Our Mission Statement Lone Star National Bank will be the respected leader in financial services through flawless execution of quality sales, service, and support, and achieving extraordinary customer loyalty with timely delivery of value-added services to our stakeholders: Customers: Deliver value-added personal financial services Employees: Create an enthusiastic team by offering them rewarding career opportunities Community: Serve with pride and integrity, and help our communities grow, including low to moderate income neighborhoods and small businesses Shareholders: Remain a high performance bank with a high rate of return for shareholders
Expansion of Our Corporate Office 520 E. Nolana Avenue McAllen, TX
Share Our Vision of the Rio Grande Valley
Letter to Shareholders, Customers & Friends . . . . . . . . . . . . . . . . . . . . . . 4 Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Management’s Discussion and Analysis of Financial Conditions and Results of Operations . . . . . . . . . . . . . . . . . . . . 8 Management’s Report on Responsibility for Financial Reporting . . . . . . 12 Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Bank Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Banking Centers, Mortgage & ATM Locations . . . . . . . . . . . . . . . . . . . . 48 Our History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
We are ‘Bringing the Bank to You’ through our bankers, our branches, the Internet, LSNB Mobile and Office Banker . TM
TM
A. Jabier Rodriguez Chief Executive Officer
Letter to Our Shareholders, Customers & Friends Dear Shareholders, Customers and Friends, As we review 2008, it was a very difficult year for banking. We were not immune from a downturn of this magnitude, resulting in a decrease in our net interest margin, and an increase to the allowance for loan losses, which affected net income. We continued to grow and expand our presence in the Rio Grande Valley and grew over ONE HUNDRED MILLION DOLLARS ($100,000,000.00) in loans and deposits to new and existing customers, remained profitable and continued to increase our equity capital base through retained earnings. The following graph reflects the growth of Shareholder Equity since 2005.
Book Value Per Share
Shareholders’ Equity (Dollars in Millions) $26 $23
$106
$19 $80
$15
2005
$145
$126
2006
2007
2008
2005
2006
2007
2008
Despite the worst economy in our nation’s history since the Great Depression, our Shareholder Equity grew 14.61% from $126.3 million to $144.8 million for the year and book value, per share, grew 14.39% from $23.05 per share to $26.37 per share, far exceeding the performance of publicly traded banks. During the same period, the percentage growth in Assets, Loans, and Deposits remained at double-digit figures as expressed below:
Category Assets Loans Deposits
Percentage Growth 12.63% 10.77% 14.19%
Net Income for the year was $13.3 million compared to $18.5 million for the prior year, due primarily to a decrease in Net Interest Income of $3.3 million and an increase in the provision for loans of $4.6 million. Interest rates fell over five percent (5.00%), compressing interest income and the economic downturn affected residential construction, development, and retail sector loans. Reserves were increased, due to the external factors, resulting in an increase in the allowance for loans from $16.0 million to $18.2 million. In an economic downturn, more reserves are required even on sound performing loans. The national recession, which started in December of 2007, has persisted through 2008 making it one of the worst in our nation’s history. The nation’s nine (9) largest banks have received over $150 billion in government and Federal Deposit Insurance
Bringing the 4 2008 Annual Report Lone Star National Bank
Stock Price Per Share $50.00 $45.00
Corporation assistance. The nation’s largest investment banks are now commercial banks, including Goldman Sachs, Merrill Lynch and Morgan Stanley. Over twenty-four (24) commercial banks have failed since the recession started. Needless to say, the money center banks were impacted by this recession more than the local area banks. We accomplished our mission to become the “The Valley’s Bank,” and we have expanded our mission to become the “Bank for South Texas” by “Bringing the Bank to You” through our bankers, our branches, the Internet, “LSNB MobileTM” (mobile banking) and “Office BankerTM” (our remote deposit product) which extends banking hours until 9:00 p.m. to make banking convenient from the comfort of your office. We are optimistic about the future and continue to lend in our communities to individuals and companies who have demonstrated their ability to survive during a recession and feel good about the fact that this recession has made our team much better bankers. In these challenging times, our directors, officers and employees have provided a great source of strength to our bank. In coping with difficult problems, all have demonstrated strong talent and desire to provide leadership, direction and the hard work necessary to help us succeed in the future.
$40.00
$36.00 $30.00
2004
2005
2006
2007
2008
Total Assets
(Dollars in Thousands) $1,776
$1,716 $1,577
$1,407 $1,089
We value our relationship, appreciate your loyalty, and look forward to continuing to serve you and your family. Yours very truly,
2004
A. Jabier Rodriguez Chief Executive Officer
2005
2006
Net Income
2007
2008
$18,489 $15,460 $13,291
Carta a nuestros Accionistas, Clientes y Amigos
$10,904
$10,081
2004
2005
2006
2007
2008
Per Share Data: Net Income-Diluted
Estimados Accionistas, Clientes y Amigos: Al hacer un recuento del año 2008, este fue un año muy difícil para el sector bancario. Nosotros no fuimos inmunes a este deterioro de tal magnitud en la economía. Lo cual resultó en una disminución de nuestro margen de interés neto y un aumento de la estimación preventiva para riesgos crediticios, lo cual afectó el resultado neto. Continuamos con nuestro crecimiento y expansión en el valle del Río Grande y acumulamos mas de CIEN MILLONES DE DOLARES ($100,000,000.00) en préstamos y depósitos para clientes nuevos y existentes, nos mantuvimos rentables y seguimos aumentando nuestra base de capital neto a través de los ingresos retenidos.
$3.23 $2.81 $2.14
$2.33 $1.90
La gráfica a continuación muestra el crecimiento de las participaciones de los accionistas desde el 2005.
Valor Contable por Acción
Participaciones de los accionistas
$26
$145
(En Millones)
$126
$23
$106
$19
2004
2006
2007
2008
Return on Average Stockholders’ Equity 20.06%
$80
$15
2005
18.87% 16.30%
14.61%
9.82%
2005
2006
2007
2008
2005
2006
2007
2008
A pesar de la peor economía en la historia de nuestra nación desde la Gran Depresión, las participaciones de nuestros accionistas crecieron en un 14.61%, de $126.3 millones hasta $144.8 millones en el año y el valor contable por acción creció de un 14.39%, de
2004
2005
2006
2007
2008
5 Year Compounded Growth Rate 23.05% 18.50% 14.13% Deposits
Loans
Shareholders’ Equity
Assets
Bank to You.
16.37%
2008 Annual Report Lone Star National Bank 5
$23.05 por acción a $26.37 por acción. Sobrepasando ampliamente al rendimiento de los bancos cotizados en la bolsa. Durante este mismo periodo, el porcentaje de crecimiento en activos, préstamos y depósitos se mantiene en cifras de dos dígitos tal como se muestra a continuación.
Categoría Activos Préstamos Depósitos
Porcentaje de crecimiento 12.63% 10.77% 14.19%
El resultado neto para el año fue de $13.3 millones comparado con $18.5 del año anterior debido primordialmente a la disminución de los ingresos netos por intereses de $3.3 millones y un aumento de la estimación preventiva para riesgos crediticios de $4.6 millones. Las tasas de interés disminuyeron en más de un cinco por ciento (5%) restringiendo el ingreso por intereses y el deterioro de la economía afectando a los prestamos para la construcción residencial, para el desarrollo y para el sector del menudeo. Se aumentaron las reservas debido a los factores externos resultando en un aumento en las asignaciones para préstamos de $16.0 millones a $18.2 millones. En una situación de deterioro económico, es necesario contar con mas reservas aún para los prestamos de rendimiento estable. La recesión económica nacional, tuvo su inicio en diciembre del 2007 y ha persistido a lo largo del 2008 haciéndola una de las peores en la historia de nuestra nación. Los nueve (9) bancos mas importantes han recibido mas de $150 mil millones en asistencia gubernamental y por parte de la corporación federal de seguros para los depósitos. Los bancos de inversiones mas grandes de la nación ahora son bancos comerciales, incluyendo Goldman Sachs, Merrill Lynch y Morgan Stanley. Mas de veinticuatro (24) bancos comerciales han ido a la quiebra desde el inicio de la depresión económica. No es necesario decir que los bancos mas grandes han sido afectados por esta depresión económica mas que los bancos locales. Hemos logrado nuestra misión al convertirnos en “El Banco del Valle” y asimismo ampliandola hasta llegar a ser “El Banco Del Sur De Texas”. Con el hema de “Le Llevamos El Banco Hasta Donde Usted Se Encuentre” nuestros banqueros, nuestras sucursales, Internet, “LSNB MobileTM” (Banca telefónica) y “Office BankerTM” (nuestro servicio de depósitos vía electronica) lo cual extiende las horas de banca hasta las 9:00 p.m. para hacer sus transacciones bancarias mas accesibles desde la comodidad de su oficina. Nos sentimos optimistas respecto al futuro y seguimos haciendo prestamos en nuestras comunidades a las personas y empresas que hayan demostrado su capacidad de subsistencia durante una recesión económica y nos sentimos satisfechos con el hecho de que esta crisis económica ha hecho a nuestro equipo ser los mejores banqueros. En estos tiempos difíciles, nuestros directores, funcionarios y empleados han sido una gran fuente de fuerza para nuestro banco. Al luchar con problemas difíciles, todos han demostrado un fuerte talento y deseo de proporcionar liderazgo, dirección y el empeño necesarios para un futuro exitoso. Valorando nuestra relación, agradeciendo su lealtad y esperando seguir sirviéndole a usted y a su familia. Su seguro servidor
A. Jabier Rodriguez Director General
6 2008 Annual Report Lone Star National Bank
Financial Highlights (Dollars in Thousands, Except Per Share Data) For the Year
2008
2007
%Change
$13,291 0.80% 9.82% 3.62% 57.58%
$18,489 1.15% 16.30% 3.96% 53.08%
-28.11% -30.38% -39.77% -8.60% 8.48%
$2.42 $2.33 $26.37
$3.38 $3.23 $23.05
-28.24% -27.94%
5,487 5,698 5,491
5,477 5,725 5,481
0.18% -0.47% 0.19%
14.21% 15.46% 9.81% 8.15%
14.15% 15.40% 10.02% 8.01%
0.42% 0.39% -2.10% 1.76%
$1,776,071 1,160,879 18,230 467,822 1,432,232 144,781
$1,576,948 1,047,998 16,032 387,779 1,254,214 126,322
12.63% 10.77% 13.71% 20.64% 14.19% 14.61%
Net income Return on average assets Return on average shareholders’ equity Net interest margin Efficiency ratio Per share data: Net income - basic Net income - diluted Dividends declared Book value at end of period Weighted average shares outstanding (in thousands) - Basic - Diluted Shares outstanding at end of period (in thousands)
14.39%
Capital Ratios Tier 1 risk-based capital ratio Total risk-based capital ratio Leverage capital ratio Shareholders' equity to total assets Balance Sheet Data Total assets Loans Allowance for loan losses Investment securities Deposits Shareholders’ equity
Return on Average Assets 1.12%
1.06%
Efficiency Ratio 1.15%
0.85%
52.41%
Per Share Data Book Value
53.01% 49.29% 51.81%
57.58%
$26.37 $23.05
0.80%
$19.34 $13.06
2004
2005
2006
2007
2008
2004
2005
2006
2007
2008
2004
$15.41
2005
2006
2007
2008
2008 Annual Report Lone Star National Bank 7
Management’s Discussion and Analysis of Financial Conditions and Results of Operations The following discussion addresses information pertaining to the financial condition and results of operation of Lone Star National Bancshares-Texas, Inc. and subsidiaries (the “Company”) that may not be otherwise apparent from a review of the audited consolidated financial statements and related footnotes. It should be read in conjunction with those statements, as well as other information presented throughout the report. In addition to historical information, this discussion and other sections contained in this Annual Report include certain forward-looking statements regarding events and trends which may affect the Company’s future results. Such statements are subject to risk and uncertainties that could cause the Company’s actual results to differ materially. Such factors include, but are not limited to, those described in this discussion and analysis. The Company is a privately held bank holding company headquartered in Pharr, Texas, offering a broad array of financial services through its wholly owned banking subsidiary, Lone Star National Bank (the “Bank”). The Company provides full service banking to individuals, businesses, and municipalities in our market area, the Rio Grande Valley. The Rio Grande Valley is composed of the following Texas counties: Hidalgo, Cameron, Starr and Willacy (the “Rio Grande Valley”). The Company’s strategy is to become the largest independent bank of south Texas with talented bankers who offer a higher level of value-added customer service through personal banking relationships, and delivering technologically advanced financial services and solutions. As of December 31, 2008 the Company had total assets of $1.8 billion, loans of $1.2 billion, deposits of $1.4 billion and shareholders’ equity of $144.8 million. During the fourth quarter of 2008, financial institutions across the United States of America were given an opportunity to apply for additional capital under the U. S. Treasury Department’s Troubled Assets Relief Program (TARP). The Company’s Board of Directors decided not to participate in the Treasury Department’s Capital Purchase Program (CPP), which is part of the broader TARP initiative. Management of the Company analyzed the strengths of its own balance sheet and determined that its current capital position and sources of liquidity allow it the flexibility to make acquisitions, extend credit and execute current growth strategies. The CPP did not represent an advantage for the Company. The Company’s primary goal is to provide a higher quality service for its customers in its delineated community by providing personal service, relationship banking and innovative technology solutions. In order to broaden the customer base, primarily through expanding the Company’s network
8 2008 Annual Report Lone Star National Bank
of full-service banking offices, the Company completed an additional full-service branch in McAllen to support our growth. The Company’s profitability is dependent on managing interest rate spreads, other operating income and expenses, and credit risk. Net interest income is the largest component of revenue for the Company. The Company manages interest rate risks through the funds management policy of the Company by offering deposit and / or loan structures that tend to counter the natural rate risk profile of the Company. The Company addresses loan and deposit pricing, the asset and liability mix and interest rate sensitivity on a periodic basis. Although interest rates declined during 2008, the Company generated strong earnings by managing interest rate spreads in the decreasing rate environment. The Company evaluates its management of operating expenses through the efficiency ratio, which is approximately 57.6% for 2008. The Company manages its credit risk by establishing underwriting guidelines, which address the characteristics of borrowers, industries, geographic locations and risk products. The credit process is controlled by continuous review and credit analysis.
Analysis of Financial Condition Overview: The U. S. economy entered into a recession in December 2007. Year 2008 has been a difficult year with the U.S. economy continuing its decline in corporate earnings reports, climbing unemployment and problems in the housing market. The Rio Grande Valley economy has been affected by the current recession as reflected by a decline in building permits for 2008 compared to 2007. A few bright spots in the Rio Grande Valley economy are net growth in the labor market and net growth in the bank deposits for 2008 compared to 2007 which is reflective of and attributable to the vitality of its economy. The economy of the Rio Grande Valley is based principally on retailing (including trade with Mexico), government, agriculture, tourism, manufacturing, health care and education. Total assets of $1.8 billion at December 31, 2008 increased $199.1 million or 12.6% compared to $1.6 billion at December 31, 2007. Total deposits of $1.4 billion at December 31, 2008 increased $178.0 million or 14.2% compared to $1.3 billion at December 31, 2007. The increase in deposits which resulted in an increase in assets was partially attributable to brokered deposits of $72.0 million at December 31, 2008 reflecting a $61.7 million net increase when compared to $10.3 million at December 31, 2007. The Company increased brokered deposits to help fund asset growth.
Investment Securities: Total investment securities of $467.8 million at December 31, 2008 increased $80.0 million or 20.6% compared to $387.8 million at December 31, 2007. The increase in investment securities during 2008, primarily U. S. Government Agency securities, was by design to increase liquidity, improve asset quality and lessen market value risk of the bond portfolio. The fixed-rate collateralized mortgage obligations and mortgage backed securities totaling $215.0 million at December 31, 2008 reflects a net decrease of $108.6 million when compared to $323.6 million at December 31, 2007. Loans: Loans of $1.2 billion at December 31, 2008 increased $112.9 million or 10.8% compared to $1.0 billion at December 31, 2007. At December 31, 2008 the loan portfolio consisted primarily of $305.1 million of commercial loans, $803.6 million of real estate loans, $53.2 million of consumer and other loans. These loans are primarily originated within our market area of the Rio Grande Valley and are generally secured by residential or commercial real estate or business or personal property. The Company manages its credit risk by establishing and implementing strategies and guidelines appropriate to the characteristics of borrowers, industries, geographic locations and products. Diversification of risk within each of these areas is a primary objective. Policies and procedures are developed to ensure that loan commitments conform to current strategies and guidelines. Management continues to refine the Company’s credit policies and procedures to address risks in the current and prospective environment and to reflect management’s current strategic focus. The credit process is controlled with continuous credit review and analysis as well as review by internal and external auditors and regulatory authorities. The Company’s loans are widely diversified by borrower and industry group. The Company has lending policies in place so that lending of all types is approached, to the extent possible, including low-to-moderate income neighborhoods and small business, on a basis consistent with safe and sound standards. Stress Testing is utilized to take into consideration the potentially adverse economic conditions under which liquidation of the loan could occur. Collateral accepted against the commercial loan portfolio is primarily real estate in addition to accounts receivable and inventory, marketable securities and equipment. Autos, deeds of trust, life insurance and marketable securities are accepted as collateral for the installment loan portfolio. The Company’s policy on maturity extensions and rollovers is based on management’s assessment of
individual loans. Approvals for the extension or renewal of loans without reduction of principal for more than one twelve-month period are generally avoided, unless the loans are fully secured and properly margined by cash or marketable securities, or are revolving lines subject to annual analysis and renewal. Nonperforming Assets: The Bank has several procedures in place to assist in maintaining the overall quality of its loan portfolio. The Bank has established underwriting guidelines to be followed by its officers and monitors its delinquency levels for any negative or adverse trends, particularly with respect to credits which have total exposures of $10,000 or more. Nonperforming assets consist of nonaccrual loans, loans for which the interest rate has been renegotiated below originally contracted rates and real estate or other assets that have been acquired in partial or full satisfaction of loan obligations. At December 31, 2008 nonperforming assets totaled $48.4 million or 4.0% of loans plus repossessed assets. Management believes that it is unlikely that any material loss will be incurred on disposition of the collateral even though the volume of loan losses has increased, while the allowance for loan losses has continually been enhanced to 1.57% of total loans. Management regularly reviews and monitors the loan portfolio to identify borrowers experiencing financial difficulties. Management believes that at December 31, 2008 all such loans had been identified and included in the nonaccrual, restructured or 90 days past due loan totals. Management continues to emphasize maintaining a low level of nonperforming assets and returning nonperforming assets to an earning status. Allowance for Loan Losses: The allowance for loan losses at December 31, 2008 of $18.2 million increased $2.2 million or 13.7% compared to $16.0 million at December 31, 2007. The allowance for loan losses at December 31, 2008 was 1.57% of loans outstanding, net of unearned discount. Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain an adequate allowance. In assessing the appropriateness of the allowance, management reviews the size, quality and risks of loans in the portfolio and considers factors such as specific known risks, past experience, the status and amount of nonperforming assets and economic conditions. The allowance for loan losses is comprised of three elements which include: 1) allowances established on specific loans, 2) allowances based on loss experience and trends in pools of/or loans with similar characteristics and 3) unallocated allowances based on general economic conditions and other internal and external risk factors in our market. Loans identified as losses are charged off. In addition, the loan review committee of the Bank reviews the assessments of management in
determining the adequacy of the Bank’s allowance for loan losses. Based on total allocations, the provision is recorded to maintain the allowance at a level deemed appropriate by management. While management uses available information to recognize losses on loans, there can be no assurance that future additions to the allowance will not be necessary. Future adjustments could be necessary to the allowance for loan losses if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. The downturn in the economy and employment rates has resulted in increased levels of nonperforming assets and charge-offs, increased loan loss provisions and reduction to income. Additionally, as an internal part of the examination process, bank regulatory agencies periodically review our allowance for loan losses. The banking agencies could require the recognition of additions to our loan loss allowance based on their judgment of information available to them at the time of their examination.
year-end assets was 8.2% in 2008 and 8.0% in 2007.
Premises and Equipment: Premises and equipment of $43.7 million at December 31, 2008 increased $1.6 million or 3.7% compared to $42.1 million at December 31, 2007. The net increase in premises and equipment for year ended December 31, 2008 is primarily attributable to the addition of a new branch location in McAllen, Texas.
Analysis of Results of Operations
Deposits: Deposits at December 31, 2008 of $1.4 billion increased $178.0 million or 14.2% compared to $1.3 billion at December 31, 2007. At December 31, 2008, noninterest bearing deposits were 7.7% of total deposits and time deposits over $100,000 were 51.4% of total deposits. Deposits are the Bank’s primary source of funds. The Bank offers a variety of products designed to attract and retain deposit customers. The Bank offers products consisting of checking accounts, regular savings deposits, NOW accounts, money market accounts, select certificates of deposit savings, an interest bearing club account, and certificates of deposits. Deposits are gathered primarily from individuals, partnerships and corporations in our market areas. In addition, we obtain deposits from state and local entities. The Bank’s policy also permits the acceptance of brokered deposits. The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. The Bank’s management will continue to manage interest expense through deposit pricing. The Bank’s management believes that additional funds can be attracted and deposit growth can be accelerated through deposit pricing if the Bank experiences increased loan demand or other liquidity needs. Capital Resources: Shareholders’ equity of $144.8 million at December 31, 2008 increased $18.5 million or 14.6% compared to $126.3 million at December 31, 2007. The increase was primarily attributable to earnings. Shareholders’ equity as a percentage of total
Bank holding companies are required to maintain capital ratios in accordance with guidelines adopted by the Federal Reserve Board. The guidelines are commonly known as Risk-Based Capital Guidelines. The minimum Total Risk-Based Capital, Tier 1 Risk-Based Capital, and Tier 1 Leverage Capital ratios are 8.0%, 4.0% and 4%, respectively. At December 31, 2008, the Company’s Total Risk-Based Capital, Tier 1 Risk-Based Capital, and Tier 1 Leverage Capital ratios were 15.46%, 14.21% and 9.81%, respectively. At December 31, 2008, the Company and the Bank met the criteria for classification as a “well-capitalized” institution under the prompt corrective action rules promulgated under the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations does not constitute a recommendation or endorsement of the Company or the Bank by Federal bank regulators.
Earnings Summary: Net income for the year ended December 31, 2008, was $13.3 million or $2.33 per fully diluted share, reflecting a decrease of $5.2 million or $0.90 per fully diluted share, compared to the net income of $18.5 million or $3.23 per fully diluted share for the year ended December 31, 2007. Earnings performance for the year ended December 31, 2008 compared to year ended December 31, 2007 reflected a decrease in net interest income and an increase in noninterest income, partially offset by increases in provision for loan losses, noninterest expense and Federal and state income taxes. A more detailed description of the results of operations is included in the material that follows. Net Interest Income: Net interest income represents the greatest source of income for the Company. Net interest income is the difference between interest earned on assets and interest expense incurred for the funds supporting those assets. The largest category of earning assets consists of loans. The second largest category of earning assets is investments, followed by Federal funds sold. Earning assets are financed by consumer and commercial deposits and short-term borrowings. In addition to these interest-bearing funds, assets also are supported by interest-free funds, primarily demand deposits and shareholders’ equity. Variations in the volume and mix of assets and liabilities, and their relative sensitivity to interest rate movements, determine changes in net interest income. Net interest income of $56.6 million for the year ended December 31, 2008, reflected a decrease of $3.3 million or 5.5% compared to year ended December 31, 2007 of $59.9 million. The decrease in net interest income was primarily attributable to a declining interest rate environment whereby the Company’s interest earning assets repriced to a lower yield faster than the Company’s interest bearing
2008 Annual Report Lone Star National Bank 9
deposits repriced to a lower yield. The net yield on total interest-earning assets, also referred to as net interest margin, represents net interest income divided by average interest-earning assets. Since a significant portion of the Company’s funding is derived from interest-free sources, primarily demand deposits and shareholders’ equity, the effective rate paid for all funds is lower than the rate paid on interest-bearing liabilities alone. The net interest margin of 3.62% for the year ended December 31, 2008 decreased 34 basis points compared to 3.96% for the year ended December 31, 2007. The decrease in the net interest margin for the year ended December 31, 2008 reflects the change in earnings mix due to a declining interest rate environment and management’s emphasis on creating additional liquidity in the bond portfolio which resulted in a lower yielding bond portfolio for 2008. The Company continued to experience intense market competitiveness for both loans and deposits during 2008. The yield on interest-earning assets of 6.70% for the year ended December 31, 2008 decreased 119 basis points compared to 7.89% for the year ended December 31, 2007. The yield on interest-bearing liabilities of 3.30% for the year ended December 31, 2008 decreased 94 basis points compared to 4.24% for the year ended December 31, 2007. Provision for Loan Losses: The amount of provision for loan losses is based on periodic (not less than quarterly) evaluations of the loan portfolio, especially nonperforming and other potential problem loans. During these evaluations, management considers various factors. For additional information concerning the factors in these evaluations, see the “Allowance for Loan Losses” section of this Report. The provision for loan losses are charged to earnings to bring the allowance for loan losses to a level deemed appropriate by management based on such factors as historical experience, the volume and type of lending conducted by the Company, the amount of nonperforming assets, regulatory policies, generally accepted accounting principles, general economic conditions, particularly as they relate to the Company’s lending area, and other factors related to the collectibility of the Company’s loan portfolio. The provision for loan losses for the year ended December 31, 2008 of $10.9 million compares unfavorably to the $6.4 million provision for loan losses for the year ended December 31, 2007. The $10.9 million provision for loan losses for year ended December 31, 2008 was primarily attributable to loan growth of $112.9 million, net charge-offs of $8.7 million and an amount to maintain the allowance for loan losses at a level deemed appropriate by management based on various factors discussed in the “Allowance for Loan Loss” section of this Report. The $8.7 million net charge-offs for the year ended December 31, 2008 compares unfavorably to the $4.5 million for the year ended December 31, 2007. Noninterest Income: Noninterest income for year ended December 31, 2008 of $14.5 million increased
10 2008 Annual Report Lone Star National Bank
$841,000 or 6.2% compared to $13.6 million for year ended December 31, 2007. The net increase in noninterest income for year ended December 31, 2008 was primarily attributable to a $2.3 million gain on sale of securities reflecting a net increase of $1.4 million or 154.6% compared to $892,000 for December 31, 2007. Gain on sale of securities was partially decreased by the $1.4 million charge related to other-thantemporary impairment of certain private-label collateralized mortgage-backed securities as of December 31, 2008. At the time of purchase, these private-label collateralized mortgage-backed securities were triple-A rated and broadly considered sound. However, the unprecedented nationwide deterioration of home prices combined with the ongoing recession has resulted in a sharp increase in loss rates on the mortgages underlying these securities. To determine whether any of the securities had become other-than-temporarily-impaired, the Bank performed cash flow analysis of the individual loans underlying each security under various combinations of default, loss severity and prepayment assumptions to evaluate the potential credit performance of the mortgages. Based on the year-end 2008 analysis, the Bank recorded a $1.4 million charge related to other-than-temporary impairment. We continuously monitor these securities, and further deterioration in delinquency, loss rates, and real estate values may also cause an increase in estimated and actual economic losses. Other service charge and fee income for year ended December 31, 2008 of $3.7 million increased $501,000 or 15.9% compared to $3.1 million for year ended December 31, 2007. The net increase in other service charge and fee income for year ended December 31, 2008 was primarily attributable to debit card fee income of $1.5 million for year ended December 31, 2008 increasing $320,000 or 26.1% compared to $1.2 million for year ended December 31, 2007. The increase in debit card fee income is attributable to an increased volume of business. The decreases in service charges on deposit accounts, real estate package fees, and other noninterest income for the year ended December 31, 2008 was primarily attributable to a decline in the activity for these accounts. Noninterest Expense: Noninterest expense for year ended December 31, 2008 of $40.2 million increased $1.4 million or 3.5% compared to $38.8 million for year ended December 31, 2007. The increase in noninterest expense was primarily attributable to the increased volume of business conducted by the Company, the addition of a new full-service branch facility and increased FDIC insurance premiums. The largest category of noninterest expense, Personnel expense, of $19.5 million for the year ended December 31, 2008 decreased $1.3 million or 6.3% compared to $20.8 million for the year ended December 31, 2007. Personnel expense decreased as
a result of staffing attrition, and no increases in payroll for merit or bonus, during year ended December 31, 2008. Net occupancy and equipment expense of $7.6 million for the year ended December 31, 2008 increased $1.1 million or 17.1% compared to $6.5 million for the year ended December 31, 2007. The net increase in occupancy and equipment expense is primarily attributable to a net increase in depreciation expense and related expenses as a result of the investment in buildings, furniture and fixtures, and software of $2.9 million, and $85,000 of repairs not covered by insurance due to Hurricane Dolly. Legal and professional expense of $2.2 million for the year ended December 31, 2008 increased $534,000 or 32.2% compared to $1.7 million for the year ended December 31, 2007. The net increase in legal and professional expense is primarily attributable to the increased level of nonperforming loans. Advertising expense of $1.7 million for the year ended December 31, 2008 increased $658,000 or 65.6% compared to $1.0 million for the year ended December 31, 2007. The net increase in advertising expense is primarily attributable to promoting the bank in the communities that we serve, promoting product awareness and launching a new website. The Other Real Estate Owned, net loss of $333,000 for the year ended December 31, 2008 increased $274,000 compared to $59,000 for the year ended December 31, 2007. The additional expenses for year 2008 are primarily attributable to direct expenses of foreclosed real estate including property taxes, maintenance costs and $85,000 in write-downs, exceeding the net gains on the sale of previously foreclosed real estate. FDIC insurance expense of $1.1 million for the year ended December 31, 2008 increased $222,000 or 26.6% compared to $834,000 for the year ended December 31, 2007. The increase in FDIC insurance expense was partially attributable to the net increase in deposits for the year ended December 31, 2008 and partially attributable to an increase in the FDIC rates for 2008 to rebuild the deposit insurance fund. Federal and State Income Taxes: Federal and state income taxes of $6.7 million for the year ended December 31, 2008 decreased $3.2 million or 32.3% compared to $9.9 million for the year ended December 31, 2007. The decrease in federal and state income taxes is primarily attributable to a decreased level of pretax income during year ended December 31, 2008. Net Income: Net income for the year ended December 31, 2008, was $13.3 million or $2.33 per fully diluted share, reflecting a decrease of $5.2 million or $0.90 per fully diluted share, compared to the net income of $18.5 million or $3.23 per fully diluted share for the year ended December 31, 2007.
Internet Banking Bringing the Bank to You
Life is busy enough without having to find the time to go to the bank. With Internet Banking from Lone Star National Bank, you can get immediate access to your accounts from your home, office or from any computer with Internet access. Anytime you want, day or night. It’s simple, secure and best of all it’s free. • Check your account balance
• Order checks
• View statements and transaction history
• Originate a stop payment on a check
• Transfer funds to other Lone Star National Bank accounts
• Create alerts for a variety of events
• View images of checks
• Sign up for Unlimited Bill Pay, e-Statements and mobile banking
Internet Banking, just one of the many ways Lone Star National Bank brings the bank to you.
Management’s Report on Responsibility for Financial Reporting To Our Shareholders March 23, 2009 Financial Statements The management of Lone Star National Bancshares-Texas, Inc. and its subsidiaries (the “Company”) has the responsibility for preparing the consolidated financial statements and for their integrity and objectivity. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include amounts that are based on management’s best estimates and judgments.
Internal Control Over Financial Reporting Management is responsible for establishing and maintaining effective internal controls over financial reporting presented in conformity with both accounting principles generally accepted in the United States of America and the instructions of the Board of Governors of the Federal Reserve System for preparation of Consolidated Financial Statements for Bank Holding Companies (Reporting Form FR Y-9C). This internal control contains monitoring mechanisms, and actions to correct deficiencies identified. There are inherent limitations in any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
A. Jabier Rodriguez Chief Executive Officer
George R. Carruthers Executive Vice President & Chief Financial Officer
12 2008 Annual Report Lone Star National Bank
Management assessed the Company’s internal control over financial reporting presented in conformity with both accounting principles generally accepted in the United States of America and call report instructions as of December 31, 2008. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Tredway Commission. Based on this assessment, management believes that, as of December 31, 2008, Lone Star National Bancshares-Texas, Inc. and subsidiaries maintained effective internal control over financial reporting presented in conformity with accounting principles generally accepted in the United States of America and call report instructions.
Compliance With Laws and Regulations Management is responsible for compliance with the federal and state laws and regulations concerning dividend restriction and federal laws and regulations concerning loans to insiders designated by the Federal Deposit Insurance Corporation as safety and soundness laws and regulations. Management assessed compliance by the Bank with the designated laws and regulations relating to safety and soundness. Based on this assessment, management believes that the Bank complied, in all significant respects, with the designated laws and regulations related to safety and soundness for the year ended December 31, 2008.
INDEPENDENT AUDITOR’S REPORT
BOARD OF DIRECTORS AND STOCKHOLDERS LONE STAR NATIONAL BANCSHARES--TEXAS, INC. PHARR, TEXAS We have audited the accompanying consolidated balance sheet of Lone Star National Bancshares--Texas, Inc. and Subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lone Star National Bancshares--Texas, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
March 23, 2009
Certified Public Accountants 3700 NORTH TENTH STREET
• SUITE 301 • P.O. BOX 3125 • (956) 682-6365 • FAX (956) 682-2995
McALLEN, TEXAS 78502-3125
2008 Annual Report Lone Star National Bank 13
LONE STAR NATIONAL BANCSHARES--TEXAS, INC. AND SUBSIDIARIES Consolidated Balance Sheet December 31, 2008 and 2007 (Dollars in Thousands, Except Share Data) Assets Cash and due from banks Federal funds sold Total cash and cash equivalents Securities available for sale Securities to be held to maturity Loans, less allowance for loan losses of $18,230 and $16,032 respectively Properties and equipment, net Net deferred tax asset Overpayment of federal income tax Accrued interest receivable Other real estate Other assets Total assets Liabilities Deposits Demand NOW accounts Savings and money market deposit accounts Time $100 and over Other time Total deposits Accrued interest payable Allowance for off-balance-sheet losses Other liabilities Federal funds purchased and securities sold under repurchase agreements Guaranteed preferred beneficial interest in Company's subordinated debentures Other borrowed money Total liabilities Stockholders' equity Common stock, par value $5; authorized 50,000,000 shares; 5,491,333 and 5,480,733 shares issued and outstanding Paid-in capital Retained earnings Accumulated other comprehensive income (loss) Total stockholders' equity Total liabilities and stockholders' equity
2008 $
$
$
$
56,454 17,300 73,754 362,668 105,154 1,142,649 43,658 5,399 817 8,459 14,627 18,886 1,776,071
110,169 162,052 289,000 735,524 135,487 1,432,232 3,541 700 1,374
2007 $
$
$
27,550 45,425 72,975 270,346 117,433 1,031,966 42,096 7,144 10,081 7,562 17,345 1,576,948
180,708 294,087 168,058 479,576 131,785 1,254,214 4,193 877 2,196
44,633
35,168
27,837 120,973 1,631,290
27,837 126,141 1,450,626
27,457 36,616 79,494 1,214 144,781 1,776,071
27,403 36,196 66,203 (3,480) 126,322 1,576,948
$
The accompanying notes are an integral part of the consolidated financial statements. 14 2008 Annual Report Lone Star National Bank
LONE STAR NATIONAL BANCSHARES--TEXAS, INC. AND SUBSIDIARIES Consolidated Statement of Income Years Ended December 31, 2008 and 2007 (Dollars in Thousands, Except Share Data) Interest income Loans, including fees Securities available for sale Securities to be held to maturity Federal funds sold
2008 $
Interest expense Deposits Federal funds purchased and repurchase agreements Subordinated debentures Other borrowed money Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Service charges on deposit accounts Gain on securities Real estate package fee income Other service charge and fee income Other noninterest income Noninterest expense Employee compensation Employee benefits Net occupancy and equipment expenses Legal and professional Telephone expense Supplies Advertising expense Business development Data processing fees Provision for off-balance-sheet losses FDIC insurance Other real estate, net Other noninterest expense Income before income tax expense Income tax expense Net income
$
84,337 14,238 5,822 705 105,102
2007 $
91,797 18,434 6,493 2,899 119,623
40,634 1,865 15 5,993 48,507 56,595 10,900 45,695
53,612 1,909 2,586 1,624 59,731 59,892 6,350 53,542
6,323 2,271 616 3,651 1,613 14,474
6,424 892 1,440 3,150 1,727 13,633
15,792 3,710 7,559 2,188 1,283 556 1,661 565 1,926 (177) 1,056 333 3,744 40,196 19,973 6,682 13,291
17,319 3,497 6,455 1,654 1,183 660 1,003 404 1,807 74 834 59 3,869 38,818 28,357 9,868 18,489
$
The accompanying notes are an integral part of the consolidated financial statements. 2008 Annual Report Lone Star National Bank 15
LONE STAR NATIONAL BANCSHARES--TEXAS, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders' Equity Years Ended December 31, 2008 and 2007 (Dollars in Thousands)
Balance at December 31, 2006 Comprehensive income Net income Other comprehensive income, net of tax Unrealized holding gains arising during period Reclassification adjustment for gains included in net income Total other comprehensive income Total comprehensive income Exercise of stock options, 15,150 shares Sale of common stock, 2,069 shares Purchased treasury stock, 17,928 shares Sale of treasury stock, 17,931 shares Share-based compensation Tax benefit from stock options exercised
Comprehensive income $
Common stock $ 27,318
18,489
Balance at December 31, 2008
-
-
-
-
75 10 -
184 80 228 34
27,403
36,196
-
-
-
-
54 -
183 181 56
2,452
$
(892) 1,560 20,049
Balance at December 31, 2007 Comprehensive income Net income Other comprehensive income, net of tax Unrealized holding gains arising during period Reclassification adjustment for gains included in net income Total other comprehensive income Total comprehensive income Exercise of stock options, 10,600 shares Sale of treasury stock, 16,656 shares Share-based compensation Tax benefit from stock options exercised
Paid-in capital $ 35,670
$
13,291 6,965
$
(2,271) 4,694 17,985
$
27,457
$
36,616
The accompanying notes are an integral part of the consolidated financial statements. 16 2008 Annual Report Lone Star National Bank
$
$
Retained earnings 47,714
Accumulated other comprehensive income (loss) $ (5,040)
Treasury stock $ -
Total stockholders' equity $ 105,662
18,489
-
-
18,489
-
1,560
-
1,560
-
-
66,203
(3,480)
-
126,322
13,291
-
-
13,291
-
4,694
-
4,694
-
-
79,494
$
1,214
(805) 805 -
259 90 (805) 805 228 34
814 (814) $
-
237 814 (633) 56 $
144,781
2008 Annual Report Lone Star National Bank 17
LONE STAR NATIONAL BANCSHARES--TEXAS, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows Years Ended December 31, 2008 and 2007 (Dollars in Thousands) Operating activities Net income $ Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization Amortization (accretion) of investment security premiums and discounts, net Share-based compensation Gain on sale of other real estate Gain on sale of investment securities Loss on sale of properties and equipment Provision for loan losses Other than temporary impairment of securities held to maturity Writedown of other real estate owned Provision for off-balance-sheet losses (Increase) decrease in overpayment of federal income tax Increase in deferred income tax benefit Decrease (increase) in accrued interest receivable Increase in other assets (Decrease) increase in accrued interest payable Increase in other liabilities Net cash provided by operating activities Investing activities Proceeds from sale of investment securities available for sale Proceeds from sale of trading securities Proceeds from maturities and principal reduction of securities available for sale Proceeds from maturities and principal reduction of securities to be held to maturity Proceeds from mandatory repurchase of FHLB stock Purchase of securities available for sale Purchase of securities to be held to maturity Purchase of trading securities Purchase of properties and equipment Net increase in loans Improvements to other real estate Net proceeds from sale of other real estate Net cash provided (used) by investment activities
2008
2007
13,291
$
3,411
2,962
(1,119) 181 (433) (3,657) 10,900
(2,612) 228 (337) (892) 16 6,350
1,386 84 (177) (777) (2,773) 1,622 (2,340) (652) 1,294 20,241
64 74 551 (764) (565) (664) 15 586 23,501
324,528 15,503
73,003 -
480,238
928,155
10,676 587 (885,742) (505) (14,826) (4,174) (130,259) (672) 2,632 (202,014)
19,672 1,563 (843,826) (10,471) (9,910) (118,463) 4,808 44,531
The accompanying notes are an integral part of the consolidated financial statements. 18 2008 Annual Report Lone Star National Bank
18,489
LONE STAR NATIONAL BANCSHARES--TEXAS, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows (Continued) Years Ended December 31, 2008 and 2007 (Dollars in Thousands) 2008
Financing activities Net decrease in demand deposits, NOW accounts, savings and money market accounts Proceeds from sale of common stock Proceeds from sale of treasury stock Repayment of other borrowed money Proceeds from other borrowed money Net increase in federal funds purchased and repurchase agreements Net increase (decrease) in time deposits Purchase of treasury stock Net cash provided (used) by financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year
$
2007
(81,632) 237 814 (21,142) 15,974
(204,783) 349 805 (15,198) 105,000
9,465 259,650 (814) 182,552
411 (45,911) (805) (160,132)
779 72,975 73,754
(92,100) 165,075 72,975
$
The accompanying notes are an integral part of the consolidated financial statements. 2008 Annual Report Lone Star National Bank 19
LONE STAR NATIONAL BANCSHARES--TEXAS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008 and 2007 Note 1 - Summary of Significant Accounting Policies Lone Star National Bancshares--Texas, Inc. (the “Parent" or "Company”), its primary subsidiary, Lone Star National Bank (the “Bank”) and its other subsidiaries (collectively the “Company”) are headquartered in Pharr, Texas. The Company provides a broad array of customary banking services and operates 20 banking centers throughout the Rio Grande Valley of Texas. The accounting principles and reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. A summary of the more significant accounting policies follows: Basis of Presentation. The consolidated financial statements include the accounts of Lone Star National Bancshares--Texas, Inc. and its wholly-owned subsidiaries. The Company eliminates all significant intercompany transactions and balances in consolidation. The accounting and financial reporting policies the Company follows conform, in all material respects, to accounting principles generally accepted in the United States of America. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States of America. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in an entity is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Company’s whollyowned subsidiaries, Lone Star National Capital Trust II, Lone Star National Capital Trust III and Lone Star National Capital Trust IV are VIEs for which the Company is not the primary beneficiary. Accordingly, the accounts of these entities are not included in the Company’s consolidated financial statements. Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The allowance for possible loan losses, the fair value of financial instruments and the status of contingencies are particularly subject to change. Cash and cash equivalents. For the purpose of reporting cash flows, the Company considers cash on hand, amounts due from banks and federal funds sold to be cash and cash equivalents. Generally, federal funds sold are purchased and sold for one-day periods. The Company has maintained balances in various operating and money market accounts in excess of federally insured limits. Investments in securities. Securities that management has both the positive intent and ability to hold to maturity are classified as securities held to maturity and are carried at cost, adjusted for amortization of premium or accretion of discount, using the level-yield method. Amortization and accretion on mortgage-
20 2008 Annual Report Lone Star National Bank
backed securities are adjusted for prepayments. Securities that may be sold prior to maturity for asset/liability management purposes, or that may be sold in response to changes in interest rates, to changes in prepayment risk, to increase regulatory capital or other similar factors, are classified as securities available for sale and carried at fair value with any adjustments to fair value reported in stockholders’ equity as a component of accumulated other comprehensive income (loss), net of tax. Declines in the fair value of individual held to maturity and available for sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in net income as realized losses. Securities purchased for trading purposes are held in the trading portfolio at fair value, with changes in fair value included in noninterest income. Interest and dividends on securities, including the amortization of premiums and the accretion of discounts, are reported in interest income on securities using the level-yield method. Gains and losses on the sale of securities are recorded on the trade date and are calculated using the specific identification method. Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Allowance for loan losses. The Company has established the allowance for loan losses through provision for loan losses charged against income. The Company charges off portions of loans deemed uncollectible against the allowance for loan losses and credits subsequent recoveries, if any, to the allowance. The Company’s allowance for loan losses represents estimations based on guidance provided by Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan - an amendment of FASB Statements No. 5 and 15, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures - an amendment of FASB Statement No. 114 and SFAS No. 5, Accounting for Contingencies. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the loans and prior loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts that the borrower’s financial condition is such that collection of interest is doubtful. Assets acquired through foreclosure are carried at the lower of the estimated net realizable value or the balance of the loan and are included in other assets. Revenues and expenses from operations and changes in the valuation allowance of foreclosed assets are included in noninterest expense. Properties and equipment. Land is carried at cost. Other premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Depreciation for tax purposes is computed by using the Accelerated Cost Recovery System and the Modified Accelerated Cost Recovery System required by the Internal Revenue Code. Impairment of long-lived assets. Long-lived assets and certain identifiable intangibles are reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
2008 Annual Report Lone Star National Bank 21
Earnings per share of common stock. Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock. Loan origination fees and costs. Loan origination fees and costs are deferred and recognized over the life of the loan as an adjustment of yield using the interest method. Interest income on loans. Interest income on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed. Subsequent interest payments received on loans in which accrual of interest has been discontinued, are either applied against principal or reported as income, depending upon management’s assessment of the ultimate collectability of principal. Advertising. Advertising costs are expensed as they are incurred. Income tax expense. Income tax expense includes federal and state taxes currently payable and deferred taxes arising from timing differences between income for financial reporting and income tax purposes. These timing differences result principally from the use of different methods for financial reporting and tax purposes in the calculation of depreciation expense, loan loss reserves and loan origination costs. Off-balance-sheet instruments. In the ordinary course of business the Company has entered into offbalance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. Accounting for derivative instruments and for hedging activities. SFAS No. 133, “Accounting for Derivative Instruments and for Hedging Activities”, requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Statement 133 requires that changes in fair value of a derivative be recognized currently in earnings unless specific hedge accounting criteria are met. The Company’s risk management activities do not presently include entering into derivative contracts to manage interest rate risk. Segments of an enterprise and related information. The Company applies the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, in determining its reportable segments and related disclosures. No line of business, except for the Bank, exceeds 10 percent of revenues, net earnings or assets. The Company is managed as one financial unit and does not presently report by segment. Share-based payments. Prior to January 1, 1996, the Company accounted for its stock compensation programs in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25 (“Opinion 25”), Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Effective January 1, 1996, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which requires entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, Statement 123 also allows entities to continue to apply the provisions of Opinion 25 and provide pro forma net income
22 2008 Annual Report Lone Star National Bank
and pro forma earnings per share disclosures for employee stock option grants made in 1996 and future years as if the fair-value-based method defined in Statement 123 had been applied. The Company had elected to continue to apply the provisions of Opinion 25 and provide the pro forma disclosure provisions of Statement 123. In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004) ‘Share-Based Payment”, a revision of Statement 123. This statement supersedes Opinion 25. Statement 123R eliminates an entity’s ability to report employee stock options under the methods prescribed by Opinion 25. Statement 123R establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods or services or incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant-date fair value of those awards. Statement 123R was effective for nonpublic entities as of the first annual reporting period that begins after December 15, 2005 and the Company adopted its provisions during 2006. Accounting changes and error corrections. In May 2005, the Financial Accounting Standards Board issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3”. This statement replaces Accounting Principles Board Opinion No. 20 (“Opinion 20”), Accounting Changes and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements – an amendment of APB Opinion No. 28”, and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. Opinion 20 required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. Statement 154 requires companies to recognize a change in accounting principle by applying that change retrospectively to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Statement 154 also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. Statement 154 also requires that a change in depreciation, amortization or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. Statement 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will assess the impact of a retrospective application of a change in accounting principle in accordance with Statement 154 should such a change arise after the effective date. 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, 2008 and 2007 was $15,817,000 and $11,751,000, respectively.
2008 Annual Report Lone Star National Bank 23
Note 3 – Investment Securities An analysis of securities available for sale as of December 31, 2008 follows:
(Dollars in Thousands)
Amortized Cost
U.S. Government Agency Mortgage-backed Collateralized mortgage obligations Total
$ 229,373 40,152 91,304 $ 360,829
Gross Unrealized Gains $ $
877 274 786 1,937
Gross Unrealized Losses ( ( ( (
$ $
-0-098 98
Estimated Fair Value ) $ 230,250 ) 40,426 ) 91,992 ) $ 362,668
The carrying amount and estimated fair value of securities to be held to maturity as of December 31, 2008 follow:
(Dollars in Thousands)
Amortized Cost
State and local governments Mortgage-backed Collateralized mortgage obligations Other Total
$ 14,669 10,696 71,892 7,897 $ 105,154
Gross Unrealized Gains $
$
85 185 663 -0933
Gross Unrealized Losses ( ( ( ( (
$
$
228 -06,035 -06,263
Estimated Fair Value ) $ 14,526 ) 10,881 ) 66,520 ) 7,897 ) $ 99,824
An analysis of securities available for sale as of December 31, 2007 follows:
(Dollars in Thousands)
Amortized Cost
U.S. Government Agency Mortgage-backed Collateralized mortgage obligations Total
$ 40,854 142,805 91,961 $ 275,620
Gross Unrealized Gains $ $
2 1,005 23 1,030
Gross Unrealized Losses ( ( ( (
$ $
9 36 6,259 6,304
Estimated Fair Value ) $ 40,847 ) 143,774 ) 85,725 ) $ 270,346
The carrying amount and estimated fair value of securities held to maturity as of December 31, 2007 follow:
(Dollars in Thousands)
Amortized Cost
State and local governments Mortgage-backed Collateralized mortgage obligations Ot h er Total
$ 15,277 11, 874 82,228 8, 054 $ 117,433
Gross Unrealized Gains $
$
91 -0791 -0882
Gross Unrealized Losses ( ( ( ( (
$
$
15 176 2,548 1 2,740
Estimated Fair Value ) $ 15,353 ) 11,698 ) 80,471 ) 8,053 ) $ 115,575
The net change in unrealized holding gains and losses on securities available for sale, net of related tax effect, of $4,694,000 and $1,560,000 net gains for 2008 and 2007, respectively, was included in a separate component of stockholders’ equity as accumulated other comprehensive income (loss).
24 2008 Annual Report Lone Star National Bank
Provided below is a summary of securities which were in an unrealized loss position at December 31, 2008. A total of 37 securities had unrealized losses at December 31, 2008. The unrealized loss was comprised mainly of securities in a continuous loss position for more than twelve months, which consisted primarily of collateralized mortgage obligations and mortgage-backed securities. The Company believes the deterioration in value is attributable to changes in market interest rates and not the credit quality of the issuer.
(Dollars in Thousands) U.S. Government Agency State and local governments Mortgage-backed Collateralized mortgage obligations Other Total
Less than 12 Months Estimated Fair Unrealized Value Loss
More than 12 Months Estimated Fair Unrealized Value Loss
Estimated Fair Value
$
$
$
$
-02,990 -025,115 -028,105
$
-0137 -05,249 -05,386
$
$
-02,351 24 10,678 -013,053
$
$
-091 -0884 -0975
$
Total Unrealized Loss
-05,341 24
$
35,793 -041,158
$
-0228 -06,133 -06,361
The amortized cost and estimated market value of securities available for sale and to be held to maturity at December 31, 2008, 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.
(Dollars in Thousands) Due within one year Due one to five years Due five to ten years Due after ten years Subtotal Mortgage-backed and collateralized mortgage obligations Other Total
Securities Available for Sale Estimated Amortized Fair Cost Value
Securities Held to Maturity Estimated Amortized Fair Cost Value
$
$
228,873 500 -0-0229,373
131,456 -0$ 360,829
$
229,723 527 -0-0230,250
132,418 -0$ 362,668
993 1,485 4,701 29,664 36,843
60,464 7,847 $ 105,154
$
$
998 1,463 4,647 26,406 33,514 58,464 7,847 99,825
Securities not due at a single maturity date are included in scheduled maturities on the basis of coupon maturity. Proceeds from sales of securities available for sale were $324,528,000 and $73,003,000, respectively, for the years ended December 31, 2008 and 2007. Gross realized gains on sales of securities available for sale were $2,961,000 in 2008 and $894,000 in 2007. Gross realized losses on sales of securities available for sale were $6,000 in 2008 and $2,000 in 2007. Proceeds from sales of trading securities were $15,503,000 in 2008 and $-0- in 2007. Gross realized gains on sales of trading securities were $702,000 in 2007 and $-0- in 2007. There were no realized losses on sales of trading securities in 2008 or 2007. There were no sales of securities to be held to maturity in 2008 or 2007.
2008 Annual Report Lone Star National Bank 25
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-thantemporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost. Realized losses included in earnings for 2008 for other-than-temporary declines in the fair value of securities total $1,386,000. Investment securities with a carrying amount of $388,602,000 and $360,343,000 at December 31, 2008 and 2007, respectively, were pledged to secure public funds and for other purposes required or permitted by law. Note 4 - Loans Loans consist of the following: (Dollars in Thousands) Commercial Commercial tax-exempt Total commercial
$
Agricultural Real estate Construction Agricultural mortgage 1-4 Family mortgage Multifamily mortgage Commercial mortgage Total real estate Consumer Overdrafts Total principal amount of loans Unearned discount and unamortized fees and costs Allowance for loan losses Total loans
( (
$
December 31, 2008 2007 299,661 $ 260,024 5,464 4,529 305,125 264,553 2 ,807
2,862
233,885 55,931 135,542 22,377 355,841 803,576
270,753 46,462 92,236 25,351 295,086 729,888
49,164
49,866
1,275 1,161,947 1,068 )( 18,230 )( 1,142,649 $
1,924 1,049,093 1,095 ) 16,032 ) 1,031,966
2008 16,032 $ 10,900 10,141 )( 1,439 18,230 $
2007 14,174 6,350 5,750 ) 1,258 16,032
Changes in the allowance for loan losses are as follows: (Dollars in Thousands) Balance at beginning of year Provision for loan losses Loans charged off Recoveries of loans previously charged off Balance at end of year
$ ( $
Loans that the Company does not expect to collect the full principal and interest based on the terms of the original loan agreement are identified as impaired loans. These include loans that are on nonaccrual status, doubtful, other loans that have been reduced by specific valuation allowance
26 2008 Annual Report Lone Star National Bank
or are considered troubled debt restructurings due to the granting of a below market rate of interest or a partial forgiveness of indebtedness on an existing loan. Impaired loans were $34,151,000 at December 31, 2008 and $10,283,000 at December 31, 2007. The average recorded investment in impaired loans was $18,787,000 and $24,754,000 for 2008 and 2007, respectively. The total allowance for loan losses related to impaired loans at December 31, 2008 and 2007 amounted to approximately $1,663,000 and $1,126,000, respectively. There were $26,150,000 and $6,221,000 in impaired loans for which there was no related allowance for loan losses at December 31, 2008 and 2007, respectively. Interest income recognized on impaired loans for the time they were impaired was $1,736,000 during 2008, of which $139,000 was recognized for cash payments of interest. Accruing loans past due more than 90 days totaled $3.4 million at December 31, 2008. Loans on which accrual of interest had been discontinued or reduced were approximately $32,653,000 and $9,507,000 at December 31, 2008 and 2007, respectively. Note 5 - Properties and equipment The following is a summary of properties and equipment, at cost less accumulated depreciation at year end: (Dollars in Thousands) Land Buildings and improvements Furniture and equipment Construction in progress Less accumulated depreciation
$
(
$
2008 14,852 $ 24,721 16,880 1,343 57,796 14,138 ) ( 43,658 $
2007 13,105 20,990 15,478 4,050 53,623 11,527 ) 42,096
Depreciation and amortization expense was $3,411,000 and $2,962,000 for the years ended December 31, 2008 and 2007, respectively. There was no interest cost capitalized as properties and equipment during 2008 or 2007. Note 6 - Time Deposits Time deposit accounts included in the balance sheet that have a remaining term of more than one year are as follows: Amount Years Ending (Dollars in December 31, Thousands) 2010 $ 56,258 2011 23,179 2012 3,940 2013 3,937 2014 439 Beyond 2014 37 $ 87,790
2008 Annual Report Lone Star National Bank 27
Note 7 – Other Liabilities Major classifications of other liabilities at year end are as follows: (Dollars in Thousands) Accrued expenses Federal and state income taxes payable Property taxes payable
$ $
2008 1,169 75 130 1,374
$ $
2007 2, 0 31 66 99 2,196
Note 8 - Securities Sold Under Repurchase Agreements Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. The agreements have various interest rates ranging from 1.90 percent to 5.75 percent and repurchase dates to June 18, 2009. Securities sold under agreements to repurchase totaled $44,633,000 and $35,168,000 at December 31, 2008 and 2007 with accrued interest of $152,000 and $126,000 respectively. The securities sold under the agreements are collateralized by a security interest in securities available for sale. Note 9 - Other Borrowed Money The following are available lines of credit the Company has with other financial institutions: Financial Institution (Dollars in Thousands) Federal Home Loan Bank of Dallas The Independent Bankers Bank Frost National Bank
Line of Credit Amount $ 561,663 10,000 15,000 $ 586,663
Amount Available
Interest Rate
Expiration Date
$
Variable Variable Variable
None None 09/30/09
83,359 10,000 15,000 $ 108,359
The Company has received advances in the amount of $120,973,000 from Federal Home Loan Bank of Dallas (“FHLB”) under provisions of its line of credit facility. The advances mature January 12, 2009 through September 18, 2018 with interest due quarterly at rates of 1 percent through 4.349 percent. In addition, the Company has pledged various letters of credit totaling $224,739,000 against deposits from its line. The line of credit with FHLB is collateralized by a blanket floating lien on all first mortgage loans, certain investment securities held in safekeeping, the FHLB capital stock owned by the Company and any Bank funds on deposit with FHLB. The lines of credit with The Independent Bankers Bank and Frost National Bank are unsecured. Note 10 - Subordinated Dentures On January 1, 2004, the Company adopted FIN 46R, “Consolidation of Variable Interest Entities an interpretation of ARB No. 51” resulting in the deconsolidation of its Lone Star National Capital Trusts, all of which were created for the sole purpose of issuing trust preferred securities. The implementation of FIN 46R resulted in the Company’s $837,000 investment in the common equity of the trusts being included in the consolidated balance sheet as other assets with a corresponding increase to other borrowed money. The Company is now recording greater interest expense and dividend income received from the trusts with no effect on net income. The dividend income and interest expense received from and paid to the trusts, respectively, is being included in the consolidated statements of income and comprehensive income as other noninterest income and interest expense.
28 2008 Annual Report Lone Star National Bank
While the capital securities are deconsolidated in accordance with GAAP, they continue to qualify as Tier 1 capital under federal regulatory guidelines. In March 2005, the Federal Reserve amended its risk-based capital standards to expressly allow the continued limited inclusion of outstanding and prospective issuances of trust preferred securities in a bank holding company’s Tier 1 capital, subject to tightened quantitative limits. The Federal Reserve’s amended rule will, effective March 31, 2009, limit capital securities and other restricted core capital elements to 25 percent of all core capital elements, net of goodwill less any associated deferred tax liability. Management has developed a capital plan for the Company and the Bank that should allow the Company and the Bank to maintain “well-capitalized” regulatory capital levels. The Issuer Trusts are wholly owned unconsolidated subsidiaries of the Company and have no independent operations. The obligations of Issuer Trusts are fully and unconditionally guaranteed by the Company. The debentures are unsecured and rank subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. Interest on the debentures is cumulative and payable in arrears. Proceeds from any redemption of debentures would cause a mandatory redemption of capital securities having an aggregate liquidation amount equal to the principal amount of debentures redeemed. Note 11 - Federal and State Income Taxes The components of the provision for income taxes consist of the following: (Dollars in Thousands) Current income tax expense Federal State Total current income tax expense Federal deferred income tax benefit
2008 $
(
Total income tax expense
2007
7,323 33 7,356
$
674 ) ( $
6,682
9,827 52 9,879 11 )
$
9,868
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: (Dollars in Thousands) Tax at federal statutory rate Additions (reductions) Tax-exempt income Non-deductible expenses Non-statutory stock options State income tax, net of federal income tax effect Other, net Total income tax expense
$ (
(
$
2008 6,979
$
428 ) ( 109 55 ( 21 54 ) 6,682 $
2007 9,925 277 ) 162 44 ) 12 90 9,868
The net deferred tax asset included in the accompanying consolidated balance sheet is comprised of the following deferred tax assets and liabilities:
2008 Annual Report Lone Star National Bank 29
(Dollars in Thousands) Deferred tax liability Properties and equipment Net unrealized gain on securities available for sale Total deferred tax liability Deferred tax asset Net unrealized loss on securities available for sale Deferred loan fees Allowance for loan losses Writedown of other than temporarily impaired securities Other Total deferred tax asset before valuation allowance Valuation allowance Total deferred tax asset Net deferred tax asset
2008 $
$
December 31,
1,511 644 2,155 -0371 6,380 485 318 7,554 -07,554 5,399
2007
$
$
997 -0997 1,793 368 5,611 369 -08,141 -08,141 7,144
Note 12 - Concentrations of Credit Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be affected similarly by changes in economic conditions. A significant portion of the Company’s investments are in securities of the U.S. Government and its agencies and corporations. The Company’s lending activities are conducted primarily with customers in the Rio Grande Valley of Texas. The concentrations of credit by type of loan are set forth in Note 4. Based on the nature of the banking business, management does not consider any of these concentrations unusual. Note 13 - Supplemental Disclosures Supplemental disclosures of cash flow information
Years Ended December 31, 2008 2007
(Dollars in Thousands) Federal and State income taxes paid
$
8,108
$
10,214
Interest paid
$
49,159
$
59,554
$
13, 491
$
8,599
$
4,815
$
3,437
Supplemental schedule of non-cash investing and financing activities (Dollars in Thousands) Foreclosures and repossess ion in satisfaction of loans receivable Financing provided for sales of foreclosed and repossessed assets Note 14 - Fair Value Measurements Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for financial assets and financial liabilities. In accordance with Financial Accounting Standards Board Staff Position (FSP) No. SFAS 157-2, “Effective Date of FASB Statement No. 157,” the
30 2008 Annual Report Lone Star National Bank
Company will delay application of SFAS 157 for non-financial assets and non-financial liabilities, until January 1, 2009. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The application of SFAS 157 in situations where the market for a financial asset is not active was clarified by the issuance of FSP No. SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” in October 2008. FSP No. SFAS 157-3 became effective immediately and did not significantly impact the methods by which the Company determines the fair values of its financial assets. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact. SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1 Inputs -Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 Inputs -Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. Level 3 Inputs -Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value effective January 1, 2008. In general, fair value is based upon quoted market prices,
2008 Annual Report Lone Star National Bank 31
where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. Financial assets and financial liabilities measured at fair value on a recurring basis include the following: Securities Available for Sale. U.S. Treasury securities are reported at fair value utilizing Level 1 inputs. Other securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Trading Securities. U.S. Treasury securities and exchange-listed common stock are reported at fair value utilizing Level 1 inputs. Other securities classified as trading are reported at fair value utilizing Level 2 inputs in the same manner as described above for securities available for sale. Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company’s risk management activities do not presently include entering into derivative contracts to manage interest rate risk. In connection with single family mortgage loan originations, the Company enters into commitments with customers to extend mortgage loans and forward sales commitments for individual loans. The Company has identified these as derivative financial instruments and accordingly records these loan origination and sales commitments at estimated fair market value. As of December 31, 2008, 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, 2008, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value: Level 1 Inputs Level 2 Inputs Level 3 Inputs Total fair value
$ $
230,250 132,418 -0362,668
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 2008, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral.
32 2008 Annual Report Lone Star National Bank
Impaired loans with a carrying value of $8 million were reduced by specific valuation allowance allocations totaling $1.7 million to a total reported fair value of $6.3 million based on collateral valuations utilizing Level 2 valuation inputs. SFAS 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies. The methodologies for other financial assets and financial liabilities are discussed below: Loans. The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in credit risk. The fair value of fixed-rate loans and variable-rate loans which reprice on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk. Deposits. The estimated fair value approximates carrying value for demand deposits. The fair value of fixed-rate deposit liabilities with defined maturities is estimated by discounting future cash flows using the interest rates currently offered for deposits of similar remaining maturities. The estimated fair value of deposits does not take into account the value of the Company’s long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, and not considered financial instruments. Nonetheless, the Company would likely realize a core deposit premium if its deposit portfolio were sold in the principal market for such deposits. Borrowed Funds. The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed-rate borrowings is estimated using quoted market prices, if available, or by discounting future cash flows using current interest rates for similar financial instruments. The estimated fair value approximates carrying value for variable-rate junior subordinated deferrable interest debentures that reprice quarterly. Loan Commitments, Standby and Commercial Letters of Credit. The Company’s lending commitments have variable interest rates and “escape” clauses if the customer’s credit quality deteriorates. Therefore, the fair values of these items are not significant and are not included in the following table. The estimated fair values of the Company’s financial instruments at December 31, 2008 were as follows: (Dollars in Thousands) Financial assets Cash and due from banks Federal funds sold Investment securities Loans Accrued interest receivable Financial liabilities Deposits Repurchase agreements/borrowed funds Subordinated debentures Accrued interest payable
Carrying Amount $
56,454 17,300 467,822 1,142,649 8,459 1,432,232 165,606 27,837 3,541
Fair Value $
56,454 17,300 462,493 1,055,227 8,459 1,434,211 170,531 27,837 3,541
2008 Annual Report Lone Star National Bank 33
Effective January 1, 2008, the Company adopted the provisions of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities -Including an Amendment of FASB Statement No. 115.” SFAS 159 permits the Company to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, thus the Company may record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. Adoption of SFAS 159 on January 1, 2008 did not have a significant impact on the Company’s financial statements. Note 15 - Related-Party Transactions The Company has entered into transactions with its officers, directors and significant stockholders. Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present unfavorable features. (Dollars in Thousands) Balance at beginning of year Additions Reductions Collections Changes to unrelated status Charge-offs Balance at end of year
$ ( $
2008 31,358 6,245
$
6,630 ) ( -0- ( -030,973 $
2007 30,681 14,646 13,257 ) 712 ) -031,358
As of December 31, 2008 and 2007, the total amount of deposits of the Company’s officers, directors and significant stockholders were $50,953,000 and $25,699,000, respectively. The Company has currently entered into construction contracts with one of its principal stockholders. The contracts, totaling $8,525,700, are for the construction and remodeling of branch facilities. Note 16 - Employee Benefits Employee Stock Ownership Plan. The Company has an employee stock ownership plan containing Internal Revenue Code Section 401(k) provisions in effect for substantially all full-time employees. An employee becomes a participant after completing one year of service provided he or she has attained age 18. The Company makes a discretionary matching contribution up to a certain percentage of contributions made by the participant. Additional contributions are made at the discretion of the Board of Directors. Employee benefits include $280,000 and $242,000 for the employee stock ownership plan for 2008 and 2007, respectively. Incentive Compensation Agreement. The Board of Directors has approved an incentive compensation plan covering officers. This plan provides for additional compensation to the officers based upon the Bank achieving certain levels of Return on Average Equity. At December 31, 2008 and 2007, the Company’s accrued compensation under this plan was $-0- and $1,150,000, respectively.
34 2008 Annual Report Lone Star National Bank
Note 17 - Share-Based Payments The Company has granted stock options providing for the purchase of common stock by certain key employees and directors under option plans approved by the stockholders. The 2006 Stock Option Plan authorized the issuance of stock options for 150,000 shares at fair value on the date of grant. As of December 31, 2008, 78,288 shares were available for granting under this plan. The options have a vesting period of five years. A summary of the status of the Company’s two stock option plans as of December 31, 2008 and 2007, and changes during the years ended on those dates are presented below: 2008
Outstanding at beginning of year Granted Exercised Expired/forfeited Outstanding at end of year Options exercisable at end of year
( (
Shares Underlying Options 384,342 -010,600 4,800 368,942 316,252
Range of exercise prices Weighted average remaining contractual life
) )
Years Ended December 31, Weighted Average Exercise Price $ 18.02 -022.40 39.25 $ 17.62 $ 14.25
$11.00 - $45.00 2.14 years
( (
Shares Underlying Options 372,680 29,012 15,150 2,200 384,342 303,730
2007
) )
Weighted Average Exercise Price $ 16.00 44.26 17.07 28.36 $ 18.02 $ 13.07
$11.00 - $45.00 3.07 years
The following table summarizes information about stock options outstanding at December 31, 2008 and 2007:
Weighted Average Exercise Price $11.00 $13.00 $24.00 $36.00 $35.00 $43.50 $45.00
Years Ended December 31, 2008 2007 Shares Underlying Options 235,230 32,300 30,900 44,500 2,000 1,000 23,012 368,942
Shares Underlying Options 235,230 35,100 38,500 46,500 2,000 1,000 26,012 384,342
The Company has adopted the provisions of Statement 123R to measure compensation cost for unvested stock options during 2006. Statement 123R does not require restatement of prior period awards. The Company recognized the cost of all options issued during 2008 and 2007 and the unvested portion of options issued prior to 2007 using the Black-Scholes-Merton option-pricing formula and a single option award approach method to measure the compensation cost of stock options granted in 2008 and 2007. This option-pricing model requires the input of highly subjective assumptions, including the options’ expected life and the price volatility of the underlying stock. The Company utilized the following assumptions: risk-free interest rate (4.94 percent) based upon a U.S. Treasury instrument with a life that is
2008 Annual Report Lone Star National Bank 35
similar to the expected life of the option grant, a dividend payout rate of zero, and an expected option life of 78.1 months. The expected stock price volatility assumption of 12.51 was determined using a combination of historical and implied volatility of the Company’s common stock. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The forfeiture rate utilized is based on the Company's historical experience with respect to stock options issued in prior periods. Note 18 - Commitments and Contingent Liabilities In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities that are not presented in the accompanying financial statements. These commitments and contingent liabilities include commitments to extend credit, standby letters of credit and credit card guarantees. Commitments under standby letters of credit aggregated $3,844,000 and $3,676,000 at December 31, 2008 and 2007, respectively. Commitments to fund loans were approximately $24,690,000 and $39,775,000 at December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007, the Company had guarantees on credit cards to its customers totaling $6,137,000 and $6,519,000, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s creditworthiness on a case by case basis. The amount of the collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include certificates of deposit, accounts receivable, inventory, equipment and real estate. Standby letters of credit and financial guarantees written are a conditional commitment issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various types of collateral supporting those commitments for which collateral is deemed necessary, which may include certificates of deposit, accounts receivable, inventory, equipment and real estate. The Company has not incurred any losses on its commitments in either 2008 or 2007. Management does not anticipate any material losses as a result of the 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 2013 and contain provisions that allow renewal at similar terms. Total expense from these agreements amounted to $400,000 and $490,000 in 2008 and 2007, respectively. Aggregate minimum contractual payments under these agreements for the next five years are as follows: Year ended December 31, 2009 2010 2011 2012 2013
36 2008 Annual Report Lone Star National Bank
$
723,000 756,000 789,000 822,000 874,000
The Company leases various facilities under operating leases expiring at various dates through December 2013. Total rental expense in 2008 and 2007 for all operating leases was approximately $456,000 and $443,000, respectively. The following is a schedule by year of future minimum lease payments under operating leases as of December 31, 2008 that have initial or remaining lease terms in excess of one year: Year ended December 31, 2009 2010 2011 2 01 2 2 01 3
$
281,000 194,000 160,000 7,000 5,000
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. Years ended December 31, 2008 2007
(Dollars in Thousands, Except Per Share Data) Net income available to common shareholders Weighted average number of common shares outstanding used in basic EPS calculation Add assumed exercise of dilutive securities outstanding - stock options Weighted average number of common shares outstanding used in diluted basic EPS calculation Basic EPS Diluted EPS
$
$ $
13,291
$
18,489
5,486,604
5,476,9 33
211,259
248,632
5,697,863 2.42 2.33
$ $
5,725,565 3. 38 3.23
Note 20 - Regulatory Matters The Bank, as a National Bank, is subject to the dividend restrictions set forth by the Comptroller of the Currency (the “OCC”). Under such restrictions, the Bank may not, without the prior approval of the OCC, declare dividends in excess of the current year’s earnings (as defined) plus the retained earnings (as defined) from the prior two years or pay any dividend which would cause the Bank to become undercapitalized.
2008 Annual Report Lone Star National Bank 37
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 offbalance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), and Tier I capital to adjusted total assets (as defined). Management believes, as of December 31, 2008, that the Company meets all the capital adequacy requirements to which it is subject. As of December 31, 2008, 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.
(Dollars in Thousands)
Actual Amount Ratio
For Capital Adequacy Purposes Amount Ratio
To Be Well Capitalized Under Prompt Action Provisions Amount Ratio
Lone Star National Bancshares-TX December 31, 2008 Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to Average Assets)
$185,619 $170,566 $170,566
15.46% 14.21% 9.81%
$ 96,033 $ 48,017 $ 69,557
8% 4% 4%
$120,042 $ 72,025 $ 86,946
10% 6% 5%
December 31, 2007 Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to Average Assets)
$170,694 $156,802 $156,802
15.40% 14.15% 10.02%
$ 88,668 $ 44,334 $ 62,594
8% 4% 4%
$110,835 $ 66,501 $ 78,242
10% 6% 5%
Lone Star National Bank December 31, 2008 Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to Average Assets)
$181,841 $166,788 $166,788
15.15% 13.89% 9.56%
$ 96,030 $ 48,015 $ 69,782
8% 4% 4%
$120,038 $ 72,023 $ 87,227
10% 6% 5%
December 31, 2007 Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to Average Assets)
$156,849 $142,957 $142,957
14.15% 12.90% 9.10%
$ 88,666 $ 44,333 $ 62,858
8% 4% 4%
$110,833 $ 66,500 $ 78,573
10% 6% 5%
Note 21 - Recent Accounting Pronouncements SFAS No. 123, “Share-Based Payment (Revised 2004).” SFAS 123R establishes standards for the accounting for transactions in which an entity (i) exchanges its equity instruments for goods or services, or (ii) incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s
38 2008 Annual Report Lone Star National Bank
equity instruments or that may be settled by the issuance of the equity instruments. SFAS 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the measurement date, which is generally the date of the grant. The Company adopted the provisions of SFAS 123R on January 1, 2006. The impact of SFAS 123R on the Company’s financial statements is discussed in Note 16 - Employee Benefit Plans. SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157, with the exception of certain provisions, became effective for the Company on January 1, 2008 (see Note 14 - Fair Value Measurements). SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities -Including an amendment of FASB Statement No. 115.” SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. SFAS 159 became effective for the Company on January 1, 2008 (see Note 14 - Fair Value Measurements). SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The hierarchical guidance provided by SFAS 162 did not have a significant impact on the Company’s financial statements. Financial Accounting Standards Board Staff Positions and Interpretations FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109.” Interpretation 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likelythan-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Interpretation 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. The adoption of Interpretation 48 on January 1, 2007 did not significantly impact the Company’s financial statements. FSP No. 48-1 “Definition of Settlement in FASB Interpretation No. 48.” FSP 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP 48-1 was effective retroactively to January 1, 2007 and did not significantly impact the Company’s financial statements. FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share
2008 Annual Report Lone Star National Bank 39
pursuant to the two-class method. FSP EITF 03-6-1 will be effective on January 1, 2009. All previously reported earnings per share data will be retrospectively adjusted to conform with the provisions of FSP EITF 03-6-1. FSP EITF 03-6-1 is not expected to have a significant impact on the Company’s financial statements.
40 2008 Annual Report Lone Star National Bank
LSNB Mobile
TM
Bringing the Bank to You
LSNB Mobile™ from Lone Star National Bank. Using only your web-capable mobile phone you can access any of your Lone Star National Bank accounts from anywhere. On a business trip and need to make a transfer? Doing your grocery shopping and need to check your balance? With LSNB Mobile™ you have the power to do that and more. Using only a web-capable mobile phone you can: • Check your account balance and transaction history • Make a transfer to another account • Pay bills • View alerts LSNB Mobile™ is FREE, all you need is to be a current Lone Star National Bank Internet Banking user. LSNB Mobile™, just one of the many ways Lone Star National Bank brings the bank to you.
You will be charged access rates by your carrier. Web access is needed to use LSNB Mobile™. Check with your service provider for details on specific fees and charges.
Bank Officers Corporate Office A. Jabier Rodriguez Chief Executive Officer Director S. David Deanda President Director George R. Carruthers Executive Vice President & Chief Financial Officer Lone Star National Bancshares-Texas, Inc. Director Angie Vera-Oliva Executive Vice President & Chief Operations Officer Director Rodolfo Cantu Executive Vice President & Chief International Officer Curt S. Cavazos Executive Vice President & Chief Lending Officer Advisory Director Roger G. Leblond Executive Vice President & Chief Information Officer D. M. Penoli Executive Vice President & Chief Financial Officer Rolando Ayala Executive Vice President Advisory Director
Vipul Patel Vice President
Roberto Garza Vice President
Christine M. Villaseñor Vice President
Eva Markum Vice President
Veronica Vizcarra-Prinkey Vice President & Credit Manager
Armando Martinez Vice President
McAllen
Susan Trevino Vice President
Rueben Cole Senior Vice President
Maria I. Villarreal Vice President
Fred Flores Senior Vice President & BSA Officer
Rio Grande City & Roma
Adam Pearson Senior Vice President & Information Security Officer
Ruben C. Chapa Senior Vice President
Martin Volpe Senior Vice President
Alejandra Gonzalez Vice President
Desiraee Walker Senior Vice President
Hidalgo, Mission & Palmview
Cristobal Escobedo, Jr. First Vice President Rafael Gonzalez First Vice President Gloria Guerra First Vice President Homer Guerra First Vice President
Jesus Villarreal Senior Vice President Juan J. Acosta First Vice President Susie Castillo Vice President Olga G. Lopez Vice President
Janie Moran Executive Vice President & Controller
Ixchetl Romero First Vice President
Harlingen, Brownsville, Port Isabel & South Padre Island
Ezequiel “Rick” Acevedo, Jr. Executive Vice President
Adan Garcia Vice President
Robert L. Walker Executive Vice President
Sam de la Garza Executive Vice President
Paul Garcia Vice President
Rusty Brechot Senior Vice President
Tony Gorman Executive Vice President & Human Resources Director
Tina M. Guerra Vice President
Terry Gray Senior Vice President
Magda Ramirez Vice President
Jackie Russell Senior Vice President
Betty Reyna Vice President
Norma P. Weaver Senior Vice President
Ismael Rodriguez Vice President
Margarita Gonzalez First Vice President
Lydia Sandoval Vice President
Michele Robinson First Vice President
Edna Yaccarino Vice President
Michael Alvarado Vice President
Leticia Zavala Vice President
Lone Star Insurance Services, Inc.*
Kenneth Grams Senior Vice President & Chief Credit Officer Olga Lee Hinojosa Senior Vice President Geraldo X. Perez Senior Vice President Arden Peterson Senior Vice President & Compliance Officer Oscar Rodriguez Senior Vice President Ted P. Sunderland Senior Vice President Celeste I. De La Garza Esparza First Vice President Abby G. Gonzalez First Vice President Leticia E. Hinojosa First Vice President Pedro Salazar First Vice President Sameer Saxena First Vice President Jose M. Araiza, Jr. Vice President Lone Star National Bancshares-Texas, Inc. Edna X. De Saro Vice President
46 2008 Annual Report Lone Star National Bank
Pharr, Edinburg & Weslaco Elias Longoria, Jr. Senior Vice President Norma Quintanilla Senior Vice President Maria Cadenas Vice President Raymond Chan Vice President Julia De Leon Vice President Lita De Leon Vice President Erika Degollado Vice President
Jim Hansen Senior Vice President Leticia Francis Vice President Ruben Garza Vice President Sonia Martinez-Garcia Vice President
LSNB Investment Services* Yvonne L. Silguero LPL Branch Manager/Financial Consultant Enrique Lopez Financial Consultant *Insurance and Investment Products Offered are not Insured by the FDIC or Any Other Federal Government Agency, are not Deposits of or Guaranteed by the Bank or Any Bank Affiliate, and May Lose Value.
Office Banker
TM
Bringing the Bank to You
With Office Banker™ you can scan money orders, consumer, cashier’s and corporate check images into a file and send them electronically to Lone Star National Bank without ever having to leave your business or office. No more lost time driving to the bank to make a deposit.* Plus you’ll have the benefit of an extended deposit deadline of 9:00 p.m. What are the Benefits of Office Banker™? • Increased Cash Flow • Convenient and Safe • Extended Deposits Deadlines • Increased Efficiency • Next Day Availability** Office Banker™ from Lone Star National Bank, another of the many ways we bring the bank to you.
* Check items only. ** Not all check items may receive next day availability. Office Banker™ subject to approval. Fees may apply.
Texas
Starr Roma Rio Grande City
Hidalgo
Rio Grande Valley
Edinburg Full Service Banking Center
Palmview
McAllen
Mission Pharr
Motor Bank Corporate Office
Hidalgo
Coming Soon/ Expansion of Our Corporate Office
Cameron
Weslaco Mercedes
Port Isabel
Banking Centers, Mortgage & ATM Locations Brownsville 3300 N. Expressway 83 - Mortgage Center - ATM - Motor Bank
5537 N. McColl Road - ATM - Motor Bank
2100 Boca Chica Boulevard - Mortgage Center - ATM - Motor Bank
LSNB Investment Services* 1101 Nightingale Avenue
Edinburg 117 S. 10th Avenue - ATM - Motor Bank 5501 S. McColl Road - ATM - Motor Bank (Located at Doctors Hospital at Renaissance) Harlingen 1901 N. Ed Carey Drive, Suite 100 - ATM (2) - Motor Bank 918 W. Harrison Avenue (Motor Bank) - ATM Hidalgo 633 S. International Boulevard - ATM - Motor Bank McAllen 5515 N. 10th Street - ATM - Motor Bank 200 Lindberg Avenue - ATM - Motor Bank 1300 E. Ridge Road - ATM - Motor Bank 600 E. Nolana Avenue - ATM - Motor Bank
48 2008 Annual Report Lone Star National Bank
Harlingen
Lone Star Insurance Services, Inc.* 1101 Nightingale Avenue
Mercedes 5001 E. Expressway 83, Suite 650C - ATM (3) (Located at the Rio Grande Valley Premium Outlets®) Mission 2003 E. Griffin Parkway - ATM - Motor Bank 1100 S. Bryan Road - ATM - Motor Bank Palmview 720 E. Veterans Boulevard - ATM - Motor Bank Pharr 206 W. Ferguson Avenue (Corporate Office) 100 W. Ferguson Avenue - ATM - Motor Bank
Brownsville
Roma 305 E. Grant Street - ATM - Motor Bank
Pharr 1210 E. Expressway 83
South Padre Island 601 Padre Boulevard - ATM - Motor Bank
Rio Grande City 100 FM 3167 Located at the Starr County Court House-Annex Building
Weslaco 214 S. Texas Boulevard - ATM - Motor Bank
Weslaco FM 1015 & Mile 11 N Located at La Bodega #1 convenience store
2401 S. Jackson Located at 123 Country Store
Mortgage Centers Brownsville 3300 N. Expressway 83 McAllen 4500 N. 10th Street, Suite 305
Offsite ATM Locations Brownsville 100 Paredes Line Road Edinburg 5502 S. McColl Road Located at the Women’s Hospital at Renaissance 3010 W. University Drive Located at Hacienda Ford
1201 S. Cage Boulevard (Motor Bank) - ATM
McAllen 3700 Buddy Owens Avenue (Located at Burger King)
Port Isabel 202 E. Queen Isabella Boulevard (Motor Bank) - ATM
1921 N. 10th Located at Town & Country Convenience Store
Rio Grande City 2300 E. Highway 83 - ATM - Motor Bank
South Padre Island
Mercedes 5001 E. Expressway 83, Ste. 650C 3 Located at the Rio Grande Valley Premium Outlets® - North, South & the Food Court
*Insurance and Investment Products Offered are not Insured by the FDIC or Any Other Federal Government Agency, are not Deposits of or Guaranteed by the Bank or Any Bank Affiliate, and May Lose Value.
Our History Lone Star National Bank opened for business on January 23, 1983 in Pharr, Texas. Conducting business in a small, 3,000 square-foot, temporary building and with only ten employees, the bank opened its doors with the objective of making the future more prosperous for the community. Over the next two decades, Lone Star National Bank expanded continuously opening banking centers throughout the Valley, beginning with its first branch in Hidalgo County on April 4, 1994, at 200 Lindberg in McAllen. In August 2000, the bank unveiled the first branch outside Hidalgo County in Rio Grande City and then entered the Cameron County market in July 2001, with a banking center at 3300 N. Expressway 83 in Brownsville. Today, Lone Star National Bank is a technologically advanced, full-service, Valley-wide, independent, community bank with over 400 employees and 20 full-service banking centers. Our rapid growth is attributable to several factors such as offering personal “value added” customer service and providing a rewarding environment for our employees. Staying true to our mission of supporting individuals and small businesses who contribute to the growth of their communities. And staying at the forefront of technological advances like “LSNB MobileTM” (mobile banking) and “Office BankerTM” (remote capture) which let us bring the bank to our customers. These factors, combined with the support of our stockholders, customers, neighbors and friends, have made Lone Star National Bank a well-known success, and helped us become recognized as “The Valley’s Bank.”
