Annual Report Lone Star National Bancshares-Texas, Inc

11 ANNUAL REPORT LONE STAR NATIONAL BANCSHARES-TEXAS, INC. Our Mission Statement The mission of Lone Star National Bank is to be the premier, independent community bank in South Texas by providing the following to our Stakeholders: Customers: Value-added quality sales and service; Employees: Providing a rewarding work environment with opportunities for advancement; Community: Helping our communities to grow, and serving them with pride and integrity; Shareholders: Providing a high rate of return consistent with a high performing bank. 4 Letter to Shareholders, Customers & Friends 7 Financial Highlights 8 Management’s Discussion and Analysis of Financial Conditions and Results of Operations 12 Management’s Report on Responsibility for Financial Reporting 13 Independent Auditor’s Report 50 Board of Directors 52 Advisory Directors 54 Bank Officers 56 Banking Centers, Mortgage & ATM Locations 57 Our History We deeply value our personal relationship with you. We will never take it for granted. A. Jabier Rodriguez Chief Executive Officer Leer to Our Shareholders, Customers and Friends The financial industry rebounded after dustry. The increased oversight includes four (4) of the most difficult years that increased levels of Equity Capital and the banking industry has ever experi- Allowance for Credit Losses to meet enced. We emerged much wiser and regulatory requirements. The capital committed to implement company-wide ratios required, for banks, have Enterprise Risk Management processes increased from 6% to a general range of in every decision that we make. Our 9.5%. The allowance from 1% to a focus is to keep Enterprise Risk at low- general range of 2.5%. These new levels to-moderate levels and Rewards at resulted in an increase of capital and moderate to high return levels. allowance, totalling $96.5 Million Dollars for Lone Star National Bank as follows: The Business Model for safe and sound Community Banks has changed to one Capital: that is based less on credit income and 6% to 9.5% = +3.5% more on non-interest income, with a high Allowance: level of efficiency. This is due, in part, to 1% to 2.5% = +1.5% the effects of the recession and its long Total Assets: term recovery. The Dodd-Frank Financial $2.2 Billion x 3.5% = Reform Bill that was signed into law, has $77.0 Million restricted non-sufficient item charges and debit card fees, causing Banks to Total Loans: reduce the payment of non-sufficient $1.3 Billion x 1.5% = checks and negatively impacting Non- $19.5 Million Interest Income. The Dodd-Frank Finan- Total Required Increase cial Reform Bill also changes virtually In Capital: every consumer regulation, whether or $96.5 Million not it is related to Mortgages. Time will tell if it has any value to consumers, As of December 31, 2011, through the creation of a Consumer Lone Star National Bancshares Protection Financial Agency, but it will - Texas, Inc. has $208 Million take one (1) or two (2) generations to in Equity Capital and $31 determine. We only know that it cannot Million in Allowances for Loan avoid another financial crisis. Losses, representing Equity Ca- pital to Total Assets of 9.53% and The Dodd-Frank Financial Reform Bill has the Allowance for Loan brought sweeping changes in the way Losses to Total Loans ratio government regulates the financial in- of 2.48%, clearly meeting Per Share Data Shareholders’ Equity Book Value (Dollars in Millions) 07 07 $23.05 $120 08 08 $26.37 $145 09 09 $28.47 $161 10 10 $29.57 $184 11 11 $32.88 $208 4 l 2011 Annual Report these new guidelines. one dollar of revenue, improved to 62%, or $1.00 on the dollar for 2011, from The increased levels of Capital, now 63% in 2010. This compares very required, has caused bank returns to be favorably to a Peer Group Ratio of 71%. Stock Price lowered significantly. Our Return on Per Share Average Assets of .98% and Return on Net Income increased from $3.7 Million, 07 Average Equity of 11.02% for 2011, far at year-end 2010, to $21.5 Million, at $50.00 08 exceeded the Return on Average Assets year end 2011, after the net effect of the $40.00 09 of .61% and 6.16% Return on Average gain from the sale of bonds and Real $36.00 10 Equity for our Peer Group as of Decem- Estate Owned Property write-downs. This $35.50 11 ber 31, 2011. The lower volume of loans is another record level of Net Income, $37.50 creating higher levels of liquidity, toget- clearly evidencing a complete rebound her with low rates has also served to and stabilization, achieved through reduce shareholder returns. several executive initiatives implemented Total Assets by our Team. Our highest reported Net (Dollars in Millions) For the year ending December 31, 2011, Income had been $18.5 Million in 2007, 07 $1,577 Total Assets grew $92 Million to $2.2 the initial year of the most severe 08 Billion, Loans grew $28 Million to $1.3 recession in U.S. history. $1,776 09 Billion and Deposits grew $87 Million to $1,857 10 $1.8 Billion. The Board of Directors and our Team will $2,092 11 continue to work hard and create $2,184 The total number of banking centers solutions with reduced risk in order to grew to 31, including three (3) new maintain and improve our profitability centers in the Rio Grande Valley and two and Shareholder value. The Book Value Net Income (2) new centers in San Antonio, to bring of our Stock has increased every year (Dollars in ousands) the total in San Antonio to four (4) since our inception in 1983. Our vision 07 $18,489 centers, with at least two (2) more for the future is to continue expanding 08 planned for 2012. Total Assets in San our franchise in South Texas, primarily in $13,291 09 Antonio reached $73 Million, as of the Rio Grande Valley and San Antonio $9,219 10 December 31, 2011. markets. $3,711 11 $21,519 Revenue from Interest Income increased We deeply value our personal relation- from $94 Million to $98 Million and ship with you. We will never take it for Non-Interest Income increased from $18 granted. We appreciate your support and Per Share Data: Million to $28 Million, including an $8.6 look forward to working with you to Net Income-Diluted Million increase in gain from the sale of achieve our mutual success. 07 bonds, for the years ended December $3.23 08 31, 2010 to December 31, 2011. Non- $2.33 09 Interest Expense increased from $52 Yours very truly, $1.62 10 Million to $57 Million, including $3 Million $0.63 11 in write downs of foreclosed Real Estate $3.40 Owned Properties, due to falling real estate values, during this same period. A. Jabier Rodriguez Chief Executive Officer Return on Average Our efficiency ratio, the cost to produce Stockholders’ Equity 07 16.30% 08 9.82% 09 6.15% 10 2.14% Carta a Nuestros 11 Accionistas, 11.02% 5 Year Compound Clientes y Amigos Annual Growth Rate Assets 4.94% Shareholders’ Equity El sector financiero se ha recuperado compañía, medidas en los procesos de 14.52% Loans después de los cuatro (4) años más administración de riesgo en cada una de 5.91% Deposits difíciles que la industria bancaria haya nuestras decisiones. Nuestro enfoque es 3.71% experimentado. Nosotros hemos resur- de mantener el riesgo en niveles bajos a gido con más experiencia y con el com- moderados y los rendimientos a un nivel promiso de implementar, a lo largo de la de moderado a alto. 2011 Annual Report l 5 El modelo de negocios para un banco millones en capital contable y $31 en el 2011. Esto se compara favorable- regional seguro y sólido ha cambiado a millones en reservas para riesgos crediti- mente con el índice de nuestros competi- uno basado en menor medida en ingresos cios, lo cual representa un índice de dores del mismo nivel que fue del 71%. derivados por intereses de crédito y en capital propio sobre el total de activos del mayor medida en ingresos generados por 9.53% y un índice de reservas para El rendimiento neto aumentó de $3.7 tarifas y comisiones con un alto nivel de riesgos crediticios sobre el total de millones al fin del 2010 a $21.5 millones al eficiencia. Esto ha sido en parte por los préstamos del 2.48% lo cual cumple fin del 2011, después del efecto neto por efectos de la recesión y la lenta recuper- claramente con estos nuevos requisitos. la ganancia de la venta de bonos y los ación de la economía. La ley sobre la bienes raíces adjudicadas por el banco. Reforma financiera Dodd-Frank esta- Los incrementos en los niveles de capital Este es otro nivel récord de ingreso neto, blecida recientemente, ha restringido los actualmente requeridos, han causado evidenciando claramente una recuper- cargos de comisiones por los sobregiros que el rendimiento de los bancos haya ación y estabilización completa, obtenida de cuentas de cheques y tarjetas de disminuido considerablemente. Nuestras a través de varias iniciativas ejecutivas débito, causando que los bancos reduz- tasas de rentabilidad con respecto al implementadas por nuestro equipo. Nues- can el pago de aquellos cheques sin promedio de los activos fue del .98% y el tro mayor rendimiento reportado había fondos, impactando de manera negativa rendimiento sobre el promedio del capital sido de $18.5 millones en el 2007, el año el ingreso por comisiones. La ley de propio fue del 11.02% en el 2011, siendo en que inicio la recesión más severa en la Reforma financiera Dodd-Frank también superiores a los rendimiento de nuestros historia de los Estados Unidos.

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