_.____--=-_,, ® Lone Star National Bancshares· Texas, Inc.
July 31, 2020
Federal Reserve Bank of Dallas Attention: NIC Unit, Statistics Dept. 2200 North Pearl Street Dallas, Texas 75201-2216
RE: FR Y-6 Reports for the fiscal year-ending December 31 , 2019. - Replace
Enclosed are the following documents as required under section 211.23 of Regulation K: 1. Form FR Y-6 2. Report Item 1: Annual Report is attached. 3. Report Item 2: Corporate Organizational Chart 4. Report Item 3: Shareholders 5. Report Item 4: Insiders 6. Statement of Related Interest of Directors 7. Branch Data Verification
Please let me know if you need additional information.
David M. Penoli Director, EVP & CFO
520 E. Nolana Avenue * McAllen, TX 78504 Phone: (956) 984-2804 * Fax: (956) 984-2848 * 1-800-580-0322 www .lonestarnationalbank.com FR Y-6 0MB Number 7100-0297 Approval expires November 30, 2022 Page 1 of 2
Board of Governors of the Federal Reserve System
Annual Report of Holding Companies-FR Y-6
Report at the close of business as of the end of fiscal year This Report is required by law: Section 5{c)(1)(A) of the Bank This report form is to be filed by all top-tier bank holding compa Holding Company Act (12 U.S.C. § 1844(c)(1 )(A)); sections 8(a) nies, top-tier savings and loan holding companies, and U.S. inter and 13(a) of the International Banking Act (12 U.S.C. §§ 3106(a) mediate holding companies organized under U.S. law, and by and 3108(a)); sections 11(a)(1), 25, and 25A of the Federal any foreign banking organization that does not meet the require Reserve Act (12 U.S.C. §§ 248(a)(1 ), 602, and 611 a); and sec ments of and is not treated as a qualifying foreign banking orga tions 113,165,312,618, and 809 of the Dodd-Frank Act (12 U.S.C. nization under Section 211.23 of Regulation K (12 C.F.R. § §§ 5361, 5365, 54 12, 1850a(c)(1), and 5468{b)(1)). Return to the 211.23). (See page one of the general instructions for more detail appropriate Federal Reserve Bank the original and the number of of who must file.) The Federal Reserve may not conduct or spon copies specified. sor, and an organization (or a person) is not required to respond to, an information collection unless it displays a currently valid 0MB control number. NOTE: The Annual Report of Holding Companies must be signed by Date of Report (top-tier holding company's fiscal year-end): one director of the top-tier holding company. This individual should also be a senior official of the top-tier holding company. In the event December 31, 2019 that the top-tier holding company does not have an individual who is Month / Day / Year a senior official and is also a director, the chairman of the board must N/A sign the report. If the holding company is an ESOP/ESOT formed as Reporter's Legal Entity Identifier (LEI) (20-Character LEI Code) a corporation or is an LLC, see the General Instructions for the authorized individual who must sign the report. Reporter's Name, Street, and Mailing Address 1, David M. Penoli Name of the Holding Company Director and Official Lone Star National Bancshares-Texas, Inc. EVP &CFO , Director Legal Title of Holding Company Title of the Holding Company Director and Official P.O.BOX 1127 attest that the Annual Report of Holding Companies (including (Mailing Address of the Holding Company) Street/ P.O. Box the supporting attachments) for this report date has been pre Pharr TX ------78577 pared in conformance with the instructions issued by the Federal City State Zip Code Reserve System and are true and correct to the best of my knowledge and belief. 520 East Nolana Avenue McAllen, Texas 78504 Physical Location (if different from mailing address) With respect to information regarding individuals contained in this report, the Reporter certifies that it has the authority to provide this Person to whom questions about this report should be directed: information to the Federal Reserve. The Reporter also certifies David M. Penoli -EVP---- & CFO------that it has the authority, on behalf of each individual, to consent or Name Title object to public release of information regarding that individual. The Federal Reserve may assume, in the absence of a request for (956)984-2866 confidential treatment submitte ·n accordance with the Board's Area Code/ Phone Number/ Extension "Rules Regarding Availability I ormation," 12 C.F.R. Part 261, (956)661-4877 · that the Reporter "vid al c n ent to public release of all Area Code/ FAX Number details in the rep t i ividual. [email protected] E-mail Address www.lonestarnationalbank.com Address (URL) forthe Holding Company's web page Date of Signature
For holding companies .aQ1registered with the SEC- Is confidential treatment requested forany portionof O=No Indicatestatus of Annual Reportto Shareholders: this reportsubmission? ...... }=YesO IBJ is included with the FR Y-6 report In accordancewith the General Instructions forthis report D will be sent under separate cover (check only one), D is not prepared 1. a letter justifying this request is being provided along with the report...... 0 For Federal Reserve Bank Use Only 2. a letter justifying this request has been provided separately ... 0 RSSDID NOTE: Informationfor which confidential treatmentis being requested C.I. must be provided separately and labeled as "confidential."
Public reporting burden for this information collection is estimated to vary from 1.3 to 101 hours per response, with an average of 5.50 hours per response, including time to gather and i maintain data in the required form and to review instructions and complete the information collecton. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden to: Secretary, Board of Governors of the Federal Reserve System, 20th and C Streets. NW, Washington, DC 20551, and to the Office of Management and Budget, Paperwork Reduction Project (7100-0297), Washington, DC 20503. 12/2019 Lone Star National Bancshares• Texas Inc. Consolidated Financial Statements and Independent Auditor' s Report
Years Ended December 3 1, 2019 and 2018 II II SMITH FANKHAUSER VOIGT& W.ATSC>N, PUC
INDEPENDENT AUDITOR•s REPORT
To the Board of Directors and Audit Committee of Lone Star National Bancshares - Texas, Inc. and Subsidiaries We have audited the accompanying consolidated financial statements of Lone Star National Bancshares - Texas, Inc. and its subsidiaries (a Texas corporation) (the "Institution.,), which comprise the consolidated balance sheets as of December 31. 2019 and 2018, and the related statements of income, comprehensive income, changes in stockholders' equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. We also have audited Lone Star National Bancshares - Texas, Inc. 's internal control over financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the Federal Financial Institutions Examination Council Instructions for Consolidated Reports of Condition and Income (call report), as of December 31, 2019 based on criteria established in the Internal Control - integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management's Responsibility for the Financial Statements and Internal Control over Financial Reporting Lone Star National Bancshares - Texas, Inc. and its subsidiaries' management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of effective internal control over financial reporting relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Management is also responsible for its assessment about the effectiveness of internal control over financial reporting, included in the accompanying Management Report Regarding Statement of Management's Responsibilities. Compliance with Designated laws and Regulations, and Management's Assessment ofInternal Control over Financial Reporting. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Institution's internal control over financial reporting 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement and whether effective internal control over financial reporting was maintained in all material respects. An audit of consolidated financial statements involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Institution's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit of consolidated financial statements also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Certified Public Accountants 801 QUINCE AVENUE • P.O. BOX 3125 • McALLEN, TEXAS 78502-3125 (956) 682-6365 • FAX (956) 682-2995 An audit of internal control over financial reporting involves performing procedures to obtain evidence about whether a material weakness exists. The procedures selected depend on the auditor's judgment, including the assessment of the risk that a material weakness exists. An audit of internal control over financial reporting also involves obtaining an understanding of internal control over financial reporting and testing and evaluating the design and operating effectiveness of internal control over financial reporting based on the assessed risk. We believe that the audit evidence we obtained is sufficient and appropriate to provide a basis for our audit opinions. Definition and Inherent Limitations of Internal Control over Financial Reporting An institution's internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding the preparation of reliable consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Because management's assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation lmprovement Act (FDICIA), our audit of Lone Star National Bancshares - Texas, Inc. and its subsidiaries' internal control over financial reporting included controls over the preparation of schedules equivalent to basic consolidated financial statements in accordance with the Federal Financial Institutions Examination Council Instructions for Consolidated Reports of Condition and Income (call report instructions). An institution's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and those charged with governance; and (3) provide reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of the entity's assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Opinions In our opinion, the consolidated financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of Lone Star National Bancshares - Texas, Inc. and its subsidiaries as of December 31, 2019 and 2018, and the results of their operations and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Also in our opinion, Lone Star National Bancshares - Texas, Inc. and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019 based on criteria established in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
April 29, 2020 ----""'-_,, ® Lone Star National Bancshares· Texas, Inc.
MANAGEMENT REPORT REGARDING STATEMENT OF MANAGEMENT'S RESPONSIBILITIES, COMPLIANCE WITH DESIGNATED LAWS AND REGULATIONS, AND MANAGEMENT'S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
April 29, 2020
To the Board of Directors of Lone Star National Bancshares - Texas, Inc. and Subsidiaries
Statement ofManagement's Responsibilities
The management of Lone Star National Bancshares-Texas, Inc. and its subsidiaries (the "Company'') is responsible for preparing the Company's annual financial statements in accordance with generally accepted accounting principles; for designing, implementing, and maintaining an adequate internal control structure and procedures for financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the Parent Company Only Financial Statements for Small Holding Companies (Form FR Y-9SP); and for complying with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations pertaining to dividend restrictions.
Management's Assessment ofCompliance with Designated Laws and Regulations
The management of the Company has assessed the Company's compliance with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations pertaining to dividend restrictions during the fiscal year that ended on December 31, 2019. Based upon its assessment, management has concluded that the Company complied with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations pertaining to dividend restrictions during the fiscal year that ended on December 31, 2019.
Management's Assessment ofInternal Control Over Financial Reporting
The Company's internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America and financial statements for regulatory reporting purposes, i.e. for the Parent Company OnJy Financial Statements for Small Holding Companies (Form FR Y-9SP). The Institution's internal control over financial reporting includes those policies and procedures that (l) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
520 E. olana Avenue * McAllen, TX 78504 Phone. (956) 984-2804 • Fax: (956) 984-2848 • 1-800-580-0322 wwwJonestamationalbank.~om accordance with accounting principles generally accepted in the United States of America and financial statements for regulatory reporting purposes, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable as urance regarding prevention., or timely detection and correction of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting a[so can be circumvented by collusion or improper management override.
Because of its inherent limitations internal control over financial reporting may not prevent, or detect and correct, misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the call report, as of December 3 L, 20 L9, based on the framework set forth by th Committee of Sponsoring Organizations of the Treadway Commission in the Internal Control-Integrated Framework. Based upon its assessment, management has concluded that, as of December 31 , 2019, the Company's internal control over financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the call report, is effective ba ed on the criteria established in the Intenzal Control-Integrated Framework.
The Company's internal control over financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the call report, as of December 31, 2019, has been audited by Smith Fankhauser Voigt & Watson, PLLC, an independent public accounting firm, as stated in their report dated April 29 2020.
L t.,_ S. David Deanda, Jr. I Dav1.d M. Penoli President Executive Vice President & Chief Financial Officer
Lone tar National Bancshar -Texas, Loe. 521> E 'ol.inj ,\"enuc * M~.\J.lcn , TX 7851 Phone (95ol ~84-2804 * Fax: (9561 +-28+~ * J . 1\l- 58'1-ll322 ""' ,, l,m 51:lmauonalbank com . -·-.·-·· ..... I. .... ·•······------·------~ ·--·--·-- --·-·- -·- .••· ..
LONE STAR NATIONAL BANCSHARES-TEXAS, fNC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in Thousands, Except Share Data)
December 31, 2019 2018 Assets Cash and due from banks $ 34,109 $ 35,865 Due from banks - interest bearing 157,112 55,949 Federal funds sold 60,000 Total cash and cash equivalents 191,221 151,814 Securities available for sale 728,105 645,703 Securities purchased under agreements to resell 190,000 100,000 Loans held for sale 1,451 2,077 Loans, less allowance for loan losses of$21,764 and $21,725, respectively 1,145,380 1,145,061 Property and equipment, net 56,200 55,485 Net deferred tax asset 3,638 8,328 Accrued interest receivable 7,656 8,535 Overpayment of federal income tax 73 Other real estate 13,386 19,532 Bank owned life insurance 65,547 63,859 Restricted investments 8,012 4,768 Other assets 8,310 10,274 Total assets $ 2,418,906 $ 2,215,509
Liabilities Deposits Demand $ 434,048 $ 438,775 NOW accounts 850,434 810,030 Savings and money market deposit accounts 206,079 166,235 Time $250K and over 289,941 295,848 Other time 214,952 210,260 Total deposits 1,995,454 1,921,148 Accrued interest payable 999 965 Allowance for off-balance-sheet losses 654 651 Other liabilities 6,731 7,425 Dividends payable 12,537 Federal taxes on income 165 Other borrowed money 117,795 15,000 Total liabilities 2,134,335 1,945,189 Stockholders' equity Common stock, par value $5; authorized 50,000,000 shares; 5,831,607 and 5,827,918 shares outstanding 29,158 29,140 Paid-in capital 55,546 55,301 Retained earnings 188,807 190,390 Accumulated other comprehensive income (loss), net of federal income tax 11,099 (4,178) Treasury stock (39) (333) Total stockholders' equity 284,571 270,320 Total liabilities and stockholders' equity $ 2,418,906 $ 2,215,509
The accompanying notes are an integral part of the consolidated financial statements. -5------.--···· . - 1-
LONE STAR NATIONAL BANCSHARES-TEXAS, INC. AND SUBSIDIARIES Consolidated Statements oflncome (Dollars in Thousands)
Year Ended December 31, 2019 2018 Interest income Loans, including fees $ 69,633 $ 66,953 Securities available for sale 17,204 15,916 Due from banks and other earning assets 4,232 2,654 91,069 85,523 Interest expense Deposits 19,143 13,948 Federal funds purchased and repurchase agreements 174 9 Other borrowed money 278 476 19,595 14,433 Net interest income 71,474 71,090 Provision for loan losses Net interest income after provision for loan losses 71,474 71,090
Noninterestincome Service charges on deposit accounts 8,630 7,520 Other service charge and fee income 10,432 10,243 Net gain (loss) on securities transactions 2,291 (4) Bank owned life insurance 1,688 4,395 Other noninterest income 5,764 7,320 28,805 29,474 Noninterest expense Employee compensation 33,740 34,823 Employee benefits 6,291 7,068 40,031 41,891 Net occupancy and equipment expense 8,661 8,469 Data processing expense 6,698 6,238 Legal and professional 3,884 5,303 FDIC insurance 162 629 Advertising expense 1,889 1,806 Telephone expense 835 1,292 Supplies 530 554 Business development 922 784 Other real estate, net 3,643 1,289 Other noninterest expense 5,155 4,933 72,410 73,188 Income before income tax expense 27,869 27,376 Income tax expense 4,678 2,258 Net income $ 23,191 $ 25,118
The accompanying notes are an integral part of the consolidated financial statements. - 6- . --- J --- "· . ------, ----
LONE STAR NATIONAL BANCSHARES-TEXAS, fNC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Dollars in Thousands)
Year Ended December 31, 2019 2018
Net income $ 23,191 $ 25,118
Other comprehensive income (loss), before federal income tax
Securities available for sale
Net unrealized holding gains (losses) arising during year 21,628 (7,456)
Reclassification adjustment for net (gains) losses included in net income (2,291) 4
Total securities available for sale 19,337 (7,452)
Federal income tax (expense) benefit related to other comprehensive income (4,060) 1,565
Other comprehensive income (loss), net of federal income tax 15,277 (5,887)
Comprehensive income $ 38,468 $ 19,231
The accompanying notes are an integral part of the consolidated f"mancial statements. -7- .... ------···---,----,...I•-·· ,.... ,.. ------··--·--~-r-·-,·~· -··· ..... , ...
LONE STAR NATIONAL BANCSHARES-TEXAS, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity (Dollars in Thousands, Except Share Data)
Common Paid-in Retained Stock Capital earnings Balance at December 31, 201 7 $ 29,144 $ 54,960 $ 165,728
Comprehensive income Net income 25,118 Other comprehensive income, net of tax Purchase of treasury stock, 24,482 shares Sale of treasury stock, 859 shares Retirement of treasury stock, I 8,483 shares (92) (578) (431) Share-based compensation 159 Stock option exercises, 17,675 shares 88 707 Tax benefit from stock options exercised 53 Cash dividends declared - common stock (approximately $1.72 per share) (25)
Balance at December 3 I, 2018 29,140 55,301 190,390
Comprehensive income Net income 23,191 Other comprehensive income, net of tax Purchase of treasury stock, 14,644 shares Sale of treasury stock, 10,167 shares Retirement of treasury stock, 9,327 shares (47) (335) (185) Share-based compensation 22 Stock option exercises, 13,016 shares 65 521 Tax benefit from stock options exercised 37 Cash dividends declared - common stock ( approximately $2.11 per share) (24,589)
Balance at December 31, 2019 $ 29,158 $ 55,546 $ 188,807
The accompanying notes are an integral part of the consolidated financial statements. -8- - ---1----- .--~--- ' -·- -· ------~------
Accumulated other Total comprehensive Treasury stockholders' income (loss) stock equity $ 1,709 $ $ 251,541
25,118 (5,887) (5,887) (1,481) (1,481) 47 47 1,101 159 795 53
(25)
(4,178) (333) 270,320
23,191 15,277 15,277 (889) (889) 616 616 567 22 586 37
(24,589)
$ 11,099 $ (39) $ 284,571 --r-···-,----•1------•--,-•---
LONE STAR NATIONAL BANCSHARES-TEXAS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in Thousands)
Year Ended December 31, 2019 2018 Operating activities Net income $ 23,191 $ 25,118 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 3,428 3,093 Amortization/accretion of investment security premiums and discounts, net 4,246 4,951 Share-based compensation 22 159 Loss on sale of other real estate 5 407 Write down of other real estate 3,152 532 Gain on sale of properties and equipment (113) (1,330) (Gain) loss on securities transactions (2,291) 4 Gain on foreclosure of real estate (727) (1,163) Income from bank owned life insurance (1,688) (4,395) Decrease in loans held for sale 629 279 Decrease (increase) in deferred income tax asset 667 (1,419) Decrease (increase) in accrued interest receivable 879 (431) Decrease (increase) in other assets 2,207 (835) Increase in accrued interest payable 34 274 Increase (decrease) in allowance for off-balance sheet losses 3 (15) Decrease in overpayment of federal income tax 73 224 Increase in federal income tax currently payable 165 (Decrease) increase in other liabilities (694) 2,451 Net cash provided by operating activities 33,188 27,904
The accompanying notes are an integral part of the consolidated financial statements. - 9 ------1----~~------~------
LONE STAR NATIONAL BANCSHARES-TEXAS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Continued) (Dollars in Thousands)
Year Ended December 31, 2019 2018 Investing activities Securities available for sale Purchases (199,874) (1,199,552) Maturities, calls and principal repayments 77,035 1,183,795 Proceeds from sale 57,819 7,968 Benefits received on life insurance policies 4,493 Purchase of FHLB stock (3,247) (68) Proceeds from sale of FRB stock 3 2 Proceeds from sale of properties and equipment 231 2,107 Purchase of properties and equipment (3,955) (5,397) Purchase of software and licenses (549) Net (increase) decrease in loans (2,756) 11,387 Net proceeds from sale of other real estate 6,150 3,582 Net cash (used) provided by investing activities (69,143) 8,317
Financing activities Net increase (decrease) in demand deposits, NOW accounts, savings and money market accounts 75,521 (23,149) Repayment of other borrowed money (86,072) (50,000) Proceeds from other borrowed money 188,867 40,000 Dividends paid (12,052) (10,025) Net decrease in securities sold under repurchase agreements (2,500) Net increase in securities purchased under agreements to resell (90,000) (99,875) Net (decrease) increase in time deposits (1,215) 1,180 Proceeds from sale of treasury stock 616 47 Proceeds from stock option exercises 586 848 Purchase of treasury stock (889) (1,481) Net cash provided (used) by financing activities 75,362 (144,955)
Increase (decrease) in cash and cash equivalents 39,407 (108,734) Cash and cash equivalents, beginning of year 151,814 260,548 Cash and cash equivalents, end of year $ 191,221 $ 151,814 LONE STAR NATIONAL BANCSHARES-TEXAS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Amounts in Thousands, Except Share Data) December 31, 2019 and 2018
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 McAllen. Texas. The Company provides a broad array of customary banking services and operates 32 full-service banking locations throughout the Rio Grande Valley of Texas and San Antonio, 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 fmancial 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 fmancial 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 fmance 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 ("VIE") 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.
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, deposits with other financial institutions that have an initial maturity less than 90 days when acquired by the Company 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.
Repurchase/Resell Agreements. The Company purchases certain securities under agreements to resell. The amounts advanced under these agreements represent short-term loans and are reflected as assets in the accompanying consolidated balance sheets. The securities underlying these agreements are book entry securities. The Company also sells certain securities under agreements to repurchase. The agreements are treated as collateralized financing transactions and the obligations to repurchase securities sold are - 10 - ---~~---•··--···-·-·---·
reflected as a liability in the accompanying consolidated balance sheets. The dollar amount of the securities underlying the agreements remain in the asset accounts.
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 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. In 2019, all investments in securities were identified as "available for sale". 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. Restricted investments, which are nonmarketable equity securities, are carried at cost.
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 settlement 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.
Interest accruals are generally discontinued when management has determined that the borrower may be unable to meet contractual obligations and/or when loans are 90 days or more in arrears, unless management believes that collateral held by the Company is clearly sufficient and full satisfaction of both principal and interest is highly probable, or the loan is accounted for as a purchased credit-impaired loan. When a loan is placed on nonaccrual, all interest previously accrued but not collected is reversed against current period income and amortization of deferred loan fees is discontinued. Interest received on nonaccrual loans is either applied against principal or reported as income according to management's judgment as to the collectability of principal. Nonaccrual loans may be returned to an accrual status when principal and interest payments are no longer delinquent, and the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectability of principal. Loans are considered past due based upon their contractual terms.
Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated on an individual loan basis. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Allowance for Possible Loan Losses. The allowance for possible loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management's best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance,
- 11- in the judgment of management, is necessary to reserve for estimated loan losses inherent in the loan portfolio. The allowance for possible loan losses includes allowance allocations calculated in accordance with Accounting Standards Codification ("ASC") Topic 310, Receivables and allowance allocations calculated in accordance withASC Topic 450, Contingencies.
Loans Held for Sale. The Company originates mortgage loans primarily for sale in the secondary market. These loans are generally sold on a non-recourse basis and are carried at the lower of cost or market on an aggregate basis.
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.
Foreclosed Assets. Assets acquired through or instead of loan foreclosure are held for sale and are initially recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. Costs after acquisition are generally expensed. If the fair value of the asset declines, a write-down is recorded through expense. A third-party appraiser is engaged in order to obtain periodic valuation updates. The valuation of the foreclosed assets is subjective in nature. The value of the assets may be adjusted as a result of changes to the economic conditions. Foreclosed assets are included in the accompanying consolidated balance sheets as other real estate and include foreclosed residential real estate properties where physical possession has been obtained totaling $2,348,000 and $3,797,000 at December 31, 2019 and 2018, respectively. The recorded investment in consumer mortgage loans secured by residential real estate properties where formal procedures are in process total $0 and $554,000 at December 31, 2019 and 2018, respectively.
Bank Owned Life Insurance. The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at its cash surrender value, or the amount that can be realized, if lower.
Restricted Investments. As a member institution of the Federal Home Loan Bank of Dallas (FI-ILB) and the Federal Reserve Bank (FRB), the Company is required to purchase and hold a certain amount of these equity stocks. See Note 7 for further discussion.
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. - 12- 1.-.. ·· ...... ---·······---·---·. ~~--··-- ..... ,. ... -.--·· --·--
Advertising. Advertising costs are expensed as they are incurred.
Income Tax Expense. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to components of other comprehensive income). Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized.
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.
Dertvative Financial Instruments. FASB ASC Topic 815 Derivatives and Hedging requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Changes in fair value of a derivative must 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.
Share-Based Payments. The Company accounts for all stock-based compensation transactions in accordance with ASC Topic 718, Compensation ~ Stock Compensation, which requires that stock compensation transactions be recognized as compensation expense in the statement of operations based on their fair values on the measurement date, which is the date of the grant Cost of the unvested portion of options issued is recognized using the Black-Scholes-Merton option pricing model.
Subsequent Events. The Company has evaluated subsequent events for potential recognition and/or disclosure through April 29, 2020, the date which these consolidated financial statements were available to be issued.
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, 2019 and 2018 was $14,244,000 and $26,047,000, respectively.
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Note 3 - Investment Securities
An analysis of securities available for sale as of December 3 I, 2019 follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. government agency $ 20,292 $ 53 $ 12 $ 20,333 U.S. treasury 52,587 386 9 52,964 State and local government securities 185,539 7,526 32 193,033 Mortgage-backed 36,087 397 8 36,476 Collateralized mortgage obligations 419,462 6,965 1,178 425,249 Other 50 50 Total $714,017 $ 15,327 $ 1,239 $728,105
An analysis of securities available for sale as of December 31, 2018 follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. government agency $ 36,309 $ $ 509 $ 35,800 U.S. treasury 52,684 35 557 52,162 State and local government securities 212,061 2,259 975 213,345 Mortgage-backed 68,446 131 668 67,909 Collateralized mortgage obligations 281,278 203 5,169 276,312 Other 175 175 Total $650,953 $ 2,628 $ 7,878 $645,703
The net change in unrealized holding gains and losses on securities available for sale, net of related tax effect, of $15,277,000 net gain in 2019 and $5,887,000 net loss in 2018 was included in a separate component of stockholders' equity as accumulated other comprehensive income, net of federal income tax and accumulated other comprehensive loss, net of federal income tax, respectively.
Below is a summary of securities which were in an unrealized loss position at December 31, 2019. A total of25 securities had unrealized losses at December 31, 2019. 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 Value Loss Value Loss Value Loss Available for sale: U.S.governmentagency $ $ $ 5,250 $ 12 $ 5,250 $ 12 U.S. treasury securities 15,013 8 15,013 8 State and local governments 7,959 32 7,959 32 Mortgage-backed 5,419 8 5,419 8 Collateralized mortgage obligations 87,330 1,123 17,794 56 105,124 Ll79 Total $100,708 $ 1,163 $ 38,057 $ 76 $138,765 $ 1,239 - 14 - --·-···1---~ - ... ,... ---····•----'"·---··~-·•----·--·--"·--·~------
Below is a summary of securities which were in an unrealized loss position at December 31, 2018. A total of 171 securities had unrealized losses at December 31, 2018. 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 Value Loss Value Loss Value Loss Available for sale: U.S.govemmentagency $ $ $ 35,800 $ 509 $ 35,800 $ 509 U.S. treasury securities 34,697 557 34,697 557 State and local governments 54,811 448 33,684 527 88,495 975 Mortgage-backed 26,583 66 27,817 602 54,400 668 Collateralized mortgage obligations 88,130 1,141 149,896 4,028 238,026 5,169 Total $169,524 $ 1,655 $281,894 $ 6,223 $451,418 $ 7,878
The amortized cost and estimated market value of securities available for sale at December 31, 2019, 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 Estimated Amortized Fair Cost Value Due within one year $ 46,584 $ 46,636 Due one to five years 54,108 54,745 Due five to ten years 66,447 69,517 Due after ten years 91,023 95,178 Subtotal 258,162 266,076 Mortgage-backed and collateralized mortgage obligations 455,549 461,725 U.S. Small Business Administration guaranteed loan pool 256 254 Other 50 50 Total $ 714,017 $ 728,105
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 totaled $57,819,000 and $7,968,000, respectively, for the years ended December 31, 2019 and 2018. Gross realized gains on sales of securities available for sale were $1,735,000 in 2019 and $0 in 2018. Gross realized losses on sales of securities available for sale were $1,000 in 2019 and $42,000 in 2018.
During the year-ended December 31, 2019, proceeds from the maturities, calls, and principal repayments of certain securities totaled $77,035,000, with a resulting gain of $556,000. During the year-ended December 31, 2018, proceeds from the maturities, calls, and principal repayments of certain securities totaled $1,183,795,000, with a resulting gain of$38,000.
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- - 15 - ...... ·-~.-~-·---· .1 ······-----·~,·~-·-·-··"'
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. There are no realized losses included in earnings for 2019 and 2018 for other-than-temporary declines in the fair value of securities.
Investment securities with a carrying amount of $665,880,000 and $531,508,000 at December 31, 2019 and 2018, respectively, were pledged to secure public funds and for other purposes required or permitted by law.
Note 4 - Loans Held for Sale
Net gains realized on the sale of loans heldfor sale totaled $1,634,000 and $1,832,000 for the years ended December 31, 2019 and 2018, respectively.
Note 5 - Loans
Loans consist of the following: December 31, 2019 2018 Commercial: Commercial $ 82,841 $ 83,084 Commercial tax-exempt 13,934 19,690 Overdrafts 330 222 Total commercial 97,105 102,996 Agricultural 778 937 Real estate: Construction 150,482 116,221 Agricultural mortgage 27,892 30,342 1-4 family mortgage 204,789 211,332 Multifamily mortgage 97,053 124,021 Commercial mortgage 544,348 528,946 Total real estate 1,024,564 1,010,862 Consumer: Consumer 46,635 54,292 Overdrafts 395 386 Total consumer 47,030 54,678 Total principal amount ofloans 1,169,477 1,169,473 Unamortized fees and costs (2,333) (2,687) Allowance for loan losses (21,764) (21,725) Total loans $ 1,145,380 $ 1,145,061
The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.
Commercial loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower's management possesses sound ethics and solid business judgment, the Company's management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed.
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Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-tenn loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the cash flows of the borrower. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company's real estate portfolio are diverse in tenns of type and location. This diversity helps reduce the Company's exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates real estate loans based on collateral and risk grade criteria. The Company tracks the level of owner-occupied real estate loans versus non-owner-occupied loans. At December 31, 2019, approximately 42 percent of the outstanding principal balances of the Company's commercial real estate loans were secured by owner-occupied properties.
The Company originates consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.
The Company utilizes independent loan review consultants that review and validate the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company's policies and procedures.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, the Company considers the borrower's debt service capacity through the analysis of current financial information, if available, and/or current information with regards to the Company's collateral position. Regulatory provisions would typically require the placement of a loan on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on non-accrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period ( at least six months) of repayment perfonnance by the borrower.
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Year-end non-accrual loans, segregated by class of loans, were as follows:
2019 2018 Commercial $ 1,393 $ 1,187 Agricultural 1,686 1,501 Consumer 387 464 Real estate 25,408 27,223 Total $ 28,874 $ 30,375
As of December 31, 2019, non-accrual loans reported in the table above included $963,000 related to loans that were restructured as "troubled debt restructurings" during 2019. As of December 31, 2018, there were no loans restructured as "troubled debt restructurings" included in the non-accrual loans reported in the table above.
Had non-accrual loans performed in accordance with their contractual terms, interest income would have increased by $2,115,000 and $2,474,000 for the years ended December 31, 2019 and 2018, respectively.
An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of December 31, 2019 follows: Accruing Loans 90 Loans30-89 Loans 90 or or More Days Past More Days Total Past Days Past Due Past Due Due Loans Current Loans Total Loans Due
Commercial $ 984 $ 918 $ 1,902 $ 95,203 $ 97,105 $ Agricultural 778 778 Consumer 576 364 940 46,090 47,030 1 Real estate 10,461 5,337 15,798 1,008,766 1,024,564 941
Total $ 12,021 $ 6,619 $ 18,640 $ 1,150,837 $ 1,169,477 $ 942
Accruing loans 90 or more days past due totaled $935,000 at December 31, 2018.
Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of the estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Regulatory guidelines require the Company to reevaluate the fair value of collateral supporting impaired collateral dependent loans on at least an annual basis. While the Company's policy is to comply with the regulatory guidelines, the Company's general practice is to reevaluate the fair value of collateral supporting impaired collateral dependent loans on a quarterly basis.
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Year-end impaired loans are set forth in the following table. Interest income recognized on impaired loans for the time they were impaired was $2,437,000 and $3,710,000 during 2019 and 2018, respectively.
Unpaid Recorded Recorded Contractual Investment Investment Total Average 2019 Principal with No with Recorded Related Recorded Balance Allowance Allowance Investment Allowance Investment Commercial $ 2,213 $ 1,756 $ - $ 1,756 $ - $ 1,706 Agricultural Consumer 25 25 25 12 Real Estate 37,330 31,131 31,131 29,987 Total $ 39,568 $ 32,912 $ - $ 32,912 $ - $ 31,705 2018
Commercial $ 2,238 $ 1,632 $ - $ 1,632 $ - $ 2,142 Agricultural Consumer 23 19 19 74 Real Estate 45,482 35,264 35,264 35,524 Total $ 47,743 $ 36,915 $ - $ 36,915 $ - $ 37,740
Troubled Debt Restrncturings - The restructuring of a loan is considered a "troubled debt restructuring" if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Troubled debt restructurings during 2019 are set forth in the following table. There were no troubled debt restructurings during 2018. Balance at Balance at Restructuring December 31, 2019 Date 2019 Commercial $ 1,150 $ 963 Agricultural Consumer Real estate Total $ 1,150 $ 963
Typically, loans identified as troubled debt restructurings by the Company are previously on non-accrual status and reported as impaired loans prior to restructuring. The modifications primarily related to extending the amortization periods of the loans and the granting of interest-rate concessions. The modifications did not impact the Company's determination of the allowance for loan losses.
Credit Quality Indicators - As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted average risk grade of loans, (ii) the level of classified loans, (iii) the delinquency status of the loans, (iv) net charge-offs, (v) non-performing loans and (vi) the general economic conditions of South Texas.
The Company utilized a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale ofl to 1 L A description of the general characteristics of the 11 risk grades is as follows:
• Risk Grade 1 - This category includes any loan that is 100% secured by the Company or CD deposits, US Government agencies and any publicly traded stock that is properly margined - usually at least 120%.
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• Risk Grade 2 - This internal risk rating is assigned to borrowers having a stable record of strong earnings, a substantial current position, sound capitalization, and solid cash flow, and whose management team has experience and depth within a sound and stable industry.
• Risk Grade 3 - Borrowers assigned this internal rating are considered above average with higher than average credit standards based on leverage, liquidity and debt coverage ratios as well as having excellent management in critical areas.
• Risk Grade 4 - This internal risk rating includes borrowers that have average leverage, liquidity and debt service coverage ratios that compare favorably with industry standards.
• Risk Grade 5 - This internal risk rating includes borrowers that have average leverage, liquidity and debt service coverage ratios and management that may be relatively inexperienced or untested. Overall financial ratios are considered acceptable.
• Risk Grade 6 - This internal risk rating exhibits the same characteristics as Risk Grade 5, but requiring added attention due to added factors such as (1) average or unfavorable earnings and cash flow coverage, (2) average or unfavorable debt service coverage ratio, (3) repayment is slow or repayment history is marginal, (4) reliant on liquidation of collateralized assets to repay debt, (5) substantial credit, collateral, or loan policy exceptions exist, and (6) no secondary sources of repayment are evident.
• Risk Grade 7 - This risk grading includes borrowers that exhibit potential weaknesses/early warning signals that deserve close attention. If left uncorrected, these potential weaknesses may result in the borrower being unable to meet its financial obligations at some future date.
• Risk Grade 8 - This risk grading indicates that loans are in the category of performing loans which are classified substandard. A substandard credit is inadequately protected by the current sound worthiness and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. These credits are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected. However, the distinct possibility of loss in these credits, while existing in the aggregate amount of substandard assets, does not necessarily exist in individual assets classified substandard.
• Risk Grade 9 - Assets falling in this category bear all of the characteristics of those in the "8" Substandard/Performing category with the added characteristic of meeting the criteria for being placed on a non-accrual status: the loan or extension of credit is 90 or more days past due; it becomes evident that the borrower cannot or will not make payments or meet the tenns for the renewal of matured loan; anytime full repayment of principal and interest is not expected; if the borrower files bankruptcy and an approved plan of reorganization or liquidation of collateral is not anticipated to occur in the immediate future; and when foreclosure is initiated.
• Risk Grade 10 - This risk grading includes loans that have all the weaknesses inherent in a substandard classification with the added factor that the weaknesses are pronounced to the point where, on the basis of current facts, conditions and values, collection or liquidation in full is highly questionable or improbable. While the possibility of loss is extremely high, the existence of specific pending factors, which may work to the obligor's advantage, warrants that the estimated loss be deferred until a more exact status is determined.
• Risk Grade 11 - This risk grading is reserved for charge-offs. A loan in this category is considered uncollectible and of such little value that its continuance as an active asset of the Company is not warranted. This classification does not mean that an asset has absolutely no - 20- _____ J ____ ,, _____ ,,
recovery or salvage value, but simply that it is not practical or desirable to defer writing off all (or sometimes a portion) of a basically worthless asset, even though partial recovery may be affected in the future. Losses should be taken in the petiod in which they surface as uncollectible.
In monitoring credit quality trends in the context of assessing the appropriate level of the allowance for loan losses, the Company monitors portfolio credit quality by the weighted-average risk grade of each class of loan. Individual relationship managers review updated financial information for all loans risk graded 1 through 6 to recalculate the risk grade on at least an annual basis. When a loan has a calculated risk grade of 7, it is considered to be on management's "watch list," where a significant risk-modifying action is anticipated in the near term. When a loan has a calculated risk grade of 7 or higher, the loan is monitored on an on-going basis.
The following table presents weighted average risk grades for all loans by class.
December 31. 2019 December 31, 2018 Weighted Weighted Average Average Risk Risk Grade Loans Grade Loans · Commercial Risk grades 1-6 3.80 $ 93,992 3.73 $ 97,339 Risk grade 7 7.00 7.00 2,288 Risk grade 8 8.00 1,390 8.00 1,960 Risk grade 9 9.00 1,723 9.00 1,409 Risk grade 10 10.00 10.00 Risk grade 11 11.00 11.00 Total commercial $ 97,105 $ 102,996 Agricultural Risk grades 1-6 1.94 $ 778 2.07 $ 937 Risk grade 7 7.00 7.00 Risk grade 8 8.00 8.00 Risk grade 9 9.00 9.00 Risk grade 10 10.00 10.00 Risk grade 11 11.00 11.00 Total agricultural $ 778 $ 937 Consumer Risk grades 1-6 2.95 $ 46,247 3.05 $ 53,802 Risk grade 7 7.00 7.00 Risk grade 8 8.00 8.00 26 Risk grade 9 9.00 783 9.00 850 Risk grade I 0 10.00 10.00 Risk grade 11 11.00 11.00 Total consumer $ 47,030 $ 54,678 Real estate Risk grades 1-6 4.61 $ 980,944 4.53 $ 957,710 Risk grade 7 7.00 1,441 7.00 1,658 Risk grade 8 8.00 15,086 8.00 21,534 Risk grade 9 9.00 27,093 9.00 29,960 Risk grade 10 10.00 10.00 Risk grade 11 11.00 11.00 Total real estate $ 1,024,564 $ 1,010,862
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In assessing the general economic conditions in the State of Texas, management monitors and tracks the Texas Leading Index ("TLI"), which is produced by the Federal Reserve Bank of Dallas. The TLI is a single summary statistic that is designed to signal the likelihood of the Texas economy's transition from expansion to recession and vice versa. Management believes this index provides a reliable indication of the direction of overall credit quality. The TLI is a composite of the following eight leading indicators: (i) Texas Value of the Dollar, (ii) U.S. Leading Index, (iii) real oil prices (iv) well permits, (v) initial claims for unemployment insurance, (vi) Texas Stock Index, (vii) Help-Wanted Index and (viii) average weekly hours worked in manufacturing. The TLI was 128.2 at December 31, 2019 and 125.6 at December 31, 2018. A higher TLI value implies more favorable economic conditions.
Allowance for Loan Losses - The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management's best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company's allowance for loan loss methodology follows the accounting guidance set forth in U.S. generally accepted accounting principles and the Interagency Policy Statement on the Allowance for Loan and Lease Losses, which was jointly issued by the Company's regulatory agencies. In that regard, the Company's allowance for loan losses includes allowance allocations calculated in accordance with ASC Topic 310 Receivables and allowance allocations calculated in accordance with ASC Topic 450 Contingencies. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company's process for determining the appropriate level of the allowance for loan losses is designed to acconnt for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.
The level of the allowance reflects management's continuing evaluation of industry concentrations, specific credit risks, loan loss and recovery experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management's judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate determination of the appropriate level of the allowance is dependent upon a variety of factors beyond the Company's control, including, among other things, the performance of the Company's loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. The Company monitors whether or not the allowance for loan loss allocation model, as a whole, calculates an appropriate level of allowance for loan losses that moves in direct correlation to the general macroeconomic and loan portfolio conditions the Company experiences over time.
The Company's allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other risk factors both internal and external to the Company.
The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor's ability to repay; (ii) the underlying collateral, if any; and -22------.··-·--········.···-··-··-·····-··········-·,··········--··· ... .. ·······•··· ·········-·-···'------
(iii) the economic environment and industry in which the borrower operates. When a loan bas a calculated grade of 7 or higher, the loan is analyzed to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower's ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions.
Historical valuation allowances are calculated based on the historical gross loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Company calculates historical gross loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical gross loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical gross loss ratio and the total dollar amount of the loans in the pool. The Company's pools of similar loans include similarly risk-graded groups of commercial loans, commercial real estate loans, consumer real estate loans and consumer and other loans.
The components of the general valuation allowance include the additional reserves allocated to specific loan portfolio segments as a result of applying an environmental risk adjustment factor to the base historical loss allocation. The environmental adjustment factor is based upon a more qualitative analysis of risk. The various risks that may be considered in the determination of the environmental adjustment factor include, among other things, (i) the effects of the national and local economy; (ii) the change in the nature and volume of the loan portfolio; (iii) changes in lending policies and underwriting compliance risk; (iv) management risk; (v) existence and change in credit concentrations; (vi) credit risk management; (vii) change in residential construction; and (viii) international risk.
The following table presents details of the allowance for loan losses, segregated by loan portfolio segment for the years ended December 31, 2019 and 2018.
Commercial Agricultural Real Estate Consumer/Other Unallocated Total 2019 Historical ValuationAllowances $ 1,609 $ $ 848 $ 555 $ $ 3,012 Specific Valuation Allowances General Valuation Allowances: Effects of economy 109 1,526 20 8,251 9,906 Change in nature/volume loan portfolio 91 1,280 16 1,387 Change in lending policies/underwriting 87 1,221 16 1,324 Management risk 61 854 11 926 Existence/change in credit concentrations 100 1,403 18 1,521 Credit risk management 49 689 9 747 Change in residential construction/development 1!4 1,605 21 1,740 International risk 79 1,108 14 1,201 Total $ 2,299 $ $ 10,534 $ 680 $ 8,251 $21,764 2018 Historical Valuation Allowances $ 2,547 $ $ 774 $ 1,799 $ $ 5,120 Specific Valuation Allowances 521 521 General Valuation Allowances: Effects of economy 113 0.5 1,507 22 6,211 7,854 Change in nature/volume loan portfolio 93 0.4 1,239 18 1,350 Change in lending policies/underwriting 88 0.4 1,166 17 1,272 Management risk 63 0.3 843 13 919 Existence/change in credit concentrations 105 0.4 1,390 21 1,516 Credit risk management 51 0.2 680 IO 741 Change in residential construction/development 96 0.4 1,283 19 L,399 International risk 71 0.4 948 14 1,033 Total $ 3,227 $ 3 $ 10,351 $ 1,933 $ 6.211 $21,725
The Company monitors whether or not the allowance for loan loss allocation model, as a whole, calculates an appropriate level of allowance for loan losses that moves in direct correlation to the general macroeconomic and loan portfolio conditions the Company experiences over time. The Company analyzes trends in the components of the TLI, as well as any available information related to regional,
- 23 ------. ------1--~------' -----
national and international economic conditions and events and the impact such conditions and events may have on the Company and its customers. With regard to assessing loan portfolio conditions, the Company analyzes trends in weighted-average portfolio risk-grades, classified and non-performing loans and charge-off activity. In periods where general macroeconomic and loan portfolio conditions are in a deteriorating trend or remain at deteriorated levels, based on historical trends, the Company would expect to see the allowance for loan loss allocation model, as a whole, calculate higher levels of required allowances than in periods where general macroeconomic and loan portfolio conditions are in an improving trend or remain at an elevated level, based on historical trends.
The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2019 and 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
Commercial Agricultural Consumer Real Estate Unallocated Total 2019 Beginning balance $ 3,227 $ 3 $ 1,933 $ 10,351 $ 6,211 $ 21,725 Provision for loan losses (2,203) (3) (1,179) 200 2,040 (1,145) Charge--ofls (449) (209) (193) (851) Recoveries 1,724 134 177 2,035 Net charge-offs 1,275 (75) (16) 1,184 Ending balance $ 2,299 $ $ 679 $ 10,535 $ 8,251 $ 21,764 Year-end amount allocated to: Loans individually evaluated for impairment $ $ - $ $ 296 $ - $ 296 Loans collectively evaluated fur impairment 2,299 679 10,239 8,251 21,468 Ending balance $ 2,299 $ - $ 679 $ 10,535 $ 8,251 $ ?1,764
2018
Beginning balance $ 1,556 $ - $ 652 $ 10,495 $ 9,257 $ 21,960 Provision for loan losses 2;279 3 1,527 (763) (3,046) Charge-offs (1,957) (364) (567) (2,888) Recoveries 1,349 118 1,186 2,653 Net charge-offs (608) (246) 619 {235) Ending balance $ 3,227 $ 3 $ 1,933 $ 10,351 $ 6,211 $ 21,725
Year-end amount allocated to: Loans individually evaluated for impairment $ $ - $ $ 521 $ $ 521 Loans collectively evaluated for impairment 3,227 3 1,933 9,830 6.211 21,204 Ending balance $ 3227 $ 3 $ 1,933 $ 10351 $ 6,211 $ 21,725
- 24- --~--~-~~------
The Company's recorded investment in loans as of December 31, 2019 and 2018 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company's impairment methodology follows:
Commercial Agricultural Consumer Real Estate Total 2019 Loans individually evaluated for impainnent $ $ $ 25 $ 22,763 $ 22,788 Loans collectively evaluated for impainnent 97,105 778 47,005 1,001,801 1,146,689 Ending balance $ 97,105 $ 778 $ 47,030 $ 1,024.564 $ 1,169,477 2018 Loans individually evaluated for impairment $ 1 $ $ 19 $ 26,839 $ 26,859 Loans collectively evaluated for impainnent 102 995 937 54,659 984 023 1 142,614 Ending balance $ 102,996 $ 937 $ 54,678 $ 1,010,862 $ 1,169,473
Note 6 - Properties and Equipment
The following is a summary of properties and equipment, at cost less accumulated depreciation, at year end: 2019 2018 Land $ 18,926 $ 18,958 Buildings and improvements 48,115 45,936 Furniture and equipment 30,079 28,803 97,120 93,697 Less accumulated depreciation (40,920) (38,212) $ 56,200 $ 55,485
Depreciation expense was $3,122,000 and $2,769,000 for the years ended December 31, 2019 and 2018, respectively. The Company did not capitalize any interest costs as properties and equipment during 2019 and 2018.
Note 7 - Restricted Investments
Restricted investments include stock held in correspondent banks, the Federal Home Loan Bank of Dallas (FHLB) and the Federal Reserve Bank (FRB). As a member, the Company is required to purchase and hold stock to satisfy membership and borrowing requirements. These stocks are classified as restricted securities because they can only be sold to the FHLB or FRB and all sales of stock must be at par value. As a result of these restrictions, the stock is unlike the Company's other investment securities insofar as there is no trading market for the stock and the transfer price is determined by their membership rules, not by market participants. As of December 31, 2019, and 2018, FHLB stock totaled $5,714,000 and $2,468,000, respectively. As of December 31, 2019, and 2018, FRB stock totaled $2,298,000 and $2,300,000, respectively. The stock is included as a part of restricted investments on the consolidated balance sheets.
-25 - Note 8 - Time Deposits
The following table summarizes time deposits by maturity at December 31, 2019:
Years Ending December 31, Deposits 2020 $ 350,616 2021 105,968 2022 25,716 2023 11,509 2024 11,084 $ 504,893
Brokered deposits are received on terms other than those available in the normal course of business. The Company held no brokered time deposits at December 31, 2019 and 2018.
Note 9 - Other Liabilities
Major classifications of other liabilities at year end are as follows:
2019 2018 Accrued expenses $ 6,159 $ 6,901 State income taxes payable 33 30 Property taxes payable 539 494 $ 6,731 $ 7,425
Note 10- Borrowed Funds
Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. There were no securities sold under agreements to repurchase at December 31, 2019 and 20 I 8. Accordingly, there was no accrued interest during 2019 and 20 I 8.
The following are available lines of credit with other financial institutions at December 31, 2019:
Line of Credit Amount Interest Expiration Financial Institution Amount Available Rate Date Federal Home Loan Bank of Dallas $ 564,557 $ 446,762 Variable None The Independent Bankers Bank 25,000 25,000 Variable None Federal Reserve Bank 69,926 69,926 Variable None Frost Bank 40,000 40,000 Variable 05/22/2020 Texas Capital Bank 25,000 25,000 Variable 08/01/2020 American Financial Exchange 223,000 223,000 Variable None $ 947,483 $ 829,688
At December 31, 2019, the Company had advances in the amount of$15,000,000 and $102,795,000 from Federal Home Loan Bank of Dallas ("FHLB") under provisions of its line of credit facility. The advances mature October 14, 2020 and January 2, 2020, respectively, with interest due at a monthly rate of 1.331 percent and 1.35 percent, respectively.
The lines of credit with FHLB are collateralized by a blanket floating lien on certain mortgage loans. The lines of credit with The Independent Bankers Bank, Frost Bank, and Texas Capital Bank are
- 26 - . ______J______
unsecured. The line of credit with Federal Reserve Bank ("FRB") is collateralized by a blanket floating lien on certain commercial and agriculture loans.
The Bank is a member of the American Financial Exchange (AFX) where overnight fed funds purchased can be obtained from other banks on the Exchange that have approved the Bank for an unsecured, overnight line. As of December 31, 2019, the total amount approved for the Bank via AFX banks was $223,000,000, none of which was drawn as of December 31, 2019.
The scheduled maturities of borrowings at December 31, 2019, were as follows:
Within After One After Two A:fter1bree After Four After One But Within But Within But Within But Within Five Year Two Years Three Years Four Years Five Years Years Total Federal Home Loan Bank borrowings $ 117,795 $ - $ - $ $ $ - $ 117,795 Securities sold under agreements to repurchase Trust preferred subordinated debentures Total borrowings $ 117,795 $ - $ - $ $ $ - $ ll 7,795
Note 11- Federal and State Income Taxes
The components of the provision for income taxes consist of the following:
2019 2018 Current income tax expense Federal $ 4,017 $ 2,282 State 33 29 Total current income tax expense 4,050 2,311 Federal deferred income tax expense (benefit) 628 (53) Total income tax expense $ 4,678 $ 2,258
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:
2019 2018 Tax at federal statutory rate $ 5,846 $ 5,741 Additions (reductions) Tax-exempt income (2,495) (2,091) Non-deductible expenses 1,066 142 State income tax, net of federal income tax effect 26 23 Other, net 235 (1,557) Total income tax expense $ 4,678 $ 2,258
-27 - The net deferred tax asset included in the accompanying consolidated balance sheets is comprised of the following deferred tax assets and liabilities:
2019 2018 Deferred tax liability Properties and equipment $ 1,557 $ 1,253 Mortgage servicing rights 272 236 Net unrealized gain on securities available for sale 2,958 Other 331 607 Total deferred tax liability 5,118 2,096
Deferred tax asset Deferred loan fees 489 564 Loans held for sale 28 30 Allowance for loan losses 4,571 4,562 Allowance for off balance sheet losses 126 126 LHFS repurchase reserve 11 11 Net unrealized loss on securities available for sale 1,565 Interest applied to principal 2,484 2,418 Deferred compensation 496 485 Other real estate 366 663 Other 185 Total deferred tax asset, before valuation allowance 8,756 10,424 Valuation allowance Total deferred tax asset 8,756 10,424 Net deferred tax asset $ 3,638 $ 8,328
The Company files income tax returns in the U.S. federal jurisdiction. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2016. The Company also files an income tax return with the Texas Comptroller of Public Accounts and is no longer subject to state tax examination by tax authorities for years before 2015.
Note 12 - Concentrations of Credit Risk
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 and San Antonio, Texas. The concentrations of credit by type of loan are set forth in Note 5. Based on the nature of the banking business, management does not consider any of these concentrations unusual.
-28- .. ------1---
Note 13 - Supplemental Disclosures
Supplemental disclosures of cash flow information: Year Ended December 31, 2019 2018
Federal and State income taxes paid $ 3,777 $ 3,405
Interest paid $ 19,561 $ 14,158
Supplemental schedule of non-cash investing and financing activities:
Year Ended December 31, 2019 2018 Foreclosures and repossession in satisfaction of loans receivable $ 2,447 $ 2 388
Financing provided for sales of foreclosed and repossessed assets $ 404 $ 1,195
Dividends declared but unpaid $ 12,537 $
Note 14- Fair Value Measurement
ASC Topic 820 Fair Value Measurement defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC Topic 820 as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820 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 I 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, 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.
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 -29- 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. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company's monthly and/or quarterly valuation process.
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, 2019, 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, 2019, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:
Level 1 Inputs $ 52,965 Level 2 Inputs 675,140 Level 3 Inputs Total fair value $ 728,105
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 2019, - 30 ------1- -·-"
no impaired loans were remeasured nor 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.
Non-Financial Assets and Non-Financial Liabilities. We do not have any non-financial assets or non financial liabilities measured at fair value on a recurring basis. Certain non-financial assets measured at fair value on a nomecurring basis include foreclosed assets (upon initial recognition or subsequent impairment), and intangible assets and other non-fmancial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a non-recurring basis during the reported periods include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense. The fair value of a foreclosed asset is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. During the reported periods, all fair value measurements for foreclosed assets utilized Level 2 inputs. At December 31, 2019 and 2018, the Bank had other real estate assets totaling $13,386,000 and $19,532,000, respectively.
The following table presents foreclosed assets that were remeasured and reported at fair value:
2019 2018 Foreclosed assets remeasured at initial recognition: Carrying value of foreclosed assets prior to remeasurement $ 3,162 $ 3,494 Charge-offs recognized in the allowance for loan losses Fair value $ 3,162 $ 3 494 Foreclosed assets remeasured subsequent to initial recognition: Carrying value of foreclosed assets prior to remeasurement $ 10,204 $ 7,827 Write-downs included in other non-interest expense (3,152) (532) Fair value $ 7,052 $ 7,295
Charge-offs recognized upon loan foreclosures are generally offset by general or specific allocations of the allowance for loan losses and generally do not, and did not during the reported periods, significantly impact our provision for loan losses. Regulatory guidelines require us to reevaluate the fair value of other real estate owned on at least an annual basis. Appraisals are generally not considered to be outdated, and we typically do not make any adjustments to the appraised values.
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.
Activity in related party loans is presented in the following table:
2019 2018 Balance at beginning of year $ 13,049 $ 15,947 Additions Advances 2,598 100 Changes to related status 5,219 Reductions Collections {2,298) (2,998) Balance at end of year $ 18,568 $ 13,049 - 31 - -· ------1--- -.· --~----· ... ----·----,·
As of Decem her 31, 2019 and 2018, the total amount of deposits of the Company's officers, directors and significant stockholders were $47,590,000 and $49,648,000, respectively.
During 2019 and 2018, the Company entered into construction contracts, totaling $285,000 and $432,000, respectively, with one of its principal stockholders. The contracts are for the construction of new banking facilities and additions. Payments made for construction contracts during 2019 totaled $623,000.
The Company leases various facilities under operating leases with related parties that expire at various dates through October 2023 with some containing provisions that allow renewal at similar terms. Total rental expense in 2019 and 2018 for all operating leases with related parties was approximately $443,000 and $589,000, respectively.
The following is a schedule, by year, of future minimum lease payments under operating leases with related parties as of December 31, 2019 that have initial or remaining lease terms in excess of one year:
Year ended December 31, 2020 $ 177,000 2021 25,000 2022 12,000 2023 10,000
The Company engaged in other related party transactions with an aggregate amount of $856,000 during 20 I 9. These transactions included payments to related parties for title insurance, office supplies, printing, travel, maintenance and repair of other real estate owned property and the Company's marketing program.
Note 16 - Employee Benefits
The Company has an employee stock ownership plan containing Internal Revenue Code Section 40l(k) provisions in effect for substantially all employees. An employee becomes a participant after completing three months 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 $608,000 and $598,000 for the employee stock ownership plan with 40l(k) provisions for 2019 and 2018, respectively.
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.
During 2015, the Company authorized the issuance of a Stock Option Plan for 500,000 shares of common stock at an option price not lower than the fair value at day of grant. Any forfeiture will be terminated. The options have a vesting period of five years.
- 32 - ,-,J.,-,.,,,.,.~ .....,.•.o,:.~-~-~-c
---~--••r"rl'-hO.,~~~ - ~------
A summary of the status of the Company's stock option plan as of December 31, 2019 and 2018, and changes during the years ended on those dates are presented below:
Year Ended December 31, 2019 2018 Weighted Weighted Shares Average Shares Average Underlying Exercise Underlying Exercise Options Price Options Price Outstanding at beginning of year 252,613 $44.34 279,888 $44.41 Granted Exercised (13,016) 45.00 (17,675) 45.00 Expired/forfeited (3,700) 45.00 {9,600} 45.00 Outstanding at end of year 235,897 $44.30 252,613 $44.34 Options exercisable at end of year 173,097 $41.84 148,313 $40.46
Range of exercise prices $35.50 - $60.75 $35.50 - $54.75 Weighted average remaining contractual life 4.77 years 6.91 years
The following table summarizes information about stock options outstanding at December 31, 2019 and 2018: Year Ended December 31, 2019 2018 Weighted Average Shares Shares Exercise Underlying Underlying Price Options Options
$35.50 84,188 84,188 $45.00 86,709 103,425 $54.75 65,000 65,000 235,897 252,613
The Company recognizes the cost of the unvested portion of options issued in prior years using the Black Scholes-Merton option pricing model. 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. 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.
During 2008, the Stock Appreciation Right Bonus Plan was established to provide a means through which the Company can attract and retain able individual to serve as employees, directors or consultants of the Company and to provide a means whereby employees may be awarded for their contributions to the Company. The right shall vest in a series of five equal yearly installments on each anniversary of the date of grant, however an award shall not be vested and/or exercisable prior to the date on which the holder has completed two continuous years of service. The value of each right at year end is based upon an estimated market value detennined by a third-party appraiser.
- 33 ------· ------·· • ~ . .I
Outstanding rights at December 31, 2019:
Number of Stock Value Value at Date of Appreciation On Grant December 31, Award Rights Date 2019 2011 65,812 $ 35.50 $ 2,023,719 2013 3,000 38.25 84,000 2014 8,000 43.25 184,000 2015 11,500 43.25 223,100 2017 10,000 43.00 46,000 98,312 $ 2,560,819
Total share-based compensation cost was $295,000 in 2019 and $648,000 in 2018, net of tax benefit of $78,000 and $172,000, respectively.
Note 18 - Commitments and Contingent Liabilities
In the nonnal course of business, the Company makes various commitments and incurs certain contingent liabilities that are not presented in the accompanying consolidated 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 totaled $2,806,000 and $3,938,000 at December 31, 2019 and 2018, respectively. Commitments to fund loans were approximately $111,353,000 and $112,894,000 at December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the Company had guarantees on credit cards to its customers totaling $287,000 and $158,000, 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. Commitments to lend may have fixed or variable rates. The Company evaluates each customer's creditworthiness on a case by case basis. The amount of the collateral obtained, if it is deemed necessary 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 ,vritten 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 did not incur any loss on its commitments in 2019 or 2018. 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 2024, with the largest agreement expiring in 2024, and contain provisions that allow renewal at similar terms. Total expense from these agreements amounted to $3,479,000 and $2,797,000 in 2019 and 2018, respectively.
- 34 - The following is a schedule by year of future minimum payments for each of the next five years required under these agreements: Year ended December 31, 2020 $ 3,066,000 2021 2,841,000 2022 2,639,000 2023 2,639,000 2024 2,639,000
The Company leases various facilities under operating leases expiring at various dates through February 2024 with some containing provisions that allow renewal at similar terms. Total rental expense in 2019 and 2018 for all operating leases was approximately $1,122,000 and $958,000, respectively.
The following is a schedule by year of future minimum lease payments for each of the next five years under operating leases as of December 31, 2019 that have initial or remaining lease terms in excess of one year: Year ended December 31, 2020 $ 618,000 2021 349,000 2022 163,000 2023 38,000 2024 1,000
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.
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.
Year ended December 31, 2019 2018 Net income available to common shareholders $ 23,191 $ 25,119 Weighted average number of common shares outstanding used in basic EPS calculation 5,826,978 5,824,892 Add assumed exercise of dilutive securities outstanding - stock options 65,437 52,603 Weighted average number of common shares outstanding used in diluted basic EPS calculation 5,892,415 5,877,495 Basic EPS $ 3.98 $ 4.31 Diluted EPS $ 3.94 $ 4.27 - 35 - Note 20 - Regulatory Matters
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 classifications 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, 2019, that the Company meets all the capital adequacy requirements to which it is subject.
The Company's Common Equity Tier 1 capital includes common stock and related paid-in capital, net of treasury stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1.
Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. The Company did not have any additional Tier 1 capital beyond Common Equity Tier 1 at December 31, 2019 or 2018.
Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both Bancshares and Subsidiary Bank includes a permissible portion of the allowance for loan losses.
The Common Equity Tier 1, Tier 1 and Total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, with certain exclusions, allocated by risk weight category, and certain off-balance-sheet items, among other things. The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets, among other things.
As of December 31, 2019, 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 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.
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To Be Well Capitalized For Capital Under Prompt Actual Adeguac~ Pu!Eoses Action Provisions Amount Ratio Amount Ratio Amount Ratio
Lone Star National Bancshares-Texas, Inc. December 31, 2019 Common Equity Tier 1 (to Risk $273,225 19.11% $ 64,344 4.5% $ 92,942 6.5% -Weighted Assets) Total Capital (to Risk-Weighted Assets) $ 291,154 20.36% $114,390 8.0% $ 142,987 10.0% Tier 1 Capital (to Risk-Weighted Assets) $273,225 19.11% $ 85,792 6.0% $114,390 8.0% Tier 1 Capital (to Average Assets) $273,225 12.05% $ 90,707 4.0% $113,384 5.0%
December 31, 2018 Common Equity Tier 1 (to Risk $274,252 19.54% $ 63,156 4.5% $ 98,243 7.0% -Weighted Assets) Total Capital (to Risk-Weighted Assets) $291,854 20.80% $112,277 8.0% $140,347 10.0% Tier 1 Capital (to Risk-Weighted Assets) $274,252 19.54% $ 84,208 6.0% $ 119,295 8.5% Tier 1 Capital (to Average Assets) $274,252 12.73% $ 86,175 4.0% $107,719 5.0%
Lone Star National Bank December 31, 2019 Common Equity Tier 1 (to Risk $268,493 18.79% $ 64,318 4.5% $ 92,903 6.5% -Weighted Assets) Total Capital (to Risk-Weighted Assets) $286,415 20.04% $ 114,343 8.0% $142,928 10.0% Tier 1 Capital (to Risk-Weighted Assets) $268,493 18.79% $ 85,757 6.0% $ 114,343 8.0% Tier 1 Capital (to Average Assets) $268,493 11.85% $ 90,628 4.0% $ 113,285 5.0%
December 31, 20 18 Common Equity Tier 1 (to Risk $256,101 18.31% $ 62,934 4.5% $ 97,897 7.0% -Weighted Assets) Total Capital (to Risk-Weighted Assets) $273,642 19.57% $ 111,882 8.0% $139,852 10.0% Tier 1 Capital (to Risk-Weighted Assets) $ 256,101 18.31% $ 83,912 6.0% $ 118,875 8.5% Tier 1 Capital (to Average Assets) $256,101 11.89% $ 86,175 4.0% $ 107,719 5.0%
Note 21 - Recent Accounting Pronouncements
ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10). "ASU 2016-01 will, among other things, (i) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and will (ii) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. ASU 20 I 6-0 I became effective for the Company on January 1, 2019 and did not have a significant impact on the consolidated financial statements.
ASU 2016-02, "Leases (Topic 842). "ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, "Revenue from Contracts with Customers." ASU 2016-02 will be effective for the Company on January I, 2020 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the potential impact of ASU 2016-02 on the consolidated :financial statements...... ·····-··-- - -.- --- I - --~~~·-·-.•·····-----.•--
ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting." Under ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting." became effective for the Company on January 1, 2018 and did not have a significant impact on the consolidated financial statements.
ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective on January 1, 2021. The Company is currently evaluating the potential impact of ASU 2016-13 on the consolidated financial statements.
ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provides guidance related to certain cash flow issues in order to reduce the current and potential future diversity in practice. ASU 2016-15 became effective for the Company on January 1, 2019 and did not have a significant impact on the consolidated financial statements.
ASU 2016-16, "Income Taxes (Topic 740) - Intra-Entify Transfers of Assets Other Than Inventory. " ASU 2016-16 provides guidance stating that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 became effective for the Company on January 1, 2019 and did not have a significant impact on the consolidated financial statements.
ASU 2016-18, "Statement of Cash Flows (Topic 230) -Restricted Cash." ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 became effective for the Company on January 1, 2019 and did not have a significant impact on the consolidated financial statements.
ASU 2017-05, "Other income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales ofNonfinancial Assets. ASU 2017-05 clarifies the scope of Subtopic 610-20 and adds guidance for partial sales of nonfinancial assets, including partial sales of real estate. Historically, U.S. GAAP contained several different accounting models to evaluate whether the transfer of certain assets qualified for sale treatment.ASU2017-05 reduces the number of potential accounting models that might apply and - 38 - clarifies which model does apply in various circumstances. ASU 2017-05 became effective on January l, 2019 and did not have a significant impact on the consolidated financial statements.
ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities. " ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjus1ment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. ASU 2017-08 became effective for the Company on January 1, 2020 and is not expected to have a significant impact on the consolidated financial statements.
ASU 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting. " ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under ASU 2017-09, an enti1y will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the award's fair value, (ii) the award's vesting conditions and (iii) the award's classification as an equity or liability instrument. ASU 2017-09 became effective for the Company on January 1, 2020 and is not expected to have a significant impact on the consolidated financial statements.
ASU 2017-12, "Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for - Hedging Activities." ASU 2017-12 amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities to better align the entity's financial reporting for hedging relationships with those risk management activities and to reduce the complexi1y of and simplify the application of hedge accounting. ASU 2017-12 became effective for the Company on January 1, 2020 and is not expected to have a significant impact on the consolidated financial statements.
ASU 2018-02, "Income Statement- Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. " Under ASU 2018-02, entities may elect to reclassify certain income tax effects related to the change in the U.S. statutory federal income tax rate under the Tax Cuts and Jobs Act, which was enacted on December 22, 2017, from accumulated other comprehensive income to retained earnings. ASU 2018-02 also requires certain accounting policy disclosures. ASU 2018-02 became effective on January 1, 2019 and did not have a significant impact on the consolidated financial statements.
ASU 2018-13, "Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 became effective on January 1, 2020 and is not expected to have a significant impact on the consolidated financial statements.
ASU 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes." The guidance issued in this update simplifies the accounting for income taxes eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 will be effective on January 1, 2022 and is not expected to have a significant impact on the consolidated financial statements.
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Form FRY-6
Lone Star National Bancshares-Texas, Inc. McAllen, Texas Fiscal Year Ending December 31, 2019
Report Item
1: {a) The Bank Holding Company prepares an annual report for its shareholders and is not registered with the SEC. The annual report will not be prepared this year.
(b) Audited financial statements at year ended December 31, 2019 are not yet ready and will be provided when available.
2a: Organizational Chart
Lone Star National Bancshares-Texas, Inc- McAllen, Texas Incorporated in Texas I
Lone Star National Bank Pharr, Texas Incorporated in Texas
I 100.00% I I
Lone Sta r Insurance Lone Star Investment Services, Inc. Sub-Nevada, Inc. McAlle n, Texas Las Vegas, NV lncorporat ed in Texas Incorporated in Nevada
100.00% 100.00%
2b: Domestic branch verification listing enclosed.
Note: No entity in the organization has an LEI, including Lone Star National Bancshares-Texas, Inc. Form FR Y-6 Lone Star National Bancshares-Texas, Inc. Fiscal Year Ending December 31, 2019
Report Item 3: Shareholders (1)(a)(b)(c) and {2)(a)(b)(c) Current shareholders with ownership, control of holdings of 5% or more Shareholders not listed in (3)(1 )(a) through (3)(1 ){c) that with the power to vote as of fiscal year ending December 31, 2019. had ownership, control of holdings of 5% or more with power to vote during the fiscal year ending December 31, 2013. (1) (a) (1) (b) (1 )(c) (2}(a) (2) (b) (2) (c) Name & Address Country of Citizenship Number and Percentage Name & Address Country of Citizenship Number and Percentage (City, State & Country) or Incorporation of Each Class of (City, State & Country) or Incorporation of Each Class of Voting Securities Voting Securities Alonzo Cantu USA 1,069,248 - 18.02% McAllen, TX, USA Common Stock None
Victor Haddad USA 636,659 - 10.73% McAllen, TX, USA Com man Stock
Cruz Cantu Ill USA 570,200 - 9.61 % Pharr, TX, USA Com man Stock
Elvia Saenz USA 592,132 - 9.97% McAllen, TX, USA Common Stock
S. David Deanda USA 531,382 - 8.95% Mission, TX, USA Common Stock 104,188 -1.76% options on common stock
Juan M. Pena USA 372,223- 6.27% Pharr, TX, USA Common Stock Form FRY-6 Lone Star National Bancshares-Texas, Inc. Fiscal Year Ending December 31, 2019
Report Item 4: Insiders (1), (2), (3)(a)(b)(c) and (4)(a)(b)(c)
(1) (2) (3)(a) (3)(b) (3)(c) (4)(a) (4)(b) (4)(c) Names & Address Principal Title & Position Title & Position Title & Position with Percentage of Voting Percentage of List names of (City, State.Country) Occupation if other with Bank Holding with Subsidiaries Other Businesses Shares in Bank Holding Voting Shares in other companies than with Bank Company (include names (include names of Company Subsidiaries (includes partnerships) Holding Company of subsidiaries) other businesses) (include names if 25% or more of of subsidiaries) voting securities are held (List names of companies and percentage of voting securities held) Alonzo Cantu Construction Director & Director & Chairman See Exhibit #1 18.02% None See Exhibit #1 Pharr, TX/ USA and Land Chairman of of the Board of Development the Board each BHC subsidiary
Victor Haddad Physician Principal Securities N/A See Exhibit #2 10.73% None See Exhibit #2 McAllen, TX/ USA Holder
Cruz Cantu, Ill Investments, Director Director of each See Exhibit #3 9.61% None See Exhibit #3 Pharr, TX / USA construction and BHC subsidiary land development
Oscar R. Gonzalez Certified Director & Director of each See Exhibit #4 3.75% None See Exhibit #4 Pharr, TX / USA Public Vice Chairman of BHC subsidiary Accountant the Board
Abdala Kalifa Retail Apparel Director Director of each See Exhibit #5 2.52% None See Exhibit #5 Pharr, TX/ USA and Commercial BHC subsidiary Development
S. David Deanda Banker Director & Director & President See Exhibit #6 10.71% None See Exhibit #6 Pharr, TX/ USA President for each BHC subsidiary except Lone Star Insurance Services, Inc.
Joe D. Zayas Dentist Director Director of each See Exhibit #7 0.59% None See Exhibit #7 Brownsville, TX/ USA BHC subsidiary Form FRY-6 Lone Star National Bancshares-Texas, Inc. Fiscal Year Ending December 31, 2019
Report Item 4: Insiders (1), (2), (3)(a)(b)(c) and (4)(a)(b)(c)
(1) (2) (3)(a) (3)(b) (3)(c) (4)(a) (4)(b) (4)(c) Names & Address Principal Title & Position Title & Position Title & Position with Percentage of Voting Percentage of List names of (City, State.Country) Occupation if other with Bank Holding with Subsidiaries Other Businesses Shares in Bank Holding Voting Shares in other companies than with Bank Company (include names (include names of Company Subsidiaries (includes partnerships) Holding Company of subsidiaries) other businesses) (include names if 25% or more of of subsidiaries) voting securities are held (List names of companies and percentage of voting securities held) Nolan E. Perez Physician Director Director of each See Exhibit #8 0.24% None See Exhibit #8 Harlingen, TX/ USA BHC subsidiary
Manny M. Vela Attorney Director Director of each See Exhibit #9 0.17% None See Exhibit #9 Pharr, TX/ USA BHC subsidiary
Ruben M. Torres Physician Director Director of each See Exhibit #10 0.12% None See Exhibit #10 Harlingen, TX/ USA BHC subsidiary
David M. Penoli Banker Director EVP & Chief Director, Secretary, Treasurer, See Exhibit #11 0.07% None See Exhibit #11 Pharr, TX / USA Financial Officer EVP & CFO for Lone Star Insurance Services, Inc. Exhibit #1
LONE STAR NATIONAL BANK STATEMENT OF RELATED INTEREST PRINCIPAL SHAREHOLDERS, AND EXECUTIVE OFFICERS
Name of Reporting Person: Alonzo Cantu Position with Bank: Chainnan of the Board Date of Report: January I 0, 2020 Please detail all "Related Interests" below:
Name and Address: Alonzo Cantu Construction, Inc. 5221 N. McColl Road McAllen, TX 78504 Position: President Principal Activity: Construction Percentage Owned: 50%
Name and Address: P1•eference, Inc. 5221 N. McColl Road McAllen, TX 78504 Position: President Principal Activity: Real Estate Development Percentage Owned: 100%
Name and Address: 281 Investments, Ltd. 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Principal Activity: Commercial Real Estate Percentage Owned: 50%
Name and Address: Allysa's Acres, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: Member Principal Activity: Holding Company for Real Estate Percentage Owned: 100%
Name and Address: Arjuna Friends, L.L.C. 2100 M Street, NW Ste 170-316 Washington, DC 20037 Position: Member Principal Activity: Investment Percentage Owned: N/A Name and Address: Art Village on Main, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position; Member Principal Activity: Commercial Rental Property Percentage Owned: 100%
Name and Address: Big Five Ranch, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: Member Principal Activity; Ranching Percentage Owned: 77.06%
Name and Address; Brownsville Doctors Medieal Plnza, Ltd. S221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Principal Activity: Commercial Office Development Percentage Owned: 99%
Name and Address: Cantu Bungalows, L.L.C. 5221 N. McColl Road McAUen, TX 78504 Position: Sole Member Principal Activity: Hotel Management Percentage Owned: 100%
Name and Address: Cantu Consulting, L.L.C. 5221 N. McColl Road McAllen. TX 78504 Position; Member Principal Activity: Management Consulting Percentage Owned: 100%
Name and Address: Cantu Enterprises, L.L.C. 5221 N. McCoH Road McAllen, TX 78504 Position: Member Principal Activity: Management Consulting Percentage Owned; 100% Name and Address: Cantu Investment Management, Int. 5221 N. McColl Road McAllen, TX 78504 Position: President Principal Activity: Commercial Lending Percentage Owned: 100%
Name and Address: Cantu Management, L.L.C, 5221 N. McColl Road McA1len, TX 78504 Position: Member Principal Activity: General Partner for Cantu Ventures. Ltd. Percentage Owned: 100%
Name and Address: Cantu Pena Development, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: Member Principal Activity: Real Estate Developments Percentage Owned: 100%
Name and Address: Cantu Properties, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: Member Principal Activity: Real Estate Development/General Partner Percentage Owned: 100%
Name and Address! Cao.tu Residential Properties, Jnc. 5221 N. McColl Road McAllen, TX 78504 Position: President Principal Activity: Residential Contractor Percentage Owned: 100%
Name and Address: Cantu Ventures, Ltd. 5221 N. McColl Road McAllen. TX 78504 Position: Limited Partner Principal Activity: Real Estate Acquisitions Percentage Owned: 48% Name and Address: Copy Plus, L.L.C. 5221 N. McColl Road McA11en, TX 78504 Position: President Principal Activity: Office Supplies Percentage Owned: 40%
Name and AddreH: Cornerstone RGV Pa•opertyt L.L.C. 5221 N. McColl Road McAIJen, TX 78504 Position: Member Principal Activity: Commercial Rental Property Percentage Owned: 50%
Name and Address: Daucross Investn.1ents, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: President PrincipaJ Activity: Holding Company for Real Estat~ Percentage Owned: 100%
Name and Addi·ess: DHP Enterprises, L.L.C. 5221 N. McColJ Road Mc:Allen. TX 78504 Position: President PrindpaJ Activity: Generaf Partner for Point Dove Holdings, Ltd. Percentage Owned: Yolanda Cantu 50% / Alonzo Cantu 50%
Name ~nd Address: Edinburg Lone Star Plaza, L.L.C. 5221 N. McColl Road McAllen. TX 78504 Position: Member Principal Activity: Commercial Rental Property Percentage Owned~ 100%
Name and Address: GHC Enterprises, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: President Principal Activity: General Partner for Greencross Holdings, Ltd. Percentage Owned: 100% Name and Address: Golden Grape Concessions, L.L.C. 5221 N. McColl Road McAllen~ TX 78504 Position: Member Principal Activity: Food & Beverage Event Services Percentage O\.'\med: 100%
Name and Address: Golden Grape Entertainment, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: Member Principal Al-1ivity: Holding Company for Event Entities Percentage Owned: 100%
Name and Address: Greencross Holdings, Ltd. 5221 N. McColl Road McAJJen, TX 78504 Position: Limited Partner Principal Activity: Commercial Rental Property Percentage Owned: 99%
Name and Address: Harlingen LT ACH Real Estate, Ltd. 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Prindpal Activity: Commercial Office Lease Percentage Owne Name and Address:: Harlingen Medical Center Office Building, Ltd. 5221 N. McCo11 Road McAUen, TX 78504 Position: Limited Partner Principal Activity: Construction Percentage Owned; 49.50% Name and Address: Hidalgo County Property Tex Service~ Ltd. 5221 N. McColl Road McAJlen, TX 78504 Position: Chairman Principal Activity: Property Tax Service Percentage Owned: 80% Name and Address; HMCOB, Inc. 2310 N. Ed Carey Srive, Suite I A Harlingen, TX 78550 Position: Limited Partner Principal Activity: General Partner for Harlingen Medical Ctr Office Bid~ Ltd. Percentage O\vned: 500/o Name and Address: Hospital Medical Facilities, Ltd. 5221 N. McColl Road McA11en, TX 78504 Position: Limited Partner Principa] Activity: Construction Percentage Owned: 99% Name and Address: Jackson Real Property Investments, L.L.C. 5221 N. McColl Road McA11en, TX 78504 Position: Member Principal Activity: Real Estate Percentage Owned: 33.33% Name and Address: La Placlta RGVt L.L.C 5221 N. McColl Road McAllen, TX 78504 Position: Member Principal Activity: Commerci aJ Rental Property Percentage Owned: 100% Name and Address: Las vmas at Tierra Santa, Ltd. 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Principal Activity: Real Estate Developments Percentage Owned: 99% Name and Address: Lone Star FC, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: Member Principal Activity: Soccer Team Percentage Owned: 100% Name and Address: Lone Star FC Staff Payroll, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position; Member Principal Activity: Soccer Team Staff Percentage Owned: 99% Name and Address: Lone Star Litho, Ltd, 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Principal Activity: Medical Equipment Leasing Percentage Owned: 99% Name and Address: Lone Stai· Ticketing, L.L.C, 5221 N. McColl Road McAllen, TX 78504 Position: Member Principal Activity: Ticket Sales Percentage Owned: 100% Name and Address: McAllen Resort Holdings, Ltd. 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Principal Activity: Commercial Rental Property Percentage Owned: 99% Name and Address: Med-Point Investor Group, Ltd. 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Principal Activity: Commercial Rental Property Percentage Owned: N/A Name and Address: Medical Plaza of Weslaco, Ltd. 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Principal Activity: Commercial Real Estate Percentage Owned: 99% Name and Address: MRH Enterprises, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: President Principal Activity: General Partner for McAllen Resort Holdings, Ltd. Percentage Owned: JOO% Name and Address: Pepper's Beverage & Food, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: Member Principal Activity: Restaurant Percentage Owned; 98% Name and Address: Pro Lone Star Asset Management, L,L.C. 5221 N. McColl Road McAllen, TX 78504 Position: Member Ptincipal Activity: Property Management Percentage Owned: 50% Name and Address: Point Dove Holdings, Ltd. 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Ptincipal Activity: Commercial Rental Property Percentage Owned: 99% Name and Address: RGV Pro Sports, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: Member Principal Activity: Sports Merchandise Percentage Owned: 100% Name and Address: RGV Profeislonal, Ltd. 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Principal Activity: Commercial Real Estate Percentage Owned: 49.50% Name and Address: Sesame Holdings, Ltd. 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Principal Activity: Commercial Rental Property Percentage Owned: 99% Name and Address: Sharyland Title, L.L.C. 217W.Cano Edinburg, TX 78539 Position: Member P1incipal Activity: Rental Properties Percentage Owned: 74.50% Name and Address: Slteselect Medical Technologies, Inc, 5221 N. McColl Road McAllen, TX 78504 Position: Partner Principal Activity: Breast Biopsy Needle Sales Percentage Owned: N/A Name and Address: SME Enterprises, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: President Principal Activity: General Partner for South McAllen Holdings, Ltd. Percentage Owned: 100% Name and Address: SMH Enterprises, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: President Principal Activity: General Partner for Sesame Holdings, Ltd. Percentage Owned: 100% Name and Address: South McAllen Holdings, Ltd. 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Principal ActiYity: Commercial Rental Property Percentage Owned: 99% Name and Address: South Texas Citrus Partners, Ltd. 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Principal Activity: Citrus Farming Percentage Owned: N/A Name and Address: South Texas Fields, Ltd. 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Principal Activity: Fanning Percentage Owned: N/A Name and Address: South Villa Hermosa, Ltd. 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Principal Activity: Residential Subdivision Developments Percentage Owned: 99% Name and Address: Title Usa Tax Service, Inc. 5221 N. McColl Road McAllen, TX 78504 Position: Chainnan Principal Activity: Title Insurance Percentage Owned: 81% Name and Address: Toros Stadium, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: Member Principal Activity: Soccer Stadium Percentage Owned: 99.00% Name and Address: Uptown Plaza, Ltd. 5221 N. McColl Road McAllen, TX 78504 Position: Limited Partner Principal Activity: Commercial Rental Property Percentage Owned; 52% Name and Address: Val Land Shary Partnership, Ltd. 217W. Cano Edinburg, TX 78539 Position: Limited Partner Principal Activity: Rental Properties Percentage Owned: 74% Name and Address: Valley Land Management Co, L.L.C. 612 Nolana Ste 570 McAllen, TX 7S504 Position: Owner Principal Activity. Rental Properties Percentage Owned: 100% Name an Name and Address: Villagio Subdivision, L.L.C. 5221 N. McCoJI Road McAllen, TX 78504 Position: Member Principal Activity: Residential Contractor Percentage Owned: 100% Name and Address: Viper Arena, L.L.C. 5221 N. McColl Road McAllen. TX 78504 Position: Member Principal Activity: Property Management Percentage Owned: 100% Name and Address: Viper BBaU SF, L.L.C. 5221 N. McColl Road McAllen. TX 78504 Position: Member Principal Activity: Property Management Percentage Owned: 100% Name and Address: Viper Borrower, L.L.C. 5221 N. McColl Road McAllen, TX 78504 Position: Member Principal Activity: Percentage Owned: 100% Name and Address~ Viper Developer, L.L.C. 5221 N. McColJ Road McAllen, TX 78504 Position: Member Principal Activity; Percentage Owned: 100% Name and Address: Vipers Basketball, L.L.C. 5221 N. McColl Road McAUen, TX 78504 Position: Member Principal Activity: Basketball Team Percentage Owned: 100% Name and AdcDress: VLT North 10th Property, L.L.C. 5221 N. McColl Road McAHen, TX 78504 Position: Member Principal Activity: Commercial Rental Property Percentage Owned: 91.26% Name and Address: Water Tower Village, Ltd. 5221 N. McColJ Road McAllen, TX 78504 Position: Limited Partner Principal Activity; Commercial Rental Property Percentage Owned: 50% \ -~ Signature: ______t}lonzo Cantu Exhibit #2 Lone Star National Bank Statement of Related Interest of Directors, Principal Shareholders and Executive Officers Name or Reporting Person Victor Haddad Date of Report 3/26/20 Position with Bank Shareholder ___ I have NO Related Interest (as defined on page 1) at this time. Below are my Related Interest (as defined on page 1) Name and Address Position Held % Ownership Principal Activity McAllen Associates Partner N/A Management PO BOX 3125 McAllen, TX 78502 South Texas Fields, Ltd Partner N/A Real Estate Holding PO Box 2673 McAllen, TX 78502 Uptown Plaza Ltd Partner N/A Real Estate Holding PO BOX 2673 McAllen, TX 78502 281 Investments Ltd Partner N/A Real Estate Holding 5221 N McColl Road McAllen, TX 78504 Victor Haddad MDPA Owner 100.00% Physician’s Practice 1801 S 5th Suite 120 McAllen, TX 78503 The Victor Haddad Family LP Partner 34.5% Asset Holding Entity 4008 Burns Drive South McAllen, TX 78503 Water Tower Village Ltd Partner N/A Asset Holding Entity PO BOX 2673 McAllen, TX 78504 Haddad Management Inc Member 50.00% Management Entity for LP 4008 Burns Drive South McAllen, TX 78503 South Texas Citrus Partners Ltd Partner N/A Citrus Grove Operations PO Box 2673 McAllen, TX 78502 VH2 LP Partner N/A Private Stock Holding Co 1207 Westway Ave McAllen, TX 78501 VH2 Management LLC Member N/A Management Entity for LP 1207 Westway Ave McAllen, TX 78501 REGULATION O ACKNOWLEDGEMENT Page 2 of 3 I, the below signed Lone Star National Bank Executive Officer, Director or Principal Shareholder, do hereby ce1tify that the above listed infonnation is true and complete as to my "related interests" and "Lone Star National Bancshares" stock loans as of the date signed below. I further acknowledge that the above information may be used both internally for Internal and/or Compliance Auditing purposes and will be made available for regulatory review. I acknowledge my responsibility to keep the Bank informed, on a timely basis, of any new business relationships, changes in relationships or ceasing of relationships which may occur as a "related interest" during the coming year. ·························-··-·····-··········································¾······································0······························ ..... Date 3 '_.2..c cCJ ·····-·-·-··-·-··--·-·--···-······- ···-· ...... ····-···· ·············-·-···-······-·-·-······ Page 3 of 3 Exhibit #3 Lone Star National Bank Statement of Related Interest of Directors, Principal Shareholders and Executive Officers Name or Reporting Penon Cruz Cantu Ill Date of Report 12/31/19 Position with Bank Board of Directors - Member.....;..;..:-C...------ _ I have NO Related Interest (as defined on page 1) at this time. Below ~ !!lY -~e~tedJ!lterest (as defined on~ !l. Name and Address Position Held % Ownenhip------Principal Activity Red Rock Real Estate Development, LTD Member 50% Land Development REGULATION O ACKNOWLEDGEMENT I, the below signed Lone Star National Bank Executive Officer, Director or Principal Shareholder, do hereby certify that the above listed information is true and complete as to my "related interests" and "'Lone Star National Bancshares" stock loans as of the date signed below. I further acknowledge that the above information may be used both internally for Internal and/or Compliance Auditing pUipOses and will be made available for regulatory review. I acknowledge my responsibility to keep the Bank informed, on a timely basis, of any new business relationships, changes in relationships or ceasing of relationships which may occur as a "related interest" during the coming year. Signature Date / / J..2- ( ~ Page 2 of2 Exhibit #4 Lone Star National Bank Statement of Related Interest of Directors, Principal Shareholders and Executive Officers Name or Reporting Person Date of Report Position with Bank _ I have NO Related Interest (as defined on page 1) at this time. Below are my Related Interest ( as defined on page 1) Name and Address Position Held % Ownership Principal Activity tJsc-,,.>-,/l Cow1,i,f,.,,. C,?J.f t,o )'/uO /-1 :,. ~ 0 (;Mies ,111-1.-e /l1 t:'hl ~ .-~ o/4. /9-CC,e;,IJlt> "f/W C, 0111"1.f 1...~e. /Pl e Pl- I,"'"-' C,.6'¼ .z ,c)t/-$ f m,wfs 0/IJ/ff .r /Jlu)p,,.fr,,,~ llt!.. 111 '"" i,,,p '7£J% /J.,,o,I G-;rn-lt::- REGULATION O ACKNOWLEDGEMENT------I, the below signed Lone Star National Bank Executive Officer, Director or Principal Shareholder, do hereby certify that the above listed information is true and complete as to my "related interests" and "Lone Star National Bancshares" stock loans as ofthe date signed below. I further acknowledge that the above information may be used both internally for Internal and/or Compliance Auditing purposes and will be made available for regulatory review. I acknowledge my responsibility to keep the Bank informed, on a timely basis, ofany new business relationships, changes in relationships or ceasing ofrelationships which may occur as a "related interest" during the coming year. Signature tP-v Id, ~ a,,-1'3- Date Page 2 of2 ----·------Exhibit #5 Lone Star National Bank Statement of Related Interest of Directors, Principal Shareholders and Executive Officers ~~:';~·:•;.~~~~~:~-J;:;,.0L+t~~-~-~-;tl,:~£:--.~i .~}': ~ : -l·~·:1;.·;· ·.: :.~~;.21:;.;:.~~~l :&12-·.,!~(J,"?.f~li:.sif-;·r--:. =·~2~~~1; j Name or Reporting Person Abdala Kali fa Date of Re1>ort ! 12/31/2019 • Position with Bank · Board of Directors ! ~~}lfl?-2i:{~;.~:--.~ :;_'.,~2=~t:· ·}[ ~7 ~J: .. _.-- ~-~~::/·-~~-:-7 ;~~??3'5~Z ~-·~~~~~{~.:r~L:?~·.-z:~;,?~~ ,:;d;~~?:~:~•:? ·~: i _ I have NO Related Interest (as defined on page 1) at this time. ! · ! Below are my Related Interest (as defined on page 1) ; . -- --· --- - ··- . . .- ·- - ·- -- .... ------....-- .- -- ...... - .----. - - ·- - ---· _..... --.. - - ·-i Name and ~dd~s ··--···- -- __:_ ~~!ition Hel~ __ _L r~ ~ne~~ip__ . _ -~Principal_Activity _ . ------1 , Trenton View, Ltd ; Limited Partner 99% Real Estate Rental . ...! : Fla~ingo Pl~za, Ltd l Limited Partner f 97% Real Estate Rental .. ,______. - ---- ·-- ·---·--- - ',...... ·--·- -· ...... - --- ·-----··•--···------·· ·. .... -r _,._ ·----··- -- ·· - - --- i Kalifa Investments, Inc. . General Partner . 100% Real Estate Management Kalifa's Western Wear, Inc. l President ' 100% . Retail Western Attire & Real Estate I Rental '-·---··------· --- , Kalifa Enterprises, LLC -·Gen~-ral Part; ~r 83.33% --·· -· - -- . -·· Real EstateR.ental------· ---· .. - l i . 1 ! ' · Real Estate Rental : I Kalifa Rental Properties ; General Partner : 55.56% I • -··------· --·· ··1 I l--- .. - - '- . - ... '-·· ·- --- ···· -- -· -- .. ~ - ·--· r·--··. ---- · -·· ... -- . --·---·----__J' l· I, the below signed Lone Star National Bank Executive Officer, Director or Principal Shareholder, do hereby I ; certify that the above listed information is true and complete as to my "related interests" and "Lone Star National i 1 ! Bancshares" stock loans as of the date signed below. I further acknowledge that the above information may be i used both internally for Internal and/or Compliance Auditing purposes and will be made available for regulatory '. review. \ I acknowledge my responsibility to keep the Bank informed, on a timely basis, of any new business relationships, : changes in relationships or ceasing ofrelationships which may occur as a "related interest" during the coming ' year. I _t..,__ ,__ ... i _,., __:· 1- :- ~-- ~-- ~·::.;,ii.:Ji<:; .. _.::- .-~.-.i-1~ _ -~":~:.i ~~2::,, ,,;.-\.-:.::~;.-:~~£.: r---. ·c;r ;;'--::;~ =~;<>•:~;-:,f~>,- :~·. ··. .;- :::-:.. Abdala Kalifa .. . - --··------· -- ·1 .Sign~;u~ ✓ -- li) ~-- ✓ ~. ·u ·--~ -. Date 0 l/09/2020 - --- · --~ ~ Page 2 of 2 Exhibit #6 Lone Star National Bank Statement of Related Interest of Directors, Principal Shareholders and Executive Officers Name or Reporting Person S. David Deanda, Jr. Date of Report OI /8/2020 Position with Bank President I Director _ I have NO Related Interest (as defined on page 1) at this time. Below are my Related Interest (as defined on page 1)__ Name and Address Position Held % Ownership Principal Activity Rob & Aly Investments LLC President 50% Investments 2408 Dorado Drive Mission, TX 78573 t - -- ______,_~ REGULATION O ACKNOWLEDGEMENT I, the below signed Lone Star National Bank Executive Officer, Director or Principal Shareholder, do hereby certify that the above listed infonnation is true and complete as to my "related interests" and "Lone Star National Bancshares" stock loans as of the date signed below. I further acknowledge that the above information may be used both internally for Internal and/or Compliance Auditing purposes and will be made available for regulatory review. I acknowledge my responsibility to keep the Bank informed, on a timely basis, of any new business relationships, changes in relationships or ceasing of relationships which may occur as a "related interest" during the coming year. Signature Date , Page 2 of 2 Exhibit #7 Lone Star National Bank Statement of Related Interest of Directors, Principal Shareholders and Executive Officers Name or Reporting Person JOE D ZAYAS Date of Report L_!/28/2020- Position with Bank DIRECTOR _ I have NO Related Interest (as defined on page l) at this time. Below are my Related Interest (as defined on page 1) Name and Address Position Held % Ownership Principal Activity I 1JOE D ZAYAS~JlS~ - OWNE.RlD.ENTIST , 100_ ----c-»1.ENTTIITlllY______555 BOCA CHICA BROWNSVILLE, TX 18520 REGULATION O ACKNOWLEDGEMENT I, the below signed Lone Star National Bank Executive Officer, Director or Principal Shareholder, do hereby certify that the above listed infonnation is true and complete as to my "related interests" and "Lone Star National Bancshares" stock loans as ofthe date signed below. I further acknowledge that the above information may be used both internally for lnternal and/or Compliance Auditing purposes and will be made available for regulatory review. I acknowledge my responsibility to keep the Bank informed, on a timely basis, of any new business relationships, changes in relationships or ceasing of relationships which may occur as a "related interest" during the coming year. Signature 9Mt) :17J Date Page 2 of 2 Exhibit #8 Lone Star National Bank Statement of Related Interest of Directors, Principal Shareholders and Executive Officers Name or Reporting Person Ndo.n E. "Pevez Date of Report l 2 {20 /1q Position with Bank J)·,Yec.,-\--oy ✓ I have NO Related Interest (as defined on page I) at this time. Below are my Related Interest (as defined on page I ) Name and Address Position Held % Ownership Principal Activity G,CsT C"EO VM~ cio REGULATION O ACKNOWLEDGEMENT I, the below signed Lone Star National Bank Executive Officer, Director or Principal Shareholder, do hereby certify that the above listed information is true and complete as to my "related interests" and " Lone Star National Bancshares" stock loans as of the date signed below. I further acknowledge that the above information may be used both internally for Internal and/or Compliance Auditing purposes and will be made available for regulatory review. I acknowledge my responsibility to keep the Bank informed. on a timely basis. of any new business relationships, changes in relationships or ceasing of relationships which may occur as a '"related interest" during the coming year. Signature Date 1:2 /'20/ f q Page 2 of 2 Exhibit #9 Lone Star National Bank Statement of Related Interest of Directors, Principal Shareholders and Executive Officers Name or Reporting Person t-\,~14, 14(\ M_ vJ I\., I Date of Report j \~ fJo (( 1 Position with Bank -~NO Related Interest (as defined 011 page l) at this time. Below arc my Related Interest (as defined on page I) Name and Address Position Held % Ownership Principal Activity REGULATION O ACKNOWLEDGEMENT 1, the below signed Lone Star National Bank Executive Officer, Director or Principal Shareholder, do hereby certify that the above listed information is true and complete~ to my "related interests" and "Lone Star National Bancshares" stock loans as ofthe date signed below. I further acknowledge that the above information may be used both internally for Internal and/or Compliance Auditing purposes and will be made available for regulatory review. I acknowledge my responsibility to keep the Bank informed, on a timely basis, of any new business relationships, changes in relationships or ceasing of relationships which may occur as a "related interest" during the coming year. Signature ~ ~~ Date Page 2 of2 Exhibit #10 Lone Star National Bank Statement of Related Interest of Directors, Principal Shareholders and Executive Officers Name or Repom·_n_g_P_e_rs_o_n-+-I__ R_ UB_ EN_ M_ TO_ RRE_ S_ JR. Date of Report 1/28/2020 Position with Bank I BOARD OF DIRECTORS _ I have NO Related Interest ( as defined on page 1) at this time. Below are my Related Interest (as defined OE._page I) Name and Address Position Held % Ownership Principal Activity SOUTH TEXAS MEDICAL VP 50% LEASING OF MEDICAL OFFICE SPACE ~--- REGULATION O ACKNOWLEDGEMENT 11, the below signed Lone Star National Bank Executive Officer, Director or Principal Shareholder, do hereby certify that the above listed information is true and complete as to my "related interests" and "Lone Star National Bancshares" stock loans as of the date signed below. I further acknowledge that the above information may be used both internally for Internal and/or Compliance Auditing purposes and will be made available for regulatory review. I acknowledge my responsibility to keep the Bank informed, on a timely basis, of any new business relationships, changes in relationships or ceasing of relationships which may occur as a "related interest" during the coming year. Signature Date Page 2 of 2 Exhibit #11 Lone Star National Bank Statement of Related Interest of Directors, Principal Shareholders and Executive Officers Name or Reportine Person David Penoli Date or Report Position with Bank EVP CFO, Director _ I have NO Related Interest (as defined on page 1) at this time. Below are my Related Interest (as defined on page I) Name and Address Position Held % Ownership Principal Activity D. M. Penoli, L.LC. Owner 100% CPA Firm REGULATION O ACKNOWLEDGEMENT I, the below signed Lone Star National Bank Executive Officer, Director or Principal Shareholder, do hereby certify that the above listed information is true and complete as to my "related interests" and "Lone Star National Bancshares" stock loans as of the date signed below. I further acknowledge that the above infonnation may be used both internally for lntemal and/or Compliance Auditing purposes and will be made available regulatory review. for I acknowledge my responsibility to keep the Bank infonned, on a timely basis, of any new business relationships, changes in relationships or ceasing of relationships which may occur as a "related interest" during the coming year. Sianature Date Page 2 of2 Results: A list of branches for your holding company: LONE STAR NATIONAL BANCSHARES‐‐TEXAS, INC. (2325350) of MCALLEN, TX The data are as of 12/31/2019. Data reflects information that was received and processed through 03/05/2020. Reconciliation and Verification Steps 1. In the Data Action column of each branch row, enter one or more of the actions specified below 2. If required, enter the date in the Effective Date column Actions OK: If the branch information is correct, enter 'OK' in the Data Action column. Change: If the branch information is incorrect or incomplete, revise the data, enter 'Change' in the Data Action column and the date when this information first became valid in the Effective Date column. Close: If a branch listed was sold or closed, enter 'Close' in the Data Action column and the sale or closure date in the Effective Date column. Delete: If a branch listed was never owned by this depository institution, enter 'Delete' in the Data Action column. Add: If a reportable branch is missing, insert a row, add the branch data, and enter 'Add' in the Data Action column and the opening or acquisition date in the Effective Date column. If printing this list, you may need to adjust your page setup in MS Excel. Try using landscape orientation, page scaling, and/or legal sized paper Submission Procedure When you are finished, send a saved copy to your FRB contact. See the detailed instructions on this site for more information If you are e‐mailing this to your FRB contact, put your institution name, city and state in the subject line of the e‐mail Note: To satisfy the FR Y‐10 reporting requirements, you must also submit FR Y‐10 Domestic Branch Schedules for each branch with aData Action of Change, Close, Delete, or Add. The FR Y‐10 report may be submitted in a hardcopy format or via the FR Y‐10 Online application ‐ https://y10online.federalreserve.gov * FDIC UNINUM, Office Number, and ID_RSSD columns are for reference only. Verification of these values is not required. Data Action Effective Date Branch Service Type Branch ID_RSSD* Popular Name Street Address City State Zip Code County Country FDIC UNINUM* Office Number* Head Office Head Office ID_RSSD* Comments OK Full Service (Head Office) 842460 LONE STAR NATIONAL BANK 206 WEST FERGUSON PHARR TX 78577 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 5230781 ALTON BRANCH 605 S. ALTON BLVD. ALTON TX 78573 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 3450325 BROWNSVILLE BOCA CHICA TOWER BRANCH 2100 BOCA CHICA BLVD BROWNSVILLE TX 78521 CAMERON UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 3506053 BROWNSVILLE BRANCH 3300 NORTH EXPRESSWAY 83 BROWNSVILLE TX 78521 CAMERON UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 5361779 PASEO BANKING CENTER 101 AMERICA DRIVE BROWNSVILLE TX 78520 CAMERON UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 3506204 EDINBURG BRANCH 117 SOUTH 10TH EDINBURG TX 78539 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 5228023 LONE STAR PLAZA 1505 LONE STAR WAY EDINBURG TX 78539 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 3506231 HARLINGEN BRANCH 1901 NORTH ED CAREY DRIVE HARLINGEN TX 78550 CAMERON UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 3252622 HIDALGO BRANCH 633 SOUTH INTERNATIONAL BLVD HIDALGO TX 78557‐2933 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 4054832 CORPORATE OFFICE BRANCH 520 EAST NOLANA AVENUE MCALLEN TX 78504 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 3922699 DHR MEDICAL BRANCH 5537 NORTH MCCOLL ROAD MCALLEN TX 78504 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 4351595 LA PLACITA BRANCH 2109 SOUTH 10TH STREET MCALLEN TX 78503 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Limited Service 4054823 MAIN STREET BRANCH 800 NORTH MAIN STREET, SUITE 110B MCALLEN TX 78501 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 3506240 MED‐POINT BRANCH 1300 EAST RIDGE ROAD MCALLEN TX 78503 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 3794690 NOLANA BRANCH 600 EAST NOLANA AVENUE MCALLEN TX 78504 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 2449911 NORTH MCALLEN BRANCH 5515 NORTH 10TH STREET MCALLEN TX 78504 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 2246718 SOUTH MCALLEN BRANCH 200 LINDBERG AVENUE MCALLEN TX 78501 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 5306275 WARE ROAD BANKING CENTER 3605 BUDDY OWENS MCALLEN TX 78504 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 2994774 MISSION BRANCH 2003 EAST GRIFFIN PARKWAY MISSION TX 78572 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 3365607 MISSION MEDICAL BRANCH 1100 SOUTH BRYAN ROAD MISSION TX 78572 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 3295311 PALMVIEW BRANCH 720 EAST VETERANS BOULEVARD PALMVIEW TX 78572‐7068 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Limited Service 3450343 PORT ISABEL MOTOR BANK 202 EAST QUEEN ISABELLA BLVD PORT ISABEL TX 78578 CAMERON UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 2994783 RIO GRANDE CITY BRANCH 2300 EAST HIGHWAY 83 RIO GRANDE CITY TX 78582 STARR UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 4236188 RIO GRANDE CITY WEST BRANCH 201 NORTH TEXAS STREET RIO GRANDE CITY TX 78582 STARR UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 3336689 ROMA BRANCH 305 EAST GRANT ROMA TX 78584 STARR UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 4503741 HUEBNER BANKING CENTER 15236 HUEBNER ROAD SAN ANTONIO TX 78231 BEXAR UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 5223710 HUNTINGTON BRANCH 3424 PAESANOS PARKWAY, SUITE 102 SAN ANTONIO TX 78231 BEXAR UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 4195221 SAN ANTONIO MEDICAL BRANCH 7954 FREDERICKSBURG ROAD SAN ANTONIO TX 78229 BEXAR UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 4540045 STONE OAK BANKING CENTER 381 NORTH LOOP 1604 W SAN ANTONIO TX 78232 BEXAR UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 4366870 ZARZAMORA BRANCH 6986 SOUTH ZARZAMOR STREET SAN ANTONIO TX 78224 BEXAR UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 3450334 SOUTH PADRE ISLAND BRANCH 601 PADRE BLVD SOUTH PADRE ISLAND TX 78597 CAMERON UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 3302527 WESLACO BRANCH 214 SOUTH TEXAS BLVD WESLACO TX 78596 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460 OK Full Service 4351607 WESLACO NORTH BRANCH 620 WEST EXPRESSWAY 83 WESLACO TX 78596 HIDALGO UNITED STATES Not Required Not Required LONE STAR NATIONAL BANK 842460