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. Nuestros resultados también reflejan un crecimiento continuo durante esta seria recesión. Continuamos haciendo préstamos a aquellos 5 Year Compounded clientes dignos de crédito con préstamos de un mil punto dos millones, $1.2 mmdd, reflejando un incremento neto de $23.2 mdd al Growth Rate compararse con el año anterior. A pesar de que la recesión impactó a nuestro margen, continuamos siendo rentables y nuestros clientes pudieron confiar en nuestra solidez y estabilidad en estos tiempos tan difíciles de la economía. Tenemos un continuo desarrollo en el 11.27% assets incremento de los depósitos, con depósitos de un mil punto cinco millones, $1.5 mmdd, lo cual refleja un incremento neto de $39.5 19.82% shareholders’ equity mdd comparado con el año anterior. Continuamos aumentando el valor para nuestros accionistas tal como se muestra en nuestra 11.74% loans participación de los accionistas de $161.3 mdd un aumento de $16.5 mdd comparado con el año anterior. Nuestro valor contable por acción, aumentó durante este mismo período de $26.00 a $28.00 por acción, siguiendo su tendencia desde el inicio de nuestro banco. 9.86% deposits
2009 Annual Report 5 En Septiembre del 2009, reubicamos nuestra oficina corporativa en McAllen, Texas, lo que nos permitió la consolidación de varias actividades bancarias en solo sitio y brindar una operación más enfocada a los clientes y más eficiente. Continuaremos la búsqueda de más oportunidades para expandir nuestra presencia a través del Sur de Texas. En el 2009 expandimos nuestra presencia en el Valle del Río Grande en veintiún (21) sucursales de servicio completo y tres (3) instalaciones de banca móvil.
La recesión a nivel nacional, provocó el cierre, o la venta de bancos, en San Antonio, Texas, incluyendo Washington Mutual, Wachovia Bank y Guaranty Bank, respectivamente, lo cual creó una excelente oportunidad para establecer nuestra presencia en San Antonio. Hemos aprovechado esta oportunidad para diversificar nuestra base de activos. El mercado de San Antonio es dos veces mayor que el del Valle del Río Grande. Planeamos establecer aproximadamente diez (10) sucursales en el transcurso de los próximos tres (3) años y aumentar nuestra cartera de préstamos en el mercado de San Antonio hasta $500 mdd, siempre y cuando los prestatarios cumplan con nuestras normas de calidad de crédito. Podríamos también tener la oportunidad de adquirir sucursales adicionales, incluyendo activos y captación en el mercado de San Antonio y sus alrededores lo cual nos permitirá compensar nuestros costos iniciales en un plazo corto para llegar a un rendimiento positivo en un corto plazo.
Hemos obtenido dos (2) sucursales en San Antonio, las cuales abrirán sus puertas en el primer y segundo trimestre del 2010 en el 40 North East Loop 410, Suite 408, en el primer trimestre y en el 7954 Fredericksburg Road en el segundo trimestre. La expansión a San Antonio es el primer paso para llegar a los mercados crecientes y diversificar nuestra base de préstamos y captación para así poder asegurar rentabilidad en el futuro.
La expansión en nuevos mercados y la consolidación de las actividades bancarias en las nuevas oficinas corporativas fueron decisiones estratégicas tomadas por nuestro consejo y la gerencia para continuar con el desarrollo del valor para nuestros accionistas y fortalecer nuestro balance general. Esta expansión es posible por una sólida posición de capital propio y una liquidez considerable, mantenida a través de los tiempos económicos adversos.
En conclusión, nuestro plan es el de mantenernos enfocados hacia nuestra misión de objetivos y de servicio personal al cliente, brindar a nuestros clientes un servicio de valor agregado, brindar a nuestro equipo un ambiente de trabajo gratificante, apoyando a nuestras comunidades y proporcionar una fuerte y continua tasa de rendimiento a nuestros accionistas.
A pesar de que los retos continuaran durante el 2010, tenemos la confianza de que la economía y el mercado de los bienes raíces mejorará y que con un liderazgo probado y tesón continuaremos prosperando en el futuro.
Como siempre, deseamos expresar aprecio a nuestros accionistas, clientes y amigos, cuyo apoyo pasado y actual nos asegurará un futuro exitoso.
Atentamente,
A. Jabier Rodriguez Director General
Valor Contable por Acción ’06 $19 ’07 $23 ’08 $26 ’09 $28 Participaciones de los accionistas (En Millones) ’06 $106 ’07 $126 ’08 $145 ’09 $161
6 2009 Annual Report Financial Highlights
(Dollars in Thousands, Except Per Share Data) For the Year 2009 2008 %Change
Net income $9,219 $13,291 -30.64% Return on average assets 0.52% 0.80% -35.32% Return on average shareholders’ equity 6.15% 9.82% -37.36% Net interest margin 3.42% 3.62% -5.43% Efficiency ratio 62.31% 57.61% 8.15% Per share data: Net income - basic $1.67 $2.42 -31.06% Net income - diluted $1.62 $2.33 -30.43% Dividends declared - - Book value at end of period $28.47 $26.37 7.98% Weighted average shares outstanding (in thousands) - Basic 5,520 5,487 0.61% - Diluted 5,680 5,698 -0.32% Shares outstanding at end of period (in thousands) 5,666 5,491 3.17%
Capital Ratios Tier 1 risk-based capital ratio 14.57% 14.21% 2.53% Total risk-based capital ratio 15.83% 15.46% 2.39% Leverage capital ratio 10.35% 9.81% 5.50% Shareholders' equity to total assets 8.68% 8.15% 6.53%
Balance Sheet Data Total assets $1,857,472 $1,776,071 4.58% Loans 1,184,708 1,160,879 2.05% Allowance for loan losses 22,101 18,230 21.23% Investment securities 418,412 467,822 -10.56% Deposits 1,471,683 1,432,232 2.75% Shareholders’ equity 161,299 144,781 11.41%
Asset Quality Ratios Allowance for Loan Losses to Loans 1.87% 1.57% 18.80% Net Loan Charge-offs $8,254 $8,702 -5.15% Net Loan Charge-offs to Average Loans 0.71% 0.79% -10.67% Nonperforming Assets to Loans and Repossessed Assets 7.48% 4.01% 86.65% Allowance for Loan Losses to Nonperforming Assets 23.08% 37.63% -38.66% Provision for Loan Loss to Net Loan Charge-offs 146.90% 125.26% 17.28%
Return on Efficiency Per Share Data Average Assets Ratio Book Value ’05 0.85% ’05 49.29% ’05 $15.41 ’06 1.06% ’06 51.81% ’06 $19.34 ’07 1.15% ’07 53.01% ’07 $23.05 ’08 0.80% ’08 57.61% ’08 $26.37 ’09 0.52% ’09 62.31% ’09 $28.47
2009 Annual Report 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion addresses information The Company’s profitability is dependent on managing Investment Securities: Total investment securities of pertaining to the financial condition and results of interest rate spreads, other operating income and $418.4 million at December 31, 2009 decreased $49.4 operation of Lone Star National Bancshares-Texas, Inc. expenses, and credit risk. Net interest income is the million or 10.6% compared to $467.8 million at and subsidiaries (the “Company”) that may not be largest component of revenue for the Company. The December 31, 2008. The mix of investment securities otherwise apparent from a review of the audited Company manages interest rate risks through the funds during 2009 was changed in the fourth quarter to increase consolidated financial statements and related footnotes. management policy of the Company by offering deposit the yield of the portfolio while maintaining liquidity, asset It should be read in conjunction with those statements, and/or loan structures that tend to counter the natural quality and manage the market value risk of the bond as well as other information presented throughout the rate risk profile of the Company. The Company portfolio. The fixed-rate collateralized mortgage report. In addition to historical information, this addresses loan and deposit pricing, the asset and liability obligations and mortgage backed securities totaling discussion and other sections contained in this Annual mix and interest rate sensitivity on a periodic basis. $369.8 million at December 31, 2009 reflects an increase Report include certain forward-looking statements Yields on earning assets and rates paid on interest bearing of $154.8 million when compared to $215.0 million at regarding events and trends which may affect the deposits within the Company declined during 2009. The December 31, 2008. Company’s future results. Such statements are subject to Company’s efforts to manage the interest rate spreads in Loans: Loans of $1.2 billion at December 31, 2009 risk and uncertainties that could cause the Company’s this rate environment resulted in a slight decline in the increased $23.8 million or 2.1% compared to $1.2 billion actual results to differ materially. Such factors include, net interest margin partially due to management opting at December 31, 2008. At December 31, 2009 the loan but are not limited to, those described in this discussion to hold more liquidity. The Company manages its credit portfolio consisted primarily of $283.8 million of and analysis. risk by establishing underwriting guidelines, which commercial loans, $2.2 million of agriculture loans, address the characteristics of borrowers, industries, The Company is a privately held bank holding company $851.2 million of real estate loans, $48.2 million of geographic locations and risk products. The credit headquartered in Pharr, Texas, offering a broad array of consumer and other loans. These loans are primarily process is controlled by continuous review and credit financial services through its wholly owned banking originated within our market area of the Rio Grande Valley analysis. The Company evaluates its management of subsidiary, Lone Star National Bank (the “Bank”). The and are generally secured by residential or commercial real operating expenses through the efficiency ratio, which is Company provides full service banking to individuals, estate or business or personal property. Despite the approximately 62.3% for 2009. The efficiency ratio businesses, and municipalities in our market area, the unprecedented contraction in the credit markets, we equates to the cost of recording one dollar’s worth of Rio Grande Valley. The Rio Grande Valley is composed of continued to lend to credit-worthy customers. revenue. The Company’s efficiency ratio remains very the following Texas counties: Hidalgo, Cameron, Starr favorable when compared to the peer group ratings of The Company manages its credit risk by establishing and and Willacy (the “Rio Grande Valley”). The Company’s 76.9% for similar size bank holding companies in the implementing strategies and guidelines appropriate to the strategy is to become the largest independent bank in United States of America. characteristics of borrowers, industries, geographic south Texas with talented bankers who offer a higher locations and products. Diversification of risk within each level of value-added customer service through personal Analysis of Financial Condition of these areas is a primary objective. Policies and banking relationships, and delivering technologically Overview: Year 2009 has been another challenging year procedures are developed to ensure that loan advanced financial services and solutions. As of for the Company with the U.S. economy continuing its commitments conform to current strategies and December 31, 2009 the Company had total assets of $1.9 decline in corporate earnings reports, climbing guidelines. Management continues to refine the billion, loans of $1.2 billion, deposits of $1.5 billion and unemployment and problems in the housing market. The Company’s credit policies and procedures to address risks shareholders’ equity of $161.3 million. During the Rio Grande Valley economy has been affected by the in the current and prospective environment and to reflect fourth quarter of 2008, financial institutions across the current recession as reflected by a decline in building management’s current strategic focus. The credit process is United States of America were given an opportunity to permits (down 26.0%), airline boarding (down 7.8%) controlled with continuous credit review and analysis as apply for additional capital under the U. S. Treasury and vehicle and pedestrian bridge crossings to Mexico well as review by internal and external auditors and Department’s Troubled Assets Relief Program (TARP). (down 2.7%) for 2009 compared to 2008. One bright regulatory authorities. The Company’s loans are widely The Company’s Board of Directors decided not to spot in the Rio Grande Valley economy is net growth in diversified by borrower and industry group. participate in the Treasury Department’s Capital Purchase the labor market (up 0.5%) for 2009 compared to 2008 Program (CPP), which is part of the broader TARP The Company has lending policies in place so that lending which is reflective of and attributable to the vitality of its initiative. Management of the Company analyzed the of all types is approached, to the extent possible, including economy. The economy of the Rio Grande Valley is based strengths of its own balance sheet and determined that its low-to-moderate income neighborhoods and small principally on retailing (including trade with Mexico), current capital position and sources of liquidity allow it business, on a basis consistent with safe and sound government, agriculture, tourism, manufacturing, health the flexibility to make acquisitions, extend credit and standards. Stress Testing is utilized to take into care and education. execute current growth strategies. The CPP did not consideration the potentially adverse economic conditions represent an advantage for the Company. Total assets of $1.9 billion at December 31, 2009 under which liquidation of the loan could occur. increased $81.4 million or 4.6% compared to $1.8 Collateral accepted against the commercial loan portfolio The Company’s primary goal is to provide a higher billion at December 31, 2008. Total deposits of $1.5 is primarily real estate in addition to accounts receivable quality service for its customers in its delineated billion at December 31, 2009 increased $39.5 million or and inventory, marketable securities and equipment. community by providing personal service, relationship 2.8% compared to $1.4 billion at December 31, 2008. Autos, deeds of trust, life insurance and marketable banking and innovative technology solutions. In order to securities are accepted as collateral for the installment loan broaden the customer base, primarily through expanding Due from Banks-interest bearing: Due from banks- portfolio. the Company’s network of full-service banking offices, interest bearing accounts of $121.5 million at December the Company opened three new branches in the McAllen 31, 2009 increased $84.4 million or 227.7% compared The Company’s policy on maturity extensions and area, with one branch being its new corporate office, to to $37.1 million at December 31, 2008. These funds rollovers is based on management’s assessment of support our growth. The Board of Directors has decided represent excess funds deposited with correspondent individual loans. Approvals for the extension or renewal of to expand our banking organization into the San Antonio banks, primarily Federal Reserve Bank and reflect loans without reduction of principal for more than one market with plans to add six to ten branches in the next management’s strategy of remaining liquid during this twelve-month period are generally avoided, unless the eighteen months. recession. loans are fully secured and properly margined by cash or
8 2009 Annual Report marketable securities, or are revolving lines subject to resulted in increased levels of nonperforming assets and annual analysis and renewal. charge-offs, increased loan loss provisions and reduction to income. Additionally, as an internal part of the Nonperforming Assets: The Bank has several examination process, bank regulatory agencies procedures in place to assist in maintaining the overall periodically review our allowance for loan losses. The quality of its loan portfolio. The Bank has established banking agencies could require the recognition of underwriting guidelines to be followed by its officers and additions to our loan loss allowance based on their monitors its delinquency levels for any negative or judgment of information available to them at the time of adverse trends, particularly with respect to credits which their examination. have total exposures of $10,000 or more. Premises and Equipment: Premises and equipment of Nonperforming assets consists of nonaccrual loans, loans $51.9 million at December 31, 2009 increased $8.2 for which the interest rate has been renegotiated below million or 18.8% compared to $43.7 million at December originally contracted rates and real estate or other assets 31, 2008. The net increase in premises and equipment that have been acquired in partial or full satisfaction of for year 2009 is primarily attributable to the addition of loan obligations. At December 31, 2009 nonperforming three new branch locations in McAllen, Texas, with one of assets totaled $95.7 million or 7.5% of loans plus known as Risk-Based Capital Guidelines. The minimum the locations being the new corporate office. repossessed assets. Management has added seasoned Total Risk-Based Capital, Tier 1 Risk-Based Capital, and personnel to assist in turning nonperforming assets into Other Real Estate Owned: Other real estate owned Tier 1 Leverage Capital ratios are 8.0%, 4.0% and 4%, performing assets. Management believes that it is (“OREO”) of $42.1 million at December 31, 2009 respectively. At December 31, 2009, the Company’s Total unlikely that any material loss will be incurred on increased $27.5 million or 188.1% compared to $14.6 Risk-Based Capital, Tier 1 Risk-Based Capital, and Tier 1 disposition of the collateral even though the volume of million at December 31, 2008. OREO assets represent Leverage Capital ratios are 15.83%, 14.57% and 10.35%, loan losses has increased, while the allowance for loan property acquired as the result of borrower defaults on respectively. loans. Management actively manages the OREO and losses has continually been enhanced to 1.87% of total At December 31, 2009, the Company and the Bank met carries the value of each OREO at either the lower of the loans. the criteria for classification as a “well-capitalized” fair market value less estimated selling costs or at the cost institution under the prompt corrective action rules Management regularly reviews and monitors the loan of the asset. Write-downs occurring at foreclosure are promulgated under the Federal Deposit Insurance Act. portfolio to identify borrowers experiencing financial charged against the allowance for possible loan losses. On Designation as a well-capitalized institution under these difficulties. Management believes that at December 31, an ongoing basis, OREO are appraised as required by regulations does not constitute a recommendation or 2009 all such loans had been identified and included in market indications and applicable regulations. endorsement of the Company or the Bank by Federal the nonaccrual, restructured or 90 days past due loan Write-downs provided for subsequent declines in value bank regulators. totals. Management continues to emphasize maintaining a are included in other noninterest expense along with low level of nonperforming assets and returning other expenses related to maintaining the properties. nonperforming assets to an earning status. Analysis of Results of Operations Deposits: Deposits at December 31, 2009 of $1.5 billion Earnings Summary: Net income for 2009 was $9.2 Allowance for Loan Losses: The allowance for loan increased $39.5 million or 2.8% compared to $1.4 billion million or $1.62 per fully diluted share, reflecting a losses at December 31, 2009 of $22.1 million increased at December 31, 2008. At December 31, 2009, decrease of $4.1 million or $0.71 per fully diluted share, $3.9 million or 21.2% compared to $18.2 million at noninterest bearing deposits were 9.3% of total deposits compared to the net income of $13.3 million or $2.33 per December 31, 2008. The allowance for loan losses at and time deposits over $100,000 were 54.2% of total fully diluted share for the year 2008. Earnings December 31, 2009 was 1.87% of loans outstanding, net deposits. Deposits are the Bank’s primary source of funds. performance for the year 2009 compared to year 2008 of unearned discount. The Bank offers a variety of products designed to attract reflected an increase in net interest income, partially offset by a decrease in noninterest income and increases in Management analyzes the loan portfolio to determine the and retain deposit customers. The Bank offers products provision for loan losses and noninterest expense. A more adequacy of the allowance for loan losses and the consisting of checking accounts, regular savings deposits, detailed description of the results of operations is appropriate provision required to maintain an adequate NOW accounts, money market accounts, select included in the material that follows. allowance. In assessing the appropriateness of the certificates of deposit savings, an interest bearing club allowance, management reviews the size, quality and account, and certificates of deposits. Deposits are Net Interest Income: Net interest income represents the gathered primarily from individuals, partnerships and risks of loans in the portfolio and considers factors such greatest source of income for the Company. Net interest corporations in our market areas. In addition, we obtain as specific known risks, past experience, the status and income is the difference between interest earned on assets deposits from state and local entities. The Bank’s policy amount of nonperforming assets and economic and interest expense incurred for the funds supporting also permits the acceptance of brokered deposits. conditions. The allowance for loan losses is comprised of those assets. The largest category of earning assets three elements which include: 1) allowances established The interest rates paid are competitively priced for each consists of loans. The second largest category of earning on specific loans, 2) allowances based on loss experience particular deposit product and structured to meet our assets is investments, followed by Federal funds sold and and trends in pools of or loans with similar characteristics funding requirements. The Bank’s management will Due from banks-interest bearing. and 3) unallocated allowances based on general economic continue to manage interest expense through deposit Earning assets are financed by consumer and commercial conditions and other internal and external risk factors in pricing. The Bank’s management believes that additional deposits and short-term borrowings. In addition to these our market. Loans identified as losses are charged off. In funds can be attracted and deposit growth can be interest-bearing funds, assets also are supported by addition, the loan review committee of the Bank reviews accelerated through deposit pricing if the Bank interest-free funds, primarily demand deposits and the assessments of management in determining the experiences increased loan demand or other liquidity shareholder’s equity. Variations in the volume and mix of adequacy of the Bank’s allowance for loan losses. Based needs. assets and liabilities, and their relative sensitivity to on total allocations, the provision is recorded to maintain Capital Resources: Shareholders’ equity of $161.3 interest rate movements, determine changes in net the allowance at a level deemed appropriate by million at December 31, 2009 increased $16.5 million or interest income. management. While management uses available 11.4% compared to $144.8 million at December 31, information to recognize losses on loans, there can be no Net interest income of $57.0 million for the year 2009, 2008. The increase was primarily attributable to earnings. assurance that future additions to the allowance will not reflected an increase of $368 thousand or 0.7% Shareholders’ equity as a percentage of total year-end compared to the prior year of $56.6 million. The increase be necessary. Future adjustments could be necessary to assets was 8.7% in 2009 and 8.2% in 2008. in net interest income was primarily attributable to the allowance for loan losses if circumstances or management’s efforts to control the cost of funds and economic conditions differ substantially from the Bank holding companies are required to maintain capital build noninterest bearing deposits. assumptions used in making the initial determinations. ratios in accordance with guidelines adopted by the The downturn in the economy and employment rates has Federal Reserve Board. The guidelines are commonly The net yield on total interest-earning assets, also
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10 2009 Annual Report referred to as net interest margin, represents net interest income increased $402,000 or 11.0% compared to $3.7 million for the prior divided by average interest-earning assets. Since a significant portion year. The net increase in other service charge and fee income for year of the Company’s funding is derived from interest-free sources, 2009 was primarily attributable to debit card fee income of $2.1 primarily demand deposits and shareholders’ equity, the effective rate million for year 2009 increasing $562,000 or 36.4% compared to paid for all funds is lower than the rate paid on interest-bearing $1.5 million for the prior year. The increase in debit card fee income liabilities alone. The net interest margin of 3.42% for the year 2009 is attributable to management’s efforts to increase the volume of debit decreased 20 basis points compared to 3.62% for the prior year. Out card business. of an abundance of caution to be prepared for the future during this The decreases in service charges on deposit accounts and real estate uncertain environment, we believed it was prudent to maintain package fees for the year 2009 compared to year 2008 were primarily additional liquidity through the investment portfolio and due from attributable to a decline in the activity for these accounts and services. bank interest-bearing accounts. These lower-yielding investments had a negative impact on earnings. The Company continued to Other noninterest income for year 2009 of $2.0 million increased experience intense market competitiveness for both loans and $372,000 or 23.1% compared to $1.6 million for the prior year. The deposits during 2009. The yield on interest-earning assets of 5.46% net increase in Other noninterest income was primarily attributable for the year 2009 decreased 124 basis points compared to 6.70% for to increased revenue from insurance commissions and fees (up the prior year. The yield on interest-bearing liabilities of 2.40% for $257,000), and brokerage commissions (up $169,000). the year 2009 decreased 90 basis points compared to 3.30% for the Noninterest Expense: Noninterest expense for year 2009 of $44.6 prior year. million increased $4.4 million or 11.0% compared to $40.2 million Provision for Loan Losses: The amount of provision for loan losses for prior year. The increase in noninterest expense was primarily is based on periodic (not less than quarterly) evaluations of the loan attributable to the increased FDIC insurance premiums, volume of portfolio, especially nonperforming and other potential problem business conducted by the Company, and the addition of three loans. During these evaluations, management considers various branch facilities, which includes the new corporate office. factors. For additional information concerning the factors in these The largest category of noninterest expense, Personnel expense, evaluations, see the “Allowance for Loan Losses” section of this which includes employee compensation and employee benefits, of Report. $20.9 million for year 2009 increased $1.4 million or 7.0% The provision for loan losses are charged to earnings to bring the compared to $19.5 million for the prior year. Personnel expense allowance for loan losses to a level deemed appropriate by increase was primarily a result of increases in headcount and management based on such factors as historical experience, the increases in commissions and incentive pay related to performance volume and type of lending conducted by the Company, the amount metrics. of nonperforming assets, regulatory policies, generally accepted Net occupancy and equipment expense of $7.2 million for the year accounting principles, general economic conditions, particularly as 2009 decreased $393,000 or 5.2% compared to $7.6 million for the they relate to the Company’s lending area, and other factors related to prior year. The net decrease is primarily attributable to a net increase the collectibility of the Company’s loan portfolio. The provision for in rent income (up $64,000) and decrease in utility expense (down loan losses for the year 2009 of $12.1 million compares unfavorably $203,000) and ad valorem taxes (down $127,000). to the $10.9 million provision for loan losses for the prior year. The $12.1 million provision for loan losses for year 2009 was primarily Data processing fees of $2.6 million for the year 2009 increased attributable to net charge-offs of $8.3 million, loan growth of $23.3 $698,000 or 36.2% compared to $1.9 million for the prior year. The million, and an amount to maintain the allowance for loan losses at net increase is primarily attributable to the increased level of business a level deemed appropriate by management based on various factors conducted by Company and its customers. discussed in the “Allowance for Loan Loss” section of this Report. The Advertising expense of $1.3 million for the year 2009 decreased $8.3 million net charge-offs for the year 2009 compares favorably to $405,000 or 24.4% compared to $1.7 million for the prior year. The the $8.7 million for the prior year. net decrease is primarily attributable to a change in marketing focus Noninterest Income: Noninterest income for year 2009 of $13.5 while continuing to promote the bank in the communities that we million decreased $997,000 or 6.9% compared to $14.5 million for serve and to promote product awareness. prior year. The net decrease in noninterest income for year 2009 was The Other Real Estate Owned, net loss of $878,000 for the year 2009 primarily attributable to $1.7 million decline in gain on sale of increased $545,000 compared to $333,000 for the prior year. The securities when compared to the prior year. additional expenses are primarily attributable to direct expenses of Gain on sale of securities was partially decreased by the $483,000 foreclosed real estate including property taxes, maintenance costs and charge related to other-than-temporary impairment of certain $315,000 write-downs, exceeding the net gains on the sale of private-label collateralized mortgage-backed securities for 2009. At previously foreclosed real estate. the time of purchase, these private-label collateralized FDIC insurance expense of $3.2 million for the year 2009 increased mortgage-backed securities were triple-A rated and broadly $2.2 million or 204.3% compared to $1.1 million for the prior year. considered sound. However, the unprecedented nationwide The increase in FDIC insurance expense was partially attributable to deterioration of home prices combined with the ongoing recession the net increase in deposits for the year 2009 and partially has resulted in a sharp increase in loss rates on the mortgages attributable to an increase in the FDIC rates and a special assessment underlying these securities. To determine whether any of the for 2009 to rebuild the deposit insurance fund. securities had become other-than-temporarily-impaired, the Bank performed cash flow analysis of the individual loans underlying each Federal and State Income Taxes: Federal and state income taxes of security under various combinations of default, loss severity and $4.5 million for the year 2009 decreased $2.2 million or 33.2% prepayment assumptions to evaluate the potential credit performance compared to $6.7 million for the prior year. The decrease in federal of the mortgages. Based on the year-end 2009 analysis, the Bank and state income taxes is primarily attributable to a decreased level of recorded a $483,000 charge related to other-than-temporary pretax income during year 2009. impairment. We continuously monitor these securities, and further Net Income: Net income for the year 2009, was $9.2 million or deterioration in delinquency, loss rates, and real estate values may $1.62 per fully diluted share, reflecting a decrease of $4.1 million or also cause an increase in estimated and actual economic losses. $0.71 per fully diluted share, compared to the net income of $13.3 Other service charge and fee income for year 2009 of $4.1 million million or $2.33 per fully diluted share for the prior year.
2009 Annual Report 11 Management’s Report on Responsibility for Financial Reporting To Our Shareholders March 25, 2010
Financial Statements The management of Lone Star National Bancshares-Texas, financial reporting presented in conformity with both Inc. and its subsidiaries (the “Company”) has the accounting principles generally accepted in the United responsibility for preparing the consolidated financial States of America and call report instructions as of statements and for their integrity and objectivity. The December 31, 2009. This assessment was based on criteria consolidated financial statements were prepared in for effective internal control over financial reporting conformity with accounting principles generally accepted in described in Internal Control-Integrated Framework issued the United States of America. The consolidated financial by the Committee of Sponsoring Organizations of the statements include amounts that are based on management’s Tredway Commission. Based on this assessment, best estimates and judgments. management believes that, as of December 31, 2009, Lone Star National Bancshares-Texas, Inc. and subsidiaries Internal Control Over maintained effective internal control over financial Financial Reporting reporting presented in conformity with accounting Management is responsible for establishing and maintaining principles generally accepted in the United States of effective internal controls over financial reporting presented America and call report instructions. in conformity with both accounting principles generally accepted in the United States of America and the Compliance With Laws instructions of the Board of Governors of the Federal Reserve and Regulations System for preparation of Consolidated Financial Statements Management is responsible for compliance with the federal for Bank Holding Companies (Reporting Form FR Y-9C). and state laws and regulations concerning dividend This internal control contains monitoring mechanisms, and restriction and the federal laws and regulation concerning actions to correct deficiencies identified. loans to insiders designated by the Federal Deposit There are inherent limitations in any internal control, Insurance Corporation as safety and soundness laws and including the possibility of human error and the regulations. circumvention or overriding of controls. Accordingly, even Management assessed compliance by the Bank with the effective internal control can provide only reasonable designated laws and regulations relating to safety and assurance with respect to financial statement preparation. soundness. Based on this assessment, management believes Further, because of changes in conditions, the effectiveness that the Bank complied, in all significant respects, with the of internal control may vary over time. designated laws and regulations related to safety and Management assessed the Company’s internal control over soundness for the year ended December 31, 2009.
A. Jabier Rodriguez Chief Executive Officer
George R. Carruthers Executive Vice President & Chief Financial Officer
12 2009 Annual Report INDEPENDENT AUDITOR’S REPORT
BOARD OF DIRECTORS AND STOCKHOLDERS LONE STAR NATIONAL BANCSHARES--TEXAS, INC. PHARR, TEXAS
We have audited the accompanying consolidated balance sheet of Lone Star National Bancshares--Texas, Inc. and Subsidiaries as of December 31, 2009 and 2008 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lone Star National Bancshares--Texas, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
March 25, 2010
Certified Public Accountants 801 QUINCE AVENUE • P.O. BOX 3125 • McALLEN, TEXAS 78502-3125 (956) 682-6365 • FAX (956) 682-2995
2009 Annual Report 13 LONE STAR NATIONAL BANCSHARES--TEXAS, INC. AND SUBSIDIARIES Consolidated Balance Sheet December 31, 2009 and 2008 (Dollars in Thousands, Except Share Data)
2009 2008 Assets Cash and due from banks $ 18,921 $ 19,390 Due from banks-interest bearing 121,451 37,064 Federal funds sold - 17,300 Total cash and cash equivalents 140,372 73,754 Securities available for sale 295,753 362,668 Securities to be held to maturity 122,659 105,154 Loans held for sale 576 - Loans, less allowance for loan losses of $22,101 and $18,230 respectively 1,162,031 1,142,649 Properties and equipment, net 51,874 43,658 Net deferred tax asset 5,332 5,399 Overpayment of federal income tax 1,569 817 Accrued interest receivable 7,077 8,459 Other real estate 42,137 14,627 Other assets 28,092 18,886 Total assets $ 1,857,472 $ 1,776,071 Liabilities Deposits Demand $ 136,534 $ 110,169 NOW accounts 51,891 162,052 Savings and money market deposit accounts 366,438 289,000 Time $100 and over 798,008 735,524 Other time 118,812 135,487 Total deposits 1,471,683 1,432,232 Accrued interest payable 2,199 3,541 Allowance for off-balance-sheet losses 850 700 Other liabilities 1,825 1,374 Federal funds purchased and securities sold under repurchase agreements 26,010 44,633 Guaranteed preferred beneficial interest in Company's subordinated debentures 27,837 27,837 Other borrowed money 165,769 120,973 Total liabilities 1,696,173 1,631,290 Stockholders' equity Common stock, par value $5; authorized 50,000,000 shares; 5,665,583 and 5,491,333 shares issued and outstanding 28,328 27,457 Paid-in capital 39,450 36,616 Retained earnings 88,713 79,494 Accumulated other comprehensive income (loss) 4,813 1,214 Treasury stock, 125 shares (5) - Total stockholders' equity 161,299 144,781 Total liabilities and stockholders' equity $ 1,857,472 $ 1,776,071
The accompanying notes are an integral part of the consolidated financial statements.
14 2009 Annual Report LONE STAR NATIONAL BANCSHARES--TEXAS, INC. AND SUBSIDIARIES Consolidated Statement of Income Years Ended December 31, 2009 and 2008 (Dollars in Thousands)
2009 2008 Interest income Loans, including fees $ 77,774 $ 84,337 Securities available for sale 7,887 14,151 Securities to be held to maturity 5,302 5,822 Due from banks 96 87 Federal funds sold 37 705 91,096 105,102 Interest expense Deposits 27,597 40,634 Federal funds purchased and repurchase agreements 1,121 1,865 Subordinated debentures 931 1,660 Other borrowed money 4,484 4,348 34,133 48,507 Net interest income 56,963 56,595 Provision for loan losses 12,125 10,900 Net interest income after provision for loan losses 44,838 45,695 Noninterest income Service charges on deposit accounts 6,241 6,323 Other service charge and fee income 4,053 3,651 Real estate package fee income 605 616 Gain on securities 593 2,271 Other noninterest income 1,985 1,613 13,477 14,474 Noninterest expense Employee compensation 17,433 15,792 Net occupancy and equipment expenses 7,166 7,559 Employee benefits 3,433 3,710 FDIC insurance 3,213 1,056 Data processing fees 2,624 1,926 Legal and professional 2,136 2,188 Advertising expense 1,256 1,661 Telephone expense 1,490 1,283 Other real estate, net 878 333 Supplies 651 556 Business development 573 565 Provision for off-balance-sheet losses 175 (177) Other noninterest expense 3,602 3,744 44,630 40,196 Income before income tax expense 13,685 19,973 Income tax expense 4,466 6,682 Net income $ 9,219 $ 13,291
The accompanying notes are an integral part of the consolidated financial statements.
2009 Annual Report 15 LONE STAR NATIONAL BANCSHARES--TEXAS, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders' Equity Years Ended December 31, 2009 and 2008 (Dollars in Thousands)
Comprehensive Common Paid-in income stock capital Balance at December 31, 2007 $ 304,72 $ 36,196
Comprehensive income Net income $ 13,291 - - Other comprehensive income, net of tax Unrealized holding gains arising during period 6,965 Reclassification adjustment for gains included in net income (2,271) Total other comprehensive income 4,694 - - Total comprehensive income $ 17,985 Exercise of stock options, 10,600 shares 45 183 Purchase of treasury stock, 16,656 shares - - Sale of treasury stock , 16 ,656 shares - - Share-based compensation - 181 Tax benefit from stock options exercised - 56
Balance at December 31, 2008 754,72 36,616
Comprehensive income Net income $ 9,219 - - Other comprehensive income, net of tax Unrealized holding gains arising during period 4,192 Reclassification adjustment for gains included in net income (593) Total other comprehensive income 3,599 - - Total comprehensive income $ 12,818 Exercise of stock options, 174,250 shares 178 1,305 Purchase of treasury stock, 67,400 shares - - Sale of treasury stock, 67,275 shares - - Share-based compensation - 96 Tax benefit from stock options exercised - 1,433
Balance at December 31, 2009 $ 823,82 $ 39,450
The accompanying notes are an integral part of the consolidated financial statements.
16 2009 Annual Report Accumulated other Total Retained comprehensive Treasury stockholders' earnings income (loss) stock equity $ 66,203 $ (3,480) $ -$ 126,322
13,291 - - 13,291
- 4,694 - 4,694
- - - 237 - - )418( (814) - - 814 814 - - - 181 - - - 56
79,494 1,214 - 144,781
9,219 - - 9,219
- 3,599 - 3,599
- - - 2,176 - - )009,2( (2,900) - - 598,2 2,895 - - - 96 - - - 1,433
$ 88,713 $ 4,813 $ )5($ 161,299
2009 Annual Report 17 LONE STAR NATIONAL BANCSHARES--TEXAS, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows Years Ended December 31, 2009 and 2008 (Dollars in Thousands)
2009 2008 Operating activities Net income $ 9,219 $ 13,291 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 3,663 3,411 Amortization (accretion) of investment security premiums and discounts, net 2,253 (1,119) Share-based compensation 96 181 Gain on sale of other real estate (851) (433) Gain on sale of investment securities (1,076) (3,657) Gain on sale of properties and equipment (12) - Provision for loan losses 12,125 10,900 Other than temporary impairment of securities held to maturity 483 1,386 Writedown of other real estate owned 315 84 Provision for off-balance-sheet losses 175 (177) Increase in overpayment of federal income tax (974) (777) Increase in deferred income tax benefit (133) (2,773) Decrease in accrued interest receivable 1,382 1,622 Increase in loans held for sale (576) - Increase in other assets (10,209) (2,340) Decrease in accrued interest payable (1,342) (652) Increase in other liabilities 451 1,294 Net cash provided by operating activities 14,989 20,241
Investing activities Proceeds from sale of investment securities available for sale 193,116 244,362 Proceeds from sale of trading securities 20,746 95,669 Proceeds from maturities and principal reduction of securities available for sale 1,280,477 480,238 Proceeds from maturities and principal reduction of securities to be held to maturity 21,649 10,676 Proceeds from mandatory repurchase of FHLB stock - 587 Proceeds from sale of properties and equipment 225 - Purchase of securities available for sale (1,402,354) (805,576) Purchase of securities to be held to maturity (39,720) (505) Purchase of trading securities (20,711) (94,992) Purchase of properties and equipment (11,737) (4,174) Net increase in loans (68,700) (130,259) Improvements to other real estate (2,005) (672) Net proceeds from sale of other real estate 12,848 2,632 Net cash used by investment activities (16,166) (202,014)
The accompanying notes are an integral part of the consolidated financial statements.
18 2009 Annual Report LONE STAR NATIONAL BANCSHARES--TEXAS, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows (Continued) Years Ended December 31, 2009 and 2008 (Dollars in Thousands)
2009 2008 Financing activities Net decrease in demand deposits, NOW accounts, savings and money market accounts (6,358) (81,632) Proceeds from sale of common stock 2,176 237 Proceeds from sale of treasury stock 2,895 814 Repayment of other borrowed money (165,204) (21,142) Proceeds from other borrowed money 210,000 15,974 Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements (18,623) 9,465 Net increase in time deposits 45,809 259,650 Purchase of treasury stock (2,900) (814) Net cash provided by financing activities 67,795 182,552
Increase in cash and cash equivalents 66,618 779 Cash and cash equivalents at beginning of year 73,754 72,975 Cash and cash equivalents at end of year $ 140,372 $ 73,754
The accompanying notes are an integral part of the consolidated financial statements.
2009 Annual Report 19 LONE STAR NATIONAL BANCSHARES--TEXAS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2009 and 2008
Note 1 - Summary of Significant Accounting Policies
Lone Star National Bancshares--Texas, Inc. (the “Parent" or "Company”), its primary subsidiary, Lone Star National Bank (the “Bank”) and its other subsidiaries (collectively the “Company”) are headquartered in Pharr, Texas. The Company provides a broad array of customary banking services and operates 21 banking centers throughout the Rio Grande Valley of Texas. The accounting principles and reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. A summary of the more significant accounting policies follows:
Basis of Presentation. The consolidated financial statements include the accounts of Lone Star National Bancshares--Texas, Inc. and its wholly-owned subsidiaries. The Company eliminates all significant intercompany transactions and balances in consolidation. The accounting and financial reporting policies the Company follows conform, in all material respects, to accounting principles generally accepted in the United States of America.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States of America. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in an entity is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Company’s wholly- owned subsidiaries, Lone Star National Capital Trust II, Lone Star National Capital Trust III and Lone Star National Capital Trust IV are VIEs for which the Company is not the primary beneficiary. Accordingly, the accounts of these entities are not included in the Company’s consolidated financial statements.
Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The allowance for possible loan losses, the fair value of financial instruments and the status of contingencies are particularly subject to change.
Cash and cash equivalents. For the purpose of reporting cash flows, the Company considers cash on hand, amounts due from banks and federal funds sold to be cash and cash equivalents. Generally, federal funds sold are purchased and sold for one-day periods. The Company has maintained balances in various operating and money market accounts in excess of federally insured limits.
Investments in securities. Securities that management has both the positive intent and ability to hold to maturity are classified as securities held to maturity and are carried at cost, adjusted for amortization of premium or accretion of discount, using the level-yield method. Amortization and accretion on mortgage-
20 2009 Annual Report backed securities are adjusted for prepayments. Securities that may be sold prior to maturity for asset/liability management purposes, or that may be sold in response to changes in interest rates, to changes in prepayment risk, to increase regulatory capital or other similar factors, are classified as securities available for sale and carried at fair value with any adjustments to fair value reported in stockholders’ equity as a component of accumulated other comprehensive income (loss), net of tax. Declines in the fair value of individual held to maturity and available for sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in net income as realized losses. Securities purchased for trading purposes are held in the trading portfolio at fair value, with changes in fair value included in noninterest income.
Interest and dividends on securities, including the amortization of premiums and the accretion of discounts, are reported in interest income on securities using the level-yield method. Gains and losses on the sale of securities are recorded on the trade date and are calculated using the specific identification method.
Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
Allowance for loan losses. The Company has established the allowance for loan losses through provision for loan losses charged against income. The Company charges off portions of loans deemed uncollectible against the allowance for loan losses and credits subsequent recoveries, if any, to the allowance.
The Company’s allowance for loan losses represents estimations based on guidance provided by Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan - an amendment of FASB Statements No. 5 and 15, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures - an amendment of FASB Statement No. 114 and SFAS No. 5, Accounting for Contingencies.
The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the loans and prior loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay.
Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts that the borrower’s financial condition is such that collection of interest is doubtful. Assets acquired through foreclosure are carried at the lower of the estimated net realizable value or the balance of the loan and are included in other assets. Revenues and expenses from operations and changes in the valuation allowance of foreclosed assets are included in noninterest expense.
Properties and equipment. Land is carried at cost. Other premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Depreciation for tax purposes is computed by using the Accelerated Cost Recovery System and the Modified Accelerated Cost Recovery System required by the Internal Revenue Code.
Impairment of long-lived assets. Long-lived assets and certain identifiable intangibles are reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
2009 Annual Report 21 Earnings per share of common stock. Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock.
Loan origination fees and costs. Loan origination fees and costs are deferred and recognized over the life of the loan as an adjustment of yield using the interest method.
Interest income on loans. Interest income on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed. Subsequent interest payments received on loans in which accrual of interest has been discontinued, are either applied against principal or reported as income, depending upon management’s assessment of the ultimate collectability of principal.
Advertising. Advertising costs are expensed as they are incurred.
Income tax expense. Income tax expense includes federal and state taxes currently payable and deferred taxes arising from timing differences between income for financial reporting and income tax purposes. These timing differences result principally from the use of different methods for financial reporting and tax purposes in the calculation of depreciation expense, loan loss reserves and loan origination costs.
Off-balance-sheet instruments. In the ordinary course of business the Company has entered into off- balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.
Accounting for derivative instruments and for hedging activities. SFAS No. 133, Accounting for Derivative Instruments and for Hedging Activities, requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Statement 133 requires that changes in fair value of a derivative be recognized currently in earnings unless specific hedge accounting criteria are met. The Company’s risk management activities do not presently include entering into derivative contracts to manage interest rate risk.
Segments of an enterprise and related information. The Company applies the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, in determining its reportable segments and related disclosures. No line of business, except for the Bank, exceeds 10 percent of revenues, net earnings or assets. The Company is managed as one financial unit and does not presently report by segment.
Share-based payments. The Company awards stock options as compensation to certain directors and officers. Grant date fair value of non-vested shares is based on the current market value of Company common stock. Stock options generally vest over 5 years and the value of vested stock options is based on the Black-Scholes-Merton option pricing model.
Compensation cost is recognized as expense over the vesting period. Expense is reduced for estimated forfeitures over the vesting period and adjusted for actual forfeitures as they occur. Excess tax benefits from share-based payments recognized in paid-in capital are determined by the excess of tax benefits recognized over the tax effect of compensation cost recognized.
22 2009 Annual Report Reclassifications. Certain amounts in the prior year’s presentation have been reclassified to conform to the current year’s presentation. These reclassifications have no effect on previously reported net income.
Note 2 - Restriction On Cash and Due From Banks
The Company is required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The required reserve balance at December 31, 2009 and 2008 was $205,000 and $15,817,000, respectively.
Note 3 - Investment Securities
An analysis of securities available for sale as of December 31, 2009 follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollars in Thousands) Cost Gains Losses Value
U.S. Government Agency $ 22,612 $ 31 ( $ 89 ) $ 22,554 Mortgage-backed 207,408 7,295 ( 1 ) 214,702 Collateralized mortgage obligations 58,442 245 ( 190 ) 58,497 Total $ 288,462 $ 7,571 ( $ 280 ) $ 295,753
The carrying amount and estimated fair value of securities to be held to maturity as of December 31, 2009 follow: Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollars in Thousands) Cost Gains Losses Value
State and local governments $ 15,905 $ 339 ( $ 6 ) $ 16,238 Mortgage-backed 38,207 408 ( -0- ) 38,615 Collateralized mortgage obligations 58,434 587 ( 5,743 ) 53,278 Other 10,113 -0- ( -0- ) 10,113 Total $ 122,659 $ 1,334 ( $ 5,749 ) $ 118,244
An analysis of securities available for sale as of December 31, 2008 follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollars in Thousands) Cost Gains Losses Value
U.S. Government Agency $ 229,373 $ 877 ( $ -0- ) $ 230,250 Mortgage-backed 40,152 274 ( -0-) 40,426 Collateralized mortgage obligations 91,304 786 ( 98 ) 91,992 Total $ 360,829 $ 1,937 ( $ 98 ) $ 362,668
2009 Annual Report 23 The carrying amount and estimated fair value of securities to be held to maturity as of December 31, 2008 follow: Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollars in Thousands) Cost Gains Losses Value
State and local governments $ 14,669 $ 85 ( $ 228 ) $ 14,526 Mortgage-backed 10,696 185 ( -0- ) 10,881 Collateralized mortgage obligations 71,892 663 ( 6,035 ) 66,520 Other 7,897 -0- ( -0- ) 7,897 Total $ 105,154 $ 933 ( $ 6,263 ) $ 99,824
The net change in unrealized holding gains and losses on securities available for sale, net of related tax effect, of $3,599,000 and $4,694,000 net gains for 2009 and 2008, respectively, was included in a separate component of stockholders’ equity as accumulated other comprehensive income (loss).
Provided below is a summary of securities which were in an unrealized loss position at December 31, 2009. A total of 31 securities had unrealized losses at December 31, 2009. The unrealized loss was comprised mainly of securities in a continuous loss position for more than twelve months, which consisted primarily of collateralized mortgage obligations. The Company believes the deterioration in value is attributable to changes in market interest rates and not the credit quality of the issuer.
Less than 12 Months More than 12 Months Total Estimated Estimated Estimated Fair Unrealized Fair Unrealized Fair Unrealized (Dollars in Thousands) Value Loss Value Loss Value Loss
U.S. Government Agency $ 22,023 $ 89 $ -0- $ -0- $ 22,023 $ 89 State and local governments 1,017 4 4,647 2 5,664 6 Mortgage-backed -0- -0- 32 1 32 1 Collateralized mortgage obligations 36,264 329 24,135 5,604 60,399 5,933 Other -0- -0- -0- -0- -0- -0- Total $ 59,304 $ 422 $ 28,814 $ 5,607 $ 88,118 $ 6,029
The amortized cost and estimated market value of securities available for sale and to be held to maturity at December 31, 2009, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Available for Sale Securities Held to Maturity Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value (Dollars in Thousands) Due within one year $ -0- $ -0- $ 762 $ 767 Due one to five years 500 531 2,463 2,483 Due five to ten years 22,112 22,023 6,794 7,086 Due after ten years -0- -0- 6,161 6,177 Subtotal 22,612 22,554 16,180 16,513 Mortgage-backed and collateralized mortgage obligations 265,850 273,199 96,641 91,893 Other -0- -0- 9,838 9,838 Total $ 288,462 $ 295,753 $ 122,659 $ 118,244
24 2009 Annual Report Securities not due at a single maturity date are included in scheduled maturities on the basis of coupon maturity.
Proceeds from sales of securities available for sale were $193,116,000 and $244,362,000, respectively, for the years ended December 31, 2009 and 2008. Gross realized gains on sales of securities available for sale were $1,832,000 in 2009 and $2,986,000 in 2008. Gross realized losses on sales of securities available for sale were $791,000 in 2009 and $6,000 in 2008.
Proceeds from sales of trading securities were $20,746,000 in 2009 and $95,669,000 in 2008. Gross realized gains on sales of trading securities were $48,000 in 2009 and $677,000 in 2008. Gross realized losses on sales of trading securities were $13,000 in 2009 and $0 in 2008.
There were no sales of securities to be held to maturity in 2009 or 2008.
Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than- temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost. Realized losses included in earnings for 2009 and 2008 for other-than-temporary declines in the fair value of securities total $483,000 and $1,386,000, respectively.
Investment securities with a carrying amount of $307,627,000 and $388,602,000 at December 31, 2009 and 2008, respectively, were pledged to secure public funds and for other purposes required or permitted by law.
Note 4 - Loans
Loans consist of the following:
December 31, (Dollars in Thousands) 2009 2008 Commercial $ 275,482 $ 299,661 Commercial tax-exempt 8,367 5,464 Total commercial 283,849 305,125
Agricultural 2,237 2,807
Real estate Construction 175,861 233,885 Agricultural mortgage 57,687 55,931 1-4 Family mortgage 177,343 135,542 Multifamily mortgage 24,260 22,377 Commercial mortgage 416,060 355,841 Total real estate 851,211 803,576
Consumer 47,231 49,164
Overdrafts 969 1,275 Total principal amount of loans 1,185,497 1,161,947 Unearned discount and unamortized fees and costs ( 1,365 )( 1,068 ) Allowance for loan losses ( 22,101 )( 18,230 ) Total loans $ 1,162,031 $ 1,142,649
2009 Annual Report 25 Changes in the allowance for loan losses are as follows:
(Dollars in Thousands) 2009 2008 Balance at beginning of year $ 18,230 $ 16,032 Provision for loan losses 12,125 10,900 Loans charged off ( 9,578 )( 10,141 ) Recoveries of loans previously charged off 1,324 1,439 Balance at end of year $ 22,101 $ 18,230
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, doubtful, other loans that have been reduced by specific valuation allowance 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. Impaired loans were $52,196,000 at December 31, 2009 and $34,151,000 at December 31, 2008. The average recorded investment in impaired loans was $34,357,000 and $18,787,000 for 2009 and 2008, respectively. The total allowance for loan losses related to impaired loans at December 31, 2009 and 2008 amounted to approximately $3,318,000 and $1,663,000, respectively. There were $36,309,000 and $26,150,000 in impaired loans for which there was no related allowance for loan losses at December 31, 2009 and 2008, respectively. Interest income recognized on impaired loans for the time they were impaired was $695,000 and $1,736,000 during 2009 and 2008, respectively, of which $598,000 and $139,000, respectively, was recognized for cash payments of interest. Accruing loans past due more than 90 days totaled $2.3 million and $3.4 million at December 31, 2009 and 2008, respectively.
Loans on which accrual of interest had been discontinued or reduced were approximately $52,196,000 and $32,653,000 at December 31, 2009 and 2008, respectively.
Note 5 - Properties and equipment
The following is a summary of properties and equipment, at cost less accumulated depreciation at year end:
(Dollars in Thousands) 2009 2008 Land $ 14,639 $ 14,852 Buildings and improvements 33,654 24,721 Furniture and equipment 19,907 16,880 Construction in progress 440 1,343 68,640 57,796 Less accumulated depreciation ( 16,766 ) ( 14,138 ) $ 51,874 $ 43,658
Depreciation and amortization expense was $3,663,000 and $3,411,000 for the years ended December 31, 2009 and 2008, respectively. There was no interest cost capitalized as properties and equipment during 2009 or 2008.
26 2009 Annual Report Note 6 - Time Deposits
Time deposit accounts included in the balance sheet that have a remaining term of more than one year are as follows: Amount Years Ending (Dollars in December 31, Thousands) 2010 $ 568,753 2011 142,298 2012 43,394 2013 15,332 2014 40,966 Beyond 2014 37 $ 810,780
Note 7 – Other Liabilities
Major classifications of other liabilities at year end are as follows:
(Dollars in Thousands) 2009 2008 Accrued expenses $ 1,189 $ 1,169 Federal and state income taxes payable 50 75 Property taxes payable 586 130 $ 1,825 $ 1,374
Note 8 - Securities Sold Under Repurchase Agreements
Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. The agreements have various interest rates ranging from 1.75 percent to 4.25 percent and repurchase dates to June 24, 2010. Securities sold under agreements to repurchase totaled $26,010,000 and $44,633,000 at December 31, 2009 and 2008 with accrued interest of $30,000 and $152,000 respectively. The securities sold under the agreements are collateralized by a security interest in securities available for sale.
Note 9 - Other Borrowed Money
The following are available lines of credit the Company has with other financial institutions:
Line of Financial Institution Credit Amount Interest Expiration (Dollars in Thousands) Amount Available Rate Date Federal Home Loan Bank of Dallas $ 325,967 $ 71,918 Variable None The Independent Bankers Bank 10,000 10,000 Variable None Frost National Bank 15,000 15,000 Variable 09/30/10 Federal Reserve Bank 199,707 199,707 Variable None $ 550,674 $ 296,625
The Company has received advances in the amount of $165,769,000 from Federal Home Loan Bank of Dallas (“FHLB”) under provisions of its line of credit facility. The advances mature January 4, 2010 through September 18, 2018 with interest due quarterly at rates of 0.160 percent through 4.349 percent.
The line of credit with FHLB is collateralized by a blanket floating lien on certain mortgage loans. The lines of credit with The Independent Bankers Bank and Frost National Bank are unsecured. The line of
2009 Annual Report 27 credit with the Federal Reserve Bank (“FRB”) is collateralized by a blanket floating lien on certain commercial and agriculture loans.
Note 10 - Subordinated Debentures
On January 1, 2004, the Company adopted FIN 46R, Consolidation of Variable Interest Entities an interpretation of ARB No. 51, resulting in the deconsolidation of its Lone Star National Capital Trusts, all of which were created for the sole purpose of issuing trust preferred securities. The implementation of FIN 46R resulted in the Company’s $837,000 investment in the common equity of the trusts being included in the consolidated balance sheet as other assets with a corresponding increase to other borrowed money. The Company is now recording greater interest expense and dividend income received from the trusts with no effect on net income. The dividend income and interest expense received from and paid to the trusts, respectively, is being included in the consolidated statements of income and comprehensive income as other noninterest income and interest expense.
While the capital securities are deconsolidated in accordance with GAAP, they continue to qualify as Tier 1 capital under federal regulatory guidelines. In March 2005, the Federal Reserve amended its risk-based capital standards to expressly allow the continued limited inclusion of outstanding and prospective issuances of trust preferred securities in a bank holding company’s Tier 1 capital, subject to tightened quantitative limits. The Federal Reserve’s amended rule, effective March 31, 2009, limits capital securities and other restricted core capital elements to 25 percent of all core capital elements, net of goodwill less any associated deferred tax liability. Management has developed a capital plan for the Company and the Bank that should allow the Company and the Bank to maintain “well-capitalized” regulatory capital levels.
The Issuer Trusts are wholly owned unconsolidated subsidiaries of the Company and have no independent operations. The obligations of Issuer Trusts are fully and unconditionally guaranteed by the Company. The debentures are unsecured and rank subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. Interest on the debentures is cumulative and payable in arrears. Proceeds from any redemption of debentures would cause a mandatory redemption of capital securities having an aggregate liquidation amount equal to the principal amount of debentures redeemed.
Note 11 - Federal and State Income Taxes
The components of the provision for income taxes consist of the following:
(Dollars in Thousands) 2009 2008 Current income tax expense Federal $ 4,640 $ 7,323 State 39 33 Total current income tax expense 4,679 7,356
Federal deferred income tax benefit ( 213 ) ( 674 )
Total income tax expense $ 4,466 $ 6,682
The following is a reconciliation between the amount of reported income tax expense and the amount computed by multiplying the income before income tax expense by the federal statutory rate:
28 2009 Annual Report (Dollars in Thousands) 2009 2008 Tax at federal statutory rate $ 4,790 $ 6,979 Additions (reductions) Tax-exempt income ( 408 ) ( 428 ) Non-deductible expenses 1,949 109 Non-statutory stock options ( 1,673 ) ( 55 ) State income tax, net of federal income tax effect 25 21 Other, net ( 217 ) 56 Total income tax expense $ 4,466 $ 6,682
The net deferred tax asset included in the accompanying consolidated balance sheet is comprised of the following deferred tax assets and liabilities:
(Dollars in Thousands) 2009 2008 Deferred tax liability Properties and equipment $ 1,523 $ 1,511 Net unrealized gain on securities available for sale 2,552 644 Total deferred tax liability 4,075 2,155
Deferred tax asset Deferred loan fees 478 371 Allowance for loan losses 8,033 6,380 Writedown of other than temporarily impaired securities 654 485 Other 242 318 Total deferred tax asset before valuation allowance 9,407 7,554 Valuation allowance -0- -0- Total deferred tax asset 9,407 7,554 Net deferred tax asset $ 5,332 $ 5,399
Note 12 - Concentrations of Credit
Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be affected similarly by changes in economic conditions.
A significant portion of the Company’s investments are in securities of the U.S. Government and its agencies and corporations. The Company’s lending activities are conducted primarily with customers in the Rio Grande Valley of Texas. The concentrations of credit by type of loan are set forth in Note 4. Based on the nature of the banking business, management does not consider any of these concentrations unusual.
Note 13 - Supplemental Disclosures
Supplemental disclosures of cash flow information Years Ended December 31, 2009 2008 (Dollars in Thousands) Federal and State income taxes paid $ 5,597 $ 8,275
Interest paid $ 36,029 $ 49,159
2009 Annual Report 29 Supplemental schedule of non-cash investing and financing activities
(Dollars in Thousands) Foreclosures and repossession in satisfaction of loans receivable $ 38,855 $ 14,219 Financing provided for sales of foreclosed and repossessed assets $ 8,403 $ 4,905
Note 14 - Fair Value Measurements
Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements, for financial assets and financial liabilities. In accordance with Financial Accounting Standards Board Staff Position (FSP) No. SFAS 157-2, Effective Date of FASB Statement No. 157, the Company delayed application of SFAS 157 for non-financial assets and non-financial liabilities, until January 1, 2009. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The application of SFAS 157 in situations where the market for a financial asset is not active was clarified by the issuance of FSP No. SFAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, in October 2008. SFAS 157-3 became effective immediately and did not significantly impact the methods by which the Company determines the fair values of its financial assets.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs -Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs -Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active,
30 2009 Annual Report inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3 Inputs -Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value effective January 1, 2009. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.
Financial assets and financial liabilities measured at fair value on a recurring basis include the following:
Securities Available for Sale. U.S. Treasury securities are reported at fair value utilizing Level 1 inputs. Other securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.
Trading Securities. U.S. Treasury securities and exchange-listed common stock are reported at fair value utilizing Level 1 inputs. Other securities classified as trading are reported at fair value utilizing Level 2 inputs in the same manner as described above for securities available for sale.
Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company’s risk management activities do not presently include entering into derivative contracts to manage interest rate risk. In connection with single family mortgage loan originations, the Company enters into commitments with customers to extend mortgage loans and forward sales commitments for individual loans. The Company has identified these as derivative financial instruments and accordingly records these loan origination and sales commitments at estimated fair market value. As of December 31, 2009, the Company has not identified any other financial instruments as derivatives.
The following table summarizes the securities available for sale which were the financial assets measured at fair value on a recurring basis at December 31, 2009, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:
2009 Annual Report 31 Level 1 Inputs $ 22,554 Level 2 Inputs 273,199 Level 3 Inputs -0- Total fair value $ 295,753 Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and liabilities measured at fair value on a non-recurring basis include the following:
Impaired Loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. During 2009, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of $15 million were reduced by specific valuation allowance allocations totaling $3.3 million to a total reported fair value of $11.7 million based on collateral valuations utilizing Level 2 valuation inputs.
SFAS 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies. The methodologies for other financial assets and financial liabilities are discussed below:
Loans. The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in credit risk. The fair value of fixed-rate loans and variable- rate loans which reprice on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk.
Deposits. The estimated fair value approximates carrying value for demand deposits. The fair value of fixed-rate deposit liabilities with defined maturities is estimated by discounting future cash flows using the interest rates currently offered for deposits of similar remaining maturities. The estimated fair value of deposits does not take into account the value of the Company’s long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, and not considered financial instruments. Nonetheless, the Company would likely realize a core deposit premium if its deposit portfolio were sold in the principal market for such deposits.
Borrowed Funds. The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed-rate borrowings is estimated using quoted market prices, if available, or by discounting future cash flows using current interest rates for similar financial instruments. The estimated fair value approximates carrying value for variable-rate junior subordinated deferrable interest debentures that reprice quarterly.
Loan Commitments, Standby and Commercial Letters of Credit. The Company’s lending commitments have variable interest rates and “escape” clauses if the customer’s credit quality deteriorates. Therefore, the fair values of these items are not significant and are not included in the following table.
32 2009 Annual Report The estimated fair values of the Company’s financial instruments at December 31, 2009 were as follows:
Carrying Fair (Dollars in Thousands) Amount Value Financial assets Cash and due from banks $ 18,921 $ 18,921 Due from banks-interest bearing 121,451 121,451 Investment securities 418,412 413,997 Loans 1,162,031 1,175,366 Accrued interest receivable 7,077 7,077 Loans held for sale 576 576
Financial liabilities Deposits 1,471,683 1,472,145 Repurchase agreements/borrowed funds 191,779 194,223 Subordinated debentures 27,837 27,837 Accrued interest payable 2,199 2,199
Effective January 1, 2008, the Company adopted the provisions of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities -Including an Amendment of FASB Statement No. 115. SFAS 159 permits the Company to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, thus the Company may record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. Adoption of SFAS 159 on January 1, 2008 did not have a significant impact on the Company’s financial statements.
Note 15 - Related-Party Transactions
The Company has entered into transactions with its officers, directors and significant stockholders. Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present unfavorable features.
(Dollars in Thousands) 2009 2008 Balance at beginning of year $ 30,973 $ 31,358 Additions 17,664 6,245 Reductions Collections ( 7,559 ) ( 6,630 ) Changes to unrelated status -0- -0- Charge-offs -0- -0- Balance at end of year $ 41,078 $ 30,973
As of December 31, 2009 and 2008, the total amount of deposits of the Company’s officers, directors and significant stockholders were $24,096,000 and $50,953,000, respectively.
The Company has entered into construction contracts with one of its principal stockholders. The contracts, totaling $1,713,000 and $8,526,000 for 2009 and 2008, respectively, are for the construction and remodeling of branch facilities. Payments made under these contracts during 2009 and 2008 totaled $8,043,000 and $1,570,000, respectively.
2009 Annual Report 33 Note 16 - Employee Benefits
Employee Stock Ownership Plan. The Company has an employee stock ownership plan containing Internal Revenue Code Section 401(k) provisions in effect for substantially all full-time employees. An employee becomes a participant after completing one year of service provided he or she has attained age 18. The Company makes a discretionary matching contribution up to a certain percentage of contributions made by the participant. Additional contributions are made at the discretion of the Board of Directors. Employee benefits include $286,000 and $280,000 for the employee stock ownership plan for 2009 and 2008, respectively. Incentive Compensation Agreement. The Board of Directors has approved an incentive compensation plan covering officers. This plan provides for additional compensation to the officers based upon the Bank achieving certain levels of Return on Average Equity. The Company did not accrue compensation under this plan during 2009 and 2008.
Note 17 - Share-Based Payments
The Company has granted stock options providing for the purchase of common stock by certain key employees and directors under option plans approved by the stockholders.
The 2006 Stock Option Plan authorized the issuance of stock options for 150,000 shares at fair value on the date of grant. As of December 31, 2009, 80,688 shares were available for granting under this plan. The options have a vesting period of five years.
A summary of the status of the Company’s two stock option plans as of December 31, 2009 and 2008, and changes during the years ended on those dates are presented below:
Years Ended December 31, 2009 2008 Weighted Weighted Shares Average Shares Average Underlying Exercise Underlying Exercise Options Price Options Price Outstanding at beginning of year 368,942 $ 17.62 384,342 $ 18.02 Granted -0- -0- -0- -0- Exercised ( 174,250 ) 12.49 ( 10,600 ) 22.40 Expired/forfeited ( 3,800 ) 33.95 ( 4,800 ) 39.25 Outstanding at end of year 190,892 $ 21.98 368,942 $ 17.62 Options exercisable at end of year 161,885 $ 18.71 316,252 $ 14.25
Range of exercise prices $11.00 - $45.00 $11.00 - $45.00 Weighted average remaining contractual life 1.74 years 2.14 years
34 2009 Annual Report The following table summarizes information about stock options outstanding at December 31, 2009 and 2008:
Years Ended December 31, 2009 2008 Weighted Average Shares Shares Exercise Underlying Underlying Price Options Options
$11.00 76,330 235,230 $13.00 31,600 32,300 $24.00 20,450 30,900 $36.00 37,500 44,500 $35.00 2,000 2,000 $43.50 1,000 1,000 $45.00 22,012 23,012 190,892 368,942
The Company has adopted the provisions of FAS 123R to measure compensation cost for unvested stock options beginning with our year ended December 31, 2006. FAS 123R does not require the restatement of prior period awards. However, the Company must recognize the cost of the unvested portion of options issued in prior years and the cost of options issued during 2009, using the Black-Scholes-Merton option pricing model and a single options award approach method to measure the compensation cost of stock options granted in 2009. This option pricing model relies on highly subjective and variable assumptions, including the expected life of the options; the price volatility of the underlying stock; and the rate of return a prudent investor could expect in a stable market. The Company utilized the following assumptions, based on historical values and industry averages: risk-free interest rate (4.94 percent) based upon a U. S. Treasury instrument with a life similar to the expected life of the option grant at the grant date; a dividend payout rate of zero; and an expected option life of 78.1 months. The expected stock price volatility assumption of 12.51 was determined using a combination of historical and implied volatility of the Company’s common stock. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The forfeiture rate utilized is based on the Company’s historical experience with respect to stock options issued in prior periods.
Note 18 - Commitments and Contingent Liabilities
In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities that are not presented in the accompanying financial statements. These commitments and contingent liabilities include commitments to extend credit, standby letters of credit and credit card guarantees.
Commitments under standby letters of credit aggregated $5,523,000 and $3,844,000 at December 31, 2009 and 2008, respectively. Commitments to fund loans were approximately $26,781,000 and $24,690,000 at December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, the Company had guarantees on credit cards to its customers totaling $7,180,000 and $6,137,000, respectively.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s creditworthiness on a case by case basis. The amount of the collateral obtained, if it is deemed necessary
2009 Annual Report 35 by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include certificates of deposit, accounts receivable, inventory, equipment and real estate.
Standby letters of credit and financial guarantees written are a conditional commitment issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various types of collateral supporting those commitments for which collateral is deemed necessary, which may include certificates of deposit, accounts receivable, inventory, equipment and real estate. The Company incurred a loss of $25,000 on its commitments in 2009. It did not incur any loss on its commitments in 2008. Management does not anticipate any material losses as a result of its commitments and contingent liabilities.
The Company has entered into long-term agreements for certain data processing and computer software products and services. The data processing and computer software contracts provide for minimum monthly payments and additional charges based upon volume. These agreements expire in various years through 2014 and contain provisions that allow renewal at similar terms. Total expense from these agreements amounted to $718,000 and $400,000 in 2009 and 2008, respectively.
Aggregate minimum contractual payments under these agreements for the next five years are as follows:
Year ended December 31, 2010 $ 760,000 2011 786,000 2012 818,000 2013 856,000 2014 900,000
The Company leases various facilities under operating leases expiring at various dates through December 2014. Total rental expense in 2009 and 2008 for all operating leases was approximately $512,000 and $456,000, respectively.
The following is a schedule by year of future minimum lease payments under operating leases as of December 31, 2009 that have initial or remaining lease terms in excess of one year:
Year ended December 31, 2010 $ 337,000 2011 292,000 2012 97,000 2013 104,000 2014 92,000
The Company is a defendant in legal actions arising in connection with its ordinary course of business that are in various stages of litigation and investigation by the Company and its legal counsel. After reviewing with counsel the actions pending involving the Company, management believes that the ultimate resolution of these matters will not materially affect the Company’s financial position.
36 2009 Annual Report Note 19 - Earnings Per Share
Basic net income per share (“EPS”) was computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the year.
Diluted net income per share was computed by dividing net income by the weighted average number of common shares and common stock equivalents outstanding during the year. The diluted net income per share computations include the effects of common stock equivalents applicable to stock option contracts and are determined using the treasury stock method.
The table below presents a reconciliation of basic and diluted net income per share computations.
Years ended December 31, (Dollars in Thousands, Except Per Share Data) 2009 2008
Net income available to common shareholders $ 9,219 $ 13,291 Weighted average number of common shares outstanding used in basic EPS calculation 5,519,904 5,486,604 Add assumed exercise of dilutive securities outstanding - stock options 159,791 211,259 Weighted average number of common shares outstanding used in diluted basic EPS calculation 5,679,695 5,697,863 Basic EPS $ 1.67 $ 2.42 Diluted EPS $ 1.62 $ 2.33
Note 20 - Regulatory Matters
The Bank, as a National Bank, is subject to the dividend restrictions set forth by the Comptroller of the Currency (the “OCC”). Under such restrictions, the Bank may not, without the prior approval of the OCC, declare dividends in excess of the current year’s earnings (as defined) plus the retained earnings (as defined) from the prior two years or pay any dividend which would cause the Bank to become undercapitalized.
The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that if undertaken, could have a direct material effect on the Company and the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines involving quantitative measures of the Company’s assets, liabilities, and certain off- balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), and Tier I capital to adjusted total assets (as defined). Management believes, as of December 31, 2009, that the Company meets all the capital adequacy requirements to which it is subject.
As of December 31, 2009, the most recent notification from the regulators categorized the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. To be
2009 Annual Report 37 categorized as well capitalized, the Company and the Bank have to maintain minimum or greater total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in the table below. There are no conditions or events since the most recent notification that management believes have changed the Bank’s prompt corrective action category. To Be Well Capitalized For Capital Under Prompt Actual Adequacy Purposes Action Provisions (Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
Lone Star National Bancshares-TX December 31, 2009 Total Capital (to Risk-Weighted Assets) $199,313 15.83% $ 100,731 8% $ 125,913 10% Tier 1 Capital (to Risk-Weighted Assets) $183,486 14.57% $ 50,365 4% $ 75,548 6% Tier 1 Capital (to Average Assets) $183,486 10.35% $ 70,893 4% $ 88,617 5%
December 31, 2008 Total Capital (to Risk-Weighted Assets) $185,619 15.46% $ 96,033 8% $120,042 10% Tier 1 Capital (to Risk-Weighted Assets) $170,566 14.21% $ 48,017 4% $ 72,025 6% Tier 1 Capital (to Average Assets) $170,566 9.81% $ 69,557 4% $ 86,946 5%
Lone Star National Bank December 31, 2009 Total Capital (to Risk-Weighted Assets) $192,782 15.32% $ 100,661 8% $ 125,826 10% Tier 1 Capital (to Risk-Weighted Assets) $176,965 14.06% $ 50,331 4% $ 75,496 6% Tier 1 Capital (to Average Assets) $176,965 9.87% $ 71,735 4% $ 89,669 5%
December 31, 2008 Total Capital (to Risk-Weighted Assets) $181,841 15.15% $ 96,030 8% $120,038 10% Tier 1 Capital (to Risk-Weighted Assets) $166,788 13.89% $ 48,015 4% $ 72,023 6% Tier 1 Capital (to Average Assets) $166,788 9.56% $ 69,782 4% $ 87,227 5%
Note 21 - Recent Accounting Pronouncements
FASB ASC 105 Generally Accepted Accounting Principles (“ASC 105”) establishes the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. ASC 105 was adopted on September 15, 2009, and did not have a significant impact on the Company’s financial statements.
FASB ASC 810 Consolidation (“ASC 810”) became effective for the Company on January 1, 2009, and was amended to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC 810 will be effective January 1, 2010 and is not expected to have a significant impact on the Company’s financial statements.
38 2009 Annual Report Financial Accounting Standards Board Staff Position No. FAS 115-2 and FAS 124-2 Recognition and Presentation of Other-Than-Temporary Impairments (“FSP No. 115-2”) was codified by FASB into FASB Accounting Standards Codification 320 Investments-Debt and Equity Securities. It was issued April 9, 2009 to provide additional guidance and create greater clarity and consistency in accounting for impairment losses on securities. It replaces the assertion of intent and ability to hold an impaired debt security until fair value recovers with assertions that the holder does not intend to sell the security prior to recovery and that it is more likely than not that the holder will not be required to sell the impaired security prior to recovery. The full impairment loss is recognized in earnings if the holder is unable to make these assertions. Otherwise, a credit loss portion of the impairment is recognized in earnings and the remaining impairment is recognized in other comprehensive income. The guidance was effective for interim and annual periods ending after June 15, 2009 and required additional disclosures in interim periods. Early adoption for interim and annual periods ending after March 15, 2009 was permitted. The Company adopted this guidance as of January 1, 2009. It did not have a significant impact on the Company’s financial statements.
Accounting Standards Codification 855 Subsequent Events (“ASC 855”) and formerly Statement of Financial Accounting Standards No. 165, Subsequent Events (“FAS 165”) was issued to provide authoritative accounting guidance on management’s assessment of subsequent events. It incorporates existing U.S. auditing literature and clarifies that management is responsible for evaluation, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued or are available to be issued. ASC 855 was effective for the Company as of June 30, 2009 and did not have a significant impact on the Company’s financial statements.
2009 Annual Report 39 Medical Center Branch 7954 Fredericksburg Rd. San Antonio, Texas 78229
Lone Star National Bank Annex Corporate Office The Mercantile Building 40 NE Loop 410, Suite 408 San Antonio, Texas 78216 Lone Star National Bank is Bringing the Bank to San Antonio. With major plans for expansion, Lone Star National Bank is ready to lend and do business in the Alamo City. The plans include the growth of up to 10 retail branches and the possible expansion of our data processing operations. Board of Directors
Alonzo Cantu S. David Deanda, Jr. Ruben M. Torres, M.D. Chairman of the Board President & Obstetrics & Gynecology Lone Star National Bank Chief Operating Officer Cantu Construction, Inc. Lone Star National Bank Manny Vela Attorney at Law Oscar R. Gonzalez Lazaro H. Fernandez, Jr. Vice Chairman of the Board Dos Rios Textiles Corp. Angie Vera-Oliva Lone Star National Bank Executive Vice President Certified Public Accountant Abdala Kalifa Lone Star National Bank Kalifa’s Western Wear Cruz Cantu III Joe D. Zayas, D.D.S. Land Development Nolan E. Perez, M.D. Dentist Gastroenterology George R. Carruthers Executive Vice President & A. Jabier Rodriguez Chief Financial Officer Chief Executive Officer Lone Star National Bancshares-Texas, Inc. Lone Star National Bank
Advisory Directors Hidalgo County Rolando Ayala Alberto Gutierrez, Jr., M.D. David M. Penoli Executive Vice President Family Practice Executive Vice President & Lone Star National Bank Chief Financial Officer Victor Haddad, M.D. Raul C. Garza Surgeon Sunil Wadhwani Spirit Truck Lines, Inc. Watchzone.com Ambrosio Hernandez, M.D. Jaime A. Gonzalez, Jr. Pediatric Surgeon Richard Walsh Attorney at Law Healds Valley Farms Jose F. Peña, M.D. Marketing Consultant Arturo E. Guerra, Jr. Internal Medicine Attorney at Law/Rancher
Starr County Arturo S. Perez Sergio R. Ramirez Jose A. Vazquez, M.D. Gilberto Perez Properties, LLC F&M Ramirez, LTD Internal Medicine Managing Partner Rancher/Managing Partner The Honorable Judge Eloy Vera
Cameron County Raymond Cisneros Jose L. Peña Asim Zamir, M.D., F.A.A.P. Executive Vice President & Educator/Rancher Pediatrician Chief Credit Officer Rodolfo A. Saca, M.D. Ruben Lopez, M.D. Pediatric Neonatologist Cardiothoracic Surgeon Aldon Williams, M.D. David G. Oliveira Pain Medicine Specialist Attorney at Law
Bexar County Dipen J. Parekh, M.D. Urologic Oncology, Robotic Surgery
42 2009 Annual Report Bank Officers
Corporate Office A. Jabier Rodriguez Rueben Cole J. Edgar Ruiz II Chief Executive Officer Senior Vice President Vice President Director Brian Disque Paulina Solis S. David Deanda, Jr. Senior Vice President Vice President President & Chief Operating Officer Fred Flores Director Senior Vice President & Lone Star National Angie Vera-Oliva BSA Officer Bancshares-Texas, Inc. Executive Vice President & Abby G. Gonzalez George R. Carruthers Chief Operations Officer Senior Vice President Executive Vice President & Director Chief Financial Officer Kenneth Grams Raymond Cisneros Senior Vice President Jose M. Araiza, Jr. Executive Vice President & First Vice President Chief Credit Officer Gloria Guerra Advisory Director Senior Vice President McAllen D. M. Penoli Olga Lee Hinojosa Arden Peterson Executive Vice President & Senior Vice President Senior Vice President & Chief Financial Officer Adam Pearson Compliance Officer Advisory Director Senior Vice President & Desiraee Walker Rolando Ayala Information Security Officer Senior Vice President Executive Vice President Geraldo X. Perez Adan Garcia Advisory Director Senior Vice President First Vice President Rodolfo Cantu Oscar Rodriguez Paul Garcia Executive Vice President & Senior Vice President First Vice President Chief International Officer Ted P. Sunderland Rafael Gonzalez Denys Diaz Senior Vice President First Vice President Executive Vice President & Edna X. De Saro Chief Information Officer Homer Guerra First Vice President First Vice President Tony Gorman Cristobal Escobedo, Jr. Ixchetl Romero Executive Vice President & First Vice President Human Resources Director First Vice President Leticia E. Hinojosa Edna Yaccarino Roger G. Leblond First Vice President Executive Vice President & First Vice President Chief Technology Officer Vipul Patel Raymond Chan First Vice President Jesus Ramirez Vice President Executive Vice President & Veronica Vizcarra-Prinkey Veronica Cantu Corporate Legal Counsel First Vice President Vice President Janie Sandoval Sameer Saxena Brandon Ede Executive Vice President & First Vice President Vice President Controller Christine M. Villaseñor Tina M. Guerra Ezequiel “Rick” Acevedo, Jr. First Vice President Vice President Executive Vice President Hope Cadenas Marco T. Perez Vice President Sam de la Garza Vice President Executive Vice President Yael Mendez Magda Ramirez Vice President Edward Borges Vice President Senior Vice President & Marco Perez Carmen Raymundo Chief Risk Officer Vice President Vice President Betty Reyna Vice President Ismael Rodriguez Vice President Lydia Sandoval Vice President Leticia Zavala Vice President Pharr, Edinburg & Weslaco Elias Longoria, Jr. Senior Vice President Norma Quintanilla Senior Vice President
46 2008 Annual Report Martin Volpe Hidalgo, Mission San Antonio Senior Vice President & Palmview A. Jabier Rodriguez Julia De Leon Jesse A. Villarreal Chief Executive Officer First Vice President Senior Vice President Director Armando Martinez Juan J. Acosta Lydia Gonzales First Vice President First Vice President Senior Vice President Eva Markum Susie Castillo Lone Star Insurance Agency* First Vice President Vice President Erika Degollado Jim Hansen Olga G. Lopez Vice President Senior Vice President Vice President Roberto Garza Leticia Francis Vice President Harlingen, Brownsville, Vice President Nena Gutierrez Port Isabel & South Padre Island Ruben Garza Vice President Vice President Rusty Brechot Robyn Rodriguez Senior Vice President Sonia Martinez-Garcia Vice President Vice President Terry Gray Susan Trevino Senior Vice President LSNB Investment Services* Vice President Jackie Russell Yvonne L. Silguero Maria I. Villarreal Senior Vice President LPL Branch Manager/Financial Consultant Vice President Norma P. Weaver Enrique Lopez In Memoriam Senior Vice President Financial Consultant Perlita De Leon Vice President Margarita Gonzalez Patricia Rios First Vice President Financial Consultant Rio Grande City & Roma Michele Robinson Ruben C. Chapa First Vice President *Insurance and Investment Products Offered are not Insured Senior Vice President by the FDIC or Any Other Federal Government Agency, are Michael Alvarado not Deposits of or Guaranteed by the Bank or Any Bank Alejandra Gonzalez Vice President Affiliate, and May Lose Value. Vice President 2009 Annual Report 47 Banking Centers, Mortgage & ATM Locations 1-800-580-0322
Starr
Roma Hidalgo Rio Grande City SAN ANTONIO Edinburg McAllen Palmview Mission Pharr Full Service Cameron Banking Center Hidalgo Weslaco Harlingen Motor Bank Mercedes Corporate Office South Padre RIO GRANDE VALLEY Port Isabel Island
Brownsville Rio Grande Valley Locations Brownsville 600 E. Nolana Avenue Rio Grande City Mercedes 3300 N. Expressway 83 - ATM 2300 E. Highway 83 5001 E. Expressway 83, Ste. 650C - Mortgage Center - Motor Bank - ATM 3 Located at the Rio Grande Valley - ATM 5537 N. McColl Road - Motor Bank Premium Outlets® - Motor Bank North, South & the Food Court - ATM Roma 2100 Boca Chica Boulevard - Motor Bank 305 E. Grant Street Pharr - ATM 800 N. Main Street, Suite 600 - ATM 1210 E. Expressway 83 - Motor Bank (Located at the Art Village on Main) - Motor Bank Rio Grande City Edinburg Lone Star Insurance Agency* South Padre Island 100 FM 3167 117 S. 10th Avenue 520 E. Nolana Avenue, Suite 110 601 Padre Boulevard Located at the Starr County Court House- - ATM LSNB Investment Services* - ATM Annex Building - Motor Bank 520 E. Nolana Avenue, Suite 120 - Motor Bank 5501 S. McColl Road Weslaco - ATM Mission 214 S. Texas Boulevard (Located at Doctors 2003 E. Griffin Parkway San Antonio - ATM Hospital at Renaissance) - ATM Locations - Motor Bank - Motor Bank Harlingen San Antonio 1100 S. Bryan Road 1901 N. Ed Carey Drive, Suite 100 7954 Fredericksburg Road - ATM - ATM (2) Mortgage Centers (Medical Center Branch) - Motor Bank Brownsville - Motor Bank 40 NE Loop 410, Suite 408 3300 N. Expressway 83 918 W. Harrison Avenue Mercedes (Annex Corporate Office-The Mercantile Building) 5001 E. Expressway 83, Suite 650C (Motor Bank) McAllen - ATM (3) - ATM 4500 N. 10th Street, Suite 305 (Located at the Rio Grande Valley 281 Hidalgo Premium Outlets®) 10 1604 633 S. International Boulevard Offsite ATM Locations - ATM Palmview 35 Edinburg - Motor Bank 720 E. Veterans Boulevard - ATM 5502 S. McColl Road 7954 Fredericksburg Road 410 40 NE Loop 410, Suite 408 McAllen Located at the Women’s - Motor Bank 35 520 E. Nolana Avenue Hospital at Renaissance Pharr (Corporate Office) 3010 W. University Drive 10 1604 206 W. Ferguson Avenue Located at Hacienda Ford 90 5515 N. 10th Street - ATM - ATM - Motor Bank McAllen 1604 - Motor Bank 410 1201 S. Cage Boulevard 3700 Buddy Owens Avenue 35 37 200 Lindberg Avenue (Motor Bank) (Located at Burger King) - ATM - ATM 114 S. Main Street 1604 - Motor Bank (Located inside Colors Port Isabel 1300 E. Ridge Road Name Brand Clothing) 202 E. Queen Isabella Boulevard - ATM (Motor Bank) 113 S. 17th Street *Insurance and Investment Products Offered are - Motor Bank not Insured by the FDIC or Any Other Federal - ATM Government Agency, are not Deposits of or Guaranteed by the Bank or Any Bank Affiliate, and May Lose Value.
48 2008 Annual Report Our History Lone Star National Bank opened for business on January 23, 1983 in Pharr, Texas. Conducting business in a small, 3,000 square-foot, temporary building and with only ten employees, the bank opened its doors with the objective of making the future more prosperous for the community. Over the next two decades, Lone Star National Bank expanded continuously opening banking centers throughout the Valley, beginning with its first branch in Hidalgo County on April 4, 1994, at 200 Lindberg in McAllen. In August 2000, the bank unveiled the first branch outside Hidalgo County in Rio Grande City and then entered the Cameron County market in July 2001, with a banking center at 3300 N. Expressway 83 in Brownsville. Today, Lone Star National Bank is a technologically advanced, full-service, Valley-wide, independent, community bank with over 400 employees and 22 full-service banking centers. Our rapid growth is attributable to several factors such as offering personal “value added” customer service and providing a rewarding environment for our employees. Staying true to our mission of supporting individuals and small businesses who contribute to the growth of their communities. And staying at the forefront of technological advances like “LSNB MobileTM” (mobile banking) and “Office BankerTM” (remote capture) which let us bring the bank to our customers. These factors, combined with the support of our stockholders, customers, neighbors and friends, have made Lone Star National Bank a well-known success, and a leader in financial services in South Texas. 520 E. Nolana Avenue • McAllen, Texas 78504 1.800.580.0322 www.lonestarnationalbank.com
Member FDIC, Federal Reserve System and Lone Star National Bancshares-Texas, Inc.