held for Sale     11,573     —  
    Increase in Deferred Income Tax Asset     —     (8 )
    Increase (Decrease) in Deferred Income Tax Liability     847     (600 )
    Increase in Accrued Interest Receivable and Other Assets     (4,947 )   (1,330 )
    Increase (Decrease) in Accounts Payable and Accrued Liabilities     786     (1,580 )
   
 
 
Net Cash Provided by Operating Activities     44,384     22,887  
   
 
 
Cash Flows from Investing Activities              
  Net (Increase) Decrease in Time Deposits     (104 )   693  
  Proceeds from Sales of Securities Available for Sale     76,315     64,195  
  Proceeds from Maturing Securities Available for Sale     84,221     172,210  
  Purchases of Securities Available for Sale     (296,056 )   (241,897 )
  Proceeds from Maturing Securities Held to Maturity     532     567  
  Loan Originations and Advances, Net     (99,142 )   (40,770 )
  Recoveries of Charged-Off Loans     395     260  
  Proceeds from Sale of Premises and Equipment     32     37  
  Purchases of Premises and Equipment     (11,534 )   (2,333 )
  Proceeds from Sale of Other Real Estate     314     327  
  Proceeds from Sale of Other Assets     573     500  
  Purchase of Data Processing Contracts     (849 )   —  
  Net Cash Provided by Merger     17,349     —  
   
 
 
Net Cash Used in Investing Activities     (227,954 )   (46,211 )
   
 
 
Cash Flows from Financing Activities              
  Net Increase in Demand Deposits, Savings, Money Market Checking and Savings Accounts     23,498     70,105  
  Net Increase (Decrease) in Time Deposits     195,153     (20,853 )
  Net Decrease in Other Borrowed Money     (28,470 )   (7,234 )
  Cash Dividends Paid on Class A Common Stock     (5,240 )   (4,844 )
  Cash Dividends Paid on Fractional Shares     (20 )   —  
  Proceeds from the Sale of Common Stock     2,482     593  
   
 
 
Net Cash Provided by Financing Activities     187,403     37,767  
   
 
 
Increase in Cash and Cash Equivalents     3,833     14,443  
Cash and Cash Equivalents at Beginning of Period     95,702     80,665  
   
 
 
Cash and Cash Equivalents at End of Period   $ 99,535   $ 95,108  
   
 
 
Supplemental Disclosures of Cash Flow Information:              
  Interest Paid   $ 18,826   $ 47,073  
  Income Taxes Paid     14,444     10,903  
Supplemental Schedule of Noncash Investing and Financing Activities:              
  Foreclosure and Repossession in Partial Satisfaction of Loans Receivable     3,305     3,960  
  Financing Provided for Sales of Other Real Estate     1,132     861  
  Net Increase in Security Trades Not Settled     4,994     13,838  
  Net Increase (Decrease) in Dividends Payable     469     (15 )
The Company Acquired Riverway Holdings, Inc. and its subsidiary, Riverway Bank, on February 22, 2002. Assets Acquired and Liabilities Assumed are as Follows:              
  Fair Value of Assets Acquired Including Goodwill     691,322     —  
  Fair Value of Liabilities Assumed     650,542     —  
  Fair Value of Stock Issued     40,780     —  

The accompanying notes are an integral part of the condensed consolidated financial statements.

5