e are pleased that 2004 was another record year for growth in earnings and assets. Net income rose 23.0 percent to $76.7 million, assets climbed 38.4 percent to $5.8 billion and total market value of company stock outstanding rose 48.5 percent to $1.6 billion at December 31, 2004. It is my pleasure to report that total return to shareholders on Texas Regional common stock was 34.0 percent for 2004.

Net income for the year ended December 31, 2004 totaled $76.7 million, or $1.59 per diluted common share, compared to $62.3 million, or $1.40 per diluted common share, for the year ended December 31, 2003. Return on assets and return on shareholders equity averaged 1.45 percent and 14.24 percent, respectively, for the year ended December 31, 2004, compared to 1.54 percent and 15.41 percent, respectively, for the year ended December 31, 2003.

Texas Regional completed the acquisition of Southeast Texas Bancshares, Inc. ( Southeast Texas) on March 12, 2004, and Valley Mortgage Company, Inc. on November 23, 2004. The results of operations for these acquisitions have been included in the consolidated financial statements since their respective purchase dates.

Our efficiency ratio remains among the best in the industry, averaging 51.37 percent for the year. The efficiency ratio represents noninterest expense divided by total revenue (i.e. the sum of net interest income and noninterest income).

Assets totaled $5.8 billion at December 31, 2004, reflecting an increase of $1.6 billion (38.4 percent) from December 31, 2003, primarily due to the Southeast Texas merger.

Loans held for investment of $3.8 billion at December 31, 2004 increased $1.2 billion (48.8 percent) from December 31, 2003. Deposits increased to $4.8 billion at December 31, 2004, up $1.2 billion (35.4 percent) from December 31, 2003. Excluding volumes acquired through business combinations, internal growth rates for loans and deposits averaged 21.7 percent and 7.9 percent, respectively, for the twelve months ended December 31, 2004. Other assets at December 31, 2004 included goodwill and identifiable intangibles of $204.1 million.

Shareholder’s equity of $594.1 million at December 31, 2004, reflects a $172.3 million increase from December 31, 2003. This 40.9 percent increase resulted primarily from the issuance of common stock in the Southeast Texas acquisition of $110.1 million and net income of $76.7 million for the year ended December 31, 2004. The total risk-based, tier 1 risk-based and leverage capital ratios of 11.91 percent, 10.84 percent and 8.32 percent at December 31, 2004, respectively, substantially exceeded regulatory requirements for a well-capitalized bank holding company.

On December 8, 2003, Moody’s Investors Service assigned first-time ratings to Texas Regional and Texas State Bank. Texas Regional was rated Baa1 and Texas State Bank was rated A3. Moody’s said that the ratings reflect Texas Regional’s solid banking franchise and the Bank’s good asset quality, efficient operating platform and strong profitability. In addition to the 29 banking locations acquired in the Southeast Texas merger, Texas State Bank also opened four new full-service banking facilities located in Edinburg, San Juan, Silsbee and Lumberton during 2004. These new banking centers have enjoyed strong growth in the months following startup.

On January 14, 2005, Texas Regional completed its acquisition of Mercantile Bank & Trust, FSB (“Mercantile”). Mercantile was a privately held Federal savings bank headquartered at 5820 West Northwest Highway, Dallas, Texas, with two additional banking locations in the Dallas metropolitan area. As of December 31, 2004, Mercantile had total assets of $178.8 million, loans of $118.9 million, deposits of $163.7 million and shareholders’ equity of $13.9 million.

On February 14, 2005, Texas State Bank opened its newest full-service banking center in Weslaco. Texas State Bank now operates 71 banking centers across Texas, primarily located in the metropolitan areas of Houston, Dallas, Beaumont-Port Arthur, Tyler, Corpus Christi and South Texas, including 31 in the Rio Grande Valley.  We recently began construction on a new banking center in The Woodlands, with two more planned for the Houston market area. We continue to look for opportunities to grow our bank through building new banking centers and making acquisitions.

Our market position remains strong based upon data released by the Federal Deposit Insurance Corporation as of June 30, 2004.  In the Rio Grande Valley market, we rank first in deposit market share for each county with 23.9 percent in Cameron, 28.5 percent in Hidalgo, 38.1 percent in Starr and 59.1 percent in Willacy. We rank first in 7 of the 15 counties where Texas State Bank operates.

We appreciate the outstanding support of our customers and shareholders. Our directors, officers and employees are dedicated to providing superior personal service and convenient banking products. Thank you for your continued interest and support of our company.