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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 March 31, 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 10^th Street, 11^th 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 X No            

        There were 17,493,243 shares of the registrant's Class A Voting Common Stock, $1.00 par value, outstanding as of May 10, 2002.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Texas Regional Bancshares, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands, Except Share Data)				March 31, 2002			December 31, 2001
				(Unaudited)
Assets
	Cash and Due From Banks			$	92,998		$	95,606
	Interest-Bearing Deposits at Other Banks				165			96
	Federal Funds Sold				9,900			—
		Total Cash and Cash Equivalents			103,063			95,702
	Time Deposits				690			495
	Securities Available for Sale, at Fair Value				944,744			654,721
	Securities Held to Maturity, at Amortized Cost (Fair Value of $547 in 2002 and $950 in 2001)				514			914
	Loans Held for Sale				61,932			—
	Loans, Net of Unearned Discount of $1,787 in 2002 and $2,116 in 2001				2,097,488			1,710,001
	Less: Allowance for Loan Losses				(26,024	)		(21,050	)
		Net Loans			2,071,464			1,688,951
	Premises and Equipment				83,219			75,576
	Accrued Interest Receivable				28,413			22,728
	Other Real Estate				7,761			7,085
	Goodwill				24,721			24,256
	Identifiable Intangibles				20,673			11,742
	Other Assets				30,265			8,642
			Total Assets	$	3,377,459		$	2,590,812
Liabilities
	Deposits
		Demand		$	391,940		$	330,864
		Savings			128,982			118,042
		Money Market Checking and Savings			757,435			561,087
		Time Deposits			1,548,688			1,225,884
			Total Deposits		2,827,045			2,235,877
	Other Borrowed Money				210,972			70,709
	Accounts Payable and Accrued Liabilities				26,777			18,967
		Total Liabilities			3,064,794			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 17,441,583 Shares in 2002 and 16,236,481 Shares in 2001				17,442			16,236
	Paid-In Capital				177,587			137,027
	Retained Earnings				119,018			109,412
	Accumulated Other Comprehensive Income (Loss), net of tax				(1,382	)		2,584
		Total Shareholders' Equity			312,665			265,259
		Total Liabilities and Shareholders' Equity		$	3,377,459		$	2,590,812

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

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				Three Months Ended March 31,
Texas Regional Bancshares, Inc. and Subsidiaries Consolidated Statements of Income and Comprehensive Income (Dollars in Thousands, Except Per Share Data)
				2002			2001
				(Unaudited)
Interest Income
	Loans Held for Sale			$	229		$	—
	Loans Held for Investment, Including Fees				35,754			38,928
	Securities
		Taxable			9,058			8,909
		Tax-Exempt			665			542
	Time Deposits				14			33
	Federal Funds Sold				26			53
		Total Interest Income			45,746			48,465
Interest Expense
	Deposits				15,380			23,304
	Other Borrowed Money				1,116			769
		Total Interest Expense			16,496			24,073
Net Interest Income Before Provision for Loan Losses					29,250			24,392
Provision for Loan Losses					2,682			1,738
	Net Interest Income After Provision for Loan Losses				26,568			22,654
Noninterest Income
	Service Charges on Deposit Accounts				4,470			3,455
	Other Service Charges				1,484			1,075
	Trust Service Fees				648			624
	Net Realized Gains on Sales of Securities Available for Sale				458			11
	Data Processing Service Fees				1,482			749
	Loan Servicing Income, Net				133			—
	Other Operating Income				639			390
		Total Noninterest Income			9,314			6,304
Noninterest Expense
	Salaries and Employee Benefits				8,670			6,834
	Net Occupancy Expense				1,188			1,067
	Equipment Expense				1,772			1,542
	Other Real Estate Expense, Net				81			88
	Amortization of Goodwill				—			573
	Amortization of Identifiable Intangibles				669			534
	Other Noninterest Expense				4,613			3,776
		Total Noninterest Expense			16,993			14,414
Income Before Income Tax Expense					18,889			14,544
Income Tax Expense					6,478			5,246
Net Income					12,411			9,298
Other Comprehensive Income (Loss), Net of Tax
	Unrealized Gains (Losses) on Securities Available for Sale
		Unrealized Holding Gains (Losses) Arising During Period			(3,668	)		4,549
		Less: Reclassification Adjustment for Gains Included in Net Income			298			7
			Total Other Comprehensive Income (Loss)		(3,966	)		4,542
Comprehensive Income				$	8,445		$	13,840
Net Income Per Common Share
	Basic			$	0.74		$	0.58
	Diluted				0.73			0.57

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

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Texas Regional Bancshares, Inc. and Subsidiaries 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)
Three Months Ended March 31, 2002
	Balance, Beginning of Period		$	16,236	$	137,027	$	109,412		$	2,584		$	265,259
	Net Income			—		—		12,411			—			12,411
	Unrealized Losses on Securities, Net of Tax and Reclassification Adjustment			—		—		—			(3,966	)		(3,966	)
		Total Comprehensive Income		—		—		12,411			(3,966	)		8,445
	Exercise of Stock Options, 28,945 Shares of Class A Common Stock			29		876		—			—			905
	Tax Effect of Nonqualified Stock Options Exercised			—		81		—			—			81
	Purchase of Riverway Holdings, Inc.			1,177		39,603		—			—			40,780
	Class A Common Stock Cash Dividends			—		—		(2,805	)		—			(2,805	)
	Balance, End of Period		$	17,442	$	177,587	$	119,018		$	(1,382	)	$	312,665
Three Months Ended March 31, 2001
	Balance, Beginning of Period		$	16,091	$	134,084	$	79,691		$	(2,162	)	$	227,704
	Net Income			—		—		9,298			—			9,298
	Unrealized Gain on Securities, Net of Tax and Reclassification Adjustment			—		—		—			4,542			4,542
		Total Comprehensive Income		—		—		9,298			4,542			13,840
	Class A Common Stock Cash Dividends			—		—		(2,414	)		—			(2,414	)
	Balance, End of Period		$	16,091	$	134,084	$	86,575		$	2,380		$	239,130

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

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			Three Months Ended March 31,
Texas Regional Bancshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in Thousands)
			2002			2001
			(Unaudited)
Cash Flows from Operating Activities
	Net Income		$	12,411		$	9,298
	Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
		Depreciation, Amortization and Accretion, Net		2,549			2,252
		Provision for Loan Losses		2,682			1,738
		Gain on Sale of Securities Available for Sale		(458	)		(11	)
		(Gain) Loss on Sale of Other Assets		(16	)		27
		Gain on Sale of Other Real Estate		(116	)		(14	)
		Net Increase in Loans Held for Sale		(12,662	)		—
		Decrease in Deferred Income Tax Asset		3,013			—
		Decrease in Deferred Income Tax Liability		(2,376	)		(444	)
		Increase in Accrued Interest Receivable and Other Assets		(706	)		(1,517	)
		Increase in Accounts Payable and Accrued Liabilities		5,599			3,785
Net Cash Provided by Operating Activities				9,920			15,114
Cash Flows from Investing Activities
	Net (Increase) Decrease in Time Deposits			(99	)		495
	Proceeds from Sales of Securities Available for Sale			27,701			22,584
	Proceeds from Maturing Securities Available for Sale			66,790			93,237
	Purchases of Securities Available for Sale			(148,496	)		(113,848	)
	Proceeds from Maturing Securities Held to Maturity			532			567
	Loan Originations and Advances, Net			(44,807	)		(38,780	)
	Recoveries of Charged-Off Loans			209			148
	Proceeds from Sale of Premises and Equipment			—			11
	Purchases of Premises and Equipment			(4,054	)		(974	)
	Proceeds from Sale of Other Real Estate			721			343
	Proceeds from Sale of Other Assets			189			254
	Purchase of Data Processing Contracts			(849	)		—
	Net Cash Provided by Merger			17,374			—
Net Cash Used in Investing Activities				(84,789	)		(35,963	)
Cash Flows from Financing Activities
	Net Increase in Demand Deposits, Savings, Money
	Market Checking and Savings Accounts			17,382			21,525
	Net Increase in Time Deposits			69,229			39,604
	Net Decrease in Other Borrowed Money			(2,851	)		(22,207	)
	Cash Dividends Paid on Class A Common Stock			(2,435	)		(2,430	)
	Proceeds from the Sale of Common Stock			905			—
Net Cash Provided by Financing Activities				82,230			36,492
Increase in Cash and Cash Equivalents				7,361			15,643
Cash and Cash Equivalents at Beginning of Period				95,702			80,665
Cash and Cash Equivalents at End of Period			$	103,063		$	96,308
Supplemental Disclosures of Cash Flow Information
	Interest Paid		$	16,476		$	24,408
	Income Taxes Paid			200			—
Supplemental Schedule of Noncash Investing and Financing Activities
	Foreclosure and Repossession in Partial Satisfaction of Loans Receivable			2,481			994
	Financing Provided for Sales of Other Real Estate			379			76
	Net Increase in Security Trades Not Settled			3,578			11,501
	Net Increase (Decrease) in Dividends Payable			370			(16	)
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 consolidated financial statements.

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TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1:  Basis of Presentation

        The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, changes in shareholders' equity, and cash flows in conformity with accounting principles generally accepted in the United States of America. However, the consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation. All such adjustments were of a normal and recurring nature. The results of operations and cash flows for the three months ended March 31, 2002 should not be considered indicative of the results to be expected for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Texas Regional Bancshares, Inc. and Subsidiaries ("Texas Regional" or the "Company") Annual Report on Form 10-K for the year ended December 31, 2001.

        The consolidated financial statements include the accounts of Texas Regional Bancshares, Inc. (the "Parent") and its wholly-owned subsidiaries, Texas Regional Delaware, Inc. and Texas State Bank (the "Bank"). The Company eliminates all significant intercompany transactions and balances in consolidation. The Company accounts for its investments in subsidiaries on the equity method in the Parent's financial statements.

        In June 2001, the Financial Accounting Standards Board issued Statement No. 141 ("Statement 141"), "Business Combinations", and Statement No. 142 ("Statement 142"), "Goodwill and Other Intangible Assets". Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies criteria which must be met for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with the Financial Accounting Standards Board's Statement No. 121 ("Statement 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Financial Accounting Standards Board's Statement No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" supercedes Statement 121 and is effective for fiscal years beginning after December 15, 2001.

        The Company adopted the provisions of Statement 141 as of June 30, 2001 and Statement 142 effective January 1, 2002. The adoption of Statement 141 did not have any impact on the Company's consolidated financial statements. Upon adoption of Statement 142, the Company no longer amortizes goodwill. In accordance with Statement 142, the Company will perform a transitional impairment test of goodwill in the first six months of 2002, and will perform an annual impairment test of the goodwill in 2002 and thereafter. See Note 6 for the effect of adoption of Statement 142.

        In August 2001, the Financial Accounting Standards Board issued Statement No. 144 ("Statement 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement 144 supercedes Financial Accounting Standards Board Statement No. 121 ("Statement 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", it retains many of the fundamental provisions of Statement 121, establishes a single accounting model for long-lived assets to be disposed of by sale, and resolves certain implementation issues not previously addressed by Statement 121. Statement 144 also supersedes the accounting and reporting provisions of

6

Financial Accounting Standards Board Opinion No. 30, ("Opinion No. 30") "Reporting the Results of Operation—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends the reporting to a component of an entity, rather than a segment of a business, that either has been disposed of or is classified as held for sale. Statement 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted Statement 144 on January 1, 2002. The adoption of Statement 144 did not have an impact on the Company's consolidated financial statements.

Note 2:  Impaired Loans

        Loans that the Company does not expect to collect the full principal and interest based on the terms of the original loan agreement are identified as impaired loans. These include loans that are on nonaccrual status or are considered troubled debt restructurings due to the granting of a below-market rate of interest or a partial forgiveness of indebtedness on an existing loan. The balance of impaired loans was $14.5 million at March 31, 2002 for which there was a related allowance for loan losses of $3.6 million. At March 31, 2002, the Company had $244,000 in impaired loans for which there was no related allowance for loan losses. The average recorded investment in impaired loans during the three months ended March 31, 2002 was $14.3 million. Interest income on impaired loans of $24,000 for cash payments received on nonaccrual loans was recognized during the three months ended March 31, 2002.

Note 3:  Common Stock

        On March 12, 2002, the Board of Directors approved a cash dividend of $0.16 per share for shareholders of record on April 1, 2002 and payable on April 15, 2002.

Note 4:  Earnings Per Common Share Computations

        The table below presents a reconciliation of basic and diluted earnings per share computations (dollars in thousands, except share data):

	Three Months Ended March 31,
	2002		2001
	(Unaudited)
Net Income Available to Common Shareholders	$	12,411	$	9,298
Weighted Average Number of Common Shares Outstanding Used in Basic EPS Calculation		16,746,387		16,090,546
Add Assumed Exercise of Outstanding Stock Options and Riverway Holdback Shares as Adjustments for Dilutive Securities		188,513		108,632
Weighted Average Number of Common Shares Outstanding Used in Diluted EPS Calculations		16,934,900		16,199,178
Basic EPS	$	0.74	$	0.58
Diluted EPS		0.73		0.57

Note 5:  Material Business Combination

        On February 22, 2002, the Company acquired 100 percent of the outstanding common shares of Riverway Holdings, Inc. ("Riverway") located in Houston, Texas. The results of operations from the

7

Houston branch have been included in the consolidated financial statements since that date. The acquisition of Riverway gives Texas Regional a presence in the Houston metropolitan area, which adds a new market to Texas Regional's dominant market position in the Rio Grande Valley.

        The shareholders of Riverway received 1,176,157 shares of Texas Regional common stock in exchange for all of the outstanding shares of Riverway. Additionally, 100,000 shares of Texas Regional were issued and held pursuant to a holdback escrow agreement pending the outcome of certain contingencies. The aggregate purchase price was $40.8 million. The value of the 1,176,157 shares issued is based on the average market price of Texas Regional common stock over the two-day period before and after the terms of the acquisition were agreed to and announced.

        The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (dollars in thousands):

			As of February 22, 2002
Assets
	Cash and Cash Equivalents		$	17,374
	Investments			238,744
	Loans Held for Sale			49,270
	Net Loans Held for Investment			347,032
	Allowance for Loan Losses			(4,333	)
	Property and Equipment			5,379
	Intangible Assets			8,744
	Goodwill			465
	Mortgage Servicing Rights			16,054
	Other Assets			12,593
		Total Assets Acquired		691,322
Liabilities
	Deposits			504,557
	Other Borrowed Money			143,114
	Other Liabilities			2,871
		Total Liabilities Assumed		650,542
		Net Assets Acquired	$	40,780

        All of the $8,744,000 of acquired intangible assets was assigned to core deposit premium intangible subject to amortization. The core deposit premium will be amortized over its estimated useful life of 10 years.

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        The following table reflects the proforma results of operations for March 31, 2002 and 2001 as though the business combination had been completed as of January 1, 2001 (dollars in thousands, except per share data):

		Three Months Ended March 31,
		2002		2001
Net interest income		$	31,934	$	28,169
Net income			11,815		9,860
Earnings per share:
	Basic		0.68		0.57
	Diluted		0.67		0.56

Note 6:  Goodwill and Intangible Assets—Adoption of Statement 142

        As of January 1, 2002, the Company had unamortized goodwill of $23.4 million and unamortized identifiable intangible assets of $11.7 million. In accordance with Statement 142, the Company discontinued the amortization of goodwill effective January 1, 2002. The Company evaluated its existing identifiable intangible assets and determined that no reclassifications were necessary to conform to the new criteria in Statement 141 for recognition apart from goodwill. In addition, the Company has evaluated the useful lives and residual values of its identifiable intangible assets and determined that no amortization period adjustments were necessary and no identifiable intangible assets had indefinite lives.

        A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization, net of tax, follows (dollars in thousands, except per share data):

			Three Months Ended March 31,
			2002		2001
			(Unaudited)
Reported net income			$	12,411	$	9,298
Add: Goodwill amortization, net of tax				—		550
		Adjusted net income	$	12,411	$	9,848
Basic earnings per share:
	Reported net income		$	0.74	$	0.58
	Add: Goodwill amortization, net of tax			—		0.03
		Adjusted net income	$	0.74	$	0.61
Diluted earnings per share:
	Reported net income		$	0.73	$	0.57
	Add: Goodwill amortization, net of tax			—		0.04
		Adjusted net income	$	0.73	$	0.61

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        Changes in the carrying amount of goodwill are as follows (dollars in thousands):

		Three Months Ended March 31, 2002
		(Unaudited)
Balance as of January 1, 2002		$	24,256
Goodwill acquired during the period			465
	Balance as of March 31, 2002	$	24,721

        Information regarding the Company's intangible assets follows (dollars in thousands):

			Carrying Amount		Accumulated Amortization			Net
March 31, 2002 (Unaudited)
	Core deposit premium		$	28,248	$	(9,049	)	$	19,199
	Data processing contract intangible			849		(4	)		845
	Non-compete agreements			916		(287	)		629
		Subtotal		30,013		(9,340	)		20,673
	Mortgage Servicing Rights (Included in Other Assets)			16,900		(690	)		16,210
		Total	$	46,913	$	(10,030	)	$	36,883
December 31, 2001
	Core deposit premium		$	19,504	$	(8,417	)	$	11,087
	Non-compete agreements			916		(261	)		655
		Total	$	20,420	$	(8,678	)	$	11,742

        Amortization expense for the three months ended March 31, 2002 was $669,000 for identifiable intangibles and $690,000 for mortgage servicing rights. The amortization on mortgage servicing rights is included in Loan Servicing Income, Net on the consolidated statement of income and comprehensive income. Estimated amortization expense for identifiable intangibles and mortgage servicing rights for the five succeeding fiscal years is as follows (dollars in thousands):

		Total
		(Unaudited)
2002		$	4,601
2003			5,057
2004			5,047
2005			5,026
2006			4,331
	Total	$	24,062

Note 7:  Reclassifications

        Certain amounts in the prior year's presentation have been reclassified to conform to the current presentation. These reclassifications have no effect on previously reported net income.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        Forward-Looking Statements.    This Management's Discussion and Analysis includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by these sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: significant increases in competitive pressure in the banking industry; changes in the interest rate environment reducing margins; general economic conditions, either nationally or regionally, becoming less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; and changes in the securities markets. Because of these uncertainties, actual future results may be materially different from the results indicated by these forward-looking statements. In addition, the Company's past results do not necessarily indicate its future results.

        Management's discussion and analysis of the Company's consolidated financial condition and results of operations at the dates and for the periods indicated follows. This discussion should be read in conjunction with the Company's consolidated financial statements and the accompanying notes.

GENERAL

        Texas Regional Bancshares, Inc. is a Texas business corporation incorporated in 1983 and headquartered in McAllen, Texas. The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 and as such is registered with the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). Texas Regional Delaware, Inc., incorporated under the laws of Delaware as a wholly-owned second tier bank holding company subsidiary, owns Texas State Bank (the "Bank"), the Company's primary operating subsidiary. The Bank has two active wholly-owned subsidiaries: (i) TSB Securities, Inc., incorporated in 1997 to provide full service broker-dealer services and (ii) TSB Properties, Inc., incorporated in 1998 primarily to receive and liquidate foreclosed assets.

        By authority of the Board of Directors of the Company, Texas Regional in May 2000 filed a Declaration Electing to be a Financial Holding Company with the Federal Reserve Bank of Dallas. The Declaration became effective in June 2000.

        Texas State Bank operates twenty-seven banking locations. Twenty-six banking locations are located in the Rio Grande Valley including four banking locations in McAllen (including its main office), four banking locations in Brownsville, four banking locations in Harlingen, three banking locations in Mission, two banking locations in Weslaco, and one banking location each in Edinburg, Hidalgo, La Feria, Mercedes, Palm Valley, Penitas, Raymondville, Rio Grande City and Roma. On February 22, 2002, the Company made its first acquisition outside of the Rio Grande Valley through the acquisition of Riverway Bank of Houston, Texas. On that date, the banking office of Riverway Bank became the Bank's twenty-seventh banking location. At March 31, 2002, Texas Regional had consolidated total assets of $3.4 billion, loans outstanding (net of unearned discount) of $2.1 billion, deposits of $2.8 billion, and shareholders' equity of $312.7 million.

        The Bank has also expanded the services that it provides to third party correspondent banks. The Bank's data processing center, for example, presently serves seven banks in the Rio Grande Valley in addition to providing data processing services for all of the Bank's banking locations. On January 31, 2002, the Bank acquired assets and data processing service contracts related to Frost National Bank's

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data operations center in Grapevine, Texas. As a result of that acquisition, the Bank now provides data processing services for 17 banks in North Texas.

FINANCIAL CONDITION

CASH AND CASH EQUIVALENTS

        The Company offers a broad range of commercial banking services to individuals and businesses in its service area. It also acts as a correspondent to a number of banks in its service area, providing check clearing, wire transfer, federal funds transactions, loan participations and other correspondent services. The amount of cash and cash equivalents held on any day is significantly influenced by temporary changes in cash items in process of collection. The Company had cash and cash equivalents totaling $103.1 million at March 31, 2002. By comparison, the Company had $95.7 million in cash and cash equivalents at December 31, 2001, an increase of $7.4 million or 7.7%.

SECURITIES

        Securities consist of U.S. Treasury, federal agency, mortgage-backed and state, county and municipal securities. The Bank classifies debt and equity securities into one of three categories: held to maturity, trading or available for sale. At each reporting date, management reassesses the appropriateness of the classification. Investments in debt securities are classified as held to maturity and measured at amortized cost in the consolidated balance sheet only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and measured at fair value in the consolidated balance sheet with unrealized holding gains and losses included in earnings. Securities not classified as either held to maturity or trading are classified as available for sale and measured at fair value in the consolidated balance sheet with unrealized holding gains and losses reported in accumulated other comprehensive income, net of applicable income taxes, until realized.

        At March 31, 2002 and December 31, 2001, no securities were classified as trading. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, the Company does not intend to engage in such activities in the immediate future.

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        The following table presents the amortized cost and estimated fair value of securities at March 31, 2002 and December 31, 2001 (dollars in thousands):

				Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities Available for Sale
	March 31, 2002 (Unaudited)
		U.S. Treasury		$	503	$	—	$	(8	)	$	495
		U.S. Government Agency			648,904		3,956		(5,287	)		647,573
		Mortgage-Backed			218,273		1,122		(1,539	)		217,856
		States and Political Subdivisions			59,904		440		(722	)		59,622
		Other			19,198		—		—			19,198
			Total	$	946,782	$	5,518	$	(7,556	)	$	944,744
	December 31, 2001
		U.S. Treasury		$	401	$	2	$	—		$	403
		U.S. Government Agency			415,287		5,902		(1,516	)		419,673
		Mortgage-Backed			165,484		1,134		(1,004	)		165,614
		States and Political Subdivisions			60,232		446		(878	)		59,800
		Other			9,231		—		—			9,231
			Total	$	650,635	$	7,484	$	(3,398	)	$	654,721
Securities Held to Maturity
	March 31, 2002 (Unaudited)
		States and Political Subdivisions		$	514	$	33	$	—		$	547
			Total	$	514	$	33	$	—		$	547
	December 31, 2001
		States and Political Subdivisions		$	914	$	36	$	—		$	950
			Total	$	914	$	36	$	—		$	950

        The net change in unrealized holding gains (losses) on securities available for sale, net of related tax effect, of ($4.0) million and $4.5 million at March 31, 2002 and December 31, 2001, respectively, were reported in a separate component of shareholders' equity as accumulated other comprehensive income (loss).

        Securities available for sale and securities held to maturity with carrying values of $869.0 million and $514,000, respectively, at March 31, 2002 and $618.5 million and $794,000, respectively, at December 31, 2001 were pledged to secure public funds, trust assets on deposit and for other purposes required or permitted by law.

LOANS HELD FOR SALE

        Loans held for sale increased from $0 at December 31, 2001 compared to $61.9 million at March 31, 2002. Mortgage banking activities were assumed with the Riverway acquisition during first quarter 2002.

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LOANS HELD FOR INVESTMENT

        The Company manages its credit risk by establishing and implementing strategies and guidelines appropriate to the characteristics of borrowers, industries, geographic locations and risk products. Diversification of risk within each of these areas is a primary objective. Policies and procedures are developed to ensure that loan commitments conform to current strategies and guidelines. Management continually refines the Company's credit policies and procedures to address the risks in the current and prospective environment and to reflect management's current strategic focus. The credit process is controlled with continuous credit review and analysis, and review by internal and external auditors and regulatory authorities. The Company's loans are widely diversified by borrower and industry group.

        The Company has collateral management policies in place so that collateral lending of all types is approached on a basis consistent with safe and sound standards. Valuation analysis is utilized to take into consideration the potentially adverse economic conditions under which liquidation could occur. Collateral accepted against the commercial loan portfolio includes accounts receivable and inventory, marketable securities, equipment and agricultural products. Autos, deeds of trust, life insurance and marketable securities are accepted as collateral for the consumer loan portfolio.

        Management of the Company believes that the Company has benefited from increased loan demand due to passage of the North American Free Trade Agreement ("NAFTA") and the strong population growth in the Rio Grande Valley. The effects of NAFTA have also increased cross-border trade and industrial development including activity at twin manufacturing plants located on each side of the border (referred to as maquiladoras) which benefit the Rio Grande Valley economy. Management believes that NAFTA will continue to have a positive impact on the Company's growth and earnings prospects.

        The extension of credits denominated in a currency other than that of the country in which a borrower is located are called "cross-border" credits. The Company has some dollar-denominated cross-border credits to individuals or companies that are residents of, or domiciled in Mexico. The Company's total cross-border credits at March 31, 2002 of $5.1 million represented 0.2% of total loans. See "Nonperforming Assets" for additional information on cross-border credits.

        Total loans held for investment of $2.1 billion at March 31, 2002 increased $387.5 million or 22.7% compared to December 31, 2001 levels of $1.7 billion. The Riverway acquisition accounted for $347.0 million of the increase. The increase in total loans for the three months ended March 31, 2002 reflects growth in all loan categories except Agricultural Mortgage and is representative in part to the

14

vitality of the Rio Grande Valley economy. The following table presents the composition of the loans held for investment portfolio (dollars in thousands):

			March 31, 2002		December 31, 2001
			(Unaudited)
Commercial			$	608,357	$	540,812
Commercial Tax-Exempt				15,263		13,832
	Total Commercial Loans			623,620		554,644
Agricultural				59,498		57,995
Real Estate
	Construction			225,813		151,935
	Commercial Mortgage			753,431		621,699
	Agricultural Mortgage			46,854		49,888
	1-4 Family Mortgage			233,791		162,413
		Total Real Estate		1,259,889		985,935
Consumer				154,481		111,427
	Total Loans Held for Investment		$	2,097,488	$	1,710,001

        The Company's policy on maturity extensions and rollovers is based on management's assessment of individual loans. Approvals for the extension or renewal of loans without reduction of principal for more than one twelve-month period are generally avoided, unless the loans are fully secured and properly margined by cash or marketable securities, or are revolving lines subject to annual analysis and renewal.

NONPERFORMING ASSETS

        The Company has several procedures in place to assist in maintaining the overall quality of its loan portfolio. The Bank has established underwriting guidelines to be followed by its officers and monitors its delinquency levels for any negative or adverse trends.

        Nonperforming assets consist of nonperforming (impaired) loans and other assets, primarily real estate, acquired in partial or full satisfaction of loan obligations. The increase was primarily due to a $1.3 million increase in foreclosed assets. The Company's policy generally is to place a loan on nonaccrual status when payment of principal or interest is contractually past due 90 days, or earlier when concern exists as to the ultimate collection of principal and interest. At the time a loan is placed on nonaccrual status, interest previously accrued but uncollected is reversed and charged against current income unless the collateral provides more than adequate margin to ensure collection of that interest. A restructured loan is generally a loan that is accruing interest, but on which concessions in terms have been made as a result of deterioration in the borrower's financial condition. The Company's classification of nonperforming loans includes those loans for which management believes collection is doubtful. Management is not aware of any specific borrower relationships that are not reported as nonperforming where management has serious doubts as to the ability of such borrowers to comply with the present loan repayment terms which would cause nonperforming assets to increase materially.

        Nonperforming assets of $23.6 million at March 31, 2002 increased $1.8 million, 8.1% compared to December 31, 2001 levels of $21.8 million. The increase was primarily due to a $1.3 million increase in foreclosed assets. Nonaccrual loans of $14.5 million at March 31, 2002 increased $450,000 or 3.2% compared to $14.0 million at December 31, 2001. Cross-border nonaccrual loans at March 31, 2002 of $1.7 million remained unchanged compared to December 31, 2001.

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        Foreclosed and other assets increased by $1.3 million or 17.0% to $9.1 million at March 31, 2002 compared to $7.8 million at December 31, 2001. The increase in foreclosed assets during 2002 was primarily attributable to the addition of one large foreclosed property totaling $900,000. Management actively seeks buyers for all Other Real Estate. See "Noninterest Expense" below.

        Loans which are contractually past due 90 days or more, which are both well secured or guaranteed by financially responsible third parties and in the process of collection, generally are not placed on nonaccrual status. The amount of such loans past due 90 days or more at March 31, 2002 and December 31, 2001 that are not classified as nonaccrual totaled $3.8 million and $12.2 million, respectively. The decrease in accruing loans past due 90 days or more at March 31, 2002 as compared to the year ended December 31, 2001 was primarily a result of four relationships totaling $7.1 million that were either current or paid off as of March 31, 2002. In addition, a relationship in the amount of $1.1 million was transferred to other real estate during first quarter 2002. The ratio of nonperforming assets plus accruing loans 90 days or more past due as a percent of total loans and foreclosed assets at March 31, 2002 decreased to 1.30% from 1.98% at December 31, 2001 due to the decrease in accruing loans 90 days or more past due.

        An analysis of the components of nonperforming assets follows (dollars in thousands):

		March 31, 2002			December 31, 2001
		(Unaudited)
Nonaccrual Loans		$	14,484		$	14,034
Restructured Loans			—			—
	Nonperforming Loans		14,484			14,034
Foreclosed and Other Assets			9,120			7,796
	Total Nonperforming Assets		23,604			21,830
Accruing Loans 90 Days or More Past Due			3,790			12,164
	Total Nonperforming Assets and Accruing Loans 90 Days or More Past Due	$	27,394		$	33,994
Nonperforming Loans as a % of Total Loans			0.69	%		0.82	%
Nonperforming Assets as a % of Total Loans and Foreclosed Assets			1.12			1.27
Nonperforming Assets as a % of Total Assets			0.70			0.84
Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a % of Total Loans and Foreclosed Assets			1.30			1.98

        Management regularly reviews and monitors the loan portfolio to identify borrowers experiencing financial difficulties. Management believes that, at March 31, 2002, all such loans had been identified and included in the nonaccrual, renegotiated or 90 days or more past due loan totals reflected in the table above. Management continues to emphasize maintaining a low level of nonperforming assets and returning nonperforming assets to an earning status.

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ALLOWANCE FOR LOAN LOSSES—CRITICAL ACCOUNTING POLICY

        Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain an adequate allowance. Estimating the allowance is a critical accounting policy. It is subjective in nature and requires material estimates that may be subject to revision as facts and circumstances warrant. In assessing the adequacy of the allowance, management reviews the size, quality and risks of loans in the portfolio and considers factors such as specific known risks, past experience, the status and amount of nonperforming assets and economic conditions. A specific percentage is allocated to total loans in good standing and not specifically reserved while additional amounts are added for individual loans considered to have specific probable loss potential. Loans identified as losses are charged-off. In addition, the loan review committee of the Bank reviews the assessments of management in determining the adequacy of the Bank's allowance for loan losses on a quarterly basis. Based on total allocations, the provision is recorded to maintain the allowance at a level deemed appropriate by management based on probable losses in the loan portfolio. There can be no assurance that future additions to the allowance will not be necessary.

        The allowance for loan losses at March 31, 2002 totaled $26.0 million, representing a net increase of $5.0 million or 23.6% compared to $21.1 million at December 31, 2001. $4.3 million of the increase related to the Riverway acquisition during first quarter 2002. Management believes that the allowance for loan losses at March 31, 2002 adequately reflects the probable losses in the loan portfolio. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

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        The following table summarizes the activity in the allowance for loan losses (dollars in thousands):

			Three Months Ended March 31,
			2002			2001
			(Unaudited)
Balance at Beginning of Period			$	21,050		$	19,458
Balance from Acquisitions				4,333			—
Provision for Loan Losses				2,682			1,738
Charge-Offs
	Commercial			1,765			1,046
	Agricultural			13			2
	Real Estate			2			37
	Consumer			470			422
		Total Charge-Offs		2,250			1,507
Recoveries
	Commercial			46			16
	Agricultural			3			1
	Real Estate			18			—
	Consumer			142			131
		Total Recoveries		209			148
Net Charge-Offs				2,041			1,359
Balance at End of Period			$	26,024		$	19,837
Ratio of Allowance for Loan Losses to Loans Outstanding, Net of Unearned Discount				1.24	%		1.22	%
Ratio of Allowance for Loan Losses to Nonperforming Loans				179.67			149.92
Ratio of Net Charge-Offs to Average Total Loans Outstanding, Net of Unearned Discount				0.44			0.34

PREMISES AND EQUIPMENT, NET

        Premises and equipment of $83.2 million at March 31, 2002 increased by $7.6 million or 10.1% compared to December 31, 2001 levels of $75.6 million. The increase resulted primarily from $5.4 million of premises and equipment acquired in the Riverway acquisition during first quarter 2002.

GOODWILL AND IDENTIFIABLE INTANGIBLES

        Goodwill of $24.7 million at March 31, 2002 increased $465,000 or 1.9% compared to $24.3 million at December 31, 2001. The increase is attributable to $465,000 added with the Riverway acquisition. Identifiable intangibles of $20.7 million at March 31, 2002 increased $8.9 million or 76.1% compared to $11.7 million at December 31, 2001. Identifiable intangibles increased as a result of $849,000 and $8.7 million associated with the Grapevine data operations center acquisition acquired from Frost National Bank and Riverway Bank acquisition, respectively. The increases were offset by amortization of $669,000 for first quarter 2002.

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DEPOSITS

        Total deposits of $2.8 billion at March 31, 2002 increased $591.2 million or 26.4% compared to December 31, 2001 levels of $2.2 billion. The increase in total deposits for the three months ended March 31, 2002 is primarily attributable to $504.6 million added with the Riverway acquisition, as well as growth in the volume of business conducted by the Company. The following table presents the composition of total deposits (dollars in thousands):

				March 31, 2002		December 31, 2001
				(Unaudited)
Demand Deposits
	Commercial and Individual			$	388,159	$	326,733
	Public Funds				3,781		4,131
		Total Demand Deposits			391,940		330,864
Interest-Bearing Deposits
	Savings
		Commercial and Individual			128,663		117,732
		Public Funds			319		310
	Money Market Checking and Savings
		Commercial and Individual			494,286		436,846
		Public Funds			263,149		124,241
	Time Deposits
		Commercial and Individual			1,164,595		906,535
		Public Funds			384,093		319,349
		Total Interest-Bearing Deposits			2,435,105		1,905,013
			Total Deposits	$	2,827,045	$	2,235,877

OTHER BORROWED MONEY

        Other Borrowed Money of $211.0 million at March 31, 2002 increased $140.3 million or 198.4% compared to December 31, 2001 levels of $70.7 million. The increase in Other Borrowed Money for the three months ended March 31, 2002 is primarily attributable to $143.1 million added with the Riverway acquisition. Other Borrowed Money assumed with the Riverway acquisition consisted of $123.7 million of securities sold under repurchase agreements, $15.0 million in trust preferred securities and $4.4 million in subordinated debentures.

        The components of other borrowed money are as follows (dollars in thousands):

		March 31, 2002		December 31, 2001
		(Unaudited)
Federal Funds Purchased and Securities Sold Under Repurchase Agreements		$	101,572	$	70,709
Federal Home Loan Bank Advances			90,000		—
Trust Preferred Securities			15,000		—
Subordinated Debentures			4,400		—
	Total Borrowed Money	$	210,972	$	70,709

        As part of the Riverway acquisition, the Company assumed 10.18% Trust Preferred Securities offered and sold by Riverway Holdings Capital Trust I ("Trust I"), having a stated liquidation value of $10,000,000. The proceeds from such issuance, together with the proceeds of the related issuance of common securities of Trust I, were invested in 10.18% Junior Subordinated Deferrable Interest

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Debentures of the Company due June 8, 2031. The sole asset of Trust I is the debentures. The debentures are unsecured and rank junior to all senior debt of the Company.

        In addition as part of the Riverway acquisition, the Company assumed Floating Rate Trust Preferred Securities offered and sold by Riverway Holdings Capital Trust II ("Trust II"), having a stated liquidation value of $5,000,000. The proceeds from such issuance, together with the proceeds of the related issuance of common securities of Trust II, were invested in Junior Subordinated Debentures of the Company due July 25, 2031. The Trust Preferred Securities and the Junior Subordinated Debentures bear interest at a rate equal to LIBOR plus 3.75 percent. The sole asset of Trust II is the debentures. The debentures are unsecured and rank junior to all senior debt of the Company.

        At March 31, 2002, the Company had lines of credit totaling $40.0 million with correspondent banks for short-term liquidity needs. In addition, the Company had available credit of approximately $227.2 million from the Federal Home Loan Bank, of which $90.0 million was advanced at March 31, 2002.

SHAREHOLDERS' EQUITY

        Shareholders' equity increased by $47.4 million, or 17.9% during the three months ended March 31, 2002 primarily due to $40.8 million added with the Riverway acquisition, as well as comprehensive income of $8.4 million less cash dividends of $2.8 million. Comprehensive income for the period included net income of $12.4 million and unrealized loss on securities available for sale, net of tax, of $4.0 million.

        Bank holding companies are required to maintain capital ratios in accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The guidelines are commonly known as Risk-Based Capital Guidelines. The table below reflects various measures of regulatory capital (dollars in thousands):

		Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provision
		Amount		Ratio		Amount		Ratio		Amount		Ratio
Texas Regional Bancshares, Inc.
As of March 31, 2002 (Unaudited)
	Total Capital (to Risk Weighted Assets)	$	309,515	13.31	%	$	186,092	8.00	%	$	232,615	10.00	%
	Tier I Capital (to Risk Weighted Assets)		283,491	12.19			93,046	4.00			139,569	6.00
	Tier I Capital (to Average Assets)		283,491	9.84			115,275	4.00			144,093	5.00
As of December 31, 2001
	Total Capital (to Risk Weighted Assets)	$	247,727	13.54	%	$	146,401	8.00	%	$	183,001	10.00	%
	Tier I Capital (to Risk Weighted Assets)		226,677	12.39			73,200	4.00			109,801	6.00
	Tier I Capital (to Average Assets)		226,677	9.05			100,161	4.00			125,201	5.00
Texas State Bank
As of March 31, 2002 (Unaudited)
	Total Capital (to Risk Weighted Assets)	$	290,805	12.51	%	$	186,021	8.00	%	$	232,527	10.00	%
	Tier I Capital (to Risk Weighted Assets)		264,781	11.39			93,011	4.00			139,516	6.00
	Tier I Capital (to Average Assets)		264,781	9.19			115,249	4.00			144,061	5.00
As of December 31, 2001
	Total Capital (to Risk Weighted Assets)	$	235,733	12.88	%	$	146,373	8.00	%	$	182,967	10.00	%
	Tier I Capital (to Risk Weighted Assets)		214,683	11.73			73,187	4.00			109,780	6.00
	Tier I Capital (to Average Assets)		214,683	8.58			100,142	4.00			125,178	5.00

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        At March 31, 2002, the Company and the Bank met the criteria for classification as a "well-capitalized" institution under the prompt corrective action rules promulgated under the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations does not constitute a recommendation or endorsement of the Company or the Bank by Federal bank regulators.

RESULTS OF OPERATIONS

NET INCOME

        Net income was $12.4 million and $9.3 million and earnings per diluted common share were $0.73 and $0.57 for the three months ended March 31, 2002 and 2001, respectively. Return on assets averaged 1.71% and 1.55% while return on shareholders' equity averaged 16.83% and 16.10% for the three months ended March 31, 2002 and 2001, respectively.

INTEREST INCOME

        Total interest income for the three months ended March 31, 2002 was $45.7 million, a decrease of $2.7 million or 5.6% from the three months ended March 31, 2001. Interest income decreased in spite of a $454.4 million or 20.4% increase in average interest-earning assets to $2.7 billion for first quarter 2002 compared to the same period in 2001. Interest rate reductions driven by the Federal Reserve monetary policy were the primary reason for the decrease in interest income. The increase in average interest-earning assets resulted from continued emphasis on loan growth, as well as the Riverway acquisition during first quarter 2002.

        Interest income on loans held for investment decreased $3.2 million or 8.2% to $35.8 million for the three months ended March 31, 2002. Although average loans outstanding increased by $263.2 million or 16.3% to $1.9 billion for first quarter 2002 compared to the same period in 2001, a decrease of 208 basis points in the yield on loans outstanding over the comparable prior year period propelled the decrease. The increase in average loans outstanding was primarily due to the Riverway acquisition. Interest income on securities increased to $9.7 million, reflecting a $272,000 or 2.9% increase from the prior comparable period. This increase was attributable to a $171.5 million increase in average securities during first quarter 2002, up 28.0% compared to the same period in 2001. This was partially offset by a 123 basis point decrease in the yield on average securities due to declining market rates.

INTEREST EXPENSE

        Interest expense decreased to $16.5 million for the three months ended March 31, 2002 compared to $24.1 million for the same period in 2001, representing a decrease of $7.6 million or 31.5%. The decrease was primarily due to a decrease in cost of funds by 222 basis points during first quarter 2002 compared to the same period in 2001 due to declining market rates. Interest expense on deposits decreased by $7.9 million or 34.0% to $15.4 million for first quarter 2002 compared to the comparable period in 2001. The decrease reflects the effects of interest rate reductions made by the Company since March 31, 2001, as well as the offsetting effect of an increase in average interest bearing deposits by $314.6 million or 17.2% to $2.1 billion for first quarter 2002 compared with first quarter 2001. The increase in average interest-bearing deposits was primarily attributable to the Riverway acquisition during first quarter 2002. Interest expense on other borrowings increased $347,000 or 45.1% to $1.1 million for the three months ended March 31, 2002 compared to the same period in 2001. The increase is primarily due to interest expense on $143.1 million of other borrowed money assumed with the Riverway acquisition.

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NET INTEREST INCOME

        Net interest income, reported on a tax equivalent basis, was $29.7 million for the three months ended March 31, 2002, compared with $24.9 million for the same period in 2001, an increase of $4.9 million or 19.6%. The increase in net interest income was largely due to growth in average interest-earning assets, primarily loans.

        The net interest margin was 4.49% for the three months ended March 31, 2002, compared with 4.52% for the same period in 2001. The decrease in the net interest margin is primarily attributable to an increase in average interest-bearing assets by 20.4% compared to only a 19.6% increase in net interest income due to declining rates.

        The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a "volume change". It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a "rate change".

        The following tables present for periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, reported on a tax-equivalent basis, and the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Average balances are derived from average daily balances and the yields and costs are established by dividing income or expense by the average balance of the asset or liability. Income and yield on interest-earning assets include amounts to convert tax-exempt income to a taxable-equivalent basis, assuming a 35% effective tax rate for 2002 and 2001 (dollars in thousands):

					Three Months Ended
					March 31, 2002							March 31, 2001
Taxable-Equivalent Basis(1)					Average Balance			Interest		Yield/ Rate(2)		Average Balance			Interest		Yield/ Rate(2)
					(Unaudited)
Assets
	Interest-Earning Assets
		Loans Held for Sale			$	18,796		$	229	4.94	%	$	—		$	—	—	%
		Loans Held for Investment
			Commercial			638,254			10,736	6.82			575,391			13,687	9.65
			Real Estate			1,106,192			21,898	8.03			912,721			21,933	9.75
			Consumer			129,719			3,218	10.06			122,808			3,468	11.45
				Total Loans Held for Investment		1,874,165			35,852	7.76			1,610,920			39,088	9.84
		Securities
			Taxable			724,080			9,058	5.07			566,138			8,909	6.38
			Tax-Exempt			60,563			1,048	7.02			46,992			843	7.28
				Total Securities		784,643			10,106	5.22			613,130			9,752	6.45
		Interest-Bearing Deposits at Other Banks and Time Deposits				952			14	5.96			2,256			33	5.93
		Federal Funds Sold				6,228			26	1.69			4,037			53	5.32
			Total Interest-Earning Assets			2,684,784		$	46,227	6.98	%		2,230,343		$	48,926	8.90	%
	Cash and Due from Banks					106,457							71,565
	Premises and Equipment, Net					77,944							76,105
	Other Assets					89,742							77,599
	Allowance for Loan Losses					(24,005	)						(20,303	)
		Total Assets			$	2,934,922						$	2,435,309
Liabilities
	Interest-Bearing Liabilities

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		Savings		$	124,033	$	416	1.36	%	$	112,598	$	612	2.20	%
		Money Market Checking And Savings			658,230		2,531	1.56			488,349		4,452	3.70
		Time Deposits			1,363,250		12,433	3.70			1,229,987		18,240	6.01
			Total Savings and Time Deposits		2,145,513		15,380	2.91			1,830,934		23,304	5.16
			Other Borrowed Money		112,505		1,116	4.02			54,940		769	5.68
			Total Interest-Bearing Liabilities		2,258,018	$	16,496	2.96	%		1,885,874	$	24,073	5.18	%
	Demand Deposits				356,340						293,731
	Other Liabilities				21,455						21,522
		Total Liabilities			2,635,813						2,201,127
	Shareholders' Equity				299,109						234,182
		Total Liabilities and Shareholders' Equity		$	2,934,922					$	2,435,309
Net Interest Income						$	29,731					$	24,853
Net Yield on Total Interest Earning Assets								4.49	%					4.52	%

(1)

For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment that equates tax-exempt income to interest from taxable assets (assuming a 35% tax rate).

(2)

Annualized.

        The following table presents the effects of changes in volume, rate and rate/volume on interest income and interest expense for major categories of interest-earning assets and interest-bearing liabilities. Nonaccrual loans are included in assets, thereby reducing yields (see "Nonperforming Assets"). The allocation of the rate/volume variance has been made pro-rata on the percentage that volume and rate variances produce in each category. An analysis of changes in net interest income follows (dollars in thousands):

			Three Months Ended March 31, 2002 Compared to 2001
						Due to Change in
Taxable-Equivalent Basis(1)			Net Change									Rate/ Volume
						Volume			Rate
			(Unaudited)
Interest Income
	Loans Held for Sale		$	229		$	229		$	—		$	—
	Loans Held for Investment			(3,236	)		6,388			(8,272	)		(1,352	)
	Securities
		Taxable		149			2,486			(1,827	)		(510	)
		Tax-Exempt		205			244			(30	)		(9	)
	Interest-Bearing Deposits at Other Banks and Time Deposits			(19	)		(19	)		—			—
	Federal Funds Sold			(27	)		29			(36	)		(20	)
		Total Interest Income		(2,699	)		9,357			(10,165	)		(1,891	)
Interest Expense
	Deposits			(7,924	)		4,004			(10,179	)		(1,749	)
	Other Borrowed Money			347			806			(224	)		(235	)
		Total Interest Expense		(7,577	)		4,810			(10,403	)		(1,984	)
Net Interest Income Before Allocation of Rate/Volume				4,878			4,547			238			93
Allocation of Rate/Volume				—			(279	)		372			(93	)
Changes in Net Interest Income			$	4,878		$	4,268		$	610		$	—

(1)

For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment that equates tax-exempt income to interest from taxable assets (assuming a 35% effective federal income tax rate for 2002 and 2001).

23

PROVISION FOR LOAN LOSSES

        The Company recorded a provision for loan losses of $2.7 million for the three months ended March 31, 2002, compared to $1.7 million for the three months ended March 31, 2001. The provision for loan losses reflects an increase of $944,000 or 54.3% for the three months ended March 31, 2002 compared to the same period in 2001 as a result of management's assessment of current regional economic conditions and probable losses in the portfolio. Net charge-offs totaled $2.0 million and $1.4 million for the three months ended March 31, 2002 and 2001, respectively, and increased to 0.44% of average loans during first quarter 2002 compared to 0.34% of average loans during first quarter 2001.

        Management charges provisions for loan losses to earnings to bring the total allowance for loan losses to a level deemed appropriate. Management bases its decision on many factors which include historical loan loss experience, the volume and type of lending conducted by the Company, the amount of nonperforming assets, regulatory policies, generally accepted accounting principles, and general economic conditions, particularly as they relate to the Company's lending area. For additional information on charge-offs and recoveries and the aggregate provision for loan losses, see the "Allowance for Loan Losses-Critical Accounting Policy" section of this report.

NONINTEREST INCOME

        The Company's primary sources of Noninterest Income are service charges on deposit accounts and other banking service related fees. Noninterest Income totaled $9.3 million for the three months ended March 31, 2002 compared to $6.3 million for 2001. Excluding Net Realized Gains on Sales of Securities Available for Sale, Noninterest Income increased $2.6 million or 40.7% from 2001. The majority of the increase is attributable to an increase in total service charges and data processing fees.

        Total Service Charges of $6.0 million for the three months ended March 31, 2002 increased $1.4 million or 31.4% compared to $4.5 million for the same period in 2001. The increase in Total Service Charges was attributable to a $1.0 million or 44.9% increase in non-sufficient and return item charges resulting primarily from an increase in deposit growth and the introduction of two new products. In June 2001, the Company launched its Free Checking program, which allows credit worthy depositors a $400 overdraft privilege after satisfying certain conditions, and its Overdraft Privilege program, which allows credit worthy account holders, except free checking account holders, a $700 overdraft privilege. Although the account holders are still subject to non-sufficient check charges, they avoid additional charges from the retailer.

        Trust Service Fees of $648,000 for the three months ended March 31, 2002 increased $24,000 or 3.8% compared to $624,000 for the comparable prior year period due to an increase in the fair value of assets managed. The fair value of assets managed by the trust department of the Bank totaled $459.6 million at March 31, 2002, an increase of 18.8% compared to $386.8 million a year ago. Assets held by the trust department of the Bank in fiduciary or agency capacities are not assets of the Company and are not included in the consolidated balance sheets.

        Net Realized Gains on Sales of Securities Available for Sale for the three months ended March 31, 2002 totaled $458,000 compared to $11,000 for the comparable period in 2001. During first quarter 2002, Texas Regional sold various securities that had unrealized gains and were likely to be called during late 2002. Net unrealized holding losses on securities available for sale, net of tax, totaled $1.4 million at March 31, 2002. See "Shareholders' Equity".

        Data Processing Service Fees of $1.5 million for the three months ended March 31, 2002 increased $733,000 or 97.9% compared to $749,000 for the same period last year. Data processing fees increased due to the acquisition of the Grapevine data processing center and related data processing contracts during first quarter 2002, which increased the number of data processing clients from 8 to 25.

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        Other Operating Income of $639,000 for the three months ended March 31, 2002 increased $249,000 or 63.8% compared to $390,000 for the same 2001 period. The increase was primarily the result of $184,000 in life insurance proceeds.

NONINTEREST EXPENSE

        Noninterest Expense of $17.0 million for the three months ended March 31, 2002 increased $2.6 million or 17.9% compared to $14.4 million for the comparable period in 2001. The efficiency ratio of expense to total revenue was 43.83% for the three months ended March 31, 2002 compared to 46.00% for the same period in 2001. The efficiency ratio is defined as Noninterest Expense (excluding other real estate income and expense) divided by the total of taxable-equivalent Net Interest Income and Noninterest Income (excluding any gains and losses on sale of securities).

        Salaries and Employee Benefits, the largest category of Noninterest Expense, of $8.7 million for the three months ended March 31, 2002 increased $1.8 million or 26.9% compared to the same period last year of $6.8 million. The increase reflects increases in base salaries and higher levels of staff, including staff acquired as a result of the Riverway acquisition and the Grapevine data processing center acquisition. The number of full-time equivalent employees of 1,077 at March 31, 2002 represents an increase of 16.4% from 925 at March 31, 2001. Salaries and Employee Benefits averaged 1.20% of average assets for the three months ended March 31, 2002 compared to 1.14% for the three months ended March 31, 2001.

        Net Occupancy Expense of $1.2 million for the three months ended March 31, 2002 increased by $121,000 or 11.3% compared to $1.1 million reported for first quarter 2001. The increase was primarily attributable to occupancy expenses incurred at the new Houston location acquired in the Riverway acquisition.

        Equipment Expense of $1.8 million for the three months ended March 31, 2002 increased by $230,000 or 14.9% compared to $1.5 million reported for the same period in 2001. The increase was attributable to an increase in depreciation and equipment service contract expense by $73,000 and $133,000, respectively, for first quarter 2002 compared to the same period in 2001.

        Other Real Estate Expense, Net includes rent income from foreclosed properties, gain or loss on sale of other real estate properties and direct expenses of foreclosed real estate including property taxes, maintenance costs and write-downs. Write-downs of other real estate are required if the fair value of an asset acquired in a loan foreclosure subsequently declines below its carrying value. Other Real Estate Expense, Net of $81,000 for the three months ended March 31, 2002 was comparable to $88,000 for the three months ended March 31, 2001.

        Amortization of Goodwill was $0 for the three months ended March 31, 2002 compared to $573,000 for the same period in 2001. The Company adopted Statement 142 as of January 1, 2002 and no longer amortizes goodwill.

        Amortization of Identifiable Intangibles of $669,000 for first quarter 2002 increased $135,000 or 25.3% compared to $534,000 for first quarter 2001. The increase was attributable to the amortization on $8.7 million of core deposit intangible added in first quarter 2002 with the Riverway acquisition.

25

        A detailed summary of Noninterest Expense follows (dollars in thousands):

		Three Months Ended March 31,
		2002			2001
		(Unaudited)
Salaries and Wages		$	6,624		$	5,289
Employee Benefits			2,046			1,545
	Total Salaries and Employee Benefits		8,670			6,834
Net Occupancy Expense			1,188			1,067
Equipment Expense			1,772			1,542
Other Real Estate Expense, Net
	Rent Income		(138	)		(116	)
	Gain on Sale		(116	)		(14	)
	Expenses		335			218
	Writedowns		—			—
Total Other Real Estate Expense, Net			81			88
Amortization of Goodwill			—			573
Amortization of Identifiable Intangibles			669			534
Other Noninterest Expense
	Advertising and Public Relations		692			630
	Data Processing and Check Clearing		667			497
	Director Fees		113			95
	Franchise Tax		86			85
	Insurance		79			56
	FDIC Insurance		124			100
	Legal		262			407
	Professional Fees		719			433
	Postage, Delivery and Freight		345			248
	Printing, Stationery and Supplies		492			420
	Telephone		194			174
	Other Losses		226			223
	Miscellaneous Expense		614			408
Total Other Noninterest Expense			4,613			3,776
Total Noninterest Expense		$	16,993		$	14,414

INCOME TAX EXPENSE

        The Company recorded Income Tax Expense of $6.5 million for the three months ended March 31, 2002 compared to $5.2 million for the three months ended March 31, 2001. The increase in income tax is primarily due to an increased level of pretax income during the three months ended March 31, 2002 compared to the same period in 2001.

CAPITAL AND LIQUIDITY

        Bank holding companies are required to maintain capital ratios in accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The guidelines are commonly known as Risk-Based Capital Guidelines. On March 31, 2002, the Company exceeded all applicable capital requirements,

26

having a total risk-based capital ratio of 13.31%, a Tier I risk-based capital ratio of 12.19%, and a leverage ratio of 9.84%.

        Liquidity management assures that adequate funds are available to meet deposit withdrawals, loan demand and maturing liabilities. Insufficient liquidity can result in higher costs of obtaining funds, while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative investments. The ability to renew and acquire additional deposit liabilities is a major source of liquidity. The Company's principal sources of funds are primarily within the local markets of the Bank and consist of deposits, interest and principal payments on loans and securities, sales of loans and securities and borrowings.

        Cash and assets which are readily marketable, or which can be pledged, or which will mature in the near future provide asset liquidity. These include cash, federal funds sold, time deposits, U.S. Treasury, U.S. Government Agency and mortgage-backed securities. At March 31, 2002, the Company's liquidity ratio, defined as cash, U.S. Treasury, U.S. Government Agency, mortgage-backed securities, interest-bearing deposits, time deposits and federal funds sold as a percentage of deposits, was 34.4% compared to 30.3% at December 31, 2001.

        Liability liquidity is provided by access to core funding sources, principally various customers' interest-bearing and noninterest-bearing deposit accounts in the Company's trade area. The Company does not have nor does it solicit brokered deposits. Federal funds purchased and short-term borrowings are additional sources of liquidity. At March 31, 2002, the Company had lines of credit totaling $40.0 million with correspondent banks for short-term liquidity needs. In addition, the Company had available credit of approximately $227.2 million from the Federal Home Loan Bank, of which $90.0 million was advanced at March 31, 2002. These sources of liquidity are short-term in nature, and are used, as necessary, to fund asset growth and meet short-term liquidity needs.

        At March 31, 2002, the Company had outstanding commitments to extend credit of approximately $303.1 million and standby letters of credit of approximately $18.3 million.

        During the three months ended March 31, 2002, funds for $148.5 million of securities purchases and $44.8 million of net loan growth came from various sources, including $95.0 million of proceeds from security sales and maturities, a net increase in deposits of $86.6 million and $9.6 million from operating activities.

        The Company is dependent on dividend and interest income from the Bank and the sale of stock for its liquidity. Applicable Federal Reserve Board regulations provide that bank holding companies are permitted by regulatory authorities to pay cash dividends on their common or preferred stock if consolidated earnings and consolidated capital are within regulatory guidelines.

Effects of Inflation

        Financial institutions are impacted differently by inflation than are industrial companies. While industrial and manufacturing companies generally have significant investments in inventories and fixed assets, financial institutions ordinarily do not have such investments. As a result, financial institutions are generally in a better position than industrial companies to respond to inflationary trends by monitoring the spread between interest costs and interest income yields through adjustments of maturities and interest rates of assets and liabilities. In addition, inflation tends to increase demand for loans from financial institutions as industrial companies attempt to maintain a constant level of goods in inventory and assets. As consumers of goods and services, financial institutions are affected by inflation as prices increase, causing an increase in costs of salaries, employee benefits, occupancy expense and similar items.

27

Critical Accounting Policies

        The Company considers its Allowance for Loan Losses policy as a policy critical to the sound operations of the Company. The Company provides for loan losses each period by an amount resulting from both (a) an estimate by management of loan losses that occurred during the period and (b) the ongoing adjustment of prior estimates of losses occurring in prior periods. The provision for loan losses increases the allowance for loan losses which is netted against loans on the consolidated balance sheet. As losses are confirmed, the loan is written down, reducing the allowance for loan losses. See "Allowance for Loan Losses—Critical Accounting Policy" and "Provision for Loan Losses" for further information regarding the Company's provision and allowance for loan losses policy.

Possible Negative Impact of Litigation

        From time to time, the Company is a party to legal proceedings including matters involving commercial banking issues and other proceedings arising in the ordinary course of business. Although not currently anticipated by management, the Company's results could be materially impacted by legal and settlement expenses related to such lawsuits.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which the Company is exposed is interest rate risk. Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. For example, if fixed-rate loans are funded with floating-rate deposits, the spread between loan and deposit rates will decline or turn negative if rates increase. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. The Company's interest rate risk arises from transactions entered into for purposes other than trading. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, the Company does not intend to engage in such activities in the immediate future.

        Interest rate risk is managed within the funds management policy of the Company. The principal objectives of the funds management policy are to avoid fluctuating net interest margins and to maintain consistent growth of net interest income through periods of changing interest rates. The Board of Directors oversees implementation of strategies to control interest rate risk. The Company may take steps to alter its net sensitivity position by offering deposit and/or loan structures that tend to counter the natural rate risk profile of the Company. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. Because of the volatility of market rates and uncertainties, there can be no assurance of the effectiveness of management programs to achieve a targeted moderation of risk.

        In order to measure earnings and fair value sensitivity to changing rates, the Company utilizes three different measurement tools including static gap analysis, simulation earnings, and market value sensitivity (fair value at risk). The primary analytical tool used by the Company to quantify interest rate risk is a simulation model to project changes in net interest income that result from forecast changes in interest rates. This analysis estimates a percentage of change in net interest income from the stable rate scenario under scenarios of rising and falling market interest rates over a twelve month time horizon. The prime rate serves as a "driver" and is made to rise (or fall) evenly in 100 basis point increments over the 12-month forecast interval. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet.

28

        The following table summarizes the simulated change in net interest income over a 12-month period as of March 31, 2002 and December 31, 2001 (dollars in thousands):

				Increase (Decrease) in Net Interest Income
Changes in Interest Rates (Basis Points)		Estimated Net Interest Income
				Amount			Percent
March 31, 2002 (Unaudited)
	+100	$	142,347	$	1,120		0.8	%
	-		141,227		—		—
	-100		140,203		(1,024	)	(0.7	)
December 31, 2001
	+100		117,533		1,188		1.0
	-		116,345		—		—
	-100		114,879		(1,466	)	(1.3	)

        All the measurements of risk described above are made based upon the Company's business mix and interest rate exposures at the particular point in time. An immediate 100 basis point decline in interest rates is a hypothetical rate scenario, used to calibrate risk, and does not necessarily represent management's current view of future market developments. Because of uncertainties as to the extent of customer behavior, refinance activity, absolute and relative loan and deposit pricing levels, competitor pricing and market behavior, product volumes and mix, and other unexpected changes in economic events impacting movements and volatility in market rates, there can be no assurance that simulation results are reliable indicators of net interest income under such conditions.

29

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        The Company faces routine litigation and other legal proceedings arising in the normal course of business. In the opinion of management, liabilities (if any) arising from such litigation and other legal proceedings will not have a material adverse effect upon the business, consolidated results of operations or financial condition of the Company.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

        None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None

ITEM 5. OTHER INFORMATION

        None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

The following documents are filed as part of this Quarterly Report on Form 10-Q:

(1)

Exhibits—The following exhibits are filed as a part of this Quarterly Report on Form 10-Q:

        None

(b)

Reports of Form 8-K

Texas Regional Bancshares, Inc. has filed a Current Report on Form 8-K, dated February 22, 2002, concerning the acquisition through merger of Riverway. The Current Report on Form 8-K was filed under Item 2 of Form 8-K, and no additional financial information concerning Texas Regional or Riverway was required to be filed therewith because the financial information was included in the registration statement on Form S-4 filed as part of the Riverway transaction.

30

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TEXAS REGIONAL BANCSHARES, INC. (Registrant)
May 15, 2002	/s/  G. E. RONEY Glen E. Roney Chairman of the Board, President & Chief Executive Officer
May 15, 2002	/s/  R. T. PIGOTT, JR. R. T. Pigott, Jr. Executive Vice President & Chief Financial Officer

31

QuickLinks

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES