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Lone Star National Bancshares-Texas, Inc Lone Star National Bancshares-Texas, Inc. 09 AnnualReport B R I N G I N G T H E B A N K T O Y O U Our Mission Statement Lone Star National Bank will be the respected leader in financial services through flawless execution of quality sales, service, and support, and achieving extraordinary customer loyalty with timely delivery of value-added services to our stakeholders: Customers: Deliver value-added personal financial services Employees: Create an enthusiastic team by offering them rewarding career opportunities Community: Serve with pride and integrity, and help our communities grow, including low to moderate income neighborhoods and small businesses Shareholders: Remain a high performance bank with a high rate of return for shareholders Contents 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 42 Board of Directors 44 Advisory Directors 46 Bank Officers 48 Banking Centers, Mortgage & ATM Locations 49 Our History We are ‘Bringing the Bank to You’ through our bankers, our branches, the Internet, LSNB MobileTM and Office BankerTM. A. Jabier Rodriguez Chief Executive Officer Book Value Per Share ’06 $19 ’07 $23 ’08 $26 ’09 $28 Shareholders’ Equity Letter to Our Shareholders, (Dollars in Millions) Customers & Friends ’06 $106 ’07 $126 Dear Shareholders, Customers and Friends, ’08 $145 The economic contraction that brought about the longest lasting recession in the history of our nation ’09 $161 began in 2007 and persisted through most of 2009. Although the National Bureau of Economic Research has not declared an official end, we believe that the recession ended during the summer of 2009, after twenty (20) months. This current recession has caused the Gross Domestic Product to decline from a positive 2.10% to a negative 2.40% and unemployment to climb to 14.5 million people nationwide. In addition, a total of one hundred forty (140) banks failed in 2009 and already thirty (30) have failed through the end of the first quarter of 2010 and it is estimated that a total of one hundred eighty (180) will fail in 2010. We are happy to report that our Equity Capital increased from $144,781,000 to $161,299,000. Our Leverage Capital Ratio increased from 9.81% to 10.35% and our Risk Based Capital Ratio increased from 15.46% to 15.83% during this period, making it one of the strongest in the nation. We continue to remain profitable, with Net Income for year 2009 totalling $9.2 million, or $1.62 per share, down from $13.3 million, or $2.33 per share, reported in 2008. Return on assets and return on equity averaged 0.52% and 6.15%, respectively for 2009. Net Income for 2009 was impacted by events beyond our control with this recession. Our 2009 FDIC insurance increased $2.2 million to $3.2 million compared to $1 million for the prior year due to expanded FDIC insurance limits for customers, premiums for growth in deposits and a mandate for a one-time special assessment by the FDIC on all banks nationwide. Other contributing factors included a provision for loan losses of $12.1 million for 2009, which is $1.2 million more than the prior year, and net gains on securities sales of $1.1 million which is a net decrease of $2.6 million when compared to the prior year. Our results also reflect continued growth during this severe recession. We continued to lend to creditworthy customers with Loans of $1.2 billion, reflecting a net increase of $23.2 million when compared to the prior year. Though the recession impacted our earnings, we remained profitable and our customers were able to rely on our strength and stability during these difficult economic times. We have continued increases in deposit growth, with Deposits of $1.5 billion reflecting a net increase of $39.5 million when compared to the prior year. We continue to build shareholder value as reflected in our Shareholder Equity of $161.3 million, increasing $16.5 million when compared to the prior year. Our book value, per share, increased from $26.37 to $28.47 per share, during the same period. In September 2009, we moved into our new corporate office in McAllen, Texas, allowing for consolidation of several banking activities into one structure and providing a more customer friendly and efficient operation. We will continue to look for opportunities to expand our presence throughout South Texas. During 2009 we expanded our presence in the Rio Grande Valley of Texas to twenty-one full service locations and three motor bank facilities. 4 2009 Annual Report Stock Price The National Recession caused the closure or sale of banks in San Antonio, Texas, including Washington Mutual, Wachovia Bank and Per Share Guaranty Bank, creating a window of opportunity to establish a presence in San Antonio. We have taken this opportunity to diversify ’05 our asset base. The San Antonio market is twice the size of the Rio Grande Valley. We plan to establish approximately ten (10) branches $36.00 within the next three (3) years and to grow our loan portfolio in the San Antonio market to five hundred million dollars, provided that $45.00 ’06 the borrowers meet our credit quality standards. We may also have the opportunity of acquiring additional branches, including earning $50.00 ’07 assets and deposits, in the San Antonio and surrounding markets, which will enable us to offset our startup costs in a very short period of time. We have secured two locations in San Antonio that will be opened for business in the first and second quarter of 2010 at 7954 $40.00 ’08 Fredericksburg Road and 40 North East Loop 410. The expansion into the San Antonio market is the first step to expand into growing $36.00 ’09 markets and diversify our loan and deposit base to enable us to grow future earnings. The expansion into new markets and consolidation of banking activities at the new corporate office were strategic decisions by the Board of Directors and management to continue to build shareholder value and strengthen our balance sheet. This expansion is possible Total Assets due to a strong equity capital position and significant liquidity maintained throughout these adverse economic times. (Dollars in Millions) In closing, our plan is to stay focused on our Mission Statement and fundamental business of providing superior value-added customer $1,407 ’05 service, providing a rewarding environment for our team, supporting our communities, and providing a high rate of return to our $1,716 ’06 shareholders. Although challenges will continue during 2010, we are optimistic that the economy and the real estate market will improve and that with proven leadership and hard work, we will continue to prosper in the future. $1,577 ’07 As always, we wish to express our appreciation to our shareholders, customers, and friends whose past and continued support will $1,776 ’08 assure a successful future. $1,857 ’09 Yours very truly, Net Income A. Jabier Rodriguez $10,081 ’05 Chief Executive Officer $15,460 ’06 $18,489 ’07 $13,291 ’08 Carta a nuestros Accionistas, $9,219 ’09 Clientes y Amigos Per Share Data: Net Income-Diluted Estimados Accionistas, Clientes y Amigos: $1.90 ’05 $2.81 ’06 La recesión más larga en la historia de nuestra nación empezó en el 2007 y persistió hasta la mayor parte del 2009. A pesar de que el Buró Nacional de Investigación Económica no ha declarado su fin oficialmente, nosotros creemos que la recesión terminó en el verano $3.23 ’07 del 2009, después de veinte (20) meses. Esta recesión ha causado un deterioro en el Producto Doméstico Bruto de un 2.10% positivo $2.33 ’08 hasta un 2.40% negativo y el desempleo aumentó a 14.5 millones de personas a través del país. Además, un total de ciento cuarenta (140) bancos fracasaron en el 2009 y treinta (30) ya han fracasado hacia el fin del primer trimestre del 2010 y se estima que un total $1.62 ’09 de ciento ochenta (180) fracasarán en el 2010. Nos da gusto reportar que nuestro capital de participación aumentó de $144.8 mdd a $161.3 mdd representando un porcentaje de activos de 9.81% al 10.35% y capital de riesgos de 15.46% al 15.83% durante este período, haciéndonos uno de los más fuertes en la nación. Return on Average Stockholders’ Equity No fuimos inmunes a un deterioro de tal magnitud en la economia, pero continuamos con un resultado neto positivo para el año 2009 de $9.2 mdd, o $1.62 por acción. En 2008, este resultado se reportó de $13.3 mdd, o $2.33 por acción. A pesar de la peor economia 14.61% ’05 de nuestra nacion desde la gran depresión, los rendimientos en activos y la participación de nuestros inversionistas promediaron un 18.87% ’06 0.52% y 6.15%, respectivamente, en el 2009. El resultado neto para el 2009 fue impactado por eventos fuera de nuestro control debido a la recesión. Nuestro seguro FDIC para el 2009 aumentó de $2.2 mdd a $3.2 mdd en comparación a $1mdd en el año previo, esto 16.30% ’07 debido al aumento de los límites de FDIC para los clientes, primas para el aumento de depósitos y un mandato de una sola vez para 9.82% ’08 una tasación especial por parte del FDIC a todos los bancos a nivel nacional. Otros factores que contribuyeron a una reducción en 6.15% ’09 rentabilidad incluyen un aumento en la estimación preventiva para riesgos crediticios, lo cual es $1.2 mdd más que en el año anterior y utilidades netas en las ventas de valores de $1.1 mdd, lo cual es una baja de $2.6 mdd al compararse con el año anterior.
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